<PAGE>
================================================================================
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ......
Registrant, State of Incorporation,
Address and Telephone Number
----------------------------
GRC INTERNATIONAL, INC.
(a Delaware Corporation)
1900 Gallows Road
Vienna, Virginia 22182
(703) 506-5000
Commission I.R.S. Employer
File No. Identification No.
- ---------- ------------------
1-7517 95-2131929
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock January 31, 1997
- --------------------- -----------------
$.10 par value 9,342,557 shares
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
CONTENTS
Forward-Looking Statements
In addition to historical information, this Form 10-Q Quarterly Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section of this Form 10-Q captioned "Management's
Discussion and Analysis". The Company undertakes no obligation to publicly
revise these forward-looking statements, to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in the Company's Form 10-K Annual Report and other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q to be filed by the Company
subsequent to this Form 10-Q and any Current Reports on Form 8-K filed by the
Company.
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS
<S> <C>
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 8
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
C. PART II - OTHER INFORMATION 28
</TABLE>
Note: The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these consolidated condensed financial statements be
read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report on
Form 10-K.
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 30,345 $ 28,268 $ 60,479 $ 60,954
Cost of revenues 27,005 23,854 52,305 51,396
-------- -------- -------- --------
Gross Margin 3,340 4,414 8,174 9,558
Research and Development 1,701 232 2,635 423
Sales and Marketing 1,619 1,185 3,344 1,973
General and Administrative 4,356 3,232 9,005 6,829
Write down of Deferred Software
and Related Costs 14,252 --- 14,252 ---
-------- -------- -------- --------
Operating Income (Loss) (18,588) (235) (21,062) 333
Interest (expense) income, net (516) (83) (652) (20)
-------- -------- -------- --------
Income (Loss) Before Income Taxes (19,104) (318) (21,714) 313
Provision for income taxes --- --- --- ---
-------- -------- -------- --------
Net Income (Loss) $(19,104) $ (318) $(21,714) $ 313
======== ======== ======== ========
Income (Loss) Per Common and
Common Equivalent Share $ (2.05) $ (.03) $ (2.33) $ .03
======== ======== ======== ========
Common Shares used for
EPS Calculation 9,340 9,150 9,321 9,327
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ --------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,680 $ 2,790
Accounts receivable 26,226 29,966
Unbilled reimbursable costs and fees 5,129 4,033
Inventories, at lower of cost or market 1,810 2,635
Other receivables 1,377 1,018
Prepaid expenses and other 1,885 1,462
------- -------
Total current assets 40,107 41,904
------- -------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $10,490 and $9,465 12,023 12,267
------- -------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,285 2,311
Deferred software costs, net 576 11,216
Deposits and other 6,334 6,403
------- -------
Total other assets 9,195 19,930
------- -------
TOTAL ASSETS $61,325 $74,101
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
-------------- ---------
(in thousands)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,193 $ 1,823
Accounts payable 3,197 6,382
Accrued compensation and benefits 13,264 13,125
Accrued expenses 2,241 2,095
Other current liabilities 3,009 2,885
-------- --------
Total current liabilities 24,904 26,310
-------- --------
LONG-TERM DEBT 28,026 17,770
-------- --------
OTHER NON-CURRENT LIABILITIES 1,302 1,346
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 9,643,000 shares
and 9,586,000 shares 964 958
Paid-in capital 74,956 74,830
Accumulated deficit (64,982) (43,268)
-------- --------
10,938 32,520
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
-------- --------
Total stockholders' equity 7,093 28,675
-------- --------
$ 61,325 $ 74,101
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss) $(21,714) $ 313
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,846 1,774
Write down of deferred software and related costs 14,252 ---
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees 2,287 3,582
Inventory (454) (864)
Other current assets (657) (1,164)
Accounts payable, accruals and
other current liabilities (2,881) (5,016)
Other, net --- 21
-------- --------
NET CASH USED BY OPERATING ACTIVITIES (6,321) (1,354)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,504) (2,065)
Deferred software costs (2,626) (8,010)
Other, net (374) (61)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (4,504) (10,136)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (503) ---
New borrowings 12,130 10,300
Sale of common stock 132 ---
Other, net (44) (475)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,715 9,825
-------- --------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 890 (1,665)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,790 2,679
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 3,680 $ 1,014
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------
1996 1995
------ ------
(in thousands)
<S> <C> <C>
Supplemental disclosures:
Cash transactions:
Interest paid $ 595 $ 156
Income taxes paid 9 25
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
GRC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED DECEMBER 31, 1996
(unaudited)
(1) The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The results
of operations presented herein are not necessarily indicative of the
results to be expected for a full year. Although the Company believes that
all material adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim periods presented are
included and that the disclosures are adequate to make the information
presented not misleading, these consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
(2) In November 1995, the Company acquired the rights to the operating software
of Quintessential Solutions Inc. (QSI) at a cost of approximately $3.9
million. This software has been incorporated into the Company's
NetworkVUE(TM) product and as such has been accounted for as deferred
software costs. Under the purchase agreement, payments with a net present
value of $1.9 million were deferred until future periods. The Company did
not make a $600 thousand payment due November 27, 1996, because of breaches
of the purchase agreement by QSI. The Company and QSI are in negotiations
to resolve the issue. If negotiations are unsuccessful, there will be an
arbitration of the dispute. The Company does not believe that the result of
such negotiations will have an adverse effect on its results of operations
or financial position.
(3) The Company has a revolving credit and term loan agreement, secured by a
lien on all of the Company's assets. The revolving credit arrangement
entitles it to borrow up to a maximum of $22 million at the prime rate
(8.25% as of December 31, 1996). The revolving credit line is repayable on
January 15, 1998, but will automatically be renewed for successive, one-
year terms, unless the bank delivers written notice of non-renewal at least
fifteen months prior to the end of the initial term or any subsequent
renewal period. No notice of non-renewal was received by October 15, 1996,
and, thus, the Revolving Credit is repayable on January 15, 1999. As of
December 31, 1996, the Company had borrowed $17.5 million of the $22
million revolving facility.
In June 1996, the Company completed a $7.5 million financing of
substantially all of its furniture and equipment. The loan is being
amortized over a five year period at an interest rate of 9%.
8
<PAGE>
Debt at December 31, 1996, consists of the following:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C>
Revolving Credit Agreement $17,476 $ 5,425
Term Loans 5,000 5,000
Equipment Financing 6,841 7,346
Other 1,902 1,822
------- -------
Total Debt $31,219 $19,593
Less: Current Portion 3,193 1,823
------- -------
$28,026 $17,770
======= =======
</TABLE>
At December 31, 1996, the Company was in default of certain covenants under
the Amended and Restated Revolving Credit and Term Loan Agreement, which
default was cured by an amendment to that Agreement dated February 7, 1997
by reducing the tangible net worth requirement to $4 million as of December
31, 1996. For this purpose, the $4 million raised by the Convertible
Debenture issued in January 1997 is counted as equity. In addition,
certain other covenants were amended so that, under the Company's plans
and projections for the next twelve months, the Company expects to remain
in compliance with these covenants for that time period.
(4) Changes in Presentation. Certain amounts in the December 31, 1995
-----------------------
Consolidated Financial Statements have been reclassified to conform to the
December 31, 1996 presentation.
(5) Write Down of Carrying Value of Certain Assets. The Company has decided to
----------------------------------------------
dispose by sale or shutdown of several business units, including its OSU,
NetworkVUE, and APD business units. All assets of these business units
have been written down to net realizable values. Consequently, in the
quarter ended December 31, 1996, the Company recorded a write down of $14.3
million for software development and related costs. The write down was
comprised of $12.3 million in deferred software costs related to the
Company's OSU and NetworkVUE business units, which are to be disposed of
either by sale or shutdown, and $2.0 million of related assets, primarily
inventory. The assets remaining include OSU net assets of $550 thousand,
CIS net assets of $132 thousand, and GRC Instruments of $2.1 million.
(6) Subsequent Event. On January 21, 1997, the Company entered into a
----------------
Convertible Securities Subscription Agreement ("Subscription Agreement")
pursuant to which an investor purchased a $4 million 5% Convertible
Debenture due January 2000 ("Debenture"). Also on January 21, 1997, the
Company entered into a Structured Equity Line Flexible Financing Agreement
("Equity Line Agreement") whereby an investor may purchase up to $18
million in the Company's Common Stock over a 3 1/2 year period to begin
later this calendar year.
The Debenture bears interest at a 5% rate per annum payable quarterly in
cash or, at the Company's option, the amount due may be added to the
outstanding principal due under the Debenture. The Debenture is
convertible into the Company's Common Stock
9
<PAGE>
at the lesser of (i) $11 per share, or (ii) 94% of the low trade during the
3 trading days immediately preceding the date of conversion. The investor
also received a 7-year warrant to purchase 320,000 shares of the Company's
Common Stock at a price of $8.47 per share ("Debenture Warrant"). Under a
related Registration Rights Agreement ("Registration Rights Agreement"),
the Company is obligated to file a registration statement with the
Securities and Exchange Commission with respect to the Company's Common
Stock into which the Debenture is convertible and for which the Debenture
Warrant is exercisable. If the Company is in default under the Debenture,
the investor may put the Debenture to the Company at 120% of the amount
outstanding. The Debenture Warrant is not exercisable for 18 months, but
becomes immediately exercisable if the Company sells substantially all of
its assets or enters into a merger or acquisition or other similar
transaction, and in such event the Debenture Warrant is repriced at the
lesser of (i) $8.47 per share, or (ii) 80% of the Transaction Value (as
defined in the Debenture Warrant), and the investor has the option to put
the Debenture to the Company at 115% of the amount outstanding. Other
terms, conditions, and limitations apply to the Subscription Agreement, the
Debenture, the Registration Rights Agreement and the Debenture Warrant.
Each of these documents is included as an Exhibit to this Form 10-Q.
Under the Structured Equity Line Flexible Financing Agreement ("Equity Line
Agreement") the investor may, but is not required to, purchase up to $3
million of the Company's Common Stock during the first 6 months of the
effectiveness of a registration statement under the Securities Act of 1933
for the shares to be issued. For the 3 years after that initial 6-month
period, the Company can require the investor to purchase up to $3 million
of the Common Stock per quarter up to an aggregate maximum of $18 million
under the Equity Line Agreement. The purchase price is equal to 94% of the
low trade price during the 3 trading days immediately preceding the notice
of purchase by the investor. The investor, however, may not purchase
Common Stock at a price of less than $4 per share. If the Company issues
less than $5 million of its Common Stock under the Equity Line Agreement,
it must pay the investor up to $300,000 as liquidated damages. The
investor also received a 7-year Warrant to purchase 125,000 shares of the
Company's Common Stock at a price of $8.47 per share ("Equity Line
Warrant"). If the Company elects to issue more than $5 million, the
Company will issue an additional 7-year warrant for the purchase of 75,000
shares of the Company's Common Stock ("Additional Equity Line Warrant") at
a price equal to 140% of the price of the Common Stock at the time of the
issuance of the Additional Equity Line Warrant. Under a related
Registration Rights Agreement ("Registration Rights Agreement"), the
Company is obligated to file a registration statement with the Securities
and Exchange Commission with respect to the Company's Common Stock for
which the Equity Line Warrant and the Additional Line Warrant
(collectively, the "Equity Line Warrants") are exchangeable. The Equity
Warrant is not exercisable for 18 months, but becomes immediately
exercisable if the Company sells substantially all of its assets or enters
into a merger or acquisition or other similar transaction, and in such
event is repriced at the lesser of (i) $8.47, or (ii) 80% of the
Transaction Value (as defined in the Equity Line Warrant). The Additional
Equity Line Warrant, when issued, will contain provisions similar to the
Equity Line Warrant. The investor's obligation to purchase under the
Equity Line Agreement is subject to various conditions, including (i) the
effectiveness of a registration statement with respect to the underlying
shares, (ii) limitations based on the price and volume of the Company's
Common Stock, and (iii) the percentage of the Common Stock beneficially
owned by the investor from time to
10
<PAGE>
time. Other terms, conditions, and limitations apply to the Equity Line
Agreement, the Registration Rights Agreement and the Equity Line Warrant.
Each of these documents is included as an Exhibit to this Form 10-Q.
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED December 31, 1996 and 1995
(unaudited)
Summary
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
12/31/96 12/31/95 12/31/96 12/31/95
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 30,345 $ 28,268 $ 60,479 $ 60,954
========= ========= ========= =========
Write down of assets $ (14,252) $ --- $ (14,252) $ ---
========= ========= ========= =========
Operating income (loss) (18,588) (235) (21,062) 333
Interest income (expense), net (516) (83) (652) (20)
--------- --------- --------- ---------
Income (loss) before income taxes (19,104) (318) (21,714) 313
Provision for income taxes --- --- --- ---
--------- --------- --------- ---------
Net income (loss) $(19,104) $ (318) $(21,714) $ 313
========= ========== ======== =========
</TABLE>
Overview
- --------
Beginning in November 1993, the Company expanded beyond its core PSO
business by developing business units in telecommunications, comprised primarily
of the OSU and NetworkVUE business units. From the inception of these projects
through December 31, 1996, the Company has invested the free cash flow from PSO
and has incurred substantial amounts of debt in order to fund the development of
its Telecom Division. During this time, PSO has generated in excess of 90% of
the Company's revenues, has been consistently profitable, with positive cash
flows. PSO revenues and profitability have also increased in the quarter ended
December 31, 1996, and efforts are underway to continue these increases.
During the second fiscal quarter of 1997, ended December 31, 1996, two
significant events occurred with respect to Telecom. First, the Company
received the results of two independent market surveys for the OSU. Second, the
Company commercially released the NetworkVUE product. These matters are
discussed below.
11
<PAGE>
The OSU surveys clarified that the current market for OSU-like devices
is low and likely to remain so for the next two years, with a divergence of
opinion between the surveys as to whether the market would then develop
substantially. Given the Company's liquidity, discussed further below, it can
no longer afford to continue investing in the OSU business unit. Accordingly,
the Company has decided to dispose of the OSU business unit. The disposal will
either be by sale or the Company will shut down the unit as it is presently
structured. Consequently, evaluating the net realizable values of the OSU
assets, the Company at December 31, 1996 has written off $4.0 million of
capitalized software development costs and other costs related to the OSU
business unit, primarily inventory.
The NetworkVUE product has been previewed with potential customers for
approximately one year and has been commercially released since October 1996.
In the four months since the NetworkVUE product was released, several companies
have been evaluating the product, and the Company structured a co-marketing
alliance with a major system integrator and network consultant whereby the
Company would provide design and optimization services using its NetworkVUE
software as a design tool. However, the Company has not recognized significant
product or service revenues from the NetworkVUE software suite as released in
October 1996. Given the Company's liquidity, it can no longer afford to
continue investing in the NetworkVUE business unit. Accordingly, the Company
has decided to dispose of the NetworkVUE business unit by sale or a shutdown.
At the same time, the Company will retain a small complement of personnel in PSO
to market network design consulting services using the NetworkVUE software as a
tool. However, to date, no significant commissions for service engagements have
been received. Consequently, evaluating the net realizable values of the
NetworkVUE assets, the Company at December 31, 1996 has written off $10.4
million of capitalized software costs and other costs related to the NetworkVUE
business unit.
While the Company is withdrawing from its OSU and NetworkVUE business,
it remains fully committed to the Application Software Group, the third and
smallest Telecom component. ASG, although a start-up operation, was essentially
break-even for the six months ended December 31, 1996.
The Company has also decided to dispose of the business units within its
APD division in order to generate additional cash, and expects to do so at
amounts equal to at least net book values.
As a consequence of the write downs and the refocusing by the Company on
its profitable and growing PSO services business, the Company believes that,
after a short period of transition, the Company will resume profitable
operations generating positive cash flows since the profits from PSO operations
would then no longer be overridden by losses from Telecom.
The $4 million Convertible Debenture and $18 million Structured Equity Line
financing, discussed below, improves the Company's liquidity, but the $18
million Structured Equity Line financing is not expected to be available until
later this calendar year, and is subject to various conditions which may limit
its availability. The Company would, therefore, not have been able to continue
absorbing the cash flow losses generated by the OSU and NetworkVUE business
units.
12
<PAGE>
At December 31, 1996, the Company had borrowed $17.5 million against its
Revolving Credit and $5 million against its Term Loan facilities. As discussed
below, if the Company is able to restructure its bank debt to provide for
amortization of the principal outstanding over a term of approximately five
years, rather than "balloon" repayments in 1-1/2 to 2 years as the loans are
presently structured, and there can be no assurances that it will be able to do
so, the Company's cash flow from PSO operations together with the anticipated
cash inflow from the Structured Equity Line financing should be sufficient to
allow the Company to service and amortize its outstanding debt over that term.
Also as previously announced, Smith Barney continues to advise the Company
with respect to a full range of financial and strategic options.
In summary, with a proper execution of a withdrawal from the bulk of its
Telecom and all of its APD business units, the Company will be focused on a
profitable and growing PSO and, with a restructuring of the term of its current
bank debt, should be able to amortize the outstanding balance over approximately
five years.
Results of Operations - Three Months ended December 31, 1996 and 1995
- ---------------------------------------------------------------------
Summary of Results of Operations by Segment - Three Months Ended December 31,
- -----------------------------------------------------------------------------
1996 and 1995.
- -------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
12/31/96 12/31/95
----------------------------------- -----------------------------
PSO TD APD Corp GRC PSO TD APD Corp GRC
----------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 27.8 0.8 1.7 --- 30.3 26.3 0.1 1.9 --- 28.3
Gross Profit (Loss) 5.0 (2.0) 0.4 (0.1) 3.3 3.8 --- 0.9 (0.1) 4.4
R&D --- 1.1 0.6 --- 1.7 --- 0.1 0.1 --- 0.2
S&M --- 0.9 0.6 --- 1.6 0.3 0.5 0.5 --- 1.2
G&A 3.3 0.6 0.4 0.2 4.4 2.7 0.3 0.2 0.1 3.2
Write down --- 14.3 --- --- 14.3 --- --- -- --- ---
----------------------------------- ----------------------------
Operating Profit 1.7 (18.9) (1.2) (0.3) (18.6) 0.7 (0.9) 0.1 (0.2) (0.2)
(Loss)
</TABLE>
Note: Numbers may not add due to rounding.
Revenues
- --------
The Company's revenues were $30.3 million for the second quarter of fiscal
1997, compared to $28.3 million for the same quarter last fiscal year. The
revenue increase of $2.0 million, or 7%, is attributable to an increase in
revenues from the Company's Professional Service Organization ("PSO") of $1.5
million, an increase in the Company's Telecommunications Division ("Telecom")
revenues of $718 thousand, and a decrease in the Company's Advanced Products
Division ("APD") revenues of $203 thousand.
For PSO, service revenues of $27.2 million for the second quarter of fiscal
1997 increased 8% above service revenues of $25.3 million for the second quarter
of fiscal 1996. Product revenues of $665 thousand for the second quarter of
fiscal 1997 decreased 30% from product revenues of $955 thousand for the second
quarter of fiscal 1996.
13
<PAGE>
For Telecom, second quarter fiscal 1997 revenues were $848 thousand,
compared to $130 thousand for the second quarter of fiscal 1996, comprised as
follows:
. Revenues from the OSU(R) business unit for the second quarter of fiscal
1997 amounted to $71 thousand, compared to $111 thousand for the prior
year.
. Revenues from the NetworkVUE(TM) business unit amounted to $172
thousand, compared to $19 thousand for the prior year.
. And, revenues from the Application Software Group ("ASG") amounted to
$605 thousand, compared to none for the prior year.
For APD, second quarter fiscal 1997 revenues were $1.7 million, compared to
approximately $1.9 million for the second quarter of fiscal 1996, comprised as
follows:
. The GRC Instruments ("GRC Instruments") materials testing business unit
of APD had second quarter 1997 revenues of $894 thousand, a 22% decline
from second quarter 1996 revenues of $1.1 million.
. The Commercial Information Solutions ("CIS") environmental, safety, and
health management software business unit had $189 thousand second
quarter 1997 revenues, compared to revenues of approximately $490
thousand for the prior year quarter, a decline of 61%.
. The Advanced Security Technologies ("AST") business unit of APD, which
now includes what had been the Advanced Technology Services Group
("ATS"), had second quarter 1997 revenues of $588 thousand, compared to
$243 thousand in the previous year's quarter.
Cost of Revenues and Gross Profit
- ---------------------------------
The Company's cost of revenues were $27.0 million for the second quarter of
fiscal 1997, compared to $23.9 million for the same quarter last year.
Accordingly, the Company's gross profit for the first quarter of fiscal 1997 was
$3.3 million, 11% of revenues, a 25% decline from the gross profit of $4.4
million, or 16% of revenues, for the second quarter of fiscal 1996.
For PSO, cost of revenues of $22.8 million increased 1% from the $22.5
million cost of revenues for the second quarter of the prior year. Gross profit
of $5.0 million, 18% of revenues, increased by 32% over gross profit of $3.8
million, 14% of revenues, for the prior year's quarter. The increase in PSO
gross margins is due primarily to an increase in the direct labor content of PSO
service revenues, together with an increase in the gross margin earned by that
direct labor content, compared to the prior year quarter.
For Telecom, second quarter cost of revenues and gross profit were $2.8
million and a loss of $2.0 million, respectively, compared to cost of revenues
and gross profit of $134 thousand and a loss of $4 thousand, respectively, for
the second quarter of fiscal 1996, comprised as follows:
14
<PAGE>
. For OSU, second quarter cost of revenues of $835 thousand resulted in a
negative gross profit of $764 thousand, compared to cost of revenues of
$74 thousand resulting in a gross profit of $37 thousand for the second
quarter of fiscal 1996.
. For NetworkVUE, second quarter cost of revenues of $1.5 million resulted
in a negative gross profit of $1.4 million, compared to cost of revenues
of $60 thousand resulting in a negative gross profit of $41 thousand for
the second quarter of fiscal 1996.
. For ASG, second quarter cost of revenues of $444 thousand resulted in a
gross profit of $161 thousand, compared to none for the second quarter
of fiscal 1996.
Negative gross margins for the OSU and NetworkVUE business units resulted
from gross profits from unit sales being insufficient to cover the fixed cost of
revenues associated with those business units.
For APD, second quarter cost of revenues and gross profit were $1.2 million
and a profit of $438 thousand, respectively, compared to cost of revenues and
gross profit of $1.0 million and a profit of $861 thousand, respectively, for
the second quarter of fiscal 1996, comprised as follows:
. For GRI, second quarter cost of revenues of $467 thousand resulted in a
gross profit of $427 thousand, compared to cost of revenues of $539
thousand resulting in a gross profit of $603 thousand for the second
quarter of fiscal 1996.
. For CIS, second quarter cost of revenues of $316 thousand resulted in a
negative gross profit of $126 thousand, compared to cost of revenues of
$252 thousand resulting in a gross profit of $239 thousand for the
second quarter of fiscal 1996.
. For AST, which includes ATS, second quarter cost of revenues of $451
thousand resulting in a gross profit of $137 thousand, compared to cost
of revenues of $224 thousand resulting in a gross profit of $19 thousand
for the second quarter of fiscal 1996.
Operating Expenses and Operating Income
- ---------------------------------------
Including the $14.3 million write off, operating expenses for the second
quarter of fiscal 1997 amounted to $21.9 million. Excluding the $14.3 million
write off, operating expenses for the second quarter amounted to $7.7 million,
or 25% of revenues, compared to $4.6 million, or 16% of revenues for the second
quarter of the prior year, an increase of $3.1 million on a year-to-year basis.
Research & Development expenses of $1.7 million for the second quarter of
fiscal 1997 increased $1.5 million over R&D expenses for the prior year quarter
of $232 thousand. The increase occurred due to the completion of the
development of OSU and NetworkVUE software and the shift of expenditures from
capitalized cost to R&D expense. During the second quarter of fiscal 1997, the
Company capitalized $565 thousand, $342 thousand of which related to
NetworkVUE(TM) and $180 thousand of which related to OSU(R). With the first
commercial release of the NetworkVUE product in mid-October 1996, capitalization
for NetworkVUE stopped and, during the second quarter, prior to the write off of
$12.3 million of capitalized costs, a portion of the amount previously
capitalized with respect to NetworkVUE was amortized to cost of revenues.
15
<PAGE>
Sales and Marketing expenses of $1.6 million for the second quarter of
fiscal 1997 increased $434 thousand, or 37%, over sales and marketing expenses
for the prior year quarter of $1.2 million. This increase arose primarily from
Telecom, where sales and marketing expenses increased from $453 thousand last
year to $942 thousand for the second quarter this year. This increase arose
from the commercial availability of the OSU(R) unit during the first quarter and
of the NetworkVUE(TM) product in the second quarter.
General & Administrative expenses of $4.4 million increased $1.2 million,
or 35%, over the $3.2 million incurred in the prior year quarter. The increase
in G&A expense arose primarily in the increased infrastructure related to
Telecom where G&A expenses increased by $335 thousand from $309 thousand in the
second quarter last year to $644 thousand in the second quarter this year, an
increase of 108%, and in APD where G&A expenses increased from $180 thousand
last year to $390 thousand this year, an increase of 117%.
Write down of Deferred Software and Related Costs
- -------------------------------------------------
In the quarter ended December 31, 1996, the Company recorded a write down
of $14.3 million for software development and related costs. The write down was
comprised of $12.3 million in deferred software costs (comprised of $2.0 million
related to OSU(R) and $10.3 related to NetworkVUE(TM)) and $2.0 million of
related assets, primarily inventory. The write down was necessitated by the
Company's decision to withdraw from the OSU and NetworkVUE business and by the
present uncertainty regarding any sale of those businesses.
Operating Profit or Loss
- ------------------------
Including the $14.3 million write down, the Company had a second quarter
fiscal 1997 consolidated operating loss of $18.6 million. Excluding the write
down, the Company's operating loss for the second quarter amounted to $4.3
million, consisting of a $1.7 million operating profit from PSO, a $4.7 million
operating loss from Telecom, a $1.2 million operating loss from APD, and $254
thousand in Corporate expenses. This contrasts with a consolidated operating
loss of $235 thousand for the second fiscal quarter of 1996, consisting of
approximately a $713 thousand operating profit from PSO, a $905 thousand
operating loss from Telecom, approximately a $110 thousand operating profit from
APD, and $153 thousand in Corporate expenses.
Net Interest Income or Expense
- ------------------------------
Net interest expense in the second quarter of fiscal 1997 was $516
thousand, compared to net interest expense of $83 thousand in the prior year.
The increased interest expense is due to the Company's increasing reliance on
debt to fund its losses from operations and other liquidity requirements.
Net Income or Loss
- ------------------
The net loss for the second quarter of fiscal 1997 amounted to $19.1
million, compared to a loss of $318 thousand in the second quarter of fiscal
1996.
16
<PAGE>
Results of Operations - Six Months ended December 31, 1996 and 1995
- -------------------------------------------------------------------
Summary of Results of Operations by Segment - Six Months Ended December 31, 1996
- --------------------------------------------------------------------------------
and 1995.
- --------
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
12/31/96 12/31/95
------------------------------- --------------------------------
PSO TD APD Corp GRC PSO TD APD Corp GRC
------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 55.5 2.0 3.0 --- 60.5 57.5 0.1 3.3 --- 61.0
Gross Profit (Loss) 10.0 (2.5) 0.8 (0.1) 8.2 8.3 --- 1.4 (0.1) 9.6
R&D --- 1.6 1.0 --- 2.6 --- 0.1 0.3 --- 0.4
S&M 0.1 2.0 1.2 --- 3.3 0.5 0.7 0.8 --- 2.0
G&A 6.4 1.4 0.9 (0.3) 9.0 5.7 0.6 0.4 0.1 6.8
Write down --- 14.3 --- --- 14.3 --- --- --- --- ---
------------------------------- --------------------------------
Operating Profit 3.4 (21.7) (2.4) (0.4) (21.1) 2.1 (1.5) (0.1) (0.2) 0.3
(Loss)
</TABLE>
Note: Numbers may not add due to rounding.
Revenues
- --------
The Company's revenues were $60.5 million for the first half of fiscal
1997, compared to $61.0 million for the same period last fiscal year, including
$4.5 million attributable to the minority-interest portion of a majority-owned
joint venture which was accounted for on a consolidated basis through the first
quarter of fiscal 1996. Excluding the joint venture from last year's results,
revenues increased $4 million, or 7%, from $56.5 million to $60.5 million.
Consolidated first half 1997 service revenues of $56.1 million increased 7%,
compared to first half 1996 service revenues, excluding the joint venture
referred to above, of $52.5 million. Consolidated first half 1997 product
revenues of $4.3 million increased 8%, compared to first half 1996 product
revenues of $4 million.
For PSO, excluding the joint venture referred to above, service revenues of
$54.5 million for the first half of fiscal 1997 increased 5% above service
revenues of $51.7 million for the first half of fiscal 1996. Product revenues
of $993 thousand for the first half of fiscal 1997 decreased 25% from product
revenues of $1.3 million for the first half of fiscal 1996.
For Telecom, first half fiscal 1997 revenues were $2.0 million, compared to
$130 thousand for the first half of fiscal 1996. Revenues from the OSU(R)
business unit for the first half of fiscal 1997 amounted to $379 thousand,
compared to $111 thousand for the prior year period; from the NetworkVUE(TM)
business unit amounted to $369 thousand, compared to $19 thousand for the prior
year period; and from the Application Software Group amounted to $1.3 million,
compared to none for the prior year period.
For APD, first half fiscal 1997 revenues were $3.0 million, compared to
approximately $3.3 million for the first half of fiscal 1996. The GRC
Instruments materials testing business unit of APD had first half 1997 revenues
of $1.4 million, a 18% decline from first half 1996 revenues of $1.7 million.
The CIS environmental, safety, and health management software business unit had
$421 thousand first half 1997 revenues, compared to revenues of
17
<PAGE>
approximately $969 thousand for the prior year period, a decline of 57%. The AST
security business unit of APD, which now includes the Advanced Technology
Services Group, had first half 1997 revenues of $1.2 million, compared to $613
thousand in the previous year period, since the security business was not
acquired until the second fiscal quarter of 1996.
Cost of Revenues and Gross Profit
- ---------------------------------
The Company's cost of revenues were $52.3 million for the first half of
fiscal 1997, compared to $51.4 million for the same period last year, including
the cost of sales associated with the consolidated joint venture mentioned
above. Excluding the impact of the joint venture, the Company's cost of
revenues for the first half of fiscal 1996 would have been $46.9 million.
The Company's gross profit for the first half of fiscal 1997 was $8.2
million, or 14% of revenues, a 14% decline from the gross profit of $9.6
million, or 16% of revenues, for the first half of fiscal 1996.
For PSO, excluding the joint venture referred to above, cost of revenues of
$45.5 million increased 2% from the $44.8 million cost of revenues for the first
half of the prior year. Gross profit of $10.0 million, or 18% of revenues,
increased by 20% over gross profit of $8.3 million, or 16% of revenues, for the
prior year period. The increase in PSO gross margins is due primarily to an
increase in the direct labor content of PSO service revenues, together with an
increase in the gross margin earned by that direct labor content, compared to
the prior year quarter.
For Telecom, first half fiscal 1997 cost of revenues and gross profit were
$4.5 million and a loss of $2.5 million, respectively, compared to cost of
revenues and gross profit of $143 thousand and a loss of $13 thousand,
respectively, for the first half of fiscal 1996, comprised as follows:
. For OSU, first half cost of revenues of $1.6 million resulted in a
negative gross profit of $1.2 million, compared to cost of revenues of
$74 thousand resulting in a gross profit of $37 thousand for the first
half of fiscal 1996.
. For NetworkVUE, first half cost of revenues of $2.0 million resulted in
a negative gross profit of $1.6 million, compared to cost of revenues of
$69 thousand resulting in a negative gross profit of $50 thousand for
the first half of fiscal 1996.
. For ASG, first half cost of revenues of $933 thousand resulted in a
gross profit of $342 thousand, compared to none for the first half of
fiscal 1996.
Negative gross margins for the OSU and NetworkVUE business units resulted
from gross profits from unit sales being insufficient to cover the fixed cost of
revenues associated with those business units.
For APD, first half cost of revenues and gross profit were $2.2 million and
a profit of $752 thousand, respectively, compared to cost of revenues and gross
profit of $1.9 million and a profit of $1.4 million, respectively, for the first
half of fiscal 1996, comprised as follows:
18
<PAGE>
. For GRI, first half cost of revenues of $700 thousand resulted in a
gross profit of $653 thousand, compared to cost of revenues of $885
thousand resulting in a gross profit of $835 thousand for the first half
of fiscal 1996.
. For CIS, first half cost of revenues of $525 thousand resulted in a
negative gross profit of $104 thousand, compared to cost of revenues of
$471 thousand resulting in a gross profit of $498 thousand for the first
half of fiscal 1996.
. For AST, which includes ATS, first half cost of revenues of $1.0 million
resulted in a gross profit of $202 thousand, compared to cost of
revenues of $590 thousand resulting in a gross profit of $23 thousand
for the first half of fiscal 1996.
Operating Expenses and Operating Income
- ---------------------------------------
Including the $14.3 million write off, operating expenses for the first
half of fiscal 1997 amounted to $29.2 million. Excluding the $14.3 million
write off, operating expenses for the first half of fiscal 1997 amounted to
$15.0 million, or 25% of revenues, compared to $9.2 million, or 16% of revenues
for the first half of the prior year (excluding the revenues from the minority
portion of the consolidated joint venture), an increase of $5.8 million on a
year-to-year basis.
Research & Development expenses of $2.6 million for the first half of
fiscal 1997 increased $2.2 million over R&D expenses for the prior year period
of $423 thousand. The increase occurred due to the completion of the
development of OSU and NetworkVUE software and the shift of expenditures from
capitalized cost to R&D expense. During the first half of fiscal 1997, the
Company capitalized $2.6 million, $2.0 million of which related to
NetworkVUE/TM/, $438 thousand of which related to OSU(R), and $94 thousand of
which related to ASG. With the prior release of the OSU network interface and
the first commercial release of the NetworkVUE product in mid-October, 1996, the
capitalization of development costs has stopped, and, prior to the $12.3 million
write off of capitalized costs, the amortization to cost of revenues of amounts
previously capitalized with respect to OSU and NetworkVUE increased
substantially compared to prior periods.
Sales and Marketing expenses of $3.3 million for the first half of fiscal
1997 increased $1.3 million, or 70%, over sales and marketing expenses for the
prior year period of $2.0 million. This increase arose primarily from Telecom,
where sales and marketing expenses increased from $719 thousand last year to
$2.0 million for the first half of this year. This increase arose from the
commercial availability of the OSU(R) unit and NetworkVUE/TM/ product during the
first half of the 1997 fiscal year.
General & Administrative expenses of $9.0 million increased $2.2 million,
or 32%, over the $6.8 million incurred in the prior year period. The increase
in G&A expense arose primarily in the increased infrastructure related to
Telecom where G&A expenses increased from $638 thousand in the first half last
year to $1.4 million in the first half this year, an increase of 124%, and in
APD where G&A expenses increased from $414 thousand last year to $879 thousand
this year, an increase of 112%.
19
<PAGE>
Write down of Deferred Software and Related Costs
- -------------------------------------------------
In the quarter ended December 31, 1996, the Company recorded a write down
of $14.3 million for software development and related costs. The write down was
comprised of $12.3 million in deferred software costs (comprised of $2.0 million
related to OSU(R) and $10.3 related to NetworkVUE/TM/) and $2.0 million of
related assets, primarily inventory. The write down was necessitated by the
Company's decision to withdraw from the OSU and NetworkVUE business and by the
present uncertainty regarding any sale of those businesses.
Operating Profit or Loss
- ------------------------
Including the $14.3 million write down, the Company had a first half fiscal
1997 consolidated operating loss of $21.1 million. Excluding the write down,
the Company's operating loss amounted to a loss of $6.8 million, consisting of a
$3.4 million operating profit from PSO, a $7.5 million operating loss from
Telecom, a $2.4 million operating loss from APD, and $382 thousand in Corporate
expenses. This contrasts with a consolidated operating profit of $333 thousand
for the first fiscal half of 1996, consisting of approximately a $2.1 million
operating profit from PSO, a $1.5 million operating loss from Telecom, and
approximately a $120 thousand operating loss from APD, and $175 thousand in
Corporate expenses.
Net Interest Income or Expense
- ------------------------------
Net interest expense in the first half of fiscal 1997 was $652 thousand,
compared to net interest expense of $20 thousand in the prior year. The
increased interest expense is due to the Company's increasing reliance on debt
to fund its losses from operations and other liquidity requirements.
Net Income or Loss
- ------------------
The net loss for the first half of fiscal 1997 amounted to $21.7 million,
compared to a profit of $313 thousand in the first half of fiscal 1996.
The Company's PSO Business
- --------------------------
PSO derives substantially all of its business from service contracts with
the Department of Defense of the United States government. Given PSO's
historically high win rate, and its enhanced focus on marketing its information
technology services both within the government and in commercial areas, the
Company believes that PSO should be able to sustain average long-term growth
rates greater than it has been able to achieve in recent years. PSO, for this
fiscal year, should continue to achieve positive operating results and positive
cash flows.
This business, however, is subject to the uncertainties of the U.S. budget,
funding for the DoD, terminations of contracts for cause or government
convenience, the type of contracts which may be awarded to the Company, and the
ability of the Company to fill the required staff positions to service those
contracts. These open positions require operations research and software
engineers, computer programmers, and other skilled scientists and engineers,
employees for whom there is a general shortage and a high degree of competitive
pressure. At December 31, 1996, the Company had openings for approximately 219
employees for
20
<PAGE>
positions related to PSO. This contrasts with the Company's openings at June 30,
1996 for 209 employees for positions related to PSO. An inability to fill a
substantial portion of these current openings could have a materially adverse
impact on PSO's revenue and profitability growth. Although PSO's contracts
number approximately 150, and the average contract size is small, the loss of
one or more of the larger contracts may have a substantial adverse impact on
PSO's revenues and profitability.
Events Leading to the Decision to Withdraw from the OSU Business
- ----------------------------------------------------------------
Late in the second quarter of fiscal 1997, the Company received the results
of two independent market analyses for the OSU(R) Network Interface product for
the non-governmental North American market.
The first survey, conducted by a leading market research consulting firm,
concluded that only a modest addressable market for the OSU-like product will
emerge over the next five years, and that the total cumulative market would be
limited to approximately 2,400 units by 2001, with the addressable market in
1997 and 1998 approximately 133 and 362 units, respectively.
The second market analysis was presented by a specialist firm focusing on a
theory of technology substitution (Fisher-Pry Substitution Curves), where, in
this case, the substitution is SONET based wideband telecommunications as a
substitution for asynchronous communications technology. The critical assumption
in this study is that as bandwidth requirements by many corporate and Internet
related applications begin to exceed DS-1 and DS-3 transmission rates, a
rationale, based on economics and scaleability, will develop to cause a major
movement to SONET based services. As a result, this study projected that the
addressable market for OSU-like devices will exceed 45,000 by 2004. The growth
in bandwidth demand must be sufficiently large to justify the investment by
telecommunications service companies in terminating equipment needed to shift
from current asynchronous to synchronous transmission protocols required for the
Company's product.
Of critical importance, however, to the OSU's near term prospects and the
Company's subsequent decision to withdraw from the OSU business, is the fact
that both studies agree that the addressable market for OSU-like devices through
1998 will remain relatively flat. This is borne out in the marketplace where
delays in broadband SONET service deployments have continued. The divergence
between the studies occurs in their respective estimates of the addressable
market after 1998.
In any case, based on the market surveys, in order for the Company to
achieve significant profits from the OSU product, in addition to the development
of market demand for the product, the product would probably need to be
redesigned so as to reduce its cost of goods sold. This would require further
investment in product development expense of approximately $2 million with
respect to the OSU.
At December 31, 1996, prior to the write down, the Company had $2.0 million
of capitalized software development costs on its balance sheet related to the
OSU product, which was being amortized over a 5-year period.
21
<PAGE>
As discussed below, with the Company's current liquidity shortages, the
Company has concluded that it is not possible for the Company to continue
investing at current levels in the OSU business. Consequently, the Company has
offered the OSU business unit for sale. In the absence of a sale, the OSU
business unit, as it is presently structured, will be shut down to preserve the
Company's liquidity. In the case of a shutdown, the Company would pursue the
sale of the intellectual property and other assets developed with respect to the
OSU.
Events Leading to the Decision to Withdraw from the NetworkVUE Business
- -----------------------------------------------------------------------
During the second fiscal quarter of 1997, the Company completed and
commercially released the initial version of its NetworkVUE suite of software
modules for the design and optimization of wide area networks. Additional
functionality for the initial release was scheduled to be completed by June
1997. This includes such features as the ability to design and simulate public
frame relay networks, including time division multiplexing and constant bit rate
transmission protocols. Longer term development would have included ISDN, ATM,
and LANs. These features may be important for the widespread acceptance of the
product by potential customers. Due to a lack of product sales, the Company's
operating plans shifted from a licensing of its software to the providing of
wide area network design and optimization services, using the NetworkVUE
software modules as a proprietary competitive advantage in offering these
services. The Company structured a co-marketing alliance with a major system
integrator and network consultant whereby the Company would provide design and
optimization services using its NetworkVUE software as a design tool. However,
the Company has not recognized significant product or service revenues from the
NetworkVUE software suite as released in October 1996.
With the Company's current liquidity shortages, it is not possible for the
Company to continue investing at current levels in the NetworkVUE business.
Consequently, the Company has offered the NetworkVUE business unit for sale. In
the absence of a sale, the NetworkVUE business unit, as its is presently
structured, will be shut down to preserve the Company's liquidity. In the case
of a shutdown, the Company would pursue the sale of the intellectual property
and other assets developed with respect to NetworkVUE.
New York Stock Exchange Continued Listing Requirements
- ------------------------------------------------------
The Company's shares of common stock are listed and traded primarily on the
New York Stock Exchange ("NYSE"), but also on the Pacific Stock Exchange. Rules
801.00 and 802.00 of the NYSE Listed Company Manual ("NYSE Manual") contain
standards for the potential de-listing from trading of a list company's
securities. At December 31, 1996, the Company did not comply with the net
tangible asset requirement of Rule 802. If the NYSE were to consider de-listing
the Company's common shares, it would consider the Company's compliance with the
original listing requirements contained in Rule 102.01. If so, the Company may
have difficulty complying with the requirements for "aggregate market value of
publicly-held shares" and the requirement for "demonstrated earning power". The
Company has not yet had any communications with the NYSE regarding this issue.
Events Subsequent to December 31, 1996
- --------------------------------------
Subsequent to December 31, 1996, the Company (i) took actions to reduce
operating expenses and cash used in operations, (ii) proceeded with steps
previously commenced to sell or shut down all business units within APD, (iii)
circulated offering memoranda in order to solicit purchase
22
<PAGE>
interests for its OSU and NetworkVUE business units, (iv) entered into financing
transactions to raise $4 million in a Convertible Debenture and $18 million in a
Structured Equity Financing Line (see Part II, Item 5 of this Form 10-Q), and
(v) continued pursuing actions as advised by its financial adviser, Smith
Barney, with respect to a full range of financial and strategic options for the
Company as a whole.
Operating Expense Reductions. During January 1997, the Company took steps
----------------------------
to reduce its operating expense levels and negative cash flow from a monthly
average outflow of $2.0 million per month during the first half of fiscal 1997
to approximately $1 million per month when "steady state" is achieved in June
1997. This was accomplished by reducing the level of employment in OSU,
NetworkVUE, and APD by laying off some employees and transferring others to PSO.
Sixty-one employees were laid off and 24 employees were transferred to PSO.
Severance payments amounted to approximately $566 thousand. By June 1997, the
monthly reduction in the cash outflow is expected to amount to a cash savings of
approximately $1 million. However, this would imply that the monthly cash
outflow in June related to OSU and NetworkVUE would still remain at
approximately $1 million per month, if no additional steps were taken, derived
approximately equally from the OSU and the NetworkVUE business units.
Therefore, the Company is taking additional steps to generate cash and reduce
expenses, as discussed below.
Disposition efforts regarding the Advanced Products Division. During the
------------------------------------------------------------
second quarter of fiscal 1997 and continuing in the third fiscal quarter
beginning January 1, 1997, the Company is pursuing the sale or shutdown of all
business units within APD. The Company anticipates these sales to be completed
in the near term. The cash generated from these sales will assist the Company by
providing additional short-term liquidity.
Offering Memoranda with respect to the OSU and NetworkVUE business units.
------------------------------------------------------------------------
The Company, in conjunction with its investment bankers, Smith Barney, has begun
circulating offering memoranda with respect to its OSU and NetworkVUE business
units within Telecom, seeking one or more potential buyers interested in
purchasing either of the business units. In the absence of sales, the Company
will shut down the respective units as they are presently structured, causing
further staff and operating expense reductions. In that event, the Company will
continue to seek to sell the intellectual property and other assets related to
those business units. Consequently, at December 31, 1996, the Company wrote off
$14.3 million in capitalized software and other assets related to those business
units.
Financing. On January 30, 1997, the Company issued $4 million face amount
---------
Convertible Debentures. The Company also entered into an $18 million structured
equity financing line whereby the investor may purchase up to $3 million of the
Company's common stock per quarter beginning six months after the effectiveness
of a registration statement, which the Company intends to file in the near
future. For details and other terms and conditions of these transactions, see
Part II, Item 5 of this Form 10-Q.
Liquidity and Capital Resources
- -------------------------------
The Company had $3.7 million in cash and cash equivalents at December 31,
1996, compared to $1 million at December 31, 1995 and $2.8 million at June 30,
1996.
Net cash used in operations amounted to $6.3 million for the first half
of fiscal 1997, compared to $1.4 million for the first half of fiscal 1996. Net
cash used in investing activities for
23
<PAGE>
the first half of fiscal 1997 amounted to $4.5 million, compared to $10.1
million for the prior year period. Net cash provided by financing activities
amounted to $11.7 million for the first half of fiscal 1997, compared to $9.8
million provided in the first half of fiscal 1996.
Cash flows from operations, adjusted for cash used in developing software,
was a negative $8.9 million and a negative $9.4 million in the first half of
fiscal 1997 and 1996, respectively.
During fiscal years 1994, 1995, 1996, and the first half of fiscal 1997,
the Company's total cash investment in operating losses, capital equipment, net
assets, including deferred software production costs, for Telecom amounted to
approximately $43 million, comprised of $23 million for OSU, $18 million for
NetworkVUE, and $2 million for ASG. This was funded primarily by a combination
of internally generated cash flows from PSO and from increased bank debt.
As a result of the increase in funded debt and continued operating losses
during the first half of fiscal 1997, the Company's ratio of total funded debt
to total capitalization amounted to 82%, compared to 48% at September 30, 1996
and 41% at June 30, 1996.
At December 31, 1996, the Company had $31.2 million of funded debt, $3.2
million of which was classified as short term, and $28.0 million of which was
classified as long term. Of the $31.2 million, $22.5 million was bank debt,
$6.8 million related to equipment lease financings, and $1.9 million was a note
payable related to the 1996 acquisition of assets from Quintessential Solutions,
Inc. The Company had no bank debt at June 30, 1995 and $17.8 million of bank
debt and equipment lease financings at June 30, 1996.
During the first half of fiscal 1997, the Company increased its bank debt
under the Loan Agreement by $12.1 million, a use of cash for operations and
investing activities of approximately $2.0 million per month. Due to the
reductions in operating expenses effected in January 1997, the Company expects
to reduce its cash outflow to $1 million per month by June 1997, with a
transition to that level during the intervening months. At December 31, 1996,
$4.5 million was the remaining balance available on the Company's revolving line
of credit. In January 1997, the Company issued $4 million in face amount of
Convertible Debentures. At January 31, 1997, the Company had approximately
$9.6 million in cash and available credit. The Company estimates that its
minimum required operating cash and credit level is approximately $4.5 million.
Given these requirements and projections of short term liquidity, the Company
has taken significant additional actions, as described above in the section
captioned "Events Subsequent to December 31, 1996".
The credit facilities with the Company's bank consist of a fully used $5
million term loan ("Term Loan"), a $22 million revolving line of credit
("Revolving Credit"), of which $17.5 million was used at December 31, 1996, and
a $6.8 million debt arising from the equipment financing ("Equipment Lease")
arranged with the bank's equipment leasing subsidiary. The Term Loan is due on
September 1, 1998, and bears interest at the bank's floating prime rate,
currently 8.25% per annum. The Revolving Credit is due on January 15, 1999,
and, if the Company is not in default, is automatically renewable for one-year
renewal terms unless the bank, at its option, delivers written notice of non-
renewal to the Company at least 15 months prior to the end of the initial term
or any renewal term. No notice of non-renewal was received by October 15, 1996,
and, thus, the Revolving Credit is repayable on January 15, 1999. The Revolving
Credit bears interest at the bank's floating prime rate, currently 8.25% per
annum. The Term
24
<PAGE>
Loan and Revolving Credit facilities are collateralized by the Company's working
capital and equipment. The Equipment Lease is for a term of 60 months which
commenced in June 1996.
The Amended and Restated Revolving Credit and Term Loan Agreement ("Loan
Agreement") containing the Term Loan and Revolving Credit was amended as of
March 31, 1996, and again as of June 30, 1996, to amend various financial ratio
covenants so as to bring the Company into compliance with those covenants as of
those dates. At September 30, 1996, the Company was in compliance with its
covenants under this Agreement. At December 31, 1996, the Company was in
breach of a financial covenant under the Loan Agreement, namely, a covenant
requiring that tangible net worth be at least $7 million, whereas the Company's
tangible net worth at December 31, 1996 was $4.2 million.
On February 7, 1997, the Loan Agreement was again amended as of December
31, 1996, to bring the Company into compliance by reducing the tangible net
worth requirement to $4 million as of December 31, 1996. For this purpose, the
$4 million raised by the Convertible Debenture issued in January 1997 is counted
as equity. In addition, certain other covenants were amended so that, under the
Company's plans and projections for the next twelve months, the Company expects
to remain in compliance with these covenants for that time period. By a letter
dated February 6, 1997, the Company's bank has stated its view that advances
under the Revolving Credit facility should not be used for leasehold
improvement office furniture or computer equipment, and the bank has asked that
the proceeds of business-unit sales be used to repay the $5 million Term Credit.
The Company and the bank are in continuing discussions on this subject.
If the Company is again in default under its Loan Agreement and cannot
secure a waiver or amendment from the bank, then, together with cross defaults
under the equipment leasing agreement, any amounts then outstanding under the
Term Loan, the Revolving Credit, and the Equipment Lease, which at December 31,
1996 amounted to $29 million, would immediately become due and payable.
Depending on the circumstances, it may not be possible for the Company to make
or finance such an immediate payment.
With respect to long-term liquidity, the principal amount outstanding under
the Revolving Credit, amounting to $17.5 million at December 31, 1996, is due in
January, 1999, unless again extended. In addition, the $5 million principal
amount outstanding under the Term Loan is due in September 1998. The Company is
actively considering whether and how to finance the repayment of this $22.5
million in debt. The Company believes that its anticipated cash flows will be
sufficient to repay the $6.8 million Equipment Lease Financing over its existing
60-month term.
However, if the Company can restructure the term of its debt, either with
the current bank lender or through a refinancing with an alternate source of
credit, and there can be no assurance that the Company will be able to do
either, then the Company believes that, with the shutdown of the OSU and
NetworkVUE business units, the Company should be able to service its debt and
amortize the outstanding principal balances over the next 5 years with the free
cash generated by the PSO operations and the anticipated draw down of the $18
million Structured Equity Line financing. The $18 million Structured Equity
Line, however, is subject to various terms and conditions, which may limit or
affect its availability. See Part II, Item 5 of this Form 10-Q.
25
<PAGE>
Classification of Bank Debt as Current or Long-Term on the Company's Balance
- ----------------------------------------------------------------------------
Sheet
- -----
The Company was in default of its Loan Agreement at December 31, 1996, but
secured an amendment on February 7, 1997 which brought the Company back into
compliance as of December 31, 1996 and amended the financial covenants
prospectively to levels which the Company believes, under its current plans and
projections for continuing operations, will allow the Company to remain in
compliance over the next twelve months. Whether the Company will remain in
compliance with the amended financial covenants under the Loan Agreement depends
on circumstances which may arise, such as the successful withdrawal from various
business units now held for disposition and the results of the Company's
operations.
In light of all of these factors, the Company continues to classify the
amounts outstanding under the Loan Agreement and the non-current amounts owing
under the Equipment Lease as long term debt, rather than as current liabilities.
Outlook
- -------
With the Company's withdrawal from the OSU, NetworkVUE and APD businesses,
the Company will focus on its growing and profitable PSO operation. After a
transition period, which will include substantial losses in the Company's third
fiscal quarter ending March 31, 1997, the Company expects to return to
profitability and generate positive cash flows from operations. Thereafter, the
remaining issue with respect to liquidity would be restructuring the term of the
Company's current bank debt so that it is amortized over a period of years, such
as a five year level debt service amortization period. With the positive free
cash flow expected from PSO and with the potential $18 million to be raised from
the Structured Equity Line financing, the Company should be able to service its
debt and reduce substantially the outstanding principal amount of bank debt
outstanding.
Risk Factors
- ------------
In order to accomplish the above described Outlook, the Company faces the
following risk factors:
. Properly executing a plan of withdrawal from the Company's OSU,
NetworkVUE and APD businesses.
. Managing continuing operations and the plan of withdrawal within the
Company's available short term liquidity resources.
. Restructuring the term of its bank debt either with the Company's
current bank or through a refinancing with an alternative source of
credit.
. Continuing the Company's successful efforts to grow the PSO business and
generate the positive free cash flow needed to support the debt service
described above.
26
<PAGE>
General risk factors include:
. The ability of PSO to keep and attract the personnel required to service
its current and future contract portfolio.
. The dependence of PSO upon the government contracting, and particularly
the U.S. Government, Department of Defense contracting business,
mentioned above in this Form 10-Q.
. The high degree of financial leverage under which the Company will
continue to operate until its current debt levels are reduced and its
equity levels increased.
. The dilution to current holders of the Company's common stock through
the issuance of additional equity to assist in paying down the debt.
. The availability of funds as required from the Structured Equity Line
Financing.
27
<PAGE>
PART II - OTHER INFORMATION
Items 1, 2, 3 and 4 are Inapplicable.
- -------------------------------------
Item 5 Other Information.
- -------------------------
On January 21, 1997, the Company entered into a Convertible Securities
Subscription Agreement ("Subscription Agreement") pursuant to which an investor
purchased a $4 million 5% Convertible Debenture due January 2000 ("Debenture").
Also on January 21, 1997, the Company entered into a Structured Equity Line
Flexible Financing Agreement ("Equity Line Agreement") whereby an investor may
purchase up to $18 million in the Company's Common Stock over a 3 1/2 year
period to begin later this calendar year.
The Debenture bears interest at a 5% rate per annum payable quarterly in cash
or, at the Company's option, the amount due may be added to the outstanding
principal due under the Debenture. The Debenture is convertible into the
Company's Common Stock at the lesser of (i) $11 per share, or (ii) 94% of the
low trade during the 3 trading days immediately preceding the date of
conversion. The investor also received a 7-year warrant to purchase 320,000
shares of the Company's Common Stock at a price of $8.47 per share ("Debenture
Warrant"). Under a related Registration Rights Agreement ("Registration Rights
Agreement"), the Company is obligated to file a registration statement with the
Securities and Exchange Commission with respect to the Company's Common Stock
into which the Debenture is convertible and for which the Debenture Warrant is
exercisable. If the Company is in default under the Debenture, the investor may
put the Debenture to the Company at 120% of the amount outstanding. The
Debenture Warrant is not exercisable for 18 months, but becomes immediately
exercisable if the Company sells substantially all of its assets or enters into
a merger or acquisition or other similar transaction, and in such event the
Debenture Warrant is repriced at the lesser of (i) $8.47 per share, or (ii) 80%
of the Transaction Value (as defined in the Debenture Warrant), and the investor
has the option to put the Debenture to the Company at 115% of the amount
outstanding. Other terms, conditions, and limitations apply to the Subscription
Agreement, the Debenture, the Registration Rights Agreement and the Debenture
Warrant. Each of these documents is included as an Exhibit to this Form 10-Q.
Under the Structured Equity Line Flexible Financing Agreement ("Equity Line
Agreement") the investor may, but is not required to, purchase up to $3 million
of the Company's Common Stock during the first 6 months of the effectiveness of
a registration statement under the Securities Act of 1933 for the shares to be
issued. For the 3 years after that initial 6-month period, the Company can
require the investor to purchase up to $3 million of the Common Stock per
quarter up to an aggregate maximum of $18 million under the Equity Line
Agreement. The purchase price is equal to 94% of the low trade price during the
3 trading days immediately preceding the notice of purchase by the investor.
The investor, however, may not purchase Common Stock at a price of less than $4
per share. If the Company issues less than $5 million of its Common Stock under
the Equity Line Agreement, it must pay the investor up to $300,000 as liquidated
damages. The investor also received a 7-year Warrant to purchase 125,000 shares
of the Company's Common Stock at a price of $8.47 per share ("Equity Line
Warrant"). If the Company elects to issue more than $5 million, the Company
will issue an additional 7-year warrant for the purchase of 75,000 shares of the
Company's Common Stock ("Additional Equity Line Warrant") at a price equal to
140% of the price of the Common Stock at the time of the issuance of the
Additional Equity Line Warrant. Under a related Registration Rights Agreement
("Registration Rights Agreement"), the Company is
28
<PAGE>
obligated to file a registration statement with the Securities and Exchange
Commission with respect to the Company's Common Stock for which the Equity Line
Warrant and the Additional Line Warrant (collectively, the "Equity Line
Warrants") are exchangeable. The Equity Warrant is not exercisable for 18
months, but becomes immediately exercisable if the Company sells substantially
all of its assets or enters into a merger or acquisition or other similar
transaction, and in such event is repriced at the lesser of (i) $8.47, or (ii)
80% of the Transaction Value (as defined in the Equity Line Warrant). The
Additional Equity Line Warrant, when issued, will contain provisions similar to
the Equity Line Warrant. The investor's obligation to purchase under the Equity
Line Agreement is subject to various conditions, including (i) the effectiveness
of a registration statement with respect to the underlying shares, (ii)
limitations based on the price and volume of the Company's Common Stock, and
(iii) the percentage of the Common Stock beneficially owned by the investor from
time to time. Other terms, conditions, and limitations apply to the Equity Line
Agreement, the Registration Rights Agreement and the Equity Line Warrant. Each
of these documents is included as an Exhibit to this Form 10-Q.
Item 6(a) Exhibits.
- -------------------
Exhibit No. Description
------- --- -----------
10.1 Fourth Confirmation and Amendment dated February 7, 1997 and
effective as of December 31, 1996 to Amended and Restated Revolving
Credit and Term Loan Agreement between the Company and Mercantile-
Safe Deposit and Trust Company
10.2 Convertible Securities Subscription Agreement dated as of January
21, 1997 between the Company and Halifax Fund, L.P. ("Halifax")
10.3 $4,000,000 5% Convertible Debenture Due January 30, 2000 (the
"Debenture") issued by the Company to Halifax
10.4 320,000 Share Common Stock Purchase Warrant issued by the Company to
Halifax in connection with the Debenture
10.5 Registration Rights Agreement dated as of January 30, 1997 between
the Company and Halifax relating to the Debenture
10.6 Structured Equity Line Flexible Financing Agreement ("Equity Line
Agreement") dated as of January 21, 1997 between the Company and
Cripple Creek Securities, LLC ("Cripple Creek")
10.7 125,000 Share Common Stock Purchase Warrant issued by the Company to
Cripple Creek in connection with the Equity Line Agreement
10.8 Registration Rights Agreement dated as of January 30, 1997 between
the Company and Cripple Creek relating to the Equity Line Agreement
Item 6(b) is Inapplicable
- -------------------------
29
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRC INTERNATIONAL, INC.
By: /s/ Ronald B. Alexander
--------------------------------------
Ronald B. Alexander
Senior Vice President, Treasurer, Chief
Financial Officer & Chief Accounting Officer
February 14, 1997
30
<PAGE>
Exhibit 10.1
------------
FOURTH CONFIRMATION AND AMENDMENT
---------------------------------
THIS FOURTH CONFIRMATION AND AMENDMENT (this "Amendment") is dated this 7th
day of February, 1997 and is effective as of December 31, 1996, by and among GRC
INTERNATIONAL, INC., a Delaware corporation (the "Borrower"), SWL INC., a
Virginia corporation ("SWL") GENERAL RESEARCH CORPORATION, a Virginia
corporation (GRC), and MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, a Maryland
banking institution (the "Bank").
RECITALS
--------
WHEREAS, pursuant to that certain Amended and Restated Revolving Credit and
Term Loan Agreement dated as of the 12th day of February, 1996, by and among the
Bank, the Borrower, SWL and GRC, the Bank established (i) a $15,000,000
revolving credit facility (the "Revolving Credit Loan") in favor of the Borrower
for general working capital purposes and other valid business purposes and (ii)
a $5,000,000 facility (the "Acquisition Facility") for the stated purpose of
providing bridge and/or term financing to fund acquisitions by the Borrower from
time to time, on the condition that advances under such facility would be at the
Bank's sole discretion; and
WHEREAS, pursuant to that certain First Confirmation and Amendment (the
"First Amendment") effective as of March 31, 1996, the parties amended the
above-referenced Loan Agreement for the purpose, among other things, (i) of
amending certain of the financial covenants of the Borrower established
thereunder and (ii) of providing that advances under the Acquisition Facility
may also be used for working capital and over valid business purposes, all as
more particularly set forth therein; and
WHEREAS, pursuant to that certain Second Confirmation and Amendment (the
"Second Amendment") effective as of June 30. 1996, the parties amended the
above-referenced Loan Agreement for the purpose, among other things, (i) of
increasing the Revolving Credit Loan from $15,000,000 to $22,000,000 and (ii) of
providing explicitly that the amount of the annual "Facility Fee" payable
pursuant to Section 1.7 thereof shall be at least $25,000 (such Loan Agreement,
as amended by the First Amendment and the Second Amendment, the "Loan
Agreement"), and
WHEREAS, pursuant to that certain Third Confirmation and Amendment (the
"Third Amendment") effective as of June 30, 1996 the parties amended the above-
referenced Loan Agreement for the purpose, among other things, (i) of extending
the maturity of the Term Loan referenced in Section 1.1(a) thereof and (ii) of
further amending certain financial covenants of the Borrower established
thereunder; and
WHEREAS, simultaneously with the execution of the Third Amendment, the Borrower
executed allonges to the promissory note evidencing such Term Loan and to
certain other promissory notes of the Borrower in favor of the Bank, for the
purpose of extending the maturities of the loans evidenced by such promissory
notes; and
<PAGE>
WHEREAS, the parties desire with this Amendment, among other things to
amend the Loan Agreement to further amend certain financial covenants of the
Borrower established thereunder; and
WHEREAS, all capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Loan Agreement.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby confirm and agree as follows:
1. The Borrower, SWL and GRC hereby confirm their obligations under, and
unconditionally and irrevocably covenant and agree to be bound by all of the
terms, provisions, covenants and conditions contained in the Loan Agreement, as
the same shall be amended hereby.
2. The Loan Agreement shall be amended as follows:
(a) Section 4.15(c) shall be amended and restated in its entirety, to read
as follows:
(c) Consolidated Tangible Net Worth. Consolidated tangible
--------------------------------
assets (excluding patents, copyrights, capitalized research and development
costs, goodwill and other intangible assets) in excess of consolidated
liabilities ("Consolidated Tangible Net Worth") by at least $4,000,000;
provided that for purposes of such calculation, the Borrowers Consolidated
Tangible Net Worth shall include debentures and other subordinated debt
obligations issued by the Borrower that are convertible by the holders
thereof into equity."
(b) Sections 4.15(e) and 4.15(g) shall be deleted in their entirety.
3. All other terns and conditions of the Loan Agreement shall remain
unchanged and shall continue in full force and effect.
4. The Borrower, SWL and GRC (i) will execute and deliver to the Bank such
additional financial statements, amendments to financing statements,
continuation statements and other documents, certificates, instruments and
agreements as the Bank deems necessary or advisable to accomplish or facilitate
the transactions contemplated hereby and will pay all filing, recordation and
registration fees and taxes incurred in connection therewith and (ii) will pay
all costs and expenses (including reasonable legal expenses) incurred by the
Bank in connection herewith.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and delivered this Third
Confirmation and Amendment under seal as of the day and year first above
written.
ATTEST/WITNESS: GRC INTERNATIONAL, INC.
(SEAL) By: (SEAL)
- ----------------- ----------------------------
Name:
Title
ATTEST/WITNESS: SWL INC.
(SEAL) By: (SEAL)
- ----------------- ---------------------------
Name:
Title
ATTEST/WITNESS: GENERAL RESEARCH CORPORATION
(SEAL) By: (SEAL)
- ----------------- ----------------------------
Name:
Title
ATTEST/WITNESS: MERCANTILE-SAFE DEPOSIT AND
TRUST COMPANY
(SEAL) By: (SEAL)
- ----------------- ----------------------------
Name:
Title
3
<PAGE>
Exhibit 10.2
------------
[HALIFAX]
CONVERTIBLE SECURITIES SUBSCRIPTION AGREEMENT
This Convertible Securities Subscription Agreement (the "Agreement") dated
as of January 21, 1997 has been executed by the undersigned (the "Subscriber")
in connection with the sale of 5% Convertible Debentures due January 30, 2000
(the "Debentures"), of GRC International, Inc., a Delaware corporation (the
"Company"), convertible into shares of Common Stock, par value $0.10 per share
(the "Common Stock"), of the Company. The Company is offering an aggregate
amount of $4,000,000 of Debentures at an aggregate price of $4,000,000 (the
"Offering"). The form of the Debentures, including the terms on which the
Debentures may be converted into Common Stock, is attached hereto as EXHIBIT A.
The solicitation of this Agreement and, if accepted by the Company, the offer
and sale of Debentures, are being made in reliance upon the provisions of
Regulation D ("Regulation D") promulgated by the Securities and Exchange
Commission ("SEC") under the United States Securities Act of 1933, as amended
(the "Securities Act"). The Debentures, the Common Stock issuable upon
conversion thereof, the Warrants issuable pursuant to the Common Stock Purchase
Warrant attached as Exhibit B hereto (the "Warrants") and the shares of Common
Stock issuable upon exercise thereof are sometimes collectively referred to in
this Agreement as the "Securities." The Common Stock issuable upon conversion
of the Debentures and upon the exercise of the Warrants is sometimes referred to
as the "Underlying Stock." Upon the terms and subject to the conditions set
forth herein, the Subscriber hereby agrees to purchase, and the Company hereby
agrees to issue and sell, the principal amount of Debentures and at the
aggregate purchase price set forth in Section 14. In consideration of the
mutual promises, representations, warranties and conditions set forth hereto,
and intending to be legally bound hereby, the Company and the Subscriber agree
as follows:
1. Agreement to Subscribe; the Subscriber
1.1 Purchase and Issuance of Debentures. The Subscriber hereby
----------------------------------
subscribes for the principal amount of Debentures and at the
aggregate purchase price set forth in Section 14. The closing of
the purchase (the "Closing") shall occur on January 30, 1997 (the
"Closing Date"); provided that (i) the purchase price has been
delivered by the Subscriber to the Company, a mutually acceptable
escrow agent or as otherwise agreed between the parties (in same
day funds via a wire transfer pursuant to instructions previously
delivered for such purpose), (ii) the Debentures subscribed for
hereby shall have been executed, issued and delivered by the
Company to Subscriber, a mutually acceptable escrow agent or as
otherwise agreed between the parties, (iii) the Common Stock
Purchase Warrant shall have been executed, issued and delivered
by the Company to Subscriber and (iv) other conditions precedent
to the obligations of the Subscriber set forth herein shall have
been satisfied.
1.2 Nature of the Subscriber. The Subscriber is either purchasing
-----------------------
the Debentures for its own account or as an agent for a principal
(under a discretionary or similar account), in which case all of
the representations,
<PAGE>
warranties, covenants and agreements of the Subscriber herein
shall be deemed to apply to such principal and not the Subscriber
and to have been made by such principal and not by the
Subscriber. In such case, the Subscriber so acting as agent
represents and warrants that (a) its principals have confirmed to
the Subscriber the accuracy of such representations and
warranties with respect to its principals, and (c) the Subscriber
has full authority to act on behalf of its principal in executing
and delivering this Agreement and consummating the transactions
contemplated hereby.
1.3 Conditions Precedent to the Obligation of the Company to Sell the
-----------------------------------------------------------------
Debentures. The obligation hereunder of the Company to issue
----------
and/or sell the Debentures to the Subscriber is subject to the
satisfaction, at or before the Closing, of each of the conditions
set forth below. These conditions are for the Company's sole
benefit and may be waived by the Company at any time in its sole
discretion.
(a) Accuracy of the Subscriber's Representations and Warranties.
-----------------------------------------------------------
The representations and warranties of the Subscriber shall
be true and correct as of the date when made and in all
material respects as of the Closing Date as though made at
each such time.
(b) Performance by the Subscriber. The Subscriber shall have
-----------------------------
performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with
by the Subscriber at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive
-------------
order, decree, ruling or injunction shall have been enacted,
entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions
contemplated by this Agreement, and no proceeding shall have
been commenced which may have the effect of prohibiting or
adversely affecting any of the transactions contemplated
hereby.
1.4 Conditions Precedent to the Obligation of the Subscriber to
-----------------------------------------------------------
Purchase the Debentures. The obligation of Subscriber hereunder
-----------------------
to acquire and pay for the Debentures is subject to the
satisfaction, at or before the Closing, of each of the following
conditions. Each of these conditions is for Subscriber's sole
benefit and may be waived by Subscriber at any time in its sole
discretion.
(a) Accuracy of the Company's Representations and Warranties.
--------------------------------------------------------
The representations and warranties of the Company shall be
true and correct as of the date when made and in all
material respects as of the Closing Date as though made at
each such time.
2
<PAGE>
(b) Performance by the Company. The Company shall have
--------------------------
performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with
by the Company at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive
-------------
order, decree, ruling or injunction shall have been enacted,
entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which
prohibits or adversely effects any of the transactions
contemplated by this Agreement, and no proceeding shall have
been commenced which may have the effect of prohibiting or
adversely affecting any of the transactions contemplated
hereby.
(d) Adverse Changes. For the period from September 30, 1996
---------------
until Closing except as publicly disclosed since September
30, 1996 in Company press releases or Exchange Act filings
issued or made prior to or on the date hereof listed on
Schedule 1.4(d) ("Prior Public Disclosures"), no event shall
have occurred or be threatened to occur which has had or is
likely to have a Material Adverse Effect on the Company and
its subsidiaries taken as a whole. The Company shall have
received and delivered to the Subscriber (i) the consent of
all applicable lenders to the issuance of the Debentures and
(ii) the waiver of any and all pending events of default (or
pending events which with lapse of time or notice or both
would constitute an event of default) thereunder.
(e) No Suspension of Trading in or Delisting of Common Stock.
--------------------------------------------------------
The trading in the Common Stock shall not have been
suspended by the SEC, the New York Stock Exchange (the
"NYSE") or the National Association of Securities Dealers,
Inc. (the "NASD"); the Common Stock shall not have been
delisted from the NYSE; and trading in securities generally
as reported by the NYSE shall not have been suspended or
limited or minimum prices shall not have been established on
securities whose trades are reported by the NYSE.
(f) Legal Opinion. The Company shall have delivered to the
-------------
Subscriber opinions of the General Counsel of the Company
and Arnold & Porter, independent counsel to the Company,
each in form and substance reasonably satisfactory to the
Subscriber.
(g) Officer's Certificate. The Company shall have delivered to
---------------------
the Subscriber a certificate in form and substance
reasonably satisfactory to the Subscriber, executed by an
executive officer of the Company, to the effect that all the
conditions to the Closing shall have been satisfied.
3
<PAGE>
(h) Registration Rights Agreement. The Company and the
-----------------------------
Subscriber shall have entered into the Registration Rights
Agreement contemplated by Section 5.1.
(i) Common Stock Purchase Warrant. The Company shall execute
-----------------------------
and deliver the Common Stock Purchase Warrant to the
Subscriber.
2. Representations and Warranties of Subscriber
The Subscriber represents and warrants to the Company that:
2.1 No Government Recommendation or Approval. The Subscriber understands
----------------------------------------
that no United States federal or state agency or similar agency of any
other country, has passed upon or made any recommendation or
endorsement of the Company or the offering of the Securities.
2.2 Intent. The Subscriber is purchasing the Securities for its own
------
account and not with a view towards distribution and the Subscriber
has no present arrangement to sell the Debentures or the Underlying
Stock to or through any person or entity; provided, however, that by
making the representation herein, the Subscriber does not agree to
hold the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in
accordance with federal and state securities laws applicable to such
disposition. The Subscriber understands that the Securities must be
held indefinitely unless such Securities are subsequently registered
under the Securities Act or an exemption from registration is
available. The Subscriber has been advised or is aware of the
provisions of Rule 144 promulgated under the Securities Act.
2.3. Sophisticated Investor. The Subscriber is a sophisticated investor
----------------------
(as defined in Rule 506(b)(2)(ii) of Regulation D promulgated under
the Securities Act ("Regulation D")) and an accredited investor (as
defined in Rule 501 of Regulation D), and Subscriber has such
experience in business and financial matters that it is capable of
evaluating the merits and risks of an investment in the Securities.
The Subscriber acknowledges that the Securities are speculative and
involve a high degree of risk.
2.4. Independent Investigation. The Subscriber, in making the decision to
-------------------------
purchase the Securities subscribed for hereunder, has relied upon an
independent investigation made by it and/or its representatives and
has not relied on any information or representations made by third
parties or on any oral or written representations or assurances from
the Company or any representative or agent of the Company other than
as set forth in this Agreement and the public filings of the Company,
the Prior Public Disclosures and the documents described below. Prior
to the date hereof, the Subscriber has been furnished with and has
reviewed the Company's latest proxy statement and Annual Report on
Form 10-K sent to the Company's shareholders and all documents filed
by the Company with the Securities and Exchange Commission (the "SEC")
since June 30, 1993 pursuant to sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
excluding preliminary
4
<PAGE>
proxy statement filings (such documents are collectively referred to
in this Agreement as the "Exchange Act Reports" and the Prior Public
Disclosures). Subject to the foregoing, the Subscriber has had a
reasonable opportunity to ask questions of and receive answers from
the Company concerning the Company and the Offering and has received
complete and satisfactory answers to all inquiries it has made with
respect to the Company and the Securities. The Subscriber acknowledges
the price and terms of the Securities offered hereby has been
determined by negotiation based in part on the market price for the
Common Stock, and does not necessarily bear any relationship to the
assets, book value or potential performance of the Company or any
other recognized criteria of value.
2.5 Authority. This Agreement has been duly authorized and validly
---------
executed and delivered by the Subscriber and is a valid and binding
agreement enforceable in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the
enforcement of creditors' rights generally.
2.6 No Legal Advice from Company. The Subscriber acknowledges that it has
----------------------------
had the opportunity to review this Agreement and the transactions
contemplated by this Agreement with its own legal counsel and
investment and tax advisors. Except for any statements or
representations of the Company made in this Agreement and the legal
opinion called for by Section 1.4 hereof, the Subscriber is relying
solely on such counsel and advisors and not on any statements or
representations of the Company or any of its representatives or agents
for legal, tax or investment advice with respect to this investment,
the transactions contemplated by this Agreement or the securities laws
of any jurisdiction.
2.7 No Brokers. The Subscriber has taken no action which would give rise
----------
to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Company relating to this Agreement or the
transactions contemplated hereby.
2.8 Not an Affiliate. The Subscriber is not an officer, director or
----------------
"affiliate" (as that term is defined in Rule 405 of Securities Act) of
the Company.
2.9 Reliance on Representations and Warranties. The Subscriber
------------------------------------------
understands that the Securities are being offered and sold to it in
reliance on specific provisions of United States federal and state
securities laws and that the Company is relying upon the truth and
accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Subscriber set forth in this
Agreement in order to determine the applicability of such provisions.
3. Representations and Warranties of Company
The Company represents and warrants to the Subscriber that:
3.1 Company Status. The Company has registered its Common Stock pursuant
--------------
to Section 12(b) or 12(g) of the Exchange Act, is in full compliance
with all reporting requirements of the Exchange Act, and the Company
has maintained all requirements for the continued listing of its
common stock, and such common
5
<PAGE>
stock is currently listed, on the NYSE. The Company is eligible to use
Form S-3 under the Securities Act.
3.2 Current Public Information. The Exchange Act Reports are the only
--------------------------
filings made by the Company since June 30, 1993 pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act.
3.3 No Directed Selling Efforts or General Solicitation in Regard to this
---------------------------------------------------------------------
Transaction. The Company has not conducted any general solicitation
-----------
(as that term is used in Regulation D) with respect to any of the
Securities, nor has it made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that
would require registration of the Securities under the Securities Act.
3.4 Valid Issuance of Debentures and Capital Stock. The Company has an
----------------------------------------------
authorized capitalization consisting of 30,000,000 shares of Common
Stock, par value $0.10 per share. The Company has issued and
outstanding 9,642,557 shares of Common Stock on the date hereof,
300,000 of which are held in treasury. All of the issued shares of
capital stock of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable; prior to the Closing Date,
the authorized capitalization shall include the Securities; upon
issuance of the Securities, the Securities will be duly and validly
issued, fully paid and non-assessable; the shares of Common Stock
issuable upon conversion or exercise of the Debentures and the
Warrants, when issued and delivered in accordance with the terms of
the Debentures and the Warrants, will be duly and validly issued,
fully paid and non-assessable; and the holders of outstanding capital
stock of the Company are not and shall not be entitled to preemptive
or other rights afforded by the Company to subscribe for the capital
stock or other securities of the Company as a result of the sale of
the Securities or the issuance of Common Stock upon the conversion or
exercise thereof.
3.5 Organization and Qualification. The Company is a corporation duly
------------------------------
incorporated and existing in good standing under the laws of the State
of Delaware and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The
Company does not have any subsidiaries except as listed in EXHIBIT D
hereto. The Company and each such subsidiary, if any, is duly
qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary
other than those in which the failure so to qualify would not have a
Material Adverse Effect. "Material Adverse Effect" means any material
adverse effect on the business, operations, properties, prospects, or
financial condition of the Company and its subsidiaries taken as a
whole and/or any condition or situation which would prohibit or
otherwise adversely interfere with the ability of the Company to enter
into and perform its obligations under this Agreement, the Debentures,
the Registration Rights Agreement and the Common Stock Purchase
Warrants.
3.6 Authorization: Enforcement. (i) The Company has the requisite
--------------------------
corporate power and authority to enter into and perform this Agreement
and the Registration
6
<PAGE>
Rights Agreement and to issue the Securities in accordance with the
terms hereof and thereof, (ii) the execution, issuance and delivery of
this Agreement, the Registration Rights Agreement, the Debentures and
the Common Stock Purchase Warrants by the Company and the consummation
by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action, and no further
consent or authorization of the Company or its Board of Directors or
stockholders is required, (iii) this Agreement has been, and on the
Closing Date the Registration Rights Agreement, the Debentures and the
Common Stock Purchase Warrants will be, duly executed and delivered by
the Company and (iv) this Agreement constitutes, and upon execution,
issuance and delivery thereof the Registration Rights Agreement, the
Debentures and the Common Stock Purchase Warrants shall be, valid and
binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws relating
to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
3.7 Corporate Documents. The Company has furnished or made available to
-------------------
the Subscriber true and correct copies of the Company's Certificate of
Incorporation as in effect on the date hereof (the "Certificate of
Incorporation"), and the Company's By-Laws, as in effect on the date
hereof (the "By-Laws"), certified in each case by the Secretary of the
Company.
3.8 No Conflicts. The execution, delivery and performance of this
------------
Agreement, including the conversion of the debentures into, and the
exercise of the Warrants for, the Common Stock of the Company, the
Registration Rights Agreement, the Debentures and the Common Stock
Purchase Warrants by the Company and the consummation by the Company
of the transactions contemplated hereby and thereby do not and will
not (i) result in a violation of the Company's Certificate of
Incorporation or By-Laws or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would
become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture
or instrument to which the Company or any of its subsidiaries is a
party, or result in a violation of any federal, state, local or
foreign law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the
Company or any of its subsidiaries or by which any property or asset
of the Company or any of its subsidiaries is bound or affected (except
for such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect); provided that, for
purposes of such representation as to federal, state, local or foreign
law, rule or regulation, no representation is made herein with respect
to any of the same applicable solely to the Subscriber and not to the
Company. The business of the Company and its subsidiaries is not
being conducted in violation of any law, ordinance or regulations of
any governmental entity, except for possible violations which either
singly or in the aggregate do not and will not have a Material Adverse
Effect. The Company is not required under federal, state or local
law, rule or regulation in the United States to obtain any consent,
authorization or order of, or make any filing or
7
<PAGE>
registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this
Agreement or the Registration Rights Agreement or issue and sell the
Securities in accordance with the terms hereof and thereof (other than
any SEC, NYSE, NASD or state securities filings which may be required
to be made by the Company subsequent to the Closing, and any
registration statement which may be filed pursuant hereto); provided
that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Subscriber herein.
3.9 Exchange Act Reports. The Company has delivered or made available to
--------------------
the Subscriber true and complete copies of the Exchange Act Reports
(including, without limitation, proxy information and solicitation
materials). The Company has not provided to the Subscriber any
information which, according to applicable law, rule or regulation,
should have been disclosed publicly by the Company but which has not
been so disclosed. As of their respective dates, the Exchange Act
Reports complied (and as of its effective date, the Registration
Statement for the Underlying Stock will comply) in all material
respects with the requirements of the Exchange Act (or in the case of
such Registration Statement, the Securities Act) and the rules and
regulations of the SEC promulgated thereunder and other applicable
federal, state and local laws, rules and regulations, and none of the
Exchange Act Reports contained (and, as of its effective date, such
Registration Statement will not contain) any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included (or to
be included) in the Exchange Act Reports and the Registration
Statement comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
SEC or other applicable rules and regulations with respect thereto.
Such financial statements have been (or will be) prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed or summary
statements) and fairly present (or will fairly present) in all
material respects the consolidated financial position of the Company
as of the dates thereof and the consolidated results of operations and
cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
3.10 No Material Adverse Change. Since September 30, 1996, the date
--------------------------
through which the most recent Quarterly Report of the Company on Form
10-Q has been prepared and filed with the SEC, a copy of which is
included in the Exchange Act Reports, except as disclosed in the Prior
Public Disclosures, no Material Adverse Effect has occurred or exists
with respect to the Company and its subsidiaries taken as a whole.
3.10A No Violation of Creditor Covenants. Except as set forth in Schedule
----------------------------------
3.10A, no event of default has occurred and is continuing (or event
which with lapse of
8
<PAGE>
time or notice or both would constitute such an event) under any of
the revolving credit facilities or other financing arrangements of the
Company or its subsidiaries.
3.11 No Undisclosed Liabilities. The Company and its subsidiaries have no
--------------------------
liabilities or obligations not disclosed in the Exchange Act Reports,
other than those incurred in the ordinary course of the Company's or
its subsidiaries' respective businesses since September 30, 1996 and
which, individually or in the aggregate, do not or would not have a
Material Adverse Effect on the Company and its subsidiaries taken as a
whole.
3.12 No Undisclosed Events or Circumstances. No event or circumstance has
--------------------------------------
occurred or exists with respect to the Company or its subsidiaries or
their respective business, properties, prospects, operations or
financial condition, which, under applicable law, rule or regulation,
requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.
3.13 No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf has, directly
or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would require
registration of the Securities under the Securities Act.
3.14 No Brokers. The Company has taken no action which would give rise to
----------
any claim by any person for brokerage commissions, finder's fees or
similar payments by the Subscriber relating to this Agreement or the
transactions contemplated hereby, except for dealings with Investment
Research International, whose commissions and fees will be paid for by
the Company.
3.15 Effectiveness of SEC Filings. The SEC has not issued any stop order
----------------------------
or other order suspending the effectiveness of any registration
involving the Company or its subsidiaries.
3.16 No Material Litigation Proceedings. Except as disclosed in the
----------------------------------
Exchange Act Reports, neither the Company nor any of its subsidiaries
is a party to or the subject of any litigation, arbitration or other
proceeding which if adversely determined would singly or in the
aggregate have a Material Adverse Effect.
4. Covenants of the Subscriber
4.1 Resales. The Subscriber shall not make any offers or sales of the
-------
Securities other than pursuant to a registration statement under the
Securities Act or pursuant to an exemption from registration under the
Securities Act. Subscriber will comply with applicable prospectus
delivery requirements.
4.2 Low Trades. The Subscriber covenants and agrees that it will not,
----------
directly or through any Affiliate, (i) create the lowest reported
sales price on the NYSE (or NASDAQ National Market System) for the
Common Stock on any trading day or (ii) offer to sell shares of Common
Stock at a price lower than the then prevailing
9
<PAGE>
bid price for the Common Stock on the NYSE (or NASDAQ National Market
System).
5. Covenants of the Company
5.1 Registration Rights. The Company will file and use its best efforts
-------------------
to cause to become effective, as promptly as possible a registration
statement ("Registration Statement") on Form S-3 under the Securities
Act (or in the event that the Company is ineligible to use such form,
such other form as the Company is eligible to use under the Securities
Act) covering the resale of the Underlying Stock issuable on
conversion of the Debentures and shall take all action necessary to
qualify the Underlying Stock under all applicable state "blue sky"
laws, in accordance with terms of the Registration Rights Agreement
(the "Registration Rights Agreement") in the form of EXHIBIT C hereto,
which the Company and the Subscriber shall enter into at the Closing
of this Agreement.
5.2 Reservation of Common Stock. As of the date hereof, the Company has
---------------------------
reserved and the Company shall continue to reserve and keep available
at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue
shares of its Common Stock upon conversion of the Debentures;
provided, however, that the number of shares so reserved shall at all
times be at least 1,800,000 shares. The number of shares so reserved
may be reduced by the number of shares actually delivered pursuant to
conversion of Debentures (provided that in no event shall the number
of shares so reserved be less than the number required to satisfy the
remaining conversion rights on the unconverted Debentures) and the
number of shares so reserved shall be increased to reflect stock
splits and stock dividends and distributions.
5.3 Listing of Underlying Shares. The Company hereby agrees, promptly
----------------------------
following the Closing of the transactions contemplated by this
Agreement, to take such action to cause the Underlying Stock to be
listed on the NYSE as promptly as possible but no later than the
effective date of the Registration Statement referred to in Section
5.1. The Company further agrees, if the Company applies to have the
Common Stock traded on any other principal stock exchange or market,
it will include in such application the Underlying Stock and will take
such other action as is necessary to cause the Underlying Stock to be
listed on such other exchange or market as promptly as possible.
5.4 Exchange Act Registration. The Company will cause its Common Stock to
-------------------------
continue to be registered under Section 12(g) or 12(b) of the Exchange
Act, will comply in all respects with its reporting and filing
obligations under said Act, and will not take any action or file any
document (whether or not permitted by said Act or the rules
thereunder) to terminate or suspend such registration or to terminate
or suspend its reporting and filing obligations under said Act. The
Company will take all action necessary to continue the listing and
trading of its Common Stock on the NYSE (or the NASDAQ National Market
System) and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the NASD and
the NYSE (or the NASDAQ National Market System, if the Common Stock is
so listed).
10
<PAGE>
5.5 Legends. The Underlying Stock and certificates evidencing the same
-------
shall at all times be free of legends (except as provided in Section
6.1 below), "stop transfers", "stock transfer restrictions" or other
restrictions, upon the effectiveness of the Registration Statement.
5.6 Corporate Existence. The Company will take all steps necessary to
-------------------
preserve and continue the corporate existence of the Company.
5.7 Right of First Refusal. In the event that at any time or from time to
----------------------
time during the six (6) month period immediately following the Closing
Date, the Company proposes to issue or sell any shares of its Common
Stock or any of its securities which are convertible into or
exchangeable for its Common Stock or any convertible security, or any
warrants or other rights to subscribe for or to purchase or any
options for the purchase of its Common Stock (other than shares or
options issued or which may be issued pursuant to the Company's
employee, officer, director or consultant stock or option or similar
equity-based compensation plans or shares issued upon exercise of
options, warrants or rights outstanding on the Closing Date listed in
the Exchange Act Reports) whether singly or together with other
securities at an effective purchase price per Common Share which is at
a discount to the Market Price Per Common Share, then the Company
shall give written notice (the "Proposal Notice") to the Subscriber of
such proposed issuance, specifying the terms thereof in reasonable
detail, and the Subscriber shall have the right, exercisable by
written notice delivered within 30 days of the date of receipt by the
Subscriber of the Proposal Notice, to subscribe for and purchase all
(or such lesser portion as the Subscriber shall specify in writing) of
the Common Stock or other securities proposed to be issued, on terms
and conditions no less favorable to the Subscriber as those specified
in the Proposal Notice.
5.8 Withholding. It is the intent of the Company that the Debentures be
-----------
treated as "registered obligations" under Section 871(h)(2)(B) of the
Internal Revenue Code of 1986, as amended (the "Code") and that the
interest payments thereon be treated as "portfolio interest" within
the meaning of Section 871(h) of the Code. Assuming no changes in the
current law applicable hereto, so long as the Subscriber (or any
transferee thereof who is a "Holder" under the Debenture) complies
with the requirements for exemption from taxation under the Code
(including any compliance with any documentation requirements
reasonably requested by the Company to establish and support such
exemption) and the interest on the Debentures is not determined to be
other than "portfolio interest", the Company agrees that it shall not
withhold federal income taxes in respect of interest payments on the
Debentures.
6. Legends; Subsequent Transfer of Securities; Denominations
6.1 Legend. The Company will issue one or more Debentures in the name of
------
the Subscriber and in such denominations to be specified by the
Subscriber prior to (or from time to time subsequent to) Closing. The
Debentures, and any shares of Common Stock issued upon conversion
thereof prior the effectiveness of the Registration Statement, will
bear the following legend (the "Legend"):
11
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
Following the effectiveness of the Registration Statement, the Company
will promptly instruct its transfer agent, upon surrender of the
Debentures for conversion and/or Underlying Stock, to remove the
Legend from any of the Underlying Stock. In addition, and if
applicable, the Company shall reissue certificates representing the
Securities without the legend set forth above at such time as (i) the
Holder thereof is permitted to dispose of such Securities pursuant to
Rule 1 44(k) under the Securities Act or (ii) the Securities are sold
to a purchaser or purchasers in a transaction exempt from registration
under the Securities Act, as evidenced by an opinion of counsel to the
transferor delivered to and reasonably satisfactory to the Company.
6.2 No Other Legend or Stock Transfer Instructions. No legend has been or
----------------------------------------------
shall be placed on the share certificates representing the Securities
and no stock transfer instructions have been or shall be given to the
Company's transfer agent with respect thereto other than as set forth
in this Section 6.
6.3 Subscriber's Compliance. Nothing in this section shall affect in any
-----------------------
way the Subscriber's obligations and agreement to comply with all
applicable securities laws upon resale of the Securities.
6.4 Other Restrictions on Transfer. The Subscriber shall not transfer the
------------------------------
Debentures or the Common Stock Purchase Warrants to any party not
constituting an affiliate of the Palladin Group, L.P. without the
prior written consent of the Company, which consent shall not be
unreasonably withheld or delayed.
7. Governing Law; Jurisdiction; Waiver of Jury Trial
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflicts of
law or choice of law. The Company and Subscriber hereby agree that all
actions or proceedings arising directly or indirectly from or in connection
with this Agreement shall be litigated only in the Supreme Court of the
State of New York or the United States District Court for the Southern
District of New York located in New York County, New York. To the extent
permitted by applicable law, the Company and Subscriber consent to the
jurisdiction and venue of the foregoing courts and consent that any process
or notice of motion or other application to either of said courts or a
judge thereof may be served inside or outside the State of New York or the
Southern District of New York by registered mail, return receipt requested,
directed to the such party at its address set forth in this Agreement (and
service so made shall be deemed complete five (5) days after the same has
been posted as aforesaid) or by personal service or in such other manner as
12
<PAGE>
may be permissible under the rules of said courts. The parties hereto
hereby waive any right to a jury trial in connection with any litigation
pursuant to this Agreement.
8. Assignment; Entire Agreement; Amendment
8.1 Assignment. Neither this Agreement nor any rights of the Subscriber
----------
hereunder may be assigned by either party to any other person.
Notwithstanding the foregoing, the provisions of this Agreement, the
Debentures and the Registration Rights Agreement shall inure to the
benefit of, and be enforceable by, any transferee of any of the
Securities purchased by the Subscriber hereunder with respect to the
Securities held by such person.
8.2 Entire Agreement: Amendment. This Agreement, the Debentures, the
---------------------------
Registration Rights Agreement, the Common Stock Purchase Warrant and
the other documents delivered pursuant hereto constitute the full and
entire understanding and agreement between the parties with regard to
the subjects hereof and thereof, and no party shall be liable or bound
to any other party in any manner by any warranties, representations or
covenants except as specifically set forth in this Agreement or
therein. Except as expressly provided in this Agreement, neither this
Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or
termination is sought.
9. Publicity
The Company agrees that it will not disclose, and will not include in any
public announcement, the name of the Subscriber without its expressed
written consent, unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
Except as may be required by law, the Company and the Subscriber shall
consult with each other before issuing any press release or otherwise
making any public statements with respect to this Agreement and shall not
issue any such press release or make any such public statement prior to
such consultation.
10. Notices, Etc.; Expenses; Indemnity
10.1 Notices. Any notice, demand or request required or permitted to be
-------
given by either the Company or the Subscriber pursuant to the terms of
this Agreement shall be in writing and shall be deemed given when
delivered personally or by facsimile, with a hard copy to follow by
two day courier addressed to the parties at the addresses of the
parties set forth at the end of this Agreement or such other address
as a party may request by notifying the other in writing. Copies of
all notices to the Subscriber shall be sent to its designee or
representative.
10.2 Costs and Expenses. The Company shall be responsible for the
------------------
Subscriber's costs and expenses, due and payable at Closing,
(including legal fees and expenses) incurred in entering into this
Agreement and the transactions contemplated hereby and in conducting a
due diligence examination in
13
<PAGE>
connection with the transactions contemplated hereby, but not to
exceed $20,000.
10.3 Indemnification. Each party shall indemnify the other against any
---------------
loss, cost or damages (including reasonable attorney's fees and
expenses) incurred as a result of such parties' breach of any
representation, warranty, covenant or agreement in this Agreement.
11. Counterparts
This Agreement may be executed in any number of counterparts, each of which
shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
12. Survival; Severability
The representations, warranties, covenants and agreements of the parties
hereto shall survive the Closing notwithstanding any due diligence
investigation conducted by or on behalf of the Subscriber. In the event
that any provision of this Agreement becomes or is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision; provided
that no such severability shall be effective if it materially changes the
economic benefit of this Agreement to any party.
13. Titles and Subtitles
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this
Agreement.
14. Amount
The undersigned hereby subscribes for U.S.$4,000,000 in principal amount of
Debentures.
[SIGNATURE PAGE FOLLOWS]
14
<PAGE>
Subscriber's Representative Name of the Subscriber
HALIFAX FUND, L.P.
By: THE PALLADIN GROUP, L.P.,
- ------------------------------- as Attorney-in-Fact
Name:
By: PALLADIN CAPITAL MANAGEMENT, L.L.C.,
General Partner
40 West 57th St., NY, NY 10019 By:
- ------------------------------- ------------------------------------
Address Andrew Kaplan, Authorized Representative
- -------------------------------
Telephone
Date of Subscription:
------------------
212 698 0599
- -------------------------------
Fax Place of Execution: New York
------------------
Place of Organization or Citizenship:
Cayman Islands
Place of Residency and/or Principal Place of
Business
c/o CITCO Fund Services (Cayman
Islands) Limited
Corporate Center, West Bay Road
-------------------------------
Grand Cayman, Cayman Islands, BWI
---------------------------------
Attn: Patrick Agemian/Dre Barten
---------------------------------
(Telephone): (809) 949-3977
--------------
(Fax): (809) 949-3877
--------------
Registration instructions:
(Name) (Please Print) Halifax Fund, L.P.
------------------
15
<PAGE>
THIS SUBSCRIPTION IS ACCEPTED BY THE COMPANY ON THE 21st DAY OF
JANUARY 1997.
GRC INTERNATIONAL, INC.
By:
-----------------------------
Print Name: T E McCabe
Its: SVP, Gen. Cnsl. & Sec'y.
Address: 1900 Gallows Rd.
Vienna, VA 22182
16
<PAGE>
EXHIBIT A
FORM OF DEBENTURE
<PAGE>
EXHIBIT B
COMMON STOCK PURCHASE WARRANT
<PAGE>
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT D
SUBSIDIARIES OF THE COMPANY
General Research Corporation
SWL Inc.
<PAGE>
SCHEDULE 1.4(d)
PRIOR PUBLIC DISCLOSURES
<TABLE>
<CAPTION>
Press Releases
- --------------
<C> <S>
1. October 7, 1996
2. October7, 1996
3. October 15, 1996
4. October 17, 1996
5. October31, 1996
6. November 1, 1996
7. November 13, l996
8. December9, 1996
9. December 19, 1996
10. Press Release to be issued on or about January 22, 1997 in conjunction with
the execution of this Agreement.
</TABLE>
<PAGE>
SCHEDULE 3.10A
VIOLATION OF CREDITOR COVENANTS
Default under Section 4.6 (unsecured indebtedness covenant) and potential event
of default under Section 4.1 5(c)(minimum Tangible Net Worth covenant) under the
terms of the Amended and Restated Revolving Credit and Term Loan Facility, dated
as of February 12, 1996, by and among GRC International, Inc., SWL Inc., General
Research Corporation and Mercantile Safe Deposit & Trust Company.
Default and potential default have been waived by Mercantile Safe Deposit &
Trust Company pursuant to a letter dated January 6, 1997.
<PAGE>
Exhibit 10.3
------------
[HALIFAX]
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
No. 1 $4,000,000
GRC INTERNATIONAL, INC.
5% CONVERTIBLE DEBENTURE DUE JANUARY 30, 2000
THIS DEBENTURE ("Debenture") is one of a duly authorized issue of
Debentures of GRC International, Inc., a corporation duly organized and existing
under the laws of the State of Delaware (the "Company"), designated as its 5%
Convertible Debentures Due January 30, 2000, in an aggregate principal amount of
Four Million U.S. Dollars (U.S. $4,000,000) (the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to HALIFAX FUND, L.P.
the holder hereof, or its order (the "Holder"), the principal sum of Four
Million United States Dollars (U.S. $4,000,000) on January 30, 2000 (subject to
extension as provided herein, the "Maturity Date") and to pay interest on the
principal sum outstanding under this Debenture ("Outstanding Principal Amount"),
at the rate of 5% per annum due and payable quarterly in arrears on the last day
of March, June, September and December of each year (each an "Interest Payment
Date"), with the first such payment due on March 31, 1997. Accrual of interest
shall commence on the first business day to occur after the date hereof and
shall continue until payment in full of the principal sum has been made. The
interest so payable will be paid to the person in whose name this Debenture (or
one or more predecessor Debentures) is registered on the records of the Company
regarding registration and transfers of the Debentures (the "Debenture
Register"); provided, however, that the Company's obligation to a transferee of
this Debenture arises only if such transfer, sale or other disposition is made
in accordance with the terms and conditions of the Convertible Securities
Subscription Agreement dated as of January 21, 1997 between the Company and
HALIFAX FUND, L.P. (the "Subscription Agreement"). The principal of, and
interest on, this Debenture are payable in such coin or currency of the United
States of America as of the time of payment is legal tender for payment of
public and private debts, at the address last appearing on the Debenture
Registrar of the Company as designated in writing by the Holder hereof from time
to time; provided, however, that, in lieu of paying such interest in coin or
currency, the Company may, at its option, pay interest on this Debenture for any
Interest Payment Date by adding the amount of such interest to the Outstanding
Principal Amount due under this Debenture ("PIK Interest") pursuant to a
statement in the form of Exhibit 2 hereto ("PIK Statement") delivered by the
Company to the Holder on or prior to the applicable Interest Payment Date. If
neither the cash interest due hereunder is paid, nor the PIK Statement
delivered, to the Holder within 10
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calendar days of the applicable Interest Payment Date, the Company shall no
longer have the right to choose the PIK Interest option and the Holder may elect
either cash interest or PIK Interest hereunder at its option. Any PIK Interest
when so added to the Outstanding Principal Amount due under this Debenture
shall, for all purposes of this Debenture, be deemed to be part of the principal
indebtedness evidenced by this Debenture including, without limitation, for
purposes of determining interest thereafter payable hereunder and amounts
thereafter convertible into Common Stock hereunder. The Company will pay any
principal due and all accrued and unpaid interest due upon this Debenture to the
person that is the Holder of this Debenture on the records of the Company as of
the tenth (lath) day prior to the applicable payment date and addressed to such
Holder at the last address appearing on the Debenture Register. Except as
otherwise provided herein, the Outstanding Principal Amount and interest due
hereunder shall bear interest, from and after the occurrence and during the
continuance of a default hereunder, at the rate equal to the lower of twenty
percent (20%) per annum or the highest rate permitted by law.
This Debenture is subject to the following additional provisions:
1. Exchange. The Debentures in minimum principal amount of $100,000,
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are exchangeable for an equal aggregate principal amount of Debentures of
different denominations, as requested by the Holder surrendering the same. No
service charge will be made for such registration or transfer or exchange.
2. [Intentionally Omitted]
3. Transfers. This Debenture has been issued subject to investment
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representations of the original purchaser hereof and may be transferred or
exchanged in the United States only in compliance with the Securities Act of
1933, as amended (the "Act"), and applicable state securities laws. Prior to
due presentment for transfer of this Debenture, the Company may treat the person
in whose name this Debenture is duly registered on the Company's Debenture
Register as the owner hereof for the purpose of receiving payment as herein
provided and all other purposes, whether or not this Debenture be overdue, and
the Company shall not be affected by notice to the contrary.
4. Definitions. For purposes hereof the following definitions shall
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apply:
"Closing Date" shall mean the date of original issuance of the
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Debenture.
"Common Stock" shall mean the Common Stock, par value $0.10, of
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the Company.
"Conversion Date Market Price" shall mean an amount that is
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equal to the lesser of (a) the Maximum Conversion Price or (b) 94% of the Market
Price for Shares of Common Stock during three (3) trading days immediately
preceding the Holder Conversion Date, subject to adjustment from time to time as
set forth in Paragraph 8 hereof and/or in the Subscription Agreement and/or
Registration Rights Agreement (as defined in the Subscription Agreement):
"Conversion Default" shall have the meaning set forth in
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Paragraph l0(b).
"Conversion Notice" shall have the meaning set forth in
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Paragraph 6(c).
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"Conversion Rate" shall have the meaning set forth in
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Paragraph 6(b).
"Holder Conversion Date" shall have the meaning set forth in
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Paragraph 6(c).
"Market Price for Shares of Common Stock" shall mean the price of
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one share of Common Stock determined as follows:
(i) If the Common Stock is listed on NASDAQ, the lowest
reported sales price on the date of valuation;
(ii) If the Common Stock is listed on a national securities
exchange, the lowest reported sales price on such exchange on the date of
valuation;
(iii) If neither (i) nor (ii) apply but the Common Stock is
quoted in the over-the-counter market on the pink sheets or bulletin board, the
lesser of (A) the lowest sales price or (B) the mean between the last reported
"bid" and "asked" prices thereof on the date of valuation; and
(iv) If neither clause (i), (ii) or (iii) above applies,
the market value as determined by a nationally recognized investment banking
firm or other nationally recognized financial advisor retained by the Company
for such purpose, taking into consideration, among other factors, the earnings
history, book value and prospects for the Company, and the prices at which
shares of Common Stock recently have been traded. Such determination shall be
conclusive and binding on all persons.
"Maximum Conversion Price" shall mean the amount of $11.00,
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provided, however, that in the event that during the period expiring ninety (90)
days following the Closing, the Company offers, sells, contracts to sell or
otherwise issues or agrees to issue any securities of the Company, convertible
or otherwise, in a private placement transaction (other than pursuant to any
existing stock or option or similar equity-based compensation plans for
employees, officers, directors or consultants, as hereinafter amended), with a
maximum conversion price per share of Common Stock of, or in the case of a
Common Stock offering a purchase price per share equal to, an amount less than
$11.00, then the "Maximum Conversion Price" shall mean such lower conversion
price or offer price per share for the Debentures not yet converted, and
provided further that in the event of any stock split, subdivision, combination,
reorganization, exchange, substitution or reclassification, the Maximum
Conversion Price shall be equitably and appropriately adjusted to reflect such
change.
"Paragraph 5 Transaction" shall mean a merger, consolidation, or
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other transaction referred to in Paragraph 5.
"Post-Default Conversion" shall have the meaning set forth in
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Paragraph 10(b).
"The Registration Rights Agreement" shall have the meaning set
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forth for such agreement in the Subscription Agreement.
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"Subscription Agreement" shall have the meaning set forth on
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page 1 of this Debenture.
"Underlying Shares". The Common Stock issuable upon conversion
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of the Debentures.
5. Paragraph 5 Transactions. (a) If at any time (i) there occurs
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any consolidation or merger of the Company with or into any other corporation or
other entity or person (whether or not the Company is the surviving corporation)
or there occurs any other corporate reorganization or transaction or series of
related transactions, and as a result thereof the shareholders of the Company
pursuant to such merger, consolidation, reorganization or other transaction own
in the aggregate less than 50% of the voting power and common equity of the
ultimate parent corporation or other entity surviving or resulting from such
merger, consolidation, reorganization or other transaction, (ii) the Company
transfers all or substantially all of the Company's assets to another
corporation or other entity or person or (iii) the Company shall fix a record
date for the declaration of a material special distribution or dividend, whether
payable in cash, securities or assets (other than shares of Common Stock) (a
"Paragraph 5 Transaction"), then the Holders of this Debenture then outstanding
may participate in any such transaction as a class with common stockholders on
the same basis as if this Debenture had been converted one day prior to the
effective date (or record date for such distribution or dividend) of such
transaction.
(b) At the option of the Holder of this Debenture, the Company
shall redeem any outstanding Debentures effective as of the effective date of
any Paragraph 5 Transaction, and the Holder shall be entitled to receive a
redemption price equal to 115% of the then Outstanding Principal Amount of the
Debenture, plus accrued but unpaid interest on the Debenture. Such Holder shall
be entitled to make such election at any time up to 5 days after the effective
date of the Paragraph 5 Transaction.
5A. Redemption at the Option of the Company. (a) This Debenture may
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not be redeemed or prepaid except in accordance with the terms of this Section
5A. To the extent the Company shall have funds legally available for such
payment, the Company may, provided that the notice provisions set forth in
paragraph 5A(b) hereof have been complied with, redeem at its option this
Debenture, at any time on or after the Registration Statement for the Common
Stock issuable upon conversion of this Debenture shall have been effective for a
period of at least 90 consecutive days, in whole or from time to time in part,
at a redemption price equal to 115% of the then Outstanding Principal Amount of
the Debenture, plus accrued but unpaid interest on the Debenture.
(b) Notice of the Company's intention to prepay this Debenture,
in whole or in part, shall be given not less than sixty (60) days prior to the
date of redemption of this Debenture by first class mail, postage prepaid, to
the Holder of this Debenture at the address of the Holder. Each such notice
shall state: (I) a redemption date not less than 60 days following the date of
mailing of the notice; (II) if less than the Outstanding Principal Amount of
this Debenture is to be redeemed, the amount of the Debenture to be redeemed;
(III) the place or places where this Debenture is to be surrendered for
prepayment of the redemption price; and (IV) that interest on the portion of
this Debenture to be redeemed will cease to accrue on such redemption date.
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<PAGE>
(c) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the Company in providing money
for the payment of the redemption price for the portion of the Debenture called
for redemption), interest on the portion of the Debenture so called for
redemption shall cease to accrue. Upon surrender in accordance with such
redemption notice of this Debenture, this Debenture shall be redeemed by the
Company at the redemption price. In the event that less than the Outstanding
Principal Amount of this Debenture is redeemed, then the Company shall issue and
deliver within three (3) business days after delivery to the Company of this
Debenture, to such Holder of this Debenture at the address of the Holder, a
Debenture or Debentures for the Outstanding Principal Amount of this Debenture
not redeemed by the Company.
6. Conversion at the Option of the Holder. The Holder of this
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Debenture shall have the following conversion rights.
(a) Holder's Right to Convert. This Debenture shall be
-------------------------
convertible at any time on or after sixty (60) days after the Closing Date, in
whole or in part, at the option of the Holder hereof, into fully paid, validly
issued and nonassessable shares of Common Stock together with any associated
Common Stock Purchase Rights. If this Debenture is converted in part, the
remaining portion of this Debenture not so converted shall remain entitled to
the conversion rights provided herein.
(b) Conversion Price for Holder Converted Shares. The
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Outstanding Principal Amount of this Debenture that is converted into shares of
Common Stock at the option of the Holder shall be convertible into the number of
shares of Common Stock which results from application of the following formula:
P+I
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Conversion Date Market Price
P = Outstanding Principal Amount of this Debenture submitted for
conversion
I = accrued but unpaid interest (not previously added to principal on a
PIK Statement) on P as of the Holder Conversion Date
The number of shares of Common Stock into which each $1,000
principal amount of this Debenture hereto may be converted pursuant to this
paragraph hereof is hereafter referred to as the "Conversion Rate."
(c) Mechanics of Conversion. In order to convert this
-----------------------
Debenture (in whole or in part) into full shares of Common Stock, the Holder
shall surrender this Debenture, duly endorsed, by either overnight courier or 2-
day courier, to the principal office of the Company, and shall give written
notice in the form of EXHIBIT 1 hereto (the "Conversion Notice") by facsimile
(with the original of such notice forwarded with the foregoing courier) to the
Company at such office that the Holder elects to convert the Outstanding
Principal Amount (plus accrued but unpaid interest) specified therein, which
such notice and election shall be irrevocable by the Holder; provided, however,
that the Company shall not be obligated to issue certificates evidencing the
shares of the Common Stock issuable upon such conversion unless either the
Debenture evidencing the Outstanding Principal Amount is delivered to the
Company as provided above, or the Holder notifies the Company that such
Debenture(s) have
5
<PAGE>
been lost, stolen or destroyed and promptly executes an agreement reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such Debentures.
The Company shall use its best efforts to issue and deliver
within three business days after delivery to the Company of such Debenture(s),
or after receipt of such agreement and indemnification, to such Holder of
Debenture(s) at the address of the Holder, or to its designee, a certificate or
certificates for the number of shares of Common Stock to which the Holder shall
be entitled as aforesaid, together with a calculation of the Conversion Rate and
a Debenture or Debentures for the principal amount of Debentures not submitted
for conversion. The effective date of conversion (the "Holder Conversion Date")
shall be deemed to be the date on which the Company receives by facsimile the
Conversion Notice, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
7. Conversion upon Maturity. At the Maturity Date, the Outstanding
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Principal Amount of Debentures outstanding at such time shall be automatically
converted into Common Stock of the Company in accordance with the terms of this
Debenture, the Subscription Agreement and the Registration Rights Agreement,
without notice. The Company shall use its best efforts to issue and deliver
within three business days after delivery to the Company of this Debenture, or
after receipt of the agreement and indemnification described in paragraph 6(c)
above, to the Holder of the Debenture at the address of the Holder, or to its
designee, a certificate or certificates for the number of shares of Common Stock
to which the Holder shall be entitled hereunder, together with a calculation of
the Conversion Rate. The person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on the Maturity
Date. The Maturity Date shall be a "Holder Conversion Date" for purposes of
this Debenture.
8. Stock Splits: Dividends; Adjustments: Reorganizations.
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(a) Stock Splits and Combinations. The Company shall not
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effect any stock split, subdivision or combination with an effective date within
five (5) trading days of the Maturity Date.
(b) Certain Dividends and Distributions. The Company shall not
-----------------------------------
make, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, with an effective date within five (5) trading days of
the Maturity Date.
(c) Adjustment for Other Dividends and Distributions. In the
------------------------------------------------
event the Company at any time or from time to time after the Closing Date makes,
or fixes a record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution payable in securities of the
Company other than shares of Common Stock, then and in each such event provision
shall be made so that the Holders of Debentures shall receive upon conversion
thereof pursuant to Paragraph 6 hereof, in addition to the number of shares of
Common Stock receivable thereupon, the amount of such other securities of the
Company to which a Holder on the relevant record or payment date, as applicable,
of the number of shares of Common Stock so receivable upon conversion would have
been entitled,
6
<PAGE>
plus any dividends or other distributions which would have been received with
respect to such securities had such Holder thereafter, during the period from
the date of such event to and including the Holder Conversion Date, retained
such securities, subject to all other adjustments called for during such period
under this Paragraph 8 with respect to the rights of the Holders of the
Debentures. For purposes of this Paragraph 8(c), the number of shares of Common
Stock so receivable upon conversion by the Holder shall be deemed to be that
number which the Holder would have received upon conversion of the entire
Outstanding Principal Amount hereof if the Holder Conversion Date had been the
day preceding the date upon which the Company announced the making of such
dividend or other distribution.
(d) Adjustment for Reclassification, Exchange and Substitution.
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In the event that at any time or from time to time after the Closing Date, the
Common Stock issuable upon the conversion of the Debentures is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or reorganization provided for elsewhere
in this Paragraph 8 or a merger or consolidation, provided for in Paragraph 5),
then and in each such event each Holder of Debentures shall have the right
thereafter to convert such Debenture into the kind of stock receivable upon such
recapitalization, reclassification or other change by holders of shares of
Common Stock, all subject to further adjustment as provided herein. In such
event, the formulae set forth herein for conversion and redemption shall be
equitably adjusted to reflect such change in number of shares or, if shares of a
new class of stock are issued, to reflect the market price of the class or
classes of stock (applying the same factors used in determining the Market Price
for Shares of Common Stock) issued in connection with the above described
transaction.
(e) Reorganizations. If at any time or from time to time after
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the Closing Date there is a capital reorganization of the Common Stock (other
than a recapitalization, subdivision, combination, reclassification or exchange
of shares provided for elsewhere in this Paragraph 8) then, as a part of such
reorganization, provision shall be made so that the Holders of the Debentures
shall thereafter be entitled to receive upon conversion of the Debentures the
number of shares of stock or other securities or property to which a holder of
the number of shares of Common Stock deliverable upon conversion would have been
entitled on such capital reorganization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Paragraph
8 with respect to the rights of the Holders of the Debentures after the
reorganization to the end that the provisions of this Paragraph 8 shall be
applicable after that event and be as nearly equivalent as may be practicable,
including, by way of illustration and not limitation, by equitably adjusting the
formulae set forth herein for conversion and redemption to reflect the market
price of the securities or property (applying the same factors used in
determining the Market Price for Shares of Common Stock) issued in connection
with the above described transaction.
(f) In the event of a dispute between a Holder of Debentures and
the Company with respect to any of the adjustments required pursuant to the
provisions of this Paragraph 8, then the Debentures shall be converted in a
manner consistent with the Schedule of Computations delivered as set forth in
paragraph (g) below. Such Holder of Debentures shall then be entitled, within 60
days of receipt of the Schedule of Computations, to submit such dispute to the
American Arbitration Association for resolution according to then applicable
rules thereof, which determination shall be final and binding. If it shall be
determined that a Holder of Debentures should have received additional shares of
Common Stock upon such conversion (the "Undelivered Shares") then, within three
trading days of
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<PAGE>
receipt of written notice of such determination, the Company shall issue to such
holder that number of additional shares of Common Stock as shall have a value,
based upon the then Market Price for Shares of Common Stock, as shall equal the
Undelivered Shares times the Market Price for Shares of Common Stock on the date
of conversion. The cost of such proceeding shall be shared 50% by the Holder or
Holders of Debentures involved in such dispute and 50% by the Company, except
that the prevailing party, as determined by the arbitrator presiding over the
arbitration, shall be entitled to recover reasonable attorney's fees, in
addition to other costs and expenses and any other available remedy.
(g) All adjustments pursuant to this Paragraph 8 shall be
notified in writing to the Holders of this Debenture within three (3) trading
days of the occurrence thereof and such notice shall be accompanied by a
Schedule of Computations of such adjustments. If so requested by a Holder of
this Debenture, the Company shall provide to such Holder within ten (10) trading
days of its request therefor a certificate of concurrence to the Schedule of
Computations by the independent public accountants of the Company.
9. Fractional Shares. No fractional shares of Common Stock or scrip
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representing fractional shares of Common Stock shall be issuable hereunder. The
number of shares of Common Stock that are issuable upon any conversion shall be
rounded up or down to the nearest whole share.
10. Reservation of Stock Issuable Upon Conversion.
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(a) Reservation Requirement. The Company shall reserve and keep
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available at all times, free of preemptive rights shares of Common Stock for the
purpose of enabling the Company to satisfy any obligation to issue shares of its
Common Stock upon conversion of all of the Debentures pursuant hereto.
(b) Default. If the Company does not have a sufficient number
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of shares of Common Stock available to satisfy the Company's obligations to a
Holder of Debentures upon receipt of a Conversion Notice or is otherwise unable
to issue such shares of Common Stock in accordance with the terms of this
Agreement and such condition shall remain unremedied for a period of forty-five
(45) days after the Company's receipt of a Conversion Notice (a "Conversion
-----------
Default"), then from and after the fifth (5th) day following a Conversion
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Default (which for all purposes shall be deemed to have occurred upon the
expiration of the applicable cure period following the Company's receipt of the
applicable Conversion Notice), each Holder of the Debentures shall have the
right to demand from the Company immediate redemption of the Debentures in cash
at a redemption price per Debenture equal to 120% of the then Outstanding
Principal Amount of the Debenture (including Debentures for which a Conversion
Notice has not yet been sent), plus accrued but unpaid interest on the
Debenture; provided, however, that no notice of redemption may be delivered by a
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Holder subsequent to receipt by such holder of notice from the Company (sent by
overnight or 2-day courier with a copy sent by facsimile) of availability of
sufficient shares of Common Stock to perfect conversion (a "Post-Default
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Conversion") of all the Debentures; provided further that such right to demand
- ---------- -------- -------
redemption shall be reinstated if the Company shall thereafter fail to perfect
such Post-Default Conversion by delivery of Common Stock certificates in
accordance with the applicable provisions of Paragraph 6(b) hereof and payment
of all accrued and unpaid interest in cash with respect thereto within five
business days of delivery of the notice of Post-Default Conversion. In addition
to the foregoing, upon a Conversion Default, the rate of interest on all of the
Debentures (including Debentures for
8
<PAGE>
which a Conversion Notice has not yet been sent), shall, to the maximum extent
of the law, be permanently increased by two percent (2%) (i.e., from 5% to 7%)
commencing on the first day of the thirty (30) day period (or part thereof)
following a Conversion Default; an additional two percent (2%) commencing on the
first day of each of the second and third such thirty (30) day periods (or part
thereof); and an additional one percent (1%) on the first day of each
consecutive thirty (30) day period (or part thereof) thereafter until such
securities have been duly converted or redeemed as herein provided; provided
that in no event shall the rate of interest exceed the lower of 20% or the
highest rate permitted by applicable law. Any such interest which is not paid
when due shall, to the maximum extent permitted by law, accrue interest until
paid at the rate from time to time applicable to interest on the Debentures as
to which the Conversion Default has occurred.
11. No Reissuance of Debentures. No Debentures acquired by the
---------------------------
Company by reason of redemption, purchase, conversion or otherwise shall be
reissued, and all such Debentures shall be retired. No additional Debentures
shall be authorized or issued without the consent of at least 66 2/3% in
interest of the Holders of Debentures outstanding immediately prior thereto.
12. No Impairment. The Company shall not intentionally take any
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action which would impair the rights and privileges of the Debentures set forth
herein or the Holders thereof.
13. Holder's Rights if Shares are Delisted if Trading in Common Stock
-----------------------------------------------------------------
is Suspended. In the event that at any time on or after the date hereof, and
- ------------
prior to the Maturity Date, trading in the shares of the Company's Common Stock
is suspended on the New York Stock Exchange (and the Company's Common Stock does
not contemporaneously commence trading on the NASDAQ National Market System) or
the NASDAQ National Market System for a period of five consecutive trading days,
other than as a result of the suspension of trading in securities in general, or
if such Shares are delisted from the New York Stock Exchange or NASDAQ National
Market System then, at a Holder's option, the Company shall redeem such Holder's
Debentures at a redemption date designated by such Holder, and at the redemption
price equal to 120% of the then Outstanding Principal Amount of this Debenture,
plus accrued but unpaid interest on this Debenture.
14. Limitations on Holder's Right to Convert. Notwithstanding
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anything to the contrary contained herein, each Conversion Notice shall contain
a representation that, after giving effect to the shares of the Company's Common
Stock to be issued pursuant to such conversion notice, the total number of
shares of the Company's Common Stock deemed beneficially owned by the Holder
(excluding shares that might otherwise be deemed beneficially owned by reason of
the conversion right in the Debentures owned by the Holder), together with all
shares of the Company's Common Stock deemed beneficially owned by the Holder's
"affiliates" as defined in Rule 144 of the Act, will not exceed 4.9% of the
total issued and outstanding shares of the Company's Common Stock.
15. Registration Suspension. In the event that at any time or from
-----------------------
time to time any registration statement with respect to the Common Stock
issuable upon conversion of this Debenture is suspended or trading in the Common
Stock on the New York Stock Exchange or NASDAQ National Market System is
suspended for a period of time ("Blackout Period"), the Maturity Date hereunder
shall be extended for a period equal to 1.5 times the number of days in such
Blackout Period. Furthermore, additional provisions pertaining to the
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<PAGE>
suspension of effectiveness of such registration statement set forth in
Paragraph 5A of the Registration Rights Agreement, shall be applicable in the
event of a Blackout Period, and are specifically incorporated by reference
herein.
16. Obligations Absolute. No provision of this Debenture shall alter
--------------------
or impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, and interest on, this Debenture at the time, place and
rate, and in the manner, herein prescribed.
17. Waivers of Demand, Etc. The Company hereby expressly waives
----------------------
demand and presentment for payment, notice of nonpayment, protest, notice of
protest, notice of dishonor, notice of acceleration or intent to accelerate,
bringing of suit and diligence in taking any action to collect amounts called
for hereunder and will be directly and primarily liable for the payment of all
sums owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission as or with respect to the collection of any amount
called for hereunder.
18. Replacement Debentures. In the event that any Holder notifies
----------------------
the Company that its Debenture(s) have been lost, stolen or destroyed,
replacement Debenture(s) identical in all respects to the original Debenture(s)
(except for registration number and Outstanding Principal Amount, if different
than that shown on the original Debenture(s)), provided that the Holder executes
and delivers to the Company an agreement reasonably satisfactory to the Company
to indemnify the Company from any loss incurred by it in connection with such
Debenture(s).
19. Payment of Expenses. The Company agrees to pay all reasonable
-------------------
debts and expenses, including reasonable attorneys' fees, which may be incurred
by the Holder in enforcing the provisions of this Debenture and/or collecting
any amount due under this Debenture, the Subscription Agreement or the
Registration Rights Agreement (as defined in the Subscription Agreement).
20. Defaults. The following shall constitute "Events of Default":
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(a) The Company refuses at any time to honor any Conversion
Notice issued in accordance with the terms of Paragraph 6 hereof; or
(b) The Company shall default in the payment of (i) interest on
this Debenture, and such default shall continue for three (3) business days
after the due date thereof, or (ii) the Outstanding Principal Amount of this
Debenture; or
(c) Any of the representations or warranties made by the Company
herein, in the Subscription Agreement, or in any certificate or financial or
other statements heretofore or hereafter furnished by or on behalf of the
Company in connection with the execution and delivery of this Debenture or the
Subscription Agreement shall be false or misleading in any material respect at
the time made and such condition (to the extent capable of being cured) shall
continue uncured for a period of ten (10) business days after notice from the
Holder of such condition; or
(d) The Company shall fail to perform or observe in any material
respect any covenant or agreement in the Subscription Agreement, or any other
covenant,
10
<PAGE>
term, provision, condition, agreement or obligation of the Company under this
Debenture and such failure shall continue uncured for a period of ten (10)
business days after notice from the Holder of such failure; or
(e) The Company shall (1) become insolvent; (2) admit in writing
its inability to pay its debts generally as they mature; (3) make an assignment
for the benefit of creditors or commence proceedings for its dissolution; or (4)
apply for or consent to the appointment of a trustee, liquidator or receiver for
it or for a substantial part of its property or business; or
(f) A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business without its
consent and shall not be discharged within sixty (60) days after such
appointment; or
(g) Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency shall assume custody or
control of the whole or any substantial portion of the properties or assets of
the Company and shall not be dismissed within sixty (60) days thereafter; or
(h) Any money judgment (including any arbitration award, but
only if reduced to a judgment), writ or warrant of attachment, or similar
process in excess of Five Hundred Thousand Dollars ($500,000) in the aggregate
shall be entered or filed against the Company or any of its properties or other
assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of
sixty (60) days or in any event later than ten (10) days prior to the date of
any proposed sale thereunder; and
(i) Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings, or relief under any bankruptcy law or any law
for the relief of debt shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within sixty (60) days
after such institution or the Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or admit to any material
allegations of, or default in answering a petition filed in any such proceeding.
Unless an Event of Default shall have been waived in writing by the Holder
(which waiver shall not be deemed to be a waiver of any subsequent default) at
the option of and (except in the case of clause (i) above) on notice by the
Holder and in the Holder's sole discretion, the Holder may consider the
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything herein or
in any other instruments contained to the contrary notwithstanding, and the
Holder may immediately, and without expiration of any period of grace, enforce
any and all of the Holder's rights and remedies provided herein or any other
rights or remedies afforded by law. In such event, the Debenture shall be
redeemed at a redemption price equal to 120% of the Outstanding Principal Amount
of the Debenture, plus accrued but unpaid interest on the Debenture.
21. Savings Clause. In case any provision of this Debenture is held
--------------
by a court of competent jurisdiction to be excessive in scope or otherwise
invalid or unenforceable, such provision shall be adjusted rather than voided,
if possible, so that it is enforceable to the maximum extent possible, and the
validity and enforceability of the remaining provisions of this Debenture will
not in any way be affected or impaired thereby.
11
<PAGE>
22. Entire Agreement. This Debenture, the Common Stock Purchase
----------------
Warrant, and the agreements referred to in this Debenture constitute the full
and entire understanding and agreement between the Company and the Holder with
respect to the subject hereof. Neither this Debenture nor any term hereof may
be amended, waived, discharged or terminated other than by a written instrument
signed by the Company and the Holder.
23. Assignment, Etc. The Holder may, subject to compliance with the
---------------
Subscription Agreement and to applicable Federal and state securities laws,
transfer or assign this Debenture or any interest herein and may mortgage,
encumber or transfer any of its rights or interest in and to this Debenture or
any part hereof and, without limitation, each assignee, transferee and mortgagee
(which may include any affiliate of the Holder) shall have the right to transfer
or assign its interest. Each such assignment shall be in the minimum principal
amount of $100,000, or shall be all of the Holder's interest in the Debenture.
Each such assignee, transferee and mortgagee shall have all of the rights of the
Holder under this Debenture. The Company agrees that, subject to compliance with
the Subscription Agreement, after receipt by the Company of written notice of
assignment from the Holder or from the Holder's assignee, all principal,
interest and other amounts which are then and thereafter become due under this
Debenture shall be paid to such assignee at the place of payment designated in
such notice. This Debenture shall be binding upon the Company and its
successors and shall inure to the benefit of the Holder and its successors and
assigns.
24. No Waiver. No failure on the part of the Holder to exercise, and
---------
no delay in exercising any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power hereby
granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
25. Miscellaneous. Unless otherwise provided herein, any notice or
-------------
other communication to a party hereunder shall be sufficiently given if in
writing and personally delivered or mailed to said party by certified mail,
return receipt requested, at its address set forth herein or such other address
as either may designate for itself in such notice to the other and
communications shall be deemed to have been received when delivered personally
or, if sent by mail or facsimile, then when actually received by the party to
whom it is addressed. Whenever the sense of this Debenture requires, words in
the singular shall be deemed to include the plural and words in the plural shall
be deemed to include the singular. If more than one Company is named herein,
the liability of each shall be joint and several. Paragraph headings are for
convenience only and shall not affect the meaning of this document.
26. Choice of Law and Venue; Waiver of Jury Trial. THIS DEBENTURE SHALL BE
---------------------------------------------
CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW OR CHOICE OF LAW. The Company hereby agrees that all
actions or proceedings arising directly or indirectly from or in connection with
this Debenture shall, at the Holder's sole option, be litigated only in the
Supreme Court of the State of New York or the United States District Court for
the Southern District of New York located in New York County, New York. To the
extent permitted by applicable law, the Company
12
<PAGE>
consents to the jurisdiction and venue of the foregoing courts and consents that
any process or notice of motion or other application to either of said courts or
a judge thereof may be served inside or outside the State of New York or the
Southern District of New York by registered mail, return receipt requested,
directed to the Company at its address set forth in this Debenture (and service
so made shall be deemed complete five (5) days after the same has been posted as
aforesaid) or by personal service or in such other manner as may be permissible
under the rules of said courts. The parties hereto hereby waive any right to a
jury trial in connection with any litigation pursuant to this Debenture.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
by an officer "hereunto duly authorized.
Dated: January 30, 1997
GRC INTERNATIONAL, INC.
By:
----------------------------
Print Name:
--------------------
Print Title:
-------------------
Print Address:
-----------------
ATTEST
- ----------------------------
13
<PAGE>
EXHIBIT 1
(To be Executed by Registered Holder
in order to Convert Debenture)
CONVERSION NOTICE
-----------------
FOR
---
5% CONVERTIBLE DEBENTURE DUE JANUARY 30, 2000
---------------------------------------------
The undersigned, as Holder of the 5% Convertible Debenture Due January 30, 2000
of GRC International, Inc. (the "Company"), No._____, in the outstanding
principal amount of U.S.$_____(the "Debenture"), hereby irrevocably elects to
convert U.S.$_____of the outstanding principal amount of the Debenture into
shares of Common Stock, par value $.10 per share (the "Common Stock"), of the
Company according to the conditions of the Debenture, as of the date written
below. The undersigned hereby requests that share certificates for the Common
Stock to be issued to the undersigned pursuant to this Conversion Notice be
issued in the name of, and delivered to, the undersigned or its designee as
indicated below. If shares are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto. No fee will be charged to the Holder for any conversion,
except for transfer taxes, if any.
The undersigned represents that, after giving effect to the shares of the
Company's Common Stock to be issued pursuant to such conversion notice, the
total number of shares of the Company's Common Stock deemed beneficially owned
by the undersigned, together with all shares of the Company's Common Stock
deemed beneficially owned by the undersigned's "affiliates" as defined in Rule
144 of the Act, will not exceed 4.9% of the total issued and outstanding shares
of the Company's Common Stock.
Conversion Information: NAME OF HOLDER:
By:
---------------------------------
Print Name:
Print Title:
Print Address of Holder:
------------------------------------
------------------------------------
Issue Common Stock to:
--------------
at:
---------------------------------
------------------------------------
Date of Conversion
------------------------------------
Applicable Conversion Rate
<PAGE>
EXHIBIT 2
PIK STATEMENT
-------------
Date:
---------------
To: [Name of Holder of Debenture] ("Holder")
Re: 5% Convertible Debenture Due January 30, 2000 ("Debenture") of GRC
International, Inc. (the "Company") No._____, in the face principal amount
of US$______.
In lieu of paying interest on the above-referenced Debenture in coin
or currency, the Company hereby elects to pay interest on the Debenture, for the
Interest Payment Date indicated below, by having the amount of such interest
added to the Outstanding Principal Amount due under the Debenture. The Company
hereby certifies to the Holder, its successors and assigns that the Outstanding
Principal Amount due under the Debenture after delivery of this PIK Statement
equals the amount indicated below. Capitalized terms used in this PIK Statement
and not otherwise defined shall have the meaning ascribed thereto in the
Debenture.
Interest Payment Date:
---------------
Outstanding Principal Amount prior
to issuance of this PIK Statement: US$
--------------------
PIK Interest: US$
--------------------
Outstanding Principal Amount after
issuance of this PIK Statement: US$
--------------------
IN WITNESS WHEREOF, this PIK Statement has been duly executed and
delivered on the date first written above.
GRC INTERNATIONAL, INC.
By:
--------------------
Print Name:
Print Title
<PAGE>
Exhibit 10.4
------------
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS.
Right to Purchase Shares of Common Stock
of GRC International, Inc.
-------------------------------
Common Stock Purchase Warrant
GRC International, Inc., a Delaware corporation having an address at
1900 Gallows Road, Vienna, VA 22182, (the "Company"), hereby certifies that for
$10.00 and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Halifax Fund, L.P., having an address c/o Citco
Fund Services Ltd., Corporate Centre, West Bay Road, P.O. Box 311 06SMB, Grand
Cayman, Cayman Islands, ("Purchaser") or any other Warrant Holder is entitled,
on the terms and conditions set forth below, to purchase from the company at any
time after the date hereof and ending eighty-four (84) months after the date
hereof 320,000 of fully paid and nonassessable shares of Common Stock, $0.10 par
value, of the Company together with any associated Common Stock Purchase Rights
(the "Common Stock") at the Purchase Price (hereinafter defined), as the same
may be adjusted pursuant to Section 5 herein.
1. Definitions.
-----------
(a) the term "Warrant Holder" shall mean the Purchaser or any
assignee of all or any portion of this Warrant at any given time
who, at the time of assignment, acquired the right to purchase at
least 1000 Warrant Shares, (such number being subject to adjustment
after the date hereof pursuant to Section 5 herein.)
(b) the term "Warrant Shares" shall mean the Shares of Common Stock
or other securities issuable upon exercise of this Warrant.
(c) the term "Purchase Price" shall mean $8.47./1/
(d) other terms used herein which are defined in the Convertible
Securities Subscription Agreement dated as of January 21, 1997 (the
"Agreement") or the Registration Rights Agreement, dated as of January
30, 1997 (the "Registration Rights Agreement"), or in the Debentures
issued by the Company to the Purchaser pursuant to the Agreement (the
"Debentures"), shall have the same meanings herein as therein.
- ------------------------
/1/ To be 140% of the average of the closing sales prices of the Common Stock on
the NYSE from (and including) January 21, 1997 through (and including)
January 29, 1997.
<PAGE>
2. Exercise of Warrant.
-------------------
This Warrant may be exercised by Warrant Holder, in whole or in part,
at any time and from time to time, on or after the date which is eighteen
(18) months following the Closing Date, by surrender of this Warrant,
together with the Purchase Price and form of subscription at the end hereof
duly executed by Warrant Holder, to the Company at its principal office;
provided that in the event that prior to such date there is a definitive
--------
agreement executed for a Paragraph 5 Transaction (as defined in the
Debentures) (if such transaction is a merger, acquisition, sale of Common
Stock, sale of assets or similar transaction) or a declaration of a record
date for a material special dividend or distribution in respect of the
Common Stock (in cash or securities or other assets, other than Common
Stock), the Warrant shall become exercisable thereafter in full at the
Adjusted Purchase Price. The Adjusted Purchase Price shall equal the lesser
of (i) $8.47/1/ (as adjusted from time to time pursuant to Section 5
hereof) and (ii) 80.0% (as adjusted from time to time pursuant to Sections
5(c) and 5(f) hereof) of the Transaction Value per share of Common Stock
issuable upon exercise of the Warrant. The term "Transaction Value" means,
in the case of a merger, acquisition, sale of Common Stock, sale of assets
or similar transaction, the fair market value of the consideration to be
received per share of Common Stock, as evidenced by the average of the
closing sale price for the Common Stock during the ten trading days
following the announcement of such definitive agreement and in the case of
a material special dividend or distribution (which material special
dividend or distribution shall not include any grant of any "poison pill"
or any amendment or modification of the terms of any "poison pill" that
does not involve any increase in the consideration payable thereunder upon
redemption of the "poison pill"), the sum of (i) the fair market value of
the dividend or distribution as determined in good faith by the Company's
Board of Directors; provided that if the dividend or distribution is in the
form of an instrument that trades "when issued" the fair market value
thereof shall be determined by reference to the average of the closing sale
price for such instrument in the when issued market (or in the absence of a
closing sale price, the average of the closing bid and asked price) during
the ten trading days following such record date. In the event that the
Warrant is not exercised in full, the number of Warrant Shares shall be
reduced by the number of Warrant Shares for which this Warrant is exercised
and the Company, at its expense, shall forthwith issue and deliver to or
upon the order of Warrant Holder a new Warrant of like tenor in the name of
Warrant Holder or as Warrant Holder (upon payment by Warrant Holder of any
applicable transfer taxes) may request, reflecting such adjusted Warrant
Shares.
3. Delivery of Stock Certificates.
------------------------------
(a) Subject to the terms and conditions of this Warrant, as soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within three (3) trading days thereafter, the Company at its expense
(including, without limitation, the payment by it of any applicable issue taxes)
will cause to be issued in the name of and delivered to Warrant Holder, or as
Warrant Holder (upon payment by
- ------------------------
/1/ To be 140% of the average of the closing sales prices of the Common Stock on
the NYSE from (and including) January 21, 1997 through (and including)
January 29, 1997.
2
<PAGE>
Warrant Holder of any applicable transfer taxes) may lawfully direct, a
certificate or certificates for the number of fully paid and non-assessable
shares of Common Stock to which Warrant Holder shall be entitled on such
exercise, together with any other stock or other securities or property
(including cash, where applicable) to which Warrant Holder is entitled upon
such exercise.
(b) This Warrant may not be exercised as to fractional shares of
Common Stock. In the event that the exercise of this Warrant, in full or in
part, would result in the issuance of any fractional share of Common Stock,
then in such event Warrant Holder shall be entitled to cash equal to the
Fair Market Value of such fractional share. For purposes of this Warrant,
Fair Market Value equals the closing trading price of the Common Stock on
the NASDAQ Stock Market, the American Stock Exchange or the New York Stock
Exchange, whichever is the principal trading exchange or market for the
Common Stock (the "Principal Market") on the date of determination or, if
the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted in the NASDAQ Stock Market, the average of
the closing bid and asked prices on the over-the-counter market as
furnished by any New York Stock Exchange member firm reasonably selected
from time to time by the Company for that purpose, or, if the Common Stock
is not listed or admitted to trading on any national securities exchange or
quoted on the NASDAQ Stock market or traded over-the-counter and the
average price cannot be determined as contemplated above, the Fair Market
Value of the Common Stock shall be as reasonably determined in good faith
by the Company's Board of Directors.
4. Covenants of the Company.
------------------------
(a) The Company shall use its reasonable best efforts to insure
that a Registration Statement under the Act covering the issuance of the Warrant
Shares and the resale or other disposition thereof by Warrant Holder is
effective as provided in the Registration Rights Agreement.
(b) The Company shall take all necessary actions and proceedings as
may be required and permitted by applicable law, rule and regulation, including,
without limitation the notification of the New York Stock Exchange, for the
legal and valid issuance of this Warrant and the Warrant Shares to the Warrant
Holder under this Warrant.
(c) From the date hereof through the last date on which this Warrant
is exercisable, the Company shall take all steps reasonably necessary and within
its control to insure that the Common Stock remains listed on the Principal
Market and shall not amend its Certificate of Incorporation or Bylaws so as to
constitute a breach of the Company's obligations hereunder.
(d) The Company shall at all times reserve and keep available, solely
for issuance and delivery as Warrant Shares hereunder, such shares of Common
Stock as shall from time to time be issuable as Warrant Shares.
(e) The Warrant Shares, when issued in accordance with the terms
hereof, will be duly authorized and, when paid for or issued in accordance with
the terms hereof, shall be validly issued, fully paid and non-assessable. The
Company has
3
<PAGE>
authorized and reserved for issuance to Warrant Holder the requisite number
of shares of Common Stock to be issued pursuant to this Warrant.
(f) With a view to making available to Warrant Holder the benefits of
Rule 144 promulgated under the Act and any other rule or regulation of the
SEC that may at any time permit Warrant Holder to sell securities of the
Company to the public without registration, the Company agrees to use its
reasonable best efforts to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act;
and
(iii) furnish to any Warrant Holder forthwith upon request a
written statement by the Company that it has complied with the
reporting requirements of Rule 144 and of the Act and the Exchange
Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company
as may be reasonably requested to permit any such Warrant Holder to
take advantage of any rule or regulation of the SEC permitting the
selling of any such securities without registration.
5. Adjustment of Exercise Price and Number of Share.
------------------------------------------------
The number of, and kind of, securities purchasable upon exercise of
this Warrant and the Purchase Price shall be subject to adjustment from
time to time as follows:
(a) Subdivisions. Combinations and Other Issuances. If the Company
----------------------------------------------
shall at any time after the date hereof but prior to the expiration of this
Warrant subdivide its outstanding securities as to which purchase rights
under this Warrant exist, by split-up, spin-off, or otherwise, or combine
its outstanding securities as to which purchase rights under this Warrant
exist, the number of Warrant Shares as to which this Warrant is exercisable
as of the date of such subdivision, split-up, spin-off or combination shall
forthwith be proportionately increased in the case of a subdivision, or
proportionately decreased in the case of a combination. Appropriate
adjustments shall also be made to the purchase price payable per share, but
the aggregate purchase price payable for the total number of Warrant Shares
purchasable under this Warrant as of such date shall remain the same.
(b) Stock Dividend. If at any time after the date hereof the Company
--------------
declares a dividend or other distribution on Common Stock payable in Common
Stock or other securities or rights convertible into Common Stock ("Common
Stock Equivalents") without payment of any consideration by holders of
Common Stock for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
exercise or conversion thereof), then the number of shares of Common Stock
for which this Warrant may be exercised shall be increased as of the record
date (or the date of such dividend distribution if not record date is set)
for determining which holders of Common Stock shall be entitled to receive
such dividends, in proportion to the increase in the number of outstanding
4
<PAGE>
shares (and shares of Common Stock issuable upon conversion of all such
securities convertible into Common Stock) of Common Stock as a result of
such dividend, and the Purchase Price shall be adjusted so that the
aggregate amount payable for the purchase of all the Warrant Shares
issuable hereunder immediately after the record date (or on the date of
such distribution, if applicable), for such dividend shall equal the
aggregate amount so payable immediately before such record date (or on the
date of such distribution, if applicable).
(c) Other Distributions. If at any time after the date hereof the
-------------------
Company distributes to holders of its Common Stock, other than as part of
its dissolution, liquidation or the winding up of its affairs, any shares
of its capital stock, any evidence of indebtedness or any of its assets
(other than cash, Common Stock or securities convertible into Common
Stock), then the Company shall decrease the per share Purchase Price of
this Warrant by an appropriate amount based upon the value distributed on
each share of Common Stock as determined in good faith by the Company's
Board of Directors.
(d) Merger, Etc. If at any time after the date hereof there shall be
-----------
a merger or consolidation of the Company with or into or a transfer of all
or substantially all of the assets of the Company to another entity, then
the Warrant Holder shall be entitled to receive upon such transfer, merger
or consolidation becoming effective, and upon payment of the aggregate
Purchase Price then in effect, the number of shares or other securities or
property of the company or of the successor corporation resulting from such
merger or consolidation, which would have been received by Warrant Holder
for the shares of stock subject to this Warrant had this Warrant been
exercised just prior to such transfer, merger or consolidation becoming
effective or to the applicable record date thereof, as the case may be.
(e) Reclassification, Etc. If at any time after the date hereof there
---------------------
shall be a reorganization or reclassification of the securities as to which
purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, then the Warrant Holder
shall thereafter be entitled to receive upon exercise of this Warrant,
during the period specified herein and upon payment of the Purchase Price
then in effect, the number of shares or other securities or property
resulting from such reorganization or reclassification, which would have
been received by the Warrant Holder for the shares of stock subject to this
Warrant had this Warrant at such time been exercised.
(f) Purchase Price Adjustment. In the event that the Company issues
-------------------------
or sells any Common Stock or securities which are convertible into or
exchangeable for its Common Stock or any convertible securities, or any
warrants or other rights to subscribe for or to purchase or any options for
the purchase of its Common Stock or any such convertible securities (other
than issuance of Debentures or of shares of Common Stock upon conversion
thereof, securities issued or which may be issued pursuant to the Company's
employee, officer, director or consultant stock or option or similar
equity-based compensation plans now or hereafter established or shares
issued upon exercise of options, warrants or rights outstanding on the date
of the Agreement and listed in the Exchange Act Reports) at an effective
purchase price per share which is less than ninety-five percent (95%) of
the Fair Market Value (including any applicable underwriting discounts
and/or commissions) of the Common Stock on the trading day
5
<PAGE>
next preceding such issue or sale, then in each such case, the Purchase
Price in effect immediately prior to such issue or sale shall be reduced
effective concurrently with such issue or sale to an amount determined by
multiplying the Purchase Price then in effect by a fraction, (x) the
numerator of which shall be the sum of (1) the number of shares of Common
Stock outstanding immediately prior to such issue or sale, including,
without duplication, those deemed to have been issued under any provision
of the Debentures and the Warrants plus (2) the number of shares of Common
Stock which the aggregate consideration received by the Company for such
additional shares would purchase at such Fair Market Value and (y) the
denominator of which shall be the number of shares of Common Stock of the
Company outstanding immediately after such issue or sale including, without
duplication, those deemed to have been issued under any provision of the
Debentures and Warrants. For purposes of the foregoing fraction, Common
Stock outstanding shall include, without limitation, any Equity Offerings
(as defined in the Debentures) then outstanding, whether or not they are
exercisable or convertible when such fraction is to be determined.
The number of shares which may be purchased hereunder shall be
increased proportionately to any reduction in Purchase Price pursuant to
this paragraph 5(f), so that after such adjustments the aggregate Purchase
Price payable hereunder for the increased number of shares shall be the
same as the aggregate Purchase Price in effect just prior to such
adjustments.
6. No Impairment.
-------------
The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of
this Warrant, but will at all times in good faith assist in the carrying
out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Warrant
Holder against impairment. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any Warrant
Shares above the amount payable therefor on such exercise, and (b) will
take all such action as may be reasonably necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
Warrant Shares on the exercise of this Warrant. By acceptance hereof, the
Holder of this Debenture acknowledges and agrees that a Paragraph 5
Transaction (as defined in the Debentures) shall not constitute an
impairment of the rights of the Warrant Holder hereunder.
7. Notice of Adjustments: Notices.
------------------------------
Whenever the Purchase Price or number of shares purchasable hereunder
shall be adjusted pursuant to Section 5 hereof, the Company shall execute
and deliver to the Warrant Holder a certificate setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated and the
Purchase Price and number of shares purchasable hereunder after giving
effect to such adjustment, and shall cause a copy of such certificate to be
mailed (by first class mail, postage prepaid) to the Warrant Holder.
6
<PAGE>
8. Rights As Stockholder.
---------------------
Prior to exercise of this Warrant, the Warrant Holder shall not be
entitled to any rights as a stockholder of the company with respect to the
Warrant Shares, including (without limitation) the right to vote such
shares, receive dividends or other distributions thereon or be notified of
stockholder meetings. However, in the event of any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend) or other distribution, any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any
other securities or property, or to receive any other right, the Company
shall mail to each Warrant Holder, at least 10 days prior to the date
specified, therein, a notice specifying the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
the amount and character of such dividend, distribution or right.
9. Replacement of Warrant.
----------------------
On receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of the Warrant and, in the case of
any such loss, theft or destruction of the Warrant, on delivery of an
indemnity agreement or security reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, on surrender and
cancellation of such Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
10. Specific Enforcement; Consent to Jurisdiction; Waiver of Jury Trial.
-------------------------------------------------------------------
(a) The Company and the Warrant Holder acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of
this Warrant were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall
be entitled to an injunction or injunctions to prevent or cure breaches of
the provisions of this Warrant and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which
either of them may be entitled by law or equity.
(b) Each of the Company and the Warrant Holder hereby (i) agree that
all actions or proceedings arising directly or indirectly from or in
connection with this Warrant shall be litigated only in the Supreme Court
of the State of New York or the United States District Court for the
Southern District of New York located in New York County, New York and (ii)
to the extent permitted by applicable law, consent to the jurisdiction and
venue of the foregoing courts and consent that any process or notice of
motion or other application to either of said courts or a judge thereof may
be served inside or outside the State of New York or the Southern District
of New York by registered mail, return receipt requested, directed to the
such party at its address set forth in this Warrant (and service so made
shall be deemed complete five (5) days after the same has been posted as
aforesaid) or by personal service or in such other manner as may be
permissible under the rules of said courts. The parties hereto hereby
waive any right to a jury trial in connection with any litigation pursuant
to this Warrant.
7
<PAGE>
11. Entire Agreement: Amendments.
----------------------------
This Warrant, the Exhibits hereto and the provisions contained in the
Agreement, the Registration Rights Agreement or the Debentures and
incorporated into this Warrant and the Warrant Shares contain the entire
understanding of the parties with respect to the matters covered hereby and
thereby and except as specifically set forth herein and therein, neither
the Company nor the Warrant Holder makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be waived or amended other than by a written instrument
signed by the party against whom enforcement of any such amendment or
waiver is sought.
12. Restricted Securities.
---------------------
Sections 5.6, 6.1, 6.2 and 6.3 of the Agreement are incorporated
herein by reference and hereby made a part hereof.
13. Notices.
-------
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be effective (a) upon hand delivery
or delivery by telex (with correction answer back received), telecopy or
facsimile at the address or number designated below (if delivered on a
business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice
is to be received) or (b) on the second business day following the date of
mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first
occur. The addresses for such communications shall be:
to the Company:
Chairman, President & CEO
GRC International, Inc.
1900 Gallows Road
Vienna, VA 22182
with copies to:
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004
Attention: Steve Parker, Esq.
and
Cathy McCoy, Esq.
8
<PAGE>
to the Warrant Holder:
Halifax Fund, L.P.
c/o Citco Fund Services Ltd.
Corporate Centre
West Bay Road
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
Attn:
Fax: (809) 949-3877
with copies to:
The Palladin Group, L.P.
40 West 57th Street
Suite 1500
New York, NY 10019
Attn: Andrew Kaplan
Fax: (212) 698-0599
Either party hereto may from time to time change its address for notices
under this Section 13 by giving at least 10 days prior written notice of
such changed address to the other party hereto.
14. Miscellaneous.
-------------
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against
which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be construed and enforced in accordance with
and governed by the laws of the State of New York. The headings in this
Warrant are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the
validity or enforceability of any other provisions.
9
<PAGE>
15. Expiration
----------
The right to exercise this Warrant shall expire eighty-four (84)
months after the date hereof.
Dated: January 30, 1997 GRC INTERNATIONAL, INC.
By:
------------------------------
Title:
[CORPORATE SEAL]
Attest:
By:
---------------------------
Its:
10
<PAGE>
FORM OF WARRANT EXERCISE
(To be signed only on exercise of Warrant)
TO
-----------------------
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, ____ shares of
Common Stock of GRC International, Inc., a Delaware corporation (the "Company"),
and herewith makes payment of $_________ therefor, and requests that the
certificates for such shares be issued in the name of, and delivered to
__________________, whose address is _____________________________________.
Dated:
--------------------------------------
(Signature must conform to name of holder as specified on
the face of the Warrant)
- --------------------------------
(Address)
<PAGE>
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto
__________ the right represented by the within Warrant to purchase ______ shares
of Common Stock of GRC International, Inc., a ______________ corporation, to
which the within Warrant relates, and appoints ____________ Attorney to transfer
such right on the books of GRC International, Inc., a Delaware corporation, with
full power of substitution the premises.
Dated:
-----------------------------------
(Signature must conform to name of holder as
specified on the face of the Warrant)
-----------------------------------
(Address)
Signed in the presence of:
- ---------------------------------
<PAGE>
Exhibit 10.5
------------
[HALIFAX]
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT ("Registration Rights Agreement"),
entered into as of January 30, 1997, between HALIFAX FUND, L.P., with offices at
c/o The Palladin Group, L.P., 40 West 57th Street, New York, New York 10019,
Attn: Jeffrey E. Devers (the "Purchaser"), and GRC INTERNATIONAL, INC., a
Delaware corporation with offices at 1900 Gallows Road, Vienna, Virginia 22182
(the "Company").
WITNESSETH:
----------
WHEREAS, pursuant to a Convertible Securities Subscription Agreement,
dated as of January 21, 1997 (the "Agreement"), by and between the Company and
the Purchaser, the Company has agreed to sell and the Purchaser has agreed to
purchase U.S. $4,000,000 of the Company's 5% Convertible Debentures due January
30, 2000 (the "Debentures") convertible into shares of the Company's Common
Stock, $0.10 par value (the "Shares");
WHEREAS, the Company has agreed to issue a Common Stock Purchase
Warrant, dated January 30, 1997 (the "Warrant");
WHEREAS, pursuant to the terms of, and in partial consideration for,
Purchaser's purchase of the Debenture, the Company has agreed to provide the
Purchaser with certain registration rights with respect to the Shares issuable
upon conversion of the Debenture and exercise of the Warrant as set forth in
this Registration Rights Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the Agreement
and this Registration Rights Agreement, the Company and the Purchaser agree as
follows:
1. Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Registrable Securities" shall mean any Shares or other securities
issued or issuable to Purchaser or any Holder upon the conversion or exercise or
exchange of any Debentures, Warrant or Shares.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Registration Expenses" shall mean all expenses to be incurred by the
Company in connection with Purchaser's exercise of its registration rights under
this
<PAGE>
Agreement, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue sky
fees and expenses, reasonable fees and disbursements of counsel to Holder for a
"due diligence" examination of the Company and review of the Registration
Statement and related documents, and the expense of any special audits incident
to or required by any such registration (but excluding the compensation of
regular employees of the Company, which shall be paid in any event by the
Company). With respect to the "due diligence" examination of the Company, the
Registration Expenses shall include only fees and disbursements for one (1)
designated counsel for all the Holders of Debentures.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of counsel for Holder not included with "Registration Expenses".
"Holder" shall include the Purchaser and any transferee of Debentures,
Shares or Registrable Securities which have not been sold to the public to whom
the registration rights conferred by this Agreement have been transferred in
compliance with Section 10 of this Agreement.
"Registration Statement" shall have the meaning set forth in Section
2(a) herein.
"Regulation D" shall mean Regulation D as promulgated pursuant to the
Securities Act, and as subsequently amended.
"Securities Act" shall mean the Securities Act of 1933, as amended.
2. Registration Requirements. The Company shall use its diligent
-------------------------
best efforts to effect the registration of the Registrable Securities
contemplated by the Agreement (including, without limitation, the execution of
an undertaking to file post-effective amendments, appropriate qualification
under applicable blue sky or other state securities laws and appropriate
compliance with applicable regulations issued under the Securities Act) as would
permit or facilitate the sale or distribution of all the Registrable Securities
in the manner (including manner of sale) and in all states reasonably requested
by the Holder for purposes of maximizing the proceeds realizable by the Holder
from such sale or distribution. Such best efforts by the Company shall include
without limitation the following:
(a) The Company shall, as soon as practicable after the date
hereof but in no event later than thirty (30) days after the date hereof, file
(i) a registration statement with the Commission pursuant to Rule 415 under the
Securities Act on Form S-3 under the Securities Act (or in the event that the
Company in ineligible to use such form, such other form as the Company is
eligible to use under the Securities Act) covering the Registrable Securities so
requested to be registered ("Registration Statement"); (ii) such blue sky
filings as shall have been requested by the Holder; and (iii) any required
filings with the National Association of Securities Dealers, Inc. or exchange or
market where the Shares are traded. Thereafter the Company shall use its best
efforts to have such Registration Statement and other filings declared effective
as promptly as practicable.
(b) (i) If the Company fails to file a Registration Statement
complying with the requirements of this Registration Rights Agreement within 30
days from the date hereof or if such Registration Statement has not become
effective within 120 days from
2
<PAGE>
the Closing Date the Holder shall have, in addition to and without limiting any
other rights it may have at law, in equity or under the Debentures, the
Agreement or this Registration Rights Agreement (including the right to specific
performance), the right to receive, as liquidated damages, the payments as
provided in subparagraph (ii) of this section.
(ii) If after one hundred twenty (120) days from the Closing
Date, the Registration Statement has not been declared effective by the
Commission, then the Company shall pay to the Purchaser an amount equal to 2% of
the Outstanding Principal Amount (as defined in the Debenture) of the Debenture,
in cash, for each 30-day period after such 120-day period that such Registration
Statement is not effective (which payment shall be pro rata for any period of
less than 30 days. In addition to the foregoing, if after 180 days from the date
hereof the Registration Statement has not been declared effective by the
Commission, then upon demand of such Holder, the Company shall redeem all the
Debentures held by such Holder at a redemption price equal to 130% of the
Outstanding Principal Amount of the Debenture plus accrued interest thereon,
together with all other payments due under this paragraph and under the
Debenture and the Agreement.
(c) If the Holder intends to distribute the Registrable
Securities covered by its request by means of an underwriting, the Holder shall
so advise the Company. The Holder will have the right to select the investment
bankers for such underwriting subject to such investment bankers being
reasonably satisfactory to the Company.
(d) The Company shall enter into such customary agreements
(including a customary underwriting agreement with the underwriter or
underwriters, if any) and take all such other reasonable actions in connection
therewith in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, whether or not an underwriting agreement is
entered into and whether or not the Registrable Securities are to be sold in an
underwritten offering:
(i) make such representations and warranties to the Holder
and the underwriter or underwriters, if any, in form, substance and scope as are
customarily made by issuers to underwriters in secondary underwritten offerings;
(ii) cause to be delivered to the sellers of Registrable
Securities and the underwriter or underwriters, if any, opinions of counsel to
the Company, dated the effective date (or in the case of an underwritten
offering, dated the date of delivery of any Registrable Securities sold pursuant
thereto) of the Registration Statement (which counsel, and opinions (in form,
scope and substance), shall be reasonably satisfactory to the managing
underwriter or underwriters, if any, and the appointed representative or counsel
of the Holder), addressed to the Holder and each underwriter, if any, covering
the matters customarily covered in opinions requested in secondary underwritten
offerings and, in the case of an underwritten offering, such other matters as
may be reasonably requested by the Holder;
(iii) cause to be delivered, immediately prior to the
effectiveness of the Registration Statement (and, in the case of an underwritten
offering, at the time of delivery of any Registrable Securities sold pursuant
thereto), a "comfort" letter from the Company's independent certified public
accountants addressed to the Holder and each underwriter, if any, stating that
such accountants are independent public accountants within the meaning of the
Securities Act and the applicable published rules and regulations thereunder,
and otherwise in customary form and covering such financial and accounting
3
<PAGE>
matters as are customarily covered by letters of the independent certified
public accountants delivered in connection with secondary underwritten public
offerings;
(iv) if an underwriting agreement is entered into, the same
shall set forth in full the indemnification and contribution provisions and
procedures of sections 6 and 7 with respect to all parties to be indemnified
pursuant to such sections; and
(v) the Company shall deliver such documents and
certificates as may be reasonably requested by the Holder being sold or the
managing underwriter or underwriters, if any, to evidence compliance with clause
(i) above and with any customary conditions contained in the underwriting
agreement, if any, or other agreement entered into by the Company;
the foregoing in this paragraph 2(d) shall be done at each closing under such
underwriting or similar agreement or as and to the extent required thereunder;
provided, however, the foregoing in paragraph 2(d) shall not be required on more
than two (2) occasions.
(f) The Company shall make available for inspection by a
representative or representatives of the Holder, any underwriter participating
in any disposition pursuant to a Registration Statement, and any attorney or
accountant retained by such Holder or underwriter, all financial and other
records customary for such purposes, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection with such
Registration Statement. The Holder will agree to keep all non-public
information supplied to it confidential until such information is included in
the Registration Statement.
3. Expenses of Registration. Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance with registration
pursuant to this Agreement shall be borne by the Company, and all Selling
Expenses shall be borne by the Holder.
4. Registration on Form S-3. The Company shall use its best efforts
------------------------
to qualify for registration on Form S-3 or any comparable or successor form or
forms, or in the event that the Company is ineligible to use such form, such
form as the Company is eligible to use under the Securities Act. The foregoing
is not intended to require the Company to pay dividends in order to use
Form S-3.
5. Registration Procedures. In the case of each registration
-----------------------
effected by the Company pursuant to this Agreement, the Company will keep the
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense, the Company will use its best efforts
to:
(a) Keep such registration effective for the period ending
thirty-six (36) months, as extended pursuant to Section 5A hereof, after the
Closing Date (in the case of the Registration Statement for the Shares issuable
upon conversion of the Debentures) and sixty (60) months, as extended pursuant
to Section 5A hereof, after the Closing Date (in the case of the Registration
Statement for the Shares issuable upon exercise of the Warrants) or until the
Holder has completed the distribution of the Shares issuable upon conversion of
the Debentures and exercise of the Warrants, whichever first occurs.
4
<PAGE>
(b) Furnish such number of prospectuses, and amendments and
supplements thereto, and other documents incident thereto as the Holder from
time to time may reasonably request.
(c) Prepare and file with the Commission such amendments and
post-effective amendments to a Registration Statement as may be necessary to
keep such Registration Statement effective for the applicable period; cause the
related Prospectus to be supplemented by any required Prospectus supplement, and
as so supplemented to be filed pursuant to Rule 424 under the Securities Act;
and comply with the provisions of the Securities Act applicable to it with
respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended methods
of disposition by the sellers thereof set forth in such Registration Statement
or supplement to such Prospectus;
(d) Notify each Holder of Registrable Securities included in the
Registration Statement, their counsel and the managing underwriters, if any,
promptly, and (if requested by any such Person) confirm such notice (a "Notice")
in writing, (1) when a Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective, (2) of any request
by the Commission for amendments or supplements to a Registration Statement or
related Prospectus or for additional information, (3) of the issuance by the
Commission of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purposes, (4) if at any
time the representations and warranties of the Company contained in agreements
contemplated by Section 2 (d) cease to be true and correct, (5) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose, (6) of the
happening of any event as a result of which the Prospectus included in the
Registration Statement (as then in effect) contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein (in the case of the Prospectus or
any preliminary Prospectus, in light of the circumstances under which they were
made) not misleading and (7) of the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate or
that there exist circumstances not yet disclosed to the public which make
further sales under such Registration Statement inadvisable pending such
disclosure and post-effective amendment;
(e) Upon the occurrence of any event contemplated by Section
5(d)(2)-(7) and immediately upon the expiration of any Blocking Period (as
defined in Section 5A), prepare, if the occurrence of such event or period
requires such preparation, a supplement or post-effective amendment to the
Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities being sold thereunder,
such Prospectus will not contain an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading;
(f) Make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement, or the lifting
of any suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction, at the earliest possible moment;
5
<PAGE>
(g) Insure that all Registrable Securities subject to the
Registration Statement shall at all times be registered or qualified for offer
and sale under the securities or blue sky laws of such jurisdictions as any
Holder or underwriter reasonably requests in writing; use its best efforts to
keep each such registration or qualification effective, including through new
filings or amendments or renewals, during the period such Registration Statement
is required to be kept effective and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by the applicable Registration Statement;
provided, however, that the Company will not be required to qualify to do
- -------- -------
business or take any action that would subject it to taxation or general service
of process in any jurisdiction where it is not then so qualified or subject;
(h) Use its best efforts to cause the Registrable Securities
covered by the Registration Statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof or the underwriter or underwriters, if any, to
consummate the disposition of such Registrable Securities in accordance with the
chosen method or methods of distribution;
(i) Cause all Registrable Securities included in such Registration
Statement to be listed, by the date of first sale of Registrable Securities
pursuant to such Registration Statement, on the principal securities exchange or
automated interdealer system on which the same type of securities of the Company
are then listed or traded;
5A. Suspensions of Effectiveness. The Company may suspend
----------------------------
dispositions under the Registration Statement and notify the Holder that it may
not sell the Registrable Securities pursuant to any Registration Statement or
Prospectus (a "Blocking Notice") if the Company's management determines in its
reasonable good faith judgment that the Company's obligation to ensure that such
Registration Statement and Prospectus are current and complete would require the
Company to take actions that might reasonably be expected to have a materially
adverse detrimental effect on the Company and its stockholders; provided that
such suspension pursuant to a Blocking Notice or the Notice described below or
as a result of the circumstances described in 5(d)(2)-(7) may not exceed ninety
(90) days (whether or not consecutive) in any twelve (12) month period. The
Holder agrees by acquisition of the Registrable Securities that, upon receipt of
a Blocking Notice or "Notice" from the Company of the existence of any fact of
the kind described in the following sentence, such Holder shall not dispose of,
sell or offer for sale the Registrable Securities pursuant to the Registration
Statement until such Holder receives (i) copies of the supplemented or amended
Prospectus, or until counsel for the Company shall have determined that such
disclosure is not required due to subsequent events, (ii) notice in writing (the
"Advice") from the Company that the use of the Prospectus may be resumed and
(iii) copies of any additional or supplemental filings that are incorporated by
reference in the Prospectus. Pursuant to the immediately preceding sentence,
the Company may provide such Notice to the Holder upon the determination by the
Company of the existence of any fact or the happening or any event that makes
any statement of a material fact made in the Registration Statement, the
Prospectus, any amendment or supplement thereto, or any document incorporated by
reference therein untrue in any material respect, or that requires the making of
any additions to or changes in the Registration Statement or the Prospectus, in
order to make the statements therein not misleading in any material respect. If
so directed by the Company in connection with any such notice, each Holder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Registrable Securities that was current immediately prior to the
time of receipt of such notice.
6
<PAGE>
In the event the Company shall give any such Blocking Notice or Notice, the time
regarding the effectiveness of such Registration Statement set forth in Section
5(a) and the maturity date of the Debenture shall be extended by one and one-
half (1-1/2) times the number of days during the period from and including the
date of the giving of such Blocking Notice or Notice to and including the date
when the Holder shall have received the copies of the supplemented or amended
Prospectus, the Advice and any additional or supplemental filings that are
incorporated by reference in the Prospectus. Delivery of a Blocking Notice or
Notice and the related suspension of any Registration Statement shall not
constitute a default under this Agreement and shall not create any obligation to
pay liquidated damages under Section 2 hereof. However, if the Holder's ability
to sell under the Registration Statement is suspended for more than the 90 day
periods described above (an "Excess Blocking Period"), then the rate of interest
on all of the Debentures shall, to the maximum extent permitted by law, be
permanently increased by two percent (2%) (i.e., from 5% to 7%) commencing on
the first day of the thirty (30) day period (or part thereof) following the
beginning of an Excess Blocking Period; an additional two percent (2%)
commencing on the first day of each of the second and third such thirty (30) day
periods (or part thereof) thereafter; and an additional one (1%) percent on the
first day of each consecutive thirty (30) day period (or part thereof)
thereafter until the Excess Blocking Period terminates. In addition, if the
Excess Blocking Period continues for more than an aggregate of 180 days in any
360-day period, then at Holder's option, the Company shall redeem Holder's
Debentures at a redemption price equal to 130% of the Outstanding Principal
Amount of the Debentures plus accrued interest thereon to the date of
redemption, together with all payments due under this paragraph and under the
Debenture and the Agreement.
6. Indemnification.
---------------
(a) Company Indemnity. Company will indemnify the Holder, each of
-----------------
its of ricers, directors and partners, and each person controlling Holder,
within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls, within the meaning of Section 15 of the
Securities Act and the rules and regulations thereunder, any underwriter,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular or
other document (including any related registration statement, notification or
the like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities Act or any state
securities law or in either case, any rule or regulation thereunder applicable
to the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse the Holder, each of its officers, directors and partners, and each
person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission (or alleged untrue
statement or omission) that is made in reliance upon and in conformity with
written information furnished to the Company by Holder or the underwriter and
stated to be specifically for use therein. In addition to any other information
furnished in writing to the Company by the Holder, the information in the
7
<PAGE>
Registration Statement concerning the Holder under the captions "Selling
Shareholders" (or any similarly captioned section containing the information
required pursuant to Item 507 of Regulation S-K promulgated pursuant to the
Securities Act) and "Plan of Distribution" (or any similarly captioned section
containing information required pursuant to Item 508 of Regulation S-K) shall be
deemed information furnished in writing to the Company by the Holder to the
extent it conforms to information actually supplied in writing by the Holder.
The indemnity agreement contained in this Section 6(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
will not be unreasonably withheld).
(b) Holder Indemnity. The Holder will, if Registrable Securities held
----------------
by it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors, of ricers, partners, and each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of Section 15 of the
Securities Act and the rules and regulations thereunder, each other Holder (if
any), and each of their of ricers, directors and partners, and each person
controlling such other Holder against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, and will reimburse the Company and such other Holders and their
directors, officers and partners, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by Holder and
stated to be specifically for use therein, and provided that no Holder shall be
liable under this indemnity for an amount in excess of the proceeds received by
the Holder from the sale of the Registrable Securities pursuant to such
registration statement.. In addition to any other information furnished in
writing to the Company by the Holder, the information in the Registration
Statement concerning the Holder under the captions "Selling Shareholders" (or
any similarly captioned section containing the information required pursuant to
Item 507 of Regulation S-K promulgated pursuant to the Securities Act) and "Plan
of Distribution" (or any similarly captioned section containing information
required pursuant to Item 508 of Regulation S-K) shall be deemed information
furnished in writing to the Company by the Holder to the extent it conforms to
information actually supplied in writing by the Holder. The indemnity agreement
contained in this Section 6(b) shall not apply to amounts paid in settlement of
any such claims, losses, damages or liabilities if such settlement is effected
without the consent of Holder (which consent shall not be unreasonably
withheld).
(c) Procedure. Each party entitled to indemnification under this
---------
Article (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may
8
<PAGE>
participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Article
except to the extent that the Indemnifying Party is materially and adversely
affected by such failure to provide notice. The indemnifying party shall not,
in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) at any time for such indemnified party, provided,
however, that if separate firm(s) of attorneys are required due to a conflict of
interest, then the indemnifying party shall be liable for the reasonable fees
and expenses of each such separate firm. No Indemnifying Party, in the defense
of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
7. Contribution. If the indemnification provided for in Section 6
------------
herein is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein (other than by reason of the
exceptions provided therein), then each such Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) as between the Company and the Holder on the one hand and the
underwriters on the other, in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Holder on the one hand or
underwriters, as the case may be, on the other from the offering of the
Registrable Securities, or if such allocation is not permitted by applicable
law, in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and of the
Holder or underwriters, as the case may be, on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations and (ii) as
between the Company on the one hand and the Holder on the other, in such
proportion as is appropriate to reflect the relative fault of the Company and of
the Holder in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations.
The relative benefits received by the Company on the one hand and the
Holder or the underwriters, as the case may be, on the other shall be deemed to
be in the same proportion as the proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
from the initial sale of the Registrable Securities by the Company to the Holder
pursuant to this Registration Rights Agreement bear to the proceeds received by
the Holder from the sale of Registrable Securities pursuant to the registration
statement or the total underwriting discounts and commissions received by the
underwriters as set forth in the table on the cover page of the prospectus, as
the case may be. The relative fault of the Company on the one hand and of the
Holder or underwriters, as the case may be, on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
relates to information supplied by the Company, by the Holder or by the
underwriters.
9
<PAGE>
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 7 exceed the amount that such Indemnifying Party
would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 6(a) or 6(b) hereof had been
available under the circumstances.
The Company and the Holder agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Holder or the underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraphs. The amount paid or payable by an Indemnified Party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraphs shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this section, no Holder or underwriter shall
be required to contribute any amount in excess of the amount by which (i) in the
case of the Holder, the total price at which the shares of Common Stock offered
by such Holder and distributed to the public, or offered to the public, exceed
the amount paid by such Holder for the underlying debentures converted into such
shares of Common Stock, (ii) in the case of an underwriter, the total price at
which the Registrable Securities purchased by it and distributed to the public
were offered to the public exceeds, in any such case, the amount of any damages
that the Holder or underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section 11
(f) of the Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
8. Survival. The indemnity and contribution agreements contained in
--------
Sections 6 and 7 and the representations and warranties of the Company referred
to in Section 2(e)(i) shall remain operative and in full force and effect
regardless of (i) any termination of the Agreement or any underwriting
agreement, (ii) any investigation made by or on behalf of any Indemnified Party
or by or on behalf of the Company and (iii) the consummation of the sale or
successive resales of the Registrable Securities.
9. Information by Holder. The Holder shall promptly furnish to the
---------------------
Company such information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Agreement. All information provided to the
Company by Holder shall be accurate and complete in all material respects and
Holder shall promptly notify the Company if any such information becomes
incorrect or incomplete. If the Holder does not timely provide all such
reasonably requested information, the Holder shall not be entitled to the
liquidated damages contemplated by paragraph 2(b)(ii) to the extent that such
delay in the Registration Statement becoming effective is caused by such failure
to timely provide information unless such Holder shall be able to demonstrate to
the Company's satisfaction that such failure to timely provide did not
proportionately contribute to the event giving rise to the indemnity obligation.
10. Transfer or Assignment of Registration Rights. The rights,
---------------------------------------------
granted to Purchaser by the Company under this Registration Rights Agreement, to
cause the Company to register Registrable Securities, may be transferred or
assigned to a transferee or assignee
10
<PAGE>
of any of not less than $100,000 in Outstanding Principal Amount of Debentures
or any permitted transferee or assignee of the Warrants, provided that the
Company is given written notice by Holder at the time of or within a reasonable
time after said transfer or assignment, stating the name and address of said
transferee or assignee and identifying the securities with respect to which such
registration rights are being transferred or assigned, and provided further that
the transferee or assignee of such rights is not deemed by the board of
directors of the Company, in its reasonable judgment, to be a competitor of the
Company; and provided further that the transferee or assignee of such rights
agrees to be bound by this Registration Rights Agreement.
11. Miscellaneous.
-------------
(a) Entire Agreement. This Registration Rights Agreement contains
----------------
the entire understanding and agreement of the parties, and may not be modified
or terminated except by a written agreement signed by both parties.
(b) Notices. Any notice or other communication given or permitted
-------
under this Agreement shall be in writing and shall be deemed to have been duly
given if personally delivered or sent by registered or certified mail, return
receipt requested, postage prepaid or by air courier, (a) if to Purchaser, at
its address hereinabove set forth, (b) if to the Company, to GRC International,
Inc., at its address hereinabove set forth, and (c) if to a Holder other than
Purchaser, at the address thereof furnished by like notice to the Company, or
(d) to any such addresses at such other address or addresses as shall be so
furnished to the other parties by like notice.
(c) Gender of Terms. All terms used herein shall be deemed to
---------------
include the feminine and the neuter, and the singular and the plural, as the
context requires.
(d) Governing Law; Consent of Jurisdiction; Waiver of Jury Trial.
This Registration Rights Agreement and the validity and performance of the terms
hereof shall be governed by and construed in accordance with the laws of the
State of New York without regard to principles of conflicts of law or choice of
law, except to the extent that the law of Delaware regulates the Company's
issuance of securities. The parties hereto hereby agree that all actions or
proceedings arising directly or indirectly from or in connection with this
Registration Rights Agreement shall be litigated only in the Supreme Court of
the State of New York or the United States District Court for the Southern
District of New York located in New York County, New York. To the extent
permitted by applicable law, the parties hereto consent to the jurisdiction and
venue of the foregoing courts and consent that any process or notice of motion
or other application to either of said courts or a judge thereof may be served
inside or outside the State of New York or the Southern District of New York by
registered mail, return receipt requested, directed to the such party at its
address set forth in this Registration Rights Agreement (and service so made
shall be deemed complete five (5) days after the same has been posted as
aforesaid) or by personal service or in such other manner as may be permissible
under the rules of said courts. The parties hereto hereby waive any right to a
jury trial in connection with any litigation pursuant to this Registration
Rights Agreement.
(e) Titles. The titles used in this Registration Rights Agreement
------
are used for convenience only and are not to be considered in construing or
interpreting this Registration Rights Agreement.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed as of the date first above written.
HALIFAX FUND, L.P., a Cayman Islands
exempted limited partnership
By: THE PALLADIN GROUP, L.P.,
as Attorney-in-Fact
By: PALLADAIN CAPITAL MANAGEMENT, L.L.C.,
General Partner
By:
---------------------------------------------
Andrew Kaplan, Authorized Representative
GRC INTERNATIONAL, INC.,
a Delaware Corporation
By:
-------------------------
Name:
-----------------------
Title:
----------------------
12
<PAGE>
Exhibit 10.6
------------
STRUCTURED EQUITY LINE FLEXIBLE FINANCING\(SM)\ AGREEMENT
Between
CRIPPLE CREEK SECURITIES, LLC
And
GRC INTERNATIONAL, INC.
Dated as of January 21, 1997
<PAGE>
STRUCTURED EQUITY LINE FLEXIBLE FINANCING\(SM)\ AGREEMENT dated as of
January 21, 1997 (the "Agreement"), between Cripple Creek Securities, LLC (the
"Investor"), a limited liability company organized and existing under the laws
of the State of Delaware, and GRC International, Inc., a corporation organized
and existing under the laws of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue to the Investor, and the
Investor shall purchase from the Company, from time to time as provided herein,
the Company's Common Stock, par value $.10 per share (the "Common Stock"), for a
maximum aggregate Purchase Price of $18,000,000 (the "Maximum Offering Amount");
and
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) promulgated by the Securities and Exchange Commission ("SEC") under
the United States Securities Act of 1933, as amended (the "Securities Act"),
and/or upon such other exemption from the registration requirements of the
Securities Act as may be available with respect to any or all of the investments
in Common Stock to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
-------------------
Section 1.1 Additional Investment Amount". See Section 2.1(b)(iv).
-----------------------------
Section 1.2 "Additional Purchase Date" shall mean, with respect to any
------------------------
Investment Period for which the Company has delivered to the Investor an
Additional Purchase Notice, any Trading Day during such Investment Period on
which the Investor notifies the Company by delivery of an Investor Notice of its
election to purchase all or a portion of the Additional Investment Amount in
respect of such Investment Period.
Section 1.3 "Additional Purchase Notice". See Section 2.1(b)(iv).
---------------------------
Section 1.4 "Additional Warrant". See Section 2.7(b)(ii).
-------------------
Section 1.5 "Additional Warrant Registration Statement". See Section
------------------------------------------
3.2(a).
Section 1.6 "Cancellation Notice" shall mean a notice delivered by the
-------------------
Company in its sole and absolute discretion to the Investor with respect to an
Investment Period notifying the Investor that it is not required to purchase the
Minimum Investment Amount and/or any Additional Investment Amount for such
Investment Period.
Section 1.7 "Closing" shall mean the consummation of each purchase and
-------
sale of Common Stock pursuant to Section 2.1.
Section 1.8 "Closing Date" shall mean, with respect to each purchase and
------------
sale of Common Stock pursuant to this Agreement, the third Trading Day following
Investor's notice to
2
<PAGE>
the Company of its election to purchase Common Stock from the Company (as
extended pursuant to Section 3.2(i)) provided all conditions to the Closing have
been satisfied.
Section 1.9 "Commitment Period" shall mean the period commencing on the
-----------------
date the Registration Statement is declared effective and expiring on the
earliest to occur of (a) the election by the Company to terminate the Investor's
obligation to purchase Common Stock pursuant to Section 10.4 herein, (b) the
date on which the Investor shall have purchased Common Stock pursuant to this
Agreement for an aggregate Purchase Price of $18,000,000 or such lesser maximum
purchase amount as determined pursuant to Section 2.2(d), (c) the date this
Agreement is terminated pursuant to Section 2.6 or (d) the date occurring forty-
two (42) months (subject to extension as provided by Section 2.2(b)) from the
date of commencement of such period.
Section 1.10 "Common Stock". See introductory paragraphs.
-------------
Section 1.11 "Condition Satisfaction Date". See Section 3.2.
Section 1.12 "Effective Date" shall mean January 30, 1997.
--------------
Section 1.13 "Equity Offering" shall mean the issuance or sale by the
---------------
Company (a) in a registered public offering or (b) in a transaction exempt from
or not subject to the registration requirements of the Securities Act of any
shares of Common Stock or securities which are convertible into or exchangeable
for its Common Stock or any warrants, options or other rights to subscribe for
or purchase its Common Stock or any such convertible or exchangeable securities
(other than securities issued or issuable under the Company's present or future
employee, officer, director or consultant stock or option or similar equity-
based compensation plans (collectively, the "Compensation Plans")), upon the
conversion or exchange of convertible or exchangeable securities or upon the
exercise of warrants (excluding the Warrant and the Additional Warrant), or
other rights, or upon the issuance of any shares of Common Stock issued upon
exercise of options, conversion or exchange of convertible or exchangeable
securities, warrants or other rights outstanding on the date of execution and
delivery of this Agreement (other than the Additional Warrant) and listed in the
SEC Documents on file with the SEC as of the date of this Agreement (other than
the Warrant and the Additional Warrant) and other than (i) shares of Common
Stock which may be issued upon exercise of options granted under the
Compensation Plans, (ii) shares of Common Stock which may be issued upon
exercise of the Warrant and the Additional Warrant, (iii) shares of Common Stock
or securities which are convertible into or exchangeable for Common Stock or any
warrants, options or other rights to subscribe for or purchase Common Stock or
any such convertible or exchangeable securities issued in strategic corporate
partnering transactions, and (iv) shares of Common Stock which may be issued
upon conversion of convertible debentures issued on the date of this Agreement
(and exercise of warrants issued in connection therewith).
Section 1.14 "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
Section 1.15 "Floor Price". See Section 2.2(b).
------------
Section 1.16 "Investment Amount" shall mean the amount invested by the
-----------------
Investor with respect to any Optional Purchase Date as notified by the Investor
to the Company in accordance with Section 2.5(a) hereof, and with respect to any
Mandatory Purchase Date,
3
<PAGE>
Additional Purchase Date or Investor Incremental Purchase Date, as the case may
be, as notified by the Investor to the Company in accordance with Sections
2.5(b), (c) and (d), respectively, which Investment Amount shall be at least
$100,000 and shall be in increments of $50,000 in excess thereof.
Section 1.17 "Investment Period" shall mean each three-month period
-----------------
(subject to extension as provided by Section 2.2(b)) commencing on (a) in the
case of the first Investment Period, the first Trading Day subsequent to the
expiration of the Optional Purchase Period and (b) in the case of subsequent
Investment Periods, commencing on the Trading Day subsequent to the expiration
of the immediately preceding Investment Period.
Section 1.18 "Investor Incremental Purchase". See Section 2.1(b)(iii).
------------------------------
Section 1.19 "Investor Incremental Purchase Date" shall mean any Trading
----------------------------------
Day during each Investment Period with respect to which a Mandatory Purchase
Notice has been given that the Investor in its sole discretion elects by
delivery of an Investor Incremental Purchase Notice to purchase shares of Common
Stock pursuant to an Investor Incremental Purchase.
Section 1.20 "Investor Incremental Purchase Notice" shall mean a notice
------------------------------------
delivered by the Investor to the Company, notifying the Company of the
Investor's election to purchase Common Stock pursuant to an Investor Incremental
Purchase.
Section 1.21 "Investor Notice". See Section 2.5(e)(i).
----------------
Section 1.22 "Mandatory Purchase Date" shall mean, with respect to any
-----------------------
Investment Period for which the Company has delivered a Mandatory Purchase
Notice to the Investor, any Trading Day during such Investment Period on which
the Investor notifies the Company by delivery of an Investor Notice of its
election to purchase all or a portion of the Minimum Investment Amount in
respect of such Investment Period.
Section 1.23 "Mandatory Purchase Notice". See Section 2.5(b)(i).
--------------------------
Section 1.24 "Mandatory Purchase Period" shall mean the aggregate of all
-------------------------
Investment Periods during the Commitment Period.
Section 1.25 "Material Adverse Effect" shall mean any effect on the
-----------------------
business, operations, properties, prospects, or financial condition of the
Company and which is material and adverse to the Company or to the Company and
such other entities controlled by the Company, taken as a whole and/or any
condition or situation which would prohibit or otherwise interfere with the
ability of the Company to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, the Warrant or the Additional
Warrant.
Section 1.26 "Maximum Offering Amount". See introductory paragraphs.
------------------------
Section 1.27 "Minimum Investment Amount". See Section 2.1(b)(ii).
--------------------------
Section 1.28 "Minimum Offering Amount" shall mean the purchase of Common
-----------------------
Stock of the Company by the Investor for a minimum aggregate Purchase Price of
$5,000,000.
4
<PAGE>
Section 1.29 "NASD" shall mean the National Association of Security
Dealers, Inc.
Section 1.30 "Optional Purchase Date" shall mean any Trading Day during
----------------------
the Optional Purchase Period that the Investor in its sole discretion elects by
delivery of an Optional Purchase Notice to purchase Common Stock from the
Company.
Section 1.31 "Optional Purchase Notice". See Section 2.5(a).
-------------------------
Section 1.32 "Optional Purchase Period" shall mean a period of six months
------------------------
commencing on the date the Registration Statement is declared effective.
Section 1.33 "Principal Market" shall mean the New York Stock Exchange,
----------------
the American Stock Exchange, or the Nasdaq National Market, whichever is at the
time the principal trading exchange or market for the Common Stock.
Section 1.34 "Purchase Price". See Section 2.3.
---------------
Section 1.35 "Registration Rights Agreement". See Section 2.7(c).
------------------------------
Section 1.36 "Registration Statement". See Section 3.2(a).
-----------------------
Section 1.37 "Revolving Credit Agreement". See Section 3.2(f).
---------------------------
Section 1.38 "Securities Act". See introductory paragraphs.
---------------
Section 1.39 "SEC". See introductory paragraphs.
----
Section 1.40 "SEC Documents". See Section 5.2.
--------------
Section 1.41 "Stock Price". See Section 2.3.
------------
Section 1.42 "Trading Day" shall mean any day during which the New York
-----------
Stock Exchange shall be open for business and on which trading of the Common
Stock on the Principal Market shall not have been suspended or limited.
Section 1.43 "Value of Open Market Trading" with respect to any Trading
----------------------------
Day shall mean the product of the reported trading volume of the Common Stock on
the Principal Market (in the case that the Principal Market is the New York
Stock Exchange or the American Stock Exchange, the reported trading volume of
the Common Stock shall be the reported traded volume on such exchange and shall
not be the composite trading volume and in the case that the Principal Market is
the Nasdaq National Market, the reported trading volume shall be 50% of the
amount reported) on any such day, multiplied by the weighted average trading
price (by trading volume) of the Common Stock on such day (each as determined in
accordance with Section 12.4 hereof); provided, however, that in the event that
the Company consummates a registered public offering of Common Stock (whether
primary or secondary), the Trading Day on which such transaction is consummated
shall be excluded from any calculation under this Agreement based upon the Value
of Open Market Trading.
5
<PAGE>
Section 1.44 "Warrant". See Section 2.7(a).
--------
Section 1.45 "Warrant Exercise Price". See Section 2.7(a).
-----------------------
Section 1.46 "Warrant Registration Statement". See Section 3.2(a).
-------------------------------
Section 1.47 "Warrant Shares". See Section 3.2(1).
---------------
ARTICLE II
Purchase and Sale of Common Stock
---------------------------------
Section 2.1 Investments. (a) Subject to the terms and conditions set
-----------
forth herein (including, without limitation, the provisions of Article III
hereof) (i) during the Optional Purchase Period the Investor may in its sole and
absolute discretion from time to time direct the Company to issue to the
Investor, and the Company shall be obligated to issue and sell to the Investor,
shares of Common Stock at the Purchase Price determined pursuant to Section 2.3
for an aggregate Purchase Price of up to $3,000,000 and (ii) during the
Mandatory Purchase Period, the Company may in its sole and absolute discretion
from time to time elect to issue and sell to the Investor, and the Investor
shall be obligated to purchase from the Company, on such Mandatory Purchase
Date, Mandatory Purchase Dates, Additional Purchase Date or Additional Purchase
Dates as the Investor shall elect, shares of Common Stock at the Purchase Price
determined pursuant to Section 2.3.
(b) (i) The Investor shall have the right, but
not the obligation, at any time and from time to time during the Optional
Purchase Period to purchase Common Stock from the Company for an aggregate
Purchase Price of up to $3,000,000, by delivering an Optional Purchase Notice or
Optional Purchase Notices to the Company provided that (A) on the date of
delivery of an Optional Purchase Notice, the Stock Price shall not below the
Floor Price and (B) on the Trading Day immediately preceding the date of
delivery of an Optional Purchase Notice all conditions provided in this
Agreement for the delivery of an Optional Purchase Notice are satisfied. Each
Optional Purchase Notice shall set forth the Investment Amount with respect to
the Optional Purchase Date to which it relates.
(ii) Subject to the terms and conditions of
this Agreement, on or before the thirtieth (30th) day preceding the commencement
of an Investment Period, the Company may deliver a Mandatory Purchase Notice to
the Investor which shall require the Investor to purchase shares of Common Stock
from the Company during such Investment Period for an aggregate Purchase Price
of $1,500,000, subject to the limitations imposed by Section 2.2(a) (the
"Minimum Investment Amount"), provided that on the date of delivery of the
Mandatory Purchase Notice and on the Trading Day immediately preceding the
commencement of such Investment Period all conditions provided in this Agreement
for the delivery of a Mandatory Purchase Notice are satisfied. A Mandatory
Purchase Notice shall be irrevocable by the Company. Upon delivery of such
Mandatory Purchase Notice, the Investor shall be obligated to purchase on the
Closing Date in respect of such Mandatory Purchase Date or Mandatory Purchase
Dates as the Investor elects during the Investment Period to which such
Mandatory Purchase Notice relates, shares of Common Stock for an aggregate
Purchase Price equal to the Minimum Investment Amount. On each
6
<PAGE>
such Mandatory Purchase Date, the Investor shall deliver to the Company an
Investor Notice which shall set forth the Investment Amount.
(iii) Subject to the terms and conditions
of this Agreement, the Investor may, but is not obligated to, during any
Investment Period with respect to which a Mandatory Purchase Notice has been
given, purchase shares of Common Stock from the Company at any time and from
time to time in its sole and absolute discretion during such Investment Period
for an aggregate Purchase Price (an "Investor Incremental Purchase"), provided
that (A) the aggregate Purchase Price for all shares of Common Stock to be
acquired during such Investment Period, whether pursuant to a Mandatory Purchase
Notice, an Additional Purchase Notice or an Investor Incremental Purchase
Notice, shall not exceed $3,000,000 and (B) the aggregate Purchase Price for all
shares of Common Stock previously acquired by the Investor under this Agreement,
whether pursuant to a Mandatory Purchase Notice, an Additional Purchase Notice
or an Investor Incremental Purchase Notice and to be acquired during such
Investment Period shall not exceed the Minimum Offering Amount unless otherwise
agreed to by the Company in writing or unless the Company has elected to sell to
the Investor shares of Common Stock in excess of the Minimum Offering Amount as
provided below. Any Investor Incremental Purchase shall, at the Investor's
option and in its sole and absolute discretion, be credited towards the
Investor's Minimum Investment Amount for up to two Investment Periods for which
a Mandatory Purchase Notice has been given. The Investor will notify the Company
of its intent to credit all or a portion of the Investor Incremental Purchase at
any time prior to the end of an Investment Period with respect to which the
Investor elects to apply such credit. At such time as the Investor shall have
acquired shares of Common Stock under this Agreement for an aggregate Purchase
Price equal to at least the Minimum Offering Amount, the Investor shall no
longer have the right to effect an Investor Incremental Purchase; provided,
however, that the Investor shall continue to have the right to effect such
Investor Incremental Purchase if the Company allows the Investor to do so by
providing its written consent. At such time as the Company has elected to sell
to the Investor shares of Common Stock in excess of the Minimum Offering Amount
by delivery of a Mandatory Purchase Notice to the Investor following the sale by
the Company to the Investor of shares of Common Stock for an aggregate Purchase
Price of at least the Minimum Offering Amount or by otherwise advising the
Investor in writing, the Investor's right to effect Investor Incremental
Purchases shall be restored as provided in this Subsection 2.1(b)(iii). Each
Investor Incremental Purchase Notice shall set forth the Investment Amount with
respect to the Investor Incremental Purchase Date to which it relates.
(iv) Subject to the terms and
conditions of this Agreement, on or before the thirtieth (30th) day immediately
preceding the commencement of an Investment Period, the Company may deliver a
written notice to the Investor (each such notice hereinafter referred to as an
"Additional Purchase Notice") requiring the Investor to purchase shares of
Common Stock from the Company (in addition to the Minimum Investment Amount)
during such Investment Period for an aggregate Purchase Price of up to
$1,500,000 (which must be in increments of $50,000), subject to the limitations
imposed by Section 2.2(a) (the "Additional Investment Amount"), provided that
(A) the average Value of Open Market Trading for the prior twenty (20) Trading
Days preceding and excluding the date of commencement of such Investment Period
was at least $500,000, and (B) all conditions precedent for delivery of an
Additional Purchase Notice are satisfied on the date of delivery of the
Additional Purchase Notice and the Trading Day immediately preceding the
commencement of such Investment Period. An Additional Purchase Notice shall be
irrevocable by the Company. The Company may not deliver an Additional Purchase
Notice
7
<PAGE>
with respect to any Investment Period unless it has also delivered a Mandatory
Purchase Notice with respect to such Investment Period. Upon receipt of such
Additional Purchase Notice, the Investor shall be obligated to purchase on the
Closing Date in respect of such Additional Purchase Date or Additional Purchase
Dates as the Investor elects during the Investment Period to which such
Additional Purchase Notice relates, shares of Common Stock for an aggregate
Purchase Price equal to the Additional Investment Amount. On each such
Additional Purchase Date or Additional Purchase Dates, the Investor shall
deliver to the Company an Investor Notice which shall set forth the Investment
Amount.
(c) Notwithstanding anything herein to
the contrary, the Investor shall not be required or entitled to purchase shares
of Common Stock to the extent such purchase would conflict with the provisions
of Subsection 3.2(1)(i) herein.
(d) On the Closing Date in respect of
an Optional Purchase Date, Mandatory Purchase Date, Additional Purchase Date or
Investor Incremental Purchase Date, the Company shall sell to the Investor the
number of shares of Common Stock determined pursuant to Section 2.4(b);
provided, however, that the Investor shall not be required to purchase from the
Company shares of Common Stock pursuant to the terms of this Agreement for an
aggregate Purchase Price in excess of the Maximum Offering Amount.
Section 2.2 Limitation on Investment Amount. (a) Notwithstanding the
-------------------------------
obligation of the Investor to purchase shares of Common Stock pursuant to
Section 2.1(b)(ii) and (iv), the aggregate Investment Amount for any Investment
Period (whether pursuant to a Mandatory Purchase Notice or an Additional
Purchase Notice or any combination thereof) shall not exceed the lesser of (i)
the amount set forth in the Mandatory Purchase Notice or Additional Purchase
Notice or any combination thereof which shall not exceed $3,000,000, (ii) an
amount equal to the product of (A) 8% of the average daily Value of Open Market
Trading of the Common Stock on the Principal Market for each Trading Day during
the Investment Period immediately preceding the Investment Period with respect
to which a Mandatory Purchase Notice or an Additional Purchase Notice (or
combination thereof) is given times (B) the number of Trading Days in such
immediately preceding Investment Period (rounded up to the next increment of
$50,000), and (iii) an amount equal to the product of (A) 8% of the average
daily Value of Open Market Trading of the Common Stock on the Principal Market
for each Trading Day during the Investment Period with respect to which a
Mandatory Purchase Notice or an Additional Purchase Notice (or a combination
thereof) was given times (B) the number of Trading Days in such Investment
Period (rounded up to the next increment of $50,000). Notwithstanding the
limitations imposed by clauses (ii) and (iii) of this Subsection 2.2(a) on the
required investment during any Investment Period in respect of a Mandatory
Purchase Notice or an Additional Purchase Notice, the Investor shall be entitled
to effect an Investor Incremental Purchase during such Investment Period in
accordance with 2.1(b)(iii).
(b) Notwithstanding anything to the
contrary contained herein, the Investor may not acquire any shares of Common
Stock during the Optional Purchase Period or any Investment Period (whether
pursuant to an Optional Purchase Notice, a Mandatory Purchase Notice, Additional
Purchase Notice or an Investor Incremental Purchase Notice) if the Stock Price
during any of the three (3) Trading Days prior to but excluding an Optional
Purchase Date, a Mandatory Purchase Date, an Additional Purchase Date or an
Investor Incremental Purchase Date shall be below $4.00 per share (the "Floor
Price"). The Investment Period and the Commitment Period shall be extended by
1-1/2 Trading Days (rounded up to the next full Trading Day) for each Trading
Day within such
8
<PAGE>
Investment Period during which Stock Price is below the Floor Price; provided,
however, that if during any Investment Period during which the Investor is
obligated to purchase Common Stock pursuant to a Mandatory Purchase Notice or an
Additional Purchase Notice, the Stock Price shall be below the Floor Price for
more than twenty (20) Trading Days, (i) the Investment Period and the Commitment
Period shall be extended by thirty (30) Trading Days only, provided, however,
that in no event shall the Commitment Period extend beyond forty-eight (48)
months, (ii) the Investor shall not be required to purchase any shares of Common
Stock during the remainder of the Vestment Period (as so extended), regardless
of its obligation to purchase Common Stock at the commencement of the Investment
Period and the number of shares of Common Stock actually purchased during such
Investment Period, and (iii) the Investor shall have the option to purchase
shares of Common Stock on any Trading Day (such purchase to constitute an
Investor Incremental Purchase) within the remainder of the Investment Period
provided that on such Trading Day the Stock Price shall not be below the Floor
Price.
(c) The Investor shall not purchase
during any Investment Period shares of Common Stock in excess of an aggregate
Purchase Price of $3,000,000 without the Company's prior written consent.
(d) If during the Mandatory Purchase
Period the Company shall deliver or shall have been deemed to deliver to the
Investor more than six (6) Cancellation Notices, the Investor's obligation to
purchase shares of Common Stock up to the Maximum Offering Amount shall be
reduced by $1,500,000 for each subsequent Investment Period in which a
Cancellation Notice is given.
Section 2.3 Determination of Purchase Price. The purchase price per share
-------------------------------
of the Company's Common Stock (the "Purchase Price") shall be 94% of the low
trading price of the Common Stock on the Principal Market, during the three (3)
Trading Days prior to but excluding an Optional Purchase Date, a Mandatory
Purchase Date, Additional Purchase Date or Investor Incremental Purchase Date,
as the case may be (the "Stock Price").
Section 2.4 (a) Closings. On each Closing Date (i) the Company shall deliver
--------
to the Investor one or more certificates representing the number of shares of
Common Stock to be purchased by the Investor pursuant to Section 2.1 registered
in the name of the Investor or, at the Investor's option, deposit such
certificate(s) into such account or accounts previously designated by the
Investor and (ii) the Investor shall deliver to the Company the amount
determined pursuant to Section 2.4(b) by federal funds wire transfer or transfer
of New York Clearing House funds to an account designated by the Company's Chief
Executive Officer or Chief Financial Officer or such other person as either of
them may designate in writing, on or before the Closing Date. In addition, on
or prior to the Closing Date, each of the Company and the Investor shall deliver
all documents, instruments and writings required to be delivered or reasonably
requested by either of them pursuant to this Agreement in order to implement and
effect the transactions contemplated herein.
(b) Payment for the Common Stock Purchased by the Investor. On the
------------------------------------------------------
Closing Date, the Investor shall pay to the Company the Investment Amount (less
any amounts withheld pursuant to Section 11.2) in such funds as provided in
2.4(a), and shall receive from the Company the number of shares of Common Stock
determined by dividing the Investment Amount by the Purchase Price (rounded to
the nearest whole number of shares).
9
<PAGE>
Section 2.5 Mechanics of Notification.
--------------------------
(a) Delivery of Optional Purchase Notice. At any time and from time to
------------------------------------
time during the Optional Purchase Period, the Investor may deliver a written
notice to the Company (each such notice hereinafter referred to as an "Optional
Purchase Notice") setting forth the Investment Amount, subject to the
limitations imposed by Sections 2.1 and 3.2(1) herein, which the Investor
intends to purchase from the Company. The Investor may not deliver an Optional
Purchase Notice to the Company if the conditions set forth in Section 2.1(b)(i)
are not satisfied or if the events described in Section 2.6 occur, or if a
dispute exists between the Investor and the Company pursuant to Section 3.3 or
if the conditions set forth in Article III are not satisfied. If such Optional
Purchase Notice does not comply with Section 2.1(b)(i), any of the events
described in Section 2.6 occur, a dispute exists between the Investor and the
Company pursuant to Section 3.3 or if the conditions set forth in Article III
are not satisfied, on or after the date on which an Optional Purchase Notice is
given but prior to the closing of the transaction on the Closing Date associated
with such Optional Purchase Notice, such Optional Purchase Notice shall be null,
void and of no further force or effect.
(b) Delivery of Mandatory Purchase Notice. (i) On or before the
--------------------------------------
thirtieth (30th) day immediately preceding the commencement of an Investment
Period, the Chief Executive Officer or the Chief Financial Officer (or such
other person as designated by either in writing) of the Company may deliver a
written notice to the Investor (each such notice hereinafter referred to as a
"Mandatory Purchase Notice") which shall require the Investor to purchase shares
of Common Stock from the Company for an aggregate Purchase Price of $1,500,000,
subject to the limitations imposed by Sections 2.1 and 3.2(1) herein. The
Company may not deliver a Mandatory Purchase Notice to the Investor if the
conditions set forth in Section 2.1(b)(ii) are not satisfied or if the events
described in Section 2.6 occur, or if a dispute exists between the Investor and
the Company pursuant to Section 3.3, or if the conditions set forth in Article
III are not satisfied. If the conditions set forth in Section 2.1(b)(ii) are
not satisfied, any of the events described in Section 2.6 occur, a dispute
exists between the Investor and the Company pursuant to Section 3.3 or if the
conditions set forth in Article III are not satisfied, on or after the date on
which a Mandatory Purchase Notice is given but prior to the closing of the
transaction on the Closing Date associated with such Mandatory Purchase Notice,
the Investor Notice relating to such Mandatory Purchase Notice shall be null,
void and of no further force or effect.
(ii) In the event the Company intends not to obligate the Investor to
purchase Common Stock during an Investment Period, on or before the thirtieth
(30th) day preceding the commencement of such Investment Period, the Company
shall deliver a Cancellation Notice to the Investor. Such Cancellation Notice
shall be irrevocable by the Company.
(iii) In the event the Company fails to deliver a Mandatory Purchase
Notice or a Cancellation Notice pursuant to clause (b)(i) or (b)(ii) on or
before the thirtieth (30th) day preceding the commencement of an Investment
Period, the Company shall be deemed to have delivered a Cancellation Notice with
respect to such Investment Period.
(c) Delivery of an Additional Purchase Notice. (i) On or before the thirtieth
-----------------------------------------
(30th) day immediately preceding the commencement of an Investment Period, the
Chief Executive Officer or the Chief Financial Officer (or such other person as
designated by either in writing) of the Company may deliver an Additional
Purchase Notice to the Investor stating the Additional Investment Amount,
subject to the limitations imposed by Sections 2.1 and 3.2(1) herein,
10
<PAGE>
which the Investor shall be required to purchase during such Investment Period
(in addition to shares of Common Stock which the Investor is required to
purchase pursuant to the delivery by the Company to the Investor of a Mandatory
Purchase Notice). An Additional Purchase Notice may not be delivered if a
Mandatory Purchase Notice is not delivered with respect to the same Investment
Period. The Company may not deliver an Additional Purchase Notice to the
Investor if the conditions set forth in Section 2.1(b)(iv) are not satisfied or
if the events described in Section 2.6 occur, or if a dispute exists between the
Investor and the Company pursuant to Section 3.3, or if the conditions set forth
in Article III are not satisfied. If the conditions set forth in Section
2.1(b)(iv) are not satisfied, any of the events described in Section 2.6 occur,
a dispute exists between the Investor and the Company pursuant to Section 3.3 or
if the conditions set forth in Article III are not satisfied, on or after the
date on which an Additional Purchase Notice is given but prior to the closing of
the transaction on the Closing Date associated with such Additional Purchase
Notice, such Additional Purchase Notice shall be null, void and of no further
force or effect.
(ii) In the event the Company intends to not require the Investor to
purchase Common Stock during an Investment Period pursuant to an Additional
Purchase Notice, on or before the thirtieth (30th) day preceding the
commencement of such Investment Period, the Company shall deliver a Cancellation
Notice to the Investor. Such Cancellation Notice shall be irrevocable.
(d) Delivery of an Investor Incremental Purchase Notice. During any
---------------------------------------------------
Investment Period with respect to which the Company delivers a Mandatory
Purchase Notice the Investor may, in its sole and absolute discretion, at any
time and from time to time deliver an Investor Incremental Purchase Notice to
the Company stating the amount of the Investor Incremental Purchase for that
Investment Period, subject to the limitations imposed by Section 2.1(b)(iii).
(e) Date of Delivery of an Optional Purchase Notice, an Investor
------------------------------------------------------------
Incremental Purchase Notice an Investor Notice, a Mandatory Purchase Notice, an
- -------------------------------------------------------------------------------
Additional Purchase Notice or Other Notice.
- -------------------------------------------
(i) An Optional Purchase Notice, an Investor Incremental Purchase
Notice, and any other notice sent by the Investor to the Company notifying the
Company of the Investor's election to purchase Common Stock (each an "Investor
Notice") and any other notice sent by the Investor to the Company shall be
deemed to be delivered on the Trading Day it is received by facsimile or
otherwise by the Company if such notice is received prior to 5:00 P.M. New York
time, or on the immediately succeeding Trading Day if it is received by
facsimile or otherwise after 5:00 P.M. New York time (in which case the
provisions of Sections 2.1(b) and 2.2(b) must be satisfied as of such
immediately succeeding Trading Day).
(ii) A Mandatory Purchase Notice or an Additional Purchase Notice
shall be deemed to be delivered on the Trading Day it is received by facsimile
or otherwise by the Investor if such notice is received prior to 5:00 P.M. New
York time, or on the immediately succeeding Trading Day if it is received by
facsimile or otherwise after 5:00 P.M. New York time or on any day which is not
a Trading Day (in which case the provisions of Sections 2.1(b) and 2.2(b) must
be satisfied as of such immediately succeeding Trading Day).
Section 2.6 Termination or Suspension of Investment Obligation. (a) The
--------------------------------------------------
Investor shall not purchase any shares of Common Stock from the Company on any
Closing Date nor may an Optional Purchase Notice or Additional Purchase Notice
be delivered nor shall a
11
<PAGE>
Mandatory Purchase Notice be delivered at any time during the Commitment Period
that there shall exist any one or more of the following: (i) the withdrawal of
the effectiveness of the Registration Statement, (ii) the withdrawal of the
effectiveness of the Warrant Registration Statement or the Additional Warrant
Registration Statement or any other suspension of the use of the Warrant
Registration Statement or related prospectus or the Additional Warrant
Registration Statement or related prospectus pursuant to the Registration Rights
Agreement, (iii) the Company's failure to satisfy the requirements of Section
3.2 or (iv) any failure or interruption in the material compliance by the
Company with the covenants provided in Article VI. In the event that the Company
shall have delivered a Mandatory Purchase Notice or Additional Purchase Notice
with respect to an Investment Period and one or more of the events listed in
clauses (i) through (iv) above exist at the time such Mandatory Purchase Notice
or Additional Purchase Notice is given but has not been cured by the Trading Day
preceding the commencement of the Investment Period to which such notice
relates, the Mandatory Purchase Notice or Additional Purchase Notice shall be
void and of no effect. In the event that the Company shall have delivered a
Mandatory Purchase Notice or Additional Purchase Notice with respect to an
Investment Period and one or more of the events listed in clauses (i) through
(iv) above occur during the Investment Period, the obligation of the Investor to
purchase shares of Common Stock during such Investment Period shall be reduced
(but in no event shall such reduction result in a negative number) by
subtracting an amount calculated by multiplying the amount which the Investor
would otherwise be obligated to purchase by a fraction, the numerator of which
shall be 1-1/2 times the number of Trading Days within such Investment Period
that such event or events exist and the denominator of which shall be the number
of Trading Days within such Investment Period (without adjustment for the Stock
Price being below the Floor Price pursuant to Section 2.2(b)) from the
Investor's obligation during such Investment Period. If such event remains
uncured for a period of greater than five (5) Trading Days or exists during the
last five (5) Trading Days of the Investment Period, the remaining obligation of
the Investor to purchase shares of Common Stock pursuant to a Mandatory Purchase
Notice or an Additional Purchase Notice shall be canceled for the remainder of
the Investment Period. If such event exists on the last day preceding an
Investment Period on which the Company may deliver a Mandatory Purchase Notice
with respect of such Investment Period, the Company shall have five (5) Trading
Days in which to cure, and if cured within such period, the commencement of the
Investment Period shall be postponed for such number of days during such period
as the event remained uncured, but in no event shall such Investment Period be
postponed for a period in excess of five (5) Trading Days.
(b) The obligation of the Investor to purchase shares of Common Stock under
the Agreement may, if the Investor in its sole and absolute discretion so
elects, be terminated (including with respect to a Closing Date which has not
yet occurred) in the event that (i) the Registration Statement shall not have
been declared effective by the SEC by June 2, 1997, (ii) there shall occur any
stop order or suspension of the effectiveness of the Registration Statement, the
Warrant Registration Statement or the Additional Registration Statement or any
withdrawal of the effectiveness of the Registration Statement, the Warrant
Registration Statement or the Additional Registration Statement for any reason
other than as a result of subsequent corporate developments which would require
such Registration Statement, the Warrant Registration Statement or the
Additional Registration Statement to be amended to reflect such event in order
to maintain its compliance with the disclosure requirements of the Securities
Act or (iii) the Company shall at any time fail to comply with the requirements
of Sections 6.2, 6.3, 6.4, 6.5 or 6.6 and the Company shall fail to cure such
noncompliance within (i) five (5) Trading Days after receipt of notice from the
Investor of its election to terminate this
12
<PAGE>
Agreement provided that the Investor has been notified by the Company of such
noncompliance within two (2) Trading Days of the occurrence of such
noncompliance or, if the noncompliance relates to a failure of the Company to
comply with the provisions of Section 6.5, the Investor otherwise becomes aware
of such noncompliance or (ii) otherwise within five (5) Trading Days of the
occurrence of such noncompliance; provided, however, that notwithstanding the
foregoing, the Investor may, in its sole and absolute discretion, terminate this
Agreement if the Company shall fail to maintain the listing of the Common Stock
on a Principal Market, or if trading of the Common Stock on a Principal Market
shall have been suspended for a period of five (5) consecutive Trading Days.
Section 2.7 Commitment Fee. (a) On the Effective Date, the Company will issue
---------------
to the Investor a warrant exercisable by the Investor in its sole and absolute
discretion from time to time within seven (7) years from the date of issuance
(the "Warrant") to purchase an aggregate of 125,000 shares of Common Stock at an
exercise price per share equal to 140% of the average of the closing sale prices
of the Common Stock on the Principal Market for the period from and including
January 21, 1997 to and including January 29, 1997 (the "Warrant Exercise
Price"). The Warrant shall provide that it shall not be exercisable on any date
to the extent that such exercise would limit the ability of the Investor to
purchase shares of Common Stock as a result of a Mandatory Purchase Notice or
Additional Purchase Notice pursuant to Section 2.1(c). The Warrant shall be
delivered by the Company to the Investor upon execution of this Agreement by the
parties hereto, and shall not be exercisable by the Investor for a period of
eighteen (18) months from the date of issuance; provided, however, that if (i)
the Company declares a record date for a material dividend or distribution in
respect of the Common Stock (in cash or securities or other assets, other than
Common Stock), (ii) if at any time (A) there occurs any consolidation or merger
of the Company with or into any other corporation or other entity or person
(whether or not the Company is the surviving corporation) or there occurs any
other corporate reorganization or transaction or series of related transactions,
and as a result thereof the shareholders of the Company pursuant to such merger,
consolidation, reorganization or other transaction own in the aggregate less
than 50% of the voting power and common equity of the ultimate parent
corporation or other transaction (B) the Company transfers all or substantially
all of the Company's assets to another corporation or other entity or person or
(iii) the Agreement is terminated by the Investor pursuant to Section 2.6, the
Warrant shall become immediately exercisable at a price equal to the lesser of
(A) the Warrant Exercise Price or (B) if applicable, 80% of the Transaction
Value per share of Common Stock. The term "Transaction Value per share" means,
in the case of a merger, acquisition, sale of Common Stock, sale of assets, or
similar transaction, the fair market value of the consideration to be received
per share of Common Stock, as evidenced by the average of the closing sale price
for the Common Stock during the ten (10) Trading Days following the announcement
of such definitive agreement and in the case of a material dividend or
distribution (which material dividend or distribution shall not include any
grant of any "poison pill" that does not involve any increase in the
consideration payable thereunder upon redemption of the "poison pill"), the fair
market value of the dividend or distribution per share of Common Stock to be
received as determined in good faith by the Company's Board of Directors;
provided that if the dividend or distribution is in the form of an instrument
that trades "when issued" the fair market value thereof shall be determined by
reference to the average of the closing sale price for such instrument in the
when issued market (or in the absence of a closing sale price, the average of
the closing bid and asked price) during the ten (10) Trading Days following such
record date.
13
<PAGE>
(b) (i) The Company shall notify the Investor in writing on or
before the first anniversary of the effectiveness of the Registration Statement
as to whether it intends to require or does not intend to require the Investor
to purchase Common Stock in excess of the Minimum Offering Amount through the
remainder of the Commitment Period. In the event the Company fails to make such
notification, the Company shall be deemed to have notified the Investor that it
does not intend to require the Investor to purchase Common Stock in excess of
the Minimum Offering Amount through the remainder of the Commitment Period.
(ii) In the event (A) the Company elects during the first twelve
(12) months following effectiveness of the Registration Statement to issue and
sell to the Investor shares of Common Stock by delivery of Mandatory Purchase
Notices and Additional Purchase Notices in excess of the Minimum Offering
Amount, or (B) the Company notifies the Investor on or before the first
anniversary of effectiveness of the Registration Statement that it intends to
require the Investor to purchase shares of Common Stock in excess of the Minimum
Offering Amount through the remainder of the Commitment Period, the Company
shall issue to the Investor, as of the date of occurrence of the event specified
in clauses (A) or (B) above, an additional warrant exercisable from time to time
within seven (7) years from the date of issuance (an "Additional Warrant") to
purchase an aggregate of 75,000 shares of Common Stock at an exercise price
equal to 140% of the closing sale price on the Principal Market of the Company's
Common Stock on the date the Additional Warrant is issued. The Additional
Warrant shall provide that it shall not be exercisable on any date to the extent
that such exercise would limit the ability of the Investor to purchase shares of
Common Stock as a result of a Mandatory Purchase Notice or Additional Purchase
Notice pursuant to Section 2.1(c). The Additional Warrant shall be exercisable
by the Investor at such time as the Warrant becomes exercisable (provided that
if the Warrant becomes exercisable prior to the issuance of the Additional
Warrant, the Additional Warrant, when issued, shall be immediately exercisable).
(c) The resale by the Investor of Common Stock issuable upon exercise
of the Warrant as well as the Additional Warrant shall be subject to a
registration rights agreement (the "Registration Rights Agreement") entered into
between the Company and the Investor on the date of execution of this Agreement.
Each of the Warrant and the Additional Warrant shall be substantially in the
form of Exhibit A hereto.
ARTICLE III
Conditions to Delivery of Optional Purchase Notices,
----------------------------------------------------
Mandatory Purchase Notices, Additional Purchase Notices,
--------------------------------------------------------
and Conditions to Closing
-------------------------
Section 3.1 Conditions Precedent to the Obligation of the Company to Issue
--------------------------------------------------------------
and Sell Common Stock. The obligation hereunder of the Company to issue and
- ---------------------
sell Common Stock to the Investor incident to each Closing is subject to the
satisfaction, at or before each such Closing, of each of the conditions set
forth below, which conditions cannot be waived without the prior written consent
of the Company and the Investor.
(a) Accuracy of the Investor's Representation and Warranties. The
--------------------------------------------------------
representations and warranties of the Investor set forth in this Agreement shall
be true and
14
<PAGE>
correct in all material respects as of the date of this Agreement and as of the
date of each such Closing as though made at each such time.
(b) Performance by the Investor. The Investor shall have performed,
---------------------------
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Investor at or prior to such Closing; provided, further, that the
Investor shall have fully performed its obligations to purchase shares of Common
Stock pursuant to Section 2.1 herein with respect to the preceding Investment
Period.
(c) No Injunction. No statute, rule, regulation, executive order,
-------------
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which,
in the reasonable opinion of the Company and its legal counsel, prohibits or
adversely affects any of the transactions contemplated by this Agreement, and no
proceeding shall have been commenced which may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by this Agreement.
Section 3.2 Conditions Precedent to the Right of the Investor to Deliver
------------------------------------------------------------
an Optional Purchase Notice an Investor Incremental Purchase Notice, the Right
- ------------------------------------------------------------------------------
of the Company to Deliver a Mandatory Purchase Notice or an Additional Purchase
- -------------------------------------------------------------------------------
Notice and the Obligation of the Investor to Purchase Common Stock. The right
- ------------------------------------------------------------------
of the Investor to deliver an Optional Purchase Notice, an Investor Incremental
Purchase Notice, the right of the Company to deliver a Mandatory Purchase Notice
or an Additional Purchase Notice and the obligation of the Investor hereunder to
acquire and pay for Common Stock incident to a Closing is subject to the
satisfaction, on the date of delivery of such Optional Purchase Notice,
Mandatory Purchase Notice or Additional Purchase Notice, as applicable, and on
the applicable Closing Date (each a "Condition Satisfaction Date") of each of
the following conditions, which conditions cannot be waived without the prior
written consent of the Company and the Investor.
(a) Registration of the Common Stock with the SEC. The Company shall
---------------------------------------------
have filed with the SEC (i) a registration statement on Form S-3 (the
"Registration Statement") for the registration of the resale by the Investor of
Common Stock to be acquired pursuant to this Agreement (not including Common
Stock to be issued upon exercise of the Warrants) under the Securities Act,
which Registration Statement shall have been filed with the SEC as early as
practicable, but in no event later than thirty (30) days of execution of this
Agreement and which Registration Statement shall have been declared effective by
the SEC no later than June 2,1997, (ii) in accordance with the Registration
Rights Agreement a registration statement on Form S-3 for the registration of
the resale by the Investor of Common Stock to be issued upon exercise of the
Warrant (the "Warrant Registration Statement"), which Warrant Registration
Statement shall have been declared effective by the SEC no later than June 2,
1997, (iii) within thirty (30) days of the issuance of the Additional Warrant,
in accordance with the Registration Rights Agreement, a registration statement
on Form S-3 for the registration of the resale by the investor of Common Stock
to be issued upon exercise of such Additional Warrant (the "Additional Warrant
Registration Statement"). Furthermore, the Company shall have filed with the
applicable states securities commissions such blue sky filings as shall have
been requested by the Investor, and any required filings with the NASD or
exchange or market where the Common Stock is traded. No stop order or
suspension or withdrawal of the effectiveness of or with respect to any
registration statement or any other suspension of the use of any registration
statement or related prospectus shall have been issued by the SEC or
15
<PAGE>
any states securities commission during the Commitment Period, and the Company
shall be in compliance with the terms of the Registration Rights Agreement.
(b) Effective Registration Statement. The Registration Statement
--------------------------------
shall have previously become effective and shall remain effective on each
Condition Satisfaction Date and (i) neither the Company nor the Investor shall
have received notice that the SEC has issued or intends to issue a stop order
with respect to the Registration Statement or that the SEC otherwise has
suspended or withdrawn the effectiveness of the Registration Statement, either
temporarily or permanently, or intends or has threatened to do so, and (ii) no
other suspension of the use of the Registration Statement or prospectus shall
exist pursuant to the Registration Rights Agreement.
(c) Accuracy of the Company's Representations and Warranties. The
--------------------------------------------------------
representations and warranties of the Company as set forth in this Agreement and
the Registration Rights Agreement shall be true and correct as of each Condition
Satisfaction Date as though made at each such time (except for representations
and warranties specifically made as of a particular date) with respect to all
periods, and as to all events and circumstances occurring or existing to and
including each Condition Satisfaction Date.
(d) Performance by the Company. The Company shall have performed,
--------------------------
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement and the Registration Rights Agreement
to be performed, satisfied or complied with by the Company at or prior to each
Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive order,
-------------
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits or adversely affects any of the transactions contemplated by this
Agreement, and no proceeding shall have been commenced which may have the effect
of prohibiting or adversely affecting any of the transactions contemplated by
this Agreement.
(f) Adverse Changes. Since September 30,1996 the date through which
---------------
the most recent quarterly report of the Company on Form 10-Q has been prepared
and filed with the SEC, a copy of which is included in the SEC Documents, except
as disclosed in SEC Documents or as publicly disclosed in Company press releases
subsequent to such date, no event which had or is reasonably likely to have a
Material Adverse Effect has occurred. The Company has received and delivered to
the Investor the waiver of the default by the Company of the minimum Tangible
Net Worth requirement for the quarter ended December 31, 1996 under the Amended
and Restated Revolving Credit and Term Loan Facility, dated as of February 12,
1996, by and among the Company, SWL, Inc., General Research Corporation and
Mercantile Safe Deposit & Trust Company (the "Revolving Credit Agreement").
(g) No Suspension of Trading In or Delisting of Common Stock. The
--------------------------------------------------------
trading of the Common Stock shall not have been suspended by the SEC, the
Principal Market or the NASD and the Common Stock shall have been approved for
listing or quotation on and shall not have been delisted from the Principal
Market. The issuance of shares of Common Stock with respect to the applicable
Closing, if any, shall not violate the shareholder approval requirements of the
Principal Market.
16
<PAGE>
(h) Legal Opinions. The Company shall have caused to be delivered to
--------------
the Investor, (i) within five (5) Trading Days of the effective date of the
Registration Statement, the Warrant Registration Statement and the Additional
Warrant Registration Statement, as applicable, (ii) as of a date subsequent to
the date of the Company's filing of its most recent quarterly report on Form 10-
Q (or the date by which such report is required to be filed), (iii) as of a date
subsequent to the date on which the Company announces, whether on a preliminary
or definitive basis, its fourth quarter or full-year financial results, (iv) to
the extent provided by Section 3.3, and (v) as of a date within five (5) Trading
Days of a Mandatory Purchase Notice or an Additional Purchase Notice, as the
case may be, an opinion of the Company's independent counsel containing the
opinions and statements set forth in Exhibit B hereto to be delivered on or
before the Effective Date, addressed to the Investor stating, inter alla, that
in such counsel's belief the Registration Statement, the Warrant Registration
Statement and the Additional Warrant Registration Statement, as applicable (as
each may be amended, if applicable), does not contain an untrue statement of
material fact or omits a material fact required to make the statements contained
therein, not misleading or that the underlying prospectus (if applicable, as so
amended or supplemented) does not contain an untrue statement of material fact
or omits a material fact required to make the statements contained therein, in
light of the circumstances in which they were made, not misleading; provided,
however, that in the event that such an opinion cannot be delivered by the
Company's independent counsel to the Investor, the Company shall promptly notify
the Investor and promptly revise each of the Registration Statement, the Warrant
Registration Statement and the Additional Warrant Registration Statement, as
applicable, and the Investor shall not deliver an Optional Purchase Notice, and
the Company shall not deliver a Mandatory Purchase Notice, an Additional
Purchase Notice or, if an Optional Purchase Notice, a Mandatory Purchase Notice
or an Additional Purchase Notice shall have been delivered in good faith without
knowledge by the Investor or the Company that an opinion of independent counsel
can not be delivered as required, postpone such Closing Date for a period of up
to five (5) Trading Days until such an opinion is delivered to the Investor (or
such Closing shall otherwise be canceled). In the event of such a postponement,
the Purchase Price of the Common Stock to be issued at such Closing as
determined pursuant of Section 2.3 shall be the lower of such Purchase Price as
calculated as of the originally scheduled Closing Date or as of the actual
Closing Date. The Company's general counsel and its independent counsel shall
also deliver to the Investor on the Effective Date an opinion in form and
substance satisfactory to the Investor addressing, among other things, corporate
matters and the exemption from registration under the Securities Act of the
issuance of the Common Stock by the Company to the Investor under this
Agreement.
(i) Accountant's Letter. (a) The Company shall engage its
-------------------
independent auditors to perform certain agreed upon procedures in accordance
with the provisions of Statement on Auditing Standards No. 72, as amended, and
report thereon as shall have been reasonably requested by the Investor with
respect to certain financial information contained in the Registration Statement
and shall have delivered to the Investor, (x) within five (5) Trading Days of
the effective date of the Registration Statement and (y) within ten (10) Trading
Days of the filing with the SEC of each SEC Document which is deemed to be
incorporated by reference in the Registration Statement, a report addressed to
the Investor. (b) In the event that the Investor shall have requested delivery
of an "agreed upon procedures" report pursuant to Section 3.3, the Company shall
engage its independent auditors to perform certain agreed upon procedures and
report thereon as shall have been reasonably requested by the Investor with
respect to certain financial information of the Company and the Company shall
deliver to the Investor a copy of such report addressed to the Investor. In the
event that the report
17
<PAGE>
required by this Section 3.2(i) cannot be delivered by the Company's independent
auditors, the Company shall, if necessary, promptly revise the Registration
Statement and the Investor shall not deliver an Optional Purchase Notice or an
Investor Incremental Purchase Notice, and the Company shall not deliver a
Mandatory Purchase Notice or an Additional Purchase Notice or, if an Optional
Purchase Notice, an Investor Incremental Purchase Notice shall have been
delivered in good faith without knowledge by the Investor that a report of the
Company's independent auditors can not be delivered as required or, if a
Mandatory Purchase Notice or an Additional Purchase Notice shall have been
delivered in good faith without knowledge by the Company that a report of its
independent auditors can not be delivered as required, postpone such Closing
Date for a period of up to five (5) Trading Days until such a report is
delivered (or such Closing shall otherwise be canceled). In the event of such a
postponement, the Purchase Price of the Common Stock to be issued at such
Closing as determined pursuant to Section 2.3 shall be the lower of such
Purchase Price as calculated as of the originally scheduled Closing Date and as
of the actual Closing Date.
(j) Officer's Certificate. The Company shall have delivered to
---------------------
the Investor, on each Closing Date, a certificate in substantially the form and
substance of Exhibit C hereto, executed in either case by an executive officer
of the Company and to the effect that all the conditions to such Closing shall
have been satisfied as at the date of each such certificate.
(k) Due Diligence. No dispute between the Company and the
-------------
Investor shall exist pursuant to Section 3.3 as to the adequacy of the
disclosure contained in the Registration Statement.
(l) Beneficial Ownership Limitation. On each Closing Date (i) the
-------------------------------
additional shares of Common Stock then to be purchased by the Investor shall not
exceed the number of such shares which, when aggregated with all other shares of
Common Stock then owned by the Investor pursuant to this Agreement and with the
shares of Common Stock beneficially or deemed beneficially owned by the Investor
pursuant to this Agreement, the Warrant and the Additional Warrant (if then
issued and outstanding) ("Warrant Shares") theretofore issued to the Investor
pursuant to Section 2.7, would result in the Investor or any affiliate of the
Investor beneficially owning more than 4.9% of all of such Common Stock as would
be outstanding on such Closing Date, as determined in accordance with Section
13(d) of the Exchange Act and (ii) the Investor shall have received and been
reasonably satisfied with such other certificates and documents as shall have
been reasonably requested by the Investor in order for the Investor to confirm
the Company's satisfaction of the conditions set forth in this Section 3.2. For
purposes of clause (i) of this Section 3.2(1), in the event that the amount of
Common Stock outstanding as determined in accordance with Section 13(d) of the
Exchange Act and the regulations promulgated thereunder is greater on a Closing
Date than on the date upon which the Optional Purchase Notice, Mandatory
Purchase Notice, the Additional Purchase Notice or Investor Incremental Purchase
Notice associated with such Closing Date is given, the amount of Common Stock
outstanding on such Closing Date shall govern for purposes of determining
whether the when aggregating all purchases of Common Stock made pursuant to this
Agreement and, if any, Warrant Shares, would own more than 4.9% of the Common
Stock following such Closing Date.
Section 3.3 Due Diligence Review. Prior to the delivery of an Optional
--------------------
Purchase Notice, or after the delivery of a Mandatory Purchase Notice or an
Additional Purchase Notice pursuant to Section 2.5 herein, the Company shall
make available for inspection and review by the Investor, advisors to and
representatives of the Investor (who may or may not be affiliated
18
<PAGE>
with the Investor and who are reasonably acceptable to the Company), any
underwriter participating in any disposition of Common Stock on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
The Company shall not disclose non-public information to the Investor,
advisors to or representatives of the Investor unless prior to disclosure of
such information the Company identifies such information as being non-public
information and provides the Investor, such advisors and representatives with
the opportunity to accept or refuse to accept such non-public information for
review. The Company may, as a condition to disclosing any non-public information
hereunder, require the Investor's advisors and representatives to enter into a
confidentiality agreement (including an agreement with such advisors and
representatives prohibiting them from trading in Common Stock during such period
of time as they are in possession of non-public information) in form reasonably
satisfactory to the Company and the Investor.
Nothing herein shall require the Company to disclose non-public information
to the Investor, his advisors or representatives, and the Company represents
that it does not disseminate non-public information to any investors who
purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting non-
public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein, in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 3.3 shall be construed to mean that such
persons or entities other than the Investor (without the written consent of the
Investor prior to disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms of this Agreement; provided, however, that in no event shall the
Investor's advisors or representatives disclose to the Investor the nature of
the specific event or circumstances constituting any non-public information
discovered by such advisors or representatives in the course of their due
diligence (without the written consent of the Investor prior to disclosure of
such information). The Investor's advisors or representatives shall make
complete disclosure to the Investor's independent counsel of all events or
circumstances constituting non-public information discovered by such advisors or
representatives in the course of their due diligence upon which such advisors or
representatives form the opinion that the Registration Statement
19
<PAGE>
contains an untrue statement of a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in the light of the circumstances in which they
were made, not misleading. Upon receipt of such disclosure, the Investor's
independent counsel shall consult with the Company's independent counsel in
order to address the concern raised as to the existence of a material
misstatement or omission and to discuss appropriate disclosure with respect
thereto; provided, however, that such consultation shall not constitute the
advice of the Company's independent counsel to the Investor as to the accuracy
of the Registration Statement and related prospectus In the event after such
consultation the Investor's independent counsel believes that the Registration
Statement contains an untrue statement or a material fact or omits a material
fact required to be stated in the Registration Statement or necessary to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading, (a) the Company shall file with the SEC an amendment
to the Registration Statement responsive to such alleged untrue statement or
omission and provide the Investor, as promptly as practicable with copies of the
Registration Statement and related prospectus, as so amended, (b) if the Company
disputes the existence of any such material misstatement or omission, (i) the
Company's independent counsel shall provide the Investor's independent counsel
with an opinion stating that nothing has come to their attention that would lead
them to believe that the Registration Statement or the related prospectus, as of
the date of such opinion contains an untrue statement of a material fact or
omits a material fact required to be stated in the Registration Statement or the
related prospectus or necessary to make the statements contained therein, in
light of the circumstances in which they were made, not misleading and (ii) in
the event the dispute relates to the adequacy of financial disclosure and the
Investor shall reasonably request, the Company's independent auditors shall
provide to the Company a letter outlining the performance of such "agreed upon
procedures" as shall be reasonably requested by the Investor and the Company
shall provide the Investor with a copy of such letter, or (c) if the Company
disputes the existence of any such material misstatement or omission, and the
dispute relates to the timing of disclosure of a material event and the
Company's independent counsel is unable to provide the opinion referenced in
clause (b)(i) above to the Investor, then this Agreement shall be suspended for
a period of up to thirty (30) days, at the end of which, if the dispute still
exists between the Company's independent counsel and the Investor's independent
counsel, the Company shall either (i) amend the Registration Statement as
provided above, (ii) provide to the Investor the Company's independent counsel
opinion and a copy of the letter of the Company's independent auditors
referenced above, or (iii) the obligation of the Investor to purchase shares of
Common Stock pursuant to this Agreement shall terminate. The Investor hereby
agrees to hold harmless the Company's independent auditors from any liability
that may arise out of the delivery of an "agreed upon procedures" letter
pursuant to clause (b)(ii) above.
ARTICLE IV
Representations and Warranties of Investor
------------------------------------------
The Investor represents and warrants to the Company as follows:
Section 4.1 Intent. The Investor is entering into this Agreement for its
------
own account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any
20
<PAGE>
minimum or other specific term and reserves the right to dispose of the Common
Stock at any time in accordance with federal and state securities laws
applicable to such disposition.
Section 4.2 Sophisticated Investor. The Investor is a sophisticated
----------------------
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in Common Stock. The Investor
acknowledges that an investment in the Common Stock is speculative and involves
a high degree of risk.
Section 4.3 Authority. This Agreement has been duly authorized and
---------
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 4.4 No Brokers. The Investor has taken no action which would give
----------
rise to any claim by any person for brokerage commission, finder's fees or
similar payments by the Company relating to this Agreement or the transactions
contemplated hereby.
Section 4.5 Not an Affiliate. The Investor is not an officer, director or
----------------
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 4.6 Organization and Standing. The Investor is a limited
-------------------------
liability company duly organized, validly existing, and in good standing under
the laws of the State of Delaware.
Section 4.7 Absence of Conflicts. The execution and delivery of this
--------------------
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on the Investor, or
the provision of any indenture, instrument or agreement to which the Investor is
a party or is subject, or by which the Investor or any of its assets is bound,
or conflict with or constitute a material default thereunder, or result in the
creation or imposition of any lien pursuant to the terms of any such indenture,
instrument or agreement, or constitute a breach of any fiduciary duty owed by
the Investor to any third party, or require the approval of any third-party
(which has not been obtained) pursuant to any material contract, agreement,
instrument, relationship or legal obligation to which the Investor is subject or
to which any of its assets, operations or management may be subject.
Section 4.8 Disclosure: Access to Information. The Investor has received
---------------------------------
all documents, records, books and other information pertaining to the Investor's
investment in the Company that have been requested by the Investor. The
Investor further acknowledges that it understands that the Company is subject to
the periodic reporting requirements of the Exchange Act, and the Investor has
reviewed or received copies of any such reports that have been requested by it.
Section 4.9 Manner of Sale. At no time was the Investor presented with or
--------------
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
21
<PAGE>
ARTICLE V
Representations and Warranties of the Company
---------------------------------------------
The Company represents and warrants to the Investor as follows:
Section 5.1 Company Status. The Company has registered its Common Stock
--------------
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company has
maintained all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the New York Stock
Exchange. The Company is eligible to use Form S-3 under the Securities Act.
Section 5.2 Current Public Information. The Company has furnished the
--------------------------
Investor with true and correct copies of all registration statements, reports
and documents, including proxy statements (other than preliminary proxy
statements), filed with the SEC by or with respect to the Company through
November 14,1996. All such registration statements, reports and documents,
together with those registration statements, reports and documents filed
pursuant to the Securities Act or Exchange Act subsequent to the date of this
Agreement (copies of which shall be supplied to the Investor) are collectively
referred to herein as the "SEC Documents".
Section 5.3 No General Solicitation in Regard to this Transaction.
-------------------------------------------------------
Neither the Company nor any of its affiliates nor any distributor or any person
acting on its or their behalf has conducted any general solicitation (as that
term is used in Rule 502(c) of Regulation D) with respect to any of the Common
Stock, nor have they made any offers or sales of any security or solicited any
offers to buy any security under any circumstances that would require
registration of the Common Stock under the Securities Act.
Section 5.4 Valid Issuance of Common Stock. As of the date of this
------------------------------
Agreement, the Company has authorized capitalization consisting of 30,000,000
shares of Common Stock, par value $.10 per share. As of the date of this
Agreement, the Company has reserved for issuance to employees, officers,
directors or consultants approximately 1,900,000 shares of Common Stock. As of
the date hereof, there were issued and outstanding 9,642,557 shares of Common
Stock, of which 300,000 are held in treasury. As of the date of this Agreement,
the Company has no other outstanding securities convertible into or exchangeable
for its Common Stock or any warrants, options or other rights to subscribe for
or purchase its Common Stock or any such convertible or exchangeable securities
(other than securities under the Company's Compensation Plans and other than the
Company's 5% Convertible Debentures due 2002) other than as described in the
documents filed with the SEC as of the date of this Agreement. All of the
outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and nonassessable, upon issuance of the
Common Stock, the Common Stock will be duly and validly issued, fully paid and
nonassessable, and the holders of outstanding Common Stock of the Company are
not and shall not be entitled to preemptive or other rights afforded by the
Company or other rights afforded by the Company to subscribe for the capital
stock or other securities of the Company as a result of the sale of the Common
Stock to the Investor hereunder.
22
<PAGE>
Section 5.5 Organization and Qualification. The Company is a corporation
------------------------------
duly incorporated and existing in good standing under the laws of the State of
Delaware and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company and each subsidiary,
if any, is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, other than those in
which the failure so to qualify would not have a Material Adverse Effect.
Section 5.6 Authorization: Enforcement. (a) The Company has the
--------------------------
requisite corporate power and authority to enter into and perform this Agreement
and to issue the Common Stock, the Warrant and the Additional Warrant in
accordance with the terms hereof and thereof, (b) the execution, issuance and
delivery of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no further consent or authorization of the Company or its
Board of Directors or stockholders is required (other than such stockholder
approval as may be required by the standards imposed on companies listed on the
New York Stock Exchange or other Principal Market on which the Common Stock is
traded with respect to issuances by such companies of greater than 20% of such
companies' outstanding voting stock), (c) this Agreement has been duly executed
and delivered by the Company and constitutes valid and binding obligations of
the Company enforceable against the Company in accordance with its terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application and
(d) the Common Stock issuable in accordance with the terms of this Agreement or
upon exercise of the Warrant and the Additional Warrant will be duly and validly
issued, fully paid and nonassessable.
Section 5.7 Corporate Documents. The Company has furnished or made
-------------------
available to the Investor true and correct copies of the Company's Certificate
of Incorporation, as amended and in effect on the date hereof (the
"Certificate"), and the Company's By-Laws, as amended and in effect on the date
hereof (the "By-Laws").
Section 5.8 No Conflicts. The execution, delivery and performance of this
------------
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of Common Stock,
the Warrant and the Additional Warrant do not and will not (a) result in a
violation of the Company's Certificate of Incorporation or By-Laws or (b) except
as otherwise disclosed in Section 5.16 herein, conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or instrument
to which the Company or any of its subsidiaries is a party, or (c) result in a
violation of any federal, state, local or foreign law, rule, regulation, order,
judgment or decree (including federal and state securities laws and regulations)
applicable to the Company or any of its subsidiaries or by which any property or
asset of the Company or any of its subsidiaries is bound or affected (except for
such conflicts, defaults, terminations, amendments, accelerations, cancellations
and violations as would not, individually or in the aggregate, have a Material
Adverse Effect) nor is the Company otherwise in violation of, conflict with or
in default under any of the foregoing; provided that, for purposes of the
Company's representations and warranties as to violations of foreign law, rule
or regulation referenced in clause (iii), such representations and warranties
are made only to the best of the Company's knowledge insofar as the execution,
delivery and performance of this Agreement by the Company and the consummation
by the
23
<PAGE>
Company of the transactions contemplated hereby are or may be affected by
the status of the Investor under or pursuant to any such foreign law, rule or
regulation). The business of the Company is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for possible
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Common Stock or the Warrant and the Additional
Warrants in accordance with the terms hereof (other than any SEC, NASD or state
securities filings which may be required to be made by the Company subsequent to
any Closing, and any registration statement which may be filed pursuant hereto
and other than any shareholder approval required by the rules applicable to
companies whose common stock trades on the New York Stock Exchange or other
Principal Market referenced in Section 5.6); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investor
herein.
Section 5.9 SEC Documents. The Company has delivered or made available
-------------
to the Investor true and complete copies of the SEC Documents (including,
without limitation, proxy information and solicitation materials). The Company
has not provided to the Investor any information which, according to applicable
law, rule or regulation, should have been disclosed publicly prior to the date
hereof by the Company but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
rules and regulations of the SEC promulgated thereunder and other federal, state
and local laws, rules and regulations applicable to such SEC Documents, and none
of the SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (a)
as may be otherwise indicated in such financial statements or the notes thereto
or (b) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
Section 5.10 No Material Adverse Change. Since September 30, 1996, the
--------------------------
date through which the most recent quarterly report of the Company on Form 10-Q
has been prepared and filed with the SEC, a copy of which is included in the SEC
Documents, no Material Adverse Effect has occurred or exists with respect to the
Company or its subsidiaries, except as disclosed in the SEC Documents or except
as otherwise publicly disclosed in Company press releases.
Section 5.11 No Undisclosed Liabilities. The Company and its subsidiaries
--------------------------
have no liabilities or obligations not disclosed in the SEC Documents or except
as otherwise publicly disclosed in Company press releases, other than those
incurred in the ordinary course of the
24
<PAGE>
Company's or its subsidiaries' respective businesses since September 30,1996 and
which, individually or in the aggregate, do not or would not have a Material
Adverse Effect on the Company and upon any of its subsidiaries taken as a whole.
Section 5.12 No Undisclosed Events or Circumstances. Since September 30,
--------------------------------------
1996, no event or circumstance has occurred or exists with respect to the
Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial condition, which, under applicable law, rule
or regulation, requires public disclosure or announcement prior to the date
hereof by the Company but which has not been disclosed in the SEC Documents or
otherwise publicly disclosed in Company press releases.
Section 5.13 No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Common Stock under the Securities Act to
be issued under this Agreement.
Section 5.14 No Brokers. The Company has taken no action which would give
----------
rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Investor relating to this Agreement for the transactions
contemplated hereby.
Section 5.15 Litigation and Other Proceedings. Except as may be set forth
--------------------------------
in the SEC Documents, there are no lawsuits or proceedings pending or to the
best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which might have a Material Adverse Effect on the Company or
which might materially adversely affect the transactions contemplated by this
Agreement. Except as set forth in the SEC Documents no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which might
result in a Material Adverse Effect on the Company or which might materially
adversely affect the transactions contemplated by this Agreement.
Section 5.16 No Violation of Covenants. No event of default has occurred
-------------------------
and is continuing (or event which with lapse of time or notice or both would
constitute such an event) which has not otherwise been waived under any of the
revolving credit facilities or under any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument for money borrowed or any other
material agreement to which the Company or any of its subsidiaries is bound, or
to which any of the property or assets of the Company or any of its subsidiaries
is subject. The Company shall have fifteen (15) Trading Days after the end of a
fiscal quarter during which to cure or obtain the waiver of any default that has
occurred and is continuing during an Investment Period with respect to the
minimum Tangible Net Worth covenant under the terms of the Revolving Credit
Agreement, and the Investor hereby acknowledges that the Company shall not be
deemed to be in default under this Agreement for such period of fifteen (15)
Trading Days after the end of a fiscal quarter during which the Company cures
such default or obtains a waiver of such default.
Section 5.17 Effectiveness of SEC Filings. The SEC has not issued any
----------------------------
stop order or other order suspending the effectiveness of any registration
involving the securities of the Company or its subsidiaries.
25
<PAGE>
ARTICLE VI
Covenants of the Company
------------------------
Section 6.1 Registration Rights. The Registration Rights Agreement shall
-------------------
remain in full force and effect and the Company shall comply in all respects
with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
---------------------------
Company will reserve in each Investment Period 750,000 shares of Common Stock,
and the Company shall continue to reserve and keep available at all times in
each Investment Period, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue shares of
its Common Stock incident to the Closings in such Investment Period and incident
to the exercise of the Warrant and the Additional Warrant issued hereunder; such
amount of shares of Common Stock to be reserved to be calculated based upon the
minimum Purchase Price therefore under the terms of this Agreement, and assuming
the full exercise of the Warrant and the Additional Warrant. The number of
shares so reserved from time to time, as theretofore increased or reduced as
hereinafter provided, may be reduced by the number of shares actually delivered
hereunder and the number of shares so reserved shall be increased to reflect (a)
potential increases in the Common Stock which the Company may thereafter be so
obligated to issue by reason of adjustments to the Purchase Price therefore and
the issuance of the Warrant and each Additional Warrant and (b) stock splits and
stock dividends and distributions.
Section 6.3 Listing of Common Stock. The Company hereby agrees to
-----------------------
maintain the listing of the Common Stock on a Principal Market, and as soon as
practicable but in any event prior to the commencement of the Commitment Period
to list the additional shares of Common Stock issuable under this Agreement
(including Common Stock issuable upon exercise of the Warrant and the Additional
Warrant). The Company further agrees, if the Company applies to have the Common
Stock traded on any other Principal Market, it will include in such application
the Common Stock issuable under this Agreement (including Common Stock issuable
upon exercise of the Warrant and the Additional Warrant), and will take such
other action as is necessary or desirable to cause the Common Stock to be listed
on such other Principal Market as promptly as possible. The Company shall
maintain sufficient net tangible assets to satisfy the requirements of the NASD
for the listing of the Common Stock on the New York Stock Exchange. The Company
shall undertake its best efforts to obtain the shareholder approval referenced
in Section 5.6 required for the issuance of Common Stock under this Agreement
within such time period as shall not at any time preclude the Investor from
providing an Optional Purchase Notice during the Optional Purchase Period, or
the Company from providing a Mandatory Purchase Notice or an Additional Purchase
Notice for the maximum Investment Amount during any Investment Period.
Section 6.4 Exchange Act Registration. The Company will cause its Common
-------------------------
Stock to continue to be registered under Section 12(g) or 12(b) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, and will not take any action or file any document (whether or
not permitted by the Exchange Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under the Exchange Act. The Company will take all action to
continue the listing and trading of its Common Stock on the Principal Market and
will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the NASD and the Principal Market.
26
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Section 6.5 Legends. The certificates evidencing the Common Stock to be
-------
issued to the Investor at each Closing and upon the exercise of the Warrant and
the Additional Warrant (and otherwise as provided by Section 7.1) shall be free
of legends or stop transfer or other restrictions.
Section 6.6 Corporate Existence. The Company will take all steps
-------------------
necessary to preserve and continue the corporate existence of the Company.
Section 6.7 Additional SEC Documents. The Company will furnish to the
------------------------
Investor, as and when the originals thereof are submitted to the SEC for filing,
copies of all SEC Documents so furnished or submitted to the SEC.
Section 6.8 "Blackout Period". The Company will immediately notify the
-----------------
Investor upon the occurrence of any of the following events in respect of a
registration statement or related prospectus in respect of an offering of
securities required to be registered under this Agreement or the Registration
Rights Agreement: (a) receipt of any request for additional information by the
SEC or any other federal or state governmental authority during the period of
effectiveness of the registration statement for amendments or supplements to the
registration statement or related prospectus; (b) the issuance by the SEC or any
other federal or state governmental authority of any stop order suspending the
effectiveness of the registration statement or the initiation of any proceedings
for that purpose; (c) receipt of any notification with respect to the suspension
of the qualification or exemption from qualification of any of such registrable
securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; (d) the happening of any event which makes any
statement made in the registration statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or which requires the making of any changes in the
registration statement, related prospectus or documents so that, in the case of
the registration statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the case
of the related prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (e) the Company's reasonable
determination that a post-effective amendment to the registration statement
would be appropriate; and the Company will promptly make available to the
Investor any such supplement or amendment to the related prospectus. The
Investor shall not deliver to the Company any Optional Purchase Notice, and the
Company shall not deliver to the Investor any Mandatory Purchase Notice or
Additional Purchase Notice during the continuation of any of the foregoing
events.
ARTICLE VII
Legends and Delivery of Certificates, Investor Compliance and Investor Covenants
- --------------------------------------------------------------------------------
Section 7.1 Legends and Delivery of Certificates. Each of the Warrant and
------------------------------------
the Additional Warrant and, unless otherwise provided below, the Common Stock
will bear the following legend (the "Legend"):
27
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THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY
NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE SECURITIES ACT AND
ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
In the event shares of Common Stock are issued incident to a Closing or
upon exercise of the Warrant or the Additional Warrant in circumstances pursuant
to which shares of Common Stock are either required to bear the Legend or are
not to bear the Legend, such certificates (bearing or not bearing the Legend, as
appropriate) shall be issued and delivered to the Investor or as otherwise
directed by the Investor on the applicable Closing Date or within two Trading
Days of the surrender of the Warrant or Additional Warrant for exercise
(together with all other documentation required to be delivered to effect such
exercise), as applicable, in each case against payment therefor.
The Company shall cause the transfer agent for the Common Stock to issue
and deliver to the Investor or as otherwise directed by the Investor, shares of
Common Stock not bearing the Legend, during the following periods and under the
following circumstances and without the need for any further advice or
instruction or documentation to the transfer agent by or from the Investor:
(a) At any time from and after the effective date of the applicable
registration statement: (i) incident to any Closing or the issuance of any
shares of Common Stock; (ii) incident to the exercise of the Warrant and the
Additional Warrant; and (iii) upon any surrender of one or more certificates
evidencing Common Stock and which bear the Legend, to the extent accompanied by
a notice requesting the issuance of new certificates free of the Legend to
replace those surrendered; provided that in connection with such event the
Investor confirms to the transfer agent that it intends to sell such Common
Stock to a third party which is not an affiliate of the Company or the Investor,
and the Investor agrees to redeliver such Common Stock to the transfer agent to
add the Legend in the event the Common Stock is not sold; and
(b) At any time from and after the Closing Date, upon any surrender of one
or more certificates evidencing Common Stock and which bear the Legend, to the
extent accompanied by a notice requesting the issuance of new certificates free
of the Legend to replace those surrendered and containing or also accompanied by
representations that (i) the then holder thereof is permitted to dispose thereof
pursuant to Rule 144(k) under the Securities Act, (ii) such holder intends to
effect the sale or other disposition of such Common Stock whether or not
pursuant to the Registration Statement, to a purchaser or purchasers who will
not be subject to the registration requirements of the Securities Act or (iii)
such holder is not then subject to such requirements.
Section 7.2 No Other Legend or Stock Transfer Restrictions. No Legend has
----------------------------------------------
been or shall be placed on the share certificates representing the Common Stock
and no instructions or stop transfers or other restrictions on transfer have
been or shall be given to the Company's transfer agent with respect thereto
other than as expressly set forth in this Article VII.
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Section 7.3 Investor's Compliance. Nothing in this Article VII shall
---------------------
affect in any way the Investor' s obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
Section 7.4 Covenants of the Investor. (a) The Investor shall not make
-------------------------
any offers or sales of the Common Stock other than pursuant to a registration
statement under the Securities Act or pursuant to an exemption from the
registration requirements thereof. The Investor will comply with applicable
prospectus delivery requirements under the Securities Act.
(b) The Investor covenants and
agrees that it will not, directly or through any affiliate (i) create the lowest
reported sales price of the Common Stock on the Principal Market on any Trading
Day or (ii) offer to sell shares of Common Stock at a price lower than the then
prevailing bid price for the Common Stock on the Principal Market.
(c) The Investor shall limit its
trading in shares of Common Stock to trading on the Principal Market for the
Common Stock for as long as the Company maintains the listing of its Common
Stock on a Principal Market.
(d) The Investor covenants and
agrees that it shall not retain beneficial ownership of shares of Common Stock
for the purpose of limiting the Investor's obligation of purchase shares of
Common Stock under this Agreement as a result of the provisions of Section
2.1(c). The Investor further covenants and agrees that it shall use its
reasonable best efforts to sell shares of Common Stock to the extent required
such that the limitations of Section 2.1(c) shall not prevent the Investor from
acquiring shares of Common Stock pursuant to a Mandatory Purchase Notice or
Additional Purchase Notice.
ARTICLE VIII
Other Issuances of Common Stock
-------------------------------
Section 8.1 Equity Offering Adjustment to Purchase Price. (a) In the
--------------------------------------------
event that during the Optional Purchase Period or during an Investment Period
the Company makes an Equity Offering and an Optional Purchase Notice or a
Mandatory Purchase Notice (and Additional Purchase Notice or Investor
Incremental Purchase Notice, if applicable) has been delivered with respect to
the Optional Purchase Period or such Investment Period, then notwithstanding
anything herein to the contrary, the purchase price per share of Common Stock
for any Investment Amount made during the Optional Purchase Period and such
Investment Period prior to the consummation of the Equity Offering shall be the
lower of (a) the lowest effective purchase price per share of Common Stock
received by the Company in any such Equity Offering, and (b) the price per share
of Common Stock determined hereunder with respect to purchases of Common Stock
effected by the Investor (whether pursuant to an Optional Purchase Notice, a
Mandatory Purchase Notice, an Additional Purchase Notice or an Investor
Incremental Purchase Notice) during the Optional Purchase Period or such
Investment Period;
(b) Subsequent to consummation of the Equity Offering, the Company's
obligation to adjust the purchase price per share of Common Stock pursuant to
8.1(a) during the remainder of the Optional Purchase Period or any Investment
Period shall terminate.
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<PAGE>
Section 8.2 Other Adjustments to Purchase Price and Floor Price. The
---------------------------------------------------
daily low trading price of the Common Stock for any Trading Day used to
calculate the Purchase Price and the Floor Price shall be adjusted
proportionally to reflect any stock splits, stock dividends, reclassifications,
combinations and similar transactions involving the Company's Common Stock.
ARTICLE IX
Choice of Law and Venue, Waiver of Jury Trial
---------------------------------------------
Section 9.1 Choice of Law: Submission to Jurisdiction. THIS AGREEMENT
-----------------------------------------
SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW. The parties hereby agree that
all actions or proceedings arising directly or indirectly from or in connection
with this Agreement shall, at the option of either party, be litigated only in
the United States District Court for the Southern District of New York located
in New York County, New York. The parties consent to the jurisdiction and venue
of the foregoing court and consent that any process or notice of motion or other
application to said court or a judge thereof may be served inside or outside the
State of New York or the Southern District of New York by registered mail,
return receipt requested, directed to the party for which it is intended at its
address set forth in this Agreement (and service so made shall be deemed
complete five (5) days after the same has been posted as aforesaid) or by
personal service or in such other manner as may be permissible under the rules
of said court. The parties hereto hereby irrevocably waive any and all right to
a trial by jury with respect to any legal proceeding arising out of or relating
to this Agreement or the transactions contemplated hereby.
ARTICLE X
Assignment: Entire Agreement, Amendment: Termination
----------------------------------------------------
Section 10.1 Assignment. Neither this Agreement nor any rights of the
----------
Investor or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, the Investor's rights and obligations
under this Agreement may be assigned at any time, in whole or in part, to (x)
any affiliate of the Investor without any prior written consent of the Company
or (y) to any other person or entity, upon the prior written consent of the
Company, which consent shall not to be unreasonably withheld (a "Permitted
Transferee"), and the rights and obligation of the Investor under this Agreement
shall inure to the benefit of, and be enforceable by and against, any such
Permitted Transferee.
Section 10.2 Entire Agreement Amendment. This Agreement, the Registration
--------------------------
Rights Agreement, and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth in this Agreement or therein. Except as expressly
provided in this Agreement, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
30
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Section 10.3 Publicity. The Company agrees that it will not disclose, and
---------
will not include in any public announcement, the name of the Investor without
its express written consent, unless and until such disclosure is required by law
or applicable regulation, and then only to the extent of such requirement.
Except as may be required by law, the Company and the Investor shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to this Agreement and shall not issue any such press
release or make any such public statement prior to such consultation.
Section 10.4 Termination. (a) If any of the events listed in Section
-----------
2.6(a)(i) through (a)(iv) occur and remain uncured for a period of either (x)
twenty (20) consecutive Trading Days or (y) ninety (90) Trading Days in the
aggregate in any 365-day period, the Investor may elect, in its sole and
absolute discretion, to terminate this Agreement. The Investor may also
terminate this Agreement pursuant to the provisions of Section 2.6(b).
(b) In the event this Agreement is terminated
by the Investor prior to the Company having issued Common Stock to the Investor
under this Agreement for an aggregate Purchase Price at least equal to the
Minimum Offering Amount, the Company shall pay to the Investor, within thirty
(30) days of such termination, as liquidated damages an amount in cash equal to
$300,000 multiplied by a fraction the numerator of which is equal to the
difference between the Minimum Offering Amount and the aggregate Purchase Price
of Common Stock purchased under this Agreement prior to termination and the
denominator of which shall be the Minimum Offering Amount. In the event the
Investor shall have purchased Common Stock for an aggregate Purchase Price of at
least the Minimum Offering Amount prior to the date of termination, the Investor
shall not be entitled to any damages or other remedies.
(c) On or before the first anniversary of
effectiveness of the Registration Statement, the Company may, in its sole
discretion and without being subject to the provisions of Section 10.4(b)
hereof, terminate the Investor's obligation to purchase any Investment Amount
for the remainder of the Commitment Period, provided, however, that the Company
shall have sold to the Investor the Minimum Offering Amount.
ARTICLE XI
Notices. Etc.; Cost and Expenses; Indemnification
-------------------------------------------------
Section 11.1 Notices. Etc. All notices, demands, requests, consents,
-------------
approvals or other communications required or permitted to be given hereunder or
which are given with respect to this Agreement shall be in writing and shall be
personally served or deposited in the mail, registered or certified, return
receipt requested, postage prepaid, or delivered by reputable air courier
service with charges prepaid, or transmitted by hand delivery, telegram, telex
or facsimile, addressed as set forth below, or to such other address as such
party shall have specified most recently by written notice: (a) if to the
Company, to: GRC International, Inc., 1900 Gallows Road, Vienna, VA 22182;
Attention: Chief Financial Officer and General Counsel, Facsimile No.: (703)
448-6890, with copies (which shall not constitute notice) to: Arnold & Porter,
555 12th St. N.W., Washington, D.C. 20004; Attention: Steve Parker, Esq. and
C.D. McCoy, Esq., Facsimile No.: (202) 942-5999; and (b) if to the Investor, to
Cripple Creek Securities, LLC, 40 West 57th St., 15th Fl., New York, N.Y. 10019;
Attention: Robert Chender, Esq., Facsimile No.: (212) 698-0554, with copies
(which shall not constitute notice) to: (i)The Palladin Group, L.P., 40 West
57th Street, 15th Fl., New York, NY 10019; Attention:
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A. Kaplan, Facsimile No.: (212) 698-0599 and (ii) Ramius Capital LLC, 40 West
57th St., 15th Fl., New York, N.Y. 10019; Attention: Jeffrey Solomon, Facsimile
No.: (212) 698-0554. Notice shall be deemed given on the date of service or
transmission if personally served or transmitted by telegram, telex or
facsimile. Notice otherwise sent as provided herein shall be deemed given on the
third business day following the date mailed or on the second business day
following delivery of such notice by a reputable air courier service.
Section 11.2 Cost and Expenses. The Company shall be responsible for the
-----------------
Investor's reasonable, actual and allocable costs and expenses (including legal
fees) incurred in entering into this Agreement in an amount not exceeding
$45,000, which amounts shall be paid within forty-five (45) days of the
Company's receipt of the applicable invoice or invoices as well as the
Investor's reasonable, actual and allocable costs and expenses (including legal
fees) incurred in connection with the performance of its initial due diligence
activities relating to the effectiveness of the Registration Statement in an
amount of up to $25,000. The Company shall also be responsible for any
reasonable, actual and allocable subsequent costs and expenses incurred by the
Investor in connection with matters set forth in Section 3.3 (including without
limitation legal fees and fees of advisors and representatives of the Investor)
in an amount not exceeding $7,500 with respect to the Optional Purchase Period
and each Investment Period, which amounts may be netted by the Investor against
the amount of any payment relating to the issuance of shares of Common Stock to
the Investor in connection with any Closing. In the event that with respect to
the conduct by the Investor of its due diligence activities in connection with
the effectiveness of the Registration Statement, the Optional Purchase Period or
any Investment Period, it incurs reasonable, actual and allocable costs and
expenses in excess of the amount for which the Company is responsible to
reimburse it, up to $5,000 of such excess costs and expenses may be carried
forward to be reimbursed by the Company (within the limitation set forth above)
in connection with the Optional Purchase Period, the first Investment Period or
the immediately succeeding Investment Period, as applicable.
Section 11.3 Securities Law Indemnification.
------------------------------
(a) Indemnification of Investor. The Company agrees to indemnify and hold
---------------------------
harmless the Investor and each person, if any, who controls the Investor within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto), including
any prospectus, or in any offering circular or other document, as applicable, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statement therein not misleading or
arising out of any untrue statement or alleged untrue statement of a material
fact contained in any prospectus (or any amendment or supplement thereto), or in
any offering circular or other document, as applicable, or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, based upon any such untrue statement or omission,
or any such alleged untrue statement or omission;
32
<PAGE>
provided that (subject to Section 11.3(d) below) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred (including
the fees and disbursements of counsel chosen by the Investor), reasonably
incurred in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the extent that
any such expense is not paid under (i ) or (ii) above; provided, however, that
this indemnity agreement shall not apply to any loss, liability, claim, damage
or expense to the extent arising out of any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by the Investor expressly for
use in the Registration Statement (or any amendment thereto), including any
prospectus (or any amendment or supplement thereto), or in any offering circular
or other document, as applicable.
(b) Indemnification of Company. The Investor agrees to indemnify and hold
--------------------------
harmless the Company its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including any prospectus (or any amendment or supplement thereto), or in any
offering circular or other document, as applicable, in reliance upon and in
conformity with written information furnished to the Company by the Investor
expressly for use in the Registration Statement (or any amendment or supplement
thereto) or in any offering circular or other document, as applicable.
(c) Action against Parties; Notification. Each indemnified party shall
------------------------------------
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of his indemnity
agreement. In the case of parties indemnified pursuant to Section 11.3(a)
above, counsel to the indemnified parties shall be selected by the Investor, and
in the case of parties indemnified pursuant to Section 11.3(b) above, counsel to
the indemnified parties shall be selected by the Company. An indemnifying party
may participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with he
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnifies parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry or any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section or Section
11.4 hereof (whether or not the indemnified parties are actual or potential
parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each
33
<PAGE>
indemnifies part form all liability arising out of such litigation,
investigation proceeding or claim and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of an any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
--------------------------------------------------
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for the fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 11.3(a)(ii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
Section 11.4 Contribution. If the indemnification provided for in Section
------------
11.3 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to herein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred (a) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Investor on the other hand from the offering of the Common Stock
pursuant to this Agreement or (b) if the allocation provided by clause (a) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (a) above but also the
relative fault of the Company on the one hand and of the Investor on the other
hand in connection with the statements or omissions which resulted in such
losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Investor on the other hand in connection with the offering of the Common Stock
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total proceeds from the offering of the Common Stock pursuant
to this Agreement received by the Company from the Investor and the total
proceeds received by the Investor upon the sale of such Common Stock bear to the
aggregate public offering price.
The relative fault of the Company on the one hand and the Investor on the
other hand shall be determined by reference to, among other things, whether any
such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Investor and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Investor agree that it would not be just and equitable
if contribution pursuant to this Section 11.4 were determined on a pro-rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 11.4. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 11.4 shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened,
34
<PAGE>
or any claim whatsoever based upon any such untrue or alleged untrue statement
or omission or alleged omission.
Notwithstanding the provisions of this Section 11.4, the Investor shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Common Stock purchased by it and resold to the public exceeds
the amount of any damages which the Investor has otherwise been required to pay
by reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 11.4, each person, if any, who controls the
Investor within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act shall have the same rights to contribution as such Investor,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act shall have the same rights to contribution as the Company.
Section 11.5 General Indemnification. Each party shall indemnify the
-----------------------
other against any loss, cost or damages (including reasonable attorney's fees
and expenses) incurred as a result of such parties' breach of any
representation, warranty, covenant or agreement in this Agreement.
ARTICLE XII
Miscellaneous
-------------
Section 12.1 Counterparts. This Agreement may be executed in any number
------------
of counterparts, all of which together shall constitute one instrument.
Section 12.2 Survival: Severability. The representations, warranties,
----------------------
covenants and agreements of the parties hereto shall survive each Closing
hereunder. The indemnity and contribution agreements contained in Sections 11.3
and 11.4 hereof shall remain operative and in full force and effect regardless
of (a) any termination of this Agreement or of the Commitment Period, (b) any
investigation made by or on behalf of any indemnified party or by or on behalf
of the Company, and (c) the consummation of the sale or successive resales of
the Common Stock. In the event that any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 12.3 Title and Subtitles. The titles and subtitles used in this
-------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 12.4 Reporting Entity for the Common Stock. The reporting entity
-------------------------------------
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given
35
<PAGE>
Trading Day for the purposes of this Agreement shall be Bloomberg or any other
reputable pricing service chosen by the Investor and reasonably acceptable to
the Company.
Section 12.5 Effectiveness of the Agreement. This Agreement shall be
------------------------------
effective as of the Effective Date provided the Company shall have delivered on
such date fully executed versions of the Warrant, the opinion(s) of counsel and
the Registration Rights Agreement and any other documents required to be
delivered pursuant to the terms of this Agreement and shall have agreed by such
date to the final form of Exhibits to this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date hereof.
CRIPPLE CREEK SECURITIES, LLC GRC INTERNATIONAL, INC.
By: By:
-------------------------- -------------------------
Name: Name:
Title: Title:
36
<PAGE>
Exhibit 10.7
------------
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED ( THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR
AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
Right to Purchase Shares of Common Stock
of GRC International, Inc.
_____________________________
Common Stock Purchase Warrant
GRC International, Inc., a Delaware corporation having an address at
1900 Gallows Road, Vienna, VA 22181, (the "Company"), hereby certifies that for
$10.00 and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Cripple Creek Securities, LLC having an address
at 40 West 57th Street, 15th Floor, New York, NY 10019, ("Purchaser") or any
other Warrant Holder is entitled, on the terms and conditions set forth below,
to purchase from the Company at any time after the date hereof (subject to the
provisions of Section 2 hereof) and ending eighty-four (84) months after the
date hereof up to 125,000 of fully paid and nonassessable shares of Common
Stock, $0.10 par value, of the Company together with any associated Common Stock
Purchase Rights (the "Common Stock") at the Purchase Price (hereinafter
defined), as the same may be adjusted pursuant to Section 5 herein.
1. Definitions.
------------
(a) the term "Warrant Holder" shall mean the Purchaser or any
assignee of all or any portion of this Warrant at any given time
who, at the time of assignment, acquired the right to purchase at
least 1000 Warrant Shares, (such number being subject to
adjustment after the date hereof pursuant to Section 5 herein).
(b) the term "Warrant Shares" shall mean the shares of Common
Stock or other securities issuable upon exercise of this Warrant.
(c) the term "Purchase Price" shall mean $8.47, which represents
140% of the average of the closing sale prices of the Common
Stock on the Principal Market (as hereinafter defined) for the
period from and including January 21, 1997 to and including
January 29, 1997.
(d) other terms used herein which are defined in the Structured
Equity Line Flexible FinancingSM Agreement dated as of January
21, 1997 (the "Agreement") or the Registration Rights Agreement,
dated as of January 30, 1997 (the "Registration Rights
Agreement") shall have the same meanings herein as therein.
<PAGE>
2. Exercise of Warrant.
--------------------
This Warrant may be exercised by Warrant Holder, in whole or in part,
at any time and from time to time, on or after the date which is eighteen (18)
months following the date hereof, by surrender of this Warrant, together with
the Purchase Price (as defined in Section 1) for each share of Common Stock as
to which the Warrant is exercised, and the form of subscription attached hereto
as Exhibit A duly executed by Warrant Holder, to the Company it its principal
office; provided that in the event that prior to such date (i) the Company
declares a record date for a material dividend or distribution in respect of the
Common Stock (in cash or securities or other assets, other than Common Stock),
(ii) if at any time (A) there occurs any consolidation or merger of the Company
with or into any other corporation or other entity or person (whether or not the
Company is the surviving corporation) or there occurs any other corporate
reorganization or transaction or series of related transactions, and as a result
thereof the shareholders of the Company pursuant to such merger, consolidation,
reorganization or other transaction own in the aggregate less than 50% of the
voting power and common equity of the ultimate parent corporation or other
transaction (B) the Company transfers all or substantially all of the Company's
assets to another corporation or other entity or person or (iii) the Agreement
is terminated by the Investor pursuant to Section 2.6, of the Agreement, the
Warrant shall become exercisable thereafter in full at the Adjusted Purchase
Price. The Adjusted Purchase Price shall equal the lesser of (x) $8.47 (as
adjusted from time to time pursuant to Section 5 hereof) and (y) 80.0% (as
adjusted from time to time pursuant to Sections 5 (c) and 5(f) hereof) of the
Transaction Value per share of Common Stock issuable upon exercise of the
Warrant. The term "Transaction Value per share" means, in the case of a merger,
acquisition, sale of Common Stock, sale of assets or similar transaction, the
fair market value of the consideration to be received per share of Common Stock,
as evidenced by the average of the closing sale price for the Common Stock
during the ten (10) Trading Days following the announcement of such definitive
agreement and in the case of a material special dividend or distribution (which
material special dividend or distribution shall not include any grant of any
"poison pill" or any amendment or modification of the terms of any "poison pill"
that does not involve any increase in the consideration payable thereunder upon
redemption of the "poison pill"), the fair market value of the dividend or
distribution as determined in good faith by the Company's Board of Directors;
provided that if the dividend or distribution is in the form of an instrument
that trades "when issued" the fair market value thereof shall be determined by
reference to the average of the closing sale price for such instrument in the
when issued market or in the absence of a closing sale price, the average of the
closing bid and asked price) during the ten (10) Trading Days following such
record date. In the event that the Warrant is not exercised in full, the number
of Warrant Shares shall be reduced by the number of such Warrant Shares for
which this Warrant is exercised, and the Company, at its expense, shall
forthwith issue and deliver to or upon the order of the Warrant Holder a new
Warrant of like tenor in the name of the Warrant Holder or as Warrant Holder
(upon payment by the Warrant Holder of any applicable transfer taxes) may
request, reflecting such adjusted Warrant Shares.
(a) Subject to the terms of conditions of this Warrant, as soon
as practicable after the exercise of this Warrant in full or in
part, and in any event within three (3) Trading Days thereafter,
the Company at its expense (including, without limitation, the
payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to Warrant Holder, or as
Warrant Holder (upon payment by Warrant Holder of any applicable
transfer taxes) may lawfully direct, certificate or
2
<PAGE>
certificates for the number of fully paid and non-assessable
shares of Common Stock to which Warrant Holder shall be entitled
on such exercise, together with any other stock or other
securities or property (including cash, where applicable) to
which Warrant Holder is entitled upon such exercise.
(b) This Warrant may not be exercised as to fractional shares of
Common Stock. In the event that the exercise of this Warrant, in
full or in part, would result in the issuance of any fractional
share of Common Stock, then in such event the Warrant Holder
shall be entitled to cash equal to the Fair Market Value of such
fractional share. For purposes of this Warrant, Fair Market
Value equals the closing sale price of the Common Stock on the
New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market whichever is the principal trading
exchange or market for the Common Stock (the "Principal Market")
on the date of determination or, if the Common Stock is not
listed or admitted to trading on any national securities exchange
or quoted in the Nasdaq National Market, the average of the
closing bid and asked prices on the over-the-counter market as
furnished by any New York Stock Exchange member firm that makes a
market in the Common Stock reasonably selected from time to time
by the Company for that purpose, or, if the Common Stock is not
listed or admitted to trading on any national securities exchange
or quoted on the Nasdaq National Market or traded over-the-
counter and the average price cannot be determined as
contemplated above, the Fair Market Value of the Common Stock
shall be as reasonably determined in good faith by the Company's
Board of Directors.
(c) Notwithstanding any provision of this Section 2, as of any
date prior to the date of exercise of this Warrant or any portion
thereof, the aggregate number of shares of Common Stock into
which this Warrant, all other warrants and all other securities
convertible into or exchangeable for Common Stock held by the
Warrant Holder and its affiliates shall be convertible or
exchangeable, together with the shares of Common Stock then
beneficially owned (as such term is defined in the Exchange Act)
by such Warrant Holder and its affiliates, shall not exceed 4.9%
of the total outstanding shares of Common Stock as of such date.
This Warrant shall not be exercisable on any date to the extent
that such exercise would limit the ability of the Investor to
purchase shares of Common Stock as a result of a Mandatory
Purchase Notice or an Additional Purchase Notice (as such terms
are defined in the Agreement) pursuant to Section 2.1(c) of the
Agreement.
4. Covenants of the Company.
-------------------------
(a) The Company shall use its reasonable best efforts to insure
that a Registration Statement under the Securities Act covering the
resale of other disposition thereof of the Warrant Shares by Warrant
Holder is effective to the extent as provided in the Registration
Rights Agreement or, to the extent applicable, pursuant to Section
3.2(a) of the Agreement.
3
<PAGE>
(b) The Company shall take all necessary actions and proceedings
as may be required and permitted by applicable law, rule and
regulation, including, without limitation the notification of the New
York Stock Exchange, for the legal and valid issuance of this Warrant
and the Warrant Shares to the Warrant Holder under this Warrant.
(c) From the date hereof through the last date on which this
Warrant is exercisable, the Company shall take all steps reasonably
necessary and within its control to insure that the Common Stock
remains listed on the Principal Market and shall not amend its
Certificate of Incorporation or Bylaws so as to constitute a breach of
the Company's obligations hereunder or so as to adversely affect any
rights of the Warrant Holder under this Warrant.
(d) The Company shall at all times reserve and keep available,
solely for issuance and delivery as Warrant Shares hereunder, such
shares of Common Stock as shall from time to time be issuable as
Warrant Shares.
(e) The Warrant Shares, when issued in accordance with the terms
hereof, will be duly authorized and, when paid for or issued in
accordance with the terms hereof, shall be validly issued, fully paid
and non-assessable. The Company has authorized and reserved for
issuance to the Warrant Holder the requisite number of shares of
Common Stock to be issued pursuant to this Warrant.
(f) With a view to making available to the Warrant Holder the
benefits of Rule 144 promulgated under the Securities Act and any
other rule or regulation of the SEC that may at any time permit the
Warrant Holder to sell securities of the Company to the public without
registration, the Company agrees to use its reasonable best efforts
to:
(i) make and keep public information available, as those
terms are understood an defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act
and Exchange Act; and
(iii) furnish to any Warrant Holder forthwith upon request
a written statement by the Company that it has complied with the
reporting requirements of Rule 144 and of the Securities Act and
the Exchange Act, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so
filed by the Company as may be reasonably requested to permit any
such Warrant Holder to take advantage of any rule or regulation
of the SEC permitting the selling of any such securities without
registration.
5. Adjustment of Exercise Price and Number of Shares.
--------------------------------------------------
The number of, and kind of, securities purchasable upon exercise
of this Warrant and the Purchase Price shall be subject to adjustment
from time to time as follows:
4
<PAGE>
(a) Subdivisions, Combinations and Other Issuances. If the
----------------------------------------------
Company shall at any time after the date hereof, but prior to the
expiration of this Warrant subdivide its outstanding securities as to
which purchase rights under this Warrant exist, by split-up, spin-off,
or otherwise, or combine its outstanding securities as to which
purchase rights under this Warrant exist, the number of Warrant Shares
as to which this Warrant is exercisable as of the date of such
subdivision, split-up, spin-off or combination shall forthwith be
proportionately increased in the case of a subdivision, or
proportionately decreased in the case of a combination. Appropriate
adjustments shall also be made to the Purchase Price payable per
share, but the aggregate purchase price payable for the total number
of Warrant Shares purchasable under this Warrant as of such date shall
remain the same.
(b) Stock Dividend. If at any time after the date hereof the
--------------
Company declares a dividend or other distribution on Common Stock
payable in Common Stock or other securities or rights convertible into
Common Stock ("Common Stock Equivalents") without payment of any
consideration by holders of Common Stock for the additional shares of
Common Stock or the Common Stock Equivalents (including the additional
shares of Common Stock issuable upon exercise or conversion thereof),
then the number of shares of Common Stock for which this Warrant may
be exercised shall be increased as of the record date (or the date of
such dividend distribution if not record date is set) for determining
which holders of Common Stock shall be entitled to receive such
dividends, in proportion to the increase in the number of outstanding
shares (and shares of Common Stock issuable upon conversion of all
such securities convertible into Common Stock) of Common Stock as a
result of such dividend, and the Purchase Price per share shall be
adjusted so that the aggregate amount payable for the purchase of all
the Warrant Shares issuable hereunder immediately after the record
date (or on the date of such distribution, if applicable), for such
dividend shall equal the aggregate amount so payable immediately
before such record date (or on the date of such distribution, if
applicable).
(c) Other Distributions. If at any time after the date hereof
-------------------
the Company distributes to holders of its Common Stock, other than as
part of its dissolution, liquidation or the winding up of its affairs,
any shares of its capital stock, any evidence of indebtedness or any
of its assets (other than cash, Common Stock or securities convertible
into or exchangeable for Common Stock), then the Company shall
decrease the per share Purchase Price of this Warrant by an
appropriate amount based upon the value distributed on each share of
Common Stock as determined in good faith by the Company's Board of
Directors.
(d) Merger. etc. If at any time after the date hereof there
------
shall be a merger or consolidation of the Company with or into or a
transfer of all or substantially all of the assets of the Company to
another entity, then the Warrant Holder shall be entitled to receive
upon payment of the aggregate Purchase Price then in effect, the
number of shares or other securities or property of the Company or of
the successor corporation resulting from such merger or consolidation,
which would have been received by Warrant Holder for
5
<PAGE>
the shares of stock subject to this Warrant had this Warrant been
exercised just prior to such transfer, merger or consolidation
becoming effective or to the applicable record date thereof, as the
case may be.
(e) Reclassification. Etc. If at any time after the date hereof
---------------------
there shall be a reorganization or reclassification of the securities
as to which purchase rights under this Warrant exist into the same or
a different number of securities of any other class or classes, then
the Warrant Holder shall thereafter be entitled to receive upon
exercise of this Warrant, during the period specified herein and upon
payment of the Purchase Price then in effect, the number of shares or
other securities or property resulting from such reorganization or
reclassification, which would have been received by the Warrant Holder
for the shares of stock subject to this Warrant had this Warrant at
such time been exercised.
(f) Purchase Price Adjustment. In the event that the Company
-------------------------
issues or sells any Common Stock or securities which are convertible
into or exchangeable for its Common Stock or any convertible
securities, or any warrants or other rights to subscribe for or to
purchase or any options for the purchase of its Common Stock or any
such convertible securities (other than issuance of the Company's 5%
Convertible Debentures due 2002 (the "Debentures") or of shares of
Common Stock upon conversion thereof, shares or options issued or
which may be issued pursuant to the Company's employee, officer,
director, or consultant stock or option or similar equity-based
compensations plans now or hereafter established or shares used upon
exercise of options, warrants or rights outstanding on the date of the
Agreement and listed in the SEC Documents) at an effective purchase
price per share which is less than ninety-five (95%) of the Fair
Market Value (including any applicable underwriting discounts and/or
commissions) of the Common Stock on the Trading Day next preceding
such issue or sale, then in each such case, the Purchase Price in
effect immediately prior to such issue or sale shall be reduced
effective concurrently with such issue or sale to an amount determined
by multiplying the Purchase Price then in effect by a fraction, (x)
the numerator of which shall be the sum of (1) the number of shares of
Common Stock outstanding immediately prior to such issue or sale,
including, without duplication, those deemed to have been issued under
any provision of the Debentures and the Warrant plus (2) the number of
shares of Common Stock which the aggregate consideration received by
the Company for such additional shares would purchase at such Fair
Market Value and (y) the denominator of which shall be the number of
shares of Common Stock of the Company outstanding immediately after
such issue or sale including, without duplication, those deemed to
have been issued under any provision of the Debentures and Warrants.
For purposes of the foregoing fraction, Common Stock outstanding shall
include, without limitation, any Equity Offerings (as defined in the
Agreement) then outstanding whether or not they are exercisable or
convertible when such fraction is to be determined.
The number of shares which may be purchased hereunder shall be
increased proportionately to any reduction in Purchase Price pursuant
to this paragraph 5(f), so that after such adjustments the aggregate
Purchase Price payable hereunder for the increased number of shares of
Common Stock shall
6
<PAGE>
be the same as the aggregate Purchase Price in effect immediately
prior to such adjustment.
Notwithstanding anything else contained in this Warrant to the
contrary, there shall be no adjustment of the Purchase Price or the
number of shares of Common Stock issuable pursuant to the exercise of
this Warrant in the event that during the term of this Warrant, the
Company issues shares of Common Stock, or securities convertible into
Common Stock to the Purchaser.
(g) Adjustments: Additional Shares, Securities or Assets. In the
----------------------------------------------------
event that at any time, as a result of an adjustment made pursuant to
this Section 5, the Warrant Holder shall, upon exercise of this
Warrant, become entitled to receive shares and/or other securities
(other than Common Stock) then, wherever appropriate, all references
herein to shares of Common Stock shall be deemed to refer to and
include such shares and/or other securities or assets; and thereafter
the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as
nearly equivalent as practicable to the provisions of this Section 5.
6. No Impairment.
--------------
The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times
in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order
to protect the rights of the Warrant Holder against impairment.
Without limiting the generality of the foregoing, the Company (a) will
not increase the par value of any Warrant Share above the amount
payable therefor on such exercise, and (b) will take all such action
as may be reasonably necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable
Warrant Shares on the exercise of this Warrant. By acceptance hereof,
the Holder of this Warrant acknowledges and agrees that the
transactions specified in Section 2(i) and (ii) hereof shall not
constitute an impairment of the rights of the Warrant Holder
hereunder.
7. Notice of Adjustments.
----------------------
Whenever the Purchase Price or number of Warrant Shares
purchasable hereunder shall be adjusted pursuant to Section 5 hereof,
the Company shall execute and deliver to the Warrant Holder a
certificate setting forth, in reasonable detail, the event requiring
the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated and the Purchase Price and number of shares
purchasable hereunder after giving effect to such adjustment, and
shall cause a copy of such certificate to be mailed (by first class
mail, postage prepaid) to the Warrant Holder.
7
<PAGE>
8. Rights as Stockholder.
---------------------
Prior to exercise of this Warrant, the Warrant Holder shall not
be entitled to any rights as a stockholder of the Company with respect
to the Warrant Shares, including (without limitation) the right to
vote such shares, receive dividends or other distributions thereon or
be notified of stockholder meetings. However, in the event of any
taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Company shall mail to
each Warrant Holder, at least 10 days prior to the date specified,
therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or right, and
the amount and character of such dividend, distribution or right.
9. Replacement of Warrant.
----------------------
Upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of the Warrant and, in
the case of any such loss, theft or destruction of the Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory
in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company
at its expense will execute and deliver, in lieu thereof, a new
Warrant of like tenor.
10. Specific Enforcement: Consent to Jurisdiction: Waiver of Jury
-------------------------------------------------------------
Trial.
-----
(a) The Company and the Warrant Holder acknowledge and agree that
irreparable damage would occur in the event that any of the provisions
of this Warrant were not performed in accordance with their specific
terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent
or cure breaches of the provisions of this Warrant and to enforce
specifically the terms and provisions hereof, this being in addition
to any other remedy to which either of them may be entitled by law or
equity.
(b) Each of the Company and the Warrant Holder hereby (i) agree
that all actions or proceedings arising directly or indirectly from or
in connection with this Warrant shall be litigated only in the Supreme
Court of the Sate of New York or the United States District Court for
the Southern District of New York located in New York County, New York
and (ii) to the extent permitted by applicable law, consent to the
jurisdiction and venue of the foregoing courts and consent that any
process or notice of motion or other application to either of said
courts or a judge thereof may be served inside or outside the State of
New York or the Southern District of New York by registered mail,
return receipt requested, directed to the such party at its address,
set forth in this Warrant (and service so made shall be deemed
complete five (5) days after the same has been posted as aforesaid) or
by personal service or in such other manner
8
<PAGE>
as may be permissible under the rules of said courts. The parties
hereby waive any right to a jury trial in connection with any
litigation pursuant to this Warrant.
11. Entire Agreement: Amendments.
----------------------------
This Warrant, the Exhibits hereto and the provisions contained in
the Agreement or the Registration Rights Agreement and incorporated
into this Warrant and the Warrant Shares contain the entire
understanding of the parties with respect to the matters covered
hereby and thereby and except as specifically set forth herein and
therein. This Warrant and any term thereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by
the party against which enforcement of such change, waiver, discharge
or termination is sought.
12. Restricted Securities.
---------------------
Sections 6.6, 7.1, 7.2 and 7.3 of the Agreement are incorporated
herein by reference and hereby made a part hereof.
13. Notices.
-------
Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be effective (a) upon
hand delivery or delivery by telex (with correction answer back
received), telecopy or facsimile at the address or number designated
below (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day
during normal business hours where such notice is to be received) or
(b) on the second business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or
upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
to the Company:
Chairman, President & CEO
GRC International, Inc.
1900 Gallows Road
Vienna, VA 22182
with copies to:
Steve Parker, Esq.
C.D. McCoy, Esq.
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004
9
<PAGE>
to the Warrant Holder:
Cripple Creek Securities, LLC
40 West 57th Street
15th Floor
New York, NY 10019
Attn: Robert Chender, Esq.
Fax: (212) 698-0554
with copies to:
The Palladin Group, L.P.
40 West 57th Street
15th Floor
New York, NY 10019
Attn: Andrew Kaplan
Fax: (212) 698-0599
and
Ramius Capital LLC
40 West 57th Street
15th Floor
New York, NY 10019
Attn: Jeffrey Solomon
Fax: (212) 698-0554
Either party hereto may from time to time change its address for
notices under this Section 13 by giving at least 10 days prior written
notice of such changed address to the other party hereto.
14. Miscellaneous.
-------------
This Warrant shall be construed and enforced in accordance with
and governed by the laws of the State of New York. The headings
in this Warrant are for purposes of reference only, and shall not
limit otherwise affect any of the terms hereof. The invalidity
or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any other provisions.
10
<PAGE>
15. Expiration.
----------
The right to exercise this Warrant shall expire eighty-four (84)
months after the date hereof.
Dated: January 30, 1997 GRC INTERNATIONAL, INC.
By:
-----------------------------------
Title: Chairman, President & CEO
[CORPORATE SEAL]
Attest:
By:
-------------------------
Its: SVP, Gen. Cnsl. & Sec'y.
11
<PAGE>
EXHIBIT A
---------
FORM OF WARRANT EXERCISE
(To be signed only on exercise of Warrant)
TO:
--------------------
The undersigned, the holder of the within Warrant, hereby irrevocably elects to
exercise this Warrant for, and to purchase thereunder, ____ shares of Common
Stock of GRC International, Inc., a Delaware corporation (the "Company"), and
herewith makes payment of $ _____ therefor, and requests that the certificates
for such shares be issued in the name of, and delivered to ________, whose
address is ______________________________________________________.
Dated:______________
(Signature must conform to name of holder as specified on
the face of the Warrant)
_________________________
(Address)
12
<PAGE>
EXHIBIT B
---------
FORM OF ASSIGNMENT
------------------
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto
_____________________ the right represented by the within Warrant to purchase
________ shares of Common Stock of GRC International, Inc., a ______
corporation, to which the within Warrant relates, and appoints ________
Attorney to transfer such right on the books of GRC International, Inc., a
Delaware corporation, with full power of substitution the premises.
Dated:
----------------------------------
(Signature must conform to name of
holder as specified on the face of
the Warrant)
----------------------------------
Address
Signed in the presence of:
- -----------------------------
13
<PAGE>
Exhibit 10.8
------------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT ("Registration Rights Agreement"),
entered into as of January 30,1997, between CRIPPLE CREEK SECURITIES, LLC, with
offices at 40 West 57th Street, 15th Floor, New York, NY 10019 (the "Investor"),
and GRC INTERNATIONAL, Inc., a Delaware corporation with offices at 1900 Gallows
Road, Vienna, Virginia 22182 (the "Company").
WITNESSETH:
WHEREAS, pursuant to a Structured Equity Line Flexible Financing\\SM\\
Agreement, dated as of January 21, 1997 (the "Investor Agreement"), by and
between the Company and the Investor, the Company has agreed to sell and the
Investor has agreed to purchase, from time to time as provided in the Investor
Agreement, shares of the Company's Common Stock, $0.10 par value (the "Shares"
or the "Common Stock") for a maximum aggregate price of $18,000,000;
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Investor's agreement to enter into the Investment Agreement, the Company has
issued to the Investor a warrant dated January 30, 1997, exercisable from time
to time within seven (7) years from the date of issuance (the "Warrant") for the
purchase of an aggregate of 125,000 shares of Common Stock at a price specified
in such Warrant;
WHEREAS, the Company has agreed to issue to the Investor an additional
seven (7) year warrant to purchase up to 75,000 Shares at a price determined
pursuant to the Investment Agreement ("Additional Warrant") upon the occurrence,
if any, of certain circumstances set forth in the Investor Agreement;
WHEREAS, pursuant to the terms of, and in partial consideration for the
Investor's commitment to enter into the Investor Agreement, the Company has
agreed to provide the Investor with certain registration rights with respect to
the Shares as set forth in this Registration Rights Agreement;
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in the Investor Agreement and
this Registration Rights Agreement and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
intending to be legally bound hereby, the Company and the Investor agree as
follows:
1. Certain Definitions. Capitalized terms used in this Registration Rights
Agreement and not otherwise defined herein shall have the same meaning ascribed
to them in the Investor Agreement. The following terms shall have the following
respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
<PAGE>
"Investor" shall include the Investor and any permitted assignee or
transferee of the rights under the Investor Agreement to whom the registration
rights conferred by this Registration Rights Agreement have been transferred in
compliance with Section 10 of this Registration Rights Agreement.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Registration Expenses" shall mean all expenses to be incurred by the
Company in connection with Investor's exercise of its registration rights under
this Registration Rights Agreement, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, reasonable fees and
disbursements of counsel to Investor for a "due diligence" examination of the
Company and review of the Warrant Registration Statement and the Additional
Warrant Registration Statement, as applicable, and the expense of any special
audits incident to or required by any such registration (but excluding the
compensation of regular employees of the Company, which shall be paid in any
event by the Company).
"Registrable Securities" shall mean any Shares or other securities
issued or issuable to the Investor or any holder or transferee upon the exercise
of the Warrant or the Additional Warrant as provided therein, until (i) a
registration statement under the Securities Act covering the offering of such
Shares has been declared effective by the Commission and such Shares have been
disposed of pursuant to such effective registration statement, (ii) such Shares
are sold under circumstances in which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (iii) such Shares have been otherwise transferred and the Company
has delivered a new certificate or other evidence of ownership for such
securities not bearing a restrictive legend or (iv) such time as, in the opinion
of counsel to the Company, which counsel shall be acceptable to the Investor in
its sole discretion, such Shares may be sold without any time, volume or manner
limitation pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act.
"Registration Statement", "Warrant Registration Statement" and
"Additional Warrant Registration Statement" shall have the meaning set forth in
Section 2(a) herein.
"Regulation D" shall mean Regulation D as promulgated pursuant to the
Securities Act, and as subsequently amended.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of counsel for Investor not included with "Registration Expenses".
2. Registration Requirements. The Company shall use its diligent best
-------------------------
efforts to effect the registration of the Registrable Securities contemplated by
the Warrant, and if applicable, the Additional Warrant (including, without
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualification under applicable blue sky or other
2
<PAGE>
state securities laws and appropriate compliance with applicable regulations
issued under the Securities Act) as would permit or facilitate the sale or
distribution of all the Registrable Securities in the manner (including manner
of sale) and in all states reasonably requested by the Investor for purposes of
maximizing the proceeds realizable by the Investor from such sale or
distribution. Such best efforts by the Company shall include without limitation
the following:
(a) Subject to the terms and conditions of this Registration Rights
Agreement, the Company shall file with the Commission (i) no later than thirty
(30) days from the date of execution of this Registration Rights Agreement, a
registration statement on Form S-3 under the Securities Act for the registration
of the resale by the Investor of the Registrable Securities to be issued upon
exercise of the Warrant (the "Warrant Registration Statement") which Warrant
Registration Statement shall have been declared effective by the Commission no
later than June 2, 1997, and (ii) no later than thirty (30) days from the date
of the issuance of the Additional Warrant, a registration statement on Form S-3
under the Securities Act for the registration of the resale by the Investor of
the Registrable Securities to be issued upon exercise of the Additional Warrant
(the "Additional Warrant Registration Statement") which Additional Warrant
Registration Statement shall have been declared effective by the Commission
within 120 days of the date of issuance of the Additional Warrant. The Warrant
Registration Statement and the Additional Warrant Registration Statement are
each referred to herein as a "Registration Statement". Furthermore, at the time
of each Registration Statement filing, the Company shall file (A) such blue sky
filings as shall have been requested by the Investor; and (B) any required
filings with the National Association of Securities Dealers, Inc. or exchange or
market where the Shares are traded. The Company shall use its best efforts to
have all filings declared effective as promptly as practicable.
(b) (i) If the Company (A) fails to file the Warrant Registration
Statement complying with the requirements of this Registration Rights Agreement
within thirty (30) days from the date hereof or if the Warrant Registration
Statement has not become effective on or before June 2, 1997 or (B) fails to
file the Additional Warrant Registration Statement complying with the
requirements of this Registration Rights Agreement within thirty (30) days of
the issuance of the Additional Warrant or if such Additional Warrant
Registration Statement has not become effective within 120 days of the issuance
of the Additional Warrant, the Investor shall have, in addition to and without
limiting any other rights it may have at law, in equity or under the Investor
Agreement, or this Registration Rights Agreement (including the right to
specific performance), the right to receive, as liquidated damages, the payments
as provided in subparagraph (ii) of this section.
(ii) In the event the Company fails to obtain the effectiveness
of a Registration Statement within the time period set forth in Section 2(a),
the Company shall pay to the Investor an amount equal to $15,000, in cash, for
each thirty (30) day period following the date by which such Registration
Statement was required to have been declared effective (which payment shall be
pro-rata for any period of less than thirty (30) days). In addition to the
foregoing, in the event the Company fails to maintain the effectiveness of a
Registration Statement (or the use of the underlying prospectus) throughout the
period set forth in Section 5(a), other than temporary suspensions as set forth
in Section 5A, the Company shall pay to the Investor an amount equal to $7,500,
in cash, for each thirty (30) day period in which a suspension has occurred
(which payment shall be pro-rata for any period of less than thirty (30) days).
Such liquidated damages amount shall not be payable with respect to suspensions
of the effectiveness of a Registration Statement (or use of the underlying
prospectus) in
3
<PAGE>
accordance with Section 5A although any such suspensions shall be counted
towards the temporary suspensions allowed by the preceding sentence.
(c) The Company shall enter into such customary agreements and take
all such other reasonable actions in connection therewith in order to expedite
or facilitate the disposition of such Registrable Securities (the Investor may,
at its option, require that any or all of the representations, warranties and
covenants of the Company in such agreements also be made to and for the benefit
of the Investor) and in such connection:
(i) cause to be delivered to the sellers of Registrable
Securities opinions of counsel to the Company, dated the effective date of the
Registration Statement (which counsel, and opinions (in form, scope and
substance), shall be reasonably satisfactory to the appointed representative or
counsel of the Investor), addressed to the Investor covering matters reasonably
requested by the Investor;
(ii) cause to be delivered, immediately prior to the
effectiveness of the Registration Statement, a "comfort" letter from the
Company's independent certified public accountants addressed to the Investor
stating that such accountants are independent public accountants within the
meaning of the Securities Act and the applicable published rules and regulations
thereunder, and otherwise in customary form and covering such financial and
accounting matters as are reasonably requested by the Investor;
(iii) the Company shall deliver such documents and certificates
as may be reasonably requested by the Investor to evidence compliance with the
Investor's request, if any, that any or all representations, warranties and
covenants of the Company made in the agreements referred to in the introductory
paragraph of (c) above were also made to the benefit of the Investor and with
any other agreement entered into by the Company;
(d) The Company shall make available for inspection by a
representative or representatives of the Investor, any attorney or accountant
retained by such Investor, all financial and other records customary for such
purposes, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, attorney or accountant in
connection with such Registration Statement. The Investor will agree to keep
all non-public information supplied to it confidential until such information is
included in the Registration Statement.
3. Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance with registration
pursuant to this Registration Rights Agreement shall be borne by the Company,
and all Selling Expenses shall be borne by the Investor.
4. Registration on Form S-3. The Company shall use its best efforts to
------------------------
remain eligible for registration on Form S-3 or any comparable or successor form
or forms, or in the event that the Company is ineligible to use such form, such
form as the Company is eligible to use under the Securities Act. The foregoing
is not intended to require the Company to pay dividends in order to use Form S-
3.
5. Registration Procedures. In the case of each registration effected by
-----------------------
the Company pursuant to this Registration Rights Agreement, the Company will
keep the Investor
4
<PAGE>
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for the period ending eighty-four
(84) months, as extended pursuant to Section 5A hereof, after the date of
issuance (in the case of the Warrant Registration Statement), and eighty-four
(84) months, as extended pursuant to Section 5A hereof, after the date of
issuance of the Additional Warrant (in the case of the Additional Warrant
Registration Statement), or until the Investor has completed the distribution of
the Shares or securities issued or issuable by the Company upon exercise of the
Warrant and the Additional Warrants, whichever first occurs.
(b) Furnish such number of prospectuses and amendments and supplements
thereto, and other documents incident thereto as the Investor from time to time
may reasonably request.
(c) Prepare and file with the Commission such amendments and post-
effective amendments to a Registration Statement as may be necessary to keep
such Registration Statement effective for the applicable period; cause the
related prospectus to be supplemented by any required prospectus supplement, and
as so supplemented to be filed pursuant to Rule 424 under the Securities Act;
and comply with the provisions of the Securities Act applicable to it with
respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended methods
of disposition by the sellers thereof set forth in such Registration Statement
or supplement to such prospectus;
(d) Notify the Investor and its counsel (as designated in writing by
the Investor) promptly, and confirm such notice (a "Notice") in writing, (i)
when a prospectus or any prospectus supplement or post-effective amendment has
been filed, and, with respect to a Registration Statement or any post-effective
amendment, when the same has become effective, (ii) of any request by the
Commission for amendments or supplements to a Registration Statement or related
prospectus or for additional information, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose, (iv) if at any
time the representations and warranties of the Company contained in agreements
contemplated by Section 2(c) cease to be true and correct, (v) of the receipt by
the Company of any notification with respect to the suspension of the
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose, (vi) of the
happening of any event as a result of which the prospectus included in a
Registration Statement (as then in effect) contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein (in the case of the prospectus or
any preliminary prospectus, in light of the circumstances under which they were
made) not misleading and (vii) of the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate or
that there exist circumstances not yet disclosed to the public which make
further sales under such Registration Statement inadvisable pending such
disclosure and post-effective amendment;
(e) Upon the occurrence of any event contemplated by Section 5(d)(ii)-
(vii) and immediately upon the expiration of any Blocking Period (as defined in
Section 5A), prepare, if the occurrence of such event or period requires such
preparation, a supplement or post-effective amendment to a Registration
Statement or related prospectus or any document
5
<PAGE>
incorporated therein by reference or file any other document so that, as
thereafter delivered to the purchasers of the Registrable Securities being sold
thereunder, such prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary, in order to make the
statements, in light of the circumstances under which they were made, not
misleading;
(f) Make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement, or the lifting of any
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction, at the earliest possible moment;
(g) Insure that all Registrable Securities subject to a Registration
Statement shall at all times be registered or qualified for offer and sale under
the securities or blue sky laws of such jurisdictions as the Investor reasonably
requests in writing; use its best efforts to keep each such registration or
qualification effective, including through new filings or amendments or
renewals, during the period a Registration Statement is required to be kept
effective and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by the applicable Registration Statement; provided. however. that the
Company will not be required to qualify to do business or take any action that
would subject it to taxation or general service of process in any jurisdiction
where it is not then so qualified or subject;
(h) Use its best efforts to cause the Registrable Securities covered
by a Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the seller or
sellers thereof to consummate the disposition of such Registrable Securities in
accordance with the chosen method or methods of distribution;
(i) Cause all Registrable Securities included in a Registration
Statement to be listed, by the date of first sale of Registrable Securities
pursuant to such Registration Statement, on the principal securities exchange or
automated interdealer system on which the same type of securities of the Company
are then listed or traded;
5A. Suspensions of Effectiveness. The Company may suspend dispositions
----------------------------
under the Registration Statement and notify the Investor that it may not sell
the Registrable Securities pursuant to any Registration Statement or prospectus
(a "Blocking Notice") if the Company's management determines in its reasonable
good faith judgment that the Company's obligation to ensure that such
Registration Statement and prospectus are current and complete would require the
Company to take actions that might reasonably be expected to have a materially
adverse detrimental effect on the Company and its stockholders; provided that
such suspension pursuant to a Blocking Notice or the Notice described below or
as a result of the circumstances described in 5(d)(ii)-(vii) may not exceed
ninety (90) days (whether or not consecutive) in any twelve (12) month period.
The Investor agrees by acquisition of the Registrable Securities that, upon
receipt of a Blocking Notice or "Notice" from the Company of the existence of
any fact of the kind described in the following sentence, the Investor shall not
dispose of, sell or offer for sale the Registrable Securities pursuant to the
Registration Statement until the Investor receives (i) copies of the
supplemented or amended prospectus, or until counsel for the Company shall have
determined that such disclosure is not required due to subsequent events, (ii)
notice in writing (the "Advice") from the Company that the use of the prospectus
may be resumed and (iii) copies of any additional or supplemental filings that
6
<PAGE>
are incorporated by reference in the prospectus. Pursuant to the immediately
preceding sentence, the Company may provide such Notice to the Investor upon the
determination by the Company of the existence of any fact or the occurrence of
any event that makes any statement of a material fact made in a Registration
Statement, the prospectus, any amendment or supplement thereto, or any document
incorporated by reference therein untrue in any material respect, or that
requires the making of any additions to or changes in a Registration Statement
or the prospectus, in order to make the statements therein not misleading in any
material respect. If so directed by the Company in connection with any such
notice, each Investor will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in the Investor's possession, of
the prospectus covering such Registrable Securities that was current immediately
prior to the time of receipt of such notice. In the event the Company shall give
any such Blocking Notice or Notice, the time regarding the effectiveness of such
Registration Statement set forth in Section 5(a) shall be extended by one and
one-half (1-1/2) times the number of days during the period from and including
the date of the giving of such Blocking Notice or Notice to and including the
date when the Investor shall have received the copies of the supplemented or
amended prospectus, the Advice and any additional or supplemental filings that
are incorporated by reference in the prospectus. Delivery of a Blocking Notice
or Notice and the related suspension of any Registration Statement shall not
constitute a default under this Registration Rights Agreement and shall not
create any obligation to pay liquidated damages under Section 2 hereof.
However, if the Investor's ability to sell under a Registration Statement is
suspended for more than ninety (90) days period described above, the Investor
may elect, in its sole and absolute discretion, to terminate the Investor
Agreement pursuant to Section 10.4 in the Investor Agreement.
6. Indemnification.
----------------
(a) Company Indemnity. The Company will indemnify the Investor, each of its
-----------------
officers, directors and partners, and each person controlling the Investor,
within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder with respect to which registration, qualification or
compliance has been effected pursuant to this Registration Rights Agreement,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular or
other document (including any related registration statement, notification or
the like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities Act or any state
securities law or in either case, any rule or regulation thereunder applicable
to the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse the Investor, each of its officers, directors and partners, and each
person controlling the Investor, for any legal and any other expenses reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission (or alleged untrue
statement or omission) that is made in reliance upon and in conformity with
written information furnished to the Company by the Investor and stated to be
specifically for therein. In addition to any other information furnished in
writing to the Company by the Investor, the information in a Registration
Statement concerning the Investor under the captions "Selling Shareholders" (or
any similarly captioned section containing the information required pursuant to
Item. 507 of Regulation S-K promulgated pursuant to the Securities Act)
7
<PAGE>
and "Plan of Distribution" (or any similarly captioned section containing
information required pursuant to Item 508 of Regulation S-K) shall be deemed
information furnished in writing to the Company by the Investor to the extent it
conforms to information actually supplied in writing by the Investor. The
indemnity agreement contained in this Section 6(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent will
not be unreasonably withheld).
(b) Investor Indemnity. The Investor will, if Registrable Securities
------------------
held by it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors, officers, partners and each person who controls the Company
within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder, each other Investor (if any), and each of their
officers, directors, and partners, and each person controlling such other
Investor against all claims, losses, liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statement therein not misleading, and will reimburse the Company and its
directors, officers and partners or control persons for any legal or any other
expenses reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by the Investor and
stated to be specifically for use therein, and provided that no Investor shall
be liable under this indemnity for an amount in excess of the proceeds received
by the Investor from the sale of the Registrable Securities pursuant to such
Registration Statement. In addition to any other information furnished in
writing to the Company by the Investor, the information in a Registration
Statement concerning the Investor under the captions "Selling Shareholders" (or
any similarly captioned section containing the information required pursuant to
Item 507 of Regulation S-K promulgated pursuant to the Securities Act) and "Plan
of Distribution" (or any similarly captioned section containing information
required pursuant to Item 508 of Regulation S-K) shall be deemed information
furnished in writing to the Company by the Investor to the extent it conforms to
information actually supplied in writing by the Investor. The indemnity
agreement contained in this Section 6(b) shall not apply to amounts paid in
settlement of any such claims, losses, damages or liabilities if such settlement
is effected without the consent of the Investor (which consent shall not be
unreasonably withheld).
(c) Procedure. Each party entitled to indemnification under this
---------
Article (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Section
except to the extent that the Indemnifying Party is materially and adversely
affected by such
8
<PAGE>
failure to provide notice. The Indemnifying Party shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) at any time for such Indemnified Party, provided, however, that if
separate firm(s) of attorneys are required due to a conflict of interest, then
the Indemnifying Party shall be liable for the reasonable fees and expenses of
each such separate firm. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.
7. Contribution. If the indemnification provided for in Section 6 herein
------------
is unavailable to the Indemnified Parties in respect of any losses, claims,
damages or liabilities referred to herein (other than by reason of the
exceptions provided therein), then each such Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) as between the Company and the Investor in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Investor from the offering of the Registrable Securities, or if such allocation
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and of the Investor, on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations and (ii) as
between the Company on the one hand and the Investor on the other, in such
proportion as is appropriate to reflect the relative fault of the Company and of
the Investor in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Investor, on the other shall be deemed to be in the same proportion as the
proceeds from the offering received by the Company from the initial sale of the
Registrable Securities by the Company to the Investor pursuant to this
Registration Rights Agreement bear to the proceeds received by the Investor from
the sale of Registrable Securities pursuant to a Registration Statement. The
relative fault of the Company on the one hand and of the Investor on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or by the
Investor.
In no event shall the obligation of any Indemnifying Party to contribute
under this Section 7 exceed the amount that such Indemnifying Party would have
been obligated to pay by way of indemnification if the indemnification provided
for under Section 6(a) or 6(b) hereof had been available under the
circumstances.
The Company and the Investor agree that it would not be just and equitable
if contribution pursuant to this Section 7 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in
9
<PAGE>
the immediately preceding paragraphs. The amount paid or payable by an
Indemnified Party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraphs shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section, no Investor shall be required to contribute any amount in excess of the
amount by which the total price at which the shares of Common Stock offered by
the Investor and distributed to the public, or offered to the public, exceeds
the amount of any damages that the Investor has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
8. Survival. The indemnity and contribution agreements contained in
--------
Sections 6 and 7 and the representations and warranties of the Company referred
to in Section 2(e)(i) shall remain operative and in full force and effect
regardless of (i) any termination of the Investor Agreement, (ii) any
investigation made by or on behalf of any Indemnified Party or by or on behalf
of the Company and (iii) the consummation of the sale or successive resales of
the Registrable Securities.
9. Information by Investor. The Investor shall promptly furnish to the
-----------------------
Company such information regarding the Investor and the distribution proposed by
the Investor as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Registration Rights Agreement. All information
provided to the Company by the Investor shall be accurate and complete in all
material respects and the Investor shall promptly notify the Company if any such
information becomes incorrect of incomplete. If the Investor does not timely
provide all such reasonably requested information the Investor shall not be
entitled to the liquidated damages contemplated by Section 2(b)(ii) to the
extent that such delay in a Registration Statement becoming effective is caused
by such failure to timely provide information unless the Investor shall be able
to demonstrate to the Company's satisfaction that such failure to timely provide
did not proportionately contribute to the event giving rise to the indemnity
obligation.
10. Transfer or Assignment of Registration Rights. Neither this
---------------------------------------------
Registration Rights Agreement nor any rights of the Investor or the Company
hereunder may be assigned by either party to any other person. Notwithstanding
the foregoing, the Investor's rights and obligations under this Registration
Rights Agreement may be assigned at any time, in whole or in part, to (x) any
affiliate of the Investor without any prior written consent of the Company or
(y) to any other person or entity, upon the prior written consent of the
Company, which consent shall not to be unreasonably withheld (a "Permitted
Transferee"), and the rights and obligation of the Investor under this
Registration Rights Agreement shall inure to the benefit of, and be enforceable
by and against, any such Permitted Transferee.
11. Miscellaneous.
--------------
(a) Entire Agreement. This Registration Rights Agreement contains the
----------------
entire understanding and agreement of the parties, and may not be modified or
terminated except by a written agreement signed by both parties.
10
<PAGE>
(b) Notices. Any notice or other communication given or permitted
-------
under this Registration Rights Agreement shall be in writing and shall be deemed
to have been duly given if personally delivered or sent by registered or
certified mail, return receipt requested, postage prepaid or by air courier,
(a) if to Investor, at its address hereinabove set forth, (b) if to the Company,
to GRC International, Inc., at its address hereinabove set forth, and (c) if to
a permitted transferee or assignee, at the address thereof furnished by like
notice to the Company, or (d) to any such addresses at such other address or
addresses as shall be so furnished to the other parties by like notice.
(c) Gender of Terms. All terms used herein shall be deemed to include
---------------
the feminine and the neuter, and the singular and the plural, as the context
requires.
(d) Governing Law; Consent of Jurisdiction; Waiver of Jury Trial.
------------------------------------------------------------
This Registration Rights Agreement and the validity and performance of the terms
hereof shall be governed by and construed in accordance with the laws of the
State of New York, except to the extent that the law of the State of Delaware
regulates the Company's issuance of securities. The parties hereto hereby agree
that all actions or proceedings arising directly or indirectly from or in
connection with this Registration Rights Agreement shall be litigated only in
the Supreme Court of the State of New York or the United States District Court
for the Southern District of New York located in New York County, New York. To
the extent permitted by applicable law, the parties hereto consent to the
jurisdiction and venue of the foregoing courts and consent that any process or
notice of motion or other application to either of said courts or a judge
thereof may be served inside or outside the State of New York or the Southern
District of New York by registered mail, return receipt requested, directed to
the such party at its address set forth in this Registration Rights Agreement
(and service so made shall be deemed complete five (5) days after the same has
been posted as aforesaid) or by personal service or in such other manner as may
be permissible under the rules of said courts. The parties hereto hereby waive
any right to a jury trial in connection with any litigation pursuant to this
Registration Rights Agreement.
(e) Titles. The titles used in this Registration Rights Agreement are
------
used for convenience only and are not to be considered in construing or
interpreting this Registration Rights Agreement.
(f) Rule 144. The Company covenants that it will file all reports
--------
required to be filed by it under the Securities Act and the Exchange Act and
that it will take such further action as holders of Registrable Securities may
reasonably request, all to the extent required from time to time to enable the
Investor to sell Registrable Securities without registration under the Act
within the limitation of the exemptions provided by (a) Rule 144, as such Rule
may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the SEC. If at any time the Company is not required to
file such reports, it will, upon the request of the Investor, make publicly
available other information so long as necessary to permit sales pursuant to
Rule 144. Upon the request of the Investor, the Company will deliver to the
Investor a written statement as to whether it has complied with such
requirements.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed as of the date first above written.
CRIPPLE CREEK SECURITIES, LLC GRC INTERNATIONAL, INC.
a Delaware Corporation
By: By:
-------------------------- --------------------------
Name: Name:
Title: Title:
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME ON PAGES
3 THROUGH 5 OF SEC INTERNATIONAL'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,680
<SECURITIES> 0
<RECEIVABLES> 26,443
<ALLOWANCES> 217
<INVENTORY> 1,810
<CURRENT-ASSETS> 40,107
<PP&E> 22,513
<DEPRECIATION> 10,490
<TOTAL-ASSETS> 61,325
<CURRENT-LIABILITIES> 24,904
<BONDS> 0
0
0
<COMMON> 964
<OTHER-SE> 6,129
<TOTAL-LIABILITY-AND-EQUITY> 61,325
<SALES> 60,479
<TOTAL-REVENUES> 60,479
<CGS> 52,305
<TOTAL-COSTS> 52,305
<OTHER-EXPENSES> 29,236
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 652
<INCOME-PRETAX> (21,714)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,714)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,714)
<EPS-PRIMARY> (2.33)
<EPS-DILUTED> (2.33)
</TABLE>
