<PAGE>
As filed with the Securities and Exchange Commission on April 8, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
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WEBVALLEY, INC.
(Exact name of issuer as specified in its charter)
Minnesota 7310 41-1842864
Primary Standard (I.R.S. Employer
(State or other Industrial Identification No.)
jurisdiction of Classification Code No.
incorporation or
organization)
1011 First Street South, Suite 203
Hopkins, Minnesota 55343
(612) 939-2500
(Address and telephone number of principal executive offices)
SATYA P. GARG
President and Chief Executive Officer
WebValley, Inc.
1011 First Street South, Suite 203
Hopkins, Minnesota 55343
(612) 939-2500
(Name, address and telephone number of agent for service)
Copies to:
Jeffrey C. Anderson, Esq. Robert K. Ranum, Esq.
Jennifer C. Debrow, Esq. James H. Snelson, Esq.
Gray, Plant, Mooty, Mooty and Fredrikson & Byron, P.A.
Bennett, P.A. 1100 International Centre
3400 City Center 900 Second Avenue South
33 South Sixth Street Minneapolis, MN 55402-3397
Minneapolis, MN 55402-3796
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Amount Proposed Maximum Aggregate
Title of Shares to be to be Offering Price Offering Amount of
Registered Registered(1) Per Share(2) Price(2) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value................. $ $34,500,000 $9,591
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</TABLE>
(1) Includes shares of common stock which may be purchased by the underwriters
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee under Rule 457(o).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission (SEC) pursuant
to said Section 8(a), may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
SEC. These securities may not be sold nor may offers to buy be accepted prior
to the time the registration statement becomes effective. This prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be a sale of these securities in any state in which such an offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated April 8, 1999.
Prospectus
Shares
[WEBVALLEY LOGO]
Common Stock
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This is our initial public offering and no public market currently exists for
our shares. We are offering shares. We propose to list the shares on the
Nasdaq National Market under the symbol "WEBV."
We estimate that the initial public offering price for the common stock will
be between $ and $ per share. For a discussion of the factors to be
considered in determining the initial public offering price, see
"Underwriting." The offering price may not reflect the market price of our
shares after the offering.
This investment involves a high degree of risk. See "Risk Factors" beginning
on page 6.
<TABLE>
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<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price $ $
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Underwriting Discounts $ $
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Proceeds to WebValley $ $
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</TABLE>
We have granted the underwriters a 30-day option to purchase up to
additional shares of our common stock from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------------
John G. Kinnard and Company, Incorporated
Kaufman Bros., L.P.
Pacific Crest Securities Inc.
The date of this prospectus is , 1999
<PAGE>
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made after the date of this prospectus imply that the information
contained in this prospectus has not changed since the date of this prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary.................................................... 3
Risk Factors.......................................................... 6
Use of Proceeds....................................................... 12
Dividend Policy and Termination of S Corporation Status............... 12
Capitalization........................................................ 13
Dilution.............................................................. 14
Selected Consolidated Historical and Pro Forma Financial Data......... 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 16
Business.............................................................. 21
Management............................................................ 30
Certain Transactions.................................................. 34
Principal Shareholders................................................ 35
Description of Securities............................................. 36
Shares Eligible For Future Sale....................................... 37
Underwriting.......................................................... 38
Legal Matters......................................................... 40
Experts............................................................... 40
Where You Can Find More Information................................... 40
Index to Financial Statements......................................... F-1
</TABLE>
Until , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
WebValley SM and the WebValley logo are our service marks. This prospectus
also includes trademarks, tradenames and service marks of other companies,
which are the property of their respective owners.
<PAGE>
Inside flap graphic:
A green background with indistinct images of the globe and a touch-tone
phone provides the underlayment for a green square upon which are colorful,
artistic renderings of the WebValley services. The white text over this square
reads, "WebValley provides Internet business solutions to more than 50,000
small businesses." In the center of these renderings is the WebValley logo with
the word "Solution" underneath. Faint arrows point from the center to each
rendering:
^ A figure chiseling a computer sitting on top of a Greek column with text
reading, "Professionally Designed Web Sites and Hosting"
^ A segmented square surrounding a globe, around which computer monitors
are revolving--the text reads, "Unlimited Internet Access"
^ A telephone ringing off the hook--"Professional Customer Service"
^ Three trumpets blowing a fanfare--"Web Site Promotion"
^ A stylized fax machine--"E-mail to fax"
^ An envelope out of which stars are shooting over an italic "E"--"Five E-
mail Accounts"
^ A cursive URL reading "www.yourbusiness.webvalley.com"--"Virtual Domain
Names"
Inside gatefold graphic:
In the center is a rectangle titled, "Successful Business Model." Around
this are six photos in a circular vignette.
^ In the upper left corner is a photo of a man with a headset sitting in
front of a computer screen. The caption reads, "Telemarketers adding
hundreds of clients every day."
^ At the top of the rectangle is a woman on the telephone with the
caption, "Accuracy verified in India by listening to digital voice
files."
^ In the upper right corner is a photo of a man and woman looking at a
computer screen with a pie chart on the monitor. The caption reads,
"Design and proofing of Web sites in India."
^ In the lower right corner is a photo of a man holding a large sheet of
paper standing in front of a printing press. The caption reads,
"Publishing, printing, and mailing done in USA."
^ At the bottom of the rectangle is a photo of stacks of silver coins. The
caption is, "Clients billed via local phone company."
^ In the lower left corner is a photo of a smiling woman with a headset
on. She is face out to the reader. The caption is, "Client support
representatives offer help and make changes."
On the lefthand side is a rectangle with the title, "Cost-Effective
Production Facility." There is an outline map of the United States of America
and an outline map of India. Minneapolis and New Delhi are indicated on their
respective map. A photo of a satellite underlies these two maps and arrows
point from Minneapolis to the satellite and from the satellite to New Delhi.
The text on this rectangle reads, "Offshore production and development unit in
India employs 45 Web designers and 20 software developers, connected through 64
kbps dedicated data line."
On the righthand side is a rectangle entitled, "Commitment to Technology
Development." This is a timeline showing:
^ 1996--Started with one-page Web sites
^ 1997--Added feedback form and map locator
^ 1998--Added virtual domain name, e-mail accounts, Internet access
^ 1999--Adding E-mail Anywhere, Shop Online, WebValley Manager, WebValley
Connect
^ 2000--Will add Office Anywhere including: communication center, office
desktop, document center
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, you should read the rest of this prospectus
before you invest in our common stock. Read the entire prospectus carefully,
especially the "Risk Factors" section, which describes the risks of investing
in our stock. Except as otherwise specified or the context otherwise requires,
share and per share information contained in this prospectus gives effect to
the 100-to-1 stock split we effected in March 1997 and the 4-to-1 stock split
we effected in August 1998.
WebValley, Inc.
WebValley is one of the largest providers of Web site design and hosting
services to small businesses in the United States, as measured by number of
sites designed and hosted. We offer effective, affordable Internet solutions
for the millions of small businesses throughout the United States that may
otherwise be intimidated by the cost, time or technology involved in
establishing a Web presence. Our current business solution consists of Web site
design and hosting, unlimited Internet access, a virtual domain name and up to
five e-mail accounts, all for $24.95 per month. Through our focused direct
marketing approach, we provide this solution to the underserved market of small
businesses and serve as their entry point onto the Internet. We design and host
Web sites for a diverse group of more than 50,000 clients, having added a net
of approximately 9,000 new clients through the first three months of 1999. We
believe that our focused marketing efforts, our low cost design and development
capabilities and our affordable Internet solutions represent significant
competitive advantages that have been key factors in the rapid growth of our
client base.
According to the Small Business Administration, there are 23 million small
businesses in the United States. For these 23 million small businesses, the
Internet provides an opportunity to access millions of potential customers.
Although usage of the Internet by small businesses is increasing, most small
businesses are not using the Internet as a strategic business tool and many do
not understand the opportunity the Internet provides to enhance their business.
According to a recent Arthur Andersen survey, only 23% of small and mid-sized
businesses had a Web site in 1998, but 65% intended to have a Web site in the
following 12 months. International Data Corporation estimates that spending on
Web site and e-commerce site development by businesses worldwide will grow from
$11.8 billion in 1999 to $43.6 billion by 2002.
Our mission is to become the leading provider of affordable Internet
solutions to these small businesses, building on our core Web site design and
hosting services. The key elements of our strategy are:
. aggressively add new clients through telemarketing, acquisitions and
alliances;
. introduce clients to more advanced Internet business solutions;
. offer superior service to our clients; and
. leverage the strength of our scalable business model.
We target small businesses and make it affordable for them to effectively
use the Internet as a business tool. Our marketing strategy employs different
methods to attract clients--telemarketing, acquisitions, our Web presence and
alliances. Once we have established a relationship with these clients, we
believe we can introduce them to more advanced Internet solutions.
Throughout our history we have continuously upgraded our internally
developed service offerings to meet the expanding needs of our current clients
and our targeted market. We are presently developing additional offerings to be
released later this year including: an e-commerce solution that will provide
our clients the ability to affordably capitalize on the emerging e-commerce
market; enhanced Web-based e-mail services that will allow businesses greater
flexibility in their communications systems; and a Web site development tool
that will enable our clients to quickly and easily modify their own sites.
3
<PAGE>
Our operating model follows two basic concepts: first, it is designed to be
scalable, allowing us to expand quickly to penetrate our targeted market
without heavy investment in new infrastructure. Our use of third-party
providers for telemarketing, client support and billing enhances this
scalability. Second, our model is operationally efficient, allowing us to
remain highly competitive in the rapidly developing Internet market we serve.
Our offshore design and development facility enables us to efficiently and
profitably serve our market as a low cost provider.
We conduct our Web site design and software development activities at our
subsidiary in India, Software Moguls India Private Limited ("India
Subsidiary"). We have found that highly trained information technology
professionals are more readily available at a lower cost in India than in the
United States. Our software developers build our business solutions and develop
efficient Web design tools. These proprietary software applications are
designed to enhance both the solutions offered to clients as well as the
scalability of our infrastructure. Our corporate headquarters and our India
Subsidiary are connected through a dedicated high-speed satellite link,
providing the ability to conduct parallel development and administration in the
United States and in India, as well as the ability to create redundancy to
protect the system's integrity.
WebValley was incorporated in Minnesota in May 1996. We operated under the
name Profile National Business Directory (PNBD) until October 1998, when we
changed our name to WebValley. Our corporate headquarters is located at 1011
First Street South, Suite 203, Hopkins, Minnesota 55343; our telephone number
is 612-939-2500; and our Web site is at http://www.webvalley.com. Information
contained in our Web site does not constitute part of this prospectus.
The Offering
<TABLE>
<S> <C>
Common
stock
offered by
WebValley.. shares
Common
stock to
be
outstanding
after this
offering.. shares(1)
Use of For capital expenditures,
proceeds.. working capital, repayment
of debt and other general
corporate purposes,
including acquisitions.
Proposed
Nasdaq
National
Market
symbol.... WEBV
</TABLE>
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(1) Excludes 778,672 shares reserved for issuance upon the exercise of
outstanding options, 2,000,000 shares issuable upon exercise of outstanding
warrants and shares issuable upon exercise of the warrant to be sold to
John G. Kinnard and Company, Incorporated.
4
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Summary Consolidated Financial Data
<TABLE>
<CAPTION>
May 22, 1996 Year ended December 31,
(inception) through -------------------------
December 31, 1996 1997 1998(1)
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<S> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales........................ $ 236,529 $ 2,360,575 $ 6,544,316
Operating income (loss).......... (147,154) 57,952 780,426
Net income (loss)................ (159,136) 17,945 723,657
Pro Forma Consolidated Statement
of Operations Data:(2)
Pro forma net income (loss)...... $(159,136) $ 10,325 $ 423,277
Pro forma net income (loss) per
share:
Basic........................... (.03) -- .05
Diluted......................... (.03) -- .04
Weighted average shares
outstanding:
Basic........................... 4,886,667 8,541,667 9,000,000
Diluted......................... 4,886,667 9,779,167 10,761,100
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------
1998 1998 (as adjusted)(3)
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<S> <C> <C>
Balance Sheet Data:
Working capital............................... $1,004,741
Total assets.................................. 1,848,829
Long-term debt................................ 757,810
Total shareholders' equity.................... 848,525
</TABLE>
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(1) In April 1998, we purchased 85% of the outstanding shares of the India
Subsidiary. This transaction was accounted for as a purchase and,
accordingly, our consolidated financial statements include the results of
the India Subsidiary since the acquisition date. We acquired the remaining
outstanding shares of the India Subsidiary on January 1, 1999, subject to
the final approval of the Reserve Bank of India.
(2) Pro Forma net income (loss) represents net income (loss) less a provision
for income taxes that would have been required had we been taxed as a C
corporation. We elected to be treated as an S corporation from January 1,
1997 through the closing of this offering and, as a result, were not
subject to federal and state income taxes for that period. Upon the closing
of this offering, we are converting from S corporation status to C
corporation status.
(3) Adjusted to reflect the sale of shares of common stock offered by us at
an assumed offering price of $ per share and the application of the
estimated net proceeds from the offering, and adjusted to reflect
anticipated S corporation distributions of approximately $ . See
"Dividend Policy and Termination of S Corporation Status."
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in WebValley. If any of the following risks actually occur,
our business, financial condition or results of future operations could be
materially adversely affected. If so, the trading price of our common stock
could decline and you may lose all or part of your investment. Many statements
in this prospectus are forward-looking statements, not historical facts. Such
forward-looking statements may be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "plan,"
"project," and similar expressions. Such statements involve risks and
uncertainties, including, but not limited to, all of the risk factors stated
below. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
Risks Related to Our Business
We have a short operating history.
Our operating history of approximately three years provides little basis for
evaluating our likelihood of success in the future. Our prospects must be
considered in light of our business plan and the risks, expenses and
difficulties encountered by companies with limited operating histories,
particularly companies in the new and rapidly evolving Internet market.
Furthermore, our limited operating history leads us to believe that period-to-
period comparisons of operating results are not meaningful and that the results
for any period should not be relied upon as an indication of future
performance.
We must expand our client base.
In order to increase our client base we must add clients at a rate faster
than our rate of attrition. Historically, our rate of attrition has averaged
13% per month, determined by the number of clients who cancel during the month
divided by the total number of clients at the end of the month. We plan to
attract new clients using telemarketing as well as acquire Web hosting clients
from other hosting services or Internet service providers (ISPs). Failure to
obtain new clients through telemarketing, acquisitions or alliances, or an
increase in attrition of clients, could materially adversely affect our
business, financial condition and operating results.
Our future offerings may not achieve market acceptance.
We plan to improve upon our current offerings and introduce new offerings,
such as an e-commerce solution, enhanced Web-based e-mail services and a Web
site development tool, but we cannot assure you that we will be successful in
developing or introducing new services or that the services will achieve market
acceptance. Failure to develop, introduce or successfully market our planned
offerings could materially adversely affect our ability to expand our business.
We are dependent on LEC relationships.
Our business is subject to specific risks associated with our use of local
telephone companies or Local Exchange Carriers (LECs) to do substantially all
of our billing. Our contracts with third-party billing companies contain
provisions that allow LECs to refuse to bill some transactions or to stop
billing with very short notice. We may be unable to establish alternative
billing arrangements effectively and efficiently. See "Business-- Operations."
We are dependent on our network.
Our internal network, particularly our connection to our India Subsidiary,
is crucial to our operations. If we cannot maintain speed, capacity and
reliability on our internal networks, our ability to provide services to our
clients will suffer. Despite measures we have taken, our network is potentially
vulnerable to computer viruses, hacking, power failures or similar disruptions
that could materially adversely affect our business, financial condition and
operating results.
6
<PAGE>
We are dependent on one Internet access provider for our clients.
Our clients who access our ISP services use dial-up points of presence
(POPs) provided by PSINet, Inc., one of the largest resellers of ISP services
in the United States. Our dependence on PSINet as sole supplier of national
Internet access for our clients could materially adversely affect our business
if we needed to change suppliers quickly. PSINet is not exclusive to our
clients and we have no direct control over network reliability and other
service quality concerns. Network capacity constraints may occur in the future,
which could result in slow downs, delays or inaccessibility and lead to loss of
clients. Moreover, PSINet provides network access to some of our competitors
and PSINet could choose to grant these competitors preferential pricing or
preferential network access, potentially limiting our clients' ability to
access the Internet. Even without preferential treatment, increased usage of
PSINet's POPs by other ISPs and online service providers may negatively affect
access system performance and thus our ability to effectively service our
clients.
We are dependent on telecommunications carriers.
We are dependent on local telecommunications carriers and other companies to
provide data communications capacity via local telephone lines and leads to
long distance lines. We are also dependent on a telecommunications satellite to
communicate with our India Subsidiary. We are subject to potential disruptions
in these telecommunications services and may have no means of replacing these
services on a timely basis or at all in the event of any disruption. Any
disruptions could materially adversely affect our business, financial condition
and operating results. Telecommunications carriers may also become our
competitors or grant our competitors preferential pricing, which could
materially adversely affect our business, financial condition and operating
results.
We are dependent on key personnel.
Our performance is substantially dependent on the performance of our senior
management and key technical personnel. In particular, our success depends on
the continued efforts of our senior management team, especially our Chairman,
President and Chief Executive Officer, Satya P. Garg, and our Vice President of
Technology, Rakesh Verma. Mr. Garg is covered by a life insurance policy under
which we are the beneficiary. In April 1999, we entered into a two-year
employment agreement with Mr. Garg that contains a covenant not to compete for
one year after termination. Other than confidentiality and assignment of
invention agreements, we do not have employment or noncompete agreements with
Mr. Verma. The loss of the services of any of our executive officers or other
key employees could materially adversely affect our business, financial
condition and operating results.
Anticipated rapid growth may strain our operations.
Anticipated rapid growth will continue to cause a significant strain on our
managerial, financial and information systems. To accommodate our increasing
size and manage our growth, we must continue to implement and improve our
operating systems and increase the number of employees. Some members of our
senior management have only recently joined us. Our Chief Financial Officer,
Robert M. Ringstad, joined us in March 1999 and Scott A. Schwefel joined us in
December 1998 as a consultant and became Vice President of Marketing in
February 1999. Additionally, most members of our management have limited
experience managing a public company or a large operating company. We cannot
assure you that our management will be able to effectively or successfully
manage our growth.
Our financial results may fluctuate.
Our financial results may fluctuate significantly because of several
factors, including:
. costs associated with acquiring and retaining clients;
. increased competition;
. changes in our pricing policies and those of our competitors;
7
<PAGE>
. changes in our operating expenses, including telecommunications and
billing costs; and
. timing and market acceptance of new and upgraded offerings by us and our
competitors.
We describe all of these factors in more detail in this section. Many of these
factors are beyond our control.
We are dependent on our telemarketing relationship.
We currently outsource telemarketing to a third-party provider, U.S. Protel,
Inc., of which our Chairman, President and Chief Executive Officer is a 25%
shareholder. We are currently the only client of this telemarketing company and
have been able to obtain favorable pricing terms. We anticipate that as we
grow, we will seek outsourcing arrangements with additional third-party
providers of telemarketing services. The transition to other telemarketing
companies instead of, or in addition to, our current relationship with U.S.
Protel could increase our costs or pose other problems that could materially
adversely affect our business, financial condition and operating results. See
"Certain Transactions."
Government regulations and general economic conditions in India may change
unexpectedly.
Our offshore software development center in India is a significant element
of our business strategy. Changes in the business or regulatory climate of
India could materially adversely affect our business, financial condition and
operating results. The Indian government exerts significant influence over its
economy. In the recent past, the Indian government has provided significant tax
incentives and relaxed regulatory restrictions in order to encourage foreign
investment in the economy, including the technology industry. The benefits that
directly affect us include tax holidays, liberalized import and export duties
and preferential rules on foreign investment and repatriation.
Although wages in India are significantly lower than in the United States
and elsewhere for comparably skilled information technology (IT) professionals,
wages in India are increasing at a faster rate than in the United States. In
the past, India has experienced significant inflation and shortages of foreign
exchange and has been subject to civil unrest and acts of terrorism. Changes in
inflation, interest rates, taxation or other social, political, economic or
diplomatic developments affecting India in the future could materially
adversely affect our business, financial condition and operating results.
We are subject to risks associated with potential acquisitions.
We intend to consider strategic acquisitions of technologies, products,
businesses or customers as opportunities may arise. Acquisitions often include
risks, including:
. we may experience difficulty in integrating acquired operations;
. we may be unable to retain the acquired clients;
. acquisitions may disrupt our ongoing business;
. management's attention may be diverted from other business concerns;
. we may not be able to successfully incorporate acquired technology and
rights into our service offerings and maintain uniform standards,
controls, procedures and policies;
. we may be required to incur debt or issue equity securities, which may be
dilutive to existing shareholders, to pay for acquisitions; and
.acquisitions may not result in any return on our investment and we may lose
our entire investment.
We have limited protection of our intellectual property rights.
Our success depends, in part, upon software tools and technologies that we
developed internally. We do not have registered copyrights or patent
protection, but rely on a combination of confidentiality and assignment of
invention agreements and common law trade secret, copyright and trademark law
to protect our proprietary
8
<PAGE>
rights. We cannot be sure that the steps we have taken will be adequate to
avoid misappropriation of our proprietary information. The laws of India, where
our applications are currently developed, may not protect our intellectual
property rights to the same extent as the laws of the United States. Our
competitors may independently develop technologies that are substantially
equivalent or superior to our proprietary property and technology.
Year 2000 risks may adversely affect us.
The Year 2000 problem is the potential for system and processing failure of
date-related data as a result of computer-controlled systems that use two
digits rather than four to define the year. If not corrected, many computer
software applications could fail or create erroneous results by, at or beyond
the Year 2000. Failures by our software, hardware, telecommunications or
electrical systems, or third-party provided services could materially adversely
affect our business, operating results or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Year 2000 Compliance."
Risks Related to Our Industry
Our industry is highly competitive.
The market for Web site design and hosting, Internet access and additional
Web-based services is extremely competitive and highly fragmented. No
substantial barriers to entry exist and we expect that competition will
continue to intensify. Competition could result in increased marketing
expenses, client acquisition costs and client attrition, all of which could
materially adversely affect our business, financial condition and operating
results. Many of our competitors and potential competitors may be larger and
more established than we are, with greater financial and other resources,
particularly as consolidation in the industry continues. Our competitors may be
able to respond more quickly to market demands or to devote greater resources
to the promotion and sale of their services than we can. See "Business--
Competition."
We must keep pace with technological change to remain competitive.
The market for Internet services is characterized by rapidly changing
technology, evolving industry standards, new delivery systems, changes in
client needs and frequent new service and product introductions. The
introduction of new technologies and industry standards may render our existing
services or underlying technology obsolete or unmarketable. Any failure on our
part to use new technologies effectively, to shift to new delivery systems
efficiently, to develop our technical expertise and new services or to enhance
existing services on a timely basis, either internally or through arrangements
with third parties, could materially adversely affect our business, financial
condition and operating results.
We are dependent on continued growth of the Internet.
If demand for Internet services fails to continue to grow or grows more
slowly than anticipated, our business, financial condition and operating
results will be materially adversely affected. Conversely, to the extent that
the Internet continues to experience significant growth in the numbers of users
and level of use, there can be no assurance that the Internet infrastructure
will be able to support the demands placed on it by this growth.
The market for Internet services is in an early stage of growth. Critical
issues concerning commercial use of the Internet, including practice standards
and protocol, reliability, cost, ease of use, access and quality of service,
remain uncertain and may affect the growth of the Internet. Small businesses
may not be willing to accept new methods of conducting business and exchanging
information over the Internet. Further, until more comprehensive security
technologies are developed, the security and privacy concerns of existing and
potential clients may inhibit growth of the Internet service industry in
general and e-commerce in particular, thus materially adversely affecting our
business, financial condition and operating results.
9
<PAGE>
We are dependent on IT professionals.
Our future success depends on our continued ability to attract, develop,
motivate and retain highly skilled IT professionals with the technical skills
and experience necessary to develop offerings and maintain our infrastructure.
Qualified IT professionals are in high demand worldwide and are likely to
remain a limited resource for the foreseeable future. We cannot be certain that
we will be able to attract or retain quality IT professionals.
Government regulation may adversely affect us.
Few laws or regulations are currently directly applicable to the Internet.
However, because of the Internet's popularity and increasing use, new laws and
regulations may be adopted. Such laws and regulations may cover issues such as
user privacy, pricing, taxes, content and distribution. The applicability of
current laws or future laws is unclear. We may be exposed to liability or our
business could be adversely affected. New laws could impede the growth of the
Internet or e-commerce. Additionally, legislation regulating LEC billing could
adversely affect our business, financial condition or operating results. See
"Business--Government Regulations."
We may be subject to potential Internet-related liability.
Liability related to use of the Internet is evolving and uncertain. We may
be exposed to potential risks because of our e-mail services, such as
liabilities or claims resulting from unsolicited e-mail ("spamming"), lost or
misdirected messages, illegal or fraudulent use of e-mail or interruptions or
delays in e-mail service. We could also be exposed to liability with respect to
third-party information that may be accessible through our Web site or through
content and materials posted on our clients' Web sites. It is possible that
claims could be made against us for defamation, negligence, copyright or
trademark infringement, or other theories based on the nature and content of
materials disseminated through our network.
Risks Related to This Offering
No public market has existed for our common stock.
Before this offering, no public market existed for our common stock. The
initial public offering price was determined by negotiations between us and the
underwriters. An active trading market for the common stock may not develop or
be sustained after the offering and the market price of the common stock may
decline below the public offering price.
Our common stock may experience price volatility.
Our common stock could experience substantial price volatility as a result
of a number of factors, including quarter-to-quarter variations in our actual
or anticipated financial results, announcements by us or our competitors,
changes in stock market analysts' recommendations regarding us or our
competitors, developments in the industry and general market conditions. In
addition, the stock market has experienced significant price and volume
fluctuations that have affected the market price of many companies and that
have at times been unrelated to the operating performance of the specific
companies whose stock is traded, particularly Internet-related companies. We
cannot assure you that our stock will trade at the same levels as other
Internet stocks or that Internet stocks in general will sustain their current
market prices. Broad market fluctuations and general economic conditions could
materially adversely affect the market price of our common stock.
Investors will incur immediate dilution.
Investors purchasing shares of our common stock in this offering will incur
immediate and substantial dilution in net tangible book value per share. To the
extent outstanding options or warrants to purchase common stock are exercised,
further dilution will occur. See "Dilution."
10
<PAGE>
We will have broad discretion in the use of proceeds.
A substantial portion of the proceeds is expected to be used for working
capital and other general corporate purposes, including potential acquisitions.
Accordingly, we will have broad discretion to allocate the proceeds of this
offering and to determine the timing of expenditures.
Our Chairman, President and Chief Executive Officer will control our
elections.
Upon completion of this offering, Satya P. Garg, our Chairman, President and
Chief Executive Officer will beneficially own approximately % ( % if the
underwriters' over-allotment option is exercised in full) of the issued and
outstanding shares of our common stock. As a result of this ownership, Mr. Garg
will have the ability to control the elections of our directors and other
matters presented to a vote of our shareholders. Such a level of ownership may
have the effect of delaying, deferring or preventing a change in control and
will allow Mr. Garg to prevent other shareholders from taking action by
shareholder vote.
11
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock offered to
the public by us at an assumed price of $ per share are estimated to be $
million ($ million if the underwriters' over-allotment option is exercised
in full) after deducting the underwriting discount and estimated offering
expenses.
We will use the net proceeds of the offering for general corporate purposes,
including additions to working capital and acquisitions of technologies,
products, businesses or customers as opportunities may arise. We may use a
portion of the proceeds to develop alternative billing arrangements, to build
infrastructure such as redundant high-speed multiple servers in India and the
United States and to upgrade software and hardware systems or to pay off our
approximately $1.0 million of existing indebtedness. This indebtedness bears
interest at a rate of prime plus 3% and is due July 15, 2001.
Pending use of the net proceeds of this offering, we plan to invest the
proceeds in short-term money market investments, high-grade commercial paper
and interest-bearing bank accounts.
DIVIDEND POLICY AND TERMINATION OF S CORPORATION STATUS
As of January 1, 1997, we elected to be treated as an S corporation. Since
then we have been, and through the closing date of the offering will be,
subject to taxation under subchapter S of the Internal Revenue Code and
comparable state tax regulations. As a result, our earnings have been taxed for
federal and state income purposes directly to our shareholders rather than to
the company.
Following the closing date of the offering, we will be taxed under
subchapter C of the Code, which will make us subject to federal and state
corporate income taxes. In connection with the termination of our S corporation
status upon the closing of this offering, we will make a distribution to the
current shareholders of 40% of previously taxed, but undistributed, S
corporation earnings. As of December 31, 1998, the undistributed earnings
determined on a cash basis were approximately $255,000. The actual amount of
the distribution will be adjusted to reflect the taxable income and any
shareholder distributions from January 1, 1999 through the termination of the S
corporation status. The amount of previously taxed S corporation earnings not
distributed to shareholders will be added to paid-in capital. This amount is
estimated to increase paid-in capital by $ .
Any future declaration and payment of dividends will be subject to the
discretion of our Board of Directors, will be subject to applicable laws and
will depend upon our operating results, earnings, financial condition, cash
requirements, restrictions by lenders and any other factors deemed relevant by
the Board of Directors. We currently anticipate that all of our earnings will
be retained for the continued development of our business and we do not
anticipate paying any cash dividends in the foreseeable future.
12
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998, our capitalization
on an actual basis and on an adjusted basis to give effect to the sale of the
shares offered hereby at an assumed initial public offering price of $
per share, after deducting underwriting discounts, the estimated offering
expenses and estimated S corporation distributions to our existing shareholders
of $ . The final S corporation distributions will be made shortly after the
closing of this offering. Any distributions to be paid relating to the period
after December 31, 1998 are not reflected in the following table. This
information should be read in conjunction with our consolidated financial
statements and the notes relating to these statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
--------------------
Actual Adjusted
---------- --------
<S> <C> <C>
Note payable.............................................. $ 757,810
Common stock, $0.01 per value, 200,000,000 shares
authorized; 9,000,000 shares issued and outstanding;
shares issued and outstanding as adjusted(1)............. 90,000
Additional paid-in capital................................ 359,700
Deferred compensation..................................... (179,700)
Accumulated other comprehensive loss...................... (3,941)
Retained earnings......................................... 582,466
---------- ----
Total shareholders' equity.............................. 848,525
---------- ----
Total capitalization.................................... $1,606,335
========== ====
</TABLE>
- --------
(1) Excludes 2,778,672 shares issuable upon exercise of options and warrants
outstanding as of the date of this prospectus and shares issuable upon
exercise of the warrant to be sold to John G. Kinnard and Company,
Incorporated.
13
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1998, was approximately
$549,000, or $.06 per share of common stock. Net tangible book value per share
is determined by dividing our net tangible worth (tangible assets less
liabilities) by the aggregate number of shares of common stock outstanding.
After giving effect to the final S corporation distribution to the current
stockholders, estimated at $ , had the termination occurred on December 31,
1998, and the sale of the shares of common stock offered hereby at an
assumed initial public offering price of $ per share and the application of
the net proceeds therefrom, our pro forma net tangible book value as of
December 31, 1998 would have been approximately $ million, or $ per share
of common stock. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing shareholders and an immediate
dilution of $ per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share (mid-range)..... $
----
Net tangible book value per share as of December 31, 1998..... $0.06
Decrease attributable to the final S corporation
distribution.................................................
Increase per share attributable to new investors..............
-----
Pro forma net tangible book value per share after this
offering.......................................................
----
Dilution per share to new investors............................. $
====
</TABLE>
The following table sets forth as of December 31, 1998, the difference
between the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by the existing
shareholders and by new investors (at an assumed public offering price of $
per share). The table assumes that no shares are purchased in this offering by
existing shareholders. To the extent existing shareholders purchase shares in
this offering, their percentage ownership, total consideration and average
consideration per share will be greater than is shown.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------- ----------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.. 9,000,000 % $ 270,000 % $0.03
New investors.......... % $ % $
--------- --- ------------ -------
Total................ 100% $ 100% $
========= === ============ =======
</TABLE>
The foregoing table excludes:
. 778,672 shares issuable upon exercise of options outstanding as of the
date of this prospectus (at a weighted average exercise price of $1.92
per share),
. 2,000,000 shares issuable upon exercise of warrants outstanding as of the
date of this prospectus (at an exercise price of $0.25 per share) and
. shares issuable upon exercise of the warrants to be sold to John G.
Kinnard and Company, Incorporated (at an exercise price of $ per
share).
To the extent these shares are issued, there will be further dilution to new
investors.
14
<PAGE>
SELECTED CONSOLIDATED HISTORICAL
AND PRO FORMA FINANCIAL DATA
The following table shows selected consolidated financial data for each of
the periods indicated and is derived from our consolidated financial
statements. The selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The consolidated statement of operations data for the years ended
December 31, 1997 and 1998 and the period from May 22, 1996 (inception) to
December 31, 1996, except for the pro forma consolidated statement of
operations data, and the consolidated balance sheet data at December 31, 1997
and 1998 are derived from the consolidated financial statements audited by
Ernst & Young LLP included elsewhere in this prospectus. The balance sheet data
at December 31, 1996 is derived from financial statements not included in this
prospectus.
<TABLE>
<CAPTION>
May 22, 1996
(inception) through Year Ended December 31,
December 31, -------------------------
1996 1997 1998(1)
------------------- ----------- -------------
<S> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales......................... $ 236,529 $ 2,360,575 $ 6,544,316
Cost of goods sold................ 45,450 177,639 701,258
--------- ----------- -----------
Gross profit...................... 191,079 2,182,936 5,843,058
Operating expenses:
Sales and marketing............. 161,697 819,490 1,845,441
General and administrative...... 176,536 1,305,494 3,217,191
Operating income (loss)........... (147,154) 57,952 780,426
Net income (loss)................. (159,136) 17,945 723,657
Pro Forma Consolidated Statement
of Operations Data:(2)
Net income (loss) as reported..... $(159,136) $ 17,945 $ 723,657
Pro forma income tax provision.... -- 7,620 300,380
--------- ----------- -----------
Pro forma net income (loss)....... $(159,136) $ 10,325 $ 423,277
========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1996 1997 1998 1998 (as adjusted)(3)
--------- -------- ---------- ---------------------
<S> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............. $ 6,215 $ 16,114 $ 183,875 $
Working capital.......... 88,435 53,521 1,004,741
Total assets............. 135,278 664,370 1,848,829
Long-term debt........... 238,100 -- 757,810
Total shareholders'
equity (deficit)........ (139,136) 128,809 848,525
</TABLE>
- --------
(1) In April 1998, we purchased 85% of the outstanding shares of the India
Subsidiary. This transaction was accounted for as a purchase and,
accordingly, our consolidated financial statements include the results of
the India Subsidiary since the acquisition date. We acquired the remaining
outstanding shares of the India Subsidiary on January 1, 1999, subject to
the final approval of the Reserve Bank of India.
(2) Pro Forma net income (loss) represents net income (loss) less a provision
for income taxes that would have been required had we been taxed as a C
corporation. We elected to be treated as an S corporation from January 1,
1997 through the closing of this offering and, as a result, were not
subject to federal and state income taxes for that period. Upon the closing
of this offering, we are converting from S corporation status to C
corporation status.
(3) Adjusted to reflect the sale of shares of common stock offered by us at
an assumed offering price of $ per share and the application of the
estimated net proceeds from the offering, and adjusted to reflect
anticipated S corporation distributions of approximately $ . See
"Dividend Policy and Termination of S Corporation Status."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion with the financial statements and
related notes included elsewhere in this prospectus. The results discussed
below are not necessarily indicative of the results to be expected in any
future periods. This discussion contains forward-looking statements based on
current expectations, which involve risks and uncertainties. Actual results and
the timing of certain events may differ significantly from those projected in
the forward-looking statements, due to a number of factors, including those
discussed in this section, in the "Risk Factors" section and elsewhere in this
prospectus.
Overview
WebValley was formed on May 22, 1996 as a provider of Internet solutions for
small businesses. We offer effective, affordable Internet solutions for the
millions of small businesses throughout the United States that may be
intimidated by the cost, time or technology involved in establishing a Web
presence. Specifically, we build and host Web sites for these small businesses.
Our operating model follows two basic concepts: first, it is designed to be
scalable, allowing us to expand quickly to penetrate our target market, without
heavy investment in new infrastructure. Second, our model is operationally
efficient, allowing us to remain highly competitive in the rapidly developing
Internet market we serve. Our current business solution consists of Web site
design and hosting, unlimited Internet access, a virtual domain name and up to
five e-mail accounts for an affordable monthly fee of $24.95.
Our India Subsidiary is a key component of our competitive strength because
of its access to highly trained IT professionals at relatively low cost. We use
our India Subsidiary professionals and a small number of domestic IT
professionals to provide the essential functions of Web site design,
maintenance of the infrastructure to support site hosting and development of
proprietary software tools used to automate the design function. This approach
has enabled us to reduce the cost of Web site design from an average of $5.30
per site in 1996 to $3.42 per site in 1998.
We use third-party providers for certain high volume transaction-based
services to maintain the scalability of our business model. We acquire and
support our clients using third-party providers in the areas of telemarketing,
billing and client support. Although we believe our current telemarketing
provider will be adequate for our needs through 1999, our focused and
uncomplicated telemarketing approach allows us to quickly expand to one or more
of the numerous other third-party telemarketing providers available. This
outsourcing approach has allowed us to rapidly expand our client base without
incurring significant infrastructure and overhead costs to support these
functions. As our business grows and our service offerings expand and become
more complex, we will continually evaluate the economic and strategic
implications of bringing these functions in-house.
As our small business clients develop awareness of the economic potential
afforded by the Internet, we anticipate enhanced client relationships and
higher average revenue per client as we develop the additional services
described below:
. an e-commerce solution, WebValley Shop Online, that will provide our
clients with the ability to affordably capitalize on the emerging e-
commerce market, and sell their products and services online;
. an enhanced Web-based e-mail service, WebValley E-mail Anywhere, that
will allow e-mail access from any Web browser;
. a Web site development tool, WebValley Manager, that will enable our
clients to easily modify their own Web sites;
. a small business intranet office solution, WebValley Office Anywhere,
that will allow our clients to share documents, communicate with
customers, and provide scheduling and groupware functionality.
In April 1998, we acquired an 85% interest in the India Subsidiary, a
software development company. We acquired the remaining outstanding shares of
the India Subsidiary in January 1999, subject to the final approval
16
<PAGE>
of the Reserve Bank of India. The acquisition was accounted for using the
purchase method of accounting. As a result of this treatment, the purchase
price was allocated to net assets acquired based on estimated fair values and
approximately $320,000 of cost in excess of net assets acquired was recorded
as goodwill.
From January 1, 1997 to the closing of this offering, we operated as an S
corporation. A pro forma tax provision has been presented in the consolidated
statements of operations as if we were a taxable entity for all periods. We
will terminate our status as an S corporation upon the closing of this
offering.
All references to 1996 in this section refer to the period from May 22,
1996, through December 31, 1996.
Results of Operations
Comparison of the Period From May 22, 1996 Through December 31, 1996 and the
Years Ended December 31, 1997 and 1998
The following table compares key operating results as a percentage of net
sales for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Statement of operations data:
Net sales........................................... 100.0% 100.0% 100.0%
Cost of goods sold.................................. 19.2% 7.5% 10.7%
------- ------- -------
Gross profit.................................... 80.8% 92.5% 89.3%
Operating expenses:
Sales and marketing............................... 68.4% 34.7% 28.2%
General and administrative........................ 74.6% 55.3% 49.2%
------- ------- -------
Total........................................... 143.0% 90.0% 77.4%
Operating income (loss)............................. (62.2%) 2.5% 11.9%
</TABLE>
Net Sales. Net sales are derived from monthly charges for the design and
hosting of Web sites for our small business clients. Net sales increased
$2,124,000 in 1997 and $4,184,000 in 1998. The majority of the increases in
net sales were attributable to our growing client base. Client accounts billed
numbered 3,762 in December 1996, 19,521 in December 1997 and 31,643 in
December 1998. Monthly charges for designing and hosting Web sites increased
from $19.95 to $24.95 for new clients added after June 1998.
Cost of Goods Sold. Cost of goods sold consists of the expenses associated
with designing Web sites, shipping costs for "Welcome Packets," Internet
access costs and ISP charges. Cost of goods sold increased $132,000 in 1997
and $524,000 in 1998. The majority of the increase in cost of goods sold was
attributable to the growth in client accounts. As a percentage of sales, costs
of goods sold declined from 19.2% of net sales in 1996 to 7.5% in 1997 and
increased to 10.7% of net sales in 1998. The decline in costs as a percentage
of sales from 1996 to 1997 was primarily due to efficiencies gained through
improved processing techniques. The improvement in processing continued into
1998 with the use of the India Subsidiary as the primary provider of Web site
design. The percentage improvement, however, was offset by a one-time charge
of $97,000 incurred to establish Internet access for our clients in 1998.
Development costs per Web site averaged $5.30 for 1996, $3.70 for 1997 and
$3.42 for 1998. We are developing software applications to further automate
the design process. We believe these applications will allow us to avoid
increases in the average design costs per Web site in the future while
enhancing features and functionality of our clients' Web sites. Historically
our clients have not accessed the Internet on a significant basis through our
dial up service and accordingly, our financial results do not include material
Internet access expenses. As our clients' understanding of the Internet
increases and they make use of services such as WebValley Shop Online, we
expect significant increases in the costs we incur to provide Internet access.
We expect these increases to be offset by the related increases in revenues
from the sales of the new services.
17
<PAGE>
Sales and Marketing. Sales and marketing expenses have consisted primarily
of telemarketing costs incurred soliciting new clients. Sales and marketing
expenses increased $658,000 in 1997 and $1,026,000 in 1998. The increase in
sales and marketing expenses is a direct result of telemarketing expenses,
which increased $657,000 in 1997 and $1,041,000 in 1998. As a percentage of net
sales, sales and marketing expenses declined from 68.4% in 1996 to 34.7% in
1997 and declined further to 28.2% in 1998. Total selling costs increased due
to the growth in our client base. However, these costs as a percentage of
revenues declined because of recurring revenues earned on accounts sold in
previous periods.
In order to reduce client attrition, we intend to pursue an enhanced
qualification process in our telemarketing strategy in 1999. We believe this
approach will increase the average cost of acquiring new clients and have a
positive effect on our retention of those clients. We intend to promote the
WebValley image and our services through advertising and alliances, and these
activities will increase expenditures on sales and marketing in the future.
General and Administrative. General and administrative expenses consist
primarily of billing fees and allowances, salaries and client service costs.
Total expenditures for general and administrative expenses increased $1,129,000
in 1997 and $1,912,000 in 1998. As a percentage of net sales, general and
administrative expenses declined from 74.6% in 1996 to 55.3% in 1997 and to
49.2% in 1998. This relative improvement results primarily from the growth of
the client billing base.
Billing fees and allowances increased $814,000 in 1997 and $1,590,000 in
1998. As a percentage, fees and allowances represented 38.1% of the net sales
in 1996, 38.3% in 1997 and 38.1% in 1998. We use the services of two third-
party billing agents who in turn bill our clients through LECs. The increases
in billing fees and allowances were primarily due to increases in sales and the
associated increases in billing activity. We intend to develop internal systems
that will enable us to work directly with the LECs. Although we will incur
expenses in the development of these systems, we believe these efforts will
reduce the costs associated with billing over the long-term.
Salaries increased $213,000 in 1997 and $143,000 in 1998. Increases in
salaries were due primarily to increased staffing levels to support the growth
of our client base. We recently hired key executives to complete our management
team and we expect to hire additional personnel as our client base grows.
Accordingly, salaries will increase in the future. Additionally, our research
and development costs consist primarily of salaries and benefits for employees
developing software tools for internal use. In 1998, we incurred $26,000 of
research and development costs. As we develop new applications, we anticipate
increased expenditures on research and development through our cost-effective
India Subsidiary. Because highly trained IT professionals are more readily
available at a lower cost in India than in the United States, the amounts of
these expenditures will be much lower than similar services obtained
domestically.
In 1996 and 1997, our client service was handled internally and accounted
for in our general and administrative expenses. In 1998, we established a
relationship with a third-party client support provider and incurred costs of
$62,000. Client support representatives can edit Web sites, change client
information and issue refunds. We intend to significantly increase expenditures
on client support in the future as we increase our focus on client retention.
In March 1999, we began an outbound client satisfaction program, involving
telephone calls to our existing clients to discuss their Internet presence,
confirm that they are satisfied with our offerings and discuss how they can
realize more benefits from their Web site. One of the goals of this effort is
to improve our client retention rates. While we have added approximately 9,000
new clients net of attrition through the first three months of 1999,
historically our attrition rate has averaged 13% per month. This attrition rate
is determined by the number of clients who cancel during a month divided by the
total number of clients at the end of the month. We believe that because many
of our clients are not experienced users of the Internet, when these clients
cancel our services, they may cease their Web presence, and do not migrate to a
competitor. Our outbound calling program will educate our clients about the
benefits of a Web site and using Internet technologies to grow their business.
18
<PAGE>
We also expect to incur additional general and administrative expenses
associated with being a public company including insurance for directors and
officers, expenses incurred in connection with investor relations and
shareholder communications and related professional fees.
Interest Expense. Interest expense consists of interest accrued on our line
of credit and notes payable. We incurred interest expense of $12,000 in 1996,
$40,000 in 1997 and $57,000 in 1998. Our loan agreement will require a minimum
interest payment of approximately $108,000 in 1999. This will be offset by
interest income earned on cash flow generated from operations and a portion of
the proceeds generated by this offering.
Liquidity and Capital Resources
We have financed our operations through sales of our common stock, advances
on notes from companies owned by our Chairman, President and Chief Executive
Officer, supplemental bank borrowings and in 1998, from cash flows generated
from operating activities. Working capital was $54,000 at December 31, 1997 and
$1,005,000 at December 31, 1998. The increase was primarily attributable to an
increase in accounts receivable related to our increase in net sales, the
reduction of current portion of notes payable and advances under our loan
agreement, considered a long-term note payable.
As of March 31, 1999, we had borrowed $1,109,000 under our loan agreement.
The loan agreement allows us to borrow up to $3,000,000 on a revolving basis
subject to limitations based on collections of accounts receivable and earnings
before interest, taxes, depreciation and amortization. The loan agreement
terminates on July 15, 2001. Amounts outstanding under the loan agreement bear
interest at the rate of 3% above the prime rate and the minimum monthly
interest payable under the loan agreement is equal to the interest that would
be due if $1,000,000 were advanced on the loan. The loan agreement provides for
a termination fee equal to the greater of the aggregate interest paid in the
six months prior to termination, the minimum monthly interest multiplied by the
number of months remaining on the loan or the average interest over the six
months before termination multiplied by the number of months remaining on the
loan.
In 1996 and 1997, we used $235,000 and $365,000 in our operating activities
primarily to fund an operating loss in 1996 and to carry the increase in
accounts receivable as our business grew. In 1998, operating activities
generated $505,000. In 1996, we invested $12,000 in property and equipment. In
1997 we invested $90,000 in property and equipment. In 1998, we invested
$237,000 in property and equipment and $372,000 in the acquisition of the India
Subsidiary. The net cash used in operating and investing activities was
provided by sales of our common stock and advances on notes payable. We
received $15,000 from the sale of our common stock in 1996 and $250,000 from
the sale of our common stock in 1997. Net advances on notes payable and under
our loan agreement were $238,000 in 1996, $215,000 in 1997 and $275,000 in
1998.
As of December 31, 1998, we had no existing commitments for capital
expenditures. We anticipate future capital expenditures to support the growth
in our client base and to keep pace with technological improvements in the
infrastructure used to serve our clients.
We are an S corporation for income tax purposes. Upon the closing of this
offering, we will terminate our status as an S corporation. We expect to make a
distribution to our shareholders of $ , before terminating S corporation
status for payment of their respective tax liabilities associated with income
of WebValley attributed to them.
We believe that funds generated by operations, proceeds from this offering
and advances available under our loan agreement will be sufficient to finance
current operations and capital expenditures for at least the next twelve
months.
Year 2000 Compliance. The Year 2000 problem is the potential for system and
processing failure of date-related data as a result of computer-controlled
systems that use two digits rather than four to define the year. If not
corrected, many computer software applications could fail or create erroneous
results by, at or
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beyond the Year 2000. We recognize the need to ensure that our operations will
not be adversely impacted by the Year 2000 problem.
State of Readiness. We have implemented a plan to modify our information
technology to be ready for the Year 2000. Our software and hardware is
being audited by an internal team of developers. Audits of our third-party
hardware, communications equipment and suppliers of services are planned to
begin in April 1999. Because we rely on third-party providers for
telemarketing, client support and billing, we are requesting Year 2000
compliance letters from these suppliers by September 1999.
Costs. We have not incurred any material expenditures to date in
connection with evaluating Year 2000 compliance. Currently we do not have
enough information to estimate any potential expenditures should we need to
replace any of our software or third-party software, hardware or services.
These expenses could materially adversely affect our business.
Risks. We are not aware of any Year 2000 compliance problems that would
have a material adverse effect on our business, financial condition or
results of operations. We cannot assure you that we will discover Year 2000
problems that may exist in our software or third-party software, hardware
or services, or that any of these problems will be resolved. If we fail to
fix or replace our software, hardware or services on a timely basis, we
could lose revenues or clients, incur increased operating costs or
experience business interruptions, any of which could have an adverse
effect on our business. We cannot assure you that governmental agencies,
utility companies, telecommunications carriers, ISPs or third-party service
providers will be Year 2000 compliant. The failure by such entities to be
Year 2000 compliant could result in a systemic failure beyond our control,
such as prolonged Internet, telecommunications or electrical failure, which
could also prevent us from delivering our services or decrease use of the
Internet generally.
Contingency Plan. As discussed above, we are engaged in an ongoing Year
2000 assessment and have not yet developed any contingency plans. The
responses received from third-party vendors and service providers will be
taken into account in determining the nature and extent of any contingency
plans.
Recently Issued Accounting Standards. In March 1998, the American Institute
of Certified Public Accountants issued Statement of Position 98-1, Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use.
Statement of Position 98-1 is effective for financial statements for years
beginning after December 15, 1998. Statement of Position 98-1 provides guidance
over accounting for computer software developed or obtained for internal use
including the requirement to capitalize specified costs and amortization of
such costs. We do not expect this standard to have a material effect on our
capitalization policy.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Cost of Start-Up Activities.
Statement of Position 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs to be expensed as incurred. Because we have
expensed these costs historically, the adoption of this standard is not
expected to have a significant impact on our operations, financial position or
cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters beginning after
June 15, 1999. Because we do not currently engage or plan to engage in
derivative or hedging activities, there will be no impact to our results of
operations, financial position or cash flows upon the adoption of this
standard.
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BUSINESS
Overview
WebValley is one of the largest providers of Web site design and hosting
services to small businesses in the United States, as measured by number of
sites designed and hosted. We offer effective, affordable Internet solutions
for the millions of small businesses throughout the United States that may
otherwise be intimidated by the cost, time or technology involved in
establishing a Web presence. Our current business solution includes Web site
design and hosting, unlimited Internet access, a virtual domain name and up to
five e-mail accounts, all for $24.95 per month. Through our focused direct
marketing approach, we provide this solution to the underserved market of small
businesses and serve as their entry point onto the Internet. We design and host
Web sites for more than 50,000 clients, having added a net of approximately
9,000 new clients through the first three months of 1999.
Throughout our history we have continuously upgraded our internally
developed service offerings to meet the expanding needs of our current clients
and our targeted market. We are currently developing additional offerings to be
released later this year including: an e-commerce solution that will provide
our clients the ability to sell online, enhanced Web-based e-mail services that
will allow businesses greater flexibility in their communications systems and a
Web site development tool that will enable our clients to quickly and easily
modify their own sites.
Our operating model follows two basic concepts: first, it is designed to be
scalable, allowing us to expand quickly to penetrate our target market without
heavy investment in new infrastructure. Our use of third-party providers for
telemarketing, client support and billing enhances this scalability. Second,
our model is operationally efficient, allowing us to remain highly competitive
in the rapidly developing Internet market we serve. Our offshore design and
development facility enables us to efficiently and profitably serve our
targeted market as the low cost provider. We believe that our focused marketing
efforts, our low cost design and development capabilities and our affordable
Internet solutions represent significant competitive advantages that have been
key factors in the rapid growth in our client base.
Market Opportunity
The Internet is an increasingly significant global medium for
communications, information and online commerce. Almost 80 million adults are
accessing the Internet and that number is expected to grow to 100 million by
2000, according to a 1999 study by IntelliQuest Research, a market research
firm focusing on the Internet and technology. Although the Internet began as an
informational tool, increased access to the Internet is leading to more
commercial uses. According to IntelliQuest, 60% of Internet users have shopped
online and 20% have purchased products.
According to the Small Business Administration, 23 million small businesses
exist in the United States. For these 23 million small businesses, the Internet
provides an opportunity to access millions of potential customers. Although
usage of the Internet by small businesses is increasing, most small businesses
are not using the Internet as a strategic business tool and many do not
understand the opportunity the Internet provides to enhance their business.
According to a recent Arthur Andersen survey of small businesses (2 to 99
employees) and mid-sized businesses (100 to 499 employees), 94% had at least
one computer. The study shows that Internet use is increasing dramatically; 21%
of small and mid-sized businesses used the Internet in 1996, 50% in 1997 and
65% in 1998. E-mail and research were the most common uses of the Internet by
these businesses. More importantly, only 23% of small and mid-sized businesses
with computers had a Web site as of 1998, and 65% planned to have a Web site
within the following year. The most common reasons cited for having a Web site
included reaching new customers, selling goods and services and disseminating
information more efficiently.
The market for providing Internet solutions to businesses is strong.
According to an International Data Corporation report, spending on Internet and
e-commerce site development by all businesses worldwide is
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anticipated to grow from $11.8 billion in 1999 to $43.6 billion by the year
2002. WebValley is well-positioned to capitalize on the growth in Internet
usage by small businesses due to our focused marketing efforts, cost-efficient
design and development capabilities and our affordable Internet solutions.
The WebValley Solution
Our Internet solutions are designed to alleviate any intimidation small
businesses may feel about the cost, time or technology involved in establishing
an Internet presence. We contact businesses directly through telemarketing and
encourage them to use the Internet as a strategic business tool. We currently
offer a custom Web site, hosting services, unlimited Internet access, a virtual
domain name and up to five e-mail accounts for only $24.95 per month, a price
that is affordable to even the smallest business.
We provide support for all levels of Internet expertise. Our clients can
contact our client support representatives to make changes to their Web sites.
With services that we plan to introduce in 1999, more technologically advanced
clients will be able to access and make changes to their Web sites themselves.
For clients without computer resources, we provide automatic fax-forwarding or
even mailing of messages that were initially sent to them via e-mail.
In the future, we anticipate our clients will want to take advantage of
additional Internet opportunities, particularly e-commerce capabilities. Later
in 1999, our WebValley Shop Online will allow them to participate in the
rapidly emerging e-commerce market. In 2000, we will introduce WebValley Office
Anywhere, which will allow businesses to further leverage Internet technology
by using Web-based office services, including intra-office e-mail communication
and e-mail access over the Internet from any Web browser.
An important enabling factor of our Internet solutions is our offshore
development facility in India. We can provide affordable Internet services to
small businesses because our development costs are low. Labor costs are lower
in India and highly skilled IT professionals are more available than in the
United States. Our India Subsidiary employs designers who make each custom Web
site and software developers who create both tools to improve current
production and new applications to offer our clients in the future. These
proprietary tools and applications are both low cost and easy to use, providing
a competitive advantage. The developers also design and implement our
administrative system and network infrastructure to allow for scalability with
rapid growth.
Strategy
Our mission is to become the leading provider of affordable Internet
solutions to small businesses, building on our core Web site design and hosting
services. To achieve this objective, we will provide a comprehensive suite of
services to put small businesses online and keep them there. The key elements
of our strategy are:
Aggressively Add New Clients
We intend to continue adding new clients using a focused telemarketing
operation to contact small businesses directly. This telemarketing approach
will be augmented by potential acquisitions and strategic alliances. In
November 1998 and February 1999, we added approximately 9,000 Web site clients
through acquisitions from other hosting service providers. We will also seek to
establish alliances with Internet partners or national organizations serving
small businesses.
Introduce Clients To More Advanced Internet Solutions
Our new offerings will offer more advanced Internet services, such as an e-
commerce solution that will allow our clients the ability to sell online,
enhanced Web-based e-mail services that will allow businesses greater
flexibility in their communications systems and a Web site development tool
that will enable our clients to quickly and easily modify their own sites.
These new offerings will increase the value we bring to our clients.
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Offer Superior Client Service
We will continuously increase our client service efforts to offer the best
available support to our clients. We intend to monitor and improve our client
support services, which are outsourced to another company. In an additional
effort to enhance client service and increase retention, we recently began
telephoning our existing clients to help them use their Web sites more
effectively.
Leverage the Strength of Our Scalable Business Model
Although there are few barriers to entry in our business, we believe that
significant barriers exist to the expansion necessary to support large numbers
of clients at a low cost. We believe that we have developed an infrastructure
capable of managing large numbers of clients at low costs. We use third-party
providers for telemarketing, client support and billing to enhance our
flexibility and scalability. The developers at our India Subsidiary have
created proprietary tools for Web site design, also improving the scalability
and productivity of our system.
The WebValley Offshore Development Model
Our India Subsidiary is a key component of our business model. Our software
developers create proprietary tools to speed the Web site production process
and enabling software that serves as the backbone of our solutions. In March
1999, we began using WebValley Virtual Site Builder, a proprietary software
tool that uses wizard-driven screens to automatically create sites. This tool
will further speed our production and allow us to create and deliver large
numbers of Web sites in a short amount of time. Our developers are currently
working on WebValley Shop Online, WebValley E-mail Anywhere, WebValley Manager
and WebValley Connect. Our India Subsidiary also employs Web site designers who
are skilled in creating custom Web sites efficiently.
Our development costs for Web sites and other offerings are low because the
labor costs in India are much lower than in the United States. This cost
advantage allows us to offer our services to small businesses at reasonable
prices. We intend to capitalize on the competitive advantage of our India
Subsidiary and continually develop new applications that enhance our ability to
provide Internet solutions for small businesses at low costs.
Current Service Offerings
When WebValley began offering Internet solutions to small businesses in
1996, we designed and hosted one-page Web sites for $19.95 per month with no
setup charges. In 1997, we added a customer feedback page and interactive map
to help customers locate our clients' businesses. In 1998, we increased prices
to $24.95 per month and later began to offer our clients additional services,
including e-mail accounts and unlimited Internet access. All of our proprietary
solutions are developed internally by our India Subsidiary. We intend to
continue developing new services to offer our clients the ability to outsource
their small business Internet needs to WebValley.
Our current business solutions are focused on establishing a business's
presence on the Internet. Our offerings include Web site design and hosting,
unlimited Internet access, e-mail accounts, a virtual domain name and Web site
registration with search engines. Usually, within 72 hours of the telemarketer
taking an order, we mail the client a welcome letter and brochure along with
the startup package and Web site design proof. Current service offerings
include:
Web Site Design
A client's Web site begins with a one or two page Web site created by our
designers based on the information supplied by the client during the initial
telemarketing contact. In addition to the front page, each
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Web site links to an interactive map that provides directions and a comment
page for customers to e-mail the business. Pages built or revised since March
1999 use a multi-page site format including Home, About Us, and Feedback. Our
experienced designers select Web site models from our model library and modify
the Web site to appear as a custom design, altering the color scheme, slogan,
graphics and additional text to complete the site. We also will scan in logos
or pictures for a client for $25.00 each. More pages will be available to
clients in June 1999, such as Job Opportunities, Frequently Asked Questions
(FAQ), Products and other information.
Web Site Hosting
We offer our clients Web site hosting services on servers located at our
corporate headquarters. We provide power backup, firewall security, daily data
backup and static Web pages for quick server response. We are developing
enhanced redundancy through servers in both our corporate headquarters and the
India Subsidiary for system security and data integrity.
Unlimited Internet Access
All clients are offered an unlimited access Internet dial-up connection
through PSINet. The access is activated within one business day with a
telephone call to one of our third-party client support representatives.
E-mail Accounts
Clients can contact a client support representative to activate up to five
e-mail accounts. We developed our own e-mail system and host all the accounts
on our servers.
Domain Names
For no additional expense, we provide clients with virtual domain names,
such as www.yourbusiness.webvalley.com. We believe this is an affordable
alternative to first-level domain names, which are more expensive and often
unavailable. For clients interested in first-level domain names, such as
www.yourbusiness.com, we will help them select a name, register the domain name
with Network Solutions, Inc. in the client's name and provide server support
for the name for an additional fee of $100.
Web Site Registration
After a client's Web site has been active for 45 days, we register the site
on major search engines, including Excite, Lycos, Infoseek, WebCrawler and
HotBot, to increase accessibility and exposure of the client's site. Because of
Yahoo's registration process, we enable our clients to easily register their
sites with Yahoo, using a form available on our Web site.
E-mail to Fax
A number of our clients are not connected to the Internet but want to offer
electronic communication for their customers. Our system automatically forwards
e-mail messages received at these clients' Web sites to the client's fax, at no
additional charge.
Client Support
Clients can contact our client support representatives between 8:00 a.m. and
5:00 p.m. (central time), Monday through Friday. We currently outsource our
client support to a third-party provider that handles the vast majority of
issues for us, including general help desk services, editing Web sites and
changing client information and account status. We train the client support
representatives ourselves and provide them with online access to our client
database. In addition, clients can contact us directly via e-mail, voice mail,
fax or mail for corrections, upgrades, additions, etc.
Future Service Offerings
WebValley Shop Online
WebValley Shop Online will allow any small business to easily engage in e-
commerce. This service will allow our clients to provide their customers with
an online catalog, price list, shopping cart and all the
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components necessary to transact business online. Our clients' customer orders
and credit card information will be securely e-mailed or faxed to the client
for processing and delivery of the goods. We are currently designing this
service and plan to offer it in the third quarter of 1999 for an additional
monthly fee.
WebValley E-mail Anywhere
WebValley E-mail Anywhere, a private mail center, will provide our clients
with e-mail services for their employees. For many small businesses, this e-
mail center could replace the need for a local area network for intra-office
correspondence. Employees will also be able to use WebValley E-mail Anywhere to
access their e-mail from any Web browser. We anticipate that this offering will
be available in August 1999 for no additional fee.
WebValley Manager
WebValley Manager will allow clients to easily update the basic layout,
color scheme, graphics and other information on their Web sites themselves.
This offering will also allow clients to add new information, such as special
promotions on products, and change information frequently. We anticipate that
this offering will be available in August 1999 for no additional fee.
WebValley Connect
We are developing WebValley Connect, a user-friendly Windows-based
application, which will serve as our clients' entry point to the Internet. It
will be a universal interface between our clients and WebValley service
offerings, helping them install and navigate through our applications. When new
features are added to this software, it will automatically upgrade itself from
our Web site. This software will be free to download from our Web site and we
anticipate it will be available in August 1999.
WebValley Office Anywhere
We plan to design WebValley Office Anywhere to make network functionality
available to any small business with Internet access. WebValley Office Anywhere
would allow our clients to manage their businesses online by outsourcing their
business software and Internet connectivity issues to WebValley. We plan to
include a communications center, office desktop, document center, scheduling
and other basic features needed to allow a small business to communicate
effectively intra-office, as well as with their customers and suppliers.
WebValley Office Anywhere is planned for development in late 1999 and for
release in 2000.
Marketing and Sales
Many small businesses are intimidated by the cost, time and technology
involved in establishing a Web presence. We believe that these businesses are
largely underserved by our competitors in the Internet services market. We
target these small businesses and make it easy and affordable for them to
effectively use the Internet as a business tool. Once we have established a
relationship with these clients, we believe we can introduce them to more
advanced Internet solutions. As their businesses need new technology to
participate in commerce in an online world, we will serve as their complete low
cost Internet solutions provider. Our marketing strategy employs different
methods to attract clients--telemarketing, acquisitions, our Web presence and
alliances.
We select businesses based on industry and geography, using a national
yellow pages listing with standard industrial classification (SIC) codes for
contact information. We selectively screen out unlikely clients, such as
affiliates of very large corporations. We have had significant success in
attracting a diversified client base across the entire United States,
including:
. restaurants and bars
. churches
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. beauty shops
. retail stores
. automotive repair
. general contractors
. doctors' offices
We provide an initial Internet presence for these businesses to introduce
them to the commercial potential of the Internet. Our third-party telemarketers
contact businesses and currently offer a package of Internet services: Web site
design and hosting, Internet access, a virtual domain name and up to five e-
mail accounts for $24.95 per month. Usually, within 72 hours of the
telemarketer taking the order, we mail the client a welcome letter and brochure
along with the startup information and Web site design proof. We will contact
existing clients to offer new services, such as WebValley Shop Online, as the
services become available.
We understand that many of our clients are intimidated or unsure about
establishing a Web site. To alleviate our clients' concerns, we previously
offered free trial periods for our services. We recently discontinued this
practice as part of our plan to reduce our client attrition rate and we now
provide a site design review period and call back confirmation before the first
billing cycle. We believe this new process is a low cost, low risk solution for
our clients, comparable to the previously offered trial period.
In March 1999, we began an outbound client satisfaction program, involving
telephone calls to our existing clients to discuss their Internet presence,
confirm that they are satisfied with our offerings and discuss how they can
realize more benefits from their Web site. One of the goals of this effort is
to improve our client retention rates. While we have added approximately 9,000
new clients net of attrition in the first three months of 1999, historically
our attrition rate has averaged 13% per month. This attrition rate is
determined by the number of clients who cancel during a month divided by the
total number of clients at the end of the month. We believe that because many
of our clients are not experienced users of the Internet, when these clients
cancel our services, they may cease their Web presence, and do not migrate to a
competitor. Our outbound calling program will educate our clients about the
benefits of a Web site and using Internet technologies to grow their business.
Our direct telemarketing effort has proven to be highly successful in
acquiring new clients. We outsource our telemarketing to one company that
currently serves us exclusively. As our telemarketing efforts grow, we may use
additional telemarketing operations around the country. Outsourced
telemarketing is an easily scalable function that also provides us with the
ability to test-market new offerings or pricing structures and obtain real-time
results to measure the effectiveness of offerings or promotions. Our
proprietary software allows us to measure success rates of individual
telemarketers, including the number of sales and client attrition.
In addition to telemarketing, we have acquired approximately 8,500 clients
through an acquisition of existing Web sites from Coleman Enterprises, Inc. and
600 clients through an acquisition from another hosting provider. We may
acquire additional hosting clients in the future as opportunities arise.
We also believe that in the future we will attract new clients through our
Web presence. Our Web site, www.webvalley.com, advertises our services and
enables potential clients to order a Web site online. We offer this ability for
more technologically advanced small businesses that may be using the Internet,
but our main marketing efforts will continue to target small businesses through
telemarketing.
In an effort to enhance our nationwide presence, we intend to explore
alliances with Web portals or other Web sites, as well as LECs or service
providers that cater to the small business marketplace. We expect that
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any of these alliances would be of varying natures and terms and could involve
commission arrangements, wholesale purchases of our services for resale,
private branding of our services or the exchange of our services for
promotional or other services. Additionally, we will use moderate amounts of
non-Web based media, such as print publication, radio and direct mail
advertising, to develop nationwide awareness of WebValley as an Internet
solution provider for small businesses.
Operations
Our business involves four separate operations--our corporate headquarters,
our India Subsidiary, a third-party telemarketing provider and a third-party
client support provider. Management at our corporate headquarters is
responsible for overall strategic direction, marketing and supervision of the
India Subsidiary. The India Subsidiary employs software developers who design
our service offerings and infrastructure and Web site designers who create our
clients' Web sites. We outsource our telemarketing and client support to other
companies. All four operations are connected to our network--our corporate
headquarters is connected to the telemarketers and client support
representatives through the Internet and to the India Subsidiary via satellite
telecommunications.
Our operational process begins with a telemarketer contacting potential
clients to offer our Web site design and hosting services. When a sale is made,
the telemarketer takes basic business information to be used to design a custom
Web site. This information is then transmitted to our corporate headquarters
over the Internet, then by satellite to India, where a designer creates a
unique Web site for each client using a model from our industry specific model
library. The client record and site design information is transmitted back to
our corporate headquarters, where the completed records and designs are
imported into the database. The Web site proofs are printed with a welcome
letter and mailed to the client with other materials in a start-up package. The
time difference between the United States and India allows for most projects to
be completed and mailed within 72 hours of the initial telemarketing contact.
We currently bill most of our clients using LECs. Many LECs allow third
parties, such as long distance companies, 900-number operators and Internet
access providers, to bill services on their clients' telephone bills. LEC
billing arrangements allow for reduced administrative and collection costs, and
LEC billing is preferable to credit card billing for initial telemarketing
contacts. Currently, we contract with two third-party billing companies that
have established nationwide LEC contracts. The practice of LEC billing has come
under scrutiny recently because of incidents involving unauthorized charges
appearing on telephone bills. See "Risk Factors--We are dependent on LEC
relationships" and "Business--Government regulations--Cramming." We are
investigating alternative billing arrangements, such as establishing our own
contracts directly with the LECs, direct billing and credit/debit card billing.
Infrastructure
Our infrastructure is constructed to provide reliable service, speed and
scalability. Our infrastructure is based upon a database management platform;
Sybase is our current database vendor. Our services and administrative tools
are built as independent components of the database platform and are also
independent of each other. These individual components reside on their own
servers--Web sites reside on one server, e-mail accounts on another and
administrative data on another. As the number of clients increases, we can add
servers without adding complexity to the system. An additional high-speed
server costs $25,000 and can support another 100,000 clients.
Our corporate headquarters contains seven servers, including four servers
responsible for storage and replication of Web sites and e-mail. The India
Subsidiary has five servers that are linked to our corporate headquarters via
satellite and offer redundancy to our system by automatically replicating the
information stored at our corporate headquarters. Our corporate headquarters is
connected to the Internet by T-1 lines through USWest Communications, PSINet
and Vector Internet Services, Inc.
Competition
Our current core business is designing and hosting Web sites for small
businesses; in addition, we offer unlimited Internet access, a virtual domain
name and up to five e-mail accounts. We believe we are one of the
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largest Web site design and hosting service providers in the United States, as
measured by sites designed and hosted. In the future, we will be offering more
advanced Internet business solutions including WebValley Shop Online, WebValley
E-mail Anywhere and WebValley Office Anywhere. Because we offer a variety of
services, we have a broad range of competitors. We have few direct competitors,
but indirect competition is plentiful and the Internet services industry is
highly competitive, fragmented and evolving every day.
We consider our direct competitors to be those offering a similar package of
services to businesses, such as QuikPage, Inc. and 1stPage, Inc., both of whom
design and host Web sites, attract clients through telemarketing and host Web
sites in a directory format.
Our indirect competition includes several different types of competitors.
Commercial online services such as America Online, Inc. or theglobe.com, Inc.,
offer hosting services for Web sites and e-mail accounts, but do not design Web
sites. Another source of competition is Web site designers and design
companies. Many companies and individuals provide site design services and
several software programs exist to help people design their own sites.
Ecbuilder, Inc. offers free software on the Web that allows users to build
their own sites. Numerous ISPs offer Internet access, including national ISPs
such as Mindspring Enterprises, Inc., Verio, Inc. and EarthLink Network, Inc.,
regional ISPs, and nonprofit ISPs. Several other business directory services
exist as well, including Switchboard, Inc., and Bigfoot International, Inc. Our
future business solutions are competitive with business services currently
offered on the Web by companies like HotOffice Technologies, Inc. It is
important to realize that the market is changing quickly and new companies are
constantly entering the Internet services industry, including
telecommunications providers such as AT&T Corp. and media companies, such as
Time Warner, Inc., who have significantly greater financial resources. We must
also be concerned with computer software and hardware companies who could
integrate Web site design software into the computer distribution channel,
presenting a serious threat to our business. Any of the above companies could
expand their offerings and become more directly competitive with us at any
time.
Our competitive advantage is that we focus our telemarketing efforts on the
underserved small business market and our India Subsidiary provides low cost
Web site design and software development, resulting in effective, affordable
and complete Internet solutions for small businesses. We believe that the
primary competitive factors determining success in this market are the ability
to grow without compromising reliability or service, pricing, creative
marketing, effective client support or geographic coverage. Other important
factors include the timing of introductions of new offerings and industry and
general economic trends. We cannot assure you that we will be able to compete
successfully against current or future competitors. Increased competition in
the industry will bring significant pricing pressure. Reductions in rates
charged by our competitors could require us to reduce prices charged to our
clients, which could cause a decrease in total revenues and revenue per client,
and reduce the likelihood of maintaining positive cash flow or profitability in
the future.
Intellectual Property Rights
Although we believe our success is more dependent on our technical,
marketing and client service expertise than our proprietary rights, we also
value our proprietary rights. We rely on a combination of copyright, trademark
and trade secret laws. Federal service mark registrations are pending for
WEBVALLEY and the WEBVALLEY logo. We have confidentiality and assignment of
invention agreements with all of our employees that provide that we own all
business-related inventions, improvements, ideas generated, conceived or
reduced to practice by our employees. The laws of India, where our offerings
and tools are currently developed, may not protect our intellectual property
rights to the same extent as laws in the United States. The steps we have taken
may not be adequate to prevent misappropriation of our technology or our
competitors may independently develop technologies that are substantially
equivalent or superior to our technology.
Employees
As of March 1, 1999, we employed 85 employees at our corporate headquarters
and India Subsidiary. The India Subsidiary operates two shifts per day and
employs 40 Web site designers who are responsible for design and maintenance of
our clients' web sites, as well as 20 software developers who develop our
custom tools for Web site production, management control and infrastructure.
These developers have at least a four year
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university degree in computer science and between 1 and 20 years experience in
computer programming. All of our employees are eligible for our stock option
plan.
Facilities
Our corporate headquarters is located in Hopkins, Minnesota, where we lease
approximately 3,000 square feet under a lease that expires April 30, 2000.
Although this facility is adequate for our current needs, we anticipate needing
more space within the next year and we expect that we can secure space at a
similar cost to our current facility. Our India Subsidiary leases a 5,000
square foot facility near New Delhi, India. This facility is adequate for our
current needs. The lease expires April 1, 2004.
Government Regulations
Government regulation of the Internet is unsettled and constantly evolving.
The major areas of potential legislation or regulation that may affect us are
content, taxes, cramming and access fees.
Content. As the Internet continues to evolve, we expect that federal, state
or foreign agencies will adopt regulations covering issues such as user
privacy, pricing, content and quality of products and services. The
Telecommunications Act of 1996 and the Communications Decency Act of 1996
already prohibit some types of information and content from being transmitted
over the Internet. Although the scope of these prohibitions and the liability
associated with violations are currently unsettled and substantial portions of
the acts have been held unconstitutional, we cannot predict what effect this
legislation or similar legislation will have on our business. If enacted, these
laws, rules or regulations could limit the market for our services, or expose
us to liability, which could materially adversely affect our business,
financial condition and operating results.
Taxes. Tax treatment of the Internet and e-commerce is currently unsettled.
A number of proposals have been made by federal, state and local lawmaking
bodies and by foreign governments that could impose taxes on sales, services
and other Internet activities. In October 1998, the Internet Tax Freedom Act
was signed into law, placing a 3-year federal moratorium on new state and local
taxes on Internet commerce. However, future laws imposing taxes or other
regulations on commerce over the Internet may substantially impair the growth
of e-commerce and as a result, materially adversely affect our business,
financial condition and operating results.
Cramming. Legislation has been introduced in Congress and several states to
regulate billing of unauthorized third-party services on local telephone
company bills, a practice known as "cramming." The proposed congressional
action would grant the Federal Trade Commission jurisdiction to address LEC
billing and cramming. Because we currently employ LEC billing methods, this or
other legislation regulating or prohibiting LEC billing could materially
adversely affect our business, financial condition and operating results.
Access Fees. Several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services.
Additionally, local telephone carriers have petitioned the Federal
Communications Commission to regulate Internet service providers in a manner
similar to long distance telephone carriers and to impose access fees on these
providers. If either of these petitions are granted, the costs of communicating
on the Internet could increase substantially. This, in turn, could slow the
growth of use of the Internet. These types of legislation or regulation could
materially adversely affect our business, financial condition and operating
results.
Legal Proceedings
On June 17, 1998, a complaint was filed in the District Court for Hennepin
County, Minnesota by a former employee against WebValley and Satya P. Garg, our
Chairman, President and Chief Executive Officer. The complaint alleges breach
of an alleged oral employment contract and fraudulent inducement to abandon
gainful employment at the former employee's own company. The former employee is
seeking approximately $55,000 in lost wages and the value of an option to
purchase 200,000 shares of our common stock. We believe this suit is without
merit and intend to vigorously defend against such claims.
We are not subject to any other material legal proceedings.
29
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- -------------------------------------------
<S> <C> <C>
Satya P. Garg...................... 54 President, Chief Executive Officer and
Chairman of the Board of Directors
Raymond L. Moles................... 43 Chief Operating Officer
Robert M. Ringstad................. 42 Chief Financial Officer, Secretary and
Director
Scott A. Schwefel.................. 35 Vice President of Marketing and Director
Rakesh Verma....................... 43 Vice President of Technology
James A. Mitchell.................. 57 Director
Richard N. Soskin.................. 43 Director
</TABLE>
Satya P. Garg founded WebValley in May 1996 and has served as President,
Chief Executive Officer and Chairman of the Board of Directors since that time.
Mr. Garg is responsible for strategic direction and coordination with our India
Subsidiary. In 1982, Mr. Garg founded SM Engineering Company, which specializes
in reducing utility costs for manufacturing and property management companies,
and he served as its Chief Executive Officer from 1982 to March 1999. He is
currently Chairman of SM Engineering. In 1993, Mr. Garg acquired LD Management,
Inc., a reseller of long distance services, and served as its Chief Executive
Officer and President until March 1999. Although Mr. Garg has held senior
management positions at SM Engineering and LD Management, his full time efforts
have been devoted to WebValley since its inception. Mr. Garg received a B.S.
from MNR Engineering College in Allahabd, India in 1967, and an M.S. in
Mechanical Engineering from the University of Minnesota in 1969.
Raymond L. Moles joined WebValley in 1997 and has held various positions,
most recently serving as Chief Operating Officer. From 1986 to 1996, Mr. Moles
was the President and owner of PC Maintenance, Inc., which provided personal
computer sales, support and networking to small and mid-sized businesses. In
1995, he co-founded World Web Wonders, Inc., a firm that specialized in basic
and advanced Web site design and development, Internet-related database
integration and network consulting for businesses. WebValley purchased World
Web Wonders in March 1997. Mr. Moles earned a B.S. in Business Management from
California State University at Fullerton in 1979.
Robert M. Ringstad joined WebValley in March 1999 as Chief Financial
Officer, Secretary and Director. From 1996 to March 1999, Mr. Ringstad served
as Chief Financial Officer and Chief Operating Officer of World Satellite
Network, Inc., which was publicly held until March 1999, when it was acquired
by a private company. World Satellite Network, Inc. is the largest distributor
of cable television programming to the private cable marketplace. From 1994 to
1996, Mr. Ringstad served as Vice President of Finance for a private investment
office, Family Partners, Ltd. From 1992 to 1994, he served as Chief Financial
Officer for Casino Hospitality Corporation. Mr. Ringstad is a certified public
accountant and received his B.B.A. in Accounting from the University of
Wisconsin at Eau Claire in 1979.
Scott A. Schwefel was appointed Vice President of Marketing in February 1999
and a Director in March 1999. He had previously served as an outside marketing
consultant since December 1998. From 1995 to March 1999, Mr. Schwefel served as
Chief Executive Officer of Benchmark Computer Learning, Inc., which provides
information technology training for Microsoft, Novell and Lotus products. Prior
to becoming Chief Executive Officer of Benchmark, he was its Vice President
from 1993 to 1995. He is currently Chairman and principal shareholder of that
company. From 1989 to 1991, Mr. Schwefel was Vice President of Sales and co-
owner of Tinos, Inc., a manufacturing company that he sold in 1991. Mr.
Schwefel graduated from Concordia College of St. Paul, Minnesota in 1988 with a
B.A. in Organizational Behavior and Communications.
Rakesh Verma joined the India Subsidiary in December 1997 and has served in
various positions. Since March 1999, Mr. Verma has served as Vice President of
Technology of WebValley and is currently responsible
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<PAGE>
for software development and deployment. He has 20 years experience in software
project management for a variety of business applications and systems software.
Before joining WebValley, Mr. Verma served as Project Manager for Bechtel
Group, Inc. from May 1997 to December 1997. Previously, he served as General
Systems Manager for Alpine Industries Ltd., a soybean processing and oil
exporting company from 1995 to 1997. Mr. Verma headed the software division for
Gateway Computers Pte in Singapore from 1993 to 1995. Mr. Verma earned a B.S.
in Electrical Engineering in 1977 from the Indore School of Engineering in
Indore, India and an M.S. in Computer Science in 1979 from the Indian Institute
of Technology in Bombay, India.
James A. Mitchell became a Director of WebValley in April 1999. From 1984 to
the present, Mr. Mitchell has served as Chairman of the Board of IDS Life
Insurance Company, a wholly-owned subsidiary of American Express Financial
Advisors. Mr. Mitchell joined American Express Financial Advisors in 1984 and
served as Executive Vice President of Marketing and Products from 1993 until
his retirement in March 1999. He serves as Chairman of the Board of the
American College in Bryn Mawr, Pennsylvania and is a member of the Executive
Committees of the Boards of the American Council of Life Insurance, the
Insurance Federation of Minnesota and the Minneapolis Institute of Arts. Mr.
Mitchell also serves as a trustee of Hamline University and the YMCA of Greater
Minneapolis. Mr. Mitchell earned a B.A. from Princeton University in 1963.
Richard N. Soskin became a Director of WebValley in April 1999. Mr. Soskin
has served as President and Chief Executive Officer of Centron DPL Company, a
leading provider of network services, since 1991. From 1988 to 1991, he served
as Chief Financial Officer of Centron. Before joining Centron, Mr. Soskin
practiced at the law firms of Thompson & Klaverkamp and Oppenheimer Wolff &
Donnelly LLP. Mr. Soskin currently serves on the Boards of Centron DPL, Centron
International Ltd. and Lombard Network Systems. Mr. Soskin earned a B.A. from
Duke University in 1978 and a J.D. from the University of Minnesota in 1982.
Board of Directors; Committees
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Executive officers
are appointed by and serve at the discretion of the Board of Directors.
The Compensation Committee of the Board, comprised of Mr. Mitchell and Mr.
Soskin, is responsible for reviewing and establishing the compensation
structure for our officers and directors, including salary rates, participation
in incentive compensation and benefit plans, stock option plans and other forms
of compensation. The Compensation Committee will also administer our 1999 Stock
Option Plan.
The Audit Committee of the Board, comprised of Mr. Garg, Mr. Mitchell and
Mr. Soskin, reviews the selection and reports of our independent auditors and
the adequacy of internal controls for compliance with corporate policies and
directives.
Limitation of Liability and Indemnification
Under provisions of the Minnesota Business Corporation Act, we have adopted
provisions in our articles of incorporation that provide that our directors
shall not be personally liable for monetary damages to us or our shareholders
for a breach of fiduciary duty as a director to the full extent that the
Minnesota Business Corporation Act permits limitation or elimination of the
liability of directors. We have been informed that, in the opinion of the
Securities and Exchange Commission, indemnification for liabilities arising
under the Securities Act is against public policy as expressed in the
Securities Act and thus is unenforceable.
Director Compensation
We do not pay directors cash compensation; however, they are reimbursed for
out-of-pocket expenses incurred while attending Board or committee meetings.
Contemporaneously with this offering, we will grant to each of Mr. Mitchell and
Mr. Soskin stock options to purchase 25,000 shares of our common stock at an
exercise price equal to the initial public offering price per share. Of those
option shares, 10,000 shares will vest immediately and 5,000 shares will vest
each year for three years on the anniversary of the initial grant. The options
will expire five years from the date of grant.
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<PAGE>
Executive Compensation
Cash Compensation. As a result of an agreement with outside investors, Satya
P. Garg, our Chief Executive Officer, did not receive any compensation through
1998. Effective April 1, 1999, Mr. Garg will receive an annual salary of
$150,000. Raymond L. Moles, our Chief Operating Officer, earned $80,000 in
salary in 1998; no officers received total salary and bonus in excess of
$100,000 during fiscal year 1998. Robert M. Ringstad, our Chief Financial
Officer was hired in March 1999 and will earn an annual salary of $120,000 for
1999 plus a one-time incentive bonus of $35,000 at the closing of this
offering. Scott A. Schwefel, our Vice President of Marketing, was hired in
February 1999 and will earn an annual salary of $100,000 for 1999.
Option/SAR Grants. The following table sets forth the information regarding
option and SAR grants during fiscal year 1998 for each of our executive
officers.
Option/SAR Grants
<TABLE>
<CAPTION>
Potential
Realizable Value at
% of Total Assumed Annual
Number of Options/SARs Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees Exercise for Option Term(1)
Options/SARs During Price Expiration -------------------
Name Granted Fiscal Year Per Share Date 5% 10%
- ---- ------------ ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Scott A. Schwefel(2).... 100,000 32.8% $1.00 12/24/03
Rakesh Verma(3)......... 25,000 8.2% $1.00 12/24/03
</TABLE>
- --------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options/SARs if exercised at the end of the option/SAR term.
These gains are based on assumed rates of stock price appreciation of 5%
and 10% compounded annually from the date the respective options/SARs were
granted to their expiration date based on an assumed initial public
offering price of per share. These assumptions are not intended to
forecast future appreciation of our stock price. The potential realizable
value computation does not take into account federal or state income tax
consequences of option/SAR exercises or sales of appreciated stock.
(2) 1,500 shares vest per month for six months beginning January 31, 1999,
2,000 shares vest per month for the seventh through fifty-first months and
1,000 shares vest in the fifty-second month.
(3) Representing an SAR providing for 25% of the shares to vest on each of the
first four anniversaries of the date of grant. This SAR has been canceled
and replaced with a stock option granted in March 1999 for 36,000 shares
with the same vesting schedule and an exercise price of $5.00 per share.
Aggregate Option Exercises and Year-End Option Values. The following table
sets forth the information regarding our aggregate option exercises in fiscal
year 1998 and the fiscal year-end options values for each of our executive
officers.
Aggregate Option/SAR Exercises
and Year End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised In-the-Money
Options/SARs at 12/31/98 Options/SARs at 12/31/98 (1)
------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Raymond L. Moles........ 80,000 120,000
Scott A. Schwefel....... -0- 100,000
Rakesh Verma............ -0- 25,000
</TABLE>
- --------
(1) Based on an assumed initial public offering price of $ per share, minus
the exercise price, multiplied by the number of shares underlying the
option.
32
<PAGE>
1999 Stock Option Plan
Our 1999 Stock Option Plan was adopted by the Board of Directors and our
shareholders in March 1999. Pursuant to the 1999 Stock Option Plan, we may
grant incentive and nonqualified stock options to our employees and directors.
A total of 1,000,000 shares of common stock have been reserved for issuance
under the 1999 Stock Option Plan.
Subject to the limitations in the 1999 Stock Option Plan, the Compensation
Committee has the sole discretion and authority to determine from time to time
the persons to whom options shall be granted and the number of shares covered
by each option, to interpret the 1999 Stock Option Plan, to establish vesting
schedules, to specify the type of consideration to be paid to us upon exercise
and, subject to restrictions, to specify other terms of the options. The
Compensation Committee may provide that an option will become immediately
exercisable upon a "change in control," as defined in the option agreement
setting forth the terms of the option.
The maximum term of options granted under the 1999 Stock Option Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per incidence. Options granted under the 1999 Stock Option Plan
are in most cases nontransferable and generally expire within three months
after the termination of the optionee's services to us. In general, if an
optionee is disabled or dies, the option may be exercised up to 12 months
following disability or death, unless the Compensation Committee determines to
allow a longer period for exercise.
The exercise price of incentive stock options must be not less than the fair
market value of the common stock on the date of grant. The exercise price of
incentive stock options granted to any person who at the time of grant owns
stock possessing more than 10% of the total combined voting power of all
classes of stock must be at least 110% of the fair market value of the stock on
the date of grant and the term of those options cannot exceed five years.
We currently have 216,672 options outstanding to our employees under the
1999 Stock Option Plan. These options are exercisable at a price of $5.00 per
share of common stock.
Stock Options Granted Outside the 1999 Stock Option Plan
Before the adoption of the 1999 Stock Option Plan, we granted nonqualified
stock options. Mr. Moles was granted an option to purchase 200,000 shares of
common stock at an exercise price of $0.25 per share on March 31, 1997. Seven
other employees were granted options to purchase an aggregate of 132,000 shares
of common stock at an exercise price of $1.00 per share on December 15, 1998.
On December 31, 1998, Mr. Schwefel was granted an option to purchase 100,000
shares of common stock at an exercise price of $1.00, while an additional four
consultants were concurrently granted options to purchase an aggregate of
130,000 shares of common stock at an exercise price of $1.00 per share.
Stock Appreciation Rights
In December 1998, we entered into phantom stock appreciation agreements with
various employees of the India Subsidiary. Those agreements were canceled and
replaced in March 1999 with nonqualified stock options to purchase an aggregate
of 83,232 shares at an exercise price of $5.00 per share. These options were
granted under the 1999 Stock Option Plan.
Employment Agreements
In April 1999, we entered into a two-year employment agreement with Satya P.
Garg, which provides for an annual salary of $150,000 and contains a covenant
not to compete for a period of one year after termination.
Under an employment letter dated March 23, 1999, Robert M. Ringstad agreed
to be our Chief Financial Officer. Under this employment letter, Mr. Ringstad
receives a base salary of $120,000 per year and a one-time
33
<PAGE>
incentive bonus of $35,000 at the time of the closing of this offering. In
connection with the employment letter, we granted Mr. Ringstad a stock option
to purchase 120,000 shares of common stock, which vests over four years and has
a term of seven years. Under the employment letter, if Mr. Ringstad is
terminated for any reason other than for cause before March 31, 2001, 60,000
shares will vest as of the date of termination. In the event of a "change in
control," as defined in the agreement, all unvested options he holds will
immediately vest.
CERTAIN TRANSACTIONS
Mr. Garg is 25% owner of U.S. Protel, Inc., a Minnesota corporation, which
is presently our principal telemarketer under a one-year, non-exclusive,
automatically-renewing contract. We believe our arrangement with U.S. Protel
grants us pricing that is more favorable than we could negotiate with an
independent telemarketing provider. Nothing was paid to U.S. Protel in 1996 or
1997; the amount paid for these services in 1998 was $832,908.
Mr. Garg owns 7.5% of Protel Advantage, Inc., a Minnesota corporation. We
purchased telemarketing services from Protel Advantage in 1996, 1997 and 1998.
The amounts paid to Protel Advantage for these services were $35,344 for 1996,
$590,807 for 1997 and $753,097 for 1998. We have no current arrangements with
Protel Advantage to purchase additional telemarketing services.
Mr. Garg and his family own, in the aggregate, 100% of SM Engineering
Company and LD Management, Inc., both Minnesota corporations. These companies
advanced various sums to WebValley in 1996, 1997 and 1998. The highest
outstanding balance in 1996 was $238,100, in 1997 it was $507,900 and in 1998
it was $593,031. We paid interest on these loans in the amount of $59,525 in
1998; no interest was paid in 1996 or 1997. All advances were paid off in 1998.
SM Engineering is also guarantor on the lease of our corporate headquarters
facility.
Mr. Garg, a founder, received 8,000,000 shares of our common stock for
$20,000 cash, or $0.0025 per share, upon our founding in May 1996.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information concerning the beneficial ownership
of our common stock by each executive officer, each director, each shareholder
known by us to have beneficial ownership of more than 5% of our outstanding
stock and all the executive officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of Total
Shares Shares of Common Stock
Beneficially(1) ------------------------------
Name of Beneficial Owner Owned Before Offering After Offering
- ------------------------ --------------- --------------- --------------
<S> <C> <C> <C>
Satya P. Garg(2)............... 8,000,000 88.9%
Raymond L. Moles(3)............ 140,000 1.5%
Robert M. Ringstad(4).......... 18,000 *
Scott A. Schwefel(5)........... 7,500 *
Rakesh Verma................... 0 *
James A. Mitchell(6)........... 10,000 *
Richard N. Soskin(6)........... 10,000 *
Ramesh K. Gupta(7)............. 480,000 5.2%
All directors and executive
officers as a group
(7 persons)(8)................ 8,185,500 89.1%
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the SEC. In
computing the number of shares beneficially owned by one person and the
percentage ownership for that person only, the shares underlying options
or warrants which are now exercisable or exercisable within 60 days of
March 31, 1999 are deemed outstanding. These underlying shares are not
deemed outstanding for purposes of computing percentage ownership of any
other person. We believe that all persons named in the table have sole
voting and investment power with respect to all shares beneficially owned
by them.
(2) Of these shares, 400,000 shares are held by each of Mr. Garg's three
children and his spouse. Mr. Garg has power of attorney for all shares
beneficially owned. The address for Mr. Garg is 1011 First Street South,
Suite 203, Hopkins, Minnesota 55343.
(3) Includes an option for the purchase of 140,000 shares.
(4) Includes an option for the purchase of 18,000 shares.
(5) Includes an option for the purchase of 7,500 shares.
(6) Includes an option for the purchase of 10,000 shares.
(7) Of these shares, 80,000 shares are held by Mr. Gupta's spouse. Includes
warrants to purchase 160,000 shares held by each of Mr. Gupta and his
spouse. Mr. Gupta's address is 14 Blue Jay Lane, North Oaks, Minnesota
55127.
(8) Includes options for the purchase of 185,500 shares.
35
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 200,000,000 shares of capital stock
with a par value of $0.01, of which 9,000,000 shares of common stock are
outstanding.
Common Stock
As of the date of this prospectus, we had 9,000,000 shares of common stock
issued and outstanding. The holders of the common stock:
. have equal ratable rights to dividends from funds legally available,
when, as and if declared by our Board of Directors;
. are entitled to share ratably in all of our assets available for
distribution to holders of common stock upon our liquidation, dissolution
or winding up;
. do not have preemptive, subscription or conversion rights or redemption
or sinking fund provisions; and
. are entitled to one vote per share on all matters which shareholders may
vote on at shareholder meetings.
All outstanding shares of common stock are fully paid and nonassessable.
The shareholders do not have cumulative voting rights for directors, which
means that the holders of a majority of the outstanding shares voting for
directors can elect all of our directors, and if so, the holders of any
remaining shares will be unable to elect any of our directors.
Additional Stock
The Board of Directors is authorized to issue additional shares of capital
stock, in any one or more classes or series, but not to exceed the amount
authorized by our articles of incorporation, to fix the dividend, redemption,
liquidation, retirement, conversion, voting and other preference rights for the
shares. Such additional stock may be common shares or preferred shares and may
have superior voting rights or class voting rights, may be convertible into
shares of common stock and may rank before the common stock as to payment of
dividends or the distribution of assets upon liquidation or dissolution. The
consent of the holders of common stock would not be required for issuance of
the additional stock, which issuance could adversely affect the voting power of
the holders of common stock.
Warrants
We have outstanding warrants to purchase 2,000,000 shares of our common
stock at an exercise price of $0.25 per share. These warrants expire in June
2002.
Minnesota Business Corporation Act
Section 302A.671 of the Minnesota Business Corporation Act provides that
shares acquired in excess of 20%, 33 1/3% or 50% of voting control in some
transactions will not be entitled to vote, unless the acquisition of new
percentages is approved by the holders of a majority of the outstanding voting
stock. For purposes of this vote, the outstanding voting stock does not include
the shares held by the acquirer (if already a shareholder) and officers and
directors who are also our employees. If the requirements of section 302A.671
are not satisfied, we may redeem the shares so acquired by the acquirer at
their market value. Section 302A.671 generally does not apply to a cash offer
to purchase all shares of voting stock of the issuing corporation if the offer
has been approved by a majority vote of disinterested directors of the issuing
corporation.
Section 302A.673 of the Minnesota Business Corporation Act restricts
transactions between us and a shareholder who becomes the beneficial holder of
10% or more of any class of our outstanding voting stock (an "interested
shareholder") unless a majority of our disinterested directors have approved,
before the date on
36
<PAGE>
which the shareholder acquired a 10% interest, either the business combination
transaction suggested by that shareholder or the acquisition of shares that
made that shareholder a statutory interested shareholder. If prior approval is
not obtained, this section imposes a prohibition for four years after the
interested shareholder's share acquisition date on mergers, sales of
substantial assets, loans, substantial issuance of stock and various other
transactions involving us and the interested shareholder or our affiliates.
In the event of tender offers for our stock, Section 302A.675 of the
Minnesota Business Corporation Act precludes the tender offeror from acquiring
additional shares of stock, including acquisitions pursuant to mergers,
consolidations or statutory share exchanges, within two years following the
completion of that offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. Section 302A.675 does not apply if
a committee of the Board consisting of all of its disinterested directors,
excluding present and former officers of the corporation, approves the
acquisition before the shares are acquired pursuant to the earlier tender
offer.
These statutory provisions could have the effect of delaying or preventing a
change in our control in a transaction or series of transactions not approved
by the Board of Directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Norwest Bank
Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have an aggregate of shares of
common stock outstanding. All of the shares sold in the offering will be freely
transferable without restriction or limitation under the Securities Act, except
for any shares purchased by our "affiliates" (as the term is defined under the
Securities Act). The remaining 9,000,000 shares are "restricted securities"
within the meaning of Rule 144 and the resale of the shares is restricted for
two years from the date acquired. Of these "restricted securities," all
9,000,000 shares have been held for the required one-year period and will be
tradable upon completion of the offering, subject to the 180-day lock-up period
described below and the restrictions of Rule 144 for shares held by affiliates
or for shares held less than the required two-year period.
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are required to be aggregated, who has beneficially owned, for at
least one year, shares of common stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of ours is entitled to
sell within any three-month period the number of shares of common stock that
does not exceed the greater of 1% of the number of then outstanding shares or
the average weekly reported trading volume during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to notice and manner
of sale requirements and to the availability of current public information
about us and must be made in unsolicited brokers' transactions or to a market
maker. A person, or persons whose shares are aggregated, who is not an
"affiliate" of ours under the Securities Act during the three months preceding
a sale and who has beneficially owned the shares for at least two years is
entitled to sell the shares under Rule 144 without regard to the volume,
notice, information and manner of sale provisions of the rule. Rule 144 does
not require the same person to have held the securities continuously for the
applicable periods.
WebValley and our officers, directors and shareholders, who will hold
collectively 9,000,000 outstanding shares of common stock after the offering,
have agreed not to offer or sell any shares of common stock for a period of 180
days following the date of this prospectus without the prior written consent of
John G. Kinnard and Company, Incorporated, subject to limited exceptions. If
this 180-day lock-up period is waived by John G. Kinnard and Company,
Incorporated, then all of the 9,000,000 shares would be freely tradable subject
to the 90-day information and other requirements of Rule 144 for shares held by
affiliates or for shares held less than the required two-year period.
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<PAGE>
After the offering, we intend to file a registration statement on Form S-8
to register 1,562,000 shares of common stock, which is the aggregate of all
shares reserved for issuance pursuant to the 1999 Stock Option Plan and shares
underlying certain nonqualified options granted to employees and consultants.
Accordingly, shares issued upon exercise of the options will be freely tradable
by holders who are not our affiliates and, subject to the volume and other
limitations of Rule 144 and the lock-up agreements, by holders who are our
affiliates.
Holders of warrants to purchase 2,000,000 shares of common stock will be
allowed to exercise their warrants on a "cashless" exercise basis entitling
them to convert their warrants into shares. These shares received upon exercise
of the warrants will be freely tradable, subject to the lock-up agreement
signed by all holders of warrants.
Before this offering, there was no market for the common stock. No
predictions can be made of the effect, if any, that market sales of shares of
common stock or the availability of the shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of common stock could adversely affect the prevailing market price of the
common stock, as well as impair our ability to raise capital through the
issuance of additional equity securities.
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by John G.
Kinnard and Company, Incorporated, Kaufman Bros., L.P. and Pacific Crest
Securities Inc. have severally agreed to purchase from us the number of shares
shown opposite their names below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
John G. Kinnard and Company, Incorporated..........................
Kaufman Bros., L.P. ...............................................
Pacific Crest Securities Inc. .....................................
----
Total............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to other
conditions. The underwriters are obligated to purchase and accept delivery of
all the shares (other than those covered by the over-allotment option described
below) if they purchase any of the shares. The obligation of the underwriters
to purchase the shares is several and not joint, meaning that, subject to the
terms of the underwriting agreement, each underwriter is obligated to purchase
only the number of shares shown opposite its name.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price shown on the cover page of this
prospectus and some of the shares to some dealers at the public offering price
less a concession not in excess of $ per share. The underwriters may allow,
and these dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the initial offering of the shares to the public,
the representatives may change the public offering price and the concessions.
38
<PAGE>
We have granted the underwriters an option exercisable for 30 days from the
date of the underwriting agreement, to purchase up to additional shares at
the public offering price less the underwriting fees. The underwriters may
exercise the option solely to cover over-allotments, if any, made in connection
with this offering. To the extent that the underwriters exercise the option,
each underwriter will become obligated, subject to conditions, to purchase a
number of additional shares approximately proportionate to the underwriter's
initial purchase commitment.
We have agreed to indemnify the underwriters against some civil liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect of any of those
liabilities. We have been informed that, in the opinion of the SEC,
indemnification for liabilities arising under the Securities Act is against
public policy as expressed in the Securities Act and thus is unenforceable.
In connection with financial advisory services rendered, we have agreed to
issue to John G. Kinnard and Company, Incorporated, for nominal consideration,
a warrant to purchase up to shares of our common stock. The warrant is not
exercisable during the first year after the date of this prospectus and
thereafter it is exercisable at a price per share equal to $ for a period of
four years. The warrant contains customary antidilution provisions and
obligates us to register the shares underlying the warrant under the Securities
Act once at the election of the holders and at any other time that we file a
registration statement under the Securities Act. The warrant also includes
"cashless" exercise provisions entitling the holder to convert the warrant into
shares of common stock. For a period of one year from the date of this
prospectus, the warrant will be restricted from sale, transfer, assignment or
hypothecation, except to persons that are officers of John G. Kinnard and
Company, Incorporated.
The representatives have informed us that the underwriters do not intend to
confirm sales to any account over which they exercise discretionary authority.
In order to facilitate the offering of common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the common stock. Specifically, the underwriters may over-allot common stock
in connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for and purchase shares
of common stock in the open market. The underwriters may also reclaim selling
concessions allowed to an underwriter or dealer for distributing common stock
in the offering, if the underwriters repurchase previously distributed common
stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the underwriters may bid for and purchase
shares of common stock in market making transactions and impose penalty bids.
These activities may stabilize or maintain the market price of the common stock
above the market level that may otherwise prevail. The underwriters are not
required to engage in these activities and may end any of these activities any
time.
In connection with this offering, the underwriters and/or selling group
members may engage in passive market making transactions with the common stock
on the Nasdaq National Market immediately before the commencement of sales in
this offering, in accordance with Rule 103 of Regulation M under the Securities
Exchange Act of 1934. Passive market making consists of displaying bids on the
Nasdaq National Market which are limited by the bid prices of independent
market makers and making purchases limited by the prices and effected in
response to order flow. Net purchases by passive market makers on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in the common stock during a specified prior
period and must be discontinued when the limit is reached. Passive market
making may stabilize the market price of the common stock at a level above that
which might otherwise prevail in the open market and, if commenced, may be
discontinued at any time.
At our request, the underwriters have reserved up to shares for sale to
our officers, directors, employees, business associates and related parties at
the initial public offering price. These persons must commit to purchase no
later than the close of business on the day following the date of this
prospectus. The number of shares available for sale to the general public will
be reduced to the extent that these persons purchase the reserved shares.
39
<PAGE>
Each of our directors, executive officers and shareholders have agreed, for
a period of 180 days from the effective date of this offering, not to offer,
sell or otherwise dispose of an aggregate of shares of common stock
beneficially held by them without the prior written consent of John G. Kinnard
and Company, Incorporated.
Before this offering, there was no public market for our common stock.
Consequently, the price at which shares are sold in this offering was
determined through negotiation between us and the underwriters and bears no
relation to our current earnings, book value, net worth or financial statement
criteria of value. We cannot assure you that the price at which shares will
sell in the public market after this offering will not be lower than the price
at which shares are sold in this offering.
The foregoing is a brief summary of the material provisions of the
underwriting agreement and does not purport to be a complete statement of their
terms and conditions. The underwriting agreement has been filed as an exhibit
to the Registration Statement of which this prospectus is a part.
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by Gray,
Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota. Legal matters will
be passed upon for the underwriters by Fredrikson & Byron, P.A., Minneapolis,
Minnesota.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1997, and for the years ended
December 31, 1998 and 1997 and for the period from May 22, 1996 (inception) to
December 31, 1996, as shown in their report. We've included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC on Form S-1 relating to
the common stock offered in this initial public offering. This prospectus is
part of the registration statement, but does not contain all of the information
in the registration statement and its exhibits and schedules. You may read our
registration statement, exhibits and schedules for free at the SEC's public
reference room in Washington, D.C. You can request copies of these documents,
upon payment of a duplication fee, by writing to the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings are
also available to the public on the SEC's Internet site at http://www.sec.gov.
40
<PAGE>
WEBVALLEY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-3
Consolidated Statements of Operations as of December 31, 1997 and 1998.... F-4
Consolidated Statement of Shareholders' Equity as of December 31, 1997 and
1998..................................................................... F-5
Consolidated Statements of Cash Flows as of December 31, 1997 and 1998.... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
WebValley, Inc.
We have audited the consolidated balance sheets of WebValley, Inc. as of
December 31, 1997 and 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the period from May 22,
1996 (date of inception) through December 31, 1996 and each of the two years in
the period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of WebValley, Inc. at December 31, 1997 and 1998 and the consolidated results
of its operations and its cash flows for the period from May 22, 1996 (date of
inception) through December 31, 1996 and each of the two years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
February 9, 1999
F-2
<PAGE>
WEBVALLEY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 16,114 $ 183,875
Accounts receivable.................................. 568,300 1,027,337
Prepaids and other assets............................ 4,668 36,023
--------- ----------
Total current assets............................... 589,082 1,247,235
Property and equipment, net............................ 75,288 301,782
Goodwill, net of amortization of $45,357............... -- 274,812
Deferred financing costs, net of amortization of
$5,000................................................ -- 25,000
--------- ----------
Total assets....................................... $ 664,370 $1,848,829
========= ==========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable..................................... $ 23,953 $ 145,414
Accrued expenses..................................... 58,708 65,330
Related party note payable........................... 452,900 --
Acquisition debt..................................... -- 31,750
--------- ----------
Total current liabilities.......................... 535,561 242,494
Note payable........................................... -- 757,810
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares--200,000,000
Issued and outstanding shares--9,000,000............ 90,000 90,000
Additional paid-in capital........................... 180,000 359,700
Deferred compensation................................ -- (179,700)
Accumulated other comprehensive loss................. -- (3,941)
Retained earnings (deficit).......................... (141,191) 582,466
--------- ----------
Total shareholders' equity......................... 128,809 848,525
--------- ----------
Total liabilities and shareholders' equity......... $ 664,370 $1,848,829
========= ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
WEBVALLEY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
May 22, 1996
(date of
inception) Year ended December
through 31,
December 31, ----------------------
1996 1997 1998
------------ ---------- -----------
<S> <C> <C> <C>
Net sales................................. $ 236,529 $2,360,575 $ 6,544,316
Cost of goods sold........................ 45,450 177,639 701,258
---------- ---------- -----------
Gross profit.............................. 191,079 2,182,936 5,843,058
Expenses:
Sales and marketing..................... 161,697 819,490 1,845,441
General and administrative.............. 176,536 1,305,494 3,217,191
---------- ---------- -----------
338,233 2,124,984 5,062,632
---------- ---------- -----------
Operating income (loss)................... (147,154) 57,952 780,426
Interest expense.......................... 11,982 40,007 56,769
---------- ---------- -----------
Net income (loss)......................... $ (159,136) $ 17,945 $ 723,657
========== ========== ===========
Pro forma consolidated statements of
operations data (unaudited):
Net income (loss) as reported........... $ (159,136) $ 17,945 $ 723,657
Pro forma income tax provision.......... -- 7,620 300,380
---------- ---------- -----------
Pro forma net income (loss)............. $ (159,136) $ 10,325 $ 423,277
========== ========== ===========
Pro forma net income (loss) per share:
Basic................................. $ (.03) $ .00 $ .05
Diluted............................... $ (.03) $ .00 $ .04
Weighted average number of shares
outstanding:
Basic................................... 4,886,667 8,541,667 9,000,000
Diluted................................. 4,886,667 9,779,167 10,761,100
</TABLE>
See accompanying notes.
F-4
<PAGE>
WEBVALLEY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
-------------------- Paid-in Comprehensive Deferred Retained
Shares Amount Capital Loss Compensation Earnings Total
---------- -------- ---------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Original issuance of
common stock at $.0025
per share in May 1996
(inception)............ 8,000,000 $ 80,000 $(60,000) $ -- $ -- $ -- $ 20,000
Value of stock issued in
lieu of cash for
services rendered...... 2,000,000 20,000 (15,000) -- -- -- 5,000
Repurchase of common
stock originally issued
at $.0025 per share.... (2,000,000) (20,000) 15,000 -- (5,000)
Net loss for the year... -- -- -- -- -- (159,136) (159,136)
---------- -------- -------- ------- --------- --------- ---------
Balance at December 31,
1996................... 8,000,000 80,000 (60,000) -- -- (159,136) (139,136)
Issuance of common stock
at $.25 per share...... 1,000,000 10,000 240,000 -- -- -- 250,000
Net income.............. -- -- -- -- -- 17,945 17,945
---------- -------- -------- ------- --------- --------- ---------
Balance at December 31,
1997................... 9,000,000 90,000 180,000 -- -- (141,191) 128,809
Consulting expense
associated with options
issued for services.... -- -- 103,500 -- (103,500) -- --
Deferred compensation
associated with phantom
stock issued to
employees.............. -- -- 19,300 -- (19,300) -- --
Deferred compensation
associated with options
issued to employees at
prices below market.... -- -- 56,900 -- (56,900) -- --
Change in foreign
currency translation... -- -- -- (3,941) -- -- (3,941)
Net income.............. -- -- -- -- -- 723,657 723,657
---------
Comprehensive income.... -- -- -- -- -- -- 719,716
---------- -------- -------- ------- --------- --------- ---------
Balance at December 31,
1998................... 9,000,000 $ 90,000 $359,700 $(3,941) $(179,700) $ 582,466 $ 848,525
========== ======== ======== ======= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
WEBVALLEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
May 22, 1996
(date of
inception) Year ended
through December 31,
December 31, --------------------
1996 1997 1998
------------ --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss).......................... $(159,136) $ 17,945 $ 723,657
Adjustments to reconcile net income (loss)
net cash provided by (used in) operating
activities:
Depreciation............................. 1,682 13,830 61,915
Amortization............................. -- -- 50,357
Value of stock issued in lieu of cash
compensation............................ 5,000 -- --
Loss on disposal of fixed assets......... -- 11,693 --
Changes in operating assets and
liabilities:
Accounts receivable.................... (117,043) (451,257) (387,466)
Prepaid expenses and other assets...... (1,491) (3,177) 89
Accounts payable....................... 22,646 1,307 113,504
Accrued expenses....................... 13,668 45,040 (56,822)
--------- --------- ---------
Net cash provided by (used in) operating
activities................................ (234,674) (364,619) 505,234
Investing activities
Acquisition of business, net of cash
acquired.................................. -- -- (372,072)
Purchase of property and equipment......... (12,211) (90,282) (237,302)
--------- --------- ---------
Net cash used in investing activities...... (12,211) (90,282) (609,374)
Financing activities
Net proceeds from issuance of common
stock..................................... 15,000 250,000 --
Proceeds from issuance of notes payable.... -- -- 757,810
Net proceeds from issuance of related party
notes payable............................. 238,100 214,800 --
Payment of debt issuance costs............. -- -- (30,000)
Payment on related party notes payable..... -- -- (452,900)
--------- --------- ---------
Net cash provided by financing activities.. 253,100 464,800 274,910
Effect of exchange rate changes on cash.... -- -- (3,009)
--------- --------- ---------
Increase in cash and cash equivalents...... 6,215 9,899 167,761
Cash and cash equivalents at beginning of
period.................................... -- 6,215 16,114
--------- --------- ---------
Cash and cash equivalents at end of
period.................................... $ 6,215 $ 16,114 $ 183,875
========= ========= =========
Supplemental schedule of non-cash financing
Issuance of debt in connection with India
Subsidiary acquisition.................... $ -- $ -- $ 31,750
========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
WEBVALLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Summary of Significant Accounting Policies
Business Activity
WebValley, Inc. (the "Company") provides Internet solutions to small
businesses throughout the United States. The current business solution consists
of Web site design and hosting, unlimited Internet access, a virtual domain
name and up to five e-mail accounts. The Company was incorporated in the State
of Minnesota on May 22, 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiary, Software Moguls India Private Limited
("India Subsidiary"). The Company owned 85% of the India Subsidiary as of
December 31, 1998. All references to the Company in these financial statements
relate to the consolidated entity. All intercompany balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents are carried at cost which approximates market value. The securities
are considered available-for-sale and consist primarily of government
securities.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Furniture and fixtures........................................ 7 years
Office equipment.............................................. 3 to 5 years
Leasehold improvements........................................ 3 years
</TABLE>
Income Taxes
The Company has elected S corporation status under the Internal Revenue
Code, whereby net income of the Company is allocated to the shareholders to be
reported on their individual income tax returns. Accordingly, no provision for
federal or state income taxes has been made in the financial statements. A pro
forma income tax provision has been presented in the consolidated statement of
operations as if the Company were a C corporation using an estimated full
statutory rate.
Revenue Recognition
The Company recognizes monthly service revenue after the expiration of a
thirty-day acceptance period. Revenue is recognized in the month that the
service is provided. The third-party billing services that the Company uses
holds back a certain percentage of the gross monthly fee to cover
administrative costs and potential bad debts.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist principally of accounts receivable. The Company has a credit policy
which helps minimize credit risk. Management believes this risk is limited due
to the large number and diversity of clients which comprise the Company's
customer base.
F-7
<PAGE>
WEBVALLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Operations
The Company's international operations represent an integral portion of the
Company's overall operating strategy. All of the Company's Web site design is
performed at the India Subsidiary.
The Company's international operations are subject to a number of risks
including currency exchange rate fluctuations, changes in foreign governments
and their laws and policies, and expropriation or requirements of local or
shared ownership. The Company believes that the availability of technical
expertise in other markets mitigates these risks.
Comprehensive Income
Comprehensive income is composed of net income and the foreign currency
translation adjustments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although estimates are considered to be fairly stated at
the time the estimates are made, actual results could differ from those
estimates.
Research and Development Costs
All research and development costs are charged to operations as incurred.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The Company provides the information under the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"). Accordingly, the Company has made pro forma
disclosure of what net income and income per share would have been had the
provisions of Statement 123 been applied to the Company's stock options.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Per Share Data
Basic earnings per share is computed by dividing net income by the weighted
average shares outstanding and excluding any dilutive effects of options and
warrants. Diluted earnings per share gives effect to all dilutive potential
common shares outstanding during the year.
In March 1997 and August 1998, the Board of Directors approved a 100-for-1
and 4-for-1 stock split, respectively, for common stock. All share, per share
and weighted average information has been restated to reflect the splits.
F-8
<PAGE>
WEBVALLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangibles consist of goodwill and deferred financing costs incurred in
connection with the India Subsidiary acquisition and issuance of long-term
debt, respectively. Goodwill is being amortized on a straight-line basis over
five years. Deferred financing costs are being amortized over the term of the
facility on a straight-line basis.
Recently Issued Accounting Standards
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. Statement of Position 98-1 is effective
for financial statements for years beginning after December 15, 1998. Statement
of Position 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The Company does not expect
this standard to have a material effect on its capitalization policy.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters beginning after
June 15, 1999. As the Company does not currently engage or plan to engage in
derivative or hedging activities, there will be no impact to its results of
operations, financial position or cash flows upon the adoption of this
standard.
2. Related Party Transactions
Two companies owned by the majority shareholder advanced various sums to the
Company in 1996, 1997 and 1998. The highest amounts outstanding were $238,100,
$507,900 and $593,031 in 1996, 1997 and 1998, respectively. All amounts
including accrued interest of $59,525 were paid off in 1998.
The Company entered into an agreement with a third party to provide
telemarketing services beginning in 1998. The majority shareholder of the
Company owns 25% of the third party. For services performed under the
agreement, the Company paid the third party $832,908 for the year ended
December 31, 1998.
The Company also purchased telemarketing services from a third party in
which the majority shareholder has a 7.5% interest. Amounts paid to this
company for these services were $35,344, $590,807 and $753,097 in 1996, 1997
and 1998, respectively.
F-9
<PAGE>
WEBVALLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- --------
<S> <C> <C>
Furniture and fixtures..................................... $30,601 $ 50,552
Office equipment........................................... 53,932 307,080
Leasehold improvements..................................... 4,585 19,895
------- --------
89,118 377,527
Accumulated depreciation................................... 13,830 75,745
------- --------
$75,288 $301,782
======= ========
</TABLE>
4. Financing Agreement
In July 1998, the Company entered into a $3,000,000 revolving credit
facility with a bank which matures in July 2001. The facility accrues interest
at a rate of 3% above the prime rate (9.75% at December 31, 1998) and is
payable on a monthly basis. The facility is secured by all of the Company's
assets. The Company has borrowings of $757,810 outstanding against the facility
at December 31, 1998 and paid interest associated with the facility of $35,170
in 1998. The loan agreement provides for a termination fee in general equal to
the greater of the aggregate interest paid in the six months prior to
termination or the minimum monthly interest multiplied by the number of months
from termination to the end of the loan.
5. Leases
The Company leases its office facility under a noncancelable operating lease
agreement which expires on April 30, 2000. Under the facility agreement, the
Company is required to pay base rent plus a percentage of the landlord's
operating expenses. The India Subsidiary leases its office facility under an
operating lease agreement which expires in April 2004.
Total rent expense, inclusive of the Company's portion of the landlord's
operating expenses, under noncancelable operating leases was $3,455, $31,683
and $49,904 for the years ended December 31, 1996, 1997 and 1998, respectively.
Future minimum lease commitments, exclusive of costs associated with the
landlord's operating costs, required under the noncancelable operating leases
as of December 31, 1998 are not material.
6. Common Stock
In June 1997, the Company completed a private placement in which the Company
sold 1,000,000 shares of common stock at $.25 per share, including warrants to
purchase an additional 2,000,000 shares of common stock exercisable at $.25 per
share. The warrants expire on June 2, 2002.
In December 1998, the Company granted options to consultants, for services
rendered, to purchase 230,000 shares of common stock at $1.00 per share. These
options vest over time and expire on December 31, 2003. The Company valued the
options in the amount of $103,500 and will recognize compensation expense over
the vesting period.
F-10
<PAGE>
WEBVALLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Deferred Compensation
In December 1998, the Company entered into phantom stock appreciation
agreements with various employees of the India Subsidiary. As part of the
agreements, the employees are eligible to earn bonuses in the amount of the
accretion in the fair market value of the Company's common stock over the
strike price of the phantom stock times the number of vested shares of phantom
stock. These phantom shares vest over a four year period. In the event of the
liquidation of the Company, registration of the Company's common stock, or the
effect of sale or merger of the Company, the shares vest automatically and
payment of the bonus amount is calculated at that time. These agreements expire
upon the earlier of the fifth anniversary of these agreements, the conversion
of the vested shares into options of the Company or the effect of a merger of
the Company which results in the use of the pooling of interest method, if
existence of these agreements would prohibit such a merger. The Company
recorded deferred compensation of $19,300 and will recognize compensation
expense over the vesting period. See Note 11.
8. Stock Options
On March 31, 1997, the Company granted a non-plan option to a key employee
to purchase 200,000 shares of the Company's common stock at $.25 per share. The
option granted has a five-year term and vests and becomes fully exercisable
over three years of continued employment with the Company.
On December 15, 1998, the Company granted additional non-plan options to
various employees to purchase 132,000 shares of the Company's common stock at
$1.00 per share. The options granted have a seven-year term and vest and become
fully exercisable over five years of continued employment with the Company.
These options were issued at an exercise price below the current appraised fair
market value of the Company's stock. The Company valued the options at $56,900
and will recognize compensation expense over the vesting period.
The following table summarizes information about the non-plan employee stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Price Number Remaining Number Exercise Price
Per Share Outstanding Contractual Life Outstanding Per Share
-------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
$ .25 200,000 2.3 years 20,000 $ .25
1.00 132,000 5.0 years -- --
------- ------
$ .25-$1.00 332,000 3.4 years 20,000 $ .25
======= ======
</TABLE>
The number of options exercisable as of year end 1997 and 1998 were 5,000
and 20,000, respectively, at a weighted average exercise price of $.25 per
share.
Pro forma information regarding net income and income per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of Statement 123. The
fair value for these options was estimated at the date of grant using the
minimum value
F-11
<PAGE>
WEBVALLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
option pricing model with the following assumptions for 1997 and 1998: risk-
free interest rates of 5.36% and 4.56%, respectively; dividend yield of 0%; and
a weighted average expected life of the option of five years.
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1998 was $.06 and $.45 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information, which is inclusive of the pro forma tax
provision, is as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Pro forma net income...................................... $7,328 $418,775
Pro forma basic net income per common share............... $ .00 $ .05
Pro forma diluted net income per share.................... $ .00 $ .04
</TABLE>
9. Acquisition
On April 21, 1998, the Company entered into an agreement with the India
Subsidiary to acquire 85% of the issued and outstanding ownership interest of
the India Subsidiary for $422,165. The acquisition was accounted for as a
purchase. On January 1, 1999, the Company purchased, subject to the final
approval of the Reserve Bank of India, the remaining 15% of the issued and
outstanding ownership interests of the India Subsidiary for $65,302.
10. Litigation
On June 17, 1998, a complaint was filed in the District Court for Hennepin
County, Minnesota by a former employee against the Company and its majority
shareholder. The complaint alleges breach of an alleged oral employment
contract and fraudulent inducement to abandon gainful employment at the former
employee's own company. The former employee is seeking approximately $55,000 in
lost wages and the value of an option to purchase 200,000 shares of the
Company's common stock. The Company believes this suit is without merit and
intends to vigorously defend against such claims.
11. Subsequent Events
In March 1999, the Company adopted the 1999 Stock Option Plan. The Company
reserved 1,000,000 shares for issuance to employees and directors as either
incentive based options or nonqualified options. In March 1999, the Company
issued 133,440 options to employees under the 1999 Stock Option Plan at an
exercise price of $5.00 per share.
In March 1999, the Company also terminated the phantom stock appreciation
agreements with the various employees of the India Subsidiary (Note 7). As part
of the termination of these agreements each holder was granted a five year
nonstatutory stock option under the 1999 Stock Option Plan at an exercise price
of $5.00, vesting 25 percent each year beginning December 24, 1999 and expiring
on December 24, 2003. A total of 83,232 options were granted as part of this
transaction.
F-12
<PAGE>
WEBVALLEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Net Income Per Share
The following table sets forth the reconciliation of the denominator for the
calculation of basic and diluted net income (loss) per share:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Denominator for basic net income per share--
weighted-average shares.................... 4,886,667 8,541,667 9,000,000
Effect of dilutive securities:
Stock options............................. -- 112,500 161,100
Warrants.................................. -- 1,125,000 1,600,000
--------- --------- ----------
Denominator for diluted net income per
share--adjusted weighted-average shares and
assumed conversions........................ 4,886,667 9,779,167 10,761,100
========= ========= ==========
</TABLE>
F-13
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Expenses in connection with the issuance and distribution of the shares of
common stock being registered hereunder, other than underwriting commissions
and expenses, are estimated below.
<TABLE>
<S> <C>
SEC registration fee.................................................... $9,591
NASD filing fee......................................................... 3,950
Nasdaq listing fee......................................................
Legal fees and expenses.................................................
Accounting fees and expenses............................................
Blue Sky fees and expenses..............................................
Printing expenses.......................................................
Transfer agent fees and expenses........................................
Miscellaneous expenses..................................................
Total................................................................... $
</TABLE>
Item 14. Indemnification of Directors and Officers
Minnesota Statutes Section 302A.521 requires that we indemnify a person made
or threatened to be made a party to a proceeding, by a reason of the former or
present official capacity of the person with respect to us, against judgments,
penalties, fines, including without limitation, excise taxes assessed against
the person with respect to an employee benefit plan, settlements, and
reasonable expenses, including attorneys' fees and disbursements, if, with
respect to the acts or omissions of the person complained of in the proceeding,
such person (1) has not been indemnified by another organization or employee
benefit plan for the same judgments, penalties, fines, including without
limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with
the proceeding with respect to the same acts or omissions; (2) acted in good
faith; (3) received no improper personal benefit, and statutory procedure has
been followed in the case of any conflict of interest by a director; (4) in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful and (5) in the case of acts or omissions occurring in the person's
performance in the official capacity of director or, for a person not a
director, in the official capacity of officer, committee member, employee or
agent, reasonably believed that the conduct was in our best interests, or in
the case of performance by our director, officer, employee or agent as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to our best interests. In addition, Section 302A.521, subd. 3 requires us to
pay, upon written request, of reasonable expenses in advance of final
disposition in certain instances. A decision as to required indemnification is
made by a majority of the disinterested Board of Directors present at a meeting
at which a disinterested quorum is present, or by a designated committee of
disinterested directors, by special legal counsel, by the disinterested
shareholders, or by a court.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act, and is therefore unenforceable.
Under the terms of the form of Underwriting Agreement filed as Exhibit 1.1
hereto, the Underwriters have agreed to indemnify, under certain conditions,
us, our directors, certain of our officers and persons who control us within
the meaning of the Securities Act, against certain liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
During the past three years, we have sold the following securities pursuant
to exemptions from registration under the Securities Act. All such sales were
made in reliance upon the exemptions from registration provided under Section
4(2) of the Securities Act for transactions not involving a public offering or
pursuant to Rule 701 under the Securities Act for securities sold pursuant to
certain compensatory benefit plans and contracts relating to compensation, and
related state securities laws. Unless otherwise stated, all shares were issued
directly by us, no underwriters were involved and, except as otherwise noted
below, no discount, commission or other transaction-related remuneration was
paid. *[Share figures have been adjusted for the 4 for 1 stock split that was
effective on August 31, 1998 and the 100 for 1 stock split that was effective
on March 31, 1997.]
1. On May 22, 1996, we issued an aggregate of 10 million common shares to
two founders in consideration of $25,000 cash.
2. As part of a units offering in June 1997 (where each unit consisted of
one share of common stock plus a warrant for the purchase of two additional
shares of common stock, at a price of $0.25 per unit), we issued warrants to
purchase an aggregate of 2,000,000 shares of our common stock at an exercise
price of $0.25 per share and 1,000,000 common shares to outside investors.
3. On March 31, 1997, we granted a five year option to purchase 200,000
shares of our common stock at $0.25 per share to a former employee which
terminated without exercise 90 days after his termination of employment with
us.
4. On March 31, 1997, we granted a five year option to purchase 200,000
shares of our common stock at $0.25 per share to Raymond L. Moles.
5. On December 15, 1998, we granted options to purchase an aggregate of
132,000 shares of our common stock at $1.00 per share to seven of our
employees.
6. On December 31, 1998, we granted four year options to purchase an
aggregate of 230,000 shares of our common stock at $1.00 per share to certain
consultants of ours.
7. On March 23, 1999, we granted seven year options to purchase 120,000
shares of our common stock at $5.00 per share to Robert M. Ringstad.
8. On March 23, 1999, we granted five year options to purchase an aggregate
of 96,672 shares of our common stock at $5.00 per share to certain of our
employees.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Draft of underwriting agreement.
3.1 Amended and restated articles of incorporation of the registrant
dated March 28, 1997, with articles of amendment dated October 22,
1998 and March 23, 1999.
3.2 Restated by-laws of the registrant.
4.1* Specimen of common stock certificate.
4.2 Draft of underwriter's warrant to purchase common stock.
5.1* Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A.
10.1 Non-qualified stock option agreement between WebValley, Inc. and
Scott A. Schwefel for the purchase of 100,000 shares of common
stock of WebValley, Inc., dated December 31, 1998.
10.2 Form of non-qualified stock option agreement between WebValley,
Inc. and each of four consultants for the purchase of an aggregate
of 130,000 shares of common stock of WebValley, Inc., dated
December 31, 1998.
10.3 Non-qualified stock option agreement between WebValley, Inc. and
Raymond L. Moles dated March 31, 1997.
10.4 Form of non-qualified stock option agreement between WebValley,
Inc. and each of seven employees for the purchase of an aggregate
of 132,000 shares of common stock of WebValley, Inc., dated
December 15, 1998.
10.5 1999 Stock Option Plan of WebValley, Inc. and affiliated
companies, with forms of Non Qualified and Incentive Stock Option
Agreements.
10.6 Employment letter dated March 23, 1999 between WebValley, Inc. and
Robert M. Ringstad, as amended.
10.7 Non-qualified stock option agreement between WebValley, Inc. and
Robert M. Ringstad dated March 23, 1999.
10.8 Loan and security agreement dated July 16, 1998 between WebValley,
Inc., as borrower, and Coast Business Credit, as lender.
10.9 Agreement with U.S. Protel, Inc.
10.10 Lease for corporate headquarters facility dated March 14, 1997.
21.1 Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP
23.3* Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. (to be
included in Exhibit No. 5.1 to the Registration Statement).
24.1 Powers of Attorney (included on Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
None required.
II-3
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling persons under the
provisions summarized in Item 14 above, or otherwise, we have been advised
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by one of our directors, officers or
controlling persons in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, we will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act, and will be
governed by the final adjudication of such issue.
We hereby undertake to provide to the Underwriters, at the closing specified
in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us under Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota, on April 7, 1999.
WebValley, Inc.
/s/ Satya P. Garg
By __________________________________
Satya P. Garg
Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Satya P. Garg and Robert M. Ringstad, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this registration statement, and to sign any
registration statement for the same offering covered by this registration
statement that is to be effective on filing pursuant to Rule 462(b) promulgated
under the Securities Act of 1933, and all post-effective amendments thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full powers and
authority to do and perform each and every act and things requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 7, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Satya P. Garg Chairman of the Board, President
______________________________________ and Chief Executive Officer and
Satya P. Garg Director (principal executive
officer)
/s/ Robert M. Ringstad Chief Financial Officer, Secretary
______________________________________ and Director (principal financial
Robert M. Ringstad and accounting officer)
/s/ Scott A. Schwefel Vice President of Marketing and
______________________________________ Director
Scott A. Schwefel
/s/ James A. Mitchell Director
______________________________________
James A. Mitchell
Director
______________________________________
Richard N. Soskin
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Draft of underwriting agreement.
3.1 Amended and restated articles of incorporation of the registrant
dated March 28, 1997, with articles of amendment dated October 22,
1998 and March 23, 1999.
3.2 Restated by-laws of the registrant.
4.1* Specimen of common stock certificate.
4.2 Draft of underwriter's warrant to purchase common stock.
5.1* Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A.
10.1 Non-qualified stock option agreement between WebValley, Inc. and
Scott A. Schwefel for the purchase of 100,000 shares of common
stock of WebValley, Inc., dated December 31, 1998.
10.2 Form of non-qualified stock option agreement between WebValley,
Inc. and each of four consultants for the purchase of an aggregate
of 130,000 shares of common stock of WebValley, Inc., dated
December 31, 1998.
10.3 Non-qualified stock option agreement between WebValley, Inc. and
Raymond L. Moles dated March 31, 1997.
10.4 Form of non-qualified stock option agreement between WebValley,
Inc. and each of seven employees for the purchase of an aggregate
of 132,000 shares of common stock of WebValley, Inc., dated
December 15, 1998.
10.5 1999 Stock Option Plan of WebValley, Inc. and affiliated
companies, with forms of Non Qualified and Incentive Stock Option
Agreements.
10.6 Employment letter dated March 23, 1999 between WebValley, Inc. and
Robert M. Ringstad, as amended.
10.7 Non-qualified stock option agreement between WebValley, Inc. and
Robert M. Ringstad dated March 23, 1999.
10.8 Loan and security agreement dated July 16, 1998 between WebValley,
Inc., as borrower, and Coast Business Credit, as lender.
10.9 Agreement with U.S. Protel, Inc.
10.10 Lease for corporate headquarters facility dated March 14, 1997.
21.1 Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP
23.3* Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. (to be
included in Exhibit No. 5.1 to the Registration Statement).
24.1 Powers of Attorney (included on Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 1.1
Draft of Underwriting Agreement
_________ SHARES
WEBVALLEY, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
<PAGE>
___________, 1999
John G. Kinnard and Company, Incorporated
- -----------------------------------------
As Representatives of the Several Underwriters
c/o John G. Kinnard and Company, Incorporated
920 Second Avenue South
Minneapolis, MN 55402
Ladies and Gentlemen:
WebValley, Inc., a Minnesota corporation (the "Company"), proposes to
sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), for whom you are acting as the representatives (the
"Representatives"), an aggregate of ________ Million (_________) shares (the
"Firm Shares") of Common Stock, $.01 par value, of the Company (the "Common
Stock"). The respective amounts of Firm Shares to be so purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto. In
addition, the Company proposes, subject to the terms and conditions stated
herein, to grant to the Underwriters an option to purchase an aggregate of up to
_______ additional shares of Common Stock upon the request of the
Representatives solely for the purpose of covering over allotments (the "Option
Shares"). The Firm Shares and the Option Shares are referred to herein
collectively as the "Shares." Further, the Company hereby confirms its agreement
to issue to the Representatives warrants for the purchase of a total of
__________ shares as described in Section 2(G) hereof (the "Representatives'
Warrants") assuming purchase by the Underwriters of the Firm shares. The shares
issuable upon exercise of the Representatives' Warrants are referred to as the
Warrant Shares.
As Representatives, you have advised the Company (i) that you are
authorized to enter into this Agreement on behalf of the Underwriters and (ii)
that the Underwriters are willing, acting severally and not jointly, to purchase
the number of Firm Shares, aggregating in total ______ Million (_________)
shares, set forth opposite their respective names in Schedule I hereto, plus
their pro rata portion of the Option Shares purchased if you elect to exercise
the over allotment option in whole or in part for the accounts of the
Underwriters.
The Company hereby confirms the arrangements with respect to the
purchase of the Shares severally by each of the Underwriters. The Company has
been advised and hereby acknowledges that John G. Kinnard and Company,
Incorporated and _____________________ have been duly authorized to act as the
representatives of the Underwriters. As used in this Agreement, the term
"Underwriter" refers to any individual member of the underwriting syndicate and
includes any party substituted for an Underwriter under Section 9 hereof.
1
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
A. The Company represents and warrants to, and agrees
with, each of the several Underwriters as follows:
i. A registration statement on Form S-1 (Registration
No. 333-_____) with respect to the Shares has been
prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") promulgated
thereunder and has been filed with the Commission
under the Act. If the Company has elected to rely
upon Rule 462(b) under the Act to increase the size
of the offering registered under the Act, the Company
will prepare and file with the Commission a
registration statement with respect to such increase
pursuant to Rule 462(b). Copies of the registration
statement as amended to date have been delivered by
the Company to the Representatives. Such registration
statement, including a registration statement (if
any) filed pursuant to Rule 462(b) under the Act and
the information (if any) deemed to be part thereof
pursuant to Rules 430A and 434(d) under the Act, and
all prospectuses included as a part thereof, all
financial statements included in such registration
statement, and all schedules and exhibits thereto, as
amended at the time when the registration statement
shall become effective, are herein referred to as the
"Registration Statement," and the term "Prospectus"
as used herein shall mean the final prospectus
included as a part of the Registration Statement on
file with the Commission when it becomes effective
(except that if a prospectus is filed by the Company
pursuant to Rules 424(b) and 430A under the Act, the
term "Prospectus" as used herein shall mean the
prospectus so filed pursuant to Rules 424(b) and 430A
(including any term sheet meeting the requirements of
Rule 434 under the Act provided by the Company for
use with a prospectus subject to completion within
the meaning of Rule 434 in order to meet the
requirements of Section 10(a) of the Act)). The term
"Preliminary Prospectus" as used herein means any
prospectus used prior to the Effective Date (as
defined in Section 5(A) hereof) and included as a
part of the Registration Statement, prior to the time
it becomes or became effective under the Act and any
prospectus subject to completion as described in
Rules 430A or 434 under the Act. Copies of the
Registration Statement, including all exhibits and
schedules thereto, any amendments thereto and all
Preliminary Prospectuses have been delivered to you.
ii. The Registration Statement has been declared
effective, and at all times subsequent thereto up to
each closing date, the Registration Statement and
Prospectus and all amendments thereof and supplements
thereto, will comply in all material respects with
the provisions of the Act
2
<PAGE>
and the Rules and Regulations. Neither the Commission
nor any state securities division has issued any
order (i) preventing or suspending the use of any
Preliminary Prospectus, (ii) issuing a stop order
with respect to the offering of the Shares or (iii)
requiring the recirculation of a Preliminary
Prospectus. The Registration Statement (as amended,
if the Company shall have filed with the Commission
any post effective amendments thereto) does not and
will not contain any untrue statement of a material
fact or omit to state a material fact require to be
stated therein or necessary to make the statements
therein, in light of the circumstances under which
they were made, not misleading. Each Preliminary
Prospectus, at the time of filing thereof, the
Registration Statement as of the date declared
effective and at all times subsequent thereto up to
each closing date, and the Prospectus (as amended or
supplemented, if the Company shall have filed with
the Commission any amendment thereof or supplement
thereto) conformed and conforms in all material
respects to the requirements of the Act and the Rules
and Regulations and did not, does not and will not
contain any untrue statement of a material fact or
omit to state a material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which
they were made, not misleading; provided, however,
that none of the representations and warranties in
this Subsection 1(A)(ii) shall apply to statements
in, or omissions from, the Registration Statement or
the Prospectus (or any amendment thereof or
supplement thereto) which are based upon and conform
to information furnished to the Company by the
Underwriters, in writing specifically for use in the
preparation of the Registration Statement or the
Prospectus or any such amendment or supplement. There
is no contract or other document of the Company of a
character required by the Act or the Rules and
Regulations to be described in the Registration
Statement or Prospectus or to be filed as an exhibit
to the Registration Statement that has not been
described or filed as required. The descriptions of
all such contracts and documents or references
thereto are correct and include the information
required under the Act and the Rules and Regulations.
iii. The Company has been duly incorporated and is
validly existing as a corporation in good standing
under the laws of the State of Minnesota, with full
corporate power and authority, to own, lease and
operate its properties and conduct its business as
described in the Registration Statement and
Prospectus. The Company owns all of the outstanding
shares of capital stock of Software Moguls India
Private, Ltd. (the "India Subsidiary"). The India
Subsidiary has been duly incorporated and is validly
existing as a corporation under the laws of India,
with full corporate power and authority to own, lease
and operate its properties and conduct its business
as described in the Registration Statement and
Prospectus. Each of the Company and the India
Subsidiary is duly
3
<PAGE>
qualified to do business as a foreign corporation in
good standing in each jurisdiction in which the
ownership or lease of its properties, or the conduct
of its business, requires such qualification and in
which the failure to be qualified or in good standing
would have a material adverse effect on the condition
(financial or otherwise), results of operations,
shareholders' equity, business, property or prospects
of the Company and the India Subsidiary, taken as a
whole. Except for the India Subsidiary, the Company
has no subsidiaries, is not affiliated with, and does
not own any stock or other equity interest of, any
other company or business entity.
iv. Each of the Company and the India Subsidiary has
all necessary material authorizations, licenses,
approvals, consents, permits, certificates and orders
of and from all state, federal, foreign and other
governmental or regulatory authorities to own its
properties and to conduct its business as described
in the Registration Statement and Prospectus, is
conducting its business in substantial compliance
with all applicable laws, rules and regulations of
the jurisdictions in which it is conducting business,
and has received no notice of nor has it knowledge of
any basis for any proceeding or action for the
revocation or suspension of any such authorizations,
licenses, approvals, consents, permits, certificates
or orders.
v. Neither the Company nor the India Subsidiary is in
violation of or in default under (i) its Articles of
Incorporation or Bylaws, (ii) or in default in the
performance or observance of any material obligation,
agreement, covenant or condition contained in any
bond, debenture, note or other evidence of
indebtedness or in any contract, license, indenture,
bond mortgage, loan agreement, joint venture or
partnership agreement, lease, agreement or instrument
to which the Company or the India Subsidiary is a
party or by which the Company or the India Subsidiary
or any of its properties are bound, (iii) any law,
order, rule, regulation, writ, injunction or decree
of any government, governmental instrumentality or
court, domestic or foreign, which violation or
default would have a material adverse effect on the
condition (financial or otherwise), results of
operations, shareholders' equity, business, property
or prospects of the Company and the India Subsidiary,
taken as a whole, or the ability of the Company to
consummate the transactions contemplated hereby.
vi. The Company has full requisite power and
authority to enter into this Agreement. This
Agreement has been duly authorized, executed and
delivered by the Company and will be a valid and
binding agreement on the part of the Company,
enforceable in accordance with its terms, if and when
this Agreement shall have become effective in
accordance with Section 8, except as enforceability
may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the
rights of creditors generally and by judicial
limitations on the right of specific
4
<PAGE>
performance and other equitable remedies, and except
as the enforceability of the indemnification or
contribution provisions hereof may be affected by
applicable federal or state securities laws. The
performance of this Agreement and the consummation of
the transactions herein contemplated will not result
in a material breach or violation of any of the terms
and provisions of or constitute a material default
under (i) any bond, debenture, note or other evidence
of indebtedness, or any contract, license, indenture,
mortgage, loan agreement, joint venture or
partnership agreement, lease, agreement or other
instrument to which the Company is a party or by
which the property of the Company is bound, (ii) the
Company's Articles of Incorporation or Bylaws, or
(iii) any statute or any order, rule or regulation of
any court, governmental agency or body having
jurisdiction over the Company. No consent, approval,
authorization or order of any court, governmental
agency or body is required for the consummation by
the Company of the transactions on its part herein
contemplated, except such as may be required under
the Act or under state or other securities laws.
vii. There are no actions, suits or proceedings
pending before any court or governmental agency,
authority or body to which the Company or the India
Subsidiary is a party or of which the business or
property of the Company or the India Subsidiary is
the subject which (i) might result in any material
adverse change in the condition (financial or
otherwise), shareholders' equity, results of
operations, business or prospects of the Company and
the India Subsidiary, taken as a whole, (ii)
materially and adversely affect their properties or
assets, or (iii) prevent consummation of the
transactions contemplated by this Agreement. To the
best of the Company's knowledge, no such actions,
suits or proceedings are threatened.
viii. The Company has the duly authorized and
outstanding capitalization set forth under the
caption "Capitalization" in the Prospectus. The
outstanding shares of capital stock of the Company
have been duly authorized and validly issued, fully
paid and nonassessable. The Shares conform in
substance to all documents relating thereto contained
in the Registration Statement and Prospectus. The
Shares to be sold by the Company hereunder have been
duly authorized and, when issued and delivered
pursuant to this Agreement, will be validly issued,
fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus. No
statutory preemptive rights or similar rights to
subscribe for or purchase shares of capital stock of
any security holders of the Company exist with
respect to the issuance and sale of the Shares by the
Company. Except as described in the Prospectus, the
Company has no agreement with any security holder
which gives such security holder the right to require
the Company to register under the Act
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<PAGE>
any securities of any nature owned or held by such
person in connection with the transactions
contemplated by this Agreement. Except as described
in the Prospectus, there are no outstanding options,
warrants, agreements, contracts or other rights to
purchase or acquire from the Company or the India
Subsidiary any shares of their capital stock. Except
as described in the Prospectus, there are no
agreements among the Company's executive officers and
directors and any other persons with respect to the
voting or transfer of the Company's capital stock or
with respect to other aspects of the Company's
affairs. Upon payment for and delivery of the Shares
to be sold by the Company pursuant to this Agreement,
the Underwriters will acquire good and marketable
title to such Shares, free and clear of all liens,
encumbrances or claims created by actions of the
Company. The certificates evidencing the Shares will
comply as to form with all applicable provisions of
the laws of the State of Minnesota.
ix. The Representatives' Warrants and the Warrant
Shares have been duly authorized. The
Representatives' Warrants, when issued and delivered
to the Representatives, will constitute valid and
binding obligations of the Company in accordance with
their terms, except as enforceability may be limited
by the application of bankruptcy, insolvency,
moratorium or similar laws affecting the rights of
creditors generally and by judicial limitations on
the right of specific performance. The Warrant Shares
when issued in accordance with the terms of this
Agreement and pursuant to the Representatives'
Warrants, will be validly issued, fully paid and
nonassessable and subject to no preemptive rights or
similar rights on the part of any person or entity. A
sufficient number of shares of Common Stock of the
Company have been reserved for issuance by the
Company upon exercise of the Representatives'
Warrants.
x. The financial statements of the Company, together
with the related notes, included in the Registration
Statement and Prospectus (the "Financial Statements")
fairly and accurately present the financial position,
the results of operations and changes in
shareholders' equity and cash flows of the Company at
the dates and for the respective periods to which
such Financial Statements apply. The Financial
Statements are accurate, complete and correct and
have been prepared in accordance with the Act, the
Rules and Regulations and generally accepted
accounting principles, consistently applied
throughout the periods involved, and all adjustments
necessary for a fair presentation of results for such
periods have been made, except as otherwise stated
therein; and the supporting schedules included in the
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Registration Statement present fairly the information
required to be stated therein. No other financial
statements or schedules are required to be included
in the Registration Statement. The summary and
selected consolidated financial data included in the
Registration Statement present fairly the information
shown therein on the basis stated in the Registration
Statement and have been compiled on a basis
consistent with the financial statements presented
therein. The summaries of the Financial Statements
and the other financial, statistical and related
notes set forth in the Registration Statement and the
Prospectus are (i) accurate and correct and fairly
present the information purported to be shown thereby
as of the dates and for the periods indicated on a
basis consistent with the audited financial
statements of the Company and (ii) in compliance in
all material respects with the requirements of the
Act and the Rules and Regulations.
xi. Ernst & Young, LLP, which has expressed its
opinion with respect to the financial statements
filed with the Commission as part of the Registration
Statement, are independent public accountants as
required by the Act and the rules and regulations
thereunder.
xii. Since the respective dates as of which
information is given in the Registration Statement
and Prospectus, (i) there has not been any material
adverse change, or any development, event or
occurrence in the business of the Company and the
India Subsidiary, taken as a whole, that, together
with other developments, events and occurrences with
respect to such business, would have or would
reasonably be expected to have a material adverse
effect on the condition (financial or otherwise) of
the Company, the India Subsidiary or the management,
shareholders' equity, results of operations,
business, property or prospects of the Company or the
India Subsidiary, whether or not occurring in the
ordinary course of business, (ii) there has not been
any transaction not in the ordinary course of
business entered into by the Company or the India
Subsidiary which is material to the Company and the
India Subsidiary, taken as a whole, other than
transactions described or contemplated in the
Registration Statement, (iii) neither the Company nor
the India Subsidiary has incurred any material
liabilities or obligations, which are not in the
ordinary course of business or which could result in
a material reduction in the future earnings of the
Company on a consolidated basis, (iv) neither the
Company nor the India Subsidiary has sustained any
material loss or interference with its business or
properties from fire, flood, windstorm, accident or
other calamity, whether or not covered by insurance,
(v) there has not been any change in the capital
stock of the Company or the India Subsidiary (other
than upon the exercise of options described in the
Registration Statement) or any material increase in
the short-term or long-term debt (including
capitalized lease obligations) of the Company or the
India Subsidiary, (vi) there has not been any
declaration or payment of any dividends or any
distributions of any kind with respect to the capital
stock of the Company or the India Subsidiary, other
than any dividends or distributions described or
contemplated in the Registration Statement, and
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<PAGE>
(vii) there has not been any issuance of warrants,
options, convertible securities or other rights to
purchase or acquire capital stock of the Company or
the India Subsidiary.
xiii. The Company and the India Subsidiary have filed
all necessary federal, state, local and foreign
income and franchise tax returns and paid all taxes
shown as due thereon. The Company has no knowledge of
any tax deficiency which either has been or might be
asserted against it or the India Subsidiary which
would materially and adversely affect the business or
properties of the Company and the India Subsidiary,
taken as a whole.
xiv. The Company and the India Subsidiary maintain a
system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions
are executed in accordance with management's general
or specific authorizations and (ii) transactions are
recorded as necessary to permit preparation of
financial statements in conformity with generally
accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is
permitted only in accordance with management's
general or specific authorization; and (iv) the
recorded accountability for assets is compared with
existing assets at reasonable intervals and
appropriate action is taken with respect to any
differences.
xv. The Company and the India Subsidiary have good
and marketable title to all of the property, real and
personal, described in the Registration Statement or
Prospectus as being owned by the Company and the
India Subsidiary, free and clear of all liens,
encumbrances, equities, charges or claims, except as
do not materially interfere with the uses made and to
be made by the Company and the India Subsidiary of
such property or as disclosed in the Financial
Statements. The Company and the India Subsidiary have
valid and binding leases to the real and personal
property described in the Registration Statement or
Prospectus as being under lease to the Company and
the India Subsidiary, except as to those leases which
are not material to the Company and the India
Subsidiary, taken as a whole, or the lack of
enforceability of which would not materially
interfere with the use made and to be made by the
Company and the India Subsidiary of such leased
property.
xvi. There has been no unlawful storage, treatment or
disposal of waste by the Company or the India
Subsidiary at any of the facilities owned or leased
thereby, except for such violations which would not
have a material adverse effect on the condition,
(financial or otherwise) or the shareholders' equity,
results of operation, business, properties or
prospects of the Company and the India Subsidiary,
taken as a whole. There has been no material spill,
discharge, leak, emission, ejection, escape, dumping
or release of any kind onto the properties owned or
leased by
8
<PAGE>
the Company or the India Subsidiary, or into the
environment surrounding those properties, of any
toxic or hazardous substances, as defined under any
federal, state or local regulations, laws or
statutes, except for those releases either
permissible under such regulations, laws or statutes
or otherwise allowable under applicable permits or
which would not have a material adverse effect on the
condition (financial or otherwise) or the
shareholders' equity, results of operation, business,
properties or prospects of the Company and the India
Subsidiary, taken as a whole.
xvii. Each employee benefit plan (as defined in
Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"))
("Employee Benefit Plan"), and each bonus,
retirement, pension, profit sharing, stock bonus,
thrift, stock option, stock purchase, incentive,
severance, deferred or other compensation or welfare
benefit plan, program, agreement or arrangement of,
or applicable to employees or former employees of,
the Company or the India Subsidiary or with respect
to which the Company or the India Subsidiary could
have any liability ("Benefit Plans"), was or has been
established, maintained and operated in all material
respects in compliance with all applicable federal,
state, and local statutes, orders, governmental rules
and regulations, including, but not limited to, ERISA
and the Internal Revenue Code of 1986, as amended
(the "Code"). No Benefit Plan is or was subject to
Title IV of ERISA or Section 302 of ERISA or Section
412 of the Code and for which an unfunded liability
exists. The Company does not, either directly or
indirectly as a member of a controlled group within
the meaning of Sections 414(b), (c), (m) and (o) of
the Code ("Controlled Group"), have any material
liability that remains unsatisfied or arising under
Section 502 of ERISA, Subchapter D of Chapter I of
Subtitle A of the Code or under Chapter 43 of
Subtitle D of the Code. No action, suit, grievance,
arbitration or other matter of litigation or claim
with respect to any Benefit Plan (other than routine
claims for benefits made in the ordinary course of
plan administration for which plan administrative
procedures have not been exhausted) is pending or, to
the Company's knowledge, threatened or imminent
against or with respect to any Benefit Plan, any
member of a Controlled Group that includes the
Company, or any fiduciary within the meaning of
Section 3(21) of ERISA with respect to a Benefit Plan
which, if determined adversely to the Company, would
have a material adverse effect on the Company.
Neither the Company nor any member of a Controlled
Group that includes the Company, has any knowledge of
any facts that could give rise to any action, suit,
grievance, arbitration or any other manner of
litigation or claim with respect to any Benefit Plan.
xviii No labor disturbance or dispute by the
employees or consultants or contractors of the
Company or the India Subsidiary exists or, to the
Company's knowledge, is threatened which could
reasonably be expected
9
<PAGE>
to have a material adverse effect on the conduct of
the business or the financial condition (financial or
otherwise), results of operations, properties or
prospects of the Company and the India Subsidiary,
taken as a whole.
xix. Except as disclosed in the Prospectus:
a. To the Company's knowledge, the Company
and the India Subsidiary own or possess the
full right to use or are licensed to use all
patents, patent applications, inventions,
copyrights, trademarks, service marks,
applications for registration of trademarks
and service marks, trade secrets, know-how
and other intellectual property, proprietary
information or know-how reasonably necessary
for the conduct of their present or intended
business as described in the Prospectus
("Proprietary Rights"); there are no pending
legal, governmental or administrative
proceedings relating to the Proprietary
Rights to which the Company or the India
Subsidiary is a party or of which any
property of the Company or the India
Subsidiary is subject; and no such
proceedings are, to the best of the
Company's knowledge, threatened or
contemplated against the Company which
threatened or contemplated proceedings are
likely to result in a material adverse
effect upon the Company and the India
Subsidiary, taken as a whole;
b. Neither the Company nor the India
Subsidiary has received notice of any
material conflict or claim with asserted
intellectual property rights of any third
parties;
c. To the best of the Company's knowledge,
neither the Company nor the India Subsidiary
infringes upon the rights or claimed rights
of any person under or, with respect to, any
of the Proprietary Rights referred to in
Section 1(A)(xix)(a) above; except as
disclosed in the Prospectus, neither the
Company nor the India Subsidiary is
obligated or under any liability whatsoever
to make any payments by way of royalties,
fees or otherwise to any owner of, licensor
of, or other claimant to, any Proprietary
Rights, with respect to the use thereof or
in connection with the conduct of its
business or otherwise; and to the best of
the Company's knowledge, neither the Company
nor the India Subsidiary is using any
confidential information or trade secrets of
any other party in the conduct of its
business;
d. Neither the Company nor the India
Subsidiary have entered into any consent,
indemnification, forbearance to sue or
settlement
10
<PAGE>
agreement with respect to the Proprietary
Rights other than in the ordinary course of
business;
e. To the best of the Company's knowledge,
the Company's and the India Subsidiary's
patents, trademark registrations, service
mark registrations and copyright
registrations are valid and enforceable and
no such registrations have lapsed, expired
or been abandoned or canceled or are the
subject of cancellation or other adversarial
proceedings, and all applications therefor
are pending and are in good standing;
f. The Company and the India Subsidiary are
in compliance in all material respects with
their contractual obligations under licenses
of Proprietary Rights; and
g. To the Company's knowledge, the Company
and the India Subsidiary own or possess the
full rights to use or are licensed to use
all trade secrets, including know-how,
customer lists, inventions, designs,
processes, computer programs and any other
technical data or information necessary to
the development, manufacture, operation and
sale of all products sold or proposed to be
sold by them.
xx. The Company and the India Subsidiary
maintain insurance, which is in full force
and effect, of the types and in the amounts
reasonably adequate for their business and,
to the best of the Company's knowledge,
consistent with coverage comparable to the
insurance maintained by similar companies or
businesses.
xxi. The Company has not sold any securities in
violation of Section 5 of the Act.
xxii. The conditions for use of a registration
statement on Form S-1 for the distribution of the
Shares have been satisfied with respect to the
Company.
xxiii. The Company intends to apply the proceeds from
the sale of the Shares by it to the purposes and
substantially in the manner set forth in the
Prospectus.
xxiv. No person is entitled, directly or indirectly,
to compensation from the Company or the Underwriters
for services as a finder in connection with the
transactions contemplated by this Agreement.
11
<PAGE>
xxv. All material transactions between the Company
and the India Subsidiary and shareholders of the
Company who beneficially own more than 5% of any
class of the Company's voting securities or officers
or directors of the Company have been accurately
disclosed in the Prospectus, and the terms of each
such transaction are fair to the Company and no less
favorable to the Company than the terms that could
have been obtained from unrelated parties.
xxvi. The Company has not distributed and will not
distribute any prospectus or other offering material
in connection with the offering and sale of the
Shares other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to
be distributed by the Company.
xxvii. The Company has not taken and will not take,
directly or indirectly, any action designed to, or
which has constituted, or which might reasonably be
expected to cause or result in, stabilization or
manipulation of the price of the Common Stock.
xxviii. The Company's application for listing the
Shares on the Nasdaq National Market ("Nasdaq") has
been approved.
xxix. To the Company's knowledge, none of the
Company's officers, directors or security holders has
any affiliations with the National Association of
Securities Dealers, Inc., except as set forth in the
Registration Statement or as otherwise disclosed in
writing to the Representatives.
xxx. The Company has obtained a written agreement,
enforceable by the Representatives, from each officer
and director of the Company and shareholder who holds
5% or more of the outstanding Common Stock of the
Company that for 180 days following the Effective
Date, such person will not, without the prior written
consent of John G. Kinnard and Company, Incorporated,
sell, transfer or otherwise dispose of, or agree to
sell, transfer or otherwise dispose of, other than by
gift to donees who agree to be bound by the same
restriction or by will or the laws of descent, any of
his or her Common Stock, or any options, warrants or
rights to purchase Common Stock or any shares of
Common Stock received upon exercise of any options,
warrants or rights to purchase Common Stock, which
are beneficially held by such persons during such
180-day period.
xxxi. The Company is not, and upon completion of the
sale of the Shares contemplated hereby will not be,
required to register as an "investment company" under
the Investment Company Act of 1940, as amended.
12
<PAGE>
xxxii. The Company has complied and will comply with
all provisions of Florida Statutes Section 517.075
(Chapter 92-198, Laws of Florida). Neither the
Company, nor any affiliate thereof, does business
with the government of Cuba or with any person of
affiliate located in Cuba.
xxxiii. Other than as contemplated by this Agreement,
the Company has not incurred any liability for any
finder's fee, broker's fee or other agent's
commission in connection with the execution and
delivery of this Agreement or the consummation of the
transactions contemplated hereby.
B. Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel to the
Underwriters shall be deemed to be a representation and
warranty of the Company to each Underwriter as to the matters
covered thereby.
2. PURCHASE, SALE, DELIVERY AND PAYMENT.
A. On the basis of the representations, warranties, and
agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to
each of the Underwriters, and the Underwriters agree,
severally and not jointly, to purchase, at a purchase price
equal to 93% of the per share price to public of $_____ (the
"Offering Price"), the respective amount of Firm Shares set
forth opposite such Underwriter's name in Schedule I hereto,
subject to adjustments in accordance with Section 9 hereof.
The Underwriters will collectively purchase all of the Firm
Shares if any are purchased.
B. On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the Underwriters
to purchase an aggregate of up to ________ Option Shares at
the same purchase price as the Firm Shares for use solely in
covering any over allotments made by the Underwriters in the
sale and distribution of the Firm Shares. The option granted
hereunder may be exercised at any time (but not more than
once) within 30 days after the Effective Date (as defined in
Section 5(A) hereof) upon notice (confirmed in writing) by the
Representatives to the Company setting forth the aggregate
number of Option Shares as to which the Underwriters are
exercising the option and the date on which certificates for
such Option Shares are to be delivered. Option Shares shall be
purchased severally for the account of each Underwriter in
proportion to the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto. The option
granted hereby may be canceled by the Representatives upon
notice to the Company as to the Option Shares for which the
option is unexercised at the time of expiration of the 30-day
period.
C. The Company will deliver the Firm Shares to the
Representatives at the offices of John G. Kinnard and Company,
Incorporated, 920 Second Avenue
13
<PAGE>
South, Minneapolis, Minnesota 55402, unless some other place
is agreed upon, at 10:00 a.m., Minneapolis time, against
payment of the purchase price at the same place, on the third
full business day after trading of the Shares has commenced,
or, if the offering commences after 4:30 p.m., on the fourth
full business day after commencement of the offering, or such
earlier time as may be agreed upon between the Representatives
and the Company, such time and place being herein referred to
as the "First Closing Date."
D. The Company will deliver the Option Shares being purchased
by the Underwriters to the Representatives at the
above-referenced offices of John G. Kinnard and Company,
Incorporated set forth in Section 2(C) above, unless some
other place is agreed, at 10:00 a.m., Minneapolis time,
against payment of the purchase price at such place, on the
date determined by the Representatives and of which the
Company has received notice as provided in Section 2(B), which
shall not be earlier than two nor later than five full
business days after the exercise of the option as set forth in
Section 2(B), or at such other time not later than ten full
business days thereafter as may be agreed upon by the
Representatives and the Company, such time and date being
herein referred to as the "Second Closing Date."
E. Certificates for the Shares to be delivered will be
registered in such names and issued in such denominations as
the Underwriters shall request two business days prior to the
First Closing Date or the Second Closing Date, as the case may
be. The certificates will be made available to the
Underwriters in definitive form for the purpose of inspection
and packaging at least twenty-four (24) hours prior to the
respective closing dates.
F. Payment to the Company for the Shares sold shall be made,
against delivery to the Representatives or their designated
agent, of certificates for the Shares, by wire transfer to an
account designated by the Company or by certified or official
bank check or checks in Clearing House funds, payable to the
order of the Company.
G. On the first Closing Date, the Company shall issue and
deliver to the Representatives the Representatives' Warrants
against payment by the Representatives of the purchase price
therefor of $__________. The Representatives' Warrants shall
first become exercisable one year after the Effective Date and
shall remain exercisable for a period of four years
thereafter. The Representatives' Warrants shall be subject to
certain transfer restrictions and shall be in substantially
the form filed as an exhibit to the Registration Statement and
attached hereto as Appendix A.
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<PAGE>
3. UNDERWRITERS' OFFERING TO THE PUBLIC.
A. The Underwriters will make a public offering of the Shares
directly to the public (which may include selected dealers who
are members in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") or foreign dealers not
eligible for membership in the NASD but who have agreed to
abide by the interpretation of the NASD Board of Governor's
with respect to free-riding and withholding) as soon as the
Underwriters deem practicable after the Registration Statement
becomes effective at the Offering Price, subject to the terms
and conditions of this Agreement and in accordance with the
Prospectus. Concessions from the Offering Price may be allowed
selected dealers who are members of the NASD as the
Underwriters determine and the Underwriters will furnish the
Company with such information about the distribution
arrangements as may be necessary for inclusion in the
Registration Statement. It is understood that the Offering
Price and such concessions may vary after the public offering.
The Underwriters shall offer and sell the Shares only in
jurisdictions in which the offering of Shares has been duly
registered or qualified, or is exempt from registration or
qualification, and shall take reasonable measures to effect
compliance with applicable state and local securities laws.
B. It is understood that the Representatives, individually and
not as representatives, may (but shall not be obligated to)
make payment on behalf of any Underwriter or Underwriters for
the Shares to be purchased by such Underwriter or
Underwriters. No such payment by the Representatives shall
relieve such Underwriter or Underwriters from any of its or
their other obligations hereunder.
4. COVENANTS OF THE COMPANY.
The Company hereby covenants and agrees with each of the several
Underwriters as follows:
A. If the Company has elected to rely on Rule 430A under the
Act, the Company will prepare and file a Prospectus (or term
sheet within the meaning of Rule 434 under the Act) containing
the information omitted therefrom pursuant to Rule 430A under
the Act with the Commission within the time period required
by, and otherwise in accordance with the provisions of, Rules
424(b), 430A and 434, if applicable, under the Act; if the
Company has elected to rely upon Rule 462(b) under the Act to
increase the size of the offering registered under the Act,
the Company will prepare and file a registration statement
with respect to such increase with the Commission within the
time period required by, and otherwise in accordance with the
provisions of, Rule 462(b) under the Act; the Company will
prepare and file with the Commission, promptly upon the
request of the Representatives, any amendments or supplements
to the Registration Statement or Prospectus (including any
term sheet within the meaning of Rule 434 under the
15
<PAGE>
Act) that, in the opinion of the Representatives, may be
necessary or advisable in connection with distribution of the
Securities by Underwriters; and the Company will not file any
amendment or supplement to the Registration Statement or
Prospectus (including any term sheet within the meaning of
Rule 434 under the Act) to which the Representatives shall
reasonably object by notice to the Company after having been
furnished with a copy a reasonable time prior to the filing.
B. The Company will advise the Representatives promptly of (i)
any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or
for any additional information, (ii) the issuance by the
Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus, (iii)
the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, or (iv) the institution or
threatening of any proceedings for that purpose, and the
Company will use its best efforts to prevent the issuance of
any such stop order preventing or suspending the use of the
Prospectus or suspending such qualification and to obtain as
soon as possible the lifting thereof, if issued.
C. The Company will promptly prepare and file at its own
expense with the Commission any amendments of, or supplements
to, the Registration Statement and the Prospectus which may be
necessary in connection with the distribution of the Shares by
the Underwriters. During the period when a Prospectus relating
to the Shares is required to be delivered under the Act, the
Company will promptly file any amendments of, or supplements
to, the Registration Statement and the Prospectus which may be
necessary to correct any untrue statement of a material fact
or any omission to state any material fact necessary to make
the statements therein, in light of the circumstances under
which they were made, not misleading. The Company will not
file any amendment of, or supplement to, the Registration
Statement or Prospectus, after the Effective Date, which shall
not previously have been submitted to the Representatives and
its counsel a reasonable time prior to such proposed filing or
to which the Representatives shall have reasonably objected.
In case any Underwriter is required to deliver a prospectus in
connection with sales of any Shares at any time nine months or
more after the Effective Date, upon the request of the
Representatives but at the expense of such Underwriter, the
Company will prepare and deliver to such Underwriter as many
copies as the Representatives may request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of the
Act.
D. The Company will endeavor to qualify the Shares for sale
under the securities laws of such jurisdictions as the
Representatives may reasonably designate and the Company will
file such consents to service of process or other documents
necessary or appropriate in order to effect such qualification
or registration. In each jurisdiction in which the Shares
shall have been qualified or registered as above provided, the
Company will continue such qualifications or
16
<PAGE>
registrations in effect for so long as may be required for
purposes of the distribution of the Shares and make and file
such statements and reports in each year as are or may be
reasonably required by the laws of such jurisdiction to permit
secondary trading of the same; provided, however, that in no
event shall the Company be obligated to qualify to do business
in any jurisdiction where it is not now so qualified or to
take any action which would subject it to the service of
process in suits, other than those arising out of the offering
or sale of the Shares.
E. The Company will furnish to the Representatives, as soon as
available, copies of the Registration Statement and all
amendments (two of which will be signed and which shall
include all exhibits), each Preliminary Prospectus, if any,
the Prospectus and any amendments or supplements to such
documents including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such
quantities as the Representatives may from time to time
reasonably request. The Company specifically authorizes the
Underwriters and all dealers to whom any of the Shares may be
sold by the Underwriters to use and distribute copies of such
Preliminary Prospectuses and Prospectuses in connection with
the sale of the Shares as and to the extent permitted by the
federal and applicable state and local securities laws.
F. The Company will make generally available to its security
holders an earnings statement, in a form complying with
requirements of Section 11(a) of the Act and Rule 158
thereunder, as soon as practicable and in any event not later
than 45 days after the end of its fiscal quarter in which
occurs the first anniversary date of the Effective Date,
meeting the requirements of Section 11(a) of the Act covering
a period of at least 12 consecutive months beginning after the
Effective Date, and will advise you in writing when such
statement has been so made available.
G. The Company will, for such period up to two years from the
First Closing Date, deliver to the Representatives copies of
its annual report and copies of all other documents, and
information furnished by the Company to its security holders
or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant
to the Act or the Exchange Act, or any state securities
commission by the Company. The Company will deliver to the
Representatives similar reports with respect to significant
subsidiaries, if any, as that term is defined in the rules and
regulations under the Act, which are not consolidated in the
Company's financial statements.
H. The Company shall be responsible for and pay all costs and
expenses incident to the performance of its obligations under
this Agreement including, without limiting the generality of
the foregoing, (i) all costs and expenses in connection with
the preparation, printing and filing of the Registration
Statement (including financial statements and exhibits),
Preliminary Prospectuses, if any, the Prospectus and any
amendments thereof or supplements to any of the foregoing;
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<PAGE>
(ii) the issuance and delivery of the Shares, including taxes,
if any; (iii) the cost of all certificates representing the
Shares; (iv) the fees and expenses of the Transfer Agent for
the Shares; (v) the fees and disbursements of counsel for the
Company; (vi) all fees and other charges of the independent
public accountants of the Company; (vii) the cost of
furnishing and delivering to the Underwriters and dealers
participating in the offering copies of the Registration
Statement (including appropriate exhibits), Preliminary
Prospectuses, the Prospectus and any amendments of, or
supplements to, any of the foregoing; (viii) the NASD filing
fee; (ix) all fees and expenses of counsel for the
Representatives incurred in qualifying the Shares for sale
under the laws of such jurisdictions designated by the
Representatives (including filing fees). In the event this
Agreement is terminated pursuant to Section 8 below, the
Company shall remain obligated to pay the Representatives
their actual accountable out-of-pocket expenses, plus any fees
and expenses described in (ix) above, not to exceed $75,000.
I. The Company will not take, and will use its best efforts to
cause each of its officers and directors not to take, directly
or indirectly, any action designed to or which might
reasonably be expected to cause or result in the stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares and will not
effect any sales of any security of the Company which are
required to be disclosed in response to Item 701 of Regulation
S-K of the Commission which have not been so disclosed in the
Registration Statement.
J. Upon completion of this offering, the Company will use its
best efforts to maintain the listing of its Common Stock on
the National Association of Securities Dealers Automated
Quotation System (Nasdaq) National Market or any other
national securities exchange.
K. The Company will apply the net proceeds from the sale of
the Shares substantially in the manner set forth in the
Prospectus.
L. During the period ending on the final closing date, the
Company agrees that it will issue press releases, make public
statements and respond to inquiries of the press and
securities analysts only after conferring with its counsel and
with the Representatives.
M. Prior to or as of either closing date, the Company shall
have performed each condition to closing required to be
performed by the Company pursuant to Section 5 hereof.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS.
The respective obligations of the Underwriters to purchase and pay for
the Shares as provided herein shall be subject to the accuracy of the
representations and warranties of the Company, in the case of the Firm Shares as
of the date hereof and the First Closing Date (as if
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<PAGE>
made on and as of the First Closing Date), and in the case of the Option Shares,
as of the date hereof and the Second Closing Date (as if made on and as of the
Second Closing Date), to the performance by the Company of their obligations
hereunder, and to the satisfaction of the following additional conditions on or
before the First Closing Date in the case of the Firm Shares and on or before
the Second Closing Date in the case of the Option Shares:
A. The Registration Statement has been declared effective as
of ____ p.m. Eastern Standard Time on ____________, 1999 (the
"Effective Date"). All filings required by Rules 424, 430A and
434 under the Act shall have been timely made. No stop order
suspending the effectiveness thereof shall have been issued
and no proceeding for that purpose shall have been initiated
or, to the knowledge of the Company or the Representatives,
threatened by the Commission or any state securities
commission or similar regulatory body. Any request of the
Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of the
Underwriters and their legal counsel.
B. The Representatives shall not have advised the Company that
the Registration Statement or Prospectus, or any amendment
thereof or supplement thereto, contains any untrue statement
of a fact which is material or omits to state a fact which is
material and is required to be stated therein or is necessary
to make the statements contained therein, in light of the
circumstances under which they were made, not misleading;
provided, however, that this Section 5(B) shall not apply to
statements in, or omissions from, the Registration Statement
or Prospectus or any amendment thereof or supplement thereto,
which are based upon and conform to written information
furnished to the Company by any of the Underwriters
specifically for use in the preparation of the Registration
Statement or the Prospectus, or any such amendment or
supplement.
C. Subsequent to the Effective Date, and except as
contemplated or referred to in the Prospectus, the Company and
the India Subsidiary shall not have incurred any direct or
contingent liabilities or obligations material to the Company
and the India Subsidiary, taken as a whole, or entered into
any material transactions, except liabilities, obligations or
transactions in the ordinary course of business, or declared
or paid any dividends or made any distribution of any kind
with respect to their capital stock; and there shall not have
been any change in the capital stock (other than a change in
the number of outstanding shares of Common Stock due to the
exercise of options or warrants described in the Registration
Statement and the Prospectus), or any change in the short-term
debt or long-term debt (including capitalized lease
obligations) of the Company or the India Subsidiary, or any
issuance of options, warrants, convertible securities or other
rights to purchase the capital stock of the Company or the
India Subsidiary or any change or any development involving a
prospective change in or affecting the general affairs,
management, financial position, shareholders' equity or
results of operations of the Company or the India Subsidiary,
otherwise than as set forth or
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<PAGE>
contemplated in the Prospectus, the effect of which, in the
judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the
delivery of the Shares being delivered.
D. The Representatives shall have received the opinion of
Gray, Plant, Mooty, Mooty and Bennett, P.A., counsel for the
Company, dated the First Closing Date or the Second Closing
Date, as the case may be, addressed to the Underwriters
covering certain corporate matters to the effect that:
i. The Company has been duly incorporated and is
validly existing in good standing under the laws of
the State of Minnesota; has the corporate power to
own, lease and operate its properties and conduct its
business as described in the Prospectus; and is duly
qualified to do business as a foreign corporation in
good standing in all jurisdictions where the
ownership or leasing of its properties or the conduct
of its business requires such qualification and in
which the failure to be so qualified or in good
standing would have a material adverse effect on
condition (financial or otherwise), shareholders'
equity, results of operations, business, properties
or prospects of the Company and the India Subsidiary,
taken as a whole.
ii. The Company has the number of authorized and
outstanding shares of capital stock of the Company as
set forth under the caption "Capitalization" in the
Prospectus, and all issued and outstanding capital
stock of the Company has been duly authorized and is
validly issued, fully paid and nonassessable. There
are no statutory preemptive rights, or to the
knowledge of such counsel, no similar subscription or
purchase rights of securities holders of the Company
with respect to issuance or sale of the Shares by the
Company pursuant to this Agreement or the issuance of
the Warrant Shares upon exercise of the
Representatives' Warrants, and to the knowledge of
such counsel except as described in the Prospectus,
no rights to require registration of shares of Common
Stock or other securities of the Company because of
the filing of the Registration Statement exist. The
Shares, the Representatives' Warrants and the Warrant
Shares conform as to matters of law in all material
respects to the description of such made in the
Prospectus, and such description accurately sets
forth the material legal provisions thereof required
to be set forth in the Prospectus.
iii. The Shares have been duly authorized and, upon
delivery to the Underwriters against payment
therefor, will be validly issued, fully paid and
nonassessable.
iv. The certificates evidencing the Shares comply as
to form with the applicable provisions of the laws of
the State of Minnesota.
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<PAGE>
v. The Representatives' Warrants have been duly
authorized, executed and delivered by the Company and
are the valid and binding obligations of the Company,
enforceable in accordance with their terms, except as
enforceability may be limited by the application of
bankruptcy, insolvency, moratorium, or other laws of
general application affecting the rights of creditors
generally and by judicial limitations on the right of
specific performance and other equitable remedies,
and except as the enforceability of indemnification
or contribution provisions hereof may be limited by
federal or state securities laws. The Warrant Shares
when issued in accordance with the terms of this
Agreement and pursuant to the Representatives'
Warrants will be validly issued, fully paid and
nonassessable. A sufficient number of shares of
Common Stock has been reserved for issuance upon
exercise of the Representatives' Warrants.
vi. The Registration Statement has become effective
under the Act, the Prospectus has been filed as
required by Rule 424(b) if necessary, and, to the
knowledge of such counsel, no stop orders suspending
the effectiveness of the Registration Statement have
been issued and no proceedings for that purpose have
been instituted or are pending or, to the knowledge
of such counsel, contemplated under the Act.
vii. Upon payment for and delivery of the Shares to
be sold by the Company pursuant to this Agreement,
the Underwriters will acquire good and marketable
title to such Shares, free and clear of all liens,
encumbrances or claims created by actions of the
Company.
viii. To such counsel's knowledge, there are no
material legal or governmental proceedings, pending
or threatened, before any court or administrative
body or regulatory agency, to which the Company, the
India Subsidiary or their affiliates are a party or
to which any of the properties of the Company, the
India Subsidiary or their affiliates are subject that
are required to be disclosed in the Registration
Statement or Prospectus that are not so described, or
statutes, regulations, or legal or governmental
proceedings that are required to be described in the
Registration Statement or Prospectus that are not so
described.
ix. To such counsel's knowledge, there are no
franchises, leases, contracts, agreements or
documents of a character required to be disclosed in
the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement or
required to be incorporated by reference into the
Prospectus which are not disclosed or filed or
incorporated by reference, as required.
x. No authorization, approval or consent of any
governmental authority or agency is necessary in
connection with the issuance and sale
21
<PAGE>
of the Shares as contemplated under this Agreement,
except such as may be required under the Act or under
state or other securities laws in connection with the
purchase and distribution of the Shares by the
Underwriters.
xi. The Registration Statement and the Prospectus and
any amendments thereof or supplements thereto (other
than the financial statements and schedules and
supporting financial and statistical data and
information included or incorporated therein, as to
which such counsel need express no opinion) conform
in all material respects with the requirements of the
Act and the Rules and Regulations, and the conditions
for use of a registration statement on Form S-1 for
the distribution of the Shares have been satisfied
with respect to the Company.
xii. The statements (i) in the Prospectus under the
caption "Risk Factors Government Regulation May
Adversely Affect Us", "We are Dependent on LEC
Relationships," "Dividend Policy and Termination of S
Corporation Status" "Business --Facilities,"
"Management - Limitation of Liability and
Indemnification," "-- Employment Agreements," "--
1999 Stock Option Plan," "Description of Securities,"
"Shares Eligible for Future Sale" and (ii) in the
Registration Statement in Item 14 insofar as such
statements constitute a summary of statutes, legal
and governmental proceeding, contracts and other
documents, are accurate summaries and fairly present
the information called for with respect to such
matters.
xiii. Such counsel does not know of any contracts,
agreements, documents or instruments required to be
filed as exhibits to the Registration Statement or
described in the Registration Statement or the
Prospectus which are not so filed or described as
required, and does not know of any amendment to the
Registration Statement required to be filed that has
not been filed; and insofar as any statements in the
Registration Statement or the Prospectus constitute
summaries of any contract, agreement, document or
instrument to which the Company is a party, such
statements are accurate summaries and fairly present
the information called for with respect to such
matters.
xiv. To such counsel's knowledge, there are no
defects in title or leasehold interests, or any
liens, encumbrances, equities, charges or claims, not
disclosed in the Registration Statement or Prospectus
which would materially affect the present occupancy
or use of any of the real or personal property owned
or leased by the Company or the India Subsidiary.
xv. The Company has the corporate power and
authorization to enter this Agreement and to
authorize, issue and sell the Shares as contemplated
22
<PAGE>
hereby. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding
agreement of the Company, enforceable in accordance
with its terms, except as enforceability may be
limited by the application of bankruptcy, insolvency,
moratorium or similar laws affecting the rights of
creditors generally and judicial limitations on the
right of specific performance and other equitable
remedies and except as the enforceability of
indemnification or contribution provisions hereof may
be limited by action of a court interpreting or
applying federal or state securities laws or
equitable principles.
xvi. The performance of this Agreement and the
consummation of the transactions described herein
will not result in a violation of or default under,
the Company's Articles of Incorporation, Bylaws or
other governing documents. To the best of such
counsel's knowledge, (a) the Company is not in
violation of, or in default under, its Articles of
Incorporation, Bylaws or other governing documents;
and (b) the performance of this Agreement and the
consummation of the transactions described herein
will not result in a material violation of, or a
material default under, the terms or provisions of
(A) any bond, debenture, note, or other evidence of
indebtedness or any contract, license, indenture,
mortgage, loan agreement, joint venture or
partnership agreement, lease, agreement or instrument
to which the Company is a party or by which the
Company or any of its properties is bound, or (B) any
law, order, rule, regulation, writ, injunction, or
decree known to such counsel of any government,
governmental agency or court having jurisdiction over
the Company or any of its properties.
xvii. Sales of unregistered securities by the Company
prior to the Effective Date were exempt from
registration requirements of the Act and are not
required to be integrated, under Rule 502(a) of
Regulation D of the Act, with the public offering
contemplated hereby.
xviii. The Company is not, and immediately upon
completion of the sale of the Shares contemplated
hereby will not, based upon information regarding the
Company's current and contemplated business as
described in the Registration Statement, be required
to register as an "investment company" under the
Investment Company Act of 1940, as amended.
xix. To the best of such counsel's knowledge, the
Company is not engaged in any negotiations regarding
any form of business combination with another entity.
xxi. Gray, Plant, Mooty, Mooty and Bennett, P.A.,
counsel for the Company, has not been retained to
provide substantive legal advice on any pending or
threatened claim, action or proceeding by any person
which
23
<PAGE>
challenges the rights of the Company with respect to
any material intellectual property of the Company.
Such counsel is not aware of any pending or
threatened claim, action or proceeding by a person or
governmental agency which challenges the rights of
the Company with respect to any material intellectual
property of the Company, except as described in
Section 1(A)(xix)(a) above or as provided in the
Prospectus.
xxii. To such counsel's knowledge, the Company's
current products, services and processes do not
infringe on any intellectual property rights of any
third parties, except as set forth in the Prospectus.
xxi. The Company's trademark registrations which have
been issued by the United States Patent and Trademark
Office have been fully maintained and are in full
force and effect. Such counsel gives no opinion,
however, as to whether any third party could
successfully challenge the validity or enforceability
of any of such trademark registrations.
In expressing the foregoing opinion, as to matters of fact
relevant to conclusions of law, counsel may rely, to the extent that
they deem proper, upon certificates of public officials and of the
officers of the Company, and opinions of other legal counsel to the
Company, provided that copies of all such certificates and opinions are
attached to the opinion.
In addition to the matters set forth above, such opinion shall
also include a statement to the effect that, although such
counsel cannot guarantee the accuracy, completeness or
fairness of any of the statements contained in the
Registration Statement or Prospectus, in connection with such
counsel's representation and inquiry of the Company in the
preparation of the Registration Statement and Prospectus, such
counsel has no reason to believe that, (i) as of its Effective
Date, the Registration Statement or any further amendment
thereto (other than the financial statements and related
schedules therein, as to which such counsel need express no
opinion) made by the Company prior to the First Closing Date
or the Second Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, or (ii), as of its
date, the Prospectus or any further amendment or supplement
thereto (other than the financial statements and related
schedules therein, as to which such counsel need express no
opinion) made by the Company prior to the First Closing Date
or the Second Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not
misleading or (iii), as of the First Closing Date or the
Second Closing Date, as the case may be, either the
Registration Statement or the Prospectus or any further
amendment or supplement thereto (other than the financial
statements and related schedules therein, as to which such
counsel need express no opinion) made by the Company
24
<PAGE>
prior to the First Closing Date or the Second Closing Date, as
the case may be, contains an untrue statement of a material
fact or omits to state a material fact necessary to make the
statements therein, in light of the circumstances in which
they were made, not misleading.
E. The Representatives shall have received the opinion of
counsel for the India Subsidiary, dated the First Closing Date
or the Second Closing Date, as the case may be, addressed to
the Underwriters covering certain corporate matters to the
effect that:
i. The India Subsidiary has been duly incorporated
and is validly existing in good standing under the
laws of India; has the corporate power to own, lease
and operate its properties and conduct its businesses
as described in the Prospectus; and is duly qualified
to do business as a foreign corporation in good
standing in all jurisdictions where the ownership or
leasing of its properties or the conduct of its
business requires such qualification and in which the
failure to be so qualified or in good standing would
have a material adverse effect on condition
(financial or otherwise), shareholders' equity,
results of operations, business, properties or
prospects of the India Subsidiary;
ii. The Company owns all of the issued and
outstanding capital stock of the India Subsidiary,
which stock has been duly authorized and is validly
issued, fully paid and nonassessable. The India
Subsidiary does not have outstanding any options to
purchase, or any rights or warrants to subscribe for,
or any securities or obligations convertible into, or
any contracts or commitments to issue or sell, any
capital stock or other securities of the India
Subsidiary, or any such warrants, convertible
securities or obligations.
iii. To such counsel's knowledge, there are no
material legal or governmental proceedings, pending
or threatened, before any court or administrative
body or regulatory agency, to which the India
Subsidiary or its affiliates is a party or to which
any of the properties of the India Subsidiary or its
affiliates are subject.
iv. The statements in the Prospectus under the
captions "Risk Factors --Government Regulation and
General Economic Conditions in India May Adversely
Affect our Business," "Business - Facilities,"
insofar as such statements constitute a summary of
statutes, legal and government proceedings, contracts
and other documents relating to the India Subsidiary
are accurate summaries and fairly present the
information called for with respect to such matters.
25
<PAGE>
v. To such counsel's knowledge, there are no defects
in title or leasehold interests, or any liens,
encumbrances, equities, charges or claims, not
disclosed in the Registration Statement or prospectus
which would materially affect the present occupancy
or use of any of the real or personal property owned
or leased by the India Subsidiary.
vi. Counsel for the India Subsidiary has not been
retained to provide substantive legal advice on any
pending or threatened claim, action or proceeding by
any person which challenges the rights of the India
Subsidiary with respect to any material intellectual
property of the India Subsidiary. To such counsel's
knowledge, such counsel is not aware of any pending
or threatened claim, action or proceeding by a person
or governmental agency which challenges the rights of
the India Subsidiary with respect to any material
intellectual property of the India Subsidiary.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper, upon
certificates of public officials and of the officers of the Company, and
opinions of other legal counsel to the Company, provided that copies of all such
certificates and opinions are attached to the opinion.
F. The Representatives shall have received from Fredrikson &
Byron, P.A., its counsel, such opinion or opinions as the
Representatives may reasonably require, dated the First
Closing Date or the Second Closing Date, as the case may be,
with respect to the sufficiency of corporate proceedings and
other legal matters relating to this Agreement and the
transactions contemplated hereby, and other related matters as
the Representatives may reasonably request; and the Company
and its counsel shall have furnished to said counsel such
documents as they may have reasonably requested for the
purpose of enabling them to pass upon such matters. In
connection with such opinion, as to matters of fact relevant
to conclusions of law, such counsel may rely, to the extent
that they deem proper, upon representations or certificates of
public officials and of responsible officers of the Company.
G. The Representatives and the Company shall have received
letters, dated the date hereof and the First Closing Date and
the Second Closing Date, as the case may be, from Ernst &
Young LLP, to the effect that they are independent public
accountants with respect to the Company within the meaning of
the Act and the related rules and regulations, stating that in
their opinion the financial statements and schedules examined
by them and included in the Registration Statement comply in
form in all material respects with the applicable accounting
requirements of the Act and the related rules and regulations,
and containing such other statements and information of the
type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and
certain financial information contained in the Registration
Statement and the Prospectus.
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H. The Representatives shall have received from the Company a
certificate, dated as of each Closing Date, of the Chief
Executive Officer and the Chief Financial Officer of the
Company to the effect that as of the First Closing Date and
the Second Closing Date:
i. The representations and warranties of the Company
in this Agreement are true and correct as if made on
and as of each Closing Date. The Company has complied
with all the agreements and satisfied all the
conditions on its part to be performed or satisfied
at, or prior to, each such Closing Date.
ii. No stop order suspending the effectiveness of the
Registration Statement has been issued, and no
proceeding for that purpose has been instituted or is
pending or to the best knowledge of such officers
contemplated under the Act.
iii. Neither the Registration Statement nor the
Prospectus nor any amendment thereof or supplement
thereto includes any untrue statement of a material
fact or omits to state any material fact required to
be stated therein or necessary to make the statements
therein, in light of the circumstances in which they
were made, not misleading, and, since the Effective
Date, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which
has not been so set forth; provided, however, that
such certificate does not require any representation
concerning statements in, or omissions from, the
Registration Statement or Prospectus or any amendment
thereof or supplement thereto, which are based upon
and conform to written information furnished to the
Company by any of the Underwriters specifically for
use in the preparation of the Registration Statement
or the Prospectus or any such amendment or
supplement.
iv. Subsequent to the respective dates as of which
information is given in the Registration Statement
and the Prospectus and except as contemplated or
referred to in the Prospectus, the Company and the
India Subsidiary have not incurred any direct or
contingent liabilities or obligations material to the
Company and the India Subsidiary, taken as a whole,
or entered into any material transactions, except
liabilities, obligations or transactions in the
ordinary course of business, or declared or paid any
dividend or made any distribution of any kind with
respect to their capital stock, and there has not
been any change in the capital stock of the Company
or the India Subsidiary (other than a change in the
number of outstanding shares of Common Stock due to
the exercise of options or warrants described in the
Registration Statement and the Prospectus) and there
has not been any material adverse change in the
capital stock, short-
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term debt, or long-term debt (including capitalized
lease obligations) of the Company or the India
Subsidiary, or any material adverse change or any
development involving a prospective material adverse
change (whether or not arising in the ordinary course
of business) in or affecting the general affairs,
condition (financial or otherwise), business, key
personnel, property, prospects, shareholders' equity
or results of operations of the Company and the India
Subsidiary, taken as a whole.
v. Subsequent to the respective dates as of which
information is given in the Registration Statement
and the Prospectus, the Company and the India
Subsidiary have not sustained any material loss of,
or damage to, their properties, whether or not
insured.
vi. Except as is otherwise expressly stated in the
Registration Statement and Prospectus there are no
material actions, suits or proceedings pending before
any court or governmental agency, authority or body,
or, to the best of such officer's knowledge,
threatened, to which the Company or the India
Subsidiary is a party or of which the business or
property of the Company or the India Subsidiary is
the subject.
I. The Representatives shall have received, dated as of each
Closing Date, from the Secretary of the Company a certificate
of incumbency certifying the names, titles and signatures of
the officers authorized to execute the resolutions of the
Board of Directors of the Company authorizing and approving
the execution, delivery and performance of this Agreement, a
copy of such resolutions to be attached to such certificate,
certifying such resolutions and certifying that the Articles
of Incorporation and the Bylaws of the Company have been
validly adopted and have not been amended or modified, except
as described in the Prospectus.
J. The Representatives shall have received a written
agreement, enforceable by the Representatives, from each
officer and director of the Company and each shareholder who
holds 5% or more of the outstanding Common Stock of Company,
that for 180 days following the Effective Date, such person
will not, without the Representatives' prior written consent,
sell, transfer or otherwise dispose of, or agree to sell,
transfer or otherwise dispose of, other than by gift to donees
who agree to be bound by the same restriction or by will or
the laws of descent, any of his or her Common Stock, or any
options, warrants or rights to purchase Common Stock or any
shares of Common Stock received upon exercise of any options,
warrants or rights to purchase Common Stock, all of which are
beneficially held by such persons during the 180 day period.
K. The Shares shall have been approved for listing on the
Nasdaq National Market.
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L. The Company shall have furnished to the Underwriters, dated
as of the date of each Closing Date, such further certificates
and documents as the Underwriters shall have reasonably
required.
M. All such opinions, certificates, letters and documents will
be in compliance with the provisions hereof only if they are
reasonably satisfactory to the Representatives and their legal
counsel. All statements contained in any certificate, letter
or other document delivered pursuant hereto by, or on behalf
of, the Company shall be deemed to constitute representations
and warranties of the Company.
N. The Representatives may waive in writing the performance of
any one or more of the conditions specified in this Section 5
or extend the time for their performance.
O. If any of the conditions specified in this Section 5 shall
not have been fulfilled when and as required by this Agreement
to be fulfilled, this Agreement and all obligations of the
Underwriters hereunder may be canceled at, or at any time
prior to, each closing date by the Representatives. Any such
cancellation shall be without liability of the Underwriters to
the Company or to any other party, and shall not relieve the
Company of its obligations under Section 4(H) hereof. Notice
of such cancellation shall be given to the Company at the
address specified in Section 11 hereof in writing, or by
facsimile or telephone and confirmed in writing.
6. INDEMNIFICATION.
A. The Company hereby agrees to indemnify and hold harmless
each Underwriter, and each person, if any, who controls any
Underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities, joint or several, to which
such Underwriter or each such controlling person may become
subject, under the Act, the Exchange Act, the common law or
otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof), arise out of, or
are based upon: (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus or the Prospectus
including any amendment thereof, or (ii) the omission or
alleged omission to state in the Registration Statement, any
Preliminary Prospectus or Prospectus including any amendment
thereof a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; or
(iii) any untrue statement or alleged untrue statement of a
material fact contained in any application or other statement
executed by the Company or based upon written information
furnished by the Company filed in any jurisdiction in order to
qualify the Shares under, or exempt the Shares or the sale
thereof from qualification under, the securities laws of such
jurisdiction, or the omission or alleged omission to state in
such
29
<PAGE>
application or statement a material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading; and the Company will reimburse each Underwriter
and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or
controlling person (subject to the limitation set forth in
Section 6(D) hereof, in connection with investigating or
defending against any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that
the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of,
or is based upon, any untrue statement, or alleged untrue
statement, omission or alleged omission, made in reliance upon
and in conformity with information furnished to the Company
by, or on behalf of, any Underwriter in writing specifically
for use in the preparation of the Registration Statement or
any such post effective amendment thereof, any such
Preliminary Prospectus or the Prospectus or any such amendment
thereof or supplement thereto. This indemnity agreement is in
addition to any liability which the Company may otherwise
have.
B. Each Underwriter severally, but not jointly, agrees to
indemnify and hold harmless the Company, each of the Company's
directors, each of the Company's officers who has signed the
Registration Statement and each person who controls the
Company within the meaning of the Act against any losses,
claims, damages or liabilities to which the Company or any
such director, officer, or controlling person may become
subject, under the Act, the Exchange Act, the common law, or
otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of, or
are based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus or Prospectus, including
any amendment thereof, (ii) the omission or alleged omission
to state in the Registration Statement, any Preliminary
Prospectus or Prospectus including any amendment thereof a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material
fact contained in any application or other statement executed
by the Company or by any Underwriter and filed in any
jurisdiction in order to qualify the Shares under, or exempt
the Shares or the sale thereof from qualification under, the
securities laws of such jurisdiction, or the omission or
alleged omission to state in such application or statement a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading; in each of the
above cases to the extent, but only the extent, that such
untrue statement, alleged untrue statement, omission or
alleged omission, was made in reliance upon and in conformity
with information furnished to the Company by, or on behalf of,
any Underwriter in writing specifically for use in the
preparation of the Registration Statement or any such post
effective amendment thereof, any such Preliminary Prospectus
or the Prospectus or any such amendment thereof or supplement
thereto, or in any
30
<PAGE>
application or other statement executed by the Company or by
any Underwriter and filed in any jurisdiction; and each
Underwriter will reimburse any legal or other expenses
reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating
or defending against any such loss, claim, damage, liability
or action as such expenses are incurred. This indemnity
agreement is in addition to any liability which the
Underwriters may otherwise have.
C. Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action or
proceeding (including any governmental investigation), such
indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 6,
notify in writing the indemnifying party of the commencement
thereof. The failure to so notify the indemnifying party will
not relieve such party from any liability under this Section 6
as to the particular item for which indemnification is then
being sought, unless such failure so to notify prejudices the
indemnifying party's ability to defend such action. In case
any such action is brought against any indemnified party and
the indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled
to participate therein and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel who shall be
reasonably satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified
party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable
judgment of the indemnified party, it is advisable for such
parties and controlling persons to be represented by separate
counsel, any indemnified party shall have the right to employ
separate counsel to represent it and all other parties and
their controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be
sought by the Underwriters against the Company or by the
Company against the Underwriters hereunder, in which event the
fees and expenses of such separate counsel shall be borne by
the indemnifying party and paid as incurred; Any such
indemnifying party shall not be liable to any such indemnified
party on account of any settlement of any claim or action
effected without the consent of such indemnifying party.
7. CONTRIBUTION.
A. If the indemnification provided for in Section 6 is
unavailable or insufficient to hold harmless any indemnified
party in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or
liabilities in such proportion as is
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<PAGE>
appropriate to reflect the relative benefits received by the
Company and the Underwriters from the offering of the Shares.
In the event that the allocation provided by the immediately
preceding sentence is not permitted by applicable law, then
each indemnifying party shall contribute in such proportion as
is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company
and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable
considerations. The Company and the Underwriters agree that
contribution determined by per capita allocation (even if the
Underwriters were considered a single person) would not be
equitable. The respective relative benefits received by the
Company, on the one hand, and the Underwriters, on the other,
shall be deemed to be in the same proportion (a) in the case
of the Company as the total price paid to the Company for the
Shares by the Underwriters (net of underwriting discount
received but before deducting expenses) bears to the aggregate
Offering Price of the Shares, and (b) in the case of the
Underwriters, as the aggregate underwriting discount received
by them bears to the aggregate Offering Price of the Shares,
in each case as reflected in the Prospectus. The relative
fault of the Company and the Underwriters shall be determined
by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and
the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of
the losses, claims, damages and liabilities referred to above
shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with
investigating or defending any action or claim.
Notwithstanding the provisions of this Section 7, (i) no
Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the
Shares underwritten by it were offered to the public exceeds
the amount of any damages which such Underwriter has otherwise
been required to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto. The Underwriters' obligation
to contribute pursuant to this Section 7 is several and not
joint. No person guilty of fraudulent misrepresentation
(within the meaning of the Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7,
each person who controls an Underwriter within the meaning of
the Act or the Exchange Act shall have the same rights to
contribution as such Underwriter, each person who controls the
Company within the meaning of the Act or the Exchange Act
shall have the same rights to contribution as the Company and
each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall
have the same rights to contribution as the Company.
32
<PAGE>
B. Promptly after receipt by a party to this Agreement of
notice of the commencement of any action, suit, or proceeding,
such person will, if a claim for contribution in respect
thereof is to be made against another party (the "Contributing
Party"), notify the Contributing Party of the commencement
thereof, but the failure to so notify the Contributing Party
will not relieve the Contributing Party from any liability
which it may have to any party other than under this Section
7, unless such failure to so notify prejudices the
Contributing Party's ability to defend such action. Any notice
given pursuant to Section 6 hereof shall be deemed to be like
notice hereunder. In case any such action, suit or proceeding
is brought against any party, and such person notifies a
Contributing Party of the commencement thereof, the
Contributing Party will be entitled to participate therein
with the notifying party and any other Contributing Party
similarly notified.
C. The obligations of the Company under this Section 7 shall
be in addition to any liability which the Company may
otherwise have, and the obligations of the Underwriters under
this Section 7 shall be in addition to any liability which the
Underwriters may otherwise have.
8. EFFECTIVE DATE AND TERMINATION.
A. This Agreement shall become effective at the later of (i)
the day upon which this Agreement shall have been executed and
delivered by the parties hereto, or (ii) at 10:00 a.m.
Minneapolis time, on the first full business day following the
Effective Date, or at such earlier time after the Effective
Date as the Representatives in its discretion shall first
release the Shares for offering to the public. For purposes of
this Section 8, the Shares shall be deemed to have been
released to the public upon release by the Representatives of
the publication of a newspaper advertisement relating to the
Shares or upon release of a telegram or a letter offering the
Shares for sale to securities dealers, whichever shall first
occur.
B. The Representatives shall have the right to terminate this
Agreement by giving notice to the Company as hereinafter
specified at any time prior to the First Closing Date, and the
option referred to in Section 2(B), if exercised, may be
canceled at any time by the Representatives by giving such
notice to the Company at any time prior to the Second Closing
Date, if (i) the Company shall have failed, refused or been
unable, at or prior to the First Closing Date, to perform any
material agreement on its part to be performed hereunder; (ii)
any other condition of the Underwriters' obligations hereunder
is not fulfilled; (iii) trading in securities generally on the
New York Stock Exchange, American Stock Exchange or the Nasdaq
Stock Market shall have been suspended, or minimum or maximum
prices for trading shall have been required or established by
the Commission or by any such exchange or the Nasdaq Stock
Market; (iv) a banking moratorium shall have been declared by
federal, New York or Minnesota authorities; (v) there shall
have been such a material adverse change in general economic,
monetary,
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<PAGE>
political or financial conditions, or the effect of
international conditions on the financial markets in the
United States shall be such as, in the judgment of the
Representatives, makes it impracticable or inadvisable to
proceed with the completion of the sale of and payment for the
Shares; (vi) there shall have been the enactment, publication,
decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental
authority, which in the judgment of the Representatives
materially and adversely affects or will materially and
adversely affect the business or operations of the Company; or
(vii) there shall be an outbreak of major hostilities (or an
escalation thereof) in which the United States is involved or
a formal declaration of war by the United States of America
shall have occurred or any other substantial national or
international calamity or any other event or occurrence of a
similar character shall have occurred since the execution of
this Agreement that, in the judgment of the Representatives,
makes it impracticable or inadvisable to proceed with the
completion of the sale of and payment for the Shares. Any such
termination shall be without liability of any party to any
other party, except as provided in Sections 6 and 7 hereof;
provided, however, that the Company shall remain obligated to
pay costs and expenses to the extent provided in Section 4(H)
hereof.
C. If the Representatives elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided
in this Section 8, it shall notify the Company promptly by
telecopy or telephone, confirmed by letter sent to the address
specified in Section 11 hereof. If the Company shall elect to
prevent this Agreement from becoming effective, it shall
notify the Representatives promptly by telecopy or telephone,
confirmed by letter sent to the address specified in Section
11 hereof.
D. If the Company shall fail at the First Closing Date to sell
and deliver the number of Shares which it is obligated to sell
hereunder, then this Agreement shall terminate without any
liability on the part of any Underwriter. No action taken
pursuant to this Section 8(D) shall relieve the Company from
liability, if any, in respect of such default.
9. DEFAULT OF UNDERWRITER.
If on the First Closing Date or the Second Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representatives of the Underwriters, shall use your best efforts to procure
within 36 hours thereafter one or more of the other Underwriters, or any others,
to purchase from the Company such amounts as may be agreed upon, and upon the
terms set forth herein, of the Firm Shares or Option Shares, as the case may be,
which the defaulting Underwriter or
34
<PAGE>
Underwriters failed to purchase. If during such 36 hours you, as
Representatives, shall not have procured such other Underwriters, or any others,
to purchase the Firm Shares or Option Shares, as the case may be, agreed to be
purchased by the defaulting Underwriter or Underwriters, then (i) if the
aggregate number of Shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby the other Underwriters shall be obligated, severally, in proportion to
the respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase or (ii) if the aggregate number of shares of
Firm Shares or Option Shares, as the case may be, with respect to which such
default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case
may be, covered hereby, the Company or you as the Representatives of the
Underwriters will have the right, by written notice given within the next 36-
hour period to the parties to this Agreement, to terminate this Agreement
without liability on the part of the non-defaulting Underwriters or of the
Company except for expenses to be borne by the Company and the Underwriters as
provided in Section 4(H) hereof and the indemnity and contribution agreements in
Sections 6 and 7 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the First Closing Date or Second
Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, as you, as Representatives, may determine in order that
the required changes, not including a reduction in the number of Firm Shares, in
the Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. SURVIVAL.
The respective indemnity and contribution agreements of the Company and
the Underwriters contained in Sections 6 and 7, respectively, the
representations and warranties of the Company set forth in Section 1 hereof and
the covenants of the Company set forth in Section 4 hereof shall remain
operative and in full force and effect, regardless of any investigation made by,
or on behalf of, the Underwriters, the Company, any of its officers and
directors or any controlling person referred to in Sections 6 and 7 and shall
survive the delivery of and payment for the Shares. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling person, or
any legal representative of such controlling person, as the case may be, shall
be entitled to the benefit of the respective indemnity and contribution
agreements.
11. NOTICES.
All notices or communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to the Representatives
or any of the Underwriters, shall be mailed, delivered, or telecopied and
confirmed, to John G. Kinnard and Company, Incorporated, 920 Second Avenue
South, Minneapolis, Minnesota 55402, Attention: Chris Hasslinger, with a copy to
Robert K. Ranum, Fredrikson & Byron, P.A., 1100 International Centre, 900 Second
Avenue South, Minneapolis, Minnesota 55402; or, if sent to the Company, shall be
mailed, delivered, or telegraphed, and confirmed, to WebValley, Inc., 1011 First
Street South, Suite 203, Hopkins, Minnesota 55343, with a copy to Jeffrey C.
Anderson, Esq., Gray,
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<PAGE>
Plant, Mooty, Mooty and Bennett, P.A., 3400 City Center, 33 South Sixth Street,
Minneapolis, Minnesota 55402-3796.
12. INFORMATION FURNISHED BY THE UNDERWRITERS.
The statements relating to the stabilization activities of the
Underwriters set forth in the last paragraph on the inside front cover page and
the statements in the table and paragraphs _____ and ___ under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitute
the only information furnished by, or on behalf of, the Underwriters in writing
specifically for use with reference to the Underwriters referred to in Section
1(A)(ii) and Section 6 hereof.
13. PARTIES.
This Agreement shall inure to the benefit of and be binding upon each
of the Underwriters and the Company, their respective successors and assigns and
the officers, directors and controlling persons referred to in Sections 6 and 7.
Nothing expressed in this Agreement is intended or shall be construed to give
any person or corporation, other than the parties hereto, their respective
successors and assigns and the controlling persons, officers and directors
referred to in Sections 6 and 7 any legal or equitable right, remedy or claim
under, or in respect of, this Agreement or any provision herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors, assigns and such controlling
persons, officers and directors, and for the benefit of no other person or
corporation. No purchaser of any Shares from the Underwriters shall be construed
to be a successor or assign merely by reason of such purchase.
14. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with the
laws of the State of Minnesota, without regard to conflict of law provisions.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed counterpart of this
Agreement, whereupon it will become a binding agreement between the Company, and
each of the several Underwriters in accordance with its terms.
Very truly yours,
WebValley, Inc.
By_________________________________
Satya P. Garg
President and Chief Executive Officer
The foregoing Underwriting Agreement is
hereby confirmed and accepted by us for
ourselves and as Representatives of the
Underwriters referred to in the foregoing
Agreement as of the date first above written.
JOHN G. KINNARD AND COMPANY, INCORPORATED
- -------------------------------------------------
By: JOHN G. KINNARD AND COMPANY, INCORPORATED
By_____________________________________
Chris Hasslinger
Vice President
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<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Name of Underwriter Number of Firm Shares
John G. Kinnard and Company, Incorporated..................... _______
____________________________________.......................... _______
____________________________________.......................... _______
____________________________________.......................... _______
____________________________________.......................... _______
____________________________________.......................... _______
____________________________________.......................... _______
____________________________________.......................... _______
____________________________________.......................... _______
Total.................................................. _______
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<PAGE>
SCHEDULE II
SCHEDULE OF SHAREHOLDERS REQUIRED TO EXECUTE
LOCK-UP AGREEMENTS
Name of Shareholder Number of Shares
- ------------------- ----------------
________________________________________________ ________
________________________________________________ ________
________________________________________________ ________
________________________________________________ ________
________________________________________________ ________
________________________________________________ ________
________________________________________________ ________
________________________________________________ ________
________________________________________________ ________
Total
_______________________ ________
39
<PAGE>
Appendix A
WARRANT
TO PURCHASE ______ SHARES OF COMMON STOCK
OF
WebValley, Inc.
THIS CERTIFIES THAT, for good and valuable consideration, John G.
Kinnard and Company, Incorporated (the "Representative"), or its registered
assigns, is entitled to subscribe for and purchase from WebValley, Inc., a
Minnesota corporation (the "Company"), at any time after [effective date less
one day] 2000, to and including [effective date], 2004,
______________________________ (________) fully paid and nonassessable shares of
the Common Stock of the Company at the price of $____ per share (the "Warrant
Exercise Price"), subject to the antidilution provisions of this Warrant.
Reference is made to this Warrant in the Underwriting Agreement dated
_____________, 1999, by and between the Company and the Representative. The
shares which may be acquired upon exercise of this Warrant are referred to
herein as the "Warrant Shares." As used herein, the term "Holder" means the
Representative, any party who acquires all or a part of this Warrant as a
registered transferee of the Representative, or any record holder or holders of
the Warrant Shares issued upon exercise, whether in whole or in part, of the
Warrant. As used herein, the term "Common Stock" means and includes the
Company's presently authorized common stock, no par value, and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the Holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution, or winding up of the
Company.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise; Transferability.
(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional share of Common
Stock), by written notice of exercise (in the form attached hereto) delivered to
the Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant along
with a check in payment of the Warrant Exercise Price for such shares.
(b) Until exercisable, this Warrant may not be sold, assigned,
hypothecated, or otherwise transferred, other than by will or pursuant to the
operation of law, except to a person who is an officer of the Representative.
Further, this Warrant may not be sold, transferred, assigned, hypothecated or
divided into two or more Warrants of smaller denominations, nor may any Warrant
shares issued pursuant to exercise of this Warrant be transferred, except as
provided in Section 7 hereof.
<PAGE>
2. Exchange and Replacement. Subject to Sections l and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. Issuance of the Warrant Shares.
(a) The Company agrees that the shares of Common Stock purchased hereby
shall be and are deemed to be issued to the Holder as of the close of business
on the date on which this Warrant shall have been surrendered and the payment
made for such Warrant Shares as aforesaid. Subject to the provisions of the next
section, certificates for the Warrant Shares so purchased shall be delivered to
the Holder within a reasonable time, not exceeding fifteen (15) days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the right to purchase the
number of Warrant Shares, if any, with respect to which this Warrant shall not
then have been exercised shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time as
either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least 30 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions. The Holder agrees to execute
such documents and make such representations, warranties, and agreements as may
be required solely to comply with the exemptions relied upon by the Company, or
the registrations made, for the issuance of the Warrant Shares.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further covenants and
2
<PAGE>
agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved for the purpose of issue or transfer upon exercise of the subscription
rights evidenced by this Warrant a sufficient number of shares of Common Stock
to provide for the exercise of the rights represented by this Warrant.
5. Antidilution Adjustments. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company payable in
Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into a
greater number of shares; or
(iii) combine outstanding shares of Common Stock, by reclassification
or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (b) the total number of shares of Common Stock outstanding
immediately after such event (including the maximum number of shares of Common
Stock issuable in respect of any securities convertible into Common Stock), and
the resulting quotient shall be the adjusted Warrant Exercise Price per share.
An adjustment made pursuant to this Subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this Subsection, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive)
shall determine the allocation of the adjusted Warrant Exercise Price between or
among shares of such classes of capital stock or shares of Common Stock and
other capital stock. All calculations under this Subsection shall be made to the
nearest cent or to the nearest 1/100 of a share, as the case may be. In the
event that at any time as a result of an adjustment made pursuant to this
Subsection, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive any shares of the Company other than shares of Common
Stock, thereafter the Warrant Exercise Price of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this Section 5.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at
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the adjusted Warrant Exercise Price the number of shares, calculated to the
nearest full share, obtained by multiplying the number of shares specified in
such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise
Price in effect prior to such adjustment) by the Warrant Exercise Price in
effect prior to such adjustment and dividing the product so obtained by the
adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a
party, or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), there shall be no adjustment under Subsection (a)
of this Section above but the Holder of each Warrant then outstanding shall have
the right thereafter to convert such Warrant into the kind and amount of shares
of stock and other securities and property which he would have owned or have
been entitled to receive immediately after such consolidation, merger, statutory
exchange, sale, or conveyance had such Warrant been converted immediately prior
to the effective date of such consolidation, merger, statutory exchange, sale,
or conveyance and in any such case, if necessary, appropriate adjustment shall
be made in the application of the provisions set forth in this Section with
respect to the rights and interests thereafter of any Holders of the Warrant, to
the end that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock and other securities and property thereafter deliverable
on the exercise of the Warrant. The provisions of this Subsection shall
similarly apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If in the
opinion of each such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the
4
<PAGE>
Holder to the Company; provided that an appropriate legend may be endorsed on
this Warrant or the certificates for such Warrant Shares respecting restrictions
upon transfer thereof necessary or advisable in the opinion of counsel to the
Company and satisfactory to the Company to prevent further transfers which would
be in violation of Section 5 of the Securities Act of 1933, as amended (the
"1933 Act") and applicable state securities laws; and provided further that the
prospective transferee or purchaser shall execute such documents and make such
representations, warranties, and agreements as may be required solely to comply
with the exemptions relied upon by the Company for the transfer or disposition
of the Warrant or Warrant Shares.
(b) If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such Warrant
Shares described in the written notice given pursuant to this Section 7 may not
be effected without registration or qualification of this Warrant or such
Warrant Shares the Company shall promptly give written notice thereof to the
Holder, and the Holder will limit its activities in respect to such as, in the
opinion of both such counsel, are permitted by law.
8. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
"Market Price" with respect to shares of Common Stock of any class or series
means the closing sale price reported by Nasdaq National Market or any national
securities exchange or, if none, the average of the last reported closing bid
and asked prices on any national securities exchange or quoted in Nasdaq
SmallCap Market, or if not listed on a national securities exchange or quoted in
Nasdaq SmallCap Market, the average of the last reported closing bid and asked
prices as reported by Metro Data Company, Inc. from quotations by market makers
in such Common Stock on the Minneapolis-St. Paul local over-the-counter market.
9. Registration Rights.
(a) If at any time after [effective date less one day], 2000 and prior
to the end of the two-year period following complete exercise of this Warrant or
[effective date], 2003, whichever occurs earlier, the Company proposes to
register under the 1933 Act (except by a Form S-4 or Form S-8 Registration
Statement or any successor forms thereto) or qualify for a public distribution
under Section 3(b) of the 1933 Act, any of its securities, it will give written
notice to all Holders of this Warrant, any Warrants issued pursuant to Section 2
and/or Section 3(a) hereof, and any Warrant Shares of its intention to do so
and, on the written request of any such Holder given within twenty (20) days
after receipt of any such notice (which request shall specify the interest in
this Warrant or the Warrant Shares intended to be sold or disposed of by such
Holder and describe the nature of any proposed sale or other disposition
thereof), the Company will use its best efforts to cause all such Warrant
Shares, the Holders of which shall have requested the registration or
qualification thereof, to be included in such registration statement proposed to
be filed by the Company; provided,
5
<PAGE>
however, that if a greater number of Warrant Shares is offered for participation
in the proposed offering than in the reasonable opinion of the managing
underwriter of the proposed offering can be accommodated without adversely
affecting the proposed offering, then the amount of Warrant Shares proposed to
be offered by such Holders for registration, as well as the number of securities
of any other selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
(b) Further, on a one-time basis during the four-year period commencing
[effective date], 2000, upon request by the Holder or Holders of a majority in
interest of this Warrant, of any Warrants issued pursuant to Section 2 and/or
Section 3(a) hereof, and of any Warrant Shares, the Company will promptly take
all necessary steps to register or qualify, under the 1933 Act and the
securities laws of such states as the Holders may reasonably request, such
number of Warrant Shares issued and to be issued upon conversion of the Warrants
requested by such Holders in their request to the Company. The Company shall
keep effective and maintain any registration, qualification, notification, or
approval specified in this Paragraph (b) for such period as may be reasonably
necessary for such Holder or Holders of such Warrant Shares to dispose thereof
and from time to time shall amend or supplement the prospectus used in
connection therewith to the extent necessary in order to comply with applicable
law.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following fees,
costs, and expenses: all registration, filing and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such securities
(if the Company is required to bear such fees and disbursements), all internal
expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any jurisdictions
in which the securities to be offered are to be registered or qualified. Fees
and disbursements of special counsel and accountants for the selling Holders,
underwriting discounts and commissions, and transfer taxes for selling Holders
and any other expenses relating to the sale of securities by the selling Holders
not expressly included above shall be borne by the selling Holders.
(d) The Company hereby indemnifies each of the Holders of this Warrant
and of any Warrant Shares, and the officers and directors, if any, who control
such Holders, within the meaning of Section 15 of the 1933 Act, against all
losses, claims, damages, and liabilities caused by (1) any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus (and as amended or supplemented if the Company shall
have furnished any amendments thereof or supplements thereto), any Preliminary
Prospectus or any state securities law filings; (2) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading except insofar as such
losses, claims, damages, or liabilities are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
Holder expressly for use therein; and each such Holder by its acceptance hereof
severally agrees that it will indemnify and hold harmless the Company, each of
its officers who signs such Registration Statement, and each person, if any, who
controls the Company, within the meaning of Section 15 of the 1933 Act, with
respect to losses,
6
<PAGE>
claims, damages, or liabilities which are caused by any untrue statement or
alleged untrue statement, omission or alleged omission contained in information
furnished in writing to the Company by such Holder expressly for use therein.
10. Additional Right to Convert Warrant.
(a) The Holder of this Warrant shall have the right to require the
Company to convert this Warrant (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of Company Common Stock as
provided for in this Section 10. Upon exercise of the Conversion Right, the
Company shall deliver to the Holder (without payment by the Holder of any
Warrant Exercise Price) that number of shares of Company Common Stock equal to
the quotient obtained by dividing (x) the value of the Warrant at the time the
Conversion Right is exercised (determined by subtracting the aggregate Warrant
Exercise Price for the Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value for the
Warrant Shares immediately prior to the exercise of the Conversion Right) by (y)
the Fair Market Value of one share of Company Common Stock immediately prior to
the exercise of the Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at any time or
from time to time after it is exercisable, prior to its expiration, on any
business day by delivering a written notice in the form attached hereto (the
"Conversion Notice") to the Company at the offices of the Company exercising the
Conversion Right and specifying (i) the total number of shares of Stock the
Holder will purchase pursuant to such conversion and (ii) a place and date not
less than one or more than 20 business days from the date of the Conversion
Notice for the closing of such purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Company Common stock
issuable upon such conversion, together with cash, in lieu of any fraction of a
share, and (iii) the Company will deliver to the Holder a new warrant
representing the number of shares, if any, with respect to which the warrant
shall not have been exercised.
(d) Fair Market Value of a share of Common Stock as of a particular
date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or
is quoted on the Nasdaq National Market, then the average closing or
last sale prices, respectively, reported for the ten (10) business days
immediately preceding the Determination Date,
(ii) If the Company's Common Stock is not traded on an
exchange or on the Nasdaq National Market but is traded on the Nasdaq
SmallCap Market_ or other over-the-counter market, then the average
closing bid and asked prices reported for the ten (10) business days
immediately preceding the Determination Date, and
7
<PAGE>
(iii) If the Company's Common Stock is not traded on an
exchange or on the Nasdaq National Market, Nasdaq SmallCap Market_ or
other over-the-counter market, then the price established in good faith
by the Board of Directors.
IN WITNESS WHEREOF, WebValley, Inc. has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated
_______________ 1999.
"Company"
WEBVALLEY, INC.
By___________________________________
Its_________________________________
8
<PAGE>
TO: WEBVALLEY, INC.
NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in
Order to Exercise the Warrant
- -----------------------------
The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash, _________________ of the shares issuable upon the exercise of
such Warrant, and requests that certificates for such shares (together with a
new Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) shall be issued in the name of
_______________________________________
(Print Name)
Please insert social security
or other identifying number
of registered Holder of
certificate (_______________________)
Address:
_______________________________________
_______________________________________
Date:____________________________ ________________________________________
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
NOTE: If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said Holder for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
9
<PAGE>
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrants.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto _________________________________________________________________
the right to purchase the securities of WebValley, Inc. to which the within
Warrant relates and appoints ____________________________________________,
attorney, to transfer said right on the books of WebValley, Inc. with full power
of substitution in the premises.
Dated:__________________ ________________________________________
(Signature)
Address:
____________________________________
____________________________________
10
<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 10)
TO: WEBVALLEY, INC.
The undersigned hereby irrevocably elects a cashless exercise of the
right of purchase represented by the within Warrant Certificate for, and to
purchase thereunder, ______________ shares of Common Stock, as provided for in
Section 10 therein.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
_____________________________________
(Print name)
Please insert social security
or other identifying number
of registered Holder of
certificate (_______________________)
Address:
___________________________________
___________________________________
Date:_______________________________ ____________________________________
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
NOTE: If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said Holder for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
11
<PAGE>
Exhibit 3.1
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
PROFILE NATIONAL BUSINESS DIRECTORY, INC.
I, the undersigned, as President of PROFILE NATIONAL BUSINESS
DIRECTORY, INC., a Minnesota corporation, do hereby certify that the a majority
of the shareholders of the corporation have resolved to amend and restate the
Articles of Incorporation in accordance with the following resolution:
RESOLVED, That the Articles of Incorporation of this corporation be
amended and restated by the Amended and Restated Articles of
Incorporation attached hereto as Exhibit A which shall include
increasing the number of authorized shares to 20 million shares; and
FURTHER RESOLVED, That Satya P. Garg, the President of this
corporation, be, and hereby is, authorized and directed to make and
execute Articles of Amendment embracing the foregoing resolution and to
cause such Articles of Amendment to be filed with the office of the
Secretary of State of the State of Minnesota.
I FURTHER CERTIFY that the foregoing Amendment and Restatement have
been adopted pursuant to Chapter 302A, Minnesota Statutes.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 28th day of
March, 1997.
/s/ Satya P. Garg
----------------------------------
Satya P. Garg, President
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PROFILE NATIONAL BUSINESS DIRECTORY, INC.
The shareholders do hereby adopt the following Amended and Restated
Articles of Incorporation, under Minnesota Statutes Chapter 302A:
ARTICLE I
Name
The name of this corporation shall be Profile National Business
Directory, Inc.
ARTICLE II
Registered Office
The location and address of this corporation's registered office in
this state shall be 1011 South First Street, Suite 203, Hopkins MN 55343.
ARTICLE III
Authorized Capital
The total authorized number of shares of this corporation is Twenty
Million (20,000,000) shares. All common stock shall have the par value of one
cent ($.01) per share. The Board of Directors has the authority to establish
more than one class or series of shares and to fix the relative rights and
preferences of any such different class or series.
ARTICLE IV
Cumulative Voting Prohibition
Shareholders shall have no rights of cumulative voting.
ARTICLE V
Preemptive Rights Prohibition
Shareholders shall have no rights, preemptive or otherwise, under
Minnesota statutes Section 302A.413 (or similar provisions of future law) to
acquire any part of any unissued shares or other securities of this corporation
or any rights to purchase shares or other securities of this corporation before
the corporation may offer them to other persons.
<PAGE>
EXHIBIT A
ARTICLE VI
Limitation of Director Liability
A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for (i) liability based on a breach of the duty of
loyalty to the corporation or the shareholders; (ii) liability for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) liability based on the payment of an improper dividend
or an improper repurchase of the corporation's stock under Minnesota Statutes
Section 302A.559 or on the sale of unregistered securities or securities fraud
under Minnesota Statutes Section 80A.23; or (iv) liability for any transaction
from which the director derived an improper personal benefit. If Minnesota
Statutes Chapter 302A hereafter is amended to authorize the further elimination
or limitation of the liability of directors, then the liability of a director of
the corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by Minnesota Statutes
Chapter 302A, as amended. Any repeal or modification of this Article by the
shareholders of the corporation shall be prospective only and shall not
adversely affect any limitation on the personal liability of a director of the
corporation existing at the time of such repeal or modification.
ARTICLE VII
Directors Action by Written Consent
Any action required or permitted to be taken at a meeting of the Board
of Directors may be taken by written action signed by all of the directors then
in office, unless the action is one which need not be approved by the
shareholders, in which case such action shall be effective if signed by the
number of directors that would be required to take the same action at a meeting
at which all directors were present.
2
<PAGE>
Exhibit 3.1 Continued
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
PROFILE NATIONAL BUSINESS DIRECTORY, INC.
I, the undersigned President of Profile National Business Directory,
Inc., a Minnesota corporation, do hereby certify that at least a majority of the
shareholders of the corporation have approved a change of name for the
corporation at a special meeting of shareholders called for the purpose, held on
October 22, 1998 pursuant to notice to all shareholders dated October 15, 1998,
and such shareholders desire to amend the Articles of Incorporation pursuant to
the following resolutions, such Articles of Amendment to be filed with the
office of the Secretary of State of the State of Minnesota:
RESOLVED, That the Articles of Incorporation of the corporation be
amended to state the name of the corporation as follows:
The name of this corporation shall be WebValley, Inc.
FURTHER RESOLVED, That the President of this corporation, be, and
hereby is, authorized and directed to make and execute Articles of
Amendment embracing the foregoing resolution and to cause such Articles
of Amendment to be filed with the office of the Secretary of State of
the State of Minnesota.
I FURTHER CERTIFY that the foregoing amendment has been adopted
pursuant to chapter 302A, Minnesota Statutes.
IN WITNESS WHEREOF, I have hereunto subscribed my name effective the
22nd day of October, 1998.
/s/ Satya P. Garg
--------------------------------------
Satya P. Garg, President
3
<PAGE>
Exhibit 3.1 Continued
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
WebValley, Inc.
I, the undersigned Satya P. Garg, as President of WebValley, Inc., a
Minnesota corporation, do hereby certify that the shareholders of the
corporation holding a majority of the corporation's shares have voted at a duly
called special meeting of the shareholders held on March 23, 1999 to amend the
Articles of Incorporation in accordance with the following resolution:
Increase to Authorized Shares
RESOLVED, That the Articles of Incorporation of this corporation be
amended as follows to increase the number of authorized shares:
The aggregate number of shares of stock which this Corporation
shall have the authority to issue is Two Hundred Million
(200,000,000) shares, with $0.01 par value.
FURTHER RESOLVED, That Satya P. Garg, the President of this
corporation, be, and hereby is, authorized and directed to make and
execute Articles of Amendment embracing the foregoing resolution and to
cause such Articles of Amendment to be filed with the office of the
Secretary of State of the State of Minnesota.
I FURTHER CERTIFY that the foregoing amendment has been adopted
pursuant to chapter 302A, Minnesota Statutes.
IN WITNESS WHEREOF, I have hereunto subscribed my name effective this
23rd day of March, 1999.
/s/ Satya P. Garg
------------------------------------
Satya P. Garg, President
4
<PAGE>
Exhibit 3.2
RESTATED BYLAWS
OF
WEBVALLEY, INC.
ARTICLE 1. Offices
1.1 Registered Office. The registered office of the corporation shall
be located within the State of Minnesota as set forth in the Articles of
Incorporation as amended. The registered office need not be identical with the
principal executive office of the corporation and may be changed from time to
time by the Board of Directors.
1.2 Other Offices. The corporation may have other offices, including
its principal business office, at such places inside and outside the State of
Minnesota as the Board of Directors may determine from time to time.
ARTICLE 2. Meetings of Shareholders
2.1 Place of Meeting. All meetings of the shareholders of this
corporation shall be held at its principal executive office unless some other
place for any such meeting inside or outside the State of Minnesota is
designated by the Board of Directors in the notice of meeting. Any regular or
special meeting of the shareholders of the corporation called by or held
pursuant to a written demand of shareholders shall be held in the county where
the principal executive office of the corporation is located.
2.2 Regular Meetings. Regular meetings of the shareholders of this
corporation may be held at the discretion of the Board of Directors on an annual
or less frequent periodic basis. The date, time and place of such meetings may
be designated by the Board of Directors in the notices of meeting. At regular
meetings the shareholders shall elect a Board of Directors and transact such
other business as may be appropriate for action by shareholders. If a regular
meeting of shareholders has not been held for a period of fifteen (15) months,
one or more shareholders holding not less than three percent (3%) of the voting
power of all shares of the corporation entitled to vote may call a regular
meeting of shareholders by delivering to the chief executive officer or chief
financial officer a written demand for a regular meeting. Within thirty (30)
days after the receipt of such a written demand by the chief executive officer
or chief financial officer, the Board of Directors shall cause a regular meeting
of shareholders to be called. Such a meeting shall be held on notice no later
than ninety (90) days after the receipt of such written demand, all at the
expense of the corporation.
2.3 Special Meetings. Special meetings of the shareholders, for any
purpose or purposes appropriate for action by shareholders, may be called by the
chief executive officer, by
<PAGE>
the acting chief executive officer in the absence of the chief executive
officer, by the chief financial officer, or by two or more members of the Board
of Directors. The date, time and place of such special meeting shall be fixed by
the person or persons calling the meeting and designated in the notice of
meeting.
A special meeting may also be called by one or more shareholders
holding ten percent (10%) or more of the voting power of all shares of the
corporation entitled to vote, except that a special meeting for the purpose of
considering any action to directly or indirectly facilitate or effect a business
combination (as that term is defined in Minnesota Statutes Section 302A.011 (or
similar provision of future law)), including any action to change or otherwise
affect the composition of the Board of Directors for that purpose, when called
by shareholders, must be called by shareholders holding twenty-five percent
(25%) or more of the voting power of all shares entitled to vote.
The shareholders calling such meeting shall deliver to the chief
executive officer or chief financial officer a written demand for a special
meeting. Such a demand shall contain the purpose or purposes of the meeting.
Within thirty (30) days after the receipt of such a written demand for a special
meeting of shareholders by the chief executive officer or chief financial
officer, the Board of Directors shall cause a special meeting of shareholders to
be called. Such a meeting shall be held on notice no later than ninety (90) days
after the receipt of such written demand, all at the expense of the corporation.
Business transacted at any special meeting of the shareholders shall be
limited to the purpose or purposes stated in the notice of the meeting. Any
business transacted at any special meeting of the shareholders that is not
included among the stated purposes of such meeting shall be voidable by or on
behalf of the corporation unless all of the shareholders have waived notice of
the meeting.
2.4 Notice of Meetings. Except when a meeting of shareholders is an
adjourned meeting to be held not more than one hundred twenty (120) days after
the date fixed for the original meeting and the date, time, and place of such
meeting were announced at the time of the original meeting or any adjournment of
the original meeting, notice of all meetings shall be given to every holder of
shares entitled to vote. Such notice shall contain the date, time, and place of
the shareholder meeting and any other information required by law. In the case
of a special meeting, the notice shall contain a statement of the purposes of
the meeting. The notice may also contain any other information deemed necessary
or desirable by the Board of Directors or by any other person or persons calling
the meeting.
Unless a different minimum notice period has been fixed by applicable
law, the Articles of Incorporation, or these Restated Bylaws, notice of all
meetings, including meetings for consideration of the sale or other disposition
of all or substantially all of the assets of the corporation, shall be given not
less than three (3) nor more than sixty (60) days before the date of the
meeting.
2
<PAGE>
In the event that a plan of merger or exchange is to be considered at a
meeting of shareholders, written notice of such meeting shall be given to every
shareholder, whether or not entitled to vote, not less than fourteen (14) nor
more than sixty (60) days before the date of the meeting. Such a notice shall
contain the date, time, and place of the shareholder meeting, shall state that a
purpose of such meeting is to consider the proposed plan of merger or exchange,
and shall include a copy or a short description of the plan of merger or
exchange.
Notice of all meetings shall be given to each eligible shareholder
either by oral communication, by mailing a copy of the notice to an address
designated by the shareholder or to the last known address of the shareholder,
by handing a copy to the shareholder, or by any other delivery that conforms to
law. Notice by mail shall be deemed given when deposited in the United States
mail with sufficient postage affixed. Notice shall be deemed received when it is
given.
Any shareholder may waive notice of any meeting of shareholders. Waiver
of notice shall be effective whether given before, at, or after the meeting and
whether given orally, in writing, or by attendance. Attendance by a shareholder
at a meeting is a waiver of notice of that meeting, except when such shareholder
objects at the beginning of the meeting to the transaction of business because
the meeting is not lawfully called or convened or objects before a vote on an
item of business because the item may not lawfully be considered at that meeting
and does not participate in the consideration of the item at the meeting.
2.5 Record Date. The Board of Directors may fix, or authorize an
officer to fix, a date not more than sixty (60) days before the date of a
meeting of shareholders as the date for the determination of the holders of
shares entitled to notice of and entitled to vote at any meeting. When a date is
so fixed, only shareholders on that date are entitled to notice of and permitted
to vote at that meeting of shareholders.
2.6 Quorum. The holders of a majority of the voting power of all shares
of the corporation, present in person or represented by proxy, entitled to vote
at a meeting shall constitute a quorum for the transaction of business at a
meeting of the shareholders. Such a quorum is a prerequisite to the shareholders
taking any action other than adjournment. In the absence of a quorum, the
holders of a majority of the voting power, present in person or represented by
proxy, may adjourn the meeting to a date, time, and place they shall announce at
the time of adjournment. Any business that might have been transacted at the
adjourned meeting had a quorum been present, may be transacted at the meeting
held pursuant to such an adjournment, if a quorum is present at the meeting held
pursuant to such an adjournment.
If a quorum is present when a duly called or held meeting is convened,
the shareholders present may continue to transact business until adjournment,
even though the withdrawal of a number of shareholders originally represented
leaves less than the number otherwise required for a quorum.
2.7 Voting and Proxies. At each meeting of the shareholders, every
shareholder shall be entitled to one vote in person or by proxy for each share
of capital stock held by such
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shareholder, except as may be otherwise provided in the Articles of
Incorporation or the terms of the share or as may be required to provide for
cumulative voting (if not denied by the Articles of Incorporation). No
appointment of a proxy, however, shall be valid for any purpose more than eleven
(11) months after the date of its execution, unless a longer period is expressly
provided in the appointment. Every appointment of a proxy shall be in writing
(which shall include telegraphing, cabling, or telephotographic transmission),
and shall be filed with the Secretary of the corporation before or at the
meeting at which the appointment is to be effective. An appointment of a proxy
for shares held jointly by two or more shareholders shall be valid if signed by
any one of them, unless the Secretary of the corporation receives from any one
of such shareholders written notice either denying the authority of another of
such shareholders to appoint a proxy or appointing a different proxy. All
questions regarding the qualification of voters, the validity of appointments of
proxies, the voting of jointly owned shares, and the acceptance or rejection of
votes shall be decided by the presiding officer of the meeting. The shareholders
shall take action by the affirmative vote of the holders of a majority of the
voting power of the shares present, in person or represented by proxy, and
entitled to vote, except when a different vote is required by law, the Articles
of Incorporation, or these Restated Bylaws.
2.8 Action Without Meeting by Shareholders. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting by written action signed by all of the shareholders entitled to vote on
such action. Such written action shall be effective when signed by all of the
shareholders entitled to vote thereon, unless a different effective time is
provided in the written action.
2.9 Procedure for Shareholder Nominations. Only persons who are
nominated in accordance with the procedures set forth in this Section 2.9 shall
be eligible for election as directors at a meeting of shareholders. Nominations
of persons for election to the Board of Directors of the corporation shall be
made at a meeting of shareholders only: (i) by or at the direction of the Board
of Directors; or (ii) by any shareholder of the corporation entitled to vote for
the election of directors at the meeting who complies with the procedures set
forth in this Section 2.9.
Notice of nominations by a shareholder shall be in writing and shall be
given to the Secretary of the corporation at the principal executive offices of
the corporation not less than 50 days nor more than 90 days before the date of
the meeting (unless a different time period is required by Rule 14a-8(a)(3)(i)
of the Securities Exchange Act of 1934, as amended); provided, however, that in
the event that less than 60 days notice or prior public disclosure of the date
of the meeting is given or made to shareholders, notice of nominations by a
shareholder shall be given to the Secretary of the corporation at the principal
executive offices of the corporation not later than the close of business on the
10th day following the day on which the notice of the date of the meeting was
given or such public disclosure was made.
Such shareholder's notice shall contain: (i) as to each person whom the
shareholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act
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of 1934, as amended (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); and
(ii) as to the shareholder giving the notice (a) the name and address, as they
appear on the corporation's books, of such shareholder and (b) the class and
number of shares of the corporation which are beneficially owned by such
shareholder. At the request of the Board of Directors any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee. The presiding officer of the
meeting shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed in this
Section 2.9 and, if such officer should so determine, such officer shall so
declare to the meeting and the defective nomination shall be disregarded.
Notice shall be given by the shareholder to the corporation when mailed
or delivered to and received by the corporation at it's principal executive
office. Notice by mail is given when deposited in the United States mail with
sufficient postage affixed.
2.10 Procedure for Shareholder Proposals. Only business as proposed in
accordance with the procedures set forth in this Section 2.10 shall be brought
before any meeting of the shareholders. Proposals for business to be conducted
at any meeting of the shareholders shall be made at the meeting of shareholders
only: (i) by or at the direction of the Board of Directors; or (ii) by any
shareholder of the corporation who complies with the procedures set forth in
this Section 2.10.
Notice of proposals by a shareholder shall be in writing and shall be
given to the Secretary of the corporation at the principal executive offices of
the corporation not less than 50 days nor more than 90 days prior to the meeting
(unless a different time period is required by Rule 14a-8(a)(3)(i) of the
Securities Exchange Act of 1934, as amended); provided, however, that in the
event that less than 60 days' notice or prior public disclosure of the date of
the meeting is given or made to shareholders, notice of proposals by a
shareholder shall be given to the Secretary of the corporation at the principal
executive offices of the corporation not later than the close of business on the
10th day following the day on which the notice of the date of the meeting was
given or such public disclosure was made.
Such shareholder's notice shall contain: (i) the name and address, as
they appear on the corporation's books, of such shareholder, and (ii) as to each
matter the shareholder proposes to bring before the meeting (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the class and number of
shares of the corporation which are beneficially owned by the shareholder, and
(c) any material interest of the shareholder in such business. The presiding
officer of the meeting shall, if the facts warrant, determine and declare to the
meeting that a proposal to conduct business was not properly brought before the
meeting in accordance with the provisions of this Section 2.10 and, if such
officer shall so determine, such officer shall so declare to the meeting and the
defective proposal shall be disregarded.
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Notice shall be given by the shareholder to the corporation when mailed
or delivered to and received by the corporation at it's principal executive
office. Notice by mail is given when deposited in the United States mail with
sufficient postage affixed.
ARTICLE 3. Directors
3.1 General Powers. Except as authorized by the shareholders pursuant
to a shareholder control agreement or except as may be otherwise provided by
law, the business and affairs of the corporation shall be managed by or under
the direction of its Board of Directors. The Board of Directors may exercise all
such powers and do all such things as may be exercised or done by the
corporation, subject to the provisions of applicable law, the Articles of
Incorporation, and these Bylaws.
3.2 Number, Tenure, and Qualification. The number of directors of the
Corporation shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution approved by the affirmative vote of a
majority of the directors then holding office; provided, however, that if the
holders of any class or series of Preferred Stock, voting as a separate class or
series, have the right to elect director(s) and such right is in effect, the
number of directors shall be increased by the number of directors that such
holders may so elect and upon termination of such right the number of directors
shall be decreased by the number of directors it was previously increased.
Each director shall be elected at a regular meeting of shareholders
except as provided in Sections 3.6 and 3.7. Such a director shall hold office
until the next regular meeting of shareholders and thereafter until a successor
is duly elected and qualified. Directors shall be natural persons, but need not
be shareholders.
3.3 Meetings. Meetings of the Board of Directors may be held at such
times and places as shall from time to time be determined by the Board of
Directors. Meetings of the Board of Directors also may be called by the chief
executive officer, by the acting chief executive officer in the absence of the
chief executive officer or by any director. In such a case, the person or
persons calling such meeting may fix the date, time, and place thereof, either
inside or outside the State of Minnesota, and shall cause notice of meeting to
be given.
3.4 Notice of Meetings. If the date, time, and place of a meeting of
the Board of Directors has been announced at a previous meeting, no notice is
required. In all other cases, notice of meetings shall be given to each member
of the Board of Directors by the person or persons calling such meeting. Such
notice shall contain the date, time, and place of the meeting and any other
information required by law or desired by the person or persons calling such
meeting. Notice of all such meetings shall be given not less than three (3) days
before the date of the meeting.
Notice of all meetings shall be given to each director either by oral
communication, by mailing a copy of the notice to an address designated by the
director, by handing a copy to the director, or by any other delivery that
conforms to law. Notice by mail shall be deemed given
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when deposited in the United States mail with sufficient postage affixed. Notice
shall be deemed received when it is given.
A director may waive notice of any meeting of the Board of Directors. A
waiver of notice by a director is effective whether given before, at, or after
the meeting, and whether given orally, in writing, or by attendance. Attendance
by a director at a meeting is a waiver of notice of that meeting, except when
such director objects at the beginning of the meeting to the transaction of
business because the meeting is not lawfully called or convened and does not
participate thereafter in the meeting.
3.5 Quorum and Voting. A majority of the directors currently holding
office shall constitute a quorum for the transaction of business at any meeting
of the Board of Directors. In the absence of a quorum, a majority of the
directors present at the meeting may adjourn the meeting from time to time until
a quorum is present.
If a quorum is present when a duly called or held meeting is convened,
the directors present at the meeting may continue to transact business until
adjournment, even though the withdrawal of a number of directors originally
present leaves less than the number otherwise required for a quorum.
3.6 Voting. The Board of Directors shall take action by the affirmative
vote of the greater of (i) a majority of the directors present at any duly held
meeting at the time the action is taken or (ii) a majority of the minimum
proportion or number of directors that would constitute a quorum for the
transaction of business at the meeting, except when a different vote is required
by law, the Articles of Incorporation, or these Restated Bylaws. A director may
give advance written consent or objection to a proposal to be acted upon at a
meeting of the Board of Directors. If the director is not present at the
meeting, consent or objection to a proposal does not constitute presence for
purposes of determining a quorum, but consent or objection shall be counted as a
vote of a director present at the meeting in favor of or against the proposal
and shall be entered in minutes or other record of action at the meeting, if the
proposal acted upon at the meeting is substantially the same or has
substantially the same effect as the proposal to which the director has
consented or objected.
3.7 Vacancies and Newly Created Directorships TC . Any vacancy
occurring on the Board of Directors resulting from the death, resignation,
removal, or disqualification of a director, may be filled by the affirmative
vote of a majority of the directors remaining in office, even though said
remaining directors may be less than a quorum. In addition, any newly created
directorship resulting from an increase in the authorized number of directors by
action of the Board of Directors may be filled by a majority vote of the
directors serving at the time of such increase. Any vacancy or newly created
directorship may be filled by resolution of the shareholders. Each director
elected by the Board of Directors to either fill a vacancy or a newly created
directorship shall hold office until a qualified successor is elected by the
shareholders at the next regular or special meeting of the shareholders.
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3.8 Removal of Directors. Any one or all of the directors may be
removed at any time, with or without cause, by the affirmative vote of the
holders of the proportion or number of the voting power of the shares entitled
to vote for the election of such director unless cumulative voting is permitted,
in which case the affirmative vote required to remove a director shall be the
larger number required by law. The shareholders may elect new directors at the
same meeting at which directors are removed.
In addition, any director may be removed at any time, with or without
cause, by the other members of the Board of Directors if (i) the director was
appointed by the board to fill a vacancy; (ii) the shareholders have not elected
directors in the interval between the time of the appointment and the time of
removal; and (iii) a majority of the remaining directors present affirmatively
vote to remove the director, even though said remaining directors may be less
than a quorum.
3.9 Action in Writing. Any action required or permitted to be taken at
a meeting of the Board of Directors which requires the approval of the
shareholders, may be taken by written action signed by all of the directors then
holding office. However, if the Articles of Incorporation authorize written
action by less than all the directors and the action does not require
shareholder approval, such action may be taken by written action signed by the
number of directors that would be required to take the same action at a meeting
of the Board of Directors at which all directors were present. If any written
action is taken by less than all directors, all directors shall be notified
immediately of its text and effective date. The failure to provide such notice,
however, shall not invalidate such written action. A director who does not sign
or consent to the written action has no liability for the action or actions
taken thereby. Such written action shall be effective when signed by the
required number of directors, unless a different effective time is provided in
the written action.
3.10 Meeting by Means of Electronic Communication. Members of the Board
of Directors of the corporation may participate in a meeting of the Board by
means of conference telephone or similar means of communication by which all
persons participating in the meeting can simultaneously hear each other. Such
participation in a meeting pursuant to this Section 3.10 shall constitute
presence in person at such meeting. Meetings held pursuant to this Section 3.10,
however, are still subject to the notice, quorum, and voting requirements as
provided in Sections 3.4, 3.5 and 3.6.
3.11 Committees. The Board of Directors, by a resolution approved by
the affirmative vote of a majority of the directors then holding office, may
establish one or more committees of one or more persons. Such committees shall
have the authority of the Board of Directors in the management of the business
of the corporation only to the extent provided in the resolution. Such
committees, other than special litigation committees and committees formed
pursuant to Minnesota Statutes Section 302A.673, subdivision 1(d), shall at all
times be subject to the direction and control of the Board of Directors.
Committee members need not be directors and shall be appointed by the
affirmative vote of a majority of the directors present at any duly held
meeting. A majority of the members of any committee shall constitute a quorum
for the transaction of business at a meeting of any such committee.
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In other matters of procedure, the provisions of these Restated Bylaws
shall apply to committees and the members thereof to the same extent they apply
to the Board of Directors and directors. This shall include, without limitation,
the provisions with respect to meetings and notice thereof, absent members,
written actions, and valid acts. Each committee shall keep regular minutes of
its proceedings and report the same to the Board of Directors.
ARTICLE 4. Officers
4.1 Number and Qualification. The officers of the corporation shall
consist of one or more natural persons elected or appointed by the Board of
Directors exercising the functions of the offices, however designated, of chief
executive officer and chief financial officer. The Board of Directors may also
elect or appoint such other officers and assistant officers as it may deem
necessary for the operation and management of the corporation. Except as
provided in these Restated Bylaws, the Board of Directors shall fix the powers,
duties, and compensation of all officers. Officers may be, but need not be,
directors of the corporation. Any number of offices may be held by the same
person.
4.2 Term of Office. An officer shall hold office until a successor
shall have been duly elected, unless prior thereto such officer shall have
resigned or been removed from office as hereinafter provided.
4.3 Removal and Vacancies. Any officer or agent elected or appointed by
the Board of Directors shall hold office at the pleasure of the Board of
Directors and may be removed at any time, with or without cause, by a resolution
approved by the affirmative vote of a majority of the directors present. Any
vacancy in an office of the corporation shall be filled by action of the Board
of Directors.
4.4 Chief Executive Officer. Unless provided otherwise by a resolution
adopted by the Board of Directors, the chief executive officer shall have
general active management of the business of the corporation, in the absence of
the Chairperson of the Board or if the office of Chairperson of the Board is
vacant, shall preside at meetings of the shareholders and Board of Directors,
shall see that all orders and resolutions of the Board of Directors are carried
into effect, shall sign and deliver in the name of the corporation any deeds,
mortgages, bonds, contracts, or other instruments pertaining to the business of
the corporation, except in cases in which the authority to sign and deliver is
required by law to be exercised by another person or is expressly delegated by
the Articles of Incorporation, these Restated Bylaws, or the Board of Directors
to some other officer or agent of the corporation, may maintain records of and
certify proceedings of the Board of Directors and shareholders, and shall
perform such other duties as may from time to time be prescribed by the Board of
Directors.
4.5 Chief Financial Officer. Unless provided otherwise by a resolution
adopted by the Board of Directors, the chief financial officer shall keep
accurate financial records for the corporation, shall deposit all moneys,
drafts, and checks in the name of and to the credit of the corporation in such
banks and depositories as the Board of Directors shall designate from time to
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time, shall endorse for deposit all notes, checks, and drafts received by the
corporation as ordered by the Board of Directors, making proper vouchers
therefor, shall disburse corporate funds and issue checks and drafts in the name
of the corporation as ordered by the Board of Directors, shall render to the
chief executive officer and the Board of Directors, whenever requested, an
account of all such officer's transactions as chief financial officer and of the
financial condition of the corporation, and shall perform such other duties as
may be prescribed by the Board of Directors or the chief executive officer from
time to time.
4.6 Chairperson of the Board. The Board of Directors may elect a
Chairperson of the Board who, if elected, shall preside at all meetings of the
shareholders and of the Board of Directors and shall perform such other duties
as may be prescribed by the Board of Directors from time to time.
4.7 President. Unless otherwise determined by the Board of Directors,
the President shall be the chief executive officer of the corporation. If an
officer other than the President is designated chief executive officer, the
President, if any, shall have such powers and perform such duties as the Board
of Directors or the chief executive officer may prescribe from time to time.
4.8 Vice President(s). The Vice President, if any, or Vice Presidents
in case there be more than one, shall have such powers and perform such duties
as the Board of Directors or the chief executive officer may prescribe from time
to time. In the absence of the President or in the event of the President's
death, inability, or refusal to act, the Vice President, or in the event there
be more than one Vice President, the Vice Presidents in the order designated by
the Board of Directors, or, in the absence of any designation, in the order of
their election, shall perform the duties of the President, and, when so acting,
shall have all the powers of and be subject to all of the restrictions upon the
President.
4.9 Secretary. The Secretary shall attend all meetings of the Board of
Directors and of the shareholders and shall maintain records of, and whenever
necessary, certify all proceedings of the Board of Directors and of the
shareholders. The Secretary shall keep the stock books of the corporation, when
so directed by the Board of Directors or other person or persons authorized to
call such meetings, shall give or cause to be given notice of meetings of the
shareholders and of meetings of the Board of Directors, and shall also perform
such other duties and have such other powers as the Board of Directors or the
chief executive officer may prescribe from time to time.
4.10 Treasurer. Unless otherwise determined by the Board of Directors,
the Treasurer shall be the chief financial officer of the corporation. If an
officer other than the Treasurer is designated chief financial officer, the
Treasurer, if any, shall have such powers and perform such duties as the Board
of Directors or the chief executive officer may prescribe from time to time.
4.11 Delegation. Unless prohibited by a resolution approved by the
affirmative vote of a majority of the directors present, an officer elected or
appointed by the Board of Directors may, without the approval of the Board of
Directors, delegate some or all of the duties and powers of such person's office
to other persons.
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ARTICLE 5. Certificates and Ownership of Shares
5.1 Certificates. All shares of the corporation shall be represented by
certificates. Each certificate shall contain on its face (a) the name of the
corporation, (b) a statement that the corporation is incorporated under the laws
of the State of Minnesota, (c) the name of the person to whom it is issued, and
(d) the number and class of shares, and the designation of the series, if any,
that the certificate represents. Certificates shall also contain any other
information required by law or desired by the Board of Directors, and shall be
in such form as shall be determined by the Board of Directors.
Such certificates shall be signed by the chief executive officer, by
the chief financial officer, or, unless otherwise limited by resolution of the
Board of Directors, by any other officer of the corporation. If a certificate is
signed (1) by a transfer agent or an assistant transfer agent or (2) by a
transfer clerk acting on behalf of the corporation and a registrar, the
signature of any such officer of the corporation may be a facsimile signature.
If a person signs or has a facsimile signature placed upon a certificate while
an officer, transfer agent, or registrar of a corporation, the certificate may
be issued by the corporation, even if the person has ceased to have that
capacity before the certificate is issued, with the same effect as if the person
had that capacity at the date of its issue. All certificates for shares shall be
consecutively numbered or otherwise identified.
If the Articles of Incorporation establish more than one class or
series of shares or authorize the Board of Directors to establish classes or
series of shares, all certificates representing such shares shall set forth on
the face or back of the certificate or shall state that the corporation will
furnish to any shareholder upon request and without charge, a full statement of
the designations, preferences, limitations, and relative rights of the shares of
each class or series authorized to be issued, so far as they have been
determined, and the authority of the Board of Directors to determine the
relative rights and preferences of subsequent classes or series.
All certificates surrendered to the corporation or the transfer agent
for transfer shall be cancelled, and no new certificate shall be issued until
the former certificate for a like number of shares shall have been surrendered
and cancelled, except that in case of a lost, destroyed, or mutilated
certificate, a new certificate may be issued therefor upon such terms and
indemnity to the corporation as the Board of Directors may prescribe.
5.2 Transfer of Shares. The transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation by the holder of
record thereof or by such holder's legal representative, who shall furnish
proper evidence of authority to transfer, or by such holder's attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the corporation, and on surrender of such shares to the corporation or the
transfer agent of the corporation.
5.3 Ownership. Except as otherwise provided in this Section, the person
in whose name shares stand on the books of the corporation shall be deemed by
the corporation to be the
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owner thereof for all purposes. The Board of Directors, however, by a resolution
approved by the affirmative vote of a majority of directors then holding office,
may establish a procedure whereby a shareholder may certify in writing to the
corporation that all or a portion of the shares registered in the name of such
shareholder are held for the account of one or more beneficial owners. Upon
receipt by the corporation of the writing, the persons specified as beneficial
owners, rather than the actual shareholder, shall be deemed the shareholders for
such purposes as are permitted by the resolution of the Board of Directors and
are specified in the writing.
ARTICLE 6. Contracts, Loans, Checks, and Deposits
6.1 Contracts. The Board of Directors may authorize such officers or
agents as they shall designate to enter into contracts or execute and deliver
instruments in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances.
6.2 Loans. The corporation shall not lend money to, guarantee the
obligation of, become a surety for, or otherwise financially assist any person
unless the transaction, or class of transactions to which the transaction
belongs, has been approved by the affirmative vote of a majority of directors
present at a duly called meeting, and (a) is in the usual and regular course of
business of the corporation, (b) is with, or for the benefit of, a related
corporation, an organization in which the corporation has a financial interest,
an organization with which the corporation has a business relationship, or an
organization to which the corporation has the power to make donations, (c) is
with, or for the benefit of, an officer or other employee of the corporation or
a subsidiary, including an officer or employee who is a director of the
corporation or a subsidiary, and may reasonably be expected, in the judgment of
the Board of Directors, to benefit the corporation, or (d) whether or not any
separate consideration has been paid or promised to the corporation, has been
approved by (i) the affirmative vote of the holders of two-thirds of the voting
power of the shares entitled to vote which are owned by persons other than the
interested person or persons or (ii) the unanimous affirmative vote of the
holders of all outstanding shares, whether or not entitled to vote.
6.3 Checks, Drafts, etc. All checks, drafts or other orders for the
payment of money, notes, or other evidences of indebtedness issued in the name
of the corporation shall be signed by such officers or agents of the corporation
as shall be designated and in such manner as shall be determined from time to
time by resolution of the Board of Directors.
6.4 Deposits. All funds of the corporation not otherwise employed shall
be deposited from time to time to the credit of the corporation in such banks or
other financial institutions as the Board of Directors may select.
ARTICLE 7. Miscellaneous.
7.1 Dividends. The Board of Directors from time to time may declare,
and the corporation may pay, dividends on its outstanding shares in the manner
and upon the terms and conditions provided by law.
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7.2 Reserves. There may be set aside out of any funds of the
corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, deems proper as a reserve or
reserves to meet contingencies, for equalizing dividends, for repairing or
maintaining any property of the corporation, for the purchase of additional
property, or for such other purpose as the directors shall deem to be consistent
with the interests of the corporation. The Board of Directors may modify or
abolish any such reserve.
7.3 Fiscal Year. The fiscal year of the corporation shall be determined
by the Board of Directors.
7.4 Amendments. Except as limited by the Articles of Incorporation and
subject to the power of the shareholders to amend or repeal these Restated
Bylaws, these Restated Bylaws may be amended or repealed by the Board of
Directors. After the adoption of the initial bylaws, the Board of Directors,
however, shall not adopt, amend, or repeal any bylaw fixing a quorum for
meetings of shareholders, prescribing procedures for removing directors or
filling vacancies on the Board of Directors or fixing the number of directors or
their classifications, qualifications or terms of office, but may adopt or amend
a bylaw to increase the number of directors.
7.5 Shareholder Agreements. In the event of any conflict or
inconsistency between these Restated Bylaws or the Articles of Incorporation, or
any amendment thereto, whenever adopted, and the terms of any shareholder
control agreement as defined in Minnesota Statutes Section 302A.457 (or similar
provision of future law), the terms of such shareholder control agreement shall
control.
* * * * *
CERTIFICATION
The undersigned, Secretary of WebValley, Inc., a Minnesota corporation,
does hereby certify that the foregoing Restated Bylaws are the Restated Bylaws
adopted for the corporation at a special meeting of shareholders held on the
23rd day of March, 1999.
/s/ Robert M. Ringstad
---------------------------------------
Robert M. Ringstad, Secretary
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Exhibit 4.2
Draft of Underwriters' Warrant
WARRANT
TO PURCHASE ______ SHARES OF COMMON STOCK
OF
WebValley, Inc.
THIS CERTIFIES THAT, for good and valuable consideration, John G.
Kinnard and Company, Incorporated (the "Representative"), or its registered
assigns, is entitled to subscribe for and purchase from WebValley, Inc., a
Minnesota corporation (the "Company"), at any time after [effective date less
one day] 2000, to and including [effective date], 2004,
______________________________ (________) fully paid and nonassessable shares of
the Common Stock of the Company at the price of $____ per share (the "Warrant
Exercise Price"), subject to the antidilution provisions of this Warrant.
Reference is made to this Warrant in the Underwriting Agreement dated
_____________, 1999, by and between the Company and the Representative. The
shares which may be acquired upon exercise of this Warrant are referred to
herein as the "Warrant Shares." As used herein, the term "Holder" means the
Representative, any party who acquires all or a part of this Warrant as a
registered transferee of the Representative, or any record holder or holders of
the Warrant Shares issued upon exercise, whether in whole or in part, of the
Warrant. As used herein, the term "Common Stock" means and includes the
Company's presently authorized common stock, no par value, and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the Holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution, or winding up of the
Company.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise; Transferability.
(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional share of Common
Stock), by written notice of exercise (in the form attached hereto) delivered to
the Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant along
with a check in payment of the Warrant Exercise Price for such shares.
(b) Until exercisable, this Warrant may not be sold, assigned,
hypothecated, or otherwise transferred, other than by will or pursuant to the
operation of law, except to a person who is an officer of the Representative.
Further, this Warrant may not be sold, transferred, assigned, hypothecated or
divided into two or more Warrants of smaller denominations, nor may any Warrant
shares issued pursuant to exercise of this Warrant be transferred, except as
provided in Section 7 hereof.
<PAGE>
2. Exchange and Replacement. Subject to Sections l and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. Issuance of the Warrant Shares.
(a) The Company agrees that the shares of Common Stock purchased hereby
shall be and are deemed to be issued to the Holder as of the close of business
on the date on which this Warrant shall have been surrendered and the payment
made for such Warrant Shares as aforesaid. Subject to the provisions of the next
section, certificates for the Warrant Shares so purchased shall be delivered to
the Holder within a reasonable time, not exceeding fifteen (15) days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the right to purchase the
number of Warrant Shares, if any, with respect to which this Warrant shall not
then have been exercised shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time as
either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least 30 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions. The Holder agrees to execute
such documents and make such representations, warranties, and agreements as may
be required solely to comply with the exemptions relied upon by the Company, or
the registrations made, for the issuance of the Warrant Shares.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further covenants and
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agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved for the purpose of issue or transfer upon exercise of the subscription
rights evidenced by this Warrant a sufficient number of shares of Common Stock
to provide for the exercise of the rights represented by this Warrant.
5. Antidilution Adjustments. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company payable in
Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into a
greater number of shares; or
(iii) combine outstanding shares of Common Stock, by reclassification
or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (b) the total number of shares of Common Stock outstanding
immediately after such event (including the maximum number of shares of Common
Stock issuable in respect of any securities convertible into Common Stock), and
the resulting quotient shall be the adjusted Warrant Exercise Price per share.
An adjustment made pursuant to this Subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this Subsection, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive)
shall determine the allocation of the adjusted Warrant Exercise Price between or
among shares of such classes of capital stock or shares of Common Stock and
other capital stock. All calculations under this Subsection shall be made to the
nearest cent or to the nearest 1/100 of a share, as the case may be. In the
event that at any time as a result of an adjustment made pursuant to this
Subsection, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive any shares of the Company other than shares of Common
Stock, thereafter the Warrant Exercise Price of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this Section 5.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at
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the adjusted Warrant Exercise Price the number of shares, calculated to the
nearest full share, obtained by multiplying the number of shares specified in
such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise
Price in effect prior to such adjustment) by the Warrant Exercise Price in
effect prior to such adjustment and dividing the product so obtained by the
adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a
party, or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), there shall be no adjustment under Subsection (a)
of this Section above but the Holder of each Warrant then outstanding shall have
the right thereafter to convert such Warrant into the kind and amount of shares
of stock and other securities and property which he would have owned or have
been entitled to receive immediately after such consolidation, merger, statutory
exchange, sale, or conveyance had such Warrant been converted immediately prior
to the effective date of such consolidation, merger, statutory exchange, sale,
or conveyance and in any such case, if necessary, appropriate adjustment shall
be made in the application of the provisions set forth in this Section with
respect to the rights and interests thereafter of any Holders of the Warrant, to
the end that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock and other securities and property thereafter deliverable
on the exercise of the Warrant. The provisions of this Subsection shall
similarly apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If in the
opinion of each such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the
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<PAGE>
Holder to the Company; provided that an appropriate legend may be endorsed on
this Warrant or the certificates for such Warrant Shares respecting restrictions
upon transfer thereof necessary or advisable in the opinion of counsel to the
Company and satisfactory to the Company to prevent further transfers which would
be in violation of Section 5 of the Securities Act of 1933, as amended (the
"1933 Act") and applicable state securities laws; and provided further that the
prospective transferee or purchaser shall execute such documents and make such
representations, warranties, and agreements as may be required solely to comply
with the exemptions relied upon by the Company for the transfer or disposition
of the Warrant or Warrant Shares.
(b) If in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such Warrant
Shares described in the written notice given pursuant to this Section 7 may not
be effected without registration or qualification of this Warrant or such
Warrant Shares the Company shall promptly give written notice thereof to the
Holder, and the Holder will limit its activities in respect to such as, in the
opinion of both such counsel, are permitted by law.
8. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
"Market Price" with respect to shares of Common Stock of any class or series
means the closing sale price reported by Nasdaq National Market or any national
securities exchange or, if none, the average of the last reported closing bid
and asked prices on any national securities exchange or quoted in Nasdaq
SmallCap Market, or if not listed on a national securities exchange or quoted in
Nasdaq SmallCap Market, the average of the last reported closing bid and asked
prices as reported by Metro Data Company, Inc. from quotations by market makers
in such Common Stock on the Minneapolis-St. Paul local over-the-counter market.
9. Registration Rights.
(a) If at any time after [effective date less one day], 2000 and prior
to the end of the two-year period following complete exercise of this Warrant or
[effective date], 2003, whichever occurs earlier, the Company proposes to
register under the 1933 Act (except by a Form S-4 or Form S-8 Registration
Statement or any successor forms thereto) or qualify for a public distribution
under Section 3(b) of the 1933 Act, any of its securities, it will give written
notice to all Holders of this Warrant, any Warrants issued pursuant to Section 2
and/or Section 3(a) hereof, and any Warrant Shares of its intention to do so
and, on the written request of any such Holder given within twenty (20) days
after receipt of any such notice (which request shall specify the interest in
this Warrant or the Warrant Shares intended to be sold or disposed of by such
Holder and describe the nature of any proposed sale or other disposition
thereof), the Company will use its best efforts to cause all such Warrant
Shares, the Holders of which shall have requested the registration or
qualification thereof, to be included in such registration statement proposed to
be filed by the Company; provided,
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<PAGE>
however, that if a greater number of Warrant Shares is offered for participation
in the proposed offering than in the reasonable opinion of the managing
underwriter of the proposed offering can be accommodated without adversely
affecting the proposed offering, then the amount of Warrant Shares proposed to
be offered by such Holders for registration, as well as the number of securities
of any other selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
(b) Further, on a one-time basis during the four-year period commencing
[effective date], 2000, upon request by the Holder or Holders of a majority in
interest of this Warrant, of any Warrants issued pursuant to Section 2 and/or
Section 3(a) hereof, and of any Warrant Shares, the Company will promptly take
all necessary steps to register or qualify, under the 1933 Act and the
securities laws of such states as the Holders may reasonably request, such
number of Warrant Shares issued and to be issued upon conversion of the Warrants
requested by such Holders in their request to the Company. The Company shall
keep effective and maintain any registration, qualification, notification, or
approval specified in this Paragraph (b) for such period as may be reasonably
necessary for such Holder or Holders of such Warrant Shares to dispose thereof
and from time to time shall amend or supplement the prospectus used in
connection therewith to the extent necessary in order to comply with applicable
law.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following fees,
costs, and expenses: all registration, filing and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such securities
(if the Company is required to bear such fees and disbursements), all internal
expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any jurisdictions
in which the securities to be offered are to be registered or qualified. Fees
and disbursements of special counsel and accountants for the selling Holders,
underwriting discounts and commissions, and transfer taxes for selling Holders
and any other expenses relating to the sale of securities by the selling Holders
not expressly included above shall be borne by the selling Holders.
(d) The Company hereby indemnifies each of the Holders of this Warrant
and of any Warrant Shares, and the officers and directors, if any, who control
such Holders, within the meaning of Section 15 of the 1933 Act, against all
losses, claims, damages, and liabilities caused by (1) any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or Prospectus (and as amended or supplemented if the Company shall
have furnished any amendments thereof or supplements thereto), any Preliminary
Prospectus or any state securities law filings; (2) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading except insofar as such
losses, claims, damages, or liabilities are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
Holder expressly for use therein; and each such Holder by its acceptance hereof
severally agrees that it will indemnify and hold harmless the Company, each of
its officers who signs such Registration Statement, and each person, if any, who
controls the Company, within the meaning of Section 15 of the 1933 Act, with
respect to losses,
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claims, damages, or liabilities which are caused by any untrue statement or
alleged untrue statement, omission or alleged omission contained in information
furnished in writing to the Company by such Holder expressly for use therein.
10. Additional Right to Convert Warrant.
(a) The Holder of this Warrant shall have the right to require the
Company to convert this Warrant (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of Company Common Stock as
provided for in this Section 10. Upon exercise of the Conversion Right, the
Company shall deliver to the Holder (without payment by the Holder of any
Warrant Exercise Price) that number of shares of Company Common Stock equal to
the quotient obtained by dividing (x) the value of the Warrant at the time the
Conversion Right is exercised (determined by subtracting the aggregate Warrant
Exercise Price for the Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value for the
Warrant Shares immediately prior to the exercise of the Conversion Right) by (y)
the Fair Market Value of one share of Company Common Stock immediately prior to
the exercise of the Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at any time or
from time to time after it is exercisable, prior to its expiration, on any
business day by delivering a written notice in the form attached hereto (the
"Conversion Notice") to the Company at the offices of the Company exercising the
Conversion Right and specifying (i) the total number of shares of Stock the
Holder will purchase pursuant to such conversion and (ii) a place and date not
less than one or more than 20 business days from the date of the Conversion
Notice for the closing of such purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Company Common stock
issuable upon such conversion, together with cash, in lieu of any fraction of a
share, and (iii) the Company will deliver to the Holder a new warrant
representing the number of shares, if any, with respect to which the warrant
shall not have been exercised.
(d) Fair Market Value of a share of Common Stock as of a particular
date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or
is quoted on the Nasdaq National Market, then the average closing or
last sale prices, respectively, reported for the ten (10) business days
immediately preceding the Determination Date,
(ii) If the Company's Common Stock is not traded on an
exchange or on the Nasdaq National Market but is traded on the Nasdaq
SmallCap Market_ or other over-the-counter market, then the average
closing bid and asked prices reported for the ten (10) business days
immediately preceding the Determination Date, and
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(iii) If the Company's Common Stock is not traded on an
exchange or on the Nasdaq National Market, Nasdaq SmallCap Market_ or
other over-the-counter market, then the price established in good faith
by the Board of Directors.
IN WITNESS WHEREOF, WebValley, Inc. has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated
_______________ 1999.
"Company"
WEBVALLEY, INC.
By ________________________________
Its________________________________
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TO: WEBVALLEY, INC.
NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in
- ----------------------------- Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash, _________________ of the shares issuable upon the exercise of
such Warrant, and requests that certificates for such shares (together with a
new Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) shall be issued in the name of
______________________________________
(Print Name)
Please insert social security
or other identifying number
of registered Holder of
certificate (_______________________)
Address:
________________________________________
________________________________________
________________________________________
Date:________________________ _______________________________________
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
NOTE: If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said Holder for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
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ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrants.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto _________________________________________________________________
the right to purchase the securities of WebValley, Inc. to which the within
Warrant relates and appoints ____________________________________________,
attorney, to transfer said right on the books of WebValley, Inc. with full power
of substitution in the premises.
Dated:__________________________ ______________________________________
(Signature)
Address:
_____________________________________
_____________________________________
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<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 10)
TO: WEBVALLEY, INC.
The undersigned hereby irrevocably elects a cashless exercise of the
right of purchase represented by the within Warrant Certificate for, and to
purchase thereunder, ______________ shares of Common Stock, as provided for in
Section 10 therein.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
__________________________________
(Print name)
Please insert social security
or other identifying number
of registered Holder of
certificate (_______________________)
Address:
__________________________________
__________________________________
Date:_________________________ _________________________________________
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
NOTE: If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said Holder for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
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<PAGE>
Exhibit 10.1
WEBVALLEY, INC.
CONSULTANT NONSTATUTORY OPTION AGREEMENT
Between:
WebValley, Inc. (the "Company") and Scott Schwefel (the "Consultant"), dated
December 31, 1998.
The Company hereby grants to the Consultant an option (the "Option") to purchase
One Hundred Thousand (100,000) shares (the "Shares") of the Company's common
stock under the terms and conditions set forth below. The terms and conditions
applicable to the Option are as follows:
1. Nonstatutory Option. The Option shall be a Nonstatutory Option, and
is not intended to qualify as an incentive stock option within the meaning of
ss.422 of the Internal Revenue Code.
2. Exercise Price. The exercise price to purchase shares of the stock
shall be $1.00 per share, which is the approximate Fair Market Value of the
stock on the date of this Agreement.
3. Period of Exercise. The Option will expire at 5:00 p.m. on the date
(the "Expiration Date") five years from the date of this Agreement.
4. Vesting of Options. The Option will vest as follows:
(a) On or after the thirty days from the effective date of this
Agreement, 1,500 shares per month for the first six months;
(b) From the seventh month through the fifty-first month, 2,000
shares per month;
(c) For the fifty-second month, 1,000 shares.
(d) On and after the fifty-second month after the effective
date of this Agreement this Option will be vested in full.
This Option may be exercised at any time and from time to time
within its terms and only to the extent vested and in no event shall
the Option be exercisable after the Expiration Date.
<PAGE>
5. Transferability. This Option is not transferable except by will or
the laws of descent and distribution and may be exercised during the lifetime of
the Consultant only by the Consultant, or if exercised following the
Consultant's death, by the Consultant's legal representative upon presenting
evidence of authority to act on behalf of Consultant's estate acceptable to the
Company.
6. Termination of Engagement. In the event that engagement (or
employment, if Consultant becomes an employee) of the Consultant with the
Company is terminated, the Option may be exercised (to the extent vested at the
date of termination) by the Consultant within five years from the date of
termination.
7. No Guarantee of Engagement. This Agreement shall in no way restrict
the right of the Company to terminate Consultant's engagement at any time.
8. Method of Exercise. The Option may be exercised, subject to the
terms and conditions of this Agreement, by written notice to the Company. The
notice shall be in the form attached to this Agreement and will be accompanied
by payment (in such form as the Company may specify) of the full purchase price
of the shares to be issued, and in the event of an exercise under the terms of
paragraphs 6(a) and 6(b) hereof, appropriate proof of the right to exercise the
Option. The Company will issue and deliver certificates representing the number
of shares purchased under the Option, registered in the name of the Consultant
(or other purchaser under paragraphs 6(a) and 6(b) hereof) as soon as
practicable after receipt of the notice. The Consultant does not have any rights
or privileges as a stockholder with respect to any Shares to be issued upon
exercise of the Option until the date of payment therefor to the Company.
9. Withholding; Taxable Income. In any case where withholding is
required or advisable under federal, state or local law in connection with any
exercise by Consultant hereunder, the Company is authorized to withhold
appropriate amounts from amounts payable to Consultant, or may require
Consultant to remit to the Company an amount equal to such appropriate amounts.
Consultant acknowledges and understands that under the provisions of
the Internal Revenue Code as presently in effect, the Consultant will have
taxable compensation income at the date of exercise of the Option equal to the
difference between the purchase price under the Option and the then fair market
value of the Stock. Consultant specifically agrees that as a condition to
permitting exercise, the Company may require that appropriate arrangements for
withholding be made with the Consultant as provided above.
10. Adjustment in Capitalization. In the event of any change in the
outstanding common stock of the Company by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of Shares subject to the Option will be appropriately adjusted
by the Board of Directors of the Company, whose determination is final and
conclusive, except that fractional shares will be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to the
Option and the Option exercise price per share will be proportionately adjusted
without any change in the aggregate Option price to be paid upon exercise of the
Option.
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11. Amendment,. Modification and Termination of Agreement. The Board of
Directors of the Company may at any time terminate, and from time to time may
amend or modify this Agreement; provided, however, that no amendment,
modification, or termination of this Agreement may in any manner adversely
affect the Option without the consent of the Optionee.
12. Securities Regulations.
12.1 Registration. In the event that the Company deems it
necessary or desirable to register or qualify the Option or any Shares
with respect to which the Option has been granted or exercised under
the Securities Act of 1933, as amended, or any other applicable statute
or regulation, the Optionee will cooperate with the Company and take
such action as is necessary to permit registration or qualification of
the Option or the Shares. The foregoing notwithstanding, the Company
has no obligation to register the Option or any Shares.
12.2 Investment Intent. Unless the Company has determined that
the following representation is unnecessary, each person exercising any
portion of the Option will be required, as a condition to the issuance
of Shares pursuant to exercise of the Option, to make a representation
in writing (a) that he or she is acquiring the Shares for his or her
own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, (b) that before
any transfer in connection with the resale of the Shares, he or she
will obtain the written opinion of counsel for the Company, or other
counsel acceptable to the Company, that the Shares may be transferred.
The Company may also place a stop transfer order with its transfer
agent with respect to the Shares and require that the certificates
representing the Shares contain legends reflecting the foregoing.
12.3 Restrictions on Issuance of Shares. Notwithstanding the
provisions of Section 8, the Company may delay the issuance of Shares
and the delivery of a certificate for any Shares until one of the
following conditions is satisfied:
(a) The Shares with respect to which the Option has
been exercised are at the time of issuance registered under
applicable federal and state securities laws as now in force or
hereafter amended;
(b) A no-action letter in respect of the issuance of
the Shares has been obtained by the Company from the Securities
and Exchange Commission and any applicable state securities
commissioner; or
(c) Counsel for the Company has given an opinion, which
opinion will not be unreasonably conditioned or withheld, that
the Shares are exempt from registration under applicable
federal and state securities laws as now in force or hereafter
amended.
3
<PAGE>
It is intended that all exercises of the Option will be effective, and
the Company will make reasonable efforts to bring about compliance with the
above conditions within a reasonable time, except that the Company is under no
obligation to cause a registration statement or a post-effective amendment to
any registration statement to be prepared at its expense solely for the purpose
of covering the issuance of Shares in respect of which the Option may be
exercised.
13. Miscellaneous.
13.1 Requirements of Law. The granting of the Option and the
issuance of Shares are subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
13.2 Choice of Law and Venue. This Agreement is made under and
must be governed by the laws of the State of Minnesota, and each of the
parties hereto consents to venue any suit or action under or with
regard to this Agreement in an appropriate court with jurisdiction in
Hennepin County, Minnesota.
13.3 Notices. All notices, requests and other communications
from either party to the other hereunder must be given in writing and
will be deemed to have been duly given if personally delivered, or sent
by first class, certified mail, return receipt requested, postage
prepaid, to the party at the address as provided below, or to such
other address as such party may hereafter designate by written notice
to the other party:
(a) If the Company, to the address of its then
principal office; and
(b) If to the Optionee, to the address last shown in
the records of the Company, which as of the date of
this Agreement is as follows:
__________________________________
__________________________________
__________________________________
13.4 No Obligation to Exercise. The granting of the Option
imposes no obligation upon the holder thereof to exercise the Option.
13.5 Amendments: Final Agreement. This Agreement contains the
complete and final understanding of the parties with respect to the
subject matter hereof and supersedes all prior understandings and
statements, written and oral. This Agreement may not be amended except
in a written instrument signed by the party against whom enforcement is
sought.
4
<PAGE>
13.6 Counterparts. This Agreement may be executed in
counterparts, each of which is an original and one in the same
instrument.
13.7 Headings. Headings and captions used in this Agreement are
for convenience and do not affect the meaning hereof.
Executed to be effective as of the date first written above
WebValley, Inc.
1011 First Street South, Suite 203
Hopkins, Minnesota 55343
By /s/ Satya P. Garg
---------------------------------
Satya P. Garg
Its: President
5
<PAGE>
WEBVALLEY, INC.
NOTICE OF EXERCISE OF STOCK OPTION ISSUED
To: President
Profile National Business Directory, Inc.
1011 First Street South, Suite 203
Hopkins, MN 55343
I hereby exercise my Option dated _____________, 19__ to purchase
_________ shares of $0.01 par value common stock of the Company at the option
exercise price of $1.00 per share. Enclosed is a certified or cashier's check in
the total amount of $ ______________ or payment in such other form as the
Company has specified. I acknowledge that I may be required to execute a
Subscription and Investment Representation Agreement prior to these shares being
issued, and I further acknowledge that I must agree to be bound by any then
existing Shareholders Agreement covering substantially all of the Company's
Shares.
I request that my shares be issued to me as follows:
--------------------------------
(Print your name in the form in which you wish to have the shares registered)
-----------------------------
(Social Security Number)
-----------------------------
(Street and Number)
-----------------------------
(City) (State) (Zip Code)
Dated: ________________, __________.
Signature: _____________________
6
<PAGE>
Exhibit 10.2
Form of 12/31/98 Consultants' Option Agreement
WEBVALLEY, INC.
CONSULTANT NONSTATUTORY OPTION AGREEMENT
Between:
WebValley, Inc. (the "Company") and ______________ (the "Consultant"),
dated December 31, 1998.
The Company hereby grants to the Consultant an option (the "Option") to
purchase _______________ (_____) shares (the "Shares") of the Company's common
stock under the terms and conditions set forth below. The terms and conditions
applicable to the Option are as follows:
1. Nonstatutory Option. The Option shall be a Nonstatutory Option, and
is not intended to qualify as an incentive stock option within the meaning of
ss.422 of the Internal Revenue Code.
2. Exercise Price. The exercise price to purchase shares of the stock
shall be $1.00 per share, which is the approximate Fair Market Value of the
stock on the date of this Agreement.
3. Period of Exercise. The Option will expire at 5:00 p.m. on the date
(the "Expiration Date") five years from the date of this Agreement.
4. Vesting of Options. The Option will vest as follows:
(a) On and after the first anniversary of the effective date
of this Agreement, the Option may be exercised for not in excess of 20%
of the total grant.
(b) On and after the second anniversary of the effective date
of this Agreement, the option may be exercised for not in excess of 40%
of the total grant, including any purchases in prior periods.
(c) On and after the third anniversary of the effective date
of this Agreement, the option may be exercised for not in excess of 60%
of the total grant including any purchases in prior periods.
(d) On and after the fourth anniversary of the effective date
of this Agreement, the option may be exercised for not in excess of 80%
of the total grant, including any purchases in prior periods.
(e) On and after the fifth anniversary of the effective date
of this Agreement, the Option may be exercised at any time and from
time to time within its terms in whole or in part, but it shall not be
exercisable after the Expiration Date.
5. Transferability. This Option is not transferable except by will or
the laws of descent and distribution and may be exercised during the lifetime of
the Consultant only by the Consultant,
<PAGE>
or if exercised following the Consultant's death, by the Consultant's legal
representative upon presenting evidence of authority to act on behalf of
Consultant's estate acceptable to the Company.
6. Termination of Engagement. In the event that engagement of the
Consultant with the Company is terminated, the Option may be exercised (to the
extent exercisable at the date of termination) by the Consultant within five
years from the date of this Agreement, but in no event after the Expiration
Date.
7. No Guarantee of Engagement. This Agreement shall in no way restrict
the right of the Company to terminate Consultant's engagement at any time.
8. Method of Exercise. The Option may be exercised, subject to the
terms and conditions of this Agreement, by written notice to the Company. The
notice shall be in the form attached to this Agreement and will be accompanied
by payment (in such form as the Company may specify) of the full purchase price
of the shares to be issued, and in the event of an exercise by the Consultant's
legal representative, appropriate proof of the right to exercise the Option. The
Company will issue and deliver certificates representing the number of shares
purchased under the Option, registered in the name of the Consultant (or the
Consultant's legal representative) as soon as practicable after receipt of the
notice. The Consultant does not have any rights or privileges as a stockholder
with respect to any Shares to be issued upon exercise of the Option until the
date of payment therefor to the Company.
9. Withholding; Taxable Income. In any case where withholding is
required or advisable under federal, state or local law in connection with any
exercise by Consultant hereunder, the Company is authorized to withhold
appropriate amounts from amounts payable to Consultant, or may require
Consultant to remit to the Company an amount equal to such appropriate amounts.
Consultant acknowledges and understands that under the provisions of
the Internal Revenue Code as presently in effect, the Consultant will have
taxable compensation income at the date of exercise of the Option equal to the
difference between the purchase price under the Option and the then fair market
value of the Stock. Consultant specifically agrees that as a condition to
permitting exercise, the Company may require that appropriate arrangements for
withholding be made with the Consultant as provided above.
10. Adjustment in Capitalization. In the event of any change in the
outstanding common stock of the Company by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of Shares subject to the Option will be appropriately adjusted
by the Board of Directors of the Company, whose determination is final and
conclusive, except that fractional shares will be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to the
Option and the Option exercise price per share will be proportionately adjusted
without any change in the aggregate Option price to be paid upon exercise of the
Option.
11. Amendment, Modification and Termination of Agreement. The Board of
Directors of the Company may at any time terminate, and from time to time may
amend or modify this
2
<PAGE>
Agreement; provided, however, that no amendment, modification, or termination of
this Agreement may in any manner adversely affect the Option without the consent
of the Optionee.
12. Securities Regulations.
12.1 Registration. In the event that the Company deems it necessary or
desirable to register or qualify the Option or any Shares with respect to which
the Option has been granted or exercised under the Securities Act of 1933, as
amended, or any other applicable statute or regulation, the Optionee will
cooperate with the Company and take such action as is necessary to permit
registration or qualification of the Option or the Shares. The foregoing
notwithstanding, the Company has no obligation to register the Option or any
Shares.
12.2 Investment Intent. Unless the Company has determined that the
following representation is unnecessary, each person exercising any portion of
the Option will be required, as a condition to the issuance of Shares pursuant
to exercise of the Option, to make a representation in writing (a) that he or
she is acquiring the Shares for his or her own account for investment and not
with a view to, or for sale in connection with, the distribution of any part
thereof, (b) that before any transfer in connection with the resale of the
Shares, he or she will obtain the written opinion of counsel for the Company, or
other counsel acceptable to the Company, that the Shares may be transferred. The
Company may also place a stop transfer order with its transfer agent with
respect to the Shares and require that the certificates representing the Shares
contain legends reflecting the foregoing.
12.3 Restrictions on Issuance of Shares. Notwithstanding the provisions
of Section 8, the Company may delay the issuance of Shares and the delivery of a
certificate for any Shares until one of the following conditions is satisfied:
(a) The Shares with respect to which the Option has been exercised are
at the time of issuance registered under applicable federal and state securities
laws as now in force or hereafter amended;
(b) A no-action letter in respect of the issuance of the Shares has
been obtained by the Company from the Securities and Exchange Commission and any
applicable state securities commissioner; or
(c) Counsel for the Company has given an opinion, which opinion will
not be unreasonably conditioned or withheld, that the Shares are exempt from
registration under applicable federal and state securities laws as now in force
or hereafter amended.
It is intended that all exercises of the Option will be effective, and
the Company will make reasonable efforts to bring about compliance with the
above conditions within a reasonable time, except that the Company is under no
obligation to cause a registration statement or a post-effective amendment to
any registration statement to be prepared at its expense solely for the purpose
of covering the issuance of Shares in respect of which the Option may be
exercised.
3
<PAGE>
13. Miscellaneous.
13.1 Requirements of Law. The granting of the Option and the issuance
of Shares are subject to all applicable laws, rules, and regulations, and to
such approvals by any governmental agencies or national securities exchanges as
may be required.
13.2 Choice of Law and Venue. This Agreement is made under and must be
governed by the laws of the State of Minnesota, and each of the parties hereto
consents to venue any suit or action under or with regard to this Agreement in
an appropriate court with jurisdiction in Hennepin County, Minnesota.
13.3 Notices. All notices, requests and other communications from
either party to the other hereunder must be given in writing and will be deemed
to have been duly given if personally delivered, or sent by first class,
certified mail, return receipt requested, postage prepaid, to the party at the
address as provided below, or to such other address as such party may hereafter
designate by written notice to the other party:
(a) If the Company, to the address of its then principal office; and
(b) If to the Optionee, to the address last shown in the records of the
Company, which as of the date of this Agreement is as follows:
________________________________
________________________________
13.4 No Obligation to Exercise. The granting of the Option imposes no
obligation upon the holder thereof to exercise the Option.
13.5 Amendments: Final Agreement. This Agreement contains the complete
and final understanding of the parties with respect to the subject matter hereof
and supersedes all prior understandings and statements, written and oral. This
Agreement may not be amended except in a written instrument signed by the party
against whom enforcement is sought.
13.6 Counterparts. This Agreement may be executed in counterparts, each
of which is an original and one in the same instrument.
13.7 Headings. Headings and captions used in this Agreement are for
convenience and do not affect the meaning hereof.
Executed to be effective as of the date first written above
WebValley, Inc.
1011 First Street South, Suite 203
Hopkins, Minnesota 55343
By: /s/ Satya P. Garg
------------------------------
Its: President
4
<PAGE>
WEBVALLEY, INC.
NOTICE OF EXERCISE OF STOCK OPTION ISSUED
To: President
Profile National Business Directory, Inc.
1011 First Street South, Suite 203
Hopkins, MN 55343
I hereby exercise my Option dated _____________, 19__ to purchase
_________ shares of $0.01 par value common stock of the Company at the option
exercise price of $1.00 per share. Enclosed is a certified or cashier's check in
the total amount of $ ______________ or payment in such other form as the
Company has specified. I acknowledge that I may be required to execute a
Subscription and Investment Representation Agreement prior to these shares being
issued, and I further acknowledge that I must agree to be bound by any then
existing Shareholders Agreement covering substantially all of the Company's
Shares.
I request that my shares be issued to me as follows:
--------------------------------
(Print your name in the form in which you wish to have the shares registered)
-----------------------------
(Social Security Number)
-----------------------------
(Street and Number)
-----------------------------
(City) (State) (Zip Code)
Dated: ________________, __________.
Signature: _____________________
5
<PAGE>
Exhibit 10.3
PROFILE NATIONAL BUSINESS DIRECTORY, INC.
NONSTATUTORY OPTION AGREEMENT
Between:
Profile National Business Directory, Inc. (the "Company") and Raymond L. Moles
(the "Employee"), dated March 31, 1997.{Amended 8/31/98 for stock split}
The Company hereby grants to the Employee an option (the "Option") to
purchase Fifty Thousand (50,000) {Two Hundred Thousand (200,000)}shares (the
"Shares") of the Company's common stock under the terms and conditions set forth
below. The terms and conditions applicable to the Option are as follows:
1. Nonstatutory Option. The Option shall be a Nonstatutory Option, and
is not intended to qualify as an incentive stock option within the meaning of
ss.422 of the Internal Revenue Code.
2. Exercise Price. The exercise price to purchase shares of the stock
shall be $1.00 {$0.25} per share, which is the approximate Fair Market Value of
the stock on the date of this Agreement.
3. Period of Exercise. The Option will expire at 5:00 p.m. on the date
(the "Expiration Date") five years from the date of this Agreement. The Option
may be exercised only while the Employee is actively employed by the Company and
as provided in Section 6, dealing with termination of employment.
4. Vesting of Options. The Option will vest as follows:
(a) Prior to completion of the closing for the purchase of the
assets of World Web Wonders, Inc. by the Company, scheduled to be
effective March 1, 1997 (the "Closing Date"), the option may not be
exercised.
(b) As of the Closing Date, the option may be exercised for
five thousand (5,000) {Twenty Thousand (20,000)}shares.
(c) On and after the first anniversary of the effective date
of this Agreement, the option may be exercised for not in excess of
twenty thousand (20,000) {Eighty Thousand (80,000)}shares;
<PAGE>
(d) On or after the second anniversary of the effective date
of this Agreement, the Option may be exercised for not in excess of
thirty-five thousand (35,000) {One Hundred Forty Thousand
(140,000)}shares;
(e) On and after the third anniversary of the effective date
of this Agreement, the Option may be exercised at any time and from
time to time within its terms in whole or in part, but it shall not be
exercisable after the Expiration Date.
5. Transferability. This Option is not transferable except by will or
the laws of descent and distribution and may be exercised during the lifetime of
the Employee only by the Employee, or if exercised following the Employee's
death, by the Employee's legal representative upon presenting evidence of
authority to act on behalf of Employee's estate acceptable to the Company.
6. Termination of Employment. In the event that employment of the
Employee with the Company is terminated, the Option may be exercised (to the
extent exercisable at the date of termination) by the Employee within three
months after the date of termination; provided, however, that:
a. If the Employee's employment is terminated because Employee
is disabled within the meaning of Internal Revenue Code ss. 422, the
Employee shall have one year rather than three months to exercise the
Option (to the extent exercisable at the date of termination).
b. If the Employee dies, the Option may be exercised (to the
extent exercisable by the Employee at the date of death) by the legal
representative of Employee or by a person who acquired the right to
exercise such option by bequest or inheritance or by reason of the
death of the Employee, but the Option must be exercised within one year
after the date of the Employee's death.
c. If the Employee's employment is terminated for cause, this
Option shall terminate immediately.
d. Notwithstanding the foregoing, in no event (including
disability or death of the Employee) may this Option be exercised after
the Expiration Date.
7. No Guarantee of Employment. This Agreement shall in no way restrict
the right of the Company to terminate Employee's employment at any time, subject
to the terms of the Employment Agreement between the Company and Employee of
even date herewith.
8. Method of Exercise. The Option may be exercised, subject to the
terms and conditions of this Agreement, by written notice to the Company. The
notice shall be in the form attached to this Agreement and will be accompanied
by payment (in such form as the Company may specify) of the full purchase price
of the shares to be issued, and in the event of an exercise
2
<PAGE>
under the terms of paragraphs 6(a) and 6(b) hereof, appropriate proof of the
right to exercise the Option. The Company will issue and deliver certificates
representing the number of shares purchased under the Option, registered in the
name of the Employee (or other purchaser under paragraphs 6(a) and 6(b) hereof)
as soon as practicable after receipt of the notice. The Employee does not have
any rights or privileges as a stockholder with respect to any Shares to be
issued upon exercise of the Option until the date of payment therefor to the
Company.
9. Withholding; Taxable Income. In any case where withholding is
required or advisable under federal, state or local law in connection with any
exercise by Employee hereunder, the Company is authorized to withhold
appropriate amounts from amounts payable to Employee, or may require Employee to
remit to the Company an amount equal to such appropriate amounts.
Employee acknowledges and understands that under the provisions of the
Internal Revenue Code as presently in effect, the Employee will have taxable
compensation income at the date of exercise of the Option equal to the
difference between the purchase price under the Option and the then Fair Market
Value of the Stock. Employee specifically agrees that as a condition to
permitting exercise, the Company may require that appropriate arrangements for
withholding be made with the Employee as provided above.
10. Adjustment in Capitalization. In the event of any change in the
outstanding common stock of the Company by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of Shares subject to the Option will be appropriately adjusted
by the Board of Directors of the Company, whose determination is final and
conclusive, except that fractional shares will be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to the
Option and the Option exercise price per share will be proportionately adjusted
without any change in the aggregate Option price to be paid upon exercise of the
Option.
11. Amendment, Modification and Termination of Agreement. The Board of
Directors of the Company may at any time terminate, and from time to time may
amend or modify this Agreement; provided, however, that no amendment,
modification, or termination of this Agreement may in any manner adversely
affect the Option without the consent of the Optionee.
12. Securities Regulations.
12.1 Registration. In the event that the Company deems it
necessary or desirable to register or qualify the Option or any Shares
with respect to which the Option has been granted or exercised under
the Securities Act of 1933, as amended, or any other applicable statute
or regulation, the Optionee will cooperate with the Company and take
such action as is necessary to permit registration or qualification of
the Option or the Shares. The foregoing notwithstanding, the Company
has no obligation to register the Option or any Shares.
3
<PAGE>
12.2 Investment Intent. Unless the Company has determined that
the following representation is unnecessary, each person exercising any
portion of the Option will be required, as a condition to the issuance
of Shares pursuant to exercise of the Option, to make a representation
in writing (a) that he or she is acquiring the Shares for his or her
own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, (b) that before
any transfer in connection with the resale of the Shares, he or she
will obtain the written opinion of counsel for the Company, or other
counsel acceptable to the Company, that the Shares may be transferred.
The Company may also place a stop transfer order with its transfer
agent with respect to the Shares and require that the certificates
representing the Shares contain legends reflecting the foregoing.
12.3 Restrictions on Issuance of Shares. Notwithstanding the
provisions of Section 8, the Company may delay the issuance of Shares
and the delivery of a certificate for any Shares until one of the
following conditions is satisfied:
(a) The Shares with respect to which the Option has
been exercised are at the time of issuance registered under
applicable federal and state securities laws as now in force
or hereafter amended;
(b) A no-action letter in respect of the issuance of
the Shares has been obtained by the Company from the
Securities and Exchange Commission and any applicable state
securities commissioner; or
(c) Counsel for the Company has given an opinion,
which opinion will not be unreasonably conditioned or
withheld, that the Shares are exempt from registration under
applicable federal and state securities laws as now in force
or hereafter amended.
It is intended that all exercises of the Option will be
effective, and the Company will make reasonable efforts to bring about
compliance with the above conditions within a reasonable time, except
that the Company is under no obligation to cause a registration
statement or a post-effective amendment to any registration statement
to be prepared at its expense solely for the purpose of covering the
issuance of Shares in respect of which the Option may be exercised.
13. Miscellaneous.
13.1 Requirements of Law. The granting of the Option and the
issuance of Shares are subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
13.2 Choice of Law and Venue. This Agreement is made under and
must be governed by the laws of the State of Minnesota, and each of the
parties hereto consents to
4
<PAGE>
venue any suit or action under or with regard to this Agreement in an
appropriate court with jurisdiction in Hennepin County, Minnesota.
13.3 Notices. All notices, requests and other communications
from either party to the other hereunder must be given in writing and
will be deemed to have been duly given if personally delivered, or sent
by first class, certified mail, return receipt requested, postage
prepaid, to the party at the address as provided below, or to such
other address as such party may hereafter designate by written notice
to the other party:
(a) If the Company, to the address of its then
principal office; and
(b) If to the Optionee, to the address last shown in
the records of the Company, which as of the date of this
Agreement is as follows:
______________________
______________________
______________________
13.4 No Obligation to Exercise. The granting of the Option
imposes no obligation upon the holder thereof to exercise the Option.
13.5 Amendments; Final Agreement. This Agreement contains the
complete and final understanding of the parties with respect to the
subject matter hereof and supersedes all prior understandings and
statements, written and oral. This Agreement may not be amended except
in a written instrument signed by the party against whom enforcement is
sought.
13.6 Counterparts. This Agreement may be executed in
counterparts, each of which is an original and one in the same
instrument.
13.7 Headings. Headings and captions used in this Agreement
are for convenience and do not affect the meaning hereof.
Executed to be effective as of the date first written above
Profile National Business Directory, Inc.
By /s/ Satya P. Garg
-----------------------------
Satya P. Garg
Its: President
5
<PAGE>
PROFILE NATIONAL BUSINESS DIRECTORY, INC.
NOTICE OF EXERCISE OF STOCK OPTION ISSUED
To: President
Profile National Business Directory, Inc.
1011 First Street South, Suite 203
Hopkins, MN 55343
I hereby exercise my Option dated , 1997 to purchase shares of $0.01
par value common stock of the Company at the option exercise price of $1.00 per
share. Enclosed is a certified or cashier's check in the total amount of $ , or
payment in such other form as the Company has specified. I acknowledge that I
may be required to execute a Subscription and Investment Representation
Agreement prior to these shares being issued, and I further acknowledge that I
must agree to be bound by any then existing Shareholders Agreement covering
substantially all of the Company's Shares.
I request that my shares be issued to me as follows:
--------------------------------
(Print your name in the form in which you wish to have the shares registered)
-----------------------------
(Social Security Number)
-----------------------------
(Street and Number)
-----------------------------
(City) (State) (Zip Code)
Dated: ________________, __________.
Signature: _____________________
6
<PAGE>
Exhibit 10.4
WEBVALLEY, INC.
NONSTATUTORY OPTION AGREEMENT
Between:
WebValley, Inc. (the "Company") and _____________________ (the "Employee"),
dated December 15, 1998.
The Company hereby grants to the Employee an option (the "Option") to purchase
_______________________ (______) shares (the "Shares") of the Company's common
stock under the terms and conditions set forth below. The terms and conditions
applicable to the Option are as follows:
1. Nonstatutory Option. The Option shall be a Nonstatutory Option, and
is not intended to qualify as an incentive stock option within the meaning of
ss.422 of the Internal Revenue Code.
2. Exercise Price. The exercise price to purchase shares of the stock
shall be $1.00 per share, which is the approximate Fair Market Value of the
stock on the date of this Agreement.
3. Period of Exercise. The Option will expire at 5:00 p.m. on the date
(the "Expiration Date") five years from the date of this Agreement. The Option
may be exercised only while the Employee is actively employed by the Company and
as provided in Section 6, dealing with termination of employment.
4. Vesting of Options. The Option will vest as follows:
(a) On and after the first anniversary of the effective date of
this Agreement, the option may be exercised for not in excess of 20% of
the total grant.
(b) On and after the second anniversary of the effective date
of this Agreement, the option may be exercised for not in excess of 40%
of the total grant.
(c) On and after the third anniversary of the effective date of
this Agreement, the option may be exercised for not in excess of 60% of
the total grant.
(d) On and after the fourth anniversary of the effective date
of this Agreement, the option may be exercised for not in excess of 80%
of the total grant.
<PAGE>
(e) On and after the fifth anniversary of the effective date of
this Agreement, the Option may be exercised at any time and from time
to time within its terms in whole or in part, but it shall not be
exercisable after the Expiration Date.
5. Transferability. This Option is not transferable except by will or
the laws of descent and distribution and may be exercised during the lifetime of
the Employee only by the Employee, or if exercised following the Employee's
death, by the Employee's legal representative upon presenting evidence of
authority to act on behalf of Employee's estate acceptable to the Company.
6. Termination of Employment. In the event that employment of the
Employee with the Company is terminated, the Option may be exercised (to the
extent exercisable at the date of termination) by the Employee within three
months after the date of termination; provided, however, that:
a. If the Employee's employment is terminated because Employee
is disabled within the meaning of Internal Revenue Code ss. 422, the
Employee shall have one year rather than three months to exercise the
Option (to the extent exercisable at the date of termination).
b. If the Employee dies, the Option may be exercised (to the
extent exercisable by the Employee at the date of death) by the legal
representative of Employee or by a person who acquired the right to
exercise such option by bequest or inheritance or by reason of the
death of the Employee, but the Option must be exercised within one year
after the date of the Employee's death.
c. If the Employee's employment is terminated for cause, this
Option shall terminate immediately.
d. Notwithstanding the foregoing, in no event (including
disability or death of the Employee) may this Option be exercised after
the Expiration Date.
7. No Guarantee of Employment. This Agreement shall in no way restrict
the right of the Company to terminate Employee's employment at any time, subject
to the terms of the Employment Agreement between the Company and Employee of
even date herewith.
8. Method of Exercise. The Option may be exercised, subject to the
terms and conditions of this Agreement, by written notice to the Company. The
notice shall be in the form attached to this Agreement and will be accompanied
by payment (in such form as the Company may specify) of the full purchase price
of the shares to be issued, and in the event of an exercise under the terms of
paragraphs 6(a) and 6(b) hereof, appropriate proof of the right to exercise the
Option. The Company will issue and deliver certificates representing the number
of shares purchased under the Option, registered in the name of the Employee (or
other purchaser under paragraphs 6(a) and 6(b) hereof) as soon as practicable
after receipt of the notice. The Employee
2
<PAGE>
does not have any rights or privileges as a stockholder with respect to any
Shares to be issued upon exercise of the Option until the date of payment
therefor to the Company.
9. Withholding; Taxable Income. In any case where withholding is
required or advisable under federal, state or local law in connection with any
exercise by Employee hereunder, the Company is authorized to withhold
appropriate amounts from amounts payable to Employee, or may require Employee to
remit to the Company an amount equal to such appropriate amounts.
Employee acknowledges and understands that under the provisions of the
Internal Revenue Code as presently in effect, the Employee will have taxable
compensation income at the date of exercise of the Option equal to the
difference between the purchase price under the Option and the then Fair Market
Value of the Stock. Employee specifically agrees that as a condition to
permitting exercise, the Company may require that appropriate arrangements for
withholding be made with the Employee as provided above.
10. Adjustment in Capitalization. In the event of any change in the
outstanding common stock of the Company by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of Shares subject to the Option will be appropriately adjusted
by the Board of Directors of the Company, whose determination is final and
conclusive, except that fractional shares will be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to the
Option and the Option exercise price per share will be proportionately adjusted
without any change in the aggregate Option price to be paid upon exercise of the
Option.
11. Amendment. Modification and Termination of Agreement. The Board of
Directors of the Company may at any time terminate, and from time to time may
amend or modify this Agreement; provided, however, that no amendment,
modification, or termination of this Agreement may in any manner adversely
affect the Option without the consent of the Optionee.
12. Securities Regulations.
12.1 Registration. In the event that the Company deems it
necessary or desirable to register or qualify the Option or any Shares
with respect to which the Option has been granted or exercised under
the Securities Act of 1933, as amended, or any other applicable statute
or regulation, the Optionee will cooperate with the Company and take
such action as is necessary to permit registration or qualification of
the Option or the Shares. The foregoing notwithstanding, the Company
has no obligation to register the Option or any Shares.
12.2 Investment Intent. Unless the Company has determined that
the following representation is unnecessary, each person exercising any
portion of the Option will be required, as a condition to the issuance
of Shares pursuant to exercise of the Option, to make a representation
in writing (a) that he or she is acquiring the Shares for his or her
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own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, (b) that before
any transfer in connection with the resale of the Shares, he or she
will obtain the written opinion of counsel for the Company, or other
counsel acceptable to the Company, that the Shares may be transferred.
The Company may also place a stop transfer order with its transfer
agent with respect to the Shares and require that the certificates
representing the Shares contain legends reflecting the foregoing.
12.3 Restrictions on Issuance of Shares. Notwithstanding the
provisions of Section 8, the Company may delay the issuance of Shares
and the delivery of a certificate for any Shares until one of the
following conditions is satisfied:
(a) The Shares with respect to which the Option has
been exercised are at the time of issuance registered under
applicable federal and state securities laws as now in force or
hereafter amended;
(b) A no-action letter in respect of the issuance of
the Shares has been obtained by the Company from the Securities
and Exchange Commission and any applicable state securities
commissioner; or
(c) Counsel for the Company has given an opinion, which
opinion will not be unreasonably conditioned or withheld, that
the Shares are exempt from registration under applicable
federal and state securities laws as now in force or hereafter
amended.
It is intended that all exercises of the Option will be effective, and
the Company will make reasonable efforts to bring about compliance with the
above conditions within a reasonable time, except that the Company is under no
obligation to cause a registration statement or a post-effective amendment to
any registration statement to be prepared at its expense solely for the purpose
of covering the issuance of Shares in respect of which the Option may be
exercised.
13. Miscellaneous.
13.1 Requirements of Law. The granting of the Option and the
issuance of Shares are subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
13.2 Choice of Law and Venue. This Agreement is made under and
must be governed by the laws of the State of Minnesota, and each of the
parties hereto consents to venue any suit or action under or with
regard to this Agreement in an appropriate court with jurisdiction in
Hennepin County, Minnesota.
13.3 Notices. All notices, requests and other communications
from either party to the other hereunder must be given in writing and
will be deemed to have been duly given if personally delivered, or sent
by first class, certified mail, return receipt requested,
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postage prepaid, to the party at the address as provided below, or to
such other address as such party may hereafter designate by written
notice to the other party:
(a) If the Company, to the address of its then
principal office; and
(b) If to the Optionee, to the address last shown in
the records of the Company, which as of the date of
this Agreement is as follows:
__________________________
__________________________
13.4 No Obligation to Exercise. The granting of the Option
imposes no obligation upon the holder thereof to exercise the Option.
13.5 Amendments: Final Agreement. This Agreement contains the
complete and final understanding of the parties with respect to the
subject matter hereof and supersedes all prior understandings and
statements, written and oral. This Agreement may not be amended except
in a written instrument signed by the party against whom enforcement is
sought.
13.6 Counterparts. This Agreement may be executed in
counterparts, each of which is an original and one in the same
instrument.
13.7 Headings. Headings and captions used in this Agreement are
for convenience and do not affect the meaning hereof.
Executed to be effective as of the date first written above
WebValley, Inc.
1011 First Street South, Suite 203
Hopkins, Minnesota 55343
By /s/ Satya P. Garg
---------------------------
Satya P. Garg
Its: President
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WEBVALLEY, INC.
NOTICE OF EXERCISE OF STOCK OPTION ISSUED
To: President
Profile National Business Directory, Inc.
1011 First Street South, Suite 203
Hopkins, MN 55343
I hereby exercise my Option dated _____________, 199_ to purchase
_________ shares of $0.01 par value common stock of the Company at the option
exercise price of $1.00 per share. Enclosed is a certified or cashier's check in
the total amount of $ ______________ or payment in such other form as the
Company has specified. I acknowledge that I may be required to execute a
Subscription and Investment Representation Agreement prior to these shares being
issued, and I further acknowledge that I must agree to be bound by any then
existing Shareholders Agreement covering substantially all of the Company's
Shares.
I request that my shares be issued to me as follows:
--------------------------------
(Print your name in the form in which you wish to have the shares registered)
-----------------------------
(Social Security Number)
-----------------------------
(Street and Number)
-----------------------------
(City) (State) (Zip Code)
Dated: ________________, __________.
Signature: _____________________
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Exhibit 10.5
WEBVALLEY, INC.
1999 STOCK OPTION PLAN
1. Establishment and Purpose.
1.1 Establishment. WebValley, Inc., a Minnesota Corporation
("Company"), hereby establishes a stock option plan for
employees and others providing services to the Company, as
described herein, which shall be known as the "1999 STOCK
OPTION PLAN" ("Plan"). The Plan permits the granting of
Nonstatutory Stock Options and Incentive Stock Options.
1.2 Purpose. The purposes of the Plan are to enhance shareholder
investment by attracting, retaining, and motivating employees
and consultants of the Company and to encourage stock
ownership by such employees and consultants by providing them
with a means to acquire a proprietary interest in the
Company's success.
2. Definitions. Unless the context clearly requires otherwise, the
following terms shall have the respective meanings set forth below, and
when said meaning is intended, the term shall be capitalized.
2.1 "Board" means the Board of Directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as amended.
2,3 "Committee" means the Committee, as specified in Article IV
hereof, appointed by the Board to administer the Plan, or the
Board if no Committee is appointed.
2.4 "Company" means WebValley, Inc., a Minnesota corporation
(including any and all subsidiaries).
2.5 "Consultant" means any person or entity, including an officer
or director of the Company who provides consulting, director
or advisory services (other than as an Employee) to the
Company.
2.6 "Date of Exercise" means the date the Company receives notice
by an Optionee of the exercise of an Option pursuant to
Section 10.1 of the Plan. Such notice shall indicate the
number of shares of Stock as to which the Optionee intends to
exercise an Option.
<PAGE>
2.7 "Employee" means any person, including an officer or director
of the Company, who is employed by the Company.
2.8 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.9 "Exercise Price" means the amount for which one share of Stock
may be purchased upon exercise of an Option, as specified in
the applicable Option Agreement.
2.10 "Fair Market Value" means the price per share of Stock
determined by any means deemed fair and reasonable by the
Committee. Whenever possible, the determination of Fair Market
Value by the Committee will be based on the closing price
reported in the Wall Street Journal. Such determination shall
be final and binding on all parties.
2.11 "Incentive Stock Option" means an Option granted under the
Plan which is designated as an Incentive Stock Option and is
intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code.
2.12 "Nonstatutory Option" means an Option granted under the Plan
which is not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code. Except as
otherwise specified herein, Nonstatutory Options may be
granted at such times and subject to such restrictions as the
Board shall determine without conforming to the statutory
rules of Section 422 of the Code applicable to incentive stock
options.
2.13 "Option" means the right, granted under the Plan, to purchase
Stock of the Company at the Exercise Price for a specified
period of time. For purposes of the Plan, an Option may be
either an Incentive Stock Option or a Nonstatutory Option.
2.14 "Optionee" means a person to whom an Option has been granted
under the Plan.
2.15 "Parent Corporation" has the meaning set forth in Section
424(e) of the Code with the Company being treated as the
employer corporation for purposes of this definition.
2.16 "Subsidiary Corporation" has the meaning set forth in Section
424(f) of the Code with the Company being treated as the
employer corporation for purposes of this definition.
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2.17 "Significant Shareholder" means an individual who, within the
meaning of Section 422(b)(6)of the Code, owns Stock possessing
more than ten percent of the total combined voting power of
all classes of stock of the Company or of any Parent
Corporation or Subsidiary Corporation of the Company. In
determining whether an individual is a Significant
Shareholder, an individual shall be treated as owning Stock
owned by certain relatives of the individual and certain Stock
owned by corporations in which the individual is a
shareholder, partnerships in which the individual is a
partner, and estates or trusts of which the individual is a
beneficiary, all as provided in Section 424(d) of the Code.
2.18 "Stock" means the common stock of the Company.
3. Gender and Number. Except when otherwise indicated by the context, any
masculine terminology when used in the Plan also shall include the
feminine gender, and the definition of any term herein in the singular
also shall include the plural.
4. Severability. Wherever possible each provision of the Plan is to be
interpreted in such a manner as will be effective and valid under
applicable law, but if any provision of the Plan is prohibited by or
invalid under applicable law, such provision will be ineffective only
to the extent of such prohibition or invalidity, without invalidating
the remainder of such provision or the remaining provisions of the
Plan.
5. Eligibility and Participation.
5.1 Eligibility. All Employees are eligible to participate in the
Plan and receive Incentive Stock Options and/or Nonstatutory
Options hereunder. All Consultants are eligible to participate
in the Plan and receive Nonstatutory Options hereunder.
5.2 Actual Participation. Subject to the provisions of the Plan,
the Committee may, from time to time, select from all
Employees and Consultants those to whom Options shall be
granted and shall determine the nature of and number of shares
of Stock subject to each such Option.
6. Administration.
6.1 The Committee. The Plan shall be administered by the
Committee. If the entire Board of Directors is not serving as
the Committee, the Committee appointed by the Board shall
consist of two or more directors of the Company, as selected
by the Board. The Board may also authorize one or more
officers or directors of the Company to administer the plan,
acting as a secondary committee within guidelines established
from time to time by the Board. Within the limitations of this
Section 6.1, any reference in the Plan to the Committee shall
include such secondary committee.
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6.2 Authority of the Committee. The Committee shall have full
power except as limited by law or by the Articles of
Incorporation or Bylaws of the Company, and subject to the
provisions herein, to determine the size and types of Options;
to determine the terms and conditions of such Options in a
manner consistent with the Plan; to construe and interpret the
Plan and any agreement or instrument entered into under the
Plan; to establish, amend, or waive rules and regulations for
the Plan's administration; and (subject to the provisions of
Article XII herein) to amend the terms and conditions of any
outstanding Option to the extent such terms and conditions are
within the discretion of the Committee as provided in the
Plan. Further, the Committee shall make all other
determinations which may be necessary or advisable for the
administration of the Plan. As permitted by law, the Committee
may delegate its authorities as identified hereunder.
6.3 Decisions Binding. All determinations and decisions made by
the Committee pursuant to the provisions of the Plan and all
related orders or resolutions of the Board of Directors shall
be final, conclusive, and binding on all persons, including
the Company, its shareholders, Employees, Consultants,
Optionees, and their respective successors.
7. Stock Subject to the Plan.
7.1 Number. The total number of shares of Stock hereby made
available for grant and reserved for issuance under the Plan
shall be 1,000,000. The aggregate number of shares of Stock
available under the Plan shall be subject to adjustment as
provided in Section 14.1 below.
7.2 Lapsed Options. If an Option shall expire or terminate for any
reason without having been exercised in full, the unpurchased
shares of Stock subject thereto shall (unless the Plan shall
have terminated) become available for other Options under the
Plan.
8. Duration of the Plan. Subject to shareholder approval, the Plan shall
be in effect for ten years from the date of its adoption by the Board.
Any Options outstanding at the end of said period shall remain in
effect in accordance with their terms. The Plan shall terminate before
the end of said period if all Stock subject to it has been purchased
pursuant to the exercise of Options granted under the Plan.
9. Terms of Stock Options.
9.1 Grant of Options. Subject to Section 7.1, Options may be
granted to Employees or Consultants at any time and from time
to time as determined by the Committee; provided, however,
that Consultants may receive only Nonstatutory Options, and
may not receive Incentive Stock Options. The Committee shall
have complete discretion in determining the recipient of
options among the Employees or Consultants, the number of
shares of Stock subject to an Option and the number
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of Options granted to each Optionee. In making such
determinations, the Committee may take into account the nature
of services rendered by such Employees or Consultants, their
present and potential contributions to the Company, and such
other factors as the Committee in its discretion shall deem
relevant. The Committee also shall determine whether an Option
is to be an Incentive Stock Option or a Nonstatutory Option.
The aggregate Fair Market Value (determined at the date of
grant) of shares of Stock with respect to which Incentive
Stock Options are exercisable for the first time by the
Optionee during any calendar year under all plans of the
Company under which Incentive Stock Options may be granted
(and all such plans of any Parent Corporations and any
Subsidiary Corporations of the Company) shall not exceed
$100,000.
The preceding paragraph shall not be deemed to prevent the
grant of Options in excess of the maximums established by the
preceding paragraph and any such excess will be treated as a
Nonstatutory Option; provided, however, no Optionee may be
granted Options in any fiscal year to purchase an aggregate
number of shares of Stock in excess of 300,000 shares per
Optionee, subject to adjustment under Section 14.1 below.
The Committee is expressly given the authority to issue
amended Options with respect to shares of Stock subject to an
Option previously granted hereunder. An amended Option amends
the terms of an Option previously granted and thereby
supersedes the previous Option.
No Options granted under the Plan may be exercisable before
the approval of the Plan by the shareholders of the Company
pursuant to the Bylaws of the Company ("Shareholder
Approval"). The granting and vesting of an Option under the
Plan by the Committee and the exercise of such Option by the
Optionee shall be subject to Shareholder Approval at the 1999
Annual Meeting of the Company. If Shareholder Approval of the
Plan does not occur at the 1999 Annual Meeting of the Company
any Option or Options held by any Optionee under the Plan
shall terminate immediately and shall be unexercisable.
9.2 No Tandem Options. Where an Option granted under the Plan is
intended to be an Incentive Stock Option, the Option shall not
contain terms pursuant to which the exercise of the Option
would affect the Optionee's right to exercise another Option,
or vice versa, such that the Option intended to be an
Incentive Stock Option would be deemed a tandem stock option
within the meaning of the regulations under Section 422 of the
Code.
9.3 Option Agreement. As determined by the Committee on the date
of grant, each Option shall be evidenced by an Option
agreement (the "Option Agreement") that includes the
nontransferability provisions of Section 12.2 hereof and
specifies:
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whether the Option is an Incentive Stock Option or
a Nonstatutory Option; the Exercise Price; the duration of the
Option; the number of shares of Stock to which the Option
applies; any vesting or serial exercise restrictions which the
Committee may impose; and any other terms or conditions which
the Committee may impose. An Option Agreement may provide that
a new Option will be granted automatically to the Optionee
when Optionee exercises a prior Option and pays the Exercise
Price using Stock pursuant to Section 9.7. The Committee may
require an Optionee to sign the Option Agreement.
All Option Agreements shall incorporate the provisions of the
Plan by reference, with certain provisions to apply depending
upon whether the Option Agreement applies to an Incentive
Stock Option or to a Nonstatutory Option.
9.4 Exercise Price. No Incentive Stock Option granted pursuant to
the Plan shall have an Exercise Price that is less than the
Fair Market Value of Stock on the date the Option is granted.
Incentive Stock Options granted to Significant Shareholders
shall have an Exercise Price of not less than 110 percent of
the Fair Market Value of Stock on the date of grant. The
Exercise Price for Nonstatutory Options may be less than the
Fair Market Value of Stock on the date the Option is granted
and shall not be subject to the restrictions applicable to
Incentive Stock Options.
9.5 Term of Options. Each Option shall expire at such time as the
Committee shall determine when it is granted, provided however
that no Option shall be exercisable later than the tenth
anniversary date of its grant. By its terms, an Incentive
Stock Option granted to a Significant Shareholder shall not be
exercisable after five years from the date of grant.
9.6 Exercise of Options. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions
and conditions as the Committee shall in each instance
approve, which need not be the same for all Optionees.
9.7 Payment. Payment for all shares of Stock shall be made at the
time that an Option, or any part thereof, is exercised, and no
shares shall be issued until full payment therefor has been
made. Payment shall be made in cash, cash equivalents, or
other form acceptable to the Committee, including without
limitation, in Stock having a Fair Market Value at the time of
the exercise equal to the Exercise Price; provided, however,
in the case of an Incentive Stock Option, that said other form
of payment does not prevent the Option from qualifying for
treatment as an "incentive stock option" within the meaning of
the Code. In addition, the Company may establish a cashless
exercise program in accordance with Federal Reserve Board
Regulation T.
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10. Written Notice, Issuance of Stock Certificates, Shareholder Privileges
10.1 Written Notice. An Optionee wishing to exercise an Option
shall give written notice to the Chief Executive Officer of
the Company, in the form and manner prescribed by the
Committee. Except for approved "cashless exercises," full
payment for the shares exercised pursuant to the Option must
accompany the written notice.
10.2 Issuance of Stock Certificates. As soon as practicable after
the receipt of written notice and payment, the Company shall
deliver to the Optionee or to a nominee of the Optionee a
certificate or certificates for the requisite number of shares
of Stock. Such certificate may bear a legend restricting
transfer if required under Article XIV below.
10.3 Rights of a Shareholder. An Optionee or any other person
entitled to exercise an Option under the Plan shall not have
dividend rights, voting rights or other rights or privileges
of a shareholder with respect to any Stock covered by an
Option until the date of issuance of a stock certificate for
such Stock. No adjustment shall be made for cash dividends or
other rights for which the record date is prior to such date
of issuance, except as expressly provided in the Plan.
11. Termination of Employment.
11.1 Death. Unless otherwise determined by the Committee, if an
Optionee's employment in the case of an Employee, or provision
of services as a Consultant, in the case of a Consultant,
terminates by reason of death, the Option may thereafter be
exercised at any time prior to the expiration date of the
Option or within 12 months after the date of such death,
whichever period is the shorter, by the person or persons
entitled to do so under the Optionee's will or, if the
Optionee shall fail to make a testamentary disposition of an
Option or shall die intestate, the Optionee's legal
representative or representatives. The Option shall be
exercisable only to the extent that such Option was
exercisable as of the date of death.
11.2 Termination Other Than For Cause Or Due to Death. Unless
otherwise determined by the Committee, in the event of an
Optionee's termination of employment, in the case of an
Employee (except when an Employee becomes a Consultant), or
termination of the provision of services as a Consultant, in
the case of a Consultant, other than by reason of death or for
cause (as defined in Section 11.3 below), the Optionee may
exercise such portion of his Option as was exercisable by the
Optionee at the date of such termination (the "Termination
Date") at any time within three (3) months after the
Termination Date; provided, however, when the termination
occurs due to disability, as defined in the Code, such
Optionee may exercise such portion of any Option as was
exercisable by
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such Optionee on Optionee's Termination Date within one year
after such Termination Date. In any event, the Option cannot
be exercised after the expiration of the term of the Option.
Options not exercised within the applicable period specified
above shall terminate.
In the case of an Employee, a change of duties or position
within the Company or an assignment of employment in a
Subsidiary Corporation or Parent Corporation of the Company,
if any, or from such a corporation to the Company, shall not
be considered a termination of employment for purposes of the
Plan. The Option Agreements may contain such provisions as the
Committee shall approve with reference to the effect of
approved leaves of absence upon termination of employment.
11.3 Termination for Cause. In the event of an Optionee's
termination of employment, in the case of an Employee, or
termination of the provision of services as a Consultant in
the case of a Consultant, which termination is by the Company
for cause (as defined below), any Option or Options held by
such Optionee under the Plan, to the extent not exercised
before such termination, shall terminate immediately.
The term "cause" means: (i) Optionee's conviction of a felony
which would materially damage the reputation of the Company,
(ii) material misappropriation by Optionee of the Company's
property or other material acts of dishonesty by Optionee
against the Company or (iii) Optionee's gross negligence or
willful misconduct in the performance of Optionee's duties,
which has a material adverse effect on the Company.
12. Rights of Optionees.
12.1 Service. Nothing in the Plan shall interfere with or limit in
any way the right of the Company to terminate any Employee's
employment, or any Consultant's services, at any time, nor
confer upon any Employee any right to continue in the employ
of the Company, or upon any Consultant any right to continue
to provide services to the Company.
12.2 Restrictions on Transfer. Except as otherwise provided by this
Section 12.2, all Options granted under the Plan shall be
nontransferable by the Optionee, other than by will or the
laws of descent and distribution, and shall be exercisable
during the Optionee's lifetime only by the Optionee. The
Committee may, in its sole discretion and with the consent of
the Optionee: (i) grant Nonstatutory Options which are
transferable within the restrictions of this Section 12.2;
(ii) amend a then existing Nonstatutory Option to allow for
transferability of such Option within the restrictions of this
Section 12.2; or (iii) amend a then existing Incentive Stock
Option (whereby such Option will become a Nonstatutory
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Option) to allow for transferability of such Option within the
restrictions of this Section 12.2 (collectively, the
"Transferable Options").
The Committee may, in its sole discretion, authorize all or a
portion of the Transferable Options to be on terms which
permit transfer of such Option by the initial Optionee of such
Option (the "Initial Optionee") to: (i) the spouse, children,
step-children, grandchildren, step-grandchildren, siblings or
parents of the Initial Optionee ("Immediate Family Members");
(ii) a trust or trusts for the exclusive benefit of such
Immediate Family Members; (iii) a partnership or other entity
in which such Immediate Family Members are the only partners
or equity owners; or (iv) a former spouse of the Initial
Optionee pursuant to a qualified domestic relations order
(collectively, a "Permitted Transferee"), provided that:
(a) there may be no consideration for any such transfer;
(b) the Option Agreement pursuant to which such Options
are granted, or any amendment thereto, must be
approved by the Committee, and must expressly provide
for transferability in a manner consistent with this
Section 12.2;
(c) any Option or portion thereof transferred by an
Initial Optionee to a Permitted Transferee may be
exercised by the Permitted Transferee only to the
same extent as the Initial Optionee would have been
entitled to exercise it, and shall remain subject to
all of the terms and conditions that would have
applied to such Option under the provisions of the
Plan and Option Agreement, if the Initial Optionee
had not transferred such option or portion thereof to
the Permitted Transferred;
(d) subsequent transfers of transferred Options
(including sale, assignment, pledge or other
transfer) shall be prohibited except by will or the
laws of descent and distribution;
(e) the Initial Optionee shall remain subject to
applicable withholding taxes upon exercise of options
transferred to a Permitted Transferee;
(f) the Company shall have no obligation to notify the
Permitted Transferee of the expiration or early
termination of any Option;
(g) the Committee may, in its sole discretion, require as
a condition to the transfer of an Option, that the
Permitted Transferee execute an agreement under which
the Permitted Transferee would become a party to the
applicable Option Agreement and agree that in the
event the Company merges into or consolidates with
another entity, the Company sells all or a
substantial part of its assets, or the Company's
Stock is subject to a tender or exchange offer, the
Permitted Transferee will consent to the transfer or
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assumption of the Option, or accept a new option in
substitution therefor, if the Company requests the
Permitted Transferee to do so; and
(h) such transfer shall not be effective unless and until
the Initial Optionee has furnished the Committee
written notice of the transfer, copies of all
requested documents evidencing the transfer, and such
other agreements as may be required by the Committee.
13. Amendment, Modification, and Termination of the Plan.
13.1 Amendment, Modification, and Termination of the Plan. The
Board may at any time terminate, and from time to time may
amend or modify the Plan, provided, however, that no such
action of the Board, without approval of the shareholders,
may:
(a) increase the total amount of Stock that may be
purchased through Options granted under the Plan,
except as provided in Section 14.1 below;
(b) change the class of Employees or Consultants eligible
to receive Options; or
(c) change the provisions of Section 9.1 above to allow
an Optionee to be granted Options in any fiscal year
to purchase an aggregate number of shares of Stock in
excess of 300,000 shares per Optionee, subject to
adjustment under Section 14.1 below.
13.2 Options Previously Granted. No amendment, modification, or
termination of the Plan shall in any manner adversely affect
any outstanding Option under the Plan without the consent of
the Optionee holding the Option.
14. Changes in Capitalization, Dissolution, Liquidation, Reorganization
14.1 Adjustments. In the event of a subdivision of the outstanding
Stock, a declaration of a dividend payable in Stock, a
declaration of a dividend payable in a form other than Stock
in an amount that has a material effect on the value of the
Stock, a combination or consolidation of the outstanding Stock
(by reclassification or otherwise) into a lesser number of
shares of Stock, a recapitalization, a spin-off or a similar
occurrence, the Committee shall make such adjustments as it,
in its sole discretion, deems appropriate in one or more of:
(a) The number of shares of Stock available for future
grants under Article V;
(b) The number of shares of Stock covered by each
outstanding Option; or
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(c) The Exercise Price under each outstanding Option.
Except as provided in this Section 14, an Optionee shall have
no rights by reason of any issue by the Company of any class
of capital stock or securities convertible into capital stock
of any class, any subdivision or consolidation of shares of
capital stock of any class, the payment of any capital stock
dividend or any other increase or decrease in the number of
shares of capital stock of any class.
14.2 Dissolution or Liquidation. To the event not previously
exercised, Options shall terminate immediately prior to the
dissolution or liquidation of the Company.
14.3 Merger, Exchange or Reorganization. In the event that the
Company is a party to a merger, exchange or reorganization,
outstanding Options are subject to the agreement of merger,
exchange or reorganization. Such agreement shall provide for:
(a) The continuation of the outstanding Options by the
Company, if the Company is a surviving corporation;
(b) The assumption of the outstanding Options by the
surviving corporation or its parent or subsidiary;
(c) The substitution by the surviving corporation or its
parent or subsidiary of its own options for the
outstanding Options;
(d) Full exercisability or vesting and accelerated
expiration of the outstanding Options; or
(e) Settlement of the full value of the outstanding
Options in cash or cash equivalents followed by
cancellation of such Options.
14.4 Asset Sale. In the event of the sale of all or substantially
all of the Company's assets, the Options, at the discretion of
the Company, shall:
(a) Remain outstanding;
(b) Be substituted for the options of the acquiring
corporation or its parent or subsidiary;
(c) Become fully vested immediately prior to the sale and
canceled upon closing of the sale; or
11
<PAGE>
(d) Cancel in exchange for payment of full value of the
outstanding Options with cash or cash equivalents.
15. Securities Registration. In the event that the Company shall deem it
necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with
respect to which an Option may be or shall have been granted or
exercised, or to qualify any such Options or Stock under the Securities
Act of 1933, as amended, or any other statute, then the Optionee shall
cooperate with the Company and take such action as is necessary to
permit registration or qualification of such Options or Stock.
Unless the Company has determined that the following representation is
unnecessary, each person exercising an Option under the Plan may be
required by the Company, as a condition to the issuance of the shares
pursuant to exercise of the Option, to make a representation in
writing: (a) that he or she is acquiring such shares for his or her own
account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof; and (b) that
before any transfer in connection with the resale of such shares, he or
she will obtain the written opinion of counsel for the Company, or
other counsel acceptable to the Company, that such shares may be
transferred. The Company may also require that the certificates
representing such shares contain legends reflecting the foregoing. The
Company will only require the foregoing investment representation from
an Optionee, inscription of a legend on the Optionee's share
certificate and placement of a stop order with the Company's transfer
agent if a registration statement is not in effect with respect to the
shares issued pursuant to the Plan at the time the Optionee exercises
the Option.
16. Tax Withholding.
16.1 Tax Withholding. The Company shall have the power and the
right to deduct or withhold, or require an Optionee to remit
to the Company, an amount sufficient to satisfy Federal,
state, and local taxes (including the Optionee's FICA
obligation) required by law to be withheld with respect to any
grant, exercise, or payment made under or as a result of the
Plan. The Company shall not be required to issue any Stock
under the Plan until such obligations are satisfied.
16.2 Share Withholding. With respect to withholding required upon
the exercise of Options, or upon any other taxable event
hereunder, Optionees may elect, subject to the approval of the
Committee and compliance with applicable laws and regulation,
to satisfy the withholding requirement, in whole or in part,
by having the Company withhold shares having a Fair Market
Value, on the date the tax is to be determined, equal to the
withholding requirement.
12
<PAGE>
17. Indemnification. To the extent permitted by law, each person who is or
shall have been a member of the Committee or of the Board shall be
indemnified and held harmless by the Company against and from any loss,
cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim,
action, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or
failure to act under the Plan and against and from any and all amounts
paid by him or her in settlement thereof, with the Company's approval,
or paid by him or her in satisfaction of judgment in any such action,
suit, or proceeding against him or her, provided he or she shall give
the Company an opportunity, at its own expense, to handle and defend
the same before he or she undertakes to handle and defend it on his or
her own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons
may be entitled under the Company's Articles of Incorporation or
Bylaws, as a matter of law, or otherwise, or any power that the Company
may have to indemnify them or hold them harmless.
18. Requirements of Law
18.1 Requirements of Law. The granting of Options and the issuance
of shares of Stock upon the exercise of an Option shall be
subject to all applicable laws, rules, and regulations, and to
such approvals by any governmental agencies or national
securities exchanges as may be required.
18.2 Governing Law. To the extent not preempted by federal law, the
Plan, and all agreements hereunder, shall be construed in
accordance with and governed by the laws of the State of
Minnesota.
18.3 Compliance with the Code. Incentive Stock Options granted
hereunder are intended to qualify as "incentive stock options"
under Code Section 422. If any provision of the Plan is
susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with
Incentive Stock Options granted under the Plan being treated
as incentive stock options under the Code.
19. Effective Date of Plan. Subject to Shareholder Approval of the Plan,
the Plan shall be effective as of March 23, 1999, the date of its
adoption by the Board.
Attachments:
Form of NSO Agreement
Form of ISO Agreement
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<PAGE>
FORM OF
WEBVALLEY, INC.
NONSTATUTORY OPTION AGREEMENT
UNDER THE 1999 STOCK OPTION PLAN
This Nonstatutory Option Agreement is entered into by and between
WebValley, Inc. (the "Company") and __________________ (the "Optionee"), this
___ day of _______, ____.
The Company hereby grants to the Optionee an option (the "Option")
under the WebValley, Inc. 1999 Stock Option Plan (the "Plan") to purchase
_________ shares of the Company's stock ("Stock") under the following terms and
conditions.
1. Nonstatutory Option. The Option shall be a Nonstatutory Option, as
defined in the Plan.
2. Purchase Price. The purchase price of the Stock is $_________________
per share which is not less than the Fair Market Value (110% of the
Fair Market Value in the case of a Significant Shareholder) of the
Stock on the date of this Agreement.
3. Period of Exercise. The Option will expire on the date (the "Expiration
Date") _____ years from the date of this Agreement. (The number of
years inserted in the preceding sentence may not be greater than ten
(five, in the case of a Significant Shareholder). [IF APPLICABLE:] The
Option may be exercised only while the Optionee is actively [employed
by/serving as a director of/providing consulting services to] the
Company (or a Subsidiary Corporation or Parent Corporation, if any, of
the Company) and as provided in Section 6, relating to termination of
[employment/services].
4. [ALTERNATIVE: Vesting.
4.1 Vesting Schedule. The Option will vest as follows:
(a) Prior to ___________, ______, the option may not be
exercised;
(b) From ___________, ______ through ___________, ______,
the option may be exercised for up to _______ shares
of Stock;
(c) From ___________, ______ through ___________, ______,
the option may be exercised for up to an aggregate
purchase pursuant to the Option, including any
purchases in prior periods, of _____ shares of Stock;
<PAGE>
(d) From ___________, ______ through ___________, ______,
the option may be exercised for up to an aggregate
purchase pursuant to the Option, including any
purchases in prior periods, of _____ shares of Stock;
(e) From ___________, ______ through the Expiration Date,
the option may be exercised for up to an aggregate
purchase pursuant to the Option, including any
purchases in prior periods, of __________ shares of
Stock.
Notwithstanding the foregoing provisions of this
Section 4.1 and subject to the following sentence, the Option
granted hereunder will become fully exercisable and vested in
the event of a "Change in Control." If the Company and the
other party to the transaction constituting a Change in
Control agree that the transaction is to be treated as a
"pooling of interests" for financial reporting purposes, and
if the transaction in fact is so treated, then the
acceleration of exercisability will not occur to the extent
that the Company's independent accountants and the other
party's independent accountants each determine in good faith
that the acceleration would preclude the use of "pooling of
interests" accounting.
[ALTERNATIVE: 4.2 Definition of "Change In Control". For
purposes of Section 4.1, a "Change in Control" means the
happening of any of the following:
(a) The consummation of a merger or consolidation of
the Company with or into another entity or any other
corporate reorganization, if more than 50% of the
combined voting power of the continuing or surviving
entity's securities outstanding immediately after
such merger, consolidation or other reorganization is
owned by persons who were not stockholders of the
Company immediately prior to such merger,
consolidation or other reorganization;
(b) When, during any period of 24 consecutive months
during the existence of the Plan, the individuals
who, at the beginning of such period, constitute the
Board ("Incumbent Directors") cease for any reason
other than death to constitute at least a majority
thereof; provided, however, that a Director who was
not a Director at the beginning of such 24-month
period will be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such
Director was elected by, or on the recommendation or,
or with the approval of, at least 60% of the
Directors who then qualified as Incumbent Directors
either actually
2
<PAGE>
(because they were Directors at the
beginning of such 24-month period) or by prior
operation of this Section 4.2(b); or
(c) The approval by the shareholders of any sale,
lease, exchange, or other transfer (in one
transaction or a series of related transactions) of
all or substantially all of the assets of the Company
or the adoption of any plan or proposal for the
liquidation or dissolution of the Company.
(d) Any transaction as a result of which any person
is the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act of 1934 ("Exchange Act"),
directly or indirectly, of securities of the Company
representing at least 25% of the total voting power
represented by the Company's then outstanding voting
securities. For purposes of this section 4.2(d), the
term "person" shall have the same meaning as when
used in Section 13(d) and 14(d) of the Exchange Act
but excludes (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the
Company or of a Parent Corporation or Subsidiary
Corporation; (ii) a corporation owned directly or
indirectly by the shareholders of the Company in
substantially the same proportions as their ownership
of the Stock of the Company; and (iii) any person
having beneficial ownership of at least 25% of the
total voting power represented by the Company's then
outstanding voting securities on the date of the
Option.]]
5. Transferability. The Option is not transferable except by will or the
laws of descent and distribution and may be exercised during the
lifetime of the Optionee only by the Optionee.
6. Termination of [Employment/Services]. Except as otherwise agreed to by
the Company or the Optionee in writing, in the event that the
[employment/service as a director/service as a consultant] of the
Optionee with the Company (and any Parent Corporation or Subsidiary
Corporation is terminated, the Option may be exercised (to the extent
exercisable at the date of termination) by the Optionee within three
months after the date of termination; provided, however, that:
(a) If the Optionee's [employment/service] is terminated because
the Optionee is disabled within the meaning of Code ss. 422,
the Optionee shall have one year rather than three months to
exercise the Option (to the extent exercisable at the date of
termination).
(b) If the Optionee dies, the Option may be exercised (to the
extent exercisable by the Optionee at the date of death) by
the legal representative of the Optionee or by a person who
acquired the right to
3
<PAGE>
exercise the Option by bequest or inheritance or by reason of
the death of the Optionee, but the Option must be exercised
within one year after the date of the Optionee's death.
(c) If the Optionee's [employment/service] is terminated for cause
(as defined in Section 11.3 of the Plan), the Option and the
Optionee's right to exercise the Option shall terminate
immediately.
(d) Notwithstanding the foregoing, in no event (including
disability or death of the Optionee) may the Option be
exercised after the Expiration Date.
7. Leaves of Absences. For purposes of this Option, your service does not
terminate when you go on a military leave, a sick leave or another bona
fide leave of absence, if the leave was approved by the Company in
writing. But your service terminates when the approved leave ends,
unless you immediately return to active work.
8. No Guarantee of Employment. This Agreement shall in no way restrict the
right of the Company (or any Parent Corporation or Subsidiary
Corporation) to terminate the Optionee's [employment/service] at any
time.
9. Method of Exercise; Use of Company Stock. The Option may be exercised,
subject to the terms and conditions of this Agreement, by written
notice to the Company. The notice shall be in the form attached to this
Agreement and will be accompanied by payment (in such form as the
Company may specify) of the full purchase price of the shares to be
issued, and in the event of an exercise under the terms of paragraphs
6(a) and 6(b) hereof, appropriate proof of the right to exercise the
Option. The Company will issue and deliver certificates representing
the number of shares purchased under the Option, registered in the name
of the Optionee (or other purchaser under paragraphs 6(a) and 6(b)
hereof) as soon as practicable after receipt of the notice.
When exercising the Option the Optionee may make payment either in
money or by tendering shares of the Company Stock owned by the
Optionee, or by a combination of the two. Where shares of Stock are
employed to pay all or part of the purchase price, the shares of Stock
shall be valued at their Fair Market Value at the time of payment.
10. Withholding; Taxable Income. In any case where withholding is required
or advisable under federal, state or local law in connection with any
exercise by the Optionee hereunder, the Company is authorized to
withhold appropriate amounts from amounts payable to the Optionee, or
may require the Optionee to remit to the Company an amount equal to
such appropriate amounts.
The Optionee acknowledges and understands that under the provisions of
the Internal Revenue Code as presently in effect, the Optionee will
have taxable compensation income at the date of exercise of the Option
equal to the difference between the purchase
4
<PAGE>
price under the Option and the then Fair Market Value of the Stock. the
Optionee specifically agrees that as a condition to permitting
exercise, the Company may require that appropriate arrangements for
withholding be made with the Optionee as provided above.
11. Changes in Capitalization, Dissolution, Liquidation and Reorganization.
The terms of this Agreement are subject to modification upon the
occurrence of certain events as described in Section 14 of the Plan.
12. Market Stand-Off. In connection with any underwritten public offering
by the Company of its equity securities pursuant to an effective
registration statement filed under the Securities Act of 1933, as
amended ("Securities Act"), including the Company's initial public
offering, the Optionee shall not directly or indirectly sell, make any
short sale of, loan, hypothecate, pledge, offer, grant or sell any
option or other contract for the purchase of, any option or other
contract for the sale of, or otherwise dispose of or transfer, or agree
to engage in any of the foregoing transactions with respect to, any
Stock acquired under this Agreement without the prior written consent
of the Company or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time following the
date of the final prospectus for the offering as may be requested by
the Company or such underwriters. In no event, however, shall such
period exceed 180 days. The Market Stand-Off shall in any event
terminate two years after the date of the Company's initial public
offering. In the event of the declaration of a stock dividend, a spin-
off, a stock split, an adjustment in conversion ratio, a
recapitalization or a similar transaction affecting the Company's
outstanding securities without receipt of consideration, any new,
substituted or additional securities which are by reason of such
transaction distributed with respect to any Stock subject to the Market
Stand-Off, the Company may impose stop-transfer instructions with
respect to such new, substituted or additional securities until the end
of the applicable stand-off period. The Company's underwriters shall be
beneficiaries of the agreement set forth in this Section 12.
13. Incorporation of Plan. This Agreement is made pursuant to the
provisions of the Plan, which Plan is incorporated by reference herein.
Terms used herein shall have the meaning employed in the Plan unless
the context clearly requires otherwise. In the event of a conflict
between the provisions of the Plan and the provisions of this
Agreement, the provisions of the Plan shall govern.
5
<PAGE>
14. Severability. In the event any provision of this Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of the Agreement, and the
Agreement shall be construed and enforced as if the illegal or invalid
provision had not been included.
WEBVALLEY, INC.
By _______________________________
Its _____________________________
EMPLOYEE:______________________
_______________________________
6
<PAGE>
WEBVALLEY, INC.
NOTICE OF EXERCISE OF STOCK OPTION ISSUED
UNDER THE 1999 STOCK OPTION PLAN
To: Stock Option Committee
WebValley, Inc.
1011 First Street South, Suite 370
Hopkins MN 55343
I hereby exercise my Option dated ___________, ______ to purchase
_______ shares of $__________ par value common stock of the Company at the
option purchase price of $________ per share. Enclosed is a certified or
cashier's check in the total amount of $_________, or payment in such other form
as the Company has specified.
I represent to you that I am acquiring said shares for investment
purposes and not with a view to any distribution thereof. I understand that my
Stock certificate may bear an appropriate legend restricting the transfer of my
shares and that a stop transfer order may be placed with the Company's transfer
agent with respect to such shares.
I request that my shares be issued to me as follows:
--------------------------------------------------------------------
(Print your name in the form in which you wish to have the shares registered)
----------------------------------
(Social Security Number)
----------------------------------
(Street and Number)
----------------------------------
(City) (State) (Zip Code)
Dated:_____________, ______.
Signature:_____________________________
7
<PAGE>
FORM OF
WEBVALLEY, INC.
INCENTIVE STOCK OPTION AGREEMENT
UNDER THE 1999 STOCK OPTION PLAN
This Incentive Stock Option Agreement (the "Agreement") is entered into
by and between WebValley, Inc. (the "Company") and ________ (the "Employee"),
this ___ day of _______, ____.
The Company hereby grants to the Employee an option (the "Option")
under the WebValley, Inc. 1999 Stock Option Plan (the "Plan") to purchase
_________ shares of the Company's stock ("Stock") under the following terms and
conditions.
1. Incentive Stock Option. The Option shall be an Incentive Stock Option,
as defined in the Plan.
2. Purchase Price. The purchase price of the Stock is $_________________
per share which is not less than the Fair Market Value (110% of the
Fair Market Value in the case of a Significant Shareholder) of the
Stock on the date of this Agreement.
3. Period of Exercise. The Option will expire on the date (the "Expiration
Date") _____ years from the date of this Agreement. (The number of
years inserted in the preceding sentence may not be greater than ten
(five, in the case of a Significant Shareholder). The Option may be
exercised only while the Employee is actively employed by the Company
(or a Subsidiary Corporation or Parent Corporation, if any, of the
Company) and as provided in Section 7, relating to termination of
employment.
4. [ALTERNATIVE: Vesting.
4.1 Vesting Schedule. The Option will vest as follows:
(a) Prior to ___________, ______, the option may not be
exercised;
(b) From ___________, ______ through ___________, ______,
the option may be exercised for up to _______ shares
of Stock;
(c) From ___________, ______ through ___________, ______,
the option may be exercised for up to an aggregate
purchase pursuant to the Option, including any
purchases in prior periods, of _____ shares of Stock;
<PAGE>
(d) From ___________, ______ through ___________, ______,
the option may be exercised for up to an aggregate
purchase pursuant to the Option, including any
purchases in prior periods, of _____ shares of Stock;
(e) From ___________, ______ through the Expiration Date,
the option may be exercised for up to an aggregate
purchase pursuant to the Option, including any
purchases in prior periods, of __________ shares of
Stock.
Notwithstanding the foregoing provisions of this Section 4.1
and subject to the following sentence, the Option granted
hereunder will become fully exercisable and vested in the
event of a "Change in Control." If the Company and the other
party to the transaction constituting a Change in Control
agree that the transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if the
transaction in fact is so treated, then the acceleration of
exercisability will not occur to the extent that the Company's
independent accountants and the other party's independent
accountants each determine in good faith that the acceleration
would preclude the use of "pooling of interests" accounting.
[ALTERNATIVE: 4.2 Definition of "Change In Control". For
purposes of Section 4.1, a "Change in Control" means the
happening of any of the following:
(a) The consummation of a merger or consolidation of
the Company with or into another entity or any other
corporate reorganization, if more than 50% of the
combined voting power of the continuing or surviving
entity's securities outstanding immediately after
such merger, consolidation or other reorganization is
owned by persons who were not stockholders of the
Company immediately prior to such merger,
consolidation or other reorganization;
(b) When, during any period of 24 consecutive months
during the existence of the Plan, the individuals
who, at the beginning of such period, constitute the
Board ("Incumbent Directors") cease for any reason
other than death to constitute at least a majority
thereof; provided, however, that a Director who was
not a Director at the beginning of such 24-month
period will be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such
Director was elected by, or on the recommendation or,
or with the approval of, at least 60% of the
Directors who then qualified as Incumbent Directors
either actually (because they were Directors at the
beginning of such 24-month period) or by prior
operation of this Section 4.2(b); or
2
<PAGE>
(c) The approval by the shareholders of any sale,
lease, exchange, or other transfer (in one
transaction or a series of related transactions) of
all or substantially all of the assets of the Company
or the adoption of any plan or proposal for the
liquidation or dissolution of the Company.
(d) Any transaction as a result of which any person
is the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act of 1934 ("Exchange Act"),
directly or indirectly, of securities of the Company
representing at least 25% of the total voting power
represented by the Company's then outstanding voting
securities. For purposes of this section 4.2(d), the
term "person" shall have the same meaning as when
used in Section 13(d) and 14(d) of the Exchange Act
but excludes (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the
Company or of a Parent Corporation or Subsidiary
Corporation; (ii) a corporation owned directly or
indirectly by the shareholders of the Company in
substantially the same proportions as their ownership
of the Stock of the Company; and (iii) any person
having beneficial ownership of at least 25% of the
total voting power represented by the Company's then
outstanding voting securities on the date of the
Option.]]
5. $100,000 Limitation. Notwithstanding anything to the contrary contained
in this Agreement, to the extent that the total Fair Market Value
(determined as of the date of grant of an option) of shares of Stock
with respect to which the Option and any other incentive stock options
granted by the Company (or any Subsidiary Corporations or Parent
Corporation) becomes exercisable for the first time during any calendar
year exceeds $100,000, such option(s) shall be treated as a
Nonstatutory Option. The preceding sentence shall be applied by taking
options into account in the order in which they were granted.
6. Transferability. The Option is not transferable except by will or the
laws of descent and distribution and may be exercised during the
lifetime of the Employee only by the Employee.
7. Termination of Employment. Except as otherwise agreed to by the Company
or the Employee in writing, in the event that the employment of the
Employee with the Company (and any Parent Corporation or Subsidiary
Corporation is terminated, the Option may be exercised (to the extent
exercisable at the date of termination) by the Employee within three
months after the date of termination; provided, however, that:
(a) If the Employee's employment is terminated because the
Employee is disabled within the meaning of Code ss. 422, the
Employee shall have one
3
<PAGE>
year rather than three months to exercise the Option (to the
extent exercisable at the date of termination).
(b) If the Employee dies, the Option may be exercised (to the
extent exercisable by the Employee at the date of death) by
the legal representative of the Employee or by a person who
acquired the right to exercise the Option by bequest or
inheritance or by reason of the death of the Employee, but the
Option must be exercised within one year after the date of the
Employee's death.
(c) If the Employee's employment is terminated for cause (as
defined in Section 11.3 of the Plan), the Option and the
Employee's right to exercise the Option shall terminate
immediately.
(d) Notwithstanding the foregoing, in no event (including
disability or death of the Employee) may the Option be
exercised after the Expiration Date.
8. Leaves of Absences. For purposes of this Option, your service does not
terminate when you go on a military leave, a sick leave or another bona
fide leave of absence, if the leave was approved by the Company in
writing. But your service terminates when the approved leave ends,
unless you immediately return to active work. To the extent that your
leave of absence constitutes termination under the regulation of the
Code applicable to Incentive Stock Options, this Option will not
terminate, but will become a Nonstatutory Option.
9. No Guarantee of Employment. This Agreement shall in no way restrict the
right of the Company (or any Parent Corporation or Subsidiary
Corporation) to terminate the Employee's employment at any time.
10. Method of Exercise; Use of Company Stock. The Option may be exercised,
subject to the terms and conditions of this Agreement, by written
notice to the Company. The notice shall be in the form attached to this
Agreement and will be accompanied by payment (in such form as the
Company may specify) of the full purchase price of the shares to be
issued, and in the event of an exercise under the terms of paragraphs
7(a) and 7(b) hereof, appropriate proof of the right to exercise the
Option. The Company will issue and deliver certificates representing
the number of shares purchased under the Option, registered in the name
of the Employee (or other purchaser under paragraphs 7(a) and 7(b)
hereof) as soon as practicable after receipt of the notice.
When exercising the Option the Employee may make payment either in
money or by tendering shares of the Company Stock owned by the
Employee, or by a combination of the two. Where shares of Stock are
employed to pay all or part of the purchase price, the shares of Stock
shall be valued at their Fair Market Value at the time of payment.
4
<PAGE>
11. Withholding. In any case where withholding is required or advisable
under federal, state or local law in connection with any exercise by
the Employee hereunder, the Company is authorized to withhold
appropriate amounts from amounts payable to the Employee, or may
require the Employee to remit to the Company an amount equal to such
appropriate amounts.
12. Changes in Capitalization, Dissolution, Liquidation and Reorganization.
The terms of this Agreement are subject to modification upon the
occurrence of certain events as described in Section 14 of the Plan.
13. Market Stand-Off. In connection with any underwritten public offering
by the Company of its equity securities pursuant to an effective
registration statement filed under the Securities Act of 1933, as
amended ("Securities Act"), including the Company's initial public
offering, the Employee shall not directly or indirectly sell, make any
short sale of, loan, hypothecate, pledge, offer, grant or sell any
option or other contract for the purchase of, any option or other
contract for the sale of, or otherwise dispose of or transfer, or agree
to engage in any of the foregoing transactions with respect to, any
Stock acquired under this Agreement without the prior written consent
of the Company or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time following the
date of the final prospectus for the offering as may be requested by
the Company or such underwriters. In no event, however, shall such
period exceed 180 days. The Market Stand-Off shall in any event
terminate two years after the date of the Company's initial public
offering. In the event of the declaration of a stock dividend, a spin-
off, a stock split, an adjustment in conversion ratio, a
recapitalization or a similar transaction affecting the Company's
outstanding securities without receipt of consideration, any new,
substituted or additional securities which are by reason of such
transaction distributed with respect to any Stock subject to the Market
Stand-Off, the Company may impose stop-transfer instructions with
respect to such new, substituted or additional securities until the end
of the applicable stand-off period. The Company's underwriters shall be
beneficiaries of the agreement set forth in this Section 12.
14. Incorporation of Plan. This Agreement is made pursuant to the
provisions of the Plan, which Plan is incorporated by reference herein.
Terms used herein shall have the meaning employed in the Plan unless
the context clearly requires otherwise. In the event of a conflict
between the provisions of the Plan and the provisions of this
Agreement, the provisions of the Plan shall govern.
15. Severability. In the event any provision of this Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of the Agreement, and the
Agreement shall be construed and enforced as if the illegal or invalid
provision had not been included.
5
<PAGE>
16. Compliance with the Code. The Option is intended to qualify as an
"incentive stock option" under Code Section 422. If any provision of
this Agreement is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with the Option
being treated as an incentive stock option under the Code.
WebValley, Inc.
By _______________________________
Its _____________________________
EMPLOYEE:______________________
_______________________________
6
<PAGE>
WEBVALLEY, INC.
NOTICE OF EXERCISE OF INCENTIVE STOCK OPTION ISSUED
UNDER THE 1999 STOCK OPTION PLAN
To: Stock Option Committee
WebValley, Inc.
1011 First Street South, Suite 370
Hopkins MN 55343
I hereby exercise my Option dated ___________, ______ to purchase
_______ shares of $__________ par value common stock of the Company at the
option purchase price of $________ per share. Enclosed is a certified or
cashier's check in the total amount of $_________, or payment in such other form
as the Company has specified.
I represent to you that I am acquiring said shares for investment
purposes and not with a view to any distribution thereof. I understand that my
Stock certificate may bear an appropriate legend restricting the transfer of my
shares and that a stop transfer order may be placed with the Company's transfer
agent with respect to such shares.
I request that my shares be issued to me as follows:
--------------------------------------------------------------
(Print your name in the form in which you wish to have the shares registered)
----------------------------------
(Social Security Number)
----------------------------------
(Street and Number)
----------------------------------
(City) (State) (Zip Code)
_____ I intend to hold the stock at least one year. (But, if I do
sell within one year of exercise, I _____ will give the Option
Plan Administrator a copy of the broker's confirmation of the
sale as soon as I receive it.)
_____ I intend to sell the stock within one year of exercise, and
will give the Option Plan Administrator a copy of the broker's
confirmation of the sale as soon as I receive it.
Dated:_____________, ______.
Signature:_____________________________
7
<PAGE>
Exhibit 10.6
{WEBVALLEY LETTERHEAD}
March 23, 1999
Robert M. Ringstad
3430 Montgomerie Avenue
Deephaven, MN 55391
Dear Bob,
It is our pleasure to offer to you employment with WebValley, Inc. (the
"Company" or "WebValley") in the position of Chief Financial Officer, commencing
April 1, 1999 (with your first day in the office to be April 5, 1999). Your
employment with the Company is at will and may be terminated at any time by the
Company, with or without cause, upon written notice to you from the Company. You
will report to the Company's President.
Compensation, based on satisfactory performance, is anticipated to include the
following:
1. Gross monthly salary of $10,000 per month, paid in accordance with the
Company's usual payroll practices.
2. Grant of a seven year option for the purchase of up to 100,000 shares of
common stock of WebValley at a price of $3.00 per share, exercisable based
on your continued employment with the Company, vesting on the following
schedule: 15,000 shares upon the effective date of the Company's initial
public offering; an additional 17,500 shares on March 31, 2000, an
additional 20,000 shares on March 31, 2001, an additional 22,500 shares on
March 31, 2002 and an additional 25,000 shares on March 31, 2003. In the
event that your employment is terminated by the Company without "cause" on
or before March 31, 2001, the option's vesting will accelerate to 50,000
shares as of the date of termination, and you will have 90 days to exercise
following such termination. For purposes of this option, the term "cause"
means your conviction of a felony which would materially damage the
reputation of the Company, material misappropriation by you of the
Company's property; other material acts of dishonesty by you against the
Company or your gross negligence or willful misconduct in the performance
of your duties, which has a material adverse effect on the Company.
3. A one time incentive bonus of $35,000 will be paid to you upon closing of
the IPO which the Company is presently pursuing.
<PAGE>
4. You will participate in the WebValley executive compensation plan which
will be developed by a Compensation Committee of the Board of Directors.
5. You will be able to participate in all WebValley employee benefit plans
provided to employees and/or management.
6. You will receive four weeks of paid vacation for each calendar year, plus
one additional week for 1999 only, to facilitate your proposed three-week
vacation in July-August, 1999.
7. WebValley will reimburse you for the tuition costs of classes which you
take to maintain your license as a certified public account, provided such
classes have been preapproved by the President of the Company.
This offer of employment will remain open until April 1,1999. If you decide to
accept this offer of employment, please sign and return the copy of this letter
provided. Please give me a call if there are questions or concerns. I look
forward to hearing from you.
Sincerely,
WEBVALLEY, INC.
By: /s/ Satya P. Garg
--------------------------------------
Satya P. Garg
Its: President
The undersigned hereby accepts the terms of this letter.
/s/ Robert M. Ringstad March 23, 1999
- ----------------------------------------------------- ---------------
Robert M. Ringstad Date
2
<PAGE>
AMENDMENT TO EMPLOYMENT OFFER
Employee: Robert M. Ringstad
3430 Montgomerie Avenue
Deephaven, MN 55391
Company: WebValley, Inc.
1011 South First Street, Suite 250
Hopkins, MN 55343
Employee has previously accepted Company's employment offer which included terms
relating to an option for the purchase of shares of the Company's common stock.
Employee and Company hereby agree to amend the agreed-upon employment offer to
replace Section 2. in its entirety with the following:
2. Grant of a seven year option for the purchase of up to 120,000 shares
of common stock of WebValley at a price of $5.00 per share, exercisable
based on your continued employment with the Company, vesting on the
following schedule: 18,000 shares upon the effective date of the
Company's initial public offering; an additional 21,000 shares on March
31, 2000, an additional 24,000 shares on March 31, 2001, an additional
27,000 shares on March 31, 2002 and an additional 30,000 shares on
March 31, 2003. In the event that your employment is terminated by the
Company without "cause" on or before March 31, 2001, the option's
vesting will accelerate to 60,000 shares as of the date of termination,
and you will have 90 days to exercise following such termination. For
purposes of this option, the term "cause" means your conviction of a
felony which would materially damage the reputation of the Company,
material misappropriation by you of the Company's property; other
material acts of dishonesty by you against the Company or your gross
negligence or willful misconduct in the performance of your duties,
which has a material adverse effect on the Company.
Acknowledged and agreed to effective the 7th day of April, 1999
Company: Employee:
WebValley, Inc.
/s/ Robert M. Ringstad
-------------------------------
By: /s/ Satya P. Garg Robert M. Ringstad
--------------------------------
Satya P. Garg
Its: President
<PAGE>
Exhibit 10.7
WEBVALLEY, INC.
INCENTIVE STOCK OPTION AGREEMENT
UNDER THE 1999 STOCK OPTION PLAN
This Incentive Stock Option Agreement (the "Agreement") is entered into
by and between WebValley, Inc. (the "Company") and Robert M. Ringstad (the
"Employee"), effective the 23rd day of March, 1999.
The Company hereby grants to the Employee an option (the "Option")
under the WebValley, Inc. 1999 Stock Option Plan (the "Plan") to purchase
120,000 shares of the Company's stock ("Stock") under the following terms and
conditions.
1. Incentive Stock Option. The Option shall be an Incentive Stock Option,
as defined in the Plan.
2. Purchase Price. The purchase price of the Stock is $5.00 per share
which is not less than the Fair Market Value of the Stock on the date
of this Agreement.
3. Period of Exercise. The Option will expire on the date (the "Expiration
Date") seven years from the date of this Agreement. The Option may be
exercised only while the Employee is actively employed by the Company
(or a Subsidiary Corporation or Parent Corporation, if any, of the
Company) and as provided in Section 7, relating to termination of
employment.
4. Vesting.
4.1 Vesting Schedule. The Option will vest as follows:
(a) Prior to the earlier of the date on which an initial
public offering of the Company's common stock becomes
effective ("IPO Date") or March 31, 2000, the option
may not be exercised;
(b) From the IPO Date through March 31, 2000, the option
may be exercised for up to 18,000 shares of Stock;
(c) From April 1, 2000 through March 31, 2001, the option
may be exercised for up to 39,000 shares of Stock;
(d) From April 1, 2001 through March 31, 2002, the option
may be exercised for up to an aggregate purchase
pursuant to the Option, including any purchases in
prior periods, of 63,000 shares of Stock;
<PAGE>
(e) From April 1, 2002 through March 31, 2003, the option
may be exercised for up to an aggregate purchase
pursuant to the Option, including any purchases in
prior periods, of 90,000 shares of Stock;
(f) From April 1, 2003 through the Expiration Date, the
option may be exercised for up to an aggregate
purchase pursuant to the Option, including any
purchases in prior periods, of 120,000 shares of
Stock.
Notwithstanding the foregoing provisions of this Section 4.1
and subject to the following sentence, the Option granted
hereunder will become fully exercisable and vested in the
event of a "Change in Control." If the Company and the other
party to the transaction constituting a Change in Control
agree that the transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if the
transaction in fact is so treated, then the acceleration of
exercisability will not occur to the extent that the Company's
independent accountants and the other party's independent
accountants each determine in good faith that the acceleration
would preclude the use of "pooling of interests" accounting.
4.2 Definition of "Change In Control". For purposes of Section
4.1, a "Change in Control" means the happening of any of the
following:
(a) The consummation of a merger or consolidation of
the Company with or into another entity or any other
corporate reorganization, if more than 50% of the
combined voting power of the continuing or surviving
entity's securities outstanding immediately after
such merger, consolidation or other reorganization is
owned by persons who were not stockholders of the
Company immediately prior to such merger,
consolidation or other reorganization;
(b) When, during any period of 24 consecutive months
during the existence of the Plan, the individuals
who, at the beginning of such period, constitute the
Board ("Incumbent Directors") cease for any reason
other than death to constitute at least a majority
thereof; provided, however, that a Director who was
not a Director at the beginning of such 24-month
period will be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such
Director was elected by, or on the recommendation or,
or with the approval of, at least 60% of the
Directors who then qualified as Incumbent Directors
either actually (because they were Directors at the
beginning of such 24-month period) or by prior
operation of this Section 4.2(b); or
2
<PAGE>
(c) The approval by the shareholders of any sale,
lease, exchange, or other transfer (in one
transaction or a series of related transactions) of
all or substantially all of the assets of the Company
or the adoption of any plan or proposal for the
liquidation or dissolution of the Company.
(d) Any transaction as a result of which any person
is the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act of 1934 ("Exchange Act"),
directly or indirectly, of securities of the Company
representing at least 25% of the total voting power
represented by the Company's then outstanding voting
securities. For purposes of this section 4.2(d), the
term "person" shall have the same meaning as when
used in Section 13(d) and 14(d) of the Exchange Act
but excludes (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the
Company or of a Parent Corporation or Subsidiary
Corporation; (ii) a corporation owned directly or
indirectly by the shareholders of the Company in
substantially the same proportions as their ownership
of the Stock of the Company; and (iii) any person
having beneficial ownership of at least 25% of the
total voting power represented by the Company's then
outstanding voting securities on the date of the
Option.
5. $100,000 Limitation. Notwithstanding anything to the contrary contained
in this Agreement, to the extent that the total Fair Market Value
(determined as of the date of grant of an option) of shares of Stock
with respect to which the Option and any other incentive stock options
granted by the Company (or any Subsidiary Corporations or Parent
Corporation) becomes exercisable for the first time during any calendar
year exceeds $100,000, such option(s) shall be treated as a
Nonstatutory Option. The preceding sentence shall be applied by taking
options into account in the order in which they were granted.
6. Transferability. The Option is not transferable except by will or the
laws of descent and distribution and may be exercised during the
lifetime of the Employee only by the Employee.
7. Termination of Employment. Except as otherwise agreed to by the Company
or the Employee in writing, in the event that the employment of the
Employee with the Company (and any Parent Corporation or Subsidiary
Corporation is terminated, the Option may be exercised (to the extent
exercisable at the date of termination) by the Employee within three
months after the date of termination; provided, however, that:
(a) If the Employee's employment is terminated because the
Employee is disabled within the meaning of Code ss. 422, the
Employee shall have one
3
<PAGE>
year rather than three months to exercise the Option (to the
extent exercisable at the date of termination).
(b) If the Employee dies, the Option may be exercised (to the
extent exercisable by the Employee at the date of death) by
the legal representative of the Employee or by a person who
acquired the right to exercise the Option by bequest or
inheritance or by reason of the death of the Employee, but the
Option must be exercised within one year after the date of the
Employee's death.
(c) If the Employee's employment is terminated for cause (as
defined in Section 11.3 of the Plan), the Option and the
Employee's right to exercise the Option shall terminate
immediately.
(d) If the Employee's employment is terminated by the Company on
or before March 31, 2001 for other than cause (as defined in
Section 11.3 of the Plan), notwithstanding the provisions of
Section 4 hereof, the Option shall vest immediately and may be
exercised for up to an aggregate purchase pursuant to the
Option, including any purchases in prior periods, of 60,000
shares of Stock, but must be exercised within three months of
the date of termination.
(e) Notwithstanding the foregoing, in no event (including
disability or death of the Employee) may the Option be
exercised after the Expiration Date.
8. Leaves of Absences. For purposes of this Option, your service does not
terminate when you go on a military leave, a sick leave or another bona
fide leave of absence, if the leave was approved by the Company in
writing. But your service terminates when the approved leave ends,
unless you immediately return to active work. To the extent that your
leave of absence constitutes termination under the regulation of the
Code applicable to Incentive Stock Options, this Option will not
terminate, but will become a Nonstatutory Option.
9. No Guarantee of Employment. This Agreement shall in no way restrict the
right of the Company (or any Parent Corporation or Subsidiary
Corporation) to terminate the Employee's employment at any time.
10. Method of Exercise; Use of Company Stock. The Option may be exercised,
subject to the terms and conditions of this Agreement, by written
notice to the Company. The notice shall be in the form attached to this
Agreement and will be accompanied by payment (in such form as the
Company may specify) of the full purchase price of the shares to be
issued, and in the event of an exercise under the terms of paragraphs
7(a) and 7(b) hereof, appropriate proof of the right to exercise the
Option. The Company will issue and deliver certificates representing
the number of shares purchased under the
4
<PAGE>
Option, registered in the name of the Employee (or other purchaser
under paragraphs 7(a) and 7(b) hereof) as soon as practicable after
receipt of the notice.
When exercising the Option the Employee may make payment either in
money or by tendering shares of the Company Stock owned by the
Employee, or by a combination of the two. Where shares of Stock are
employed to pay all or part of the purchase price, the shares of Stock
shall be valued at their Fair Market Value at the time of payment.
11. Withholding. In any case where withholding is required or advisable
under federal, state or local law in connection with any exercise by
the Employee hereunder, the Company is authorized to withhold
appropriate amounts from amounts payable to the Employee, or may
require the Employee to remit to the Company an amount equal to such
appropriate amounts.
12. Changes in Capitalization, Dissolution, Liquidation and Reorganization.
The terms of this Agreement are subject to modification upon the
occurrence of certain events as described in Section 14 of the Plan.
13. Market Stand-Off. In connection with any underwritten public offering
by the Company of its equity securities pursuant to an effective
registration statement filed under the Securities Act of 1933, as
amended ("Securities Act"), including the Company's initial public
offering, the Employee shall not directly or indirectly sell, make any
short sale of, loan, hypothecate, pledge, offer, grant or sell any
option or other contract for the purchase of, any option or other
contract for the sale of, or otherwise dispose of or transfer, or agree
to engage in any of the foregoing transactions with respect to, any
Stock acquired under this Agreement without the prior written consent
of the Company or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time following the
date of the final prospectus for the offering as may be requested by
the Company or such underwriters. In no event, however, shall such
period exceed 180 days. The Market Stand-Off shall in any event
terminate two years after the date of the Company's initial public
offering. In the event of the declaration of a stock dividend, a
spin-off, a stock split, an adjustment in conversion ratio, a
recapitalization or a similar transaction affecting the Company's
outstanding securities without receipt of consideration, any new,
substituted or additional securities which are by reason of such
transaction distributed with respect to any Stock subject to the Market
Stand-Off, the Company may impose stop-transfer instructions with
respect to such new, substituted or additional securities until the end
of the applicable stand-off period. The Company's underwriters shall be
beneficiaries of the agreement set forth in this Section 12.
14. Incorporation of Plan. This Agreement is made pursuant to the
provisions of the Plan, which Plan is incorporated by reference herein.
Terms used herein shall have the meaning employed in the Plan unless
the context clearly requires otherwise. In the event of a conflict
between the provisions of the Plan and the provisions of this
Agreement, the provisions of the Plan shall govern.
5
<PAGE>
15. Severability. In the event any provision of this Agreement shall be
held illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of the Agreement, and the
Agreement shall be construed and enforced as if the illegal or invalid
provision had not been included.
16. Compliance with the Code. The Option is intended to qualify as an
"incentive stock option" under Code Section 422. If any provision of
this Agreement is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with the Option
being treated as an incentive stock option under the Code.
WEBVALLEY, INC.
By /s/ Satya P. Garg
---------------------------------
Satya P. Garg
Its President and CEO
EMPLOYEE: Robert M. Ringstad
/s/ Robert M. Ringstad
---------------------------------
Robert M. Ringstad
6
<PAGE>
WEBVALLEY, INC.
NOTICE OF EXERCISE OF INCENTIVE STOCK OPTION ISSUED
UNDER THE 1999 STOCK OPTION PLAN
To: Stock Option Committee
WebValley, Inc.
1011 First Street South, Suite 370
Hopkins MN 55343
I hereby exercise my Option dated March 23, 1999 to purchase _______
shares of $0.01 par value common stock of the Company at the option purchase
price of $5.00 per share. Enclosed is a certified or cashier's check in the
total amount of $_________ , or payment in such other form as the Company has
specified.
I represent to you that I am acquiring said shares for investment
purposes and not with a view to any distribution thereof. I understand that my
Stock certificate may bear an appropriate legend restricting the transfer of my
shares and that a stop transfer order may be placed with the Company's transfer
agent with respect to such shares.
I request that my shares be issued to me as follows:
---------------------------------------------
(Print your name in the form in which you wish to have the shares registered)
---------------------------------------------
(Social Security Number)
---------------------------------------------
(Street and Number)
---------------------------------------------
(City) (State) (Zip Code)
_____ I intend to hold the stock at least one year. (But, if I do sell within
one year of exercise, I will give the Option Plan Administrator a copy
of the broker's confirmation of the sale as soon as I receive it.)
_____ I intend to sell the stock within one year of exercise, and will give
the Option Plan Administrator a copy of the broker's confirmation of
the sale as soon as I receive it.
Dated:_____________ , ______.
Signature:_____________________________
7
<PAGE>
Exhibit 10.8
LOAN AND SECURITY AGREEMENT
by and between
PROFILE NATIONAL BUSINESS DIRECTORY, INC.,
a Minnesota corporation
and
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
Dated as of July 16, 1998
<PAGE>
Coast Business Credit
Loan and Security Agreement
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
Page
----
Coast Business Credit
Loan and Security Agreement
- --------------------------------------------------------------------------------
1. DEFINITIONS 1
Account Debtor 1
Affiliate 1
Audit 1
BIA 1
Borrower 1
Borrower's Address 1
Business Day 1
Change of Control 1
Closing Date 1
Coast 2
Code 2
Collateral 2
Collections 2
Credit Limit 2
Default 2
Deposit Account 2
Dollars or $ 2
Early Termination Fee 2
EBITDA 2
Equipment 2
Event of Default 2
GAAP 2
General Intangibles 2
Inventory 2
Loan Documents 3
Loans 3
Material Adverse Effect 3
Maturity Date 3
Maximum Dollar Amount 3
Minimum Monthly Interest 3
Obligations 3
Permitted Liens 3
Person 4
Prime Rate 4
Receivables 4
Renewal Date 4
Revolving Loans 4
Solvent 4
Tangible Net Worth 4
Term Loan 4
Year 2000 Problem 4
Other Terms 4
2. CREDIT FACILITIES. 4
2.1 Loans. 4
3. INTEREST AND FEES. 4
3.1 Interest. 4
3.2 Fees. 5
4. SECURITY INTEREST. 5
5. CONDITIONS PRECEDENT. 5
5.1 Status of Accounts at Closing 5
5.2 Minimum Availability 5
5.3 Landlord Waiver 5
5.4 Executed Agreement 5
5.5 Opinion of Borrower's Counsel 5
5.6 Priority of Coast's Liens 5
5.7 Insurance 5
5.8 Borrower's Existence 5
5.9 Organizational Documents 5
5.10 Taxes 6
5.11 Year 2000 Problem Assessment Certificate 6
5.12 Due Diligence 6
5.13 Tri-Party Agreements between Billing
Companies, Borrower, and Coast 6
5.14 Borrower's Officers 6
5.15 BIA's Appraisal of Borrower 6
5.16 Account Verification 6
5.17 Loans to Affiliates 6
5.18 Minimum Tangible Net Worth 6
5.19 Other Documents and Agreements 6
6. REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE BORROWER. 6
6.1 Existence and Authority 6
6.2 Name; Trade Names and Styles 6
6.3 Place of Business; Location of Collateral 7
6.4 Title to Collateral; Permitted Liens 7
6.5 Maintenance of Collateral 7
Page
----
6.6 Books and Records 7
6.7 Financial Condition, Statements and Reports 7
i
<PAGE>
Coast Business Credit
Loan and Security Agreement
- --------------------------------------------------------------------------------
Page
----
6.8 Tax Returns and Payments; Pension
Contributions 7
6.9 Compliance with Law 8
6.10 Litigation 8
6.11 Use of Proceeds 8
6.12 Year 2000 Compliance 8
7. RECEIVABLES. 8
7.1 Representations Relating to Receivables 8
7.2 Representations Relating to Documents and
Legal Compliance 8
7.3 Schedules and Documents relating to
Receivables 8
7.4 Collection of Receivables 9
7.5 Remittance of Proceeds 9
7.6 Disputes 9
7.7 Returns 9
7.8 Verification 9
7.9 No Liability 9
8. ADDITIONAL DUTIES OF THE BORROWER. 9
8.1 Financial and Other Covenants 9
8.2 Insurance 9
8.3 Reports 10
8.4 Access to Collateral, Books and Records 10
8.5 Negative Covenants 10
8.6 Litigation Cooperation 11
8.7 Further Assurances 11
Page
----
9. TERM. 11
9.1 Maturity Date 11
9.2 Early Termination 11
9.3 Payment of Obligations 11
10. EVENTS OF DEFAULT AND REMEDIES. 11
10.1 Events of Default 11
10.2 Remedies 12
10.3 Standards for Determining Commercial
Reasonableness 14
10.4 Power of Attorney 14
10.5 Application of Proceeds 15
10.6 Remedies Cumulative 15
11. GENERAL PROVISIONS. 15
11.1 Interest Computation 15
11.2 Application of Payments 16
11.3 Charges to Accounts 16
11.4 Monthly Accountings 16
11.5 Notices 16
11.6 Severability 16
11.7 Integration 16
11.8 Waivers 16
11.9 No Liability for Ordinary Negligence 16
11.10 Amendment 16
11.11 Time of Essence 17
11.12 Attorneys Fees, Costs and Charges 17
11.13 Benefit of Agreement 17
11.14 Publicity 17
11.15 Paragraph Headings; Construction 17
11.16 Governing Law; Jurisdiction; Venue 17
11.17 Mutual Waiver of Jury Trial 18
ii
<PAGE>
Coast Business Credit
Loan and Security Agreement
- --------------------------------------------------------------------------------
Coast
Loan and Security Agreement
Borrower: Profile National Business Directory, Inc.,
a Minnesota corporation
Address: 1011 First Street S.
Suite 203
Hopkins, Minnesota 55343
Date: July 16, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrower named above (the "Borrower"), whose chief
executive office is located at the above address ("Borrower's Address"). The
Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to
be a part of this Agreement, and the same is an integral part of this Agreement.
(Definitions of certain terms used in this Agreement are set forth in Section 1
below.)
<PAGE>
Coast Business Credit
Loan and Security Agreement
- --------------------------------------------------------------------------------
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable or General Intangible.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Audit" means to inspect, audit and copy Borrower's books and records and
the Collateral.
"BIA" means BIA Consulting, Inc.
"Borrower" has the meaning set forth in the introduction to this Agreement.
"Borrower's Address" has the meaning set forth in the introduction to this
Agreement.
"Business Day" means a day on which Coast is open for business.
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty percent
(20%) of the total voting power of all classes of stock or other ownership
interests then outstanding of any Borrower normally entitled to vote in the
election of directors or analogous governing body.
"Closing Date" means the date of the initial funding under this Agreement.
"Coast" has the meaning set forth in the introduction to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 4 hereof.
"Collections" means those collections of Borrower including, but not
limited to, collections arising from the following: direct billings of Borrower;
web page services; or other services of Borrower.
"Credit Limit" means the maximum amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Dollars or $" means United States dollars.
"Early Termination Fee" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"EBITDA" means, in any fiscal period, Borrower's consolidated net income
(other than extraordinary or non-recurring items of Borrower for such period),
plus (i) the amount of all interest expense, income tax expense, depreciation
expense, and amortization expense of Borrower for such period, on a
4
<PAGE>
Coast Business Credit
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consolidated basis, and plus or minus (as the case may be) (ii) any other
non-cash charges which have been added or subtracted, as the case may be, in
calculating Borrower's consolidated net income for such period.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 10.1 of
this Agreement.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, investment property, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit, and
including without limitation all farm products), and all materials and supplies
of every kind, nature and description which are or might be used or consumed in
Borrower's business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all warehouse receipts, documents of title and other
documents representing any of the foregoing.
"Investment Property" has the meaning set forth in Section 9115 of the Code
as in effect as of the date hereof.
"Loan Documents" means this Agreement, the agreements and documents listed
on Section 5 of the Schedule, and any other
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agreement, instrument or document executed in connection herewith or therewith.
"Loans" has the meaning set forth in Section 2.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations of
Borrower or any subsidiary of Borrower, (ii) the ability of Borrower or any
guarantor of any of the Obligations to perform its obligations under this
Agreement (including, without limitation, repayment of the Obligations as they
come due) or (iii) the validity or enforceability of this Agreement or any other
agreement or document entered into by any party in connection herewith, or the
rights or remedies of Coast hereunder or thereunder.
"Maturity Date" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"Maximum Dollar Amount" has the meaning set forth in Section 2 of the
Schedule.
"Minimum Monthly Interest" has the meaning set forth in Section 3 of the
Schedule.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees (including attorneys' fees and expenses incurred in bankruptcy), expert
witness fees, audit fees, letter of credit fees, collateral monitoring fees,
closing fees, facility fees, termination fees, minimum interest charges and any
other sums chargeable to Borrower under this Agreement or under any other
present or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following:
(a) purchase money security interests in specific items of Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in writing by
Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially concurrently with
this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or other
similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal or refinancing
of the indebtedness secured by liens of the type described above in clauses
(1) or (2) above, provided that any extension, renewal or replacement lien
is limited to
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the property encumbered by the existing lien and the principal amount of
the indebtedness being extended, renewed or refinanced does not increase;
or
(h) liens in favor of customs and revenue authorities which secure payment
of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (4) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, general partnership,
limited partnership, limited liability partnership, limited liability company,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute therefor
of the Bank of America NT & SA whether or not that rate is the lowest interest
rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime
Rate" shall mean the highest of the prime rates published in the Wall Street
Journal on the first business day of the applicable month, as the base rate on
corporate loans at large U.S. money center commercial banks.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities accounts,
security entitlements, commodity contracts, commodity accounts, investment
property and all other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, all merchandise returned to or
repossessed by Borrower, and all rights of stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.
"Renewal Date" shall mean the Maturity Date if this Agreement is renewed
pursuant to Section 9.1 hereof, and each anniversary thereafter that this
Agreement is renewed pursuant to Section 9.1 hereof.
"Revolving Loans" means the Loans described in Section 2.1 of the Schedule.
"Solvent" means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such
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Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person's properties and assets
would constitute unreasonably small capital after giving due consideration to
the prevailing practices in the industry in which such Person is engaged. In
computing the amount of contingent liabilities at any time, it is intended that
such liabilities will be computed at the amount that, in light of all the facts
and circumstances existing at such time, represents the amount that reasonably
can be expected to become an actual or matured liability.
"Tangible Net Worth" means consolidated shareholder equity, plus
subordinated debt otherwise permitted hereunder.
"Term Loan" means the Loans described in Section 2(c) of the Schedule.
"Year 2000 Problem" means the risk that computer systems, software and
applications used by Borrower may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
"Other Terms." All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. CREDIT FACILITIES.
2.1 Loans. Coast agrees, provided no Default or Event of Default has
occurred and is continuing, to make loans to Borrower (the "Loans") not to
exceed the Maximum Dollar Amount shown on the Schedule. In addition, Coast
may create reserves against or reduce its advance rates without declaring a
Default or an Event of Default if it determines that there has occurred a
Material Adverse Effect.
3. INTEREST AND FEES.
3.1 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set
forth to the contrary in this Agreement. Interest shall be payable monthly,
on the last day of the month. Interest may, in Coast's discretion, be
charged to Borrower's loan account, and the same shall thereafter bear
interest at the same rate as the other Loans. Regardless of the amount of
Obligations that may be outstanding from time to time, Borrower shall pay
Coast Minimum Monthly Interest during the term of this Agreement with
respect to the Receivable Loans in the amount set forth on the Schedule.
3.2 Fees. Borrower shall pay Coast the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Coast and are
deemed fully earned and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when due,
Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
and all money, and all property now or at any time in
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the future in Coast's possession (including claims and credit balances), and all
proceeds of any of the foregoing (including proceeds of any insurance policies,
proceeds of proceeds, and claims against third parties), all products of any of
the foregoing, and all books and records related to any of the foregoing (all of
the foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the satisfaction,
in the sole discretion of Coast, at or prior to the first advance of funds
hereunder, of each, every and all of the following conditions:
5.1 Status of Accounts at Closing. No accounts payable shall be due and
unpaid sixty (60) days past its due date except for such accounts payable
being contested in good faith in appropriate proceedings and for which
adequate reserves have been provided.
5.2 Minimum Availability. Borrower shall have minimum loan availability
immediately following the initial funding in the amount set forth on the
Schedule.
5.3 Landlord Waiver. Borrower will use its best efforts to obtain landlord
waivers and access agreements in form and substance satisfactory to Coast,
in Coast's sole and absolute discretion, and, when deemed appropriate by
Coast, in form for recording in the appropriate recording office, with
respect to all leased locations where Borrower maintains any inventory or
equipment.
5.4 Executed Agreement. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.5 Opinion of Borrower's Counsel. Coast shall have received an opinion of
Borrower's counsel, in form and substance satisfactory to Coast in its sole
and absolute discretion.
5.6 Priority of Coast's Liens. Coast shall have received the results of "of
record" searches satisfactory to Coast in its sole and absolute discretion,
reflecting its Uniform Commercial Code filings against Borrower indicating
that Coast has a perfected, first priority lien in and upon all of the
Collateral, subject only to Permitted Liens.
5.7 Insurance. Coast shall have received copies of the insurance binders or
certificates evidencing Borrower's compliance with Section 8.2 hereof,
including lender's loss payee endorsements.
5.8 Borrower's Existence. Coast shall have received copies of Borrower's
articles or certificate of incorporation and all amendments thereto, and a
Certificate of Good Standing, each certified by the Secretary of State of
the state of Borrower's organization, and dated a recent date prior to the
Closing Date, and Coast shall have received Certificates of Foreign
Qualification for Borrower from the Secretary of State of each state
wherein the failure to be so qualified could have a Material Adverse
Effect.
5.9 Organizational Documents. Coast shall have received copies of
Borrower's By-Laws and all amendments thereto, and Coast shall have
received copies of the resolutions of the board of directors of Borrower,
authorizing the execution and delivery of this Agreement
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and the other documents contemplated hereby, and authorizing the
transactions contemplated hereunder and thereunder, and authorizing
specific officers of Borrower to execute the same on behalf of Borrower, in
each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date.
5.10 Taxes. Coast shall have received evidence from Borrower that Borrower
has complied with all tax withholding and Internal Revenue Service
regulations, in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.11 Year 2000 Problem Assessment Certificate. Coast shall have received a
certificate from the relevant officer of Borrower to the effect that, as
the result of a comprehensive assessment undertaken by Borrower of
Borrower's computer systems, software and applications, Borrower knows of
no facts that would cause Borrower to reasonably believe that the Year 2000
Problem will cause a Material Adverse Effect.
5.12 Due Diligence. Coast shall have completed its due diligence with
respect to Borrower.
5.13 Tri-Party Agreements between Billing Companies, Borrower, and Coast.
Coast shall have received duly executed tri-party agreements between each
of Borrower's billing companies, Borrower, and Coast in a form acceptable
to Coast.
5.14 Borrower's Officers. Coast shall have reviewed the background check of
Borrower's officers to its satisfaction.
5.15 BIA's Appraisal of Borrower. Coast shall have received the final draft
of BIA's appraisal of Borrower's subscriber base or in lieu thereof, Coast
shall have received BIA's letter of appraisal of Borrower's subscriber
base.
5.16 Account Verification. Coast shall have confirmed that the account
verification system utilized by Borrower is satisfactory to Coast.
5.17 Loans to Affiliates. Coast shall have received concurrent with funding
by direct disbursement, evidence satisfactory to Coast that all advances
and loans from affiliated companies, SM Engineering Company and LD
Management, Inc. are to be fully repaid.
5.18 Minimum Tangible Net Worth. Borrower's Tangible Net Worth shall be no
less than Seven Hundred Fifty Thousand Dollars ($750,000) on the Closing
Date.
5.19 Other Documents and Agreements. Coast shall have received such other
agreements, instruments and documents as Coast may require in connection
with the transactions contemplated hereby, all in form and substance
satisfactory to Coast in Coast's sole and absolute discretion, and in form
for filing in the appropriate filing office, including, but not limited to,
those documents listed in Section 5 of the Schedule.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
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6.1 Existence and Authority. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be
qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a Material Adverse Effect. The execution,
delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (a) have been duly and validly authorized,
(b) are enforceable against Borrower in accordance with their terms (except
as enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to
creditors' rights generally), and (c) do not violate Borrower's articles or
certificate of incorporation, or Borrower's by-laws, or any law or any
material agreement or instrument which is binding upon Borrower or its
property, and (d) do not constitute grounds for acceleration of any
material indebtedness or obligation under any material agreement or
instrument which is binding upon Borrower or its property.
6.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are
all prior names of Borrower and all of Borrower's present and prior trade
names. Borrower shall give Coast thirty (30) days' prior written notice
before changing its name or doing business under any other name. Borrower
has complied, and will in the future comply, with all laws relating to the
conduct of business under a fictitious business name.
6.3 Place of Business; Location of Collateral. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In
addition, Borrower has places of business and Collateral is located only at
the locations set forth on the Schedule. Borrower will give Coast at least
thirty (30) days' prior written notice before opening any additional place
of business, changing its chief executive office, or moving any of the
Collateral to a location other than Borrower's Address or one of the
locations set forth on the Schedule.
6.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and
will remain free and clear of any and all liens, charges, security
interests, encumbrances and adverse claims, except for Permitted Liens.
Coast now has, and will continue to have, a first-priority perfected and
enforceable security interest in all of the Collateral, subject only to the
Permitted Liens, and Borrower will at all times defend Coast and the
Collateral against all claims of others. None of the Collateral now is or
will be affixed to any real property in such a manner, or with such intent,
as to become a fixture. Borrower is not and will not become a lessee under
any real property lease pursuant to which the lessor may obtain any rights
in any of the Collateral (other than Permitted Liens and the lessor's
interest in any security deposits required under the lease) and no such
lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party
has an interest (whether as owner, mortgagee, beneficiary under a deed of
trust, lien or otherwise), Borrower shall, whenever
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requested by Coast, use its best efforts to cause such third party to
execute and deliver to Coast, in form acceptable to Coast, such waivers and
subordinations as Coast shall specify, so as to ensure that Coast's rights
in the Collateral are, and will continue to be, superior to the rights of
any such third party. Borrower will keep in full force and effect, and will
comply with all the terms of, any lease of real property where any of the
Collateral now or in the future may be located.
6.5 Maintenance of Collateral. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Coast in writing of any
material loss or damage to the Collateral.
6.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with GAAP.
6.7 Financial Condition, Statements and Reports. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with GAAP (except, in the case of unaudited financial
statements, for the absence of footnotes and subject to normal year-end
adjustments) and now and in the future will fairly reflect the financial
condition of Borrower, at the times and for the periods therein stated.
Between the last date covered by any such statement provided to Coast and
the date hereof, there has been no Material Adverse Effect. Borrower is now
and will continue to be Solvent.
6.8 Tax Returns and Payments; Pension Contributions. Borrower has timely
filed, and will timely file, all tax returns and reports required by
foreign, federal, state and local law, and Borrower has timely paid, and
will timely pay, all foreign, federal, state and local taxes, assessments,
deposits and contributions now or in the future owed by Borrower. Borrower
may, however, defer payment of any contested taxes, provided that Borrower
(i) in good faith contests Borrower's obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted,
(ii) notifies Coast in writing of the commencement of, and any material
development in, the proceedings, and (iii) posts bonds or takes any other
steps required to keep the contested taxes from becoming a lien upon any of
the Collateral. As of the date hereof, Borrower is unaware of any claims or
adjustments proposed for any of Borrower's prior tax years which could
result in additional taxes becoming due and payable by Borrower. Borrower
has paid, and shall continue to pay all amounts necessary to fund all
present and future pension, profit sharing and deferred compensation plans
in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit
the occurrence of any other event with respect to, any such plan which
could result in any liability of Borrower, including any liability to the
Pension Benefit Guaranty Corporation or its successors or any other
governmental agency. Borrower shall, at all times, utilize the services of
an outside payroll service providing for the automatic deposit of all
payroll taxes payable by Borrower.
6.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all material
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foreign, federal, state and local laws and regulations relating to
Borrower, including, but not limited to, the Fair Labor Standards Act, and
those relating to Borrower's ownership of real or personal property, the
conduct and licensing of Borrower's business, and environmental matters.
6.10 Litigation. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of
Borrower's knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in a
Material Adverse Effect. Borrower will promptly inform Coast in writing of
any claim, proceeding, litigation or investigation in the future threatened
(to the best of Borrower's knowledge) or instituted by or against Borrower
involving an amount set forth on the Schedule.
6.11 Use of Proceeds. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any
"margin stock" (as defined in Regulation G of the Board of Governors of the
Federal Reserve System) and no part of the proceeds of any Loan will be
used to purchase or carry any "margin stock" or to extend credit to others
for the purpose of purchasing or carrying any "margin stock."
6.12 Year 2000 Compliance. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software
and applications, Borrower represents and warrants that the Year 2000
problem will not result in a Material Adverse Effect.
7. RECEIVABLES.
7.1 Representations Relating to Receivables. Borrower represents and
warrants to Coast as follows: all Collections with respect to which Loans
are requested by Borrower shall, on the date each Loan is requested and
made, represent bona fide existing unconditional Collections from Account
Debtors on Receivables created by the sale, delivery and acceptance of
goods or the rendition of services in the ordinary course of Borrower's
business.
7.2 Representations Relating to Documents and Legal Compliance. Borrower
represents and warrants to Coast as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct in all
material respects and all such invoices, instruments and other documents
and all of Borrower's books and records are and shall be genuine and in all
respects what they purport to be. All sales and other transactions
underlying or giving rise to each Receivable shall fully comply in all
material respects with all applicable laws and governmental rules and
regulations. All signatures of and indorsements by Borrower on all
documents, instruments, and agreements relating to all Receivables are and
shall be genuine, and all such documents, instruments and agreements are
and shall be legally enforceable in accordance with their terms.
7.3 Schedules and Documents relating to Receivables. Borrower shall deliver
to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may reasonably request,
transaction reports and loan requests, schedules of Receivables, and
schedules of collections, all on Coast's standard forms; provided,
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however, that Borrower's failure to execute and deliver the same shall not
affect or limit Coast's security interest and other rights in all of
Borrower's Receivables, nor shall Coast's failure to advance or lend
against a specific Receivable affect or limit Coast's security interest and
other rights therein. Loan requests received after 10:30 A.M. Los Angeles,
California time, will not be considered by Coast until the next Business
Day. Together with each such schedule, or later if requested by Coast,
Borrower shall furnish Coast with copies (or, at Coast's request,
originals) of all contracts, orders, invoices, and other similar documents,
and all original shipping instructions, delivery receipts, bills of lading,
and other evidence of delivery, for any goods the sale or disposition of
which gave rise to such Receivables, and Borrower warrants the genuineness
of all of the foregoing. Borrower shall also furnish to Coast an aged
accounts receivable trial balance in such form and at such intervals as
Coast shall request. In addition, Borrower shall deliver to Coast the
originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, upon receipt thereof and in the same form as received, with
all necessary indorsements, all of which shall be with recourse. Borrower
shall also provide Coast with copies of all credit memos as and when
requested by Coast.
7.4 Collection of Receivables. Borrower shall cause its Account Debtors to
direct all payments on Receivables to be deposited into a lockbox account,
or such other "blocked account" as Coast may specify, pursuant to a
lockbox/blocked account agreement in such form as Coast may specify. Coast
or its designee may, at any time, notify Account Debtors that Coast has
been granted a security interest in the Receivables.
7.5 Remittance of Proceeds. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one (1) Business Day
after receipt by Borrower, in their original form, duly endorsed to Coast,
to be applied to the Obligations in such order as Coast shall determine.
Borrower agrees that it will not commingle proceeds of Collateral with any
of Borrower's other funds or property, but will hold such proceeds separate
and apart from such other funds and property and in an express trust for
Coast. Nothing in this Section limits the restrictions on disposition of
Collateral set forth elsewhere in this Agreement.
7.6 Disputes. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in
full, or agree to do any of the foregoing, except that Borrower may do so,
provided that: (a) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, and in arm's length
transactions, which are reported to Coast on the regular reports provided
to Coast; (b) no Default or Event of Default has occurred and is
continuing; and (c) taking into account all such discounts settlements and
forgiveness, the total outstanding Loans will not exceed the Credit Limit.
Coast may, at any time after the occurrence of an Event of Default, settle
or adjust disputes or claims directly with Account Debtors for amounts and
upon terms which Coast considers advisable in its reasonable credit
judgment
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and, in all cases, Coast shall credit Borrower's Loan account with only the
net amounts received by Coast in payment of any Receivables.
7.7 Returns. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary
course of its business, Borrower shall promptly determine the reason for
such return and promptly issue a credit memorandum to the Account Debtor in
the appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, Borrower shall (a) hold the returned
Inventory in trust for Coast, (b) segregate all returned Inventory from all
of Borrower's other property, (c) conspicuously label the returned
Inventory as subject to Coast's security interest, and (d) immediately
notify Coast of the return of any Inventory, specifying the reason for such
return, the location and condition of the returned Inventory, and on
Coast's request deliver such returned Inventory to Coast.
7.8 Verification. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating
to the Receivables, by means of mail, telephone or otherwise, either in the
name of Borrower or Coast or such other name as Coast may choose.
7.9 No Liability. Coast shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which gives
rise to a Receivable, or for any error, act, omission or delay of any kind
occurring in the settlement, failure to settle, collection or failure to
collect any Receivable, or for settling any Receivable in good faith for
less than the full amount thereof, nor shall Coast be deemed to be
responsible for any of Borrower's obligations under any contract or
agreement giving rise to a Receivable. Nothing herein shall, however,
relieve Coast from liability for its own gross negligence or willful
misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 Financial and Other Covenants. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
8.2 Insurance. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast
may reasonably require, and Borrower shall provide evidence of such
insurance to Coast, so that Coast is satisfied that such insurance is, at
all times, in full force and effect. All liability insurance policies of
Borrower shall name Coast as an additional insured, and all property
casualty and related insurance policies of Borrower shall name Coast as a
loss payee thereon and Borrower shall cause a lender's loss payee
endorsement to be issued in form reasonably acceptable to Coast. Upon
receipt of the proceeds of any such insurance, Coast shall apply such
proceeds in reduction of the Obligations as Coast shall determine in its
sole discretion, except that, provided no Default or Event of Default has
occurred and is continuing, Coast shall release to Borrower insurance
proceeds with respect to Equipment totaling less than the amount set forth
in Section 8 of the Schedule, which shall be utilized by Borrower for the
replacement of the Equipment with respect to
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which the insurance proceeds were paid. Coast may require reasonable
assurance that the insurance proceeds so released will be so used. If
Borrower fails to provide or pay for any insurance, Coast may, but is not
obligated to, obtain the same at Borrower's expense. Borrower shall
promptly deliver to Coast copies of all reports made to insurance
companies.
8.3 Reports. Borrower, at its expense, shall provide Coast with the written
reports set forth in Section 8 of the Schedule, and such other written
reports with respect to Borrower (including budgets, sales projections,
operating plans and other financial documentation), as Coast shall from
time to time reasonably specify.
8.4 Access to Collateral, Books and Records. At reasonable times but not
less frequently than quarterly and on one (1) Business Day's notice, Coast,
or its agents, shall have the right to perform Audits. Coast shall take
reasonable steps to keep confidential all confidential information obtained
in any Audit, but Coast shall have the right to disclose any such
information to its auditors, regulatory agencies, and attorneys, and
pursuant to any subpoena or other legal process. The Audits shall be at
Borrower's expense and the charge for the Audits shall be Seven Hundred
Fifty Dollars ($750) per person per day (or such higher amount as shall
represent Coast's then current standard charge for the same), plus
reasonable out-of-pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written
agreement from such accounting firm, service bureau or other third party to
give Coast the same rights with respect to access to books and records and
related rights as Coast has under this Loan Agreement. Borrower shall also
take all necessary steps to assure that this material accounting and
software, systems and applications, and those of its accounting firm,
service bureau or any other third party vendor or supplier, will, on a
timely basis, adequately and completely address the Year 2000 Problem in
all material respects.
8.5 Negative Covenants. Borrower shall not, without Coast's prior written
consent, do any of the following:
(a) merge or consolidate with another entity, except in a transaction in
which (i) the owners of the Borrower hold at least fifty percent
(50%) of the ownership interest in the surviving entity immediately
after such merger or consolidation, and (ii) the Borrower is the
surviving entity;
(b) acquire any assets, except (i) in the ordinary course of business, or
(ii) in a transaction or a series of transactions not involving the
payment of an aggregate amount in excess of the amount set forth in
Section 8 of the Schedule;
(c) enter into any other transaction outside the ordinary course of
business;
(d) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except
for the sale of obsolete or unneeded Equipment in the ordinary course
of business;
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(e) store any Inventory or other Collateral with any warehouseman or
other third party;
(f) sell any Inventory on a sale-or-return, guaranteed sale, consignment,
or other contingent basis;
(g) make any loans of any money or other assets, except (i) advances to
customers or suppliers in the ordinary course of business, (ii)
travel advances, employee relocation loans and other employee loans
and advances in the ordinary course of business, and (iii) loans to
employees, officers and directors for the purpose of purchasing
equity securities of the Borrower;
(h) make or receive loans or advances to or from affiliated companies,
including affiliated companies SM Engineering, LD Management and
Software Moguls India Pvt., Limited. Notwithstanding the foregoing,
this limitation shall not apply to accounts payable arising in the
ordinary course of business owing to or from affiliate company
Software Moguls India Pvt., Limited.
(i) incur any debts, outside the ordinary course of business, which would
have a Material Adverse Effect;
(j) guarantee or otherwise become liable with respect to the obligations
of another party or entity;
(k) pay or declare any dividends on Borrower's stock (except for
dividends payable solely in stock of Borrower and dividends in an
amount not to exceed the shareholders' S corporation tax liability
arising out of their ownership of Borrower);
(l) make any change in Borrower's capital structure which would have a
Material Adverse Effect; or
(m) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default is continuing or would occur as a
result of such transaction.
8.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating
to Borrower, Borrower shall, without expense to Coast, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Coast may deem them reasonably necessary in
order to prosecute or defend any such suit or proceeding.
8.7 Further Assurances. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully
consummate the transactions contemplated by this Agreement.
9. TERM.
9.1 Maturity Date. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be
extended, and this Agreement shall automatically and continuously renew,
for successive additional terms of one year each, unless one party gives
written notice to the other, not less than sixty (60) days prior to the
Maturity Date or the next Renewal Date, that such
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party elects to terminate this Agreement effective on the Maturity Date or
such next Renewal Date.
9.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business
Days after written notice of termination is given to Coast; or (b) by Coast
at any time after the occurrence and during the continuance of an Event of
Default, without notice, effective immediately. If this Agreement is
terminated by Borrower or by Coast under this Section 9.2, Borrower shall
pay to Coast an Early Termination Fee in the amount shown in Section 3 of
the Schedule. The Early Termination Fee shall be due and payable on the
effective date of termination and thereafter shall bear interest at a rate
equal to the rate applicable to the Receivable Loans.
9.3 Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and
whether or not all or any part of such Obligations are otherwise then due
and payable. Notwithstanding any termination of this Agreement, all of
Coast's security interests in all of the Collateral and all of the terms
and provisions of this Agreement shall continue in full force and effect
until all Obligations have been paid and performed in full; provided that,
Coast may, in its sole discretion, refuse to make any further Loans after
termination. No termination shall in any way affect or impair any right or
remedy of Coast, nor shall any such termination relieve Borrower of any
Obligation to Coast, until all of the Obligations have been paid and
performed in full. Upon payment and performance in full of all the
Obligations and termination of this Agreement, Coast shall promptly deliver
to Borrower termination statements, requests for reconveyances and such
other documents as may be required to fully terminate Coast's security
interests.
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall
give Coast immediate written notice thereof:
(a) Any material warranty, representation, statement, report or
certificate made or delivered to Coast by Borrower or any of
Borrower's officers, employees or agents, now or in the future, shall
be untrue or misleading and result in a Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest thereon
or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall
exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to Coast as
provided in Section 7.5 above, or shall fail to give Coast access to
its books and records or Collateral as provided in Section 8.4 above,
or shall breach any negative covenant set forth in Section 8.5 above;
or
(e) Borrower shall fail to comply with the financial covenants (if any)
set forth in the
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Schedule or shall fail to perform any material non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any material non-monetary Obligation,
which failure is not cured within ten (10) Business Days after the
date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance (other
than a Permitted Lien) is made on all or any part of the Collateral
which is not cured within ten (10) Business Days after the occurrence
of the same; or
(h) any default or event of default occurs under any obligation secured
by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which has or
may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business failure
of Borrower; or appointment of a receiver, trustee or custodian, for
all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by Borrower under
any reorganization, bankruptcy, insolvency, arrangement, readjustment
of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect; or
(k) the commencement of any proceeding against Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction,
now or in the future in effect, which is (i) not timely controverted,
or (ii) not cured by the dismissal thereof within thirty (30) days
after the date commenced; or
(l) Borrower makes any payment on account of any indebtedness or
obligation which has been subordinated to the Obligations, other than
as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations
terminates or in any way limits his subordination agreement; or
(m) Except as permitted under Section 8.5(a), Borrower shall suffer or
experience any Change of Control without Coast's prior written
consent, which consent shall be in the discretion of Coast in the
exercise of its reasonable business judgment; or
(n) Borrower shall generally not pay its debts as they become due, or
Borrower shall conceal, remove or transfer any part of its property,
with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent
under any bankruptcy, fraudulent conveyance or similar law; or
(o) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during
any of the above cure periods.
10.2 Remedies. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without
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notice or demand of any kind (all of which are hereby expressly waived by
Borrower), may do any one or more of the following:
(a) Cease making Loans or otherwise extending credit to Borrower under
this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any
deferred or installment payments allowed by any instrument evidencing
or relating to any Obligation;
(c) Take possession of any or all of the Collateral wherever it may be
found, and for that purpose Borrower hereby authorizes Coast without
judicial process to enter onto any of Borrower's premises without
interference to search for, take possession of, keep, store or remove
any of the Collateral, and remain on the premises or cause a
custodian to remain on the premises in exclusive control thereof,
without charge for so long as Coast deems it reasonably necessary in
order to complete the enforcement of its rights under this Agreement
or any other agreement; provided, however, that should Coast seek to
take possession of any of the Collateral by Court process, Borrower
hereby irrevocably waives:
(i) any bond and any surety or security relating thereto required
by any statute, court rule or otherwise as an incident to such
possession;
(ii) any demand for possession prior to the commencement of any suit
or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final
judgment;
(d) Require Borrower to assemble any or all of the Collateral and make it
available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to
such locations as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any Collateral
prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's
premises, vehicles, hoists, lifts, cranes, equipment and all other
property without charge. Coast is hereby granted a license or other
right to use, without charge, Borrower's labels, patents, copyrights,
rights of use of any name, trade secrets, trade names, trademarks,
service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production
of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to
Coast's benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or
private sales, in lots or in bulk, for cash, exchange or other
property, or on credit, and to adjourn any such sale from time to
time without notice other than oral announcement at the time
scheduled for sale. Coast shall have the right to conduct
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such disposition on Borrower's premises without charge, for such time
or times as Coast deems reasonable, or on Coast's premises, or
elsewhere and the Collateral need not be located at the place of
disposition. Coast may directly or through any affiliated company
purchase or lease any Collateral at any such public disposition, and
if permissible under applicable law, at any private disposition. Any
sale or other disposition of Collateral shall not relieve Borrower of
any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith,
Borrower irrevocably authorizes Coast to endorse or sign Borrower's
name on all collections, receipts, instruments and other documents,
to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or
proceeds thereof, and, in Coast's sole discretion, to grant
extensions of time to pay, compromise claims and settle Receivables
and the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal and state
income tax returns and the books and records utilized in the
preparation thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations incurred
by Coast (including attorneys' fees and expenses incurred in connection with
bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand. Coast may charge the same to Borrower's loan account, and the
same shall thereafter bear interest at the same rate as is applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional three percent per annum.
10.3 Standards for Determining Commercial Reasonableness. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least seven (7) days prior
to the sale, and, in the case of a public sale, notice of the sale is
published at least seven (7) days before the sale in a newspaper of
general circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general, non-specific
terms;
(c) The sale is conducted at a place designated by Coast, with or without
the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m. Los
Angeles, California time;
(e) Payment of the purchase price in cash or by cashier's check or wire
transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may (but is
not obligated to) direct any prospective purchaser to
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ascertain directly from Borrower any and all information concerning
the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
10.4 Power of Attorney. Borrower grants to Coast an irrevocable power of
attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its
option, but without obligation, with or without notice to Borrower, and at
Borrower's expense, to do any or all of the following, in Borrower's name
or otherwise, but Coast agrees to exercise the following powers in a
commercially reasonable manner:
(a) Execute on behalf of Borrower any documents that Coast may, in its
sole discretion, deem advisable in order to perfect and maintain
Coast's security interest in the Collateral, or in order to exercise
a right of Borrower or Coast, or in order to fully consummate all the
transactions contemplated under this Agreement, and all other present
and future agreements;
(b) Execute on behalf of Borrower any document exercising, transferring
or assigning any option to purchase, sell or otherwise dispose of or
to lease (as lessor or lessee) any real or personal property which is
part of Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to
any Account Debtor, any proof of claim in bankruptcy, any Notice of
Lien, claim of mechanic's, materialman's or other lien, or assignment
or satisfaction of mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of payment
or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may
come into Coast's possession;
(e) Endorse all checks and other forms of remittances received by Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any
judgment based thereon, or otherwise take any action to terminate or
discharge the same;
(g) Grant extensions of time to pay, compromise claims and settle
Receivables and General Intangibles for less than face value and
execute all releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to secure the
release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim that
relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any books or
records belonging to, or relating to, Borrower to give Coast the same
rights of access and other rights with respect thereto as Coast has
under this Agreement; and
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(k) Take any action or pay any sum required of Borrower pursuant to this
Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
Borrower shall pay, indemnify, defend, and hold Coast and each of its officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all attorneys fees and disbursements and other
costs and expenses actually incurred in connection therewith (as and when they
are incurred and irrespective of whether suit is brought), at any time asserted
against, imposed upon, or incurred by any of them in connection with or as a
result of or related to the execution, delivery, enforcement, performance, and
administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person hereunder with respect to any Indemnified Liability that a
court of competent jurisdiction finally determines to have resulted from the
gross negligence or willful misconduct of such Indemnified Person. This
provision shall survive the termination of this Agreement and the repayment of
the Obligations.
10.5 Application of Proceeds. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in
the exercise of its rights under this Agreement, second to the interest due
upon any of the Obligations, and third to the principal of the Obligations,
in such order as Coast shall determine in its sole discretion. Any surplus
shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to Coast for any deficiency. If, Coast, in its
sole discretion, directly or indirectly enters into a deferred payment or
other credit transaction with any purchaser at any sale of Collateral,
Coast shall have the option, exercisable at any time, in its sole
discretion, of either reducing the Obligations by the principal amount of
purchase price or deferring the reduction of the Obligations until the
actual receipt by Coast of the cash therefor.
10.6 Remedies Cumulative. In addition to the rights and remedies set forth
in this Agreement, Coast shall have all the other rights and remedies
accorded a secured party in equity, under the Code, and under all other
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applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise
by Coast of one or more of its rights or remedies shall not be deemed an
election, nor bar Coast from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Coast to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights
and remedies shall continue in full force and effect until all of the
Obligations have been indefeasibly paid and performed.
11. GENERAL PROVISIONS.
11.1 Interest Computation. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast
(including proceeds of Receivables and payment of the Obligations in full)
shall be deemed applied by Coast on account of the Obligations three (3)
Business Days after receipt by Coast of immediately available funds, and,
for purposes of the foregoing, any such funds received after 10:30 AM Los
Angeles, California time, on any day shall be deemed received on the next
Business Day. Coast shall be entitled to charge Borrower's account for such
three (3) Business Days of "clearance" or "float" at the rate(s) set forth
in Section 3 of the Schedule on all checks, wire transfers and other items
received by Coast, regardless of whether such three (3) Business Days of
"clearance" or "float" actually occur, and shall be deemed to be the
equivalent of charging three (3) Business Days of interest on such
collections. This across-the-board three (3) Business Day clearance or
float charge on all collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Coast's financing of
Borrower. Coast shall not, however, be required to credit Borrower's
account for the amount of any item of payment which is unsatisfactory to
Coast in its sole discretion, and Coast may charge Borrower's loan account
for the amount of any item of payment which is returned to Coast unpaid.
11.2 Application of Payments. Subject to Section 7.5 hereof, all payments
with respect to the Obligations may be applied, and in Coast's sole
discretion reversed and re-applied, to the Obligations, in such order and
manner as Coast shall determine in its sole discretion.
11.3 Charges to Accounts. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to
Borrower's Loan account, in which event they will bear interest from the
date due to the date paid at the same rate applicable to the Loans.
11.4 Monthly Accountings. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless
manifestly erroneous or unless Borrower notifies Coast in writing to the
contrary within thirty (30) days after each account is rendered, describing
the nature of any alleged errors or omissions.
11.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable
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private delivery service or by regular first-class mail, facsimile or
certified mail return receipt requested, addressed to Coast or Borrower at
the addresses shown in the heading to this Agreement, or at any other
address designated in writing by one party to the other party. Notices to
Coast shall be directed to the Commercial Finance Division, to the
attention of the Division Manager or the Division Credit Manager. All
notices shall be deemed to have been given upon delivery in the case of
notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of one (1) Business Day following
delivery to the private delivery service, or two (2) Business Days
following the deposit thereof in the United States mail, with postage
prepaid.
11.6 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect
shall not affect the remainder of this Agreement, which shall continue in
full force and effect.
11.7 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and
supersede all prior and contemporaneous negotiations and oral
representations and agreements, all of which are merged and integrated in
this Agreement. There are no oral understandings, representations or
agreements between the parties which are not set forth in this Agreement or
in other written agreements signed by the parties in connection herewith.
11.8 Waivers. The failure of Coast at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Coast shall not
waive or diminish any right of Coast later to demand and receive strict
compliance therewith. Any waiver of any Default shall not waive or affect
any other Default, whether prior or subsequent, and whether or not similar.
None of the provisions of this Agreement or any other agreement now or in
the future executed by Borrower and delivered to Coast shall be deemed to
have been waived by any act or knowledge of Coast or its agents or
employees, but only by a specific written waiver signed by an authorized
officer of Coast and delivered to Borrower. Borrower waives demand,
protest, notice of protest and notice of default or dishonor, notice of
payment and nonpayment, release, compromise, settlement, extension or
renewal of any commercial paper, instrument, account, General Intangible,
document or guaranty at any time held by Coast on which Borrower is or may
in any way be liable, and notice of any action taken by Coast, unless
expressly required by this Agreement.
11.9 No Liability for Ordinary Negligence. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast shall be liable for any claims,
demands, losses or damages, of any kind whatsoever, made, claimed, incurred
or suffered by Borrower or any other party through the ordinary negligence
of Coast, or any of its directors, officers, employees, agents, attorneys
or any other Person affiliated with or representing Coast, but nothing
herein shall relieve Coast from liability for its own gross negligence or
willful misconduct.
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Coast Business Credit
Loan and Security Agreement
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11.10 Amendment. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 Time of Essence. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 Attorneys Fees, Costs and Charges. Borrower shall reimburse Coast for
all attorneys' fees (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and all filing, recording, search, title insurance,
appraisal, audit, and other costs incurred by Coast, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any attorneys' fees and costs
(including attorneys' fees and expenses incurred pursuant to bankruptcy)
Coast incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice
in connection with this Agreement or Borrower; enforce, or seek to enforce,
any of its rights; prosecute actions against, or defend actions by, Account
Debtors; commence, intervene in, or defend any action or proceeding;
initiate any complaint to be relieved of the automatic stay in bankruptcy;
file or prosecute any probate claim, bankruptcy claim, third-party claim,
or other claim; examine, audit, copy, and inspect any of the Collateral or
any of Borrower's books and records; protect, obtain possession of, lease,
dispose of, or otherwise enforce Coast's security interest in, the
Collateral; and otherwise represent Coast in any litigation relating to
Borrower. If either Coast or Borrower files any lawsuit against the other
predicated on a breach of this Agreement, the prevailing party in such
action shall be entitled to recover its costs and attorneys' fees
(including attorneys' fees and expenses incurred pursuant to bankruptcy),
including (but not limited to) attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. Borrower shall also pay Coast's standard charges for returned
checks and for wire transfers, in effect from time to time. All attorneys'
fees, costs and charges (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and other fees, costs and charges to which Coast
may be entitled pursuant to this Agreement may be charged by Coast to
Borrower's loan account and shall thereafter bear interest at the same rate
as the Receivable Loans.
11.13 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors,
assigns, heirs, beneficiaries and representatives of Borrower and Coast;
provided, however, that Borrower may not assign or transfer any of its
rights under this Agreement without the prior written consent of Coast, and
any prohibited assignment shall be void. No consent by Coast to any
assignment shall release Borrower from its liability for the Obligations.
Coast may assign its rights and delegate its duties hereunder without the
consent of Borrower. Coast reserves the right to syndicate all or a portion
of the transaction created herein or sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in Coast's
rights and benefits hereunder. In connection with any such syndication,
assignment or participation, Coast may disclose all documents and
information which Coast now
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Coast Business Credit
Loan and Security Agreement
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or hereafter may have relating to Borrower or Borrower's business. To the
extent that Coast assigns its rights and obligations hereunder to a third
Person, Coast thereafter shall be released from such assigned obligations
to Borrower.
11.14 Publicity. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published
announcing the consummation of this transaction and the aggregate amount
thereof.
11.15 Paragraph Headings; Construction. Paragraph headings are only used in
this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe,
limit, define or interpret any term or provision of this Agreement. The
term "including", whenever used in this Agreement, shall mean "including
(but not limited to)". This Agreement has been fully reviewed and
negotiated between the parties and no uncertainty or ambiguity in any term
or provision of this Agreement shall be construed strictly against Coast or
Borrower under any rule of construction or otherwise.
11.16 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Coast's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Los Angeles
County; (b) consents to the jurisdiction and venue of any such court and
consents to service of process in any such action or proceeding by personal
delivery or any other method permitted by law; and (c) waives any and all
rights Borrower may have to object to the jurisdiction of any such court,
or to transfer or change the venue of any such action or proceeding.
11.17 Mutual Waiver of Jury Trial. BORROWER AND COAST EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT,
ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE.
27
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Coast Business Credit
Loan and Security Agreement
- --------------------------------------------------------------------------------
BORROWER:
PROFILE NATIONAL BUSINESS
DIRECTORY, INC., a Minnesota
corporation
By /s/ Satya P. Garg
- -----------------------------
President
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/
- -----------------------------
Title:
28
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Coast Business Credit
Loan and Security Agreement
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Coast
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
Borrower: Profile National Business Directory, Inc.,
a Minnesota corporation
Address: 1011 First Street S.
Suite 203
Hopkins, Minnesota 55343
Date: July 16, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Bank, and the
above-borrower of even date.
SECTION 2 - CREDIT FACILITIES
Section 2.1 - Credit Limit: Revolving Loans in a total amount at
any time outstanding totaling Three
Million Dollars ($3,000,000, being the
"Maximum Dollar Amount"), which is
based on:
a) Advances in an amount not to exceed
at any time four (4) times recurring
monthly Collections (as defined in
Section 1, above), based on a
trailing three (3) month moving
average however, these Advances shall
not exceed the lesser of:
1) Eighty percent (80%) of the
orderly liquidation value of the
subscriber base as determined by
BIA or other appraiser acceptable
to Coast in its sole and absolute
discretion, or
2) Four (4) times annualized EBITDA
(as defined in Section 1, above),
based on a trailing 12 month
moving average;
provided, however, Coast shall
have the right, at its sole
discretion to reduce the multiple
in section (a) in the
1
<PAGE>
event that either (1) one month's
Collections decline by 30% or
more from the previous months
Collections, or (2) the three
month's moving average of
recurring monthly Collections
declines by 30% or more from the
prior three months moving
average.
SECTION 3 - INTEREST AND FEES
Section 3.1 - Interest Rate: A rate equal to the Prime Rate plus 3%
per annum, calculated on the basis of a
360-day year for the actual number of
days elapsed. The interest rate
applicable to all Loans shall be
adjusted monthly as of the first day of
each month, and the interest to be
charged for each month shall be based
on the highest Prime Rate in effect
during the prior month, but in no event
shall the rate of interest charged on
any Loans in any month be less than 9%
per annum.
Section 3.1 - Minimum Monthly
Interest: An amount equal to the interest that
would have accrued had the daily
aggregate outstanding balance of the
Loans been equal twenty percent (20%)
of the Maximum Dollar Amount during the
first three months following the
Closing Date, twenty-five percent (25%)
of the Maximum Dollar Amount during
months four through six following the
Closing Date, and thirty-three (33%) of
the Maximum Dollar Amount thereafter.
Section 3.2 - Loan Fee: 1% of the Maximum Dollar Amount, to be
fully earned and payable on the Closing
Date.
Section 3.2 - Facility Fee: $500, per quarter, payable on the
Closing Date (prorated for any partial
quarter at the beginning of the term of
this Agreement), and thereafter, on the
first Business Day of the first month
of each subsequent calendar quarter.
Section 9.2 - Early Termination
Fee: An amount equal to the greater of (i) an
amount equal to all interest due and
payable during the six (6) months
immediately preceding the effective date
of termination, or (ii) an amount equal
to the Minimum Monthly Interest
multiplied by the number of full or
partial months from the effective date
of termination to the Maturity Date, or
(iii) an amount equal to the average
monthly interest due and payable based
on the greater of the six month monthly
interest immediately preceding the
effective date of termination or, if the
effective date of termination is less
than six months from initial funding, an
amount equal to the average monthly
interest multiplied by the number of
full or partial months
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Coast Business Credit
Loan and Security Agreement
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from the effective date of termination
to the Maturity Date will be due and
payable.
SECTION 5 - CONDITIONS PRECEDENT
Section 5.2 - Minimum
Availability: $300,000
Section 5.13 - Other Documents
and Agreements: 1. Security Agreements (including those
covering copyrights, patents and
trademarks);
2. UCC-1 financing statements, fixture
filings and termination statements;
and
3. Tri-Party Agreements (with billing
companies).
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 6.2 - Prior Names of
Borrower: National Business Directory; nbd.
Section 6.2 - Prior Trade Names
of Borrower: National Business Directory; nbd.
Section 6.2 - Existing Trade Names
of Borrower: busdir.com
Section 6.3 - Other Locations and
Addresses: 1011 First Street S., #370, Hopkins,
Minnesota 55343
Section 6.10 - Material Adverse
Litigation: Complaint for Breach of Contract, Fraud
and Unfair Discrimination practices
filed by Plaintiff Jeffrey J. Jensen
against Borrower and Satya P. Garg
seeking damages of $100,000. All causes
of action in the Complaint arise from
plaintiff's objection that Borrower
agreed to employ plaintiff for a three
year period after plaintiff's company,
World Web Wonders, Inc., acquired by
Borrower. Complaint alleges that
plaintiff was employed by Borrower for
approximately four months. Complaint
appears to have been filed during June,
1998.
Section 6.10 - Future Claims and
Litigation: Borrower will promptly inform Coast in
writing of any claim, proceeding,
litigation or investigation in the
future threatened or instituted by or
against Borrower involving any single
claim of Fifty Thousand Dollars
($50,000) or more, or involving One
Hundred Thousand Dollars ($100,000) or
more in the aggregate.
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Coast Business Credit
Loan and Security Agreement
- -------------------------------------------------------------------------------
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
Section 8.1 - Other Provisions:1. Borrower's Tangible Net Worth
shall be no less than Seven
Hundred Fifty Thousand Dollars
($750,000) at all times.
Section 8.2 - Insurance: Subject to the limitations set forth in
Section 8.2 of the Agreement, Coast
shall release to Borrower insurance
proceeds with respect to Equipment
totaling less than Fifty Thousand
Dollars ($50,000).
Section 8.3 - Reporting: Borrower shall provide Coast with the
following:
(a) Monthly Receivable agings, aged by
invoice date, within ten (10) days
after the end of each month.
(b) Monthly accounts payable agings,
aged by invoice date, and
outstanding or held check registers
within ten (10) days after the end
of each month.
(c) Monthly internally prepared
financial statements, as soon as
available, and in any event within
thirty (30) days after the end of
each month.
(d) Quarterly internally prepared
financial statements, as soon as
available, and in any event within
forty-five (45) days after the end
of each fiscal quarter of Borrower.
(e) Quarterly customer lists, including
customer name, address, and phone
number.
(f) Annual audited financial
statements, as soon as available,
and in any event within ninety (90)
days following the end of
Borrower's fiscal year, containing
the unqualified opinion of, and
certified by, an independent
certified public accountant
acceptable to Coast.
Section 8.5: $150,000.00.
SECTION 9 - TERM
Section 9.1 - Maturity Date: The last Business Day of the month
three (3) years from the Closing Date,
subject to automatic renewal as
provided in Section 9.1 of the
Agreement, and early termination as
provided in Section 9.2 of the
Agreement.
4
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Coast Business Credit
Loan and Security Agreement
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Exhibit 10.9
TELEMARKETING AGREEMENT
This TELEMARKETING AGREEMENT (Agreement") is made and entered into
effective as of the 1st day of January, 1999, by and among U.S. Protel, Inc., a
Minnesota corporation ("Protel") with its principal offices at 1144 Larpenteur,
Roseville, Minnesota 55113, and Web Valley, Inc., a Minnesota corporation
formerly known as Profile National Business Directory, Inc. ("Web Valley") with
its principal offices at 1011 First Street South, Suite 370, Hopkins, MN 55343.
RECITALS
Web Valley desires to engage Protel to provide telemarketing services,
and Protel is willing to sell and provide such services to Web Valley, upon the
terms and conditions hereinafter set forth.
AGREEMENT
1. Services Provided. As of the date hereof, subject to the terms and
provisions of this Agreement, Protel will telemarket small businesses and sell
Web page advertising, Internet Service Provider ("ISP") access and e-mail
services ("Services). Protel agrees to submit its sales records for
verification, and acknowledges that Web Valley has the right in its absolute
discretion to determine whether to accept a sale of Services by Protel. Upon
acceptance by WebValley, such sale becomes part of "Verified Sales." Protel
agrees to make from 500 to 1,000 Verified Sales of WebValley's Services per day.
2. Payment for Verified Sales. WebValley will pay Protel at the rate of
$22.50 per Verified Sale ("Commission"), or such other rate as is agreed to
between the parties. WebValley will pay Prowl its Commission weekly on Friday
for Verified Sales made the preceding week; that is, for Verified Sales made
Monday through Friday, payment will be made the following Friday.
3. Term and Termination. This Agreement will terminate as of the end of
business on December 31, 1999, and WebValley will be obligated to pay Protel for
Verified Sales made though that day; provided however, that this Agreement will
automatically renew for additional one year terms ending on December 31 of
subsequent years if neither party notifies the other in writing on or before
November 30 that it is terminating the Agreement as of the next succeeding
December 31. The rate of Commission for any renewal term is to be determined by
mutual agreement. Either party may terminate this Agreement for breach of the
Agreement after giving the other party thirty (30) days written notice.
4. General Provisions. Each of the parties shall pay its own expenses
incurred in the preparation and negotiation of this Agreement. No party may
assign this Agreement without the other party's prior written consent. No
amendment to this Agreement or waiver of the rights or obligations-of any party
shall be effective unless in writing signed by all the parties. This
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Coast Business Credit
Loan and Security Agreement
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Agreement is governed by the laws of the State of Minnesota. If any provision of
this Agreement is held invalid or unenforceable by any court of competent
jurisdiction, the other provisions of this Agreement will remain in full force
and effect. Any provision of this Agreement held invalid or unenforceable only
in part or degree will remain in full force and effect to the extent not held
invalid or unenforceable. Any notices, consents or other communications pursuant
to this Agreement must be in writing and delivered by mail, courier or facsimile
(with written confirmation of receipt) to the address of the recipient party
shown at the preamble to this Agreement (or to such other address provided by
such notice). This Agreement contains the entire agreement and understanding of
the parties concerning the subject matter of this Agreement. This Agreement may
be signed by facsimile and in counterparts.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
U.S. PROTEL, Inc.
By /s/ Blaine C. Christofferson
-----------------------------------------
Blaine C. Christofferson
Its Chief Executive Officer
WEBVALLEY, INC.
By /s/ Satya P. Garg
-----------------------------------------
Satya P. Garg
Its President
2
<PAGE>
Exhibit 10.10
Lease for Corporate Headquarters Facility
NORWEST
BANK
BUILDING
This LEASE AGREEMENT, ("Lease") made as of this 14th day of March, 1997
between Lexington Hopkins Limited Partnership, a Minnesota limited partnership
("Landlord"), and Profile National Business Directory, a Minnesota Corporation
("Tenant");
WITNESSETH, THAT
1. PREMISES: Landlord, subject to the terms and conditions hereof,
hereby leases to Tenant certain premises ("Premises") shown crosshatched on the
floor plan attached hereto as Exhibit A, containing approximately 2,300 net
rentable square feet on the 3rd floor, Suite 203 located in the building (the
"Building") situated at 1011 First Street South, Hopkins, Minnesota 55343, which
building, is situated on property legally described on Exhibit B attached hereto
and made a part hereof.
2. USE: Tenant shall use the Premises only as business offices for
Tenant's business of general office use and shall not use the Premises for any
other use or purpose without the prior written consent of Landlord.
3. TERM: Tenant takes the Premises from Landlord, upon the terms and
conditions herein contained for the term ("Term") of three (3) years and zero
(0) months commencing on the first (1st) day of May, 1997 (the "Commencement
Date") and ending on the 30th day of April, 2000 unless sooner terminated as
herein provided.
Notwithstanding the foregoing if the Premises shall, on the scheduled
Commencement Date of the Term, not be ready for occupancy by the Tenant due to
the possession or occupancy thereof by any person not lawfully entitled thereto,
or because construction has not yet been completed, or by reason of any Building
operations, repair or remodeling, to be done by Landlord, Landlord shall use
good faith efforts to complete such construction, Building operations, repair or
remodeling and to deliver possession of the Premises to Tenant. Landlord, using
such good faith efforts, shall not in any way be liable for failure to obtain
possession of the Premises for Tenant or to timely complete such construction,
building operations, repair or remodeling, but the Base Rent, Operating Costs
and Additional Rent payable by Tenant hereunder shall abate until the date
Landlord is able to tender possession of the Premises to Tenant, which date
shall thenceforth be deemed the "Commencement Date;" and the Term of this Lease
shall be automatically extended so as to include the full number of months
hereinbefore provided except that if the Commencement Date is other than the
first day of a calendar month, such Term shall also be extended for the
remainder of the calendar month in which possession is tendered.
If Tenant's possession is delayed because Landlord has not sufficiently
completed the Building or the Premises, and if Landlord shall be delayed in such
substantial completion as a result of: (i) Tenant's failure to agree to plans
and specifications; (ii) Tenant's request for materials, finishes or
<PAGE>
installations other than Landlord's standard; (iii) Tenant's changes in plans;
or (iv) the performance or completion by a party employed by Tenant, the
Commencement Date shall be deemed to be the date on which Landlord would have
been able to tender possession of the Premises to Tenant, but for such delay.
The taking of possession by Tenant shall be deemed conclusively to
establish that the Premises have been completed in accordance with the plans and
specifications and are in good and satisfactory condition as of when possession
was so taken (except for such items as Landlord is permitted to complete at a
later date, which items shall be specified by Landlord to Tenant in writing).
The date stated in Article 3 above shall be deemed to be the Commencement Date
and this Lease shall be in full force and effect as of that date unless Landlord
and Tenant execute a Commencement Letter identifying a change in that date, such
letter to be in the form attached hereto as Exhibit G. In the event of any
dispute as to when and whether the work performed or required to be performed by
Landlord has been substantially completed, the certificate of an A.I.A.
registered architect or a temporary or final certificate of occupancy issued by
the local governmental authority shall be conclusive evidence of such
completion, effective on the date of the delivery of a copy or any such
certificate to Tenant.
4. SECURITY DEPOSIT: On or before March 10, 1997, Tenant shall deposit
with Landlord the sum of Three Thousand One Hundred Sixty-eight and 25/100
Dollars ($3,168.25) (the "Security Deposit") as security for the full and
faithful performance of this Lease to be performed by Tenant. If Tenant defaults
with respect to any provision of this Lease, including, without limitation, the
provisions relating to the payment of Base Rent, Operating Costs or Additional
Rent, the repair of damage to the Premises and/or cleaning or restoring the
Premises upon termination of this Lease. Landlord may use, apply or retain all
or any part of this security deposit for the payment of any Base Rent, Operating
Costs or Additional Rent or other sum in default and any amounts which Landlord
may spend or become obligated to spend by reason of Tenant's default to the full
extent permitted by law. If any portion of said deposit is so used, applied or
retained, Tenant shall, within ten (10) days after written demand therefor,
deposit cash with Landlord in an amount sufficient to restore the security
deposit to an amount equal to one monthly installment of the then-applicable
Base Rent, plus the monthly amount of estimated Operating Costs and other
charges payable hereunder by Tenant multiplied by the number of months worth of
Base Rent represented by the initial security deposit, and Tenant's failure to
do so shall be a material default and breach of this Lease. Landlord shall lot
be required to keep any security deposit separate from its general funds, and
Tenant shall not be entitled to interest on any such deposit. If Tenant shall
fully and faithfully perform every provision of this Lease to be performed by
it, the security deposit or any balance thereof shall be returned to Tenant or
to the last assignee of Tenant's interest hereunder within sixty days after the
expiration of the Term.
5. BASE RENT: Tenant agrees to pay to Landlord during the Term a Base
Rent ("the Base Rent") of See Addendum to Lease #38 Dollars ($_________ ) per
annum, payable in equal monthly installments of $___________ due and payable in
advance on the Commencement Date and on the first day of each month thereafter
during the Term, without deduction or setoff of any kind, and delivered or sent
to Landlord's managing agent, Richard Ellis Inc., 6800 France Avenue South,
Suite 170, Edina, Minnesota 53435 or at such other place as may from time to
time be designated by Landlord.
6. ADDITIONAL RENT AMOUNTS: Any amounts in addition to Base Rent and
Operating Costs, as defined below, payable to Landlord by Tenant hereunder,
including, without limitation, amounts payable pursuant to Section 9 and Exhibit
C, and any costs set forth in the Addendum to Lease, if any, described in
Section 37 hereof (collectively the "Additional Rent") shall be an obligation of
Tenant hereunder and all such Additional Rent shall be due and payable upon
demand.
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<PAGE>
7. OPERATING COSTS: In addition to Base Rent and Additional Rent,
Tenant shall, for the entire Term, pay to Landlord, without any setoff or
deduction therefrom, its Proportionate Share (as hereinafter defined) of costs
which Landlord may incur in owning, maintaining and operating the Building
during each calendar year of the Term (such costs hereinafter "Operating
Costs"). "Proportionate Share" is defined as (3.74%) of all Operating Costs
incurred by Landlord with respect to the Building (being the decimal equivalent
of a fraction, the numerator of which is the net rentable square feet of the
Premises and the denominator of which is the net rentable square feet of the
entire Building each as reasonably determined by Landlord). Operating Costs are
defined to include all expenses and costs (but not specific costs which are
separately billed to and paid by individual tenants including Tenant) of every
kind and nature which the Landlord shall pay or become obligated to pay because
of or in connection with the ownership and operation of the Building and
supporting facilities of the Building, including but not limited to all real
estate taxes and special or other assessments payable with respect to the
Building, and all other taxes, service payments in lieu of taxes, excises,
levies, fees, or charges, general and special, ordinary and extraordinary, of
any kind, which are assessed, levied, charged, confirmed or imposed by any
public authority upon the Building, its operations or the Rent provided for in
this Lease including, but not limited to the amount of any gross receipts tax,
sales tax or similar tax, or any tax imposed in lieu of real property taxes (but
excluding therefrom any income tax), or tax arising out of ownership of the
Building, which tax is payable or which will be payable by Landlord, by reason
of the receipt of the Base Rent, Operating Costs or Additional Rent and
adjustments thereto; costs of any contest of such taxes, including attorneys'
fees, management fees, insurance premiums, utility costs, janitorial costs,
Building security costs, costs of wages, salaries and fringe benefits for all
individuals providing services to the Building through the level of property
manager or similar position, maintenance costs (relating to the Building and
adjacent land including sidewalks, landscaping and parking or service areas,
common areas, service contracts, equipment and supplies) and all other costs of
any nature whatsoever which for federal tax purposes may be expensed rather than
capitalized, but exclusive only of leasing commissions, depreciation, principal
and interest, and costs of tenant improvements. Operating Costs shall also
include the yearly amortization of capital costs incurred by the Landlord for
improvements or structural repairs to the Building required to comply with any
change in the laws, rules or regulations of any governmental authority having
jurisdiction, or for purposes of reducing Operating Costs, which costs shall be
amortized over the useful life of such improvements or repairs, as reasonably
estimated by the Landlord or as required by law.
As soon as reasonably practicable prior to the commencement of each
calendar year during the Term, Landlord shall furnish to Tenant an estimate of
Operating Costs for the ensuing calendar year and the amount of Tenant's
Proportionate Share thereof. Tenant shall pay, together with each installment of
Base Rent, one-twelfth (1/12th) of its estimated annual Proportionate Share of
Operating Costs. As soon as reasonably practicable after the end at each
calendar year during the Term, Landlord shall furnish to Tenant a statement of
the actual Operating Costs for the previous calendar year, including Tenant's
Proportionate Share of Operating Costs, and within thirty (30) days thereafter
Tenant shall pay to Landlord or Landlord shall credit to the next Base Rent
payment due Landlord from Tenant or Landlord shall pay, if the Lease has
expired, as the case may be, any difference between the actual Operating Costs
and the estimated Operating Costs paid by Tenant for such year. Tenant's
Proportionate Share of Operating Costs for the years in which this Lease
commences and terminates shall be prorated by multiplying the actual Operating
Costs by a fraction, the numerator of which is the number of days of that year
of the Term and the denominator of which is 365. Tenant's obligation to pay
Operating Costs for the year in which this Lease expires or terminates shall
survive the expiration or earlier termination of this Lease, and shall be
prorated to reflect that portion of the calendar year during which Tenant was
obligated to pay Operating Costs. Notwithstanding any other provision herein to
the contrary, it is agreed that in the event that the Building is not fully
occupied at any time during the Term, an
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adjustment shall be made in computing the Operating Costs for such year so that
the Operating Costs shall be computed for such year as though the Building had
been fully occupied during such year (including, for real estate tax purposes,
as if fully occupied and assessed as a completed Building during such year).
Notwithstanding the foregoing, if Landlord shall from time to time reasonably
determine that the use of any utility or service in the Premises by Tenant is
disproportionate to the use of other tenants, Landlord may adjust Tenant's share
of the cost thereof from a date reasonably determined by Landlord to take
equitable account of the disproportionate use. A Landlord's request, Tenant
shall install and maintain at Tenant's expense metering devices for measuring
the use of any such utility or service in the Premises.
8. QUIET ENJOYMENT: Landlord covenants that Tenant, upon paying all
Base Rent, Operating Costs (as defined in Section 7 hereof) and Additional Rent
(as defined in Section 6 hereof) (the Base Rent, Operating Costs and Additional
Rent collectively hereinafter the "Rent") and performing all covenants and
agreements on its part to be performed, shall have quiet enjoyment and
possession of the Premises during the term, subject to the terms and conditions
of this Lease and to any agreements to which this Lease is or may become
subordinate.
9. SERVICE: Subject to a right of reimbursement from Tenant through its
Proportionate Share of Operating Costs, and so long as Tenant is not in default
hereunder, Landlord shall:
(a) maintain, repair and replace as needed all heating,
ventilating, air conditioning, mechanical, electrical and
plumbing systems, facilities and equipment in the Premises and
the Building;
(b) replace Building-standard fluorescent electric lamps and
ballasts used in the Premises; and
(c) furnish Tenant: (i) hot and cold water, at those points of
supply provided for general use of tenants; (ii) heated and
refrigerated air conditioning in season at such times as
Landlord normally furnishes these services to all tenants of
the Building, and at such temperatures and in such amounts as
are in accordance with any applicable statutes, rules or
regulations and are considered by Landlord to be standard,
such service at other times and on Saturdays, Sundays, and
holidays to be optional on the part of Landlord (Landlord
hereby reserves the right to charge Tenant for any such
optional service requested by Tenant on such basis as
Landlord, in its sole discretion, determines) (iii) janitor
service to the Premises on weekdays other than holidays; (iv)
such window washing as may from time to time in the Landlord's
judgment be reasonably required; and (v) operator-less
passenger elevators for ingress and egress to the floor on
which the Premises are located, provided Landlord may
reasonably limit the number of elevators to be in operation on
Saturdays, Sundays, and holidays.
Failure to any extent to furnish, or any stoppage or interruption of
these defined services, resulting from any cause, shall not render Landlord
liable in any respect for damages to any person, property, or business, nor be
construed as an eviction of Tenant or work an abatement of Rent, nor relieve
Tenant from fulfillment of any covenant or agreement hereof. Should any
equipment or machinery furnished by Landlord cease to function properly,
Landlord shall use reasonable diligence to repair the same promptly upon receipt
of notice from Tenant, but Tenant shall have no claim for an abatement of Rent
or damages on account of any interruptions in service occasioned thereby or
resulting therefrom. Whenever heat generating machines or equipment are used by
Tenant in the Premises which
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disproportionately affect the temperature otherwise maintained by the air
conditioning equipment, Landlord reserves the right to install supplementary air
conditioning units in the Premises (or for the use of the Premises) and the
expense of such purchase, installation, maintenance, operation and repair shall
be paid by Tenant upon demand as Additional Rent.
Notwithstanding the foregoing, if services required to be performed by
Landlord pursuant to (a), (b) or (c) above must be performed due to the
negligence or willful misconduct of Tenant, its agents, servants or employees,
the costs of such services shall not be a part of Operating Costs, but shall be
Tenant's sole responsibility, and shall be Additional Rent payable in accordance
with Section 6.
10. COVENANTS OF TENANT: In addition to all of its other obligations
pursuant to the Lease, Tenant hereby covenants with Landlord as follows:
A. Laws and Regulations: Tenant shall observe such governmental
ordinances, laws and regulations and such Building rules and
regulations, including, but not limited to those set forth in
Exhibit F, which from time to time may be put into effect by
Landlord for the general safety, comfort, and convenience of
Landlord, occupants and tenants of the Building and their
licensees and invitees, including, without limitation,
Building signage and graphics standards, use of designated
common areas and other Building areas, security measures, and
similar matters.
B. Surrender of Premises; Goods and Effects: Upon the termination
of this Lease in any manner whatsoever, Tenant shall remove
its goods and effects and those of any other person claiming
under Tenant, and quit and deliver up the Premises to Landlord
peaceably and quietly in as good order and condition as the
same were in on the Commencement Date, reasonable use and wear
excepted. Goods and effects not removed by Tenant at the
termination of this Lease, however terminated, shall be
considered abandoned, and Landlord may dispose of the same as
it deems expedient, at Tenant's expense. Tenant shall be
responsible for payment of all costs incurred by Landlord for
any restoration of the Premises needed by virtue of the
removal of Tenant's goods and effects whether removed by
Tenant or Landlord.
C. Assignment and Subletting: Tenant shall not assign this Lease
or sublet all or any part of the Premises voluntarily,
involuntarily or by operation of law, or through change in the
ownership of Tenant, if Tenant is a corporation or a
partnership, without first obtaining Landlord's written
consent thereto. Landlord's consent will not be unreasonably
withheld provided that: (i) occupancy of any such assignee or
sublessee is not, in Landlord's reasonable judgment,
inconsistent with the character of the Building; (ii) such
assignee or sublessee shall assume in writing the performance
of the covenants and obligations of Tenant hereunder; (iii) a
fully executed copy of any such assignment or sublease shall
be immediately delivered to Landlord but the making of such
assignment or sublease shall not be deemed to release Tenant
from the payment and performance of any of its obligations
under this Lease; (iv) Tenant shall promptly disclose and pay
to Landlord as Additional Rent hereunder any rent or other
payments pursuant to any sublease which exceed the amounts
payable hereunder and any other consideration paid, or to be
paid, by reason of the assignment or sublease; (v) such
assignment or subletting is approved by any mortgagee holding
a mortgage covering the Premises which reserves such right
unto the mortgagee; (vi) Tenant is not in default of this
Lease on the date of the assignment or sublease; and (vii)
such assignee or sublessee
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meets the credit standards required by Landlord for tenants of
similar size and type in the Building. Notwithstanding the
foregoing, if Tenant wishes to assign this Lease or sublet all
or any part of the Premises to a named third party, Tenant
shall first offer, in writing, to assign or sublet (as the
case may be) to Landlord on the same terms and conditions as
provided in this Lease. Any such offer by Tenant shall be
deemed to have been rejected by Landlord unless within ten
(10) days from receipt thereof, Landlord delivers to Tenant
written notice of acceptance of Tenant's offer. Any assignment
or sublease or purported assignment or sublease made without
Landlord's prior written consent shall be void, and of no
force and effect, whether or not Landlord had actual or
constructive notice of such assignment or sublease.
Notwithstanding anything to the contrary in this Lease,
options granted to Tenant, if any, to expand the Premises,
renew this Lease, have a right of first offer or first refusal
on any other space in the Building, or terminate this Lease
are personal to Tenant and shall not inure to the benefit of,
or be available to any assignee or sublessee of Tenant.
D. Signs: Tenant shall not place signs on or about the Premises
or the Building or install signs, advertising or other
material on the interior (if any) or exterior windows of the
Premises without first obtaining Landlord's written consent
thereto.
E. Damage to Building: Tenant shall not overload, damage or
deface the Premises or the Building or do any act which may
make void or voidable any insurance on the Premises or the
Building, or which may render an increased or extra premium
payable for insurance.
F. Hazardous Substances: Tenant shall not cause or permit to
occur (i) any violation of any federal, state or local law,
ordinance or regulation now or hereafter enacted relating to
environmental conditions in, under or about the Premises or
arising from Tenant's use or occupancy of the Premises; or
(ii) without Landlord's prior written consent, which consent
may be given or withheld in Landlord's sole discretion, use,
generate, release, manufacture, refine, produce, process,
store or dispose of any Hazardous Substance (as hereinafter
defined) in, under or about the Premises, or transport any
Hazardous Substance to or from the Premises. For the purposes
of this Lease, Hazardous Substance shall include, but not be
limited to flammables, explosives, radioactive materials,
asbestos, polychlorinated biphenyls (PCB's), petroleum,
petroleum products, chemicals known to cause cancer or
adversely affect reproduction, pollutants, contaminants,
hazardous wastes, toxic products and substances declared to be
hazardous or toxic under any law or regulation concerning the
environment now or hereafter enacted or promulgated by any
governmental authority.
G. Mechanic's Liens: Tenant shall keep the Premises and the
Building free from any mechanics', materialmens', contractors'
or other liens arising from, or any claims for damages growing
out of, any work performed, materials furnished or obligations
incurred by or on behalf of Tenant. Tenant shall indemnify and
hold harmless Landlord from and against any such lien, or
claim or action thereon, and reimburse Landlord promptly upon
demand therefor by Landlord for costs of suit and reasonable
attorneys' fees incurred by Landlord in connection with any
such lien, claim or action.
H. Insurance: Tenant shall maintain at its expense at all times
during the Term: (i) a policy or policies of commercial
liability insurance with respect to the Premises and the
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business of Tenant, naming Landlord as an additional insured
thereon with limits of not less than $1,000,000 combined
single limit; provided, however, that if Tenant's policy or
policies of insurance is or are subject to an annual aggregate
clause, Tenant shall provide Landlord with evidence
demonstrating that the $1,000,000 coverage required by this
subparagraph (i) applies solely to the Premises; and (ii) a
policy or policies of all-risk coverage insurance insuring
Tenant's leasehold improvements, trade fixtures and other
personal property for the full replacement cost value thereof,
and naming Landlord as a loss payee as its interest may
appear. All such insurance policies shall be placed with
companies with a Best rating of A-VII or better and qualified
to do business in the State of Minnesota, provide for at least
thirty (30) days prior written notice to Landlord before
cancellation or amendment, name Landlord as an additional
insured thereon, and current, endorsed copies or certificates
thereof shall be filed with Landlord prior to Tenant's
occupancy of the Premises and on each anniversary of the
Commencement Date during the Term.
I. Vending Machines: Tenant shall not install, operate, or permit
any vending machines or coin-operated devices upon the
Premises without Landlord's prior written consent.
J. Maintenance of Premises: Except to the extent that Landlord is
specifically responsible therefor under Paragraph 9(a) of this
Lease, Tenant shall maintain the Premises and its surrounding
walls, ceiling and floor and all improvements therein in good
order and condition, including repairs and replacements
thereto.
Notwithstanding the foregoing, if any of Tenant's obligations
pursuant to this Paragraph (j) involve any structural portion
of the Building, or any Building system, including, but not
limited to, heating, ventilating and air conditioning, Tenant
shall not undertake any maintenance, repair or replacement
thereof without Landlord's prior written consent.
K. Waste: Tenant shall not commit waste on the Premises, nor
allow waste to be committed by any of Tenant's agents,
employees, licensees, invitees or contractors.
Tenant's obligations under this Section 10 to do or not to do a specified act
shall extend to and include all conduct of Tenant's employees, agents,
contractors, licensees and invitees.
11. INSTALLATION OF IMPROVEMENTS; ALTERATIONS: Subject to Tenant's
performance of its obligations hereunder, Landlord agrees to install at
Landlord's cost and expense the improvements described in Exhibit C attached
hereto. All other improvements to the Premises shall be installed at the cost
and expense of Tenant (which cost shall be payable on demand by Land-lord as
Additional Rent), but only in accordance with plans and specifications which
have been previously submitted to and approved in writing by Landlord, and only
by Landlord or by contractors and subcontractors approved in writing by Landlord
(which approval shall not be unreasonably withheld). All alterations, additions,
improvements and partitions erected by Tenant shall be and remain the property
of Tenant during the term of this Lease and Tenant shall, unless Landlord
otherwise elects as hereinafter provided, remove all alterations, additions,
improvements and partitions erected by Tenant and restore the Premises to its
original condition by the date of expiration or termination of this Lease or
upon earlier vacating of the Premises; provided, however, that, if at such time
Landlord so elects, such alterations, additions, improvements and partitions
shall become the property of Landlord as of the date of expiration or
termination of this Lease or upon earlier vacating of the Premises and title
shall pass to
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Landlord under this Lease as by a bill of sale. All such removals and
restoration shall be accomplished in a good workmanlike manner by contractors
approved in writing by Landlord so as not to damage the primary structure or
structural qualities of the Building. All alterations, additions or improvements
proposed by Tenant shall be constructed (a) in a first-class manner consistent
with the Building; and (b) in accordance with all governmental laws, ordinances,
rules and regulations. Tenant shall, prior to construction, provide such
assurances to Landlord, including but not limited to waivers of lien, surety
company performance and payment bonds and personal guaranties of individuals of
substance, as Landlord shall require to assure payment of the costs thereof and
to protect Landlord against any loss from mechanics', laborers', materialmen's
or other liens. If such improvements are not being performed by Landlord, Tenant
shall permit Landlord, if Landlord so desires, to supervise construction
operations in connection with such work. In no event will such supervision or
right to supervise by Landlord, nor shall any approvals given by Landlord under
this Lease, constitute any warranty by Landlord to Tenant of the adequacy of the
design, workmanship or quality of such work or materials for Tenant's intended
use or impose any liability upon Landlord in connection with the performance of
such work.
12. CASUALTY LOSS: In case of damage to the Premises or the Building by
fire or other casualty, Tenant shall give immediate written notice thereof to
Landlord, who shall within sixty (60) days of such notice give notice to Tenant
that: (1) Landlord elects to terminate this Lease as hereinafter provided, or
(2) Landlord will cause the damage to be repaired with reasonable speed, at the
expense of the Landlord, subject to delays which may arise by reason of
adjustment or loss under insurance policies and for delays beyond the reasonable
control of Landlord, but Landlord shall have no obligation to restore or replace
any property owned by Tenant; and to the extent that the Premises are rendered
untenantable the Base Rent and Operating Costs shall proportionately abate,
except in the event such damage resulted from or was contributed to by the act,
fault or neglect of Tenant, Tenant's employees, invitees, contractors, licensees
or agents, in which event there shall be no abatement of Rent. If the damage
shall be so extensive that the Landlord shall decide not to repair or rebuild,
this Lease shall, at the option of Landlord, be terminated as of the date of
such damage by written notice from Landlord to Tenant, and the Base Rent and
Operating Costs shall be adjusted to the date of such damage and Tenant shall
thereupon promptly vacate the Premises. If Landlord elects to repair the damage,
Landlord shall be obligated to repair only to the extent insurance proceeds are
made available therefor.
In the event of any damage or destruction to the Building or the
Premises by any peril covered by the provisions of this Section 12, Tenant
shall, upon notice from Landlord, remove forthwith, at its sole cost and
expense, such portion or all of the property belonging to Tenant or its
assignees, sublessees or licensees from such portion or all of the Building or
the Premises as Landlord shall request and Tenant hereby indemnifies and holds
Landlord harmless from any loss, liability; costs, and expenses, including
attorneys' fees, arising out of any claim of damage or injury as a result of (i)
any alleged failure to property secure the Premises prior to such removal or
(ii) such removal.
13. CONDEMNATION: If the entire Premises are taken under power of
eminent domain (which shall include the exercise of any similar governmental
power or any purchase or other acquisition in lieu thereof), this Lease shall
automatically terminate as of the date of taking, which shall be the date Tenant
is required to yield possession thereof to the condemning authority. If a
portion of the Premises is taken under power of eminent domain, Landlord shall
have the right to terminate this Lease as of the date of taking by giving
written notice thereof to Tenant on or before the date of taking. If Landlord
does not elect to terminate this Lease, it shall, at its expense, restore or
cause to be restored the Premises, exclusive of any improvements or other
changes made therein by Tenant, to as near the condition which existed
immediately prior to the date of taking as reasonably possible, and taking into
account any reduction in the square footage of the Premises, and to the extent
that the Premises are rendered
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untenantable, the Base Rent and Operating Costs shall proportionately abate. All
damages awarded for a taking under the power of eminent domain shall belong to
and be the exclusive property of Landlord, whether such damages be awarded as
compensation for diminution in value of the leasehold estate hereby created or
to the fee of the Premises; provided, however, that Landlord shall not be
entitled to any separate award made to Tenant for the value and cost of removal
of its personal property and fixtures or any relocation payment or allowance
made to Tenant.
14. LIABILITY AND INDEMNITY: Save for its gross negligence or willful
misconduct, Landlord shall not be responsible or liable to Tenant for any loss
or damage resulting to Tenant, its agents, servants, employees, contractors,
licensees or invitees, or its property from any cause whatsoever, including, but
not limited to, loss or damage that may be occasioned by or through the acts or
omissions of persons occupying any part of the Building or any persons
transacting any business in or about the Building or persons present in or about
the Building for any other purpose or the inability of Tenant to conduct its
business in the Premises due to the failure of Tenant's telephone system as a
result of work performed on another tenant's telephone system or on the Building
telephone system. Tenant shall defend, indemnify and save Landlord harmless from
and against all liabilities, damages, claims, costs, charges, judgments and
expenses, including, but not limited to, reasonable attorneys' fees, which may
be imposed upon or incurred or paid by or asserted against Landlord, the
Premises or any interest therein or in the Building by reason of or in
connection with any use, nonuse, possession or operation of the Building or the
Premises, or any part thereof, any negligent or tortious act on the part of
Tenant or any of its agents, contractors, servants, employees, licensees or
invitees, any accident, injury, death or damage to any person or property
occurring in, on or about the Premises or any part thereof, and any failure on
the part of Tenant to perform any of the terms or conditions of this Lease;
provided, however, that nothing contained in this paragraph shall be deemed to
require Tenant to indemnity Landlord with respect to any gross negligence or
willful misconduct committed by Landlord or to any extent prohibited by law.
15. DEFAULT: Tenant hereby agrees that the occurrence of any one or
more of the following shall constitute an Event of Default under this Lease:
(a) The failure of Tenant to make any payment due hereunder within
five (5) days after the due date thereof;
(b) The failure of Tenant to perform any of the other agreements,
covenants, terms and conditions of this Lease;
(c) The commencement of any proceeding by or against Tenant in
bankruptcy or for appointment of a receiver; or
(d) The insolvency of Tenant, or the making by Tenant of a general
assignment for the benefit of creditors, or the filing by
Tenant for protection under any statute regarding bankruptcy
now or hereafter in force;
then, in any such event, Landlord, in addition to all other rights and remedies
available to Landlord, by law or by other provisions hereof, may, with or
without process of law, re-enter immediately into the Premises and remove all
persons and property therefrom, and, at Landlord's option, annul and cancel this
Lease or terminate Tenant's right to possession of the Premises without
terminating this Lease, and Tenant hereby expressly waives the service of any
notice in writing of intention to re-enter as aforesaid. Upon any termination of
Tenant's right to possession only without termination of the Lease, Landlord
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may at Landlord's option, enter into the Premises, remove Tenant's signs and
other evidences of tenancy and take and hold possession thereof as provided
above, without such entry and possession terminating the Lease or releasing
Tenant, in whole or in part, from any obligation including Tenant's obligation
to pay the Base Rent, Operating Costs and Additional Rent hereunder for the full
Term. In any such case, Tenant shall pay forthwith to Landlord, if Landlord so
elects, a sum equal to the entire amount of the Base Rent, and estimates of
Operating Costs and Additional Rent, for the residue of the stated term hereof
plus any other sums provided herein to be paid by Tenant for the remainder of
the Term.
Landlord may; but need not, relet the Premises or any part thereof for
such rent and upon such terms as Landlord, in its sole discretion, shall
determine (including the right to relet the Premises for a greater or lesser
term than that remaining under this Lease, the right to relet the Premises as
part of a larger area, and the right to change the character or use made of the
Premises) and Landlord shall not be required to accept any tenant offered by
Tenant or to observe any instructions given by Tenant about such reletting. In
any such case, Landlord may make repairs, alterations and additions in or to the
Premises, and redecorate the same to the extent Landlord deems necessary or
desirable, and Tenant shall, upon demand, pay the cost thereof, together with
Landlord's expenses of reletting including, without limitation any broker's
commission and attorneys' fees incurred by Landlord. If the consideration
collected by Landlord upon any such reletting plus any sums previously collected
from Tenant are not sufficient to pay the full amount of all Base Rent and any
amounts of Operating Costs and Additional Rent and other sums reserved in this
Lease for the remaining term hereof, together with the costs of repairs,
alterations, additions, redecorating, and Landlord's expenses of reletting and
the collection of the rent accruing therefrom (including attorneys' fees and
brokers' commissions), Tenant shall pay to Landlord the amount of such
deficiency upon demand and Tenant agrees that Landlord may file suit to recover
any sums due and payable under this section from time to time.
Neither acceptance of Rent by Landlord, with or without knowledge of
breach, nor failure of Landlord to take action on account of any breach hereof
or to enforce its rights hereunder shall be deemed a waiver of any breach, and
absent written notice or consent, said breach shall be a continuing one at
Landlord's sole option.
Notwithstanding anything in this Section 15 to the contrary, upon any
default by Tenant in any of its obligations hereunder except the obligation to
pay Base Rent, Operating Costs and Additional Rent, and the obligation to
maintain insurance, if Tenant, within five (5) days after notice from Landlord,
commences to cure such default and prosecutes such cure diligently to
completion, Tenant shall not be in default hereunder; provided, however, that
such cure period shall in no extent exceed sixty (60) days.
16. LATE PAYMENT: If Tenant fails to pay any installment of Rent, or
other sums hereunder as and when such installment or other charge is due, Tenant
shall pay to Landlord on demand a late charge in an amount equal to five percent
(5%) of such installment or other charge overdue in any month and five percent
(5%) each month thereafter until paid in full to help defray the additional cost
to Landlord for processing such late payments, and such late charge shall be
Additional Rent hereunder and the failure to pay such late charge within ten
(10) days after demand therefor shall be an additional Event of Default
hereunder. The provision for such late charge shall be in addition to all of
Landlord's other rights and remedies hereunder or at law and shall not be
construed as liquidated damages or as limiting Landlord's remedies in any
manner.
17. NOTICES: All bills, statements, notices or communications,
including changes of address of either party, which either party may desire or
be required to give to the other shall be deemed sufficiently given or rendered
if in writing and either delivered to the other party personally, sent by
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registered or certified mail, return receipt requested, sent by national air
courier service, addressed to Tenant at the Building, or to Landlord at the
address where the last installment of Base Rent due hereunder was payable, or,
as to either party, upon receipt of notice in accordance with this section, to
the last address furnished by such party. The time of rendition thereof or the
giving of such notice or communication shall be deemed to be the time when the
same is personally delivered to the other party, deposited in the mail, or
delivered to the other party by a national air courier service as herein
provided. Any notice or the return of any access cards, keys, or otherwise to be
given from Tenant to Landlord must be delivered in the manner set forth above to
Landlord's managing agent.
18. HOLDING OVER: Tenant will, at the termination of this Lease by
lapse of time or otherwise, yield up immediate possession of the Premises to
Landlord. If Tenant retains possession of the Premises or any part thereof after
any such termination, then Landlord may, at its option, serve written notice
upon Tenant that such holding over constitutes either (a) creation of a month to
month tenancy, upon the terms and conditions set forth in this Lease, or (b)
creation of a tenancy at sufferance; provided, however that the Base Rent
prorated on a daily basis if subparagraph (b) is elected, shall, in addition to
all other sums which are to be paid by Tenant hereunder including, but not
limited to Operating Costs, whether or not as Additional Rent, be equal to
double the Base Rent being paid monthly to Landlord under this Lease immediately
prior to such termination (prorated in the case of (b) on the basis of a 365 day
year for each day Tenant remains in possession). If no such notice is served,
then a tenancy at sufferance shall be deemed to be created at the Rent in the
preceding sentence. Tenant shall also pay to Landlord all damages sustained by
Landlord resulting from retention of possession by Tenant, including the loss of
any proposed subsequent tenant for any portion of the Premises. The provisions
of this paragraph shall not constitute a waiver by Landlord of any right of
re-entry as herein set forth; nor shall receipt of any Rent or any other act in
apparent affirmance of the tenancy operate as a waiver of the right to terminate
this Lease for a breach of any of the terms, covenants, or obligations herein on
Tenant's part to be performed.
19. SUBORDINATION: The rights of Tenant shall be and are subject and
subordinate at all times to the lien of any mortgage now or hereafter in force
against the Building, and Tenant shall execute such further instruments
subordinating this Lease to the lien of any such mortgage as shall be requested
by Landlord. If Landlord's interest in the Building is transferred to any person
or entity by reason of (a) a foreclosure or other proceeding to enforce a
mortgage against the Building; (b) delivery by Landlord of a deed in lieu of
foreclosure; or (c) a sale, conveyance or assignment of the Building, then in
any such case, Tenant shall immediately and automatically attorn to such person
or entity without the execution of any further instruments evidencing Tenant's
attornment. If requested by Tenant, Landlord agrees to use reasonable efforts to
obtain an agreement of non-disturbance of Tenant's occupancy of the Premises
from the holder of any mortgage against the Building in the event that such
holder, its successors or assigns, succeeds to the interest of Landlord.
20. ESTOPPEL CERTIFICATE: Tenant shall at any time and from time to
time within ten (10) days after written request from Landlord execute and
deliver to Landlord or any prospective Landlord or mortgagee or prospective
mortgagee a sworn and acknowledged estoppel certificate, in form reasonably
satisfactory to Landlord and/or Landlord's mortgagee or prospective mortgagee
certifying and stating as follows: (i) this Lease has not been modified or
amended (or if modified or amended, setting forth such modifications or
amendments); (ii) this Lease (as so modified or amended) is in full force and
effect (or if not in full force and effect, the reasons therefor); (iii) the
Tenant has no offsets or defenses to its performance of the terms and provisions
of this Lease, including the payment of Rent (or if there are any such defenses
or offsets, specifying the same); (iv) Tenant is in possession of the Premises,
if such be the case; (v) if an assignment of rents or leases has been served
upon Tenant by a
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mortgagee or prospective mortgagee, Tenant has received such assignment and
agrees to be bound by the provisions thereof; and (vi) any other accurate
statements reasonably required by Landlord or its mortgagee or prospective
mortgagee. It is intended that any such statement delivered pursuant to this
subsection may be relied upon by any prospective purchaser or mortgagee and
their respective successors and assigns and Tenant shall be liable for all loss,
cost or expense resulting from the failure of any sale or funding of any loan
caused by any material misstatement contained in Such estoppel certificate.
Tenant hereby irrevocably appoints Landlord as attorney-in-fact for the Tenant
with full power and authority to execute and deliver in the name of Tenant such
estoppel certificate if Tenant fails to deliver the same within such ten (10)
day period and such certificate as signed by Landlord shall be fully binding on
Tenant, if Tenant fails to deliver a contrary certificate within five (5) days
after receipt by Tenant of a copy of the certificate executed by Landlord on
behalf of Tenant.
21. BINDING EFFECT: The word "Tenant", wherever used in this Lease,
shall be construed to mean tenants in all cases where there is more than one
tenant, and the necessary grammatical changes required to make the provisions
hereof apply to corporation, partnerships or individuals, men or women, shall in
all cases be assumed as though in each case fully expressed. Each provision
hereof shall extend to and shall, as the case may require, bind and inure to the
benefit of Landlord and Tenant and their respective heirs, legal
representatives, successors and assigns, provided that this Lease shall not
inure to the benefit of any assignee, heir, legal representative, transferee or
successor of Tenant except upon the express written consent or election of
Landlord.
22. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfer or
transfers of Landlord's interest in the Premises or the Building, other than a
transfer for security purposes only, the transferor shall be automatically
relieved of any and all obligations and liabilities on the part of Landlord
accruing from and after the date of such transfer, including, without
limitation, the obligation of Landlord under Section 4 hereof to return the
security deposit as provided therein following assignment or transfer thereof to
such assignee of Landlord's interest.
23. EXPENSE OF ENFORCEMENT: If either party hereto be made or become a
party to any litigation commenced by or against the other party involving the
enforcement of any of the rights and remedies of such party, or arising on
account of the default of the other party in the performance of such party's
obligations hereunder, then the prevailing party in any such litigation (or the
party becoming involved in such litigation because of a claim against such other
party, as the case may be) shall receive from the other party all costs and
reasonable attorneys' fees incurred by it in relation to such litigation, and,
in the case of Tenant, such costs and attorneys' fees shall constitute
Additional Rent hereunder.
24. ACCESS; CHANGES IN BUILDING FACILITIES; NAME: (a) Tenant shall give
Landlord and Landlord's managing agent access to the Premises at any time during
emergencies and at all reasonable times, without charge or diminution of rent,
to enable Landlord to examine or exhibit the same and to make such inspections,
repairs, additions and alterations as Landlord deems necessary or may be
required to make hereunder; (b) all portions of the Building except space within
the inside surfaces of all walls and doors bounding the Premises, and any space
in or adjacent to the Premises used for shafts, stacks, pipes, conduits, fan
rooms, ducts, electric or other utilities, sinks or other Building facilities,
and the use thereof, as well as access thereto through the Premises for the
purposes of operation, maintenance, decoration and repair, are reserved to
Landlord: (i) Tenant understands and agrees the Landlord may, at any time or
from time to time during the term of this Lease, perform renovation and or
repair work in and to the Building or the mechanical systems serving the
Building (which work may include, but need not be limited to, the repair or
replacement of the Building's exterior facade, exterior window glass, elevators,
electrical systems, air conditioning and ventilating systems,
12
<PAGE>
plumbing system, common hallways, or lobby), any of which work may require
access to the same from within the Premises; (ii) Tenant therefore agrees that:
(A) Landlord shall have access to the Premises at all reasonable times, upon
reasonable notice for the purpose of performing such work, and (B) Landlord
shall incur no liability to Tenant, nor shall Tenant be entitled to any
abatement of rent on account of any noise, vibration, or other disturbance to
Tenant's business at the Premises which shall arise out of said access by
Landlord or by the performance by Landlord of the aforesaid work at the
Building; (iii) Landlord shall use reasonable efforts (which shall not include
any obligation to employ labor at overtime rates) to avoid disruption of
Tenant's business during any such entry upon the Premises by Landlord; and (iv)
it is expressly understood and agreed by and between Landlord and Tenant that if
Tenant shall commence any action or proceeding seeking injunctive, declaratory,
or monetary relief in connection with the rights reserved to Landlord under this
provision, or if Landlord shall commence any action or proceeding to obtain
access to the Premises in accordance with this provision, and if Landlord shall
prevail in any such action, then Tenant shall pay to Landlord, as additional
rent under this Lease, a sum equal to all legal fees, costs, and disbursements
incurred by Landlord in any way related to or arising out of such action or
proceeding; (c) Landlord reserves the right, at any time, without incurring any
liability to Tenant therefor, to make such changes in or to the Building and the
fixtures and equipment thereof, as well as in or to the street entrances, halls,
passages, concourse, elevators, stairways and other improvements thereof, as it
may deem necessary or desirable from time to time; and (d) Landlord may adopt
any name for the Building and Landlord reserves the right to change the name
and/or address of the Building at any time.
25. RIGHT OF LANDLORD TO PERFORM: If Tenant shall fail to pay any sum
of money other than Base Rent, Operating Costs or Additional Rent required to be
paid by it hereunder, or shall fail to perform any other act on its part to be
performed hereunder, Landlord may, but shall not be so obligated, and without
waiving or releasing Tenant from any obligations of Tenant, after the end of the
fifth day after notifying Tenant of Tenant's obligation to perform, make any
such payment or perform any such other act on Tenant's part to be made or
performed hereunder; provided, however, that in the event of emergency, Landlord
shall have the right to perform Tenant's obligations prior to the expiration of
the five-day period specified above and shall have the right to use the Security
Deposit to pay such expenses, or pay such expenses directly and reimburse itself
from the Security Deposit. Tenant shall, promptly and upon demand therefor by
Landlord, reimburse Landlord for all sums so paid by Landlord and all necessary
incidental costs, and Landlord shall have the same rights and remedies in the
event of the failure by Tenant to pay such amounts as Landlord would have in the
event of a default by Tenant in the payment of Rent.
26. BROKERS: Each of the parties (i) represents and warrants to the
other that it has not dealt with any real estate broker or finder with regard to
leasing or renting space in the Building except as described on Exhibit E
attached hereto; and (ii) indemnifies and holds the other harmless from any and
all losses, liability, costs or expenses (including attorney's fees) incurred as
a result of an alleged breach of the foregoing warranty and representation.
27. LANDLORD'S SECURITY INTEREST: Landlord reserves (and is hereby
granted) a security interest in all fixtures, equipment and personal property
(tangible and intangible) now or hereafter located in or on the Premises to
secure all sums due from and all obligations to be performed by Tenant
hereunder, which lien and security interest may be enforced by Landlord in any
manner provided by law, including, without limitation, under and in accordance
with the Uniform Commercial Code as adopted in Minnesota. At Landlord's request,
Tenant shall execute and file, where appropriate, all documents required to
perfect the security interest herein granted.
13
<PAGE>
28. MODIFICATIONS FOR LENDER: If, in connection with obtaining
financing for the Building or the Premises, any lender shall request
modifications in this Lease as a condition to such financing, Tenant shall
promptly execute any instrument submitted to Tenant by Landlord containing such
modifications; provided, however, that such modifications shall not increase the
obligations of Tenant hereunder or materially adversely affect the leasehold
interest hereby created.
29. LIMITATION OF LIABILITY: If Landlord is ever adjudged by any court
to be liable to Tenant in damages, Tenant specifically agrees to look solely to
Landlord's interest in the Building for the recovery of any judgment from
Landlord, it being agreed that Landlord, or if Landlord is a partnership, its
partners whether general or limited, or if Landlord is a corporation, its
directors, officers, or shareholders, shall never be personally liable for any
such judgment. The provision contained in the foregoing sentence is not intended
to, and shall not, limit any right that Tenant might otherwise have to obtain
injunctive relief against Landlord or Landlord's successor in interest, or to
maintain any other action not involving the personal liability of Landlord (or
if Landlord is a partnership, its partners whether general or limited, or if
Landlord is a corporation, its directors, officers, or shareholders), or to
maintain any suit or action in connection with enforcement or collection of
amounts which may become owing or payable under or on account of insurance
maintained by Landlord. Notwithstanding anything to the contrary in this Lease,
Landlord shall not be liable to Tenant, Tenant's agents, servants or employees,
or to any person or entity claiming by or through Tenant, for any consequential,
indirect, special or similar types of damages.
30. SUBSTITUTE PREMISES: At any time after the execution of this Lease,
Landlord may substitute for the Premises other premises in the Building (the
"New Premises"), in which event the New Premises shall be deemed to be the
Premises for all purposes hereunder; provided, however, that:
A. The New Premises shall be similar in area and in
appropriateness for Tenant's purposes; and
B. If Tenant is occupying the Premises at the time of any such
substitution, Landlord shall pay the expense of moving Tenant,
its property and equipment to the New Premises, and shall also
pay the expenses of improving the New Premises with
improvements substantially similar to those located in the
Premises.
31. WAIVER OF SUBROGATION: Each of Landlord and Tenant hereby releases
the other from any and all liability or responsibility to the other or anyone
claiming through or under them by way of subrogation or otherwise for any loss
or damage to property caused by the fault or negligence of the other party, or
anyone for whom such party may be responsible.
32. INCORPORATION OF EXHIBITS: The following exhibits to this Lease are
hereby incorporated by reference for all purposes as fully as if incorporated
herein:
EXHIBIT A Premises Location Drawing
EXHIBIT B Building Legal Description
EXHIBIT C Leasehold Improvements Plans and Specifications
EXHIBIT D Guaranty
EXHIBIT E Brokers
EXHIBIT F Building Rules and Regulations
14
<PAGE>
33. FORCE MAJEURE: All of the obligations of Landlord and of Tenant
under this Lease are subject to and shall be postponed for a period equal to any
delay or suspension resulting from fires, strikes, acts of God, and other causes
beyond the control of the party delayed in its performance hereunder, this Lease
remaining in all other respects in full force and effect and the Term not
thereby extended. Notwithstanding the foregoing, the unavailability of funds for
payment or performance of Tenant's obligations hereunder shall not give rise to
any postponement or delay in such payment or performance of Tenant's obligations
hereunder.
34. GENERAL: The submission of this Lease for examination does not
constitute the reservation of or an option for the Premises, and this Lease
becomes effective only upon execution and delivery hereof by Landlord and
Tenant. This Lease does not create the relationship of principal and agent or of
partnership, joint venture or any association between Landlord and Tenant, the
sole relationship between Landlord and Tenant being that of lessor and lessee.
No waiver of any default of Tenant hereunder shall be implied from any omission
by Landlord to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect any default other
than the default specified in the express waiver and that only for the time and
to the extent therein stated. Each term and each provision of this Lease
performable by Tenant shall be construed to be both a covenant and a condition.
The topical headings of the several paragraphs and clauses are for convenience
only and do not define, limit or construe the contents of such paragraphs or
clauses. All preliminary negotiations are merged into and incorporated in this
Lease, and this Lease constitutes the entire agreement between the parties.
Landlord has made no representations or warranties to Tenant with regard to this
Lease, the Premises or the Building which are not expressly set forth herein.
This Lease can only be modified or amended in writing, which writing shall be
signed by the parties hereto, their successors or assigns (and mortgagees if
required by such mortgage). All provisions hereof shall be binding upon the
heirs, successors and assigns of each party hereto.
35. SEVERABILITY: The invalidity of any provision, clause or phrase
herein contained shall not serve to render the balance of this Lease ineffective
or void and the same shall be construed as if such had not been herein set
forth.
36. GOVERNING LAW: This Lease shall be governed in accordance with the
laws of the State of Minnesota.
37. ADDITIONAL PROVISIONS: Addendum to Lease Sections 38 through 39 are
hereby incorporated by reference as fully as set forth herein.
15
<PAGE>
IN WITNESS WHEREOF, the respective parties hereto have caused this
Lease to be executed as of the day and year first above written.
LANDLORD TENANT:
LEXINGTON HOPKINS LIMITED PARTNERSHIP Profile National Business Directory
a Minnesota Corporation
By: Lexington Properties, Inc.
Its General Partner By: /s/ Satya P. Garg
-------------------------------
Its President
-------------------------------
By: /s/ Donald H. Bodel And:
---------------------------------- -------------------------------
Its: President Its
--------------------------------- -------------------------------
16
<PAGE>
ADDENDUM TO LEASE
This Addendum is hereby made a part of a certain Lease dated the 14th
day of March, 1997 between Lexington Hopkins Limited Partnership, as Landlord,
and Profile National Business Directory, a Minnesota Corporation, as Tenant.
Where any of the provisions hereinafter set forth conflict with the printed
portion of the Lease, the provisions of this Addendum shall govern.
38. Base Rent. Tenant agrees to pay Landlord during the Term a Base Rent
(the "Base Rent") as outlined below:
<TABLE>
<CAPTION>
Monthly Annual Net Rate
Annual Installments Per Square Foot
---------- ------------- ----------------
<S> <C> <C> <C>
__/97 to 04/30/98 $18,400.00 $1,533.33 $8.00
05/01/98 to 04/30/99 $18,975.00 $1,581.25 $8.25
05/01/99 to 04/30/00 $19,550.00 $1,629.17 $8.50
</TABLE>
The Base Rent is due and payable in advance on the Commencement Date
and on the first day of each month thereafter during the Term, without
deduction or setoff of any kind, and delivered or sent to Landlord's
managing agent, Welsh Companies, Inc., 8200 Normandale Boulevard, Suite
200, Bloomington, MN 55437 or at such other place as may from time to
time to be designated by Landlord.
39. Renewal Option. Landlord hereby grants to Tenant a one-time successive
three year option to extend the lease term provided:
a) Tenant has not been, and is not, in default under the Lease at
the time such option is exercised and at the time such
extension is to commence; and
b) Tenant delivers to Landlord, not later than six (6) months
prior to the end of the original lease term, written notice
(the "Renewal Notice") exercising its option to extend the
lease term.
If Tenant exercises the Renewal Notice to Landlord, the Base Rent for
the renewal term shall be at the then prevailing market rate for
comparable space in comparable buildings, as reasonably determined by
Landlord.
<PAGE>
EXHIBIT B
LEGAL DESCRIPTION
Lot 14, except the North 44 feet of the West 37 feet thereof; all of Lots 15,
16, 17, 18, 19, 20; and that part of Lot 21 lying South of the North 44 feet;
all in Block 6, West Minneapolis, including the vacated 14 foot alley adjacent
to Lots 18, 19, 20 and that part of Lot 21, lying South of the North 44 feet,
Block 6, West Minneapolis, according to the recorded plat thereof, and situate
in Hennepin County, Minnesota.
Abstract Property.
<PAGE>
EXHIBIT C
LEASEHOLD IMPROVEMENTS, PLANS AND SPECIFICATIONS
Landlord agrees to provide up to $6,900.00 toward building standard tenant
improvements to be used solely for improvements to the Premises as approved by
Landlord. Landlord reserves the right to have prior approval of all plans,
materials, payment methods, and contractors. Tenant shall receive all applicable
building permits and cause no lien against the Building. Any costs in excess of
$6,900.00, including but not limited to standard architectural fees, shall be at
the expense of Tenant. Tenant shall make payment of any such costs in excess of
Landlord's contribution to Landlord upon demand.
<PAGE>
EXHIBIT D
GUARANTY
This Guaranty is attached to a Lease dated as of the 14th day of March,
1997, by and between The Lexington Hopkins Limited Partnership ("Landlord") and
Profile National Business Directory, Inc. ("Tenant").
**
The undersigned, in consideration of the leasing of the Premises
described in the attached Lease to the Tenant therein mentioned, hereby
absolutely, unconditionally and irrevocably guarantee to Landlord the full and
complete performance of all of the Tenant's covenants and obligations under said
Lease, including any extension, renewal or holdover thereof, and the full
payment by Tenant of all Base Rent, Operating Costs and Additional Rent and all
other charges and amounts required to be paid by Tenant under the Lease, and the
undersigned will pay all of Landlord's expenses, including attorneys' fees,
incurred in enforcing the obligations of Tenant under said Lease, or incurred in
enforcing this Guaranty.
The undersigned hereby waives all requirements of notice of the
acceptance of this Guaranty and all requirements of notice of breach or
nonperformance by Tenant. The undersigned's obligation hereunder shall remain
fully binding although; (a) Landlord may have waived one or more defaults by
Tenant, extended the time of performance by Tenant, modified or amended the
Lease, released, returned or misapplied other collateral given later as
additional security (including other guaranties) or released Tenant from the
performance of its obligations under such Lease; or (b) Tenant may have
assigned, sublet or otherwise transferred the Lease.
The undersigned shall not be subrogated to any of the rights of
Landlord under the Lease or in or to the Premises described therein, or to any
other rights of Landlord, by reason of any of the provisions of this Guaranty or
by reason of the performance by the undersigned or any of its or their
obligations under this Guaranty.
This Guaranty shall survive expiration or earlier termination of the
Lease. Without limiting the generality of the foregoing, the undersigned hereby
acknowledges that if the holder of any mortgage, deed of trust, underlying
ground lease, holder of any like encumbrance or purchaser at foreclosure shall
succeed to the interests of Landlord under the Lease, this Guaranty shall remain
in full force and effect for the benefit of any holder of said encumbrances or
foreclosure purchaser, as the case may be.
The undersigned's obligations shall be joint and several and the
release of one such guarantor shall not release any other of such guarantors.
This Guaranty shall be binding upon the undersigned and their respective heirs,
executors, administrators, representatives, successors and assigns.
Executed by the undersigned this 14th day of March, 1997.
Address of Guarantor(s): SM ENGINEERING COMPANY
1011 First Street South, Suite 370 By: /s/ Satya P. Garg
----------------------------
Hopkins, MN Its: President
-----------------------
**Mr. Satya P. Garg is the majority owner of both Tenant and the undersigned and
expects to derive substantial benefit from the Lease transaction.
<PAGE>
EXHIBIT E
BROKERS
Landlord agrees that it is responsible for the brokerage commission due to Welsh
Companies for this Lease between Profile National Business Directory, a
Minnesota Corporation, as Tenant, and Lexington Hopkins Limited Partnership, a
Minnesota limited partnership, as Landlord.
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
Business Directory, Inc., a Minnesota corporation
Software Moguls India Private Limited, an Indian private corporation
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Historical and Pro Forma Financial Data" and to the use
of our report dated February 9, 1999 in the Registration Statement (Form S-1)
and related Prospectus of WebValley, Inc. for the registration of ________
shares of its common stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF WEBVALLEY, INC. FOR THE PERIOD FROM MAY
22,1996 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1996 AND THE YEARS ENDED
DECEMBER 31, 1997 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 183,875
<SECURITIES> 0
<RECEIVABLES> 1,027,337
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,247,235
<PP&E> 377,527
<DEPRECIATION> (75,745)
<TOTAL-ASSETS> 1,848,829
<CURRENT-LIABILITIES> 242,494
<BONDS> 0
0
0
<COMMON> 90,000
<OTHER-SE> 758,525
<TOTAL-LIABILITY-AND-EQUITY> 1,848,829
<SALES> 6,544,316
<TOTAL-REVENUES> 6,544,316
<CGS> 701,258
<TOTAL-COSTS> 5,062,632
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,769
<INCOME-PRETAX> 723,657
<INCOME-TAX> 0
<INCOME-CONTINUING> 723,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 723,657
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
