NOTE AND WARRANT PURCHASE AGREEMENT
DATED AS OF
AUGUST 18 , 2000
BY AND BETWEEN
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL INC., MAKER AND SELLER,
MERLIN SOFTWARE TECHNOLOGIES, INC.
AND
NARRAGANSETT I, L.P., NARRAGANSETT OFFSHORE LTD.,
PEQUOT SCOUT FUND, L.P. AND SDS MERCHANT FUND, L.P.
WITH RESPECT TO
SERIES A 10% SENIOR SECURED CONVERTIBLE NOTES
AND SERIES A WARRANTS TO PURCHASE COMMON STOCK
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<TABLE>
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TABLE OF CONTENTS
TABLE OF EXHIBITS AND SCHEDULES
<S> <C>
Exhibit A. . . Form of Series A Senior Secured Convertible Note
Exhibit B. . . Form of Series A Warrant
Exhibit C. . . Form of Registration Rights Agreement
Exhibit D. . . Form of Security Agreement
Exhibit E. . . Form of Subsidiary Security Agreement
Exhibit F. . . Form of Intellectual Property Security Agreement and Assignment of Intellectual Property
Exhibit G. . . Form of Subsidiary Intellectual Property Security Agreement and Assignment of Intellectual Property
Exhibit H. . . Form of Pledge Agreement
Exhibit I. . . Form of Subsidiary Guaranty
Exhibit J. . . Form of Lock Up and Tag-Along Rights Agreement
Exhibit K. . . Form of Escrow Agreement
Exhibit L. . . Annual Budget
Schedule 1 . . Purchasers
Schedule 3.6 . Financial Statements
Schedule 3.7 . Compliance with Law
Schedule 3.8 . No Defaults
Schedule 3.9 . Litigation
Schedule 3.10. Absence of Certain Changes
Schedule 3.11. No Undisclosed Liabilities
Schedule 3.13. Taxes
Schedule 3.14. Interests of Officers, Directors and Other Affiliates
Schedule 3.15. Intellectual Property
Schedule 3.16. Restrictions on Business Activities
Schedule 3.18. Major Customers and Suppliers; Supplies
Schedule 3.20. Insurance
Schedule 3.21. Subsidiaries and Investments
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Schedule 3.23. Rights, Warrants, Options
Schedule 3.24. Real Property
Schedule 3.25. Labor Relations
Schedule 3.26A Employment Agreements
Schedule 3.26B Employee Benefit Plans
Schedule 3.30. Licenses; Compliance With Regulatory Requirements
Schedule 3.31. Title to Securities
Schedule 3.32. Related Parties
Schedule 3.33. List of Accounts
Schedule 3.34. Material Agreements
Schedule 3.35. Guaranties
Schedule 3.36. Brokers
Schedule 3.37. Arm's Length Transactions
Schedule 3.42. Disclosure
</TABLE>
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NOTE AND WARRANT PURCHASE AGREEMENT
SERIES A 10% SENIOR SECURED CONVERTIBLE NOTES
SERIES A WARRANTS TO PURCHASE COMMON STOCK
NOTE AND WARRANT PURCHASE AGREEMENT (the "Agreement") dated as of August
18, 2000, by and between MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC., a
Nevada corporation (the "Seller"), MERLIN SOFTWARE TECHNOLOGIES, INC., a Nevada
corporation (the "Subsidiary"), and NARRAGANSETT I, L.P., a Delaware limited
partnership, NARRAGANSETT OFFSHORE LTD., a Cayman Islands corporation, Pequot
Scout Fund, L.P., a Delaware limited partnership and SDS Merchant Fund, L.P., a
Delaware limited partnership, (collectively, the "Purchasers").
WITNESSETH:
WHEREAS, the Purchasers are willing to purchase from the Seller, and the
Seller desires to sell to the Purchasers, up to an aggregate of $2,100,000
principal amount of Series A 10% Senior Secured Convertible Notes due August 18,
2003 (the "Notes") and Series A Common Stock Purchase Warrants (the "Series A
Warrants" or the "Warrants") entitling the holder thereof to purchase an
aggregate of 1,520,000 shares of the Seller's common stock, $0.001 par value
(the "Common Stock"), at an exercise price of $1.75 per share (subject to
adjustment as more fully set forth herein and in the Series A Warrants).
NOW, THEREFORE, in consideration of the mutual promises and
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 PURCHASE AND SALE. On the terms and subject to the conditions
set forth in this Agreement, at the Closing (as defined in Section 2.2), the
Seller will sell and each of the Purchasers will purchase (i) the Notes in the
principal amounts set forth on Schedule 1 hereto, and (ii) the numbers of Series
A Warrants set forth on Schedule 1 hereto. The shares of Common Stock issuable
upon conversion of the Notes are referred to herein as the "Conversion Shares,"
and the shares of Common Stock issuable upon exercise of the Series A Warrants
are referred to herein as the "Warrant Shares."
1.2 TERMS OF THE NOTES AND WARRANTS. The terms and provisions of the
Notes are more fully set forth in the Form of Series A Senior Secured
Convertible Note, in the form attached hereto as Exhibit A. The terms and
provisions of the Warrants are more fully set forth in the Form of Series A
Common Stock Purchase Warrant, in the form attached hereto as Exhibit B.
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1.3 TRANSFERS; LEGENDS.
(a) The Notes may be transferred, in whole or in part, by any of the
Purchasers at any time by delivering written transfer instructions to the
Seller, and the Seller shall reflect such transfer on its books and records and
reissue appropriate Notes upon surrender of Notes evidencing the Notes being
transferred. Any such transfer shall be made by a Purchaser in accordance with
applicable law.
(b) The certificates representing the Common Stock, until such time as
the Conversion Shares and the Warrant Shares are sold pursuant to an effective
registration statement under the Securities Act of 1933, as amended, shall
contain the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR
TRANSFERRED, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT OR UNLESS THE ISSUER HAS RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION UNDER SAID ACT IS NOT REQUIRED."
ARTICLE II
PURCHASE PRICE AND CLOSING
2.1 PURCHASE PRICE. The aggregate purchase price (the "Purchase
Price") to be paid by the Purchasers to the Seller to acquire the Notes shall be
$2,100,000, and the aggregate purchase price for the Series A Warrants shall be
$100.
2.2 THE CLOSING.
(a) The closing of the transactions contemplated under this Agreement
(the "Closing") shall take place at the offices of Kane Kessler, P.C., 1350
Avenue of the Americas, 26th Floor, New York, New York.
(b) The Closing shall take place in two stages (the "First Tranche
Closing" and the "Second Tranche Closing"; reference to the "Closing" shall be
construed to include both Closings unless only one closing is expressly referred
to). The First Tranche Closing shall take place on the date hereof.
(c) The Second Tranche Closing shall take place within 7 trading days
after a registration statement is filed and declared effective in accordance
with the Registration Rights Agreement.
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(d) When used herein, "Closing Date" refers to the date of the First
Tranche Closing and the Second Tranche Closing, unless expressly indicated
otherwise.
2.3 DELIVERIES.
(A) DELIVERIES BY THE SELLER. At Closing, the Seller shall deliver or
cause to be delivered to the Purchasers the following:
1. (i) The Notes duly executed by the Seller; at the First Tranche
Closing, the principal amount of the Notes to be delivered shall be an aggregate
of up to $1,100,000 (the "First Tranche"); at the Second Tranche Closing, the
principal amount of the Notes to be delivered shall be $1,000,000 (the "Second
Tranche"); notwithstanding any contrary provision herein or in the Notes, the
due dates of the Notes delivered at the Second Tranche Closing shall be the same
as the due dates of the Notes delivered at the First Tranche Closing; and
(ii) At the First Tranche Closing, certificates evidencing an
aggregate of 770,000 Series A Warrants; and at the Second Tranche Closing,
certificates evidencing an aggregate of an additional 750,000 Series A Warrants.
2. The Registration Rights Agreement, in the form attached hereto as Exhibit
C, duly executed by the Seller, at the First Tranche Closing only.
3. (i) At the First Tranche Closing, a legal opinion of Clark, Wilson
("Seller's Counsel"), counsel to the Seller, in form and substance satisfactory
to the Purchasers; and
(ii) At the Second Tranche Closing, a legal opinion of the Seller's
Counsel, in form and substance satisfactory to the Purchasers; the Seller
understands that the opinion to be delivered at the Second Tranche Closing may
be required to address additional or different matters than the opinion accepted
at the First Tranche Closing.
4. At the Closing, the Secretary's certificate and other documents, as
contemplated by Section 7.1.
5. At the First Tranche Closing, a wire transfer representing the
Purchasers' legal fees and expenses; such fee may, at the election of the
Seller, be paid out of the funds due from the Purchasers at the First Tranche
Closing.
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6. At the First Tranche Closing, the Security Agreement in the form attached
hereto as Exhibit D, and the related financing statements on Form UCC-1 and Form
PPR, duly executed by the Seller.
7. At the First Tranche Closing, the Subsidiary Security Agreement in the
form attached hereto as Exhibit E, and the related financing statements on Form
UCC-1 and Form PPR, duly executed by the Subsidiary.
8. At the First Tranche Closing, the Intellectual Property Security
Agreement and Assignment of Intellectual Property, in the form attached hereto
as Exhibit F, and the related financing statements on Form UCC-1 and Form PPR,
duly executed by the Seller.
9. At the First Tranche Closing, the Subsidiary Intellectual Property
Security Agreement and Assignment of Intellectual Property, in the form attached
hereto as Exhibit G, and the related financing statements on Form UCC-1 and Form
PPR, duly executed by the Subsidiary.
10. At the First Tranche Closing, the Pledge Agreement, duly executed by the
Seller in the form attached hereto as Exhibit H.
11. At the First Tranche Closing, the Subsidiary Guaranty, in the form
attached hereto as Exhibit I, duly executed by the Subsidiary.
12. At the First Tranche Closing, the Lock-Up and Tag-Along Rights
Agreement, in the form attached hereto as Exhibit J, duly executed by the
executive officers, directors and certain 5% or greater shareholders of Seller.
13. At the First Tranche Closing, the Escrow Agreement, in the form attached
hereto as Exhibit K, duly executed by the Seller and the Subsidiary.
14. Such other documents as the Purchasers shall reasonably request,
including without limitation, at the Second Tranche Closing, a bring-down
Secretary's Certificate with respect to the continuing validity and lack of
default under the documents and instruments delivered at the First Tranche
Closing and a bring-down financial statement.
(B) DELIVERIES BY THE PURCHASERS. At the Closings, the Purchasers
shall deliver or cause to be delivered to the Seller the following:
1. (i) At the First Tranche Closing, payment of the First Tranche of the
Purchase Price, in cash by either wire transfer of immediately available funds
or certified or
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cashier's check or in accordance with the Seller's instructions (which
instructions shall be given to the Purchasers in writing no later than 3
business days prior to the First Tranche Closing);
(ii) At the Second Tranche Closing, payment of the Second Tranche
of the Purchase Price, in cash by either wire transfer of immediately available
funds or certified or cashier's check or in accordance with the Seller's
instructions (which instructions shall be given to the Purchasers in writing no
later than 3 business days prior to the Second Tranche Closing); and
2. Such other documents as the Seller shall reasonably request.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller and its Subsidiary each hereby represents and warrants to the
Purchasers as follows (for purposes of this Article III, all references to the
Seller shall be deemed to include the Subsidiary and the predecessor entities of
the Seller, including, but not limited to Austin Land & Development, Inc., a
Nevada corporation):
3.1 CORPORATE EXISTENCE AND POWER. The Seller and the Subsidiary
are corporations duly incorporated, validly existing and in good standing under
the laws of the state in which they are incorporated, and have all corporate
powers required to carry on their business as now conducted. The Seller and the
Subsidiary are duly qualified to do business as a foreign corporation and are in
good standing in each jurisdiction where the character of the property owned or
leased by them or the nature of their activities makes such qualification
necessary, except for those jurisdictions where the failure to be so qualified
would not have a Material Adverse Effect on the Seller or the Subsidiary. For
purposes of this Agreement, the term "Material Adverse Effect" means, with
respect to any Person or entity, a material adverse effect on its condition
(financial or otherwise), business, properties, assets, liabilities (including
contingent liabilities), results of operations or current prospects of the
Seller or any of its Subsidiaries. True and complete copies of the Seller's
Articles of Incorporation, as amended, and Bylaws, as amended (collectively, the
"Articles and Bylaws") have previously been provided to the Purchasers. For
purposes of this Agreement, the term "Subsidiary" means, with respect to any
entity, any corporation or other organization of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are directly or
indirectly owned by such entity or of which such entity is a partner or is,
directly or indirectly, the beneficial owner of 50% or more of any class of
equity securities or equivalent profit participation interests.
3.2 CORPORATE AUTHORIZATION. The execution, delivery and performance
by the Seller and its Subsidiaries of this Agreement, the Notes, Warrants,
Registration Rights Agreement, Security
<PAGE>
Agreement, Subsidiary Security Agreement, Intellectual Property Security
Agreement and Assignment, Subsidiary Intellectual Property Security Agreement
and Assignment, Lock-Up and Tag Along Rights Agreement, Pledge Agreement,
Subsidiary Guaranty, the Escrow Agreement and each of the other documents
executed pursuant to and in connection with this Agreement (the "Related
Documents"), and the consummation of the transactions contemplated hereby
(including, but not limited to, the sale and delivery of the Notes and the
Warrants, and the subsequent issuance of the Conversion Shares upon conversion
of the Notes, and the subsequent issuance of the Warrant Shares upon exercise of
the Warrants) have been duly authorized, and no additional corporate action is
required for the approval of this Agreement. The Conversion shares and the
Warrant Shares have been duly authorized and reserved, for issuance by the
Seller in an amount sufficient to cover all conversions and exercises of the
Notes and Warrants. This Agreement and the Related Documents have been or, to
the extent contemplated hereby, will be duly executed and delivered and
constitutes the legal, valid and binding agreement of the Seller and its
Subsidiaries enforceable against them in accordance with their terms, except as
may be limited by bankruptcy, reorganization, insolvency, moratorium and similar
laws of general application relating to or affecting the enforcement of rights
of creditors, and except as enforceability of its obligations hereunder are
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
3.3 CHARTER, BYLAWS AND CORPORATE RECORDS. The minute books of
the Seller and its Subsidiaries contain complete and accurate records of all
meetings and other corporate actions of the board of directors, committees of
the board of directors, incorporators and shareholders of the Seller and the
Subsidiary from the date of their incorporation to the date hereof. All
material corporate decisions and actions have been validly made or taken. All
corporate books, including without limitation the share transfer register,
comply with applicable laws and regulations and have been regularly updated.
Such books fully and correctly reflect all the decisions of the shareholders.
3.4 GOVERNMENTAL AUTHORIZATION. Except as otherwise specifically
con-tem-plated in this Agreement and the Related Documents, and except for the
filing of a Form D with respect to the Notes and Warrants under Regulation D
under the Securities Act and any filings required under state or provincial
securities laws that are permitted to be made after the date hereof, the
execution, delivery and performance by the Seller and its Subsidiaries of this
Agreement and the Related Documents, and the consummation of the transactions
contemplated hereby (including, but not limited to, the sale and delivery of the
Notes and Warrants and the subsequent issuance of the Conversion Shares and
Warrant Shares upon conversion of the Notes or exercise of the Warrants, as
applicable) by the Seller and the Subsidiary require no action by or in respect
of, or filing with, any governmental body, agency, official or authority.
3.5 NON-CONTRAVENTION. The execution, delivery and performance by the
Seller and the Subsidiary of this Agreement and the Related Documents, and the
consummation by the Seller of the transactions contemplated hereby (including
the issuance of the Conversion Shares and Warrant Shares) do not and will not
(a) contravene or conflict with the Articles and Bylaws of the Seller and
<PAGE>
the Subsidiary; (b) contravene or conflict with or constitute a violation
of any provision of any law, regulation, judgment, injunction, order or decree
binding upon or applicable to the Seller, or the Subsidiary, which
contravention, conflict or violation would have a Material Adverse Effect on the
Seller and the Subsidiary, taken as a whole, (c) constitute a default under or
give rise to a right of termination, cancellation or acceleration or loss of any
benefit under any material agreement, contract or other instrument binding upon
the Seller or the Subsidiary or under any material license, franchise, permit or
other similar authorization held by the Seller or the Subsidiary; or (d) result
in the creation or imposition of any Lien (as defined below) on any material
asset of the Seller or the Subsidiary. For purposes of this Agreement, the term
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest, claim or encumbrance of any kind in respect of such asset.
3.6 FINANCIAL STATEMENTS. The audited balance sheet of the Seller
as at December 31, 1998 and 1999, and the audited statements of income and cash
flows for the years then ended, and the unaudited interim balance sheet and
statements of income and cash flows for the 6 months ending June 30, 2000, (the
"Financial Statements"), copies of which are attached hereto as Schedule 3.6,
were prepared in accordance with generally accepted accounting principals (as in
effect from time to time) ("GAAP") applied on a consistent basis, and such
Financial Statements fairly present in accordance with GAAP consistently applied
with prior periods in all material respects the financial position of the Seller
as at the dates thereof and the results of its operations and its cash flows for
the periods then ended, subject, in the case of the unaudited interim financial
statements, to normal, recurring year-end audit adjustments.
3.7 COMPLIANCE WITH LAW. Except as set forth in Section 3.7, the
Seller and the Subsidiary are in compliance in all respects and have conducted
their business so as to comply in all respects with all laws, rules and
regulations, judgments, decrees or orders of any court, administrative agency,
commission, regulatory authority or other governmental authority or
instrumentality, domestic or foreign, applicable to its operations except where
such non-compliance would not have a Material Adverse Effect. Except as
disclosed in Schedule 3.7, there are no judgments or orders, injunctions,
decrees, stipulations or awards (whether rendered by a court or administrative
agency or by arbitration), including any such actions relating to affirmative
action claims or claims of discrimination, against the Seller or the Subsidiary
or against any of their properties or businesses.
3.8 NO DEFAULTS. Except as set forth in Schedule 3.8, the Seller and
the Subsidiary are not, nor have they received notice that they would be with
the passage of time, giving of notice, or both, (i) in violation of any
provision of their Articles and Bylaws (ii) in default or violation of any term,
condition or provision of (A) any judgment, decree, order, injunction or
stipulation applicable to the Seller or its Subsidiaries or (B) any material
agreement, note, mortgage, indenture, contract, lease or instrument, permit,
concession, franchise or license to which the Seller or the Subsidiary are a
party or by which the Seller or the Subsidiary or their properties or assets may
be bound, and no circumstances exist which would entitle any party to any
material agreement, note, mortgage,
<PAGE>
indenture, contract, lease or instrument to which such Seller or the
Subsidiary are a party, to terminate such as a result of such Seller or the
Subsidiary, having failed to meet any material provision thereof including, but
not limited to, meeting any applicable milestone under any material agreement or
contract.
3.9 LITIGATION. Except as disclosed in Schedule 3.9, there is no
action, suit, proceeding, judgment, claim or investigation pending or, to the
best knowledge of the Seller, threatened against the Seller and the Subsidiary
taken as a whole, which could, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Seller or the Subsidiary or
which in any manner challenges or seeks to prevent, enjoin, alter or materially
delay any of the transactions contemplated hereby, or which could lead to a
claim, damages payment, settlement, loss, liability, cost or expense to the
Seller in excess of $10,000 in the aggregate and there is no basis for the
assertion of any of the foregoing. There are no claims or complaints existing
or, to the knowledge of the Seller or the Subsidiary, threatened for product
liability in respect of any product of the Seller or the Subsidiary, and the
Seller and the Subsidiary are not aware of any basis for the assertion of any
such claim.
3.10 ABSENCE OF CERTAIN CHANGES. Since June 30, 2000, the Seller
has conducted its business in the ordinary course and there has not occurred,
except as set forth on Schedule 3.10:
(a) Any event that could reasonably be expected to have a Material
Adverse Effect on the Seller and the Subsidiary taken as a whole;
(b) Any amendments or changes in the Articles or Bylaws of the Seller
and the Subsidiary;
(c) Any damage, destruction or loss, whether or not covered by
insurance, that would, individually or in the aggregate, have a Material Adverse
Effect on the Seller and the Subsidiary, taken as a whole;
(d) Any (i) incurrence, assumption or guarantee by the Seller or the
Subsidiary of any debt for borrowed money; (ii) issuance or sale of any
securities convertible into or exchangeable for securities of the Seller; (iii)
issuance or sale of options or other rights to acquire from the Seller or the
Subsidiary, directly or indirectly, securities of the Seller or any securities
convertible into or exchangeable for any such securities; (iv) issuance or sale
of any stock, bond or other corporate security; (v) discharge or satisfaction of
any Lien, other than current liabilities incurred since December 31, 1999, in
the ordinary course of business; (vi) declaration or making any payment or
distribution to shareholders or purchased or redeemed any share of its capital
stock or other security; (vii) sale, assignment or transfer any of its
intangible assets except in the ordinary course of business, or cancellation of
any debt or claim; (viii) waiver of any right of substantial value whether or
not in the ordinary course of business; (ix) material change in officer
compensation except in the ordinary
<PAGE>
course of business and consistent with past practices; or (x) other
commitment (contingent or other-wise) to do any of the foregoing.
(e) Any creation or assumption by the Seller or the Subsidiary of any
Lien on any asset or any making of any loan, advance or capital contribution to
or investment in any Person in an aggregate amount which exceeds $10,000
outstanding at any time;
(f) Any entry into, amendment of, relinquishment, termination or
non-renewal by the Seller or the Subsidiary of any contract, license, lease,
transaction, commitment or other right or obligation, other than in the ordinary
course of business; or
(g) Any transfer or grant of a right with respect to the trademarks,
trade names, service marks, trade secrets, copyrights or other intellectual
property rights owned or licensed by the Seller or the Subsidiary.
3.11 NO UNDISCLOSED LIABILITIES. Except as set forth in Schedule
3.11, and except for liabilities and obligations incurred in the ordinary course
of business since December 31, 1999, as of the date hereof, (i) the Seller and
the Subsidiary do not have any liabilities or obligations (absolute, accrued,
contingent or otherwise) and (ii) there has not been any aspect of the prior or
current conduct of the business of the Seller or the Subsidiary which may form
the basis for any claim by any third party which if asserted could result in any
such liabilities or obligations, which are not fully reflected, reserved against
or disclosed in the balance sheet of the Seller as at December 31, 1999.
3.12 RECEIVABLES. The Seller's receivables arose in the ordinary
course of business and have been collected or are collectible in the ordinary
course of business in the book amounts thereof, less an amount not in excess of
any allowance for doubtful accounts.
3.13 TAXES. The Seller has previously delivered to Purchasers true,
correct and complete copies of each of the federal, state and local income tax
returns filed by the Seller and the Subsidiary for the past three fiscal years
through 1999. Except as set forth on Schedule 3.13, all tax returns and tax
reports required to be filed with respect to the income, operations, business or
assets of the Seller and the Subsidiary have been timely filed (or appropriate
extensions have been obtained which extensions are listed on Schedule 3.13) with
-------------
the appropriate governmental agencies in all jurisdictions in which such returns
and reports are required to be filed, and all of the foregoing as filed are
true, correct and complete and, in all material respects, reflect accurately all
liability for taxes of the Seller and the Subsidiary for the periods to which
such returns relate, and all amounts shown as owing thereon have been paid.
Except as set forth on Schedule 3.13, all income, profits, franchise, sales,
use, value added, occupancy, property, excise, payroll, withholding, FICA, FUTA
and other taxes (including interest and penalties), if any, collectible or
payable by the Seller and the Subsidiary or relating to or chargeable against
any of its assets, revenues or income or relating to any employee, independent
contractor, creditor, stockholder or other third party through December 31,
<PAGE>
1999, and through the Closing Date, were fully collected and paid by such
date or provided for by adequate reserves in the December 31, 1999 Financial
Statements and all similar items due through the Closing Date will have been
fully paid by that date or provided for by adequate reserves, whether or not any
such taxes were reported or reflected in any tax returns or filings. Except as
set forth on Schedule 3.13, no taxation authority has sought to audit the
records of the Seller or the Subsidiary for the purpose of verifying or
disputing any tax returns, reports or related information and disclosures
provided to such taxation authority, or for the Seller's or the Subsidiary's
alleged failure to provide any such tax returns, reports or related information
and disclosure. Except as provided on Schedule 3.13, no claims or deficiencies
have been asserted against or inquiries raised with the Seller or the Subsidiary
with respect to any taxes or other governmental charges or levies which have not
been paid or otherwise satisfied, including claims that, or inquiries whether,
the Seller the Subsidiary has not filed a tax return that it was required to
file, and, to the best of the Seller's knowledge, there exists no reasonable
basis for the making of any such claims or inquiries. Neither the Seller or the
Subsidiary has waived any restrictions on assessment or collection of taxes or
consented to the extension of any statute of limitations relating to taxation.
Neither the Seller nor the Subsidiary has filed a consent under Section 341(f)
of the Internal Revenue Code of 1986, as amended (the "Code") concerning
collapsible corporations, is not and has never been a party to a tax allocation
or sharing agreement or a member of a group filing, a consolidated federal
income tax return and has not been a United States real property holding
corporation within the meaning of Code Section 897 (c)(2), during the applicable
period specified in Code Section 897(c)(1)(A)(ii).
3.14 INTERESTS OF OFFICERS, DIRECTORS AND OTHER AFFILIATES.
Schedule 3.14 sets forth a description of any interest held, directly or
indirectly, by any officer, director or other affiliate of Seller in any
property, real or personal, tangible or intangible, used in or pertaining to
Seller's business, including any interest in the Seller's Intellectual Property
(as defined in Section 3.15 hereof).
3.15 INTELLECTUAL PROPERTY. (a) Except as limited in Section
3.15(c), the Seller and the Subsidiary, directly or indirectly, own and have
the valid right to use all intellectual property, currently used or contemplated
or necessary to be used in connection with the business of the Seller and its
Subsidiaries, including without limitation all license agreements and other
agreements granting rights relating to any intellectual property ("License
Agreements") to which the Seller or the Subsidiary is a party or is otherwise
bound (such intellectual property, together with the License Agreements, the
"Seller's Intellectual Property").
(b) Schedule 3.15 sets forth, for all of the Seller's Intellectual Property,
directly or indirectly owned by the Seller and the Subsidiary, a complete and
accurate list of all United States, international and state (i) patents and
patent applications, (ii) Trademark registrations and applications and material
unregistered Trademarks, (iii) Internet domain names, and (iv) Copyright
registrations and applications and material unregistered Copyrights, including
Internet domain names and software, that constitute the Seller's Intellectual
Property, indicating for each, the
<PAGE>
applicable jurisdiction, registration number (or application number), date
issued (or date filed) and descriptions of the pertinent invention or software.
(c) Except as set forth on Schedule 3.15, except as may be revealed by
"prior art" searches conducted by the Purchasers with respect to the Patent
Applications prior to the Closing Date, the Seller's Intellectual Property
directly or indirectly owned or used by the Seller and the Subsidiary is solely
and exclusively owned by the Seller and the Subsidiary free and clear of all
liens, and the Seller and the Subsidiary are listed in the records of the
appropriate United States, state or foreign agency as the sole owner of record
for each registration and application for any Patent, Trademark, Internet domain
name and Copyright that it owns. Except as set forth on Schedule 3.15, all of
the items set forth on Schedule 3.15 are valid and subsisting, in full force and
effect, and have not been cancelled, expired, or abandoned. There is no pending
or threatened opposition, interference or cancellation proceeding before any
court or registration authority in any jurisdiction against the items set forth
on Schedule 3.15 or any of the Seller's Intellectual Property, directly or
indirectly, owned by the Seller and the Subsidiary or against any of the
Seller's Intellectual Property not owned by the Seller and the Subsidiary.
(d) There are no settlements, forebearances to sue, consents,
judgments, or orders or similar obligations to which the Seller or the
Subsidiary is a party or is otherwise bound, which (i) restrict the Seller and
the Subsidiary's rights to use any of the Seller's Intellectual Property, (ii)
restrict the Seller and the Subsidiaries' business in order to accommodate a
third party's intellectual property rights or (iii) permit third parties to use
any intellectual property which would otherwise infringe any of the Seller's
Intellectual Property. The Seller and the Subsidiary have not licensed or
sublicensed its rights in the Seller's Intellectual Property other than pursuant
to the License Agreements set forth on Schedule 3.15, and no royalties,
honoraria or other fees are payable by the Seller and the Subsidiary for the use
of or right to use any Seller's Intellectual Property in connection with the
Seller and the Subsidiary's business as currently conducted or contemplated to
be conducted, except pursuant to the License Agreements set forth on Schedule
3.15.
(e) The license agreements, permits and other agreements under which
the Seller and the Subsidiary has rights to the Seller's Intellectual Property
are valid and binding obligations of the Seller and the Subsidiary and all other
parties thereto, enforceable in accordance with their terms, and there exists no
event or condition which will result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default by the Seller or
its Subsidiaries, under any such agreement.
(f) The Seller and the Subsidiary takes reasonable measures to protect the
confidentiality of its material Trade Secrets, including requiring employees and
independent contractors having access thereto to execute written non-disclosure
agreements. Except as set forth in Schedule 3.15, no Trade Secret material to
the business of the Seller and the Subsidiary as currently operated or planned
to be operated has been disclosed or authorized to be disclosed to any third
party, including any employee, agent, contractor or other entity, other than
pursuant to a non-disclosure agreement
<PAGE>
that adequately protects the Seller and the Subsidiary's proprietary
interests in and to such Trade Secrets. No party to any non-disclosure
agreement relating to its Trade Secrets is in breach thereof.
(g) To the best knowledge of the Seller, the conduct of the Seller and
the Subsidiary's business as currently conducted and planned to be conducted
does not infringe upon any intellectual property owned or controlled by any
third party (either directly or indirectly such as through contributory
infringement or inducement to infringe) and is not libelous, slanderous,
defamatory, violative in any way of publicity or privacy rights, or obscene.
Except as set forth in Schedule 3.9, there are no claims or suits pending or, to
the Seller and the Subsidiary's knowledge, threatened, and the Seller and the
Subsidiary have not received any notice of a third party claim or suit, (i)
alleging that the Seller or Subsidiary's activities or the conduct of its
businesses infringes upon or constitutes the unauthorized use of the
intellectual property rights of any third party, nor alleging libel, slander,
defamation, or other violation of a personal right, or (ii) challenging the
ownership, use, validity or enforceability of any of the Seller's Intellectual
Property.
(h) To the best knowledge of the Seller, no third party is
misappropriating, infringing, diluting, or otherwise violating any of the
Seller's Intellectual Property. Except as set forth in Schedule 3.15(g), no
such claims are pending against a third party by the Seller or the Subsidiary.
(i) The consummation of the transactions contemplated hereby will not
result in the loss or impairment of the Seller or Subsidiary's right to own or
use any of the Seller's Intellectual Property nor require the consent of any
Governmental Authority or third party in respect of any such Seller's
Intellectual Property.
(j) All computer software and inventions currently used by the Seller
and its Subsidiaries, planned to be used by the Seller and Subsidiary or
necessary for the conduct of the current or planned business of the Seller and
Subsidiary were either (i) developed by an employee of the Seller and Subsidiary
within the scope of employment of the employee and pursuant to a binding
invention assignment agreement, (ii) developed by a third-party under a binding
work for hire and assignment agreement, or (iii) developed by a third party and
transferred and assigned to the Seller or the Subsidiary under a binding
transfer and assignment agreement.
(k) Without limitation to the representations and warranties set forth
elsewhere in this Section, the Seller and the Subsidiary represent and warrant
that: (i) except as set forth in Schedule 3.15, all right, title and interest
in and to the Seller and the Subsidiary Content is owned exclusively by the
Seller and the Subsidiary; (ii) the Seller and the Subsidiary has all rights
necessary for the use of the Seller and the Subsidiary Content listed in
Schedule 3.15 in connection with the Seller and the Subsidiary's business as
currently conducted and contemplated to be conducted, including the right to
copy, publish, display, perform, distribute, transmit and create derivative
works from the Seller and its Subsidiaries Content in all formats via all
current Seller and the Subsidiary sales and distribution channels, including
magazines and over the Internet; (iii) all Seller and its Subsidiaries Content
owned by the Seller and the Subsidiary was either developed by (I) employees of
the Seller
<PAGE>
and the Subsidiary within the scope of their employment, or (II)
independent contractors who have assigned their rights to the Seller and the
Subsidiary pursuant to written agreements; (iv) there are no material
restrictions on the Seller and the Subsidiary Content owned by the Seller and
its Subsidiaries; and (v) no element or aspect of the Seller and the Subsidiary
Content contains or constitutes defamatory, disparaging, obscene, materially
erroneous or misleading material, nor does it violate the privacy, publicity or
other personal rights of any third party.
(l) Schedule 3.15 contains a list of all material Trademarks of the
Seller and the Subsidiary used in connection with the Seller and the Subsidiary
business as currently conducted or contemplated to be conducted ("Material
Seller Marks"), along with their date of first use and any applicable Trademark
registration or application numbers. Without limitation to the representations
and warranties set forth above in this Section 3.15, the Seller and the
Subsidiary represent and warrant that: (i) the Material Seller Marks have been
in continuous use by the Seller and the Subsidiary at all times since their
date of first use by the Seller and the Subsidiary; (ii) there has been no prior
use of such Trademarks by any third party which would confer upon said third
party superior rights in such Trademarks; (iii) the Seller and the Subsidiary
have adequately policed the Trademarks against third party infringement to avoid
a reasonable claim of invalidation of each such Trademark; and (iv) the
registered Trademarks have been continuously used in the form appearing in, and
in connection with the goods and services listed in, their respective Trademark
registration certificates or applications.
3.16 RESTRICTIONS ON BUSINESS ACTIVITIES. Except as set forth in
Schedule 3.16, there is no agreement, judgment, injunction, order or decree
binding upon the Seller or its Sub-sidiaries which has or could reasonably be
expected to have the effect of prohibiting or materially im-pairing any business
practice of the Seller or the Subsidiary, any acquisition of property by the
Seller or the Subsidiary or the conduct of business by the Seller or the
Subsidiary as currently conducted or as currently proposed to be conducted by
the Seller.
3.17 TITLE TO AND CONDITION OF PERSONAL PROPERTY; NO LIENS. The
Seller and the Subsidiary have good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of their
tangible properties and assets, real, personal and mixed, used in their
business, free and clear of any Liens. All tangible personal property owned by
the Seller or the Subsidiary and material to the operations of the Seller or
the Subsidiary on the date hereof (with a replacement value in excess of $5000)
in the operation of their business is in good operating condition and in a good
state of maintenance and repair, and is adequate for the business conducted and
proposed to be conducted by the Seller or the Subsidiary. Except for the Leases
specifically identified in Schedule 3.24, there are no assets owned by any third
party which are material to the operation of the business of the Seller or the
Subsidiary, as presently conducted or proposed to be conducted.
3.18 MAJOR CUSTOMERS AND SUPPLIERS; SUPPLIES. Schedule 3.18 sets
forth a true and complete list of the ten largest customers (measured by dollar
volume) of the Seller and the
<PAGE>
Subsidiary and all suppliers of significant goods or services to the Seller
or the Subsidiary for the last three years. Schedule 3.18 identifies those
suppliers of significant goods or services with respect to which alternative
sources of supply are not readily available on comparable terms and conditions.
Except as indicated on Schedule 3.18, all material supplies and services
necessary for the conduct of the business of the Seller or the Subsidiary, as
presently conducted, may be obtained from alternate sources on terms and
conditions comparable to those presently available to the Seller or the
Subsidiary, and no facts, circumstances or conditions exist which create a
reasonable basis for believing that the Seller or the Subsidiary will be unable
to continue to procure the supplies and services necessary to conduct its
business on substantially the same terms and conditions as such supplies and
services are currently procured. There has not been, and there will not be, any
material adverse change in the relations of the Seller or the Subsidiary with
their respective customers, suppliers, contractors, licensor and lessors, as a
result of the announcement or consummation of the transactions contemplated by
this Agreement, nor do any facts, circumstances or conditions exist which create
a reasonable basis for believing that the Seller's or the Subsidiary's
relationships with their vendors and/or customers will be unable to continue on
substantially the same terms and conditions as currently exist.
3.19 PREEMPTIVE RIGHTS. None of the shareholders of the Seller
possess any preemptive rights in respect of the Conversion Shares or Warrant
Shares to be issued to the Purchasers upon conversion of the Notes or exercise
of the Warrants, as applicable.
3.20 INSURANCE. The insurance policies providing insurance
coverage to the Seller or the Subsidiary including for product liability are
adequate for the business conducted by the Seller and the Subsidiary and are
sufficient for compliance by the Seller and the Subsidiary with all requirements
of law and all material agreements to which the Seller or the Subsidiary are a
party or by which any of their assets are bound. All of such policies are in
full force and effect and are valid and enforceable in accordance with their
terms, and the Seller and the Subsidiary have complied with all material terms
and conditions of such policies, including premium payments. None of the
insurance carriers has indicated to the Seller or the Subsidiary an intention to
cancel any such policy. Except as set forth on Schedule 3.20, the Seller and
the Subsidiary have no claim pending against any of the insurance carriers under
any of such policies and there has been no actual or alleged occurrence of any
kind which may give rise to any such claim.
3.21 SUBSIDIARIES AND INVESTMENTS. Except as set forth on Schedule
3.21, the Seller has no subsidiaries or Investments. For purposes of this
Agreement, the term "Investments" shall mean, with respect to any Person, all
-
advances, loans or extensions of credit to any other Person, all purchases or
commitments to purchase any stock, bonds, notes, debentures or other securities
of any other Person, and any other investment in any other Person, including
partnerships or joint ventures (whether by capital contribution or otherwise) or
other similar arrangement (whether written or oral) with any Person, including
but not limited to arrangements in which (i) the Person shares profits and
losses, (ii) any such other Person has the right to obligate or bind the Person
to any third party, or
<PAGE>
(iii) the Person may be wholly or partially liable for the debts or
obligations of such partnership, joint venture or other arrangement.
3.22 CAPITALIZATION. The authorized capital stock of the Seller as
of the date hereof consists of 50,000,000 shares of common stock, $0.001 par
value per share, of which 12,270,024 shares were issued and outstanding as at
August 1, 2000. All shares of the Seller's issued and outstanding capital stock
have been duly authorized, are validly issued and outstanding, and are fully
paid and nonassessable. No securities issued by the Seller from the date of its
incorporation to the date hereof were issued in violation of any statutory or
common law preemptive rights. There are no dividends which have accrued or been
declared but are unpaid on the capital stock of the Seller. All taxes required
to be paid in connection with the issuance and any transfers of the Seller's
capital stock have been paid. All permits or authorizations required to be
obtained from or registrations required to be effected with any Person in
connection with any and all issuances of securities of the Seller from the date
of the Seller's incorporation to the date hereof have been obtained or effected
and all securities of the Seller have been issued and are held in accordance
with the provisions of all applicable securities or other laws. The Securities
constitute one hundred percent (100%) of the issued and outstanding capital
stock of the Seller.
3.23 RIGHTS, WARRANTS, OPTIONS AND REGISTRATION RIGHTS. Except as
set forth on Schedule 3.23, there are no outstanding (a) securities, notes or
instruments convertible into or exercisable for any of the capital stock or
other equity interests of the Seller or its Subsidiaries; (b) options, warrants,
subscriptions or other rights to acquire capital stock or other equity interests
of the Seller or the Subsidiary; or (c) com-mitments, agreements or
understandings of any kind, including employee benefit arrangements, relating to
the issuance or repur-chase by the Seller or the Subsidiary of any capital
stock or other equity interests of the Seller or the Subsidiary, any such
securities or instruments convertible or exer-cisable for securities or any such
options, warrants or rights. Except as set forth on Schedule 3.23, and other
than the rights granted to the Purchasers under the Notes and the Warrants,
neither the Seller nor the Subsidiary have granted anti-dilution rights to any
person or entity in connection with any option, warrant, subscription or any
other instrument convertible or exercisable for the securities of the Seller or
the Subsidiary. Other than the rights granted to the Purchasers under the
Registration Rights Agreement, there are no outstanding rights which permit the
holder thereof to cause the Seller or the Subsidiary to file a registration
statement under the Securities Act or corresponding Canadian laws or which
permit the holder thereof to include securities of the Seller or the Subsidiary
in a registration statement filed by the Seller or the Subsidiary under any of
such laws, and there are no outstanding agreements or other commitments which
otherwise relate to the registration of any securities of the Seller or the
Subsidiary for sale or distribution in any jurisdiction.
3.24 REAL PROPERTY. (a) The Seller does not own any real property.
The Seller and the Subsidiary do not hold, nor are they a party to any option,
right of first refusal or other contractual right to purchase, acquire, sell or
dispose of any interest in real property. Schedule 3.24 also sets forth the
street address of each parcel of real property leased by the Seller and the
<PAGE>
Subsidiary (the "Leased Property" or the "Premises"). The Seller has
previously delivered to the Purchasers a true and complete copy of all lease
agreements, as amended to date (the "Leases") relating to the Leased Property.
The Seller and the Subsidiary enjoy peaceful and undisturbed possession of the
Leased Property. All improvements located on the Leased Property are in a state
of good maintenance and repair and in a condition adequate and suitable for the
effective conduct therein of the business conducted and proposed to be conducted
by the Seller or the Subsidiary.
(b) The Leases are valid, binding and in full force and effect, all
rent and other sums and charges payable thereunder are current, no notice of
default or termination under any of the Leases is outstanding, no termination
event or condition or uncured default on the part of the Seller or its
Subsidiaries or, to the best of the Seller's knowledge, on the part of the
landlord, thereunder, exists under the Leases, and no event has occurred and no
condition exists which, with the giving of notice or the lapse of time or both,
would constitute such a default or termination event or condition. There are no
subleases, licenses or other agreements granting to any Person any right to the
possession, use, occupancy or enjoyment of the premises demised by the Leases or
any portion thereof. All of the Premises are used and useful in the conduct of
the Seller's and the Subsidiary's business.
(c) To the best of the Seller's knowledge, there are no liabilities
associated with any of the Leases including, without limitation, any liability
under any Environmental Law (as defined herein) or regulation, which is or which
may become payable by the Purchasers.
(d) The Seller has not experienced any material interruption in the
services provided to any of the Premises within the last twelve (12) months. To
the best knowledge of the Seller, no landlord under the Leases has any plans to
make any material alterations to any of the Leased Property, the construction of
which would interfere with the use of any portion of the Leased Property. To
the best knowledge of the Seller, no landlord under the Leases has any plans to
make any material alterations to any of the buildings in which Leased Property
is located, the costs of which alterations would be borne in any part by a
tenant under the applicable Lease.
(e) All material permits, licenses, franchises, approvals and
authorizations (collectively, the "Real Property Permits") of all governmental
authorities having jurisdiction over each Leased Property and from all insurance
companies and fire rating and other similar boards and organizations
(collectively, the "Insurance Organizations"), required or appropriate have been
issued to the Seller to enable each Leased Property to be lawfully occupied and
used for all of the purposes for which they are currently occupied and used have
been lawfully issued and are, as of the date hereof, in full force and effect.
The Seller has not received or been informed by a third party of the receipt by
it of any notice from any governmental authority having jurisdiction over any
Leased Property or from any Insurance Organization threatening a suspension,
revocation, modification or cancellation of any Real Property Permit or of any
insurance policies and there is no basis for the issuance of any such notice or
the taking of any such action. No action is required in order for all Real
Property Permits and liability and casualty insurance policies required under
any of the Leases to remain Real Property Permits and insurance policies of the
Purchasers.
<PAGE>
(f) Neither the Seller nor its Subsidiaries have received any notice of
any pending, threatened or contemplated condemnation proceeding affecting any
Leased Property or any part thereof.
3.25 LABOR RELATIONS. There is no strike, work stoppage or
slowdown or labor disturbance pending or threatened that involves any employees
of the Seller or the Subsidiary. The Seller and the Subsidiary are not a party
to, otherwise bound by or threatened with any labor or collective bargaining
agreement and there have been no attempts to organize a labor union or to seek
recognition as a collective bargaining unit by or with respect to any employees
of the Seller or its Subsidiaries. Without limiting the generality of Section
3.9, except as identified on Schedule 3.25, (i) no unfair labor practice
complaints have been filed against the Seller or its Subsidiaries with any
governmental or regulatory agency, (ii) neither the Seller nor the Subsidiary
have received any notice or communication reflecting an intention or threat to
file any such complaint, and (iii) no Person has made any claim, and there is no
basis for any claim, against the Seller or the Subsidiary under any statute,
regulation or ordinance relating to discrimination with respect to employees or
employment practices.
3.26 EMPLOYEES, EMPLOYMENT AGREEMENTS AND EMPLOYEE BENEFIT PLANS.
(A) EMPLOYMENT AGREEMENTS. Except as set forth in Schedule 3.26A,
there are no employment, consulting, severance or indemnification arrangements,
agreements, or understandings between the Seller and any officer, director,
consultant or employee of the Seller or the Subsidiary (the "Employ-ment
Agreements"). The Seller has previously delivered to the Purchasers true and
complete copies of all of the Employment Agreements. Except as disclosed in
Schedule 3.26A, no such Employment Agreement provides for the accelera-tion or
change in the award, grant, vesting or deter-mination of operations, warrants,
rights, severance payments, or other contin-gent obligations of any nature
whatsoever of the Seller or the Subsidiary in favor of any such parties in
connection with the transactions contemplated by this Agreement. Except for the
agreements set forth in Schedule 3.26A, the terms of employment or engagement of
all directors, officers, employees, agents, consultants and professional
advisors of the Seller and the Subsidiary are such that their employment or
engagement may be terminated upon not more than two weeks notice given at any
time without liability for payment of compensation or damages and the Seller and
the Subsidiary have not entered into any agreement or arrangement for the
management of their busi-ness or any part thereof other than with their
directors or employees.
(B) EMPLOYEE BENEFIT PLANS. Schedule 3.26B includes a correct and complete
list of all pension, retirement, stock purchase, stock bonus, stock ownership,
stock option, profit sharing, savings, medical, disability, hospitalization, or
insurance plans, deferred compensation, bonus, or group insurance contracts or
plans or any other incentive, welfare or employee benefit plan, policy,
agreement commitment, arrangement or practice maintained by the Seller and the
Subsidiary for any of their directors, employees or former employees (the
"Seller Plans"). The Seller has previously
<PAGE>
delivered to the Purchasers accurate and complete copies of all of the
Seller Plans (or, if oral, true and complete written summaries thereof).
Schedule 3.26B also identifies each Seller Plan which constitutes an "employee
pension benefit plan" or an "employee welfare benefit plan", as such terms are
defined in the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). The Seller is not a contributing employer to any "multiemployer
plan," as such term is defined in ERISA, nor does the Seller have any
multiemployer plan liability with respect to any such plans or any Seller Plan.
No event has occurred or condition exists with respect to any employee benefit
plan or arrangement (whether or not terminated) subject to ERISA which is (or
was) maintained, sponsored or contributed to by an entity under common control
with the Seller or the Subsidiary, determined under Section 414(b), (c), (m) or
(o) of the Code, which could, on or after the Closing, subject the Seller or the
Subsidiary or the Purchasers directly or indirectly (through an indemnification
agreement or otherwise) to any liability, including, without limitation,
liability under Section 412, 4971 or 4980B of the Code or Title IV or ERISA.
(C) EMPLOYEES. To the Seller's best knowledge, no employee, consultant
or agent of the Seller or the Subsidiary is or will be, based upon the business
and activities taken or proposed to be taken by the Seller or its Subsidiaries,
in violation of any term of any employment contract, confidentiality or
non-disclosure agreement or any other contract, agreement, commitment or
understanding relating to the relationship of such employee, consultant or agent
with the Seller or any other party. Except as set forth on Schedule 3.15, each
significant employee or consultant of the Seller or its Subsidiaries with access
to confidential or proprietary information of the Seller has executed an
agreement regarding ownership by the Seller of intellectual property and
obligating such employee, consultant, contractor or agent to hold confidential
the Seller's proprietary information. The Seller is not aware that any officer
or key employee intends to terminate employment with the Seller or the
Subsidiary.
3.27 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Seller,
nor any affiliate of the Seller, nor to the knowledge of the Seller, any agent
or employee of the Seller, any other Person acting on behalf of or associated
with the Seller, or any individual related to any of the foregoing Persons,
acting alone or together, has: (a) received, directly or indirectly, any
rebates, payments, commissions, promotional allowances or any other economic
benefits, regardless of their nature or type, from any customer, supplier,
trading company, shipping company, governmental employee or other Person with
whom the Seller has done business directly or indirectly; or (b) directly or
indirectly, given or agreed to give any gift or similar benefit to any customer,
supplier, trading company, ship-ping company, governmental employee or other
Person who is or may be in a position to help or hinder the business of the
Seller (or assist the Seller in connection with any actual or proposed
trans-action) which (i) may subject the Seller to any damage or penalty in any
civil, criminal or governmental litigation or proceeding, (ii) if not given in
the past, may have had an adverse effect on the Seller or (iii) if not continued
in the future, may adversely affect the assets, business, operations or
prospects of the Seller or subject the Seller to suit or penalty in any private
or governmental litigation or proceeding.
<PAGE>
3.28 PRODUCTS AND SERVICES. To the knowledge of the Seller,
there exists no set of facts (i) which could furnish a basis for the withdrawal,
suspension or cancellation of any registration, license, permit or other
governmental approval or consent of any governmental or regulatory agency with
respect to any product or service developed or provided by the Seller or its
Subsidiaries, (ii) which could furnish a basis for the withdrawal, suspension or
cancellation by order of any state, federal or foreign court of law of any
product or service, or (iii) which could have an adverse effect on the continued
operation of any facility of the Seller or the Subsidiary or which could
otherwise cause the Seller or its Subsidiaries to withdraw, suspend or cancel
any such product or service from the market or to change the marketing
classification of any such product or service. Each product or service provided
by Seller or the Subsidiary has been provided in accordance with the
specifications under which such product or service normally is and has been
provided and the provisions of all applicable laws or regulations.
3.29 ENVIRONMENTAL MATTERS. None of the Premises or any other
property used by the Seller or its Subsidiaries in the past has been used by the
Seller or, to the Seller's knowledge, any other Person to manufacture, treat,
store, or dispose of any hazardous substance or any other regulated material,
and such property is free of all such substances and materials. The Seller, and
any other Person for whose conduct it may be responsible, are in compliance with
all laws, regu-lations and other federal, state or local governmental
require-ments, and all applicable judgments, orders, writs, notices, decrees,
permits, licenses, approvals, consents or injunctions relating to the
generation, management, handling, transportation, treatment, disposal, storage,
delivery, discharge, release or emission of any waste, pollutant or toxic,
hazardous or other regulated substance (including, without limitation, asbestos,
radioactive material and pesticides) or to any other actions, omissions or
conditions affecting the environment (the "Environ-mental Laws"). Neither the
Seller nor any other Person for whose conduct it may be responsible has received
any complaint, notice, order, or citation of any actual, threatened or alleged
noncompliance with any of the Environmental Laws, and there is no proceeding,
suit or investigation pending or, to the Seller's knowledge, threatened against
the Seller or any such Person with respect to any violation or alleged violation
of the Environmental Laws, and there is no basis for the institution of any such
proceeding, suit or investigation.
3.30 LICENSES; COMPLIANCE WITH REGULATORY REQUIREMENTS. Schedule 3.30
lists all material authorizations, consents, approvals, franchises, licenses and
permits required under applicable law or regulation for the operation of the
business of the Seller and its Subsidiaries as presently operated (the
"Governmental Authorizations"). Except as otherwise set forth herein, all the
Governmental Authorizations have been duly issued or obtained and are in full
force and effect, and the Seller and its Subsidiaries are in compliance with the
terms of all the Governmental Authorizations. Except as otherwise set forth
herein, the Seller and the Subsidiary have not engaged in any activity that
would cause revocation or suspension of any such Governmental Authorizations.
Except as otherwise set forth herein, the Seller has no knowledge of any facts
which could reasonably be expected to cause them to believe that the
Governmental Authorizations will not be renewed by the appropriate governmental
authorities in the ordinary course. Neither the execution,
<PAGE>
delivery nor performance of this Agreement shall adversely affect the
status of any of the Governmental Authorizations.
3.31 TITLE TO SECURITIES. The shareholders set forth on Schedule
3.31 are the record owners of 5% or more of the issued and outstanding capital
stock, securities and notes of the Seller listed opposite their name, and except
as set forth on Schedule 3.31 hereto, to its knowledge such securities are owned
free and clear of any liens, encumbrances, pledges, security interests and
claims whatsoever, including, without limitation, claims or rights under any
voting trust agreements, shareholder agreements or other agreements.
3.32 RELATED PARTIES. Except as set forth on Schedule 3.32, no
member of management of the Seller or the Subsidiary, nor any current or former
(within the past three years) director, officer or employee of the Seller or the
Subsidiary (individually a "Related Party" and collectively the "Related
Parties") or any affiliate or Immediate Family Member of any of the Seller or
the Subsidiary or any Related Party: (a) owns, directly or indirectly, any
interest in any Person which is a competitor of the Seller, or of a supplier or
customer of the Seller; (b) owns, directly or indirectly, in whole or in part,
any property, asset or right, real, personal or mixed, tangible or intangible
(including, but not limited to, any of the Intangible Property) which is
utilized in the operation of the business of the Seller; or (c) has an interest
in or is, directly or indirectly, a party to any contract, agreement, lease or
arrangement pertaining or relating to the Seller, except for employment,
consulting or other personal service agreements that may be in effect and which
are listed on Schedule 3.26A hereto and except for ownership of less than 2% of
the stock of a public company listed on a recognized securities exchange. For
purposes of this Agreement, the term "Immediate Family Member" includes parents,
mother-in-law or father-in-law, husband or wife, brother or sister,
brother-in-law or sister-in-law, son-in-law or daughter-in-law and children.
Schedule 3.32 sets forth a description of any interest held, directly or
indirectly, by any officer, director or other affiliate of the Seller in any
property, real or personal, tangible or intangible, used in or pertaining to the
Seller's business, including any interest in the Seller's Intellectual Property
(as defined in Section 3.15 hereof).
3.33 LIST OF ACCOUNTS. Set forth on Schedule 3.33 is: (a) the
name and address of each bank or other institution in which the Seller maintains
an account (cash, securities or other) or safe deposit box; (b) the name and
phone number of the Seller's contact person at such bank or institution and (c)
the account number of the relevant account and a description of the type of
account.
3.34 MATERIAL AGREEMENTS.
(a) Schedule 3.34 sets forth a brief description of all material written and
oral contracts or agreements relating to the Seller and the Subsidiary (except
with respect to the Leases, which are set forth on Schedule 3.24, which are
hereby incorporated by reference into Schedule 3.34 and made a part thereof),
including without limitation any: (i) contract resulting in a commitment or
potential commitment for expenditure or other obligation or potential
obligation, or which provides for the
<PAGE>
receipt or potential receipt, involving in excess of Ten Thousand Dollars
($10,000.00) in any instance, or series of related contracts that in the
aggregate give rise to rights or obligations exceeding such amount; (ii)
indenture, mortgage, promissory note, loan agreement, guarantee or other
agreement or commitment for the borrowing or lending of money or encumbrance of
assets involving more than Ten Thousand Dollars ($10,000.00) in each instance;
(iii) agreement which restricts the Seller or the Subsidiary from engaging in
any line of business or from competing with any other Person; (iv) warranties
made with respect to products manufactured, packaged, distributed or sold by the
Seller or the Subsidiary; or (v) any other contract, agreement, instrument,
arrangement or commitment that is material to the condition (financial or
otherwise), results of operation, assets, properties, liabilities, business or
prospects of the Seller and the Subsidiary, taken as a whole (collectively, and
together with the Leases, Employment Agreements, the Seller Plans and all other
agreements required to be disclosed on any Schedule to this Agreement, the
"Material Agreements"). The Seller has previously furnished to the Purchasers
true, complete and correct copies of all written agreements, as amended,
required to be listed on Schedule 3.34.
(b) Except as set forth on Schedule 3.34, none of the Material
Agreements was entered into outside the ordinary course of business of the
Seller or the Subsidiary, contains any unusual, onerous or burdensome provisions
that will impair or adversely effect in any material way the operations of the
Seller or the Subsidiary or make them reasonably likely to be performed at a
material loss.
(c) The Material Agreements are each in full force and effect and are
the valid and legally binding obligations of the Seller or the Subsidiary and,
to the best of the Sellers' knowledge, the other parties thereto, enforceable in
accordance with their respective terms, subject only to bankruptcy, insolvency
or similar laws affecting the rights of creditors generally and to general
equitable principles. The Seller has not received notice of default by the
Seller or the Subsidiary under any of the Material Agreements and no event has
occurred which, with the passage of time or the giving of notice or both, would
constitute a default by the Seller or the Subsidiary thereunder. None of the
other parties to any of the Material Agreements is in default thereunder, nor
has an event occurred which, with the passage of time or the giving of notice or
both would constitute a default by such other party thereunder. The Seller has
not received notice of the pending or threatened cancellation, revocation or
termination of any of the Material Agreements, nor are any of them aware of any
facts or circumstances which could reasonably be expected to lead to any such
cancellation, revocation or termination.
(d) Except as otherwise indicated on Schedule 3.34, the continuation,
validity and effectiveness of the Material Agreements under the current terms
thereof will in no way be affected by the consummation of the transactions
contemplated by this Agreement.
3.35 GUARANTIES. Except as set forth on Schedule 3.35, the Seller and
-------------
the Subsidiary are not a party to any Guaranty (as hereinafter defined), and no
Person is a party to any Guaranty for the benefit of the Seller or the
Subsidiary. For purposes of this Agreement, the term "Guaranty" shall
<PAGE>
mean, as to any Person, all liabilities or obligations of such Person, with
respect to any indebtedness or other obligations of any other Person, which have
been guaranteed, directly or indirectly, in any manner by such Person, through
an agreement, contingent or otherwise, to purchase such indebtedness or
obligation, or to purchase or sell property or services, primarily for the
purpose of enabling the debtor to make payment of such indebtedness or
obligation or to assure the owner of such indebtedness or obligation against
loss, or to supply funds to or in any manner invest in the debtor, or otherwise.
3.36 BROKERS. Except as set forth on Schedule 3.36, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the transactions contemplated by this
Agreement, based upon any arrangement made by or on behalf of the Seller.
3.37 ARM'S LENGTH TRANSACTIONS. Except as set forth on Schedule
3.37, each of the agreements entered into by the Seller or the Subsidiary have
been entered into in good faith and represent transactions that are no more
favorable to the parties thereto than would be available in an arm's length
transaction between such parties.
3.38 SECURITIES LAWS. Neither the Seller nor the Subsidiary nor
any agent acting on behalf of the Seller or the Subsidiary has taken or will
taken any action which might cause this Agreement or the Notes to violate the
Securities Act of 1933, as amended, (the "Securities Act") or the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") or any rules or
regulations promulgated thereunder, as in effect on the Closing Date. All
offers and sales of capital stock, securities and notes of the Seller were
conducted and completed in compliance with the Securities Act and all shares of
capital stock and other securities issued by the Seller and the Subsidiary prior
to the date hereof have been issued in transactions exempt from the registration
requirements under the Securities Act and all applicable state securities or
"blue sky" laws and in compliance with all applicable corporate laws. Any
breach of the provisions of the immediately preceding sentence of this Section
3.8 shall not constitute an Event of Default unless such breach would reasonably
be expected to result in a Material Adverse Effect.
3.39 PRINCIPAL OFFICE. The Seller's principal place of business
is at its address herein set forth.
3.40 NO ASSUMED NAMES OR TRADE NAMES. The Seller has not been
known under, or transacted business using, any name except for the name as set
forth in this Agreement.
3.41 SOLVENCY. The Seller and the Subsidiary are solvent after
giving effect to the transactions contemplated by this Agreement, the Notes, the
Warrants and the Related Documents.
3.42 DISCLOSURE. No representation or warranty made by the Seller in
this Agreement, nor in any document, written information, financial statement,
certificate, schedule or exhibit prepared
<PAGE>
and furnished or to be prepared and furnished by the Seller or the
representatives of the Seller pursuant hereto or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact, or omits or will omit to state a material fact necessary to
make the statements or facts contained herein or therein not misleading in light
of the circumstances under which they were furnished. Except as disclosed in
Schedule 3.42, there is no event, fact or condition (other than general business
or economic conditions which affect businesses generally) that adversely affects
the business of the Seller and the Subsidiary, or, to the best of the Seller's
knowledge, that reasonably could be expected to do so, that has not been set
forth in this Agreement or in the Schedules attached hereto. Schedule 3.42 sets
forth all documents filed with the Securities and Exchange Commission (the
"Commission") by the Seller during the last two (2) years, (collectively, the
"Public Documents"). The Public Documents constitute all the documents (other
than preliminary proxy materials) that the Seller was required to file with the
Commission prior to the date of this Agreement. None of the Public Documents
contained any untrue statement of a material fact or omitted to state any
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 (in each case as of the respective dates that they were filed
with the Commission).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser, for itself, hereby severally represents and warrants to the
Seller as follows:
4.1 EXISTENCE AND POWER. The Purchaser is duly organized, validly
existing and in good standing under the laws of the jurisdiction of such
Purchaser's organization. The Purchaser has all powers required to carry on such
Purchaser's business as now conducted.
4.2 AUTHORIZATION. The execution, delivery and performance by the
Purchaser of this Agreement, the Related Documents to which such Purchaser is a
party, and the consummation by the Purchaser of the transactions contemplated
hereby have been duly authorized, and no additional action is required for the
approval of this Agreement. This Agreement and the Related Documents to which
the Purchaser is a party, have been or, to the extent contemplated hereby, will
be, duly executed and delivered and constitute valid and binding agreements of
the Purchaser, enforceable against such Purchaser in accordance with their
terms, except as may be limited by bankruptcy, reorganization, insolvency,
moratorium and similar laws of general application relating to or affecting the
enforcement of rights of creditors and except that enforceability of their
obligations thereunder are subject to general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or at
law).
4.3 INVESTMENT. The Purchaser is acquiring the Notes and Warrants for
its own account for investment and not with a view to, or for sale in connection
with, any distribution thereof, nor with the intention of distribution or
selling the same; provided, however, that the Purchaser may transfer the Notes
and Warrants among one or more of its affiliates. The Purchaser is aware
neither
<PAGE>
the Notes nor the Warrants have been registered under the Securities Act or
under applicable state securities or blue sky laws. The Purchaser is an
"Accredited Investor" as such term is defined in Rule 501 of Regulation D, as
promulgated under the Securities Act.
4.4 SECURITIES ACT (BRITISH COLUMBIA). The Purchaser has not been
created, established, formed or incorporated solely, and is not used primarily,
to acquire securities or to permit the purchase of the Notes and Warrants
without a prospectus in reliance on an exemption from the prospectus
requirements of the Securities Act (British Columbia) (the "BC Act"). Each of
the Purchasers represents and warrants that it is purchasing as a principal a
number of Notes and Warrants with an aggregate acquisition cost (as defined in
the BC Act) of not less than CDN$97,000.
4.5 RELIANCE ON EXEMPTIONS. The Purchaser understands that the
Notes, Warrants, Conversion Shares and Warrant Shares are being offered and sold
to such Purchaser in reliance upon specific exemptions from the registration
requirements of United States federal and state securities laws and exemptions
from the prospectus requirements of the BC Act and that the Seller is relying
upon the truth and accuracy of, and such Purchaser's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
such Purchaser set forth herein in order to determine the availability of such
exemptions and the eligibility of such Purchaser to acquire the Notes, Warrants,
Conversion Shares and Warrant Shares.
ARTICLE V
COVENANTS OF THE SELLER
5.1 ACTIONS REQUIRING THE PURCHASERS' CONSENT.
The Seller and the Subsidiary covenant and agree that, so long as at least
10% of the aggregate principal amount of the Notes remain outstanding, none of
the actions set forth below will take place prior or subsequent to the Closing,
without the prior written consent of persons owning a majority in interest of
the aggregate principal amount of the Notes. The actions to which the foregoing
apply are as follows:
(a) Any amendment, alteration or repeal of any of the provisions of the
Articles of Incorporation, or the By-laws of the Seller or the Subsidiary;
(b) The authorization or creation by the Seller or the Subsidiary of,
or the increase in the number of authorized shares of, any stock of any class,
or any security convertible into stock of any class, or the authorization or
creation of any new class of preferred stock (or any action which would result
in another series of preferred stock);
(c) The liquidation, dissolution or winding-up of the Seller or the
Subsidiary or any merger or consolidation of the Seller or the Subsidiary with
or into another entity or the sale,
<PAGE>
conveyance or other disposition of all, or substantially all, the assets,
property or business of the Seller or the Subsidiary;
(d) The reorganization, recapitalization, sale, conveyance, or other
disposition of or encumbrance of all or substantially all of the property or
business of the Seller or the Subsidiary or the merger into or consolidation
with any other corporation (other than a wholly owned subsidiary corporation) or
effect any transaction or series of related transactions in which, in any case,
more than 25% of the voting power of the corporation is disposed of;
(e) The taking of any action, directly or indirectly or permitting any
action to be taken, solely or primarily for the purpose of increasing the value
of any class of stock of the Seller or the Subsidiary if the effect of such
action is reasonably likely to reduce the value, security, rights or preferences
of the Notes;
(f) The redemption, purchase or other acquisition, directly or
indirectly, of any shares of capital stock of the Seller or the Subsidiary or
any option, warrant or other right to purchase or acquire any such shares or the
repayment or prepayment of any indebtedness other than trade debt incurred in
the ordinary course of business;
(g) The declaration or payment of any dividend or other distribution
(whether in cash, stock or other property) with respect to the capital stock of
the Seller or its Subsidiary;
(h) The approval of any transaction with a Related Party relating to
the Seller or the Subsidiary;
(i) The filing of any petition as a debtor or application for other
relief as a debtor under any federal or state bankruptcy, insolvency or other
similar law, or the sufferance, acquiescence in, consent to or refusal to answer
any petition or other application filed by another person against the Seller,
the Subsidiary, or any of their respective assets.
(j) The entering into by the Seller or the Subsidiary of any bank or
other non-trade indebtedness for borrowed money in excess of $500,000 in the
aggregate;
(k) The granting or making by the Seller or the Subsidiary of any
mortgage or pledge, or the assumption or suffering to exist on, or the
imposition on, any of its material properties or assets, any lien, charge,
defect in title, or encumbrance of any kind, except liens for taxes not
currently due;
(l) The loan or advance of money, credit (other than by the creation of
accounts receivable in the ordinary course of business) or property by the
Seller or the Subsidiary to any individual, corporation, association, joint
stock company, business trust, partnership, joint venture, unincorporated
organization, or government or any agency or political subdivision thereof
<PAGE>
(hereinafter collectively defined as "Person"), or the investment in (by
capital contribution or otherwise), or the purchase or repurchase by the Seller
or the Subsidiary of the stock or indebtedness, of all or a substantial part of
the assets or properties, of any Person, or guarantee, assume, endorse or
otherwise become responsible for (directly or indirectly or by any instrument
having the effect of assuring any Person's payment or performance or capability)
the indebtedness, performance, obligations, stock or dividends of any Person, or
the agreement by the Seller or the Subsidiary to do any of the foregoing, except
endorsement of negotiable instruments for deposit or collection in the ordinary
course of business, and investments in readily marketable securities;
(m) The making by the Seller or the Subsidiary of any prepayment of
indebtedness or the agreement to do the same;
(n) The termination, without cause by the Seller or the Subsidiary, of
the employment of the Chief Executive Officer, Chief Financial Officer, Chief
Operating Officer or equivalent position of the Seller or the Subsidiary, and
hire any new person to assume such responsibilities;
(o) The making of or commitment to make, by the Seller or the
Subsidiary, any capital expenditures in excess of $100,000;
(p) The approval of any material legal settlement in excess of $5,000
relating to the Seller or the Subsidiary;
(q) The grant or issuance of any stock options or other convertible
securities of the Seller or the Subsidiary at below fair market value on the
date of grant, other than the issuance of of up to 750,000 options to incoming
management and current and future employees at a maximum discount of 20% below
the fair market value on the date of the grant pursuant to any employee stock
option plan existing on the date hereof, true copies of which are attached
hereto as Schedule 3.26B;
(r) The voluntary sale, transfer, surrender, abandonment or disposition
of any of the assets or property rights (tangible or intangible) of the Seller
or the Subsidiary, other than in the ordi-nary course of business;
(s) The granting of any material increase in the compensation payable
or the compensation to become payable to directors and officers of the Seller
or the Subsidiary (including, without limitation, any such increase pursuant to
any bonus, pension, profit-sharing, incentive option or other plan or
commitment);
(t) The alteration of the manner of keeping books, accounts or records
of the Seller or the Subsidiary, or the change in any manner the accounting
practices therein reflected;
(u) The increase in the size of the Board of Directors of the Seller.
<PAGE>
5.2 INSURANCE.
(a) The Seller and the Subsidiary shall (i) keep all of its
properties adequately insured at all times with responsible insurance carriers
against loss or damage by fire and other hazards, and (ii) maintain adequate
insurance at all times with responsible insurance carriers against liability on
account of damage or injury to persons and property including from product
liability and under all applicable workmen's compensation laws. Insurance
shall be deemed adequate if the same is not less extensive in coverage and
amount than is customarily maintained by other persons engaged in the same or a
similar business similarly situated. All insurance covering tangible personal
property subject to a lien or security interest in favor of the Purchasers
granted pursuant to this Agreement or under any instrument or document given as
security pursuant hereto shall provide that, in the case of a catastrophic loss
during the period in which the Notes are outstanding, the full amount of
in-surance proceeds with respect thereto subject to creditors senior to the
Purchasers shall be payable to the Purchasers as loss payee, mortgagee, secured
party, or otherwise as its interest may appear, and shall further provide for at
least ten days' prior notice to the Purchasers of the cancellation or
modification thereof.
(b) The Seller and the Subsidiary shall, from time to time upon request
of the Purchasers, promptly furnish or cause to be furnished to the Seller
evidence, in form and substance reasonably satisfactory to the Purchasers, of
the maintenance of all insurance required by this Section 5.2 to be maintained.
From time to time during the term hereof, the Purchasers shall have the right
upon notice to the Seller, to require the Seller and the Subsidiary to maintain
additional insurance coverage or insurance coverage in additional amounts if for
any reason the Purchasers reasonably determine that the existing insurance
maintained by the Seller or the Subsidiary is insufficient.
5.3 REPORTING OBLIGATIONS.
So long as any interest or principal of the Notes is outstanding, and so long as
any Warrant has not been exercised and has not expired by its terms, the Seller
shall furnish to the Purchasers, or any other persons who hold any of the Notes
or Warrants (provided that such holders give notice to the Seller that they hold
Notes or Warrants and furnish their addresses) promptly upon their becoming
available one copy of each report, notice or proxy statement sent by the Company
to its stockholders generally, and of each regular or periodic report (pursuant
to the Exchange Act) and any registration statement, prospectus or written
communication (other than transmittal letters) (pursuant to the Securities Act),
filed by the Seller with (i) the Commission or (ii) any securities exchange on
which shares of Common Stock are listed. The Purchasers are hereby authorized
to deliver a copy of any financial statement or any other information relating
to the business, operations or financial condition of the Seller which may have
been furnished to the Purchasers hereunder or otherwise, to any regulatory body
or agency having jurisdiction over the Purchasers or to any Person which shall,
or shall have right or obligation to succeed to all or any part of the
Purchasers' interest in the Seller or this Agreement.
<PAGE>
The Seller agrees to maintain its registration pursuant to Section 12(g) of
the Exchange Act and its listing on the OTC Bulletin Board. To the extent that
the Seller is no longer required to provide information pursuant to the Exchange
Act, the Seller shall provide the Purchasers with (i) (within 15 days after the
close of each fiscal quarter in each fiscal year of the Seller) an unaudited
consolidated balance sheet of the Seller, a consolidated statement of income of
the Seller, and a consolidated statement of cash flows of the Seller, as at the
end of and for the period commencing at the end of the previous fiscal year and
ending with such month, prepared in accordance with GAAP; and (ii) (within 90
days after the close of each fiscal year then ended of the Seller) a
consolidated balance sheet of the Seller, a consolidated statement of income of
the Seller, and a consolidated statement of cash flows of the Seller, as at the
end of and for the fiscal year then ended, setting forth the corresponding
figures of the previous fiscal year in comparative form, and certified (without
any qualification or exception deemed material by the Purchasers) by the
independent certified public accountants of the Seller.
Upon the occurrence of an Event of Default under the Notes or in the event
of the failure of the Seller to comply with the first sentence of the preceding
paragraph, the Seller and its Subsidiary shall afford to the Purchasers full
access to the properties, books, records and contracts of the Seller and the
Subsidiary for the purpose of verifying compliance with the provisions of the
Notes and this Agreement.
5.4 INVESTIGATION. The representations, warranties, covenants and
agreements set forth in this Agreement shall not be affected or diminished in
any way by any investigation (or failure to investigate) at any time by or on
behalf of the party for whose benefit such representations, warranties,
covenants and agreements were made. Without limiting the generality of the
foregoing, the inability or failure of the Purchasers to discover any breach,
default or misrepresentation by the Seller under this Agreement or the Related
Documents (including under any certificate furnished pursuant to this
Agreement), notwithstanding the exercise by the Purchasers or other holders of
the Notes of their rights under Section 5.4, shall not in any way diminish any
liability hereunder.
5.5 PUBLIC ANNOUNCEMENTS. Neither the Purchasers nor the Seller
shall (and each such party shall use its reasonable efforts to cause its
subsidiaries, affiliates, directors, officers, employees and authorized
representatives not to), issue any press release, make any public announcement
or furnish any written statement to its employees or stockholders generally
concerning the transactions contemplated by this Agreement without the consent
of the other party (which consent shall not be unreasonably withheld), except to
the extent required by applicable law or the applicable requirements of
applicable stock exchange rules (including NASDAQ) or as otherwise contemplated
herein (and in either such case such party shall, to the extent consistent with
timely compliance with such requirement, consult with the other party prior to
making the required release, announcement or statement).
5.6 RIGHT OF FIRST REFUSAL. Effective as of the Closing Date and for
one year from the Effective Date, the Seller hereby grants to the Purchasers the
first option to provide and/or
<PAGE>
participate in any debt or equity financing transaction other than (i) an
underwritten public offering of the Seller's Common Stock resulting in net
proceeds to the Company of at least $20,000,000 or (ii) an issuance of
securities in consideration for the strategic acquisition by the Company of
another business (the "Future Financing"), that the Seller may require. If,
while any of the Notes are outstanding, the Seller desires to initiate any
Future Financing, then the Seller shall give written notice to the Purchasers
setting forth the price and terms of such Future Financing. The Purchasers
shall thereupon have the option for a period of twenty (20) days (the "Option
Period") from receipt of such notice, to participate in the Future Financing at
the same price and terms identified in the notice to Purchasers, with such
option to be exercised by giving written notice to the Seller. In the event the
Purchasers do not exercise such option within the Option Period, the Seller
shall be free to proceed with the Future Financing with any third parties at the
price and terms contained in the notice to Purchasers for a period of ninety
(90) days from the expiration of the Option Period. The Purchasers shall be
entitled to customary and appropriate advisory fees, agreed to in writing by the
parties hereto, in the event that the Purchasers provide acquisition, financing
or other advisory services to the Seller.
5.7 USE OF PROCEEDS. The Seller covenants and agrees that the
proceeds of the Purchase Price shall be used by the Seller for working capital
and general corporate purposes, all in the manner, amounts and as more
particularly set forth in the Annual Budget.
5.8 CORPORATE EXISTENCE. The Seller shall preserve and maintain
and cause the Subsidiary to preserve and maintain its corporate existence and
good standing in the jurisdiction of their incorporation and the rights,
privileges and franchises of the Seller and the Subsidiary in each case where
failure to so preserve or maintain could have a material adverse effect on the
financial condition, business or operations of the Seller and the Subsidiary
taken as a whole.
5.9 LICENSES. The Seller shall, and shall cause the Subsidiary to,
maintain at all times all licenses or permits necessary to the conduct of its
business or as may be required by any governmental agency or instrumentality
thereof.
5.10 TAXES AND CLAIMS. The Seller and the Subsidiary shall duly pay
and discharge (a) all taxes, assessments and governmental charges upon or
against the Seller or properties or assets prior to the date on which penalties
attach thereto, unless and to the extent that such taxes are being diligently
contested in good faith and by appropriate proceedings, and appropriate reserves
therefor have been established, and (b) all lawful claims, whether for labor,
materials, supplies, services or anything else which might or could, if unpaid,
become a lien or charge upon the properties or assets of the Seller or the
Subsidiary unless and to the extent only that the same are being diligently
contested in good faith and by appropriate proceedings and appropriate reserves
therefor have been established.
<PAGE>
5.11 BOOKS AND RESERVES. The Seller shall:
(a) maintain, and cause its Subsidiaries to maintain, at all times,
true and complete books, records and accounts in which true and correct entries
shall be made of its transactions in accordance with GAAP consistently applied
and consistent with those applied in the preparation of the Financial
Statements, and
(b) by means of appropriate monthly entries, reflect in its accounts
and in all financial statements the proper liabilities and reserves for all
taxes and proper reserves for depreciation, renewals and replacements,
obsolescence and amortization of its properties and bad debts, all in accordance
with GAAP consistently applied, as above described.
5.12 CONDITION OF PROPERTY. The Seller and the Subsidiary shall keep
their properties in good repair, working order and condition and, from time to
time, make all needful and proper repairs, renewals, replacements, additions and
improvements thereto, so that the business carried on may be properly and
advantageously conducted at all times in accordance with prudent business
management. The Seller and the Subsidiary shall at all times keep their
properties free and clear of all liens, encumbrances and security interests of
every kind, other than liens, encumbrances and security interests permitted to
exist pursuant to this Agreement.
5.13 PERFORM COVENANTS. The Seller shall (a) make full and timely
payment of any and all payments on the Notes, and all other indebtedness of the
Seller to the Purchasers, whether now existing or hereafter arising, and (b)
duly comply with all the terms and covenants contained herein and in each of the
instruments and documents given to the Purchasers in connection with or pursuant
to this Agreement, all at the times and places and in the manner set forth
herein or therein, and (c) at all times maintain the liens and security
interests provided for under or pursuant to this Agreement and the Related
Documents as valid and perfected liens and security interests on the property
covered thereby.
5.14 ADDITIONAL COVENANTS.
(a) Except for transactions approved by a majority of the disinterested
directors of the Board of Directors, neither the Seller nor the Subsidiary shall
enter into any transaction with any director, officer, employee or holder of
more than 5% of the outstanding capital stock of any class or series of capital
stock of the Seller or the Subsidiary, member of the family of any such person,
or any corporation, partnership, trust or other entity in which any such person,
or member of the family of any such person, is a director, officer, trustee,
partner or holder of more than 5% of the outstanding capital stock thereof, with
the exception of transactions which are consummated upon terms that are no less
favorable than would be available if such transaction had been effected at
arms-length, in the reasonable judgment of the Board of Directors ("Related
Person Transactions").
<PAGE>
(b) The Seller shall comply and cause each subsidiary to comply with
all applicable laws, rules, regulations and orders.
(c) The Seller shall, and shall cause the Subsidiary to, at all times
observe and comply with all rules of governmental and quasi-governmental
authorities which may be applicable to any activity of the Seller or the
Subsidiary.
(d) So long as any Notes are outstanding, the Seller shall not make any
cash payment in redemption of any of its capital stock without the prior written
consent of the holders of a majority of the outstanding principal amount of the
Notes.
(e) Neither the Seller nor the Subsidiary shall provide the Purchasers
with any material non-public information except as required pursuant to the
terms of this Agreement or the Related Documents.
5.15 FURTHER ASSURANCES. The Seller shall, at its cost and expense,
upon written request of the Purchasers, duly execute and deliver, or cause to be
duly executed and delivered, to the Purchasers such further instruments and do
and cause to be done such further acts as may be necessary, advisable or proper,
in the absolute discretion of the Purchasers, to carry out more effectually the
provisions and purposes of this Agreement.
ARTICLE VI
COVENANTS OF THE PURCHASERS
6.1 SHORTING. Until the earlier to occur of the maturity date of the
Note, any exercise by the Seller of its Mandatory Conversion Right, which
results in the conversion of 90% or more of the then outstanding Notes, as
defined in the Note or conversion by a Purchaser of 90% or more of its Notes,
such Purchasers shall not hold a short position in the Common Stock for so long
as the closing price of the Common Stock is less than $5.00.
ARTICLE VII
CONDITIONS TO THE CLOSING
7.1 CONDITIONS TO OBLIGATIONS OF THE PURCHASERS. The obligations of
the Purchasers are subject to the fulfillment or satisfaction, on and as of the
date of each of the First Tranche Closing and the Second Tranche (individually
and/or collectively, the "Closing Date") except as otherwise expressly indicated
below or in Section 1.3 hereof, of each of the following conditions (any one or
more of which may be waived by the Purchasers in their sole discretion, but only
in a writing signed by the Purchasers):
<PAGE>
(A) OPINION. The Purchasers shall have received the opinion of
Seller's Counsel, in form and substance satisfactory to the Purchasers.
(B) SECRETARY'S CERTIFICATE. The Purchasers shall have received a
certificate of the Secretary of the Seller and the Subsidiary (the "Secretary's
Certificate"), in form and substance satisfactory to the Purchasers, certifying
as follows:
(i) that attached thereto are true and complete copies of the resolutions of
the Board of Directors of the Seller and the Subsidiary authorizing the
execution, delivery and performance of this Agreement and the Related Documents,
instruments and certificates required to be executed by it in connection
herewith and approving the consummation of the transactions in the manner
contemplated hereby including, but not limited to, the authorization and
issuance of the Notes,
(ii) the names and true signatures of the officers of the Seller and the
Subsidiary signing this Agreement and all other documents to be delivered in
connection with this Agreement,
(iii) the incumbency of the members of the Seller's and Subsidiary's Board
of Directors,
(iv) such other matters as required by this Agreement,
(v) such other matters as the Purchasers may reasonably request, including
without limitation an update of any representation set forth in this Agreement
as of the time of the Closing.
At the Second Tranche Closing, the Secretary's Certificate shall include an
update of all information contained in the Secretary's Certificate delivered at
the First Tranche Closing, a certification that the documents delivered at the
First Tranche Closing remain in full force and effect, and a certification that
no Events of Default have occurred under any of the documents delivered at the
First Tranche Closing and such other matters reasonably requested, including
certification of material compliance with the Annual Budget.
(C) NOTES, WARRANTS. The Seller shall have executed and delivered the
Notes in the form of Exhibit A attached hereto, and certificates evidencing the
Warrants in the form of Exhibit B attached hereto, to the Purchasers, in the
amounts as provided in Section 2.3 with respect to the First and Second Tranche
Closings.
(D) REGISTRATION RIGHTS AGREEMENT. At the First Tranche Closing, the
Seller shall have executed and delivered the Registration Rights Agreement, in
the form attached hereto as Exhibit C.
<PAGE>
(E) SECURITY AGREEMENT. At the First Tranche Closing, the Seller shall
have executed and delivered the Security Agreement, in the form attached hereto
as Exhibit D.
(F) SUBSIDIARY SECURITY AGREEMENT. At the First Tranche Closing, the
Subsidiary shall have executed and delivered the Subsidiary Security Agreement,
in the form attached hereto as Exhibit E.
(G) INTELLECTUAL PROPERTY SECURITY AGREEMENT AND ASSIGNMENT. At the
First Tranche, the Seller shall have executed and delivered the Intellectual
Property Security Agreement and Assignment, in the form attached hereto as
Exhibit F.
(H) SUBSIDIARY INTELLECTUAL PROPERTY SECURITY AGREEMENT AND ASSIGNMENT.
At the First Tranche, the Subsidiary shall have executed and delivered the
Subsidiary Intellectual Property Agreement and Assignment, in the form attached
hereto as Exhibit G.
(I) PLEDGE AGREEMENT. At the First Tranche Closing, the Seller shall
have executed and delivered the Pledge Agreement, in the form attached hereto as
Exhibit H.
(J) SUBSIDIARY GUARANTY. At the First Tranche Closing, the Subsidiary
shall have executed and delivered the Subsidiary Guaranty, in the form attached
hereto as Exhibit I.
(K) LOCK-UP AND TAG ALONG RIGHTS AGREEMENT. At the First Tranche
Closing, the executive officers, directors and 5% or greater shareholders of
Seller and its Subsidiary shall each have executed and delivered the Lock-Up and
Tag Along Rights Agreement, in the form attached hereto as Exhibit J.
(L) ESCROW AGREEMENT. At the First Tranche Closing, the Seller and the
Subsidiary shall each have executed and delivered the Escrow Agreement, in the
form attached hereto as Exhibit K.
(M) PERFORMANCE; REPRESENTATION AND WARRANTIES. The Seller shall have
performed and complied in all respects with all agreements and conditions
contained in this Agreement which are required to be performed or complied with
by the Seller prior to or at the Closing, the representation and warranties of
the Seller contained herein shall be true and correct on and as of the Closing
Date as though made on such date, and the Seller shall have delivered to the
Purchasers a certificate of a duly authorized officer of the Seller to such
effect.
(N) APPROVALS, ETC. Approval and consent of all appropriate governmental
regulatory agencies and the receipt of approval and/or consent from all other
appropriate parties, and all consents which may be required under any of the
Seller's agreements (or otherwise), including, but
<PAGE>
not limited to, all landlord consents and waivers, with respect to the
transactions contemplated hereby shall have been obtained.
(O) NO MATERIAL ADVERSE EFFECT. There shall have occurred no event
which, in the Purchasers' sole discretion, could result in a Material Adverse
Effect on the Seller and the Subsidiary taken as a whole between the date hereof
and the date of the Closing and the Seller and the Subsidiary shall have
operated their business in the ordinary course, consistent with past practices
during such period.
(P) NO EVENT OF DEFAULT. At the Second Tranche Closing, no Event of
Default shall have occurred and be continuing.
(Q) COMPLIANCE WITH BUDGET. At the Second Tranche Closing, the Seller
shall be in material compliance with the annual budget approved at the first
board of directors meeting of the Seller within 90 days of which the First
Tranche Closing and forwarded to each Purchaser within ten days thereafter,
which reflects a financial plan that provides the Seller with a positive working
capital balance as of December 31, 2000; provided however that if no such annual
budget is adopted, the annual budget shall be the annual budget attached hereto
as Exhibit L. For purposes of this paragraph (p), Material Compliance shall
mean that (i) the operating expenses of the Seller shall be no greater than 110%
of budgeted amounts and (ii) the revenues of the Seller shall be at least 75% of
budgeted amounts.
(R) REGISTRATION STATEMENT EFFECTIVENESS. The Registration Statement
shall have been declared effective by the Commission.
(S) NO LITIGATION. No litigation, arbitration or other legal or
administrative proceeding against the Seller or the Subsidiary shall have been
commenced or be pending by or before any court, arbitration panel or
govern-mental authority or official, and no statute, rule or regulation of any
foreign or domestic, national or local government or agency thereof shall have
been enacted after the date of this Agreement, and no judicial or administrative
decision shall have been rendered which enjoins or prohibits, or seeks to enjoin
or prohibit, the consummation of all or any of the transactions contemplated by
this Agreement.
(T) NO TERMINATIONS OF FIRST TRANCHE CLOSING DOCUMENTS. At the
Second Tranche Closing, a certification by the Seller that all Related
Documents, certificates, estoppel letters and other documents or instruments
delivered at the First Tranche Closing (collectively, the "First Tranche Closing
Documents")are in full force and effect, and no party thereto has alleged any
breach or default thereunder or otherwise alleged or indicated that any party
thereto is no longer bound by any one or more First Tranche Closing Documents.
<PAGE>
(U) WORKING CAPITAL. At the Second Tranche Closing a certification by
the Seller that its working capital balance exceeds $100,000.
7.2 CONDITIONS TO OBLIGATIONS OF THE SELLER. The obligations of the
Seller hereunder are subject to the fulfillment or satisfaction, on and as of
the Closing Date, of the following condition (which may be waived by the Seller,
in its sole discretion, but only in a writing signed by the Seller):
(A) PERFORMANCE; REPRESENTATION AND WARRANTIES. The Purchasers shall
have performed and complied in all respects with all agreements and conditions
contained in this Agreement which are required to be performed or complied with
by the Purchasers prior to or at the Closing, the representation and warranties
of the Purchasers contained herein shall be true and correct on and as of the
Closing Date as though made on such date, and the Purchasers shall have
delivered to the Seller a certificate of a duly authorized officer of the
Purchasers to such effect.
(B) NO LITIGATION. No litigation, arbitration or other legal or
administrative proceeding against the Purchasers shall have been commenced or be
pending by or before any court, arbitration panel or govern-mental authority or
official, and no statute, rule or regulation of any foreign or domestic,
national or local government or agency thereof shall have been enacted after the
date of this Agreement, and no judicial or administrative decision shall have
been rendered which enjoins or prohibits, or seeks to enjoin or prohibit, the
consummation of all or any of the transactions contemplated by this Agreement.
ARTICLE VIII
INDEMNIFICATION AND TERMINATION
8.1 SURVIVAL OF REPRESENTATIONS; INDEMNITY; PURCHASERS' LIABILITY.
(A) SURVIVAL OF REPRESENTATIONS. Except as otherwise provided herein,
the representations, warranties, covenants and agreements of the Seller and the
Purchasers contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing Date and shall continue
in full force and effect and shall in no way be affected by any investigation of
the subject matter thereof made by or on behalf of the Seller or the Purchasers.
(B) INDEMNIFICATION. (i) The Seller agrees to indemnify and hold harmless
the Purchasers, their affiliates, each of their officers, directors, employees
and agents and their respective successors and assigns, from and against any
losses, damages, or expenses which are caused by or arise out of (A) any breach
or default in the performance by the Seller or the Subsidiary of any covenant
or agreement made by the Seller or the Subsidiary in this Agreement or in any of
the agreements or the Related Documents; (B) any breach of warranty or
representation made by the Seller or the Subsidiary in this Agreement or in any
of the agreements or documents referred to in this Agreement arising out of or
(C) any losses or liabilities attributable to the matters described in
<PAGE>
Schedules 3.9, 3.10, 3.14 or 3.15 and (D) any and all actions, suits,
proceedings, claims, demands, judgments, costs and expenses (including
reasonable legal fees and expenses) incident to any of the foregoing.
(ii) The Purchasers, severally and not jointly, agree to indemnify and
hold harmless the Seller, its affiliates, and its respective successors and
assigns, from and against any losses, damages, or expenses which are caused by
or arise out of (A) any breach or default in the performance by the Purchasers
of any covenant or agreement made by the Purchasers in this Agreement; (B) any
breach of warranty or representation made by the Purchasers in this Agreement;
and (C) any and all actions, suits, proceedings, claims, demands, judgments,
costs and expenses (including reasonable legal fees and expenses) incident to
any of the foregoing.
(C) INDEMNITY PROCEDURE. A party or parties hereto agreeing to be
responsible for or to indemnify against any matter pursuant to this Agreement is
referred to herein as the "Indemnifying Party" and the other party or parties
claiming indemnity is referred to as the "Indemnified Party".
An Indemnified Party under this Agreement shall, with respect to claims
asserted against such party by any third party, give written notice to the
Indemnifying party of any liability which might give rise to a claim for
indemnity under this Agreement within sixty (60) business days of the receipt of
any written claim from any such third party, but not later than twenty (20) days
prior to the date any answer or responsive pleading is due, and with respect to
other matters for which the Indemnified Party may seek indemnification, give
prompt written notice to the Indemnifying party of any liability which might
give rise to a claim for indemnity; provided, however, that any failure to give
such notice will not waive any rights of the Indemnified Party except to the
extent the rights of the Indemnifying Party are materially prejudiced.
The Indemnifying Party shall have the right, at its election, to take over the
defense or settlement of such claim by giving written notice to the Indemnified
Party at least fifteen (15) days prior to the time when an answer or other
responsive pleading or notice with respect thereto is required. If the
Indemnifying Party makes such election, it may conduct the defense of such claim
through counsel of its choosing (subject to the Indemnified Party's approval of
such counsel, which approval shall not be unreasonably withheld), shall be
solely responsible for the expenses of such defense and shall be bound by the
results of its defense or settlement of the claim. The Indemnifying Party shall
not settle any such claim without prior notice to and consultation with the
Indemnified Party, and no such settlement involving any equitable relief or
which might have an adverse effect on the Indemnified Party may be agreed to
without the written consent of the Indemnified Party (which consent shall not be
unreasonably withheld). So long as the Indemnifying Party is diligently
contesting any such claim in good faith, the Indemnified Party may pay or settle
such claim only at its own expense and the Indemnifying Party will not be
responsible for the fees of separate legal counsel to the Indemnified Party,
unless the named parties to any proceeding include both parties and
representation of both parties by the same counsel would be inappropriate. If
the Indemnifying
<PAGE>
Party does not make such election, or having made such election does not,
in the reasonable opinion of the Indemnified Party proceed diligently to defend
such claim, then the Indemnified Party may (after written notice to the
Indemnifying Party), at the expense of the Indemnifying Party, elect to take
over the defense of and proceed to handle such claim in its discretion and the
Indemnifying Party shall be bound by any defense or settlement that the
Indemnified Party may make in good faith with respect to such claim. In
connection therewith, the Indemnifying Party will fully cooperate with the
Indemnified Party should the Indemnified Party elect to take over the defense of
any such claim.
The parties agree to cooperate in defending such third party claims and the
Indemnified Party shall provide such cooperation and such access to its books,
records and properties as the Indemnifying Party shall reasonably request with
respect to any matter for which indemnification is sought hereunder; and the
parties hereto agree to cooperate with each other in order to ensure the proper
and adequate defense thereof.
With regard to claims of third parties for which indemnification is payable
hereunder, such indemnification shall be paid by the Indemnifying Party upon the
earlier to occur of: (i) the entry of a judgment against the Indemnified Party
and the expiration of any applicable appeal period, or if earlier, five (5) days
prior to the date that the judgment creditor has the right to execute the
judgment; (ii) the entry of an unappealable judgment or final appellate decision
against the Indemnified Party; or (iii) a settlement of the claim.
Notwithstanding the foregoing, the reasonable expenses of counsel to the
Indemnified Party shall be reimbursed on a current basis by the Indemnifying
Party if such expenses are a liability of the Indemnifying Party. With regard
to other claims for which indemnification is payable hereunder, such
indemnification shall be paid promptly by the Indemnifying Party upon demand by
the Indemnified Party.
(D) LIABILITY OF PURCHASERS. Except for all willful misconduct,
Purchasers shall be under no liability for, and the Seller and the Subsidiary
hereby release the Purchasers from all claims for loss or damage caused by (a)
Purchasers' failure to perform, enforce or collect any of the Collateral, as
defined in the Security Agreement, the Subsidiary Security Agreement, the
Intellectual Property Security Agreement and Assignment and the Subsidiary
Intellectual Property Security Agreement and Assignment, or any part thereof,
(b) Purchasers' failure to preserve or protect any rights of the Seller against
account debtors or prior parties to the Collateral or any part thereof, (c) the
operation, maintenance, repairing, selling, removal, taking possession or
disposing of the Collateral or any part thereof by Purchasers and (d) any other
act or omission on the part of the Purchasers.
<PAGE>
ARTICLE IX
MISCELLANEOUS
9.1 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
9.2 FEES AND EXPENSES. The Seller shall be responsible for the
payment of $35,000 of the Purchasers' reasonable and documented legal fees and
expenses relating to the transactions contemplated by this Agreement.
9.3 NOTICES. Whenever any party hereto desires or is required to
give any notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States registered or certified mail,
postage prepaid, return receipt requested (and shall be deemed to have been
received three(3) days after deposit into the United States mail), or sent by
prepaid overnight courier, facsimile or confirmed telecopier, addressed as
follows:
<TABLE>
<CAPTION>
<S> <C>
If to the Seller:
If to the Purchasers, to the Purchaser's Representative at: Merlin Software Technologies
Narragansett Asset Management, LLC. . . . . . . . . . . . . International, Inc.
375 Park Avenue . . . . . . . . . . . . . . . . . . . . . . Suite 420 - 6450 Roberts Street
New York, New York 10152. . . . . . . . . . . . . . . . . . Burnaby, British Columbia, Canada V5G 4E1
Attention: Managing Director. . . . . . . . . . . . . . . . Attention: Robert Helber
Fax No.: (212) 521-5029 . . . . . . . . . . . . . . . . . . Fax No.:
----------------------------------------------------------- -------------------------------------------
With a copy in each case to:. . . . . . . . . . . . . . . . With a copy in each case to:
Kane Kessler, P.C.. . . . . . . . . . . . . . . . . . . . . Clark, Wilson
1350 Avenue of the Americas - 26th Floor. . . . . . . . . . HSBC Building 800-885 West Georgia Street
New York, New York 10019. . . . . . . . . . . . . . . . . . Vancouver, British Columbia, Canada V6C 3H1
Attention: Robert L. Lawrence, Esq.. . . . . . . . . . . . Attention: Virgil Z. Hlus, Esq.
Fax No.: (212) 245-3009 . . . . . . . . . . . . . . . . . . Fax No.: (604) 687-6314
----------------------------------------------------------- -------------------------------------------
</TABLE>
Unless otherwise stated above, such communications shall be effective when they
are received by the addressee thereof in conformity with this Section. Any
party may change its address for such communications by giving notice thereof to
the other parties in conformity with this Section.
9.4 GOVERNING LAW. This Agreement has been entered into and shall be
construed and enforced in accordance with the laws of the State of Nevada
without reference to the choice of law principles thereof.
<PAGE>
9.5 JURISDICTION AND VENUE. This Agreement shall be subject to
the exclusive jurisdiction of the Federal District Court, Southern District of
New York and if such court does not have proper jurisdiction, the State Courts
of New York County, New York. The parties to this Agreement agree that any
breach of any term or condition of this Agreement shall be deemed to be a breach
occurring in the State of New York by virtue of a failure to perform an act
required to be performed in the State of New York and irrevocably and expressly
agree to submit to the jurisdiction of the Federal District Court, Southern
District of New York and if such court does not have proper jurisdiction, the
State Courts of New York County, New York for the purpose of resolving any
disputes among the parties relating to this Agreement or the transactions
contemplated hereby. The parties irrevocably waive, to the fullest extent
permitted by law, any objection which they may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to
this Agreement, or any judgment entered by any court in respect hereof brought
in New York County, New York, and further irrevocably waive any claim that any
suit, action or proceeding brought in Federal District Court, Southern District
of New York and if such court does not have proper jurisdiction, the State
Courts of New York County, New York has been brought in an inconvenient forum.
9.6 SUCCESSORS AND ASSIGNS. This Agreement is personal to each
of the parties and may not be assigned without the written consent of the other
parties; provided, however, that any of the Purchasers shall be permitted to
assign their rights under this Agreement to any affiliate of such Purchaser.
9.7 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall continue in full force and effect and in
no way be affected, impaired or invalidated.
9.8 ENTIRE AGREEMENT. This Agreement and the other agreements and
instruments referenced herein constitute the entire understanding and agreement
of the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings.
9.9 OTHER REMEDIES. Except as otherwise provided herein, any and
all remedies herein expressly conferred upon a party shall be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law, or in
equity on such party, and the exercise of any one remedy shall not preclude the
exercise of any other.
9.10 AMENDMENT AND WAIVERS. Any term or provision of this Agreement
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the Seller and the holders of 66% of
the outstanding principal amount of the Notes. The waiver by a party of any
breach hereof or default in the performance hereof shall not be deemed to
constitute a waiver of any other default or any succeeding breach or default.
This Agreement may not be amended or
<PAGE>
supplemented by any party hereto except pursuant to a written amendment
executed by the Seller and the holders of 66% of the outstanding principal
amount of the Notes.
9.11 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
9.12 CONSTRUCTION OF AGREEMENT; KNOWLEDGE. For purposes of this
Agreement, the term "knowledge," when used in reference to a corporation means
the knowledge of the officers of such corporation assuming such officers shall
have made inquiry that is customary and appropriate under the circumstances to
which reference is made, and when used in reference to an individual means the
knowledge of such individual assuming the individual shall have made inquiry
that is customary and appropriate under the circumstances to which reference is
made.
9.13 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
9.14 NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in
this Agreement is intended, or shall be construed, to confer upon or give any
person other than the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and permitted assigns, any
rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SELLER AND MAKER:
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
By:/s/ Robert Heller
Name: Robert Heller
Title: President
SUBSIDIARY:
MERLIN SOFTWARE TECHNOLOGIES INC.
By:/s/ Robert Heller
Name: Robert Heller
Title: President
PURCHASERS:
Narragansett I, L.P. a Delaware limited partnership
By:/s/ Joseph L. Dowling
Name: Joseph L. Dowling
Title: Managing Member
Narragansett Offshore Ltd., a Cayman Island corporation
By its Investment Manager, Leo Holdings, L.L.C.
By: /s/ Joseph L. Dowling
Name: Joseph L. Dowling
Title: Managing Member
Pequot Scout Fund, L.P., a Delaware
limited partnership
By its Investment Advisor,
Pequot Capital Management, Inc.
By: /s/ David J. Malat
Name: David J. Malat
Title: Chief Accounting Officer
SDS Merchant Fund, L.P.
By its Managing Member,
SDS Capital Partners, L.L.C.
By: /s/ Steven Derby
Name: Steven Derby
Title: Managing Member
</TABLE>
