SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1999.
_ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______________ to ____________.
Commission file number 1-10340
ALLOU HEALTH & BEAUTY CARE, INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2953972
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
50 Emjay Boulevard, Brentwood, NY 11717
- --------------------------------- -----
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (516) 273-4000
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 twelve 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.
Class August 10, 1999
----- ---------------
Class A Common Stock, $.001 par value 5,443,576
=========
Class B Common Stock, $.001 par value 1,200,000
=========
<PAGE>
ALLOU HEALTH & BEAUTY CARE, INC.
INDEX
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,1999
(unaudited) and March 31, 1999 3
Consolidated Statements of Income & Retained
Earnings (unaudited) For the Three Month Periods
Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited)
For the Three Month Period Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit Index 12
<PAGE>
<TABLE>
<CAPTION>
ALLOU HEALTH AND BEAUTY CARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30, March 31,
1999 1999
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 228,941 $ 400,090
Accounts Receivable (less allowance for
doubtful accounts of $1,775,964 at June 30,
1999 and $1,615,965 at March 31, 1999) 45,448,145 50,162,450
Inventories 140,824,946 122,917,911
Prepaid Purchases 8,825,863 24,682,481
Note Receivable 8,900,000 - 0 -
Other Current Assets 10,865,598 12,876,642
----------- -----------
Total Current Assets $215,093,493 $211,039,574
Property and Equipment, Less Accumulated Depreciation 3,569,241 3,839,906
Other Assets 7,280,434 5,027,901
----------- -----------
TOTAL ASSETS $225,943,168 $219,907,381
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Amounts Due Bank $123,815,181 $123,371,228
Current Portion of Long-Term Debt 523,187 707,652
Accounts Payable and Accrued Expenses 18,482,980 33,936,223
Income Taxes Payable 4,670,391 - 0 -
Deferred Income Taxes 3,230,000 832,000
----------- -----------
Total Current Liabilities $150,721,739 $158,847,103
----------- -----------
Long Term Liabilities
Long-Term Debt, Less Current Portion 618,939 724,234
----------- -----------
Total Long Term Liabilities 618,939 724,234
----------- -----------
TOTAL LIABILITIES $151,340,678 $159,571,337
----------- -----------
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, $.001 par value, 1,000,000
shares authorized, none issued and outstanding.
Class A Common Stock, $.001 par value;
15,000,000 shares authorized;
5,443,576 and 5,339,122 shares issued and
outstanding at June 30, 1999 and March 31, 1999 $ 5,443 $ 5,339
Class B Common Stock, $.001 par value;
2,200,000 shares authorized;
1,200,000 shares issued and outstanding
at June 30, 1999 and March 31, 1999 1,200 1,200
Additional Paid-In Capital 30,090,905 29,956,769
Retained Earnings 44,504,942 30,372,736
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 74,602,490 60,336,044
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $225,943,168 $219,907,381
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ALLOU HEALTH AND BEAUTY CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
June 30,
1999 1998
---- ----
<S> <C> <C>
Revenues $78,147,211 $68,634,713
Costs of Revenues 67,306,080 58,290,916
---------- ----------
Gross Profit 10,841,131 10,343,797
---------- ----------
Operating Expenses
Warehouse and Delivery 2,598,922 2,247,097
Selling, General and Administrative 4,051,765 4,555,489
---------- ----------
Total Expenses 6,650,687 6,802,586
---------- ----------
Income From Operations 4,190,444 3,541,211
---------- ----------
Other Charges (Credits)
Interest Expense 2,190,757 2,405,070
Other ( 12,163) ( 5,311)
Interest Income ( 142,895) - 0 -
---------- ----------
Total 2,035,699 2,399,759
---------- ----------
Income From Operations Before Income Taxes 2,154,745 1,141,452
Provision for Income Taxes 819,000 444,300
---------- ----------
Income From Continuing Operations 1,335,745 697,152
Loss From Discontinued Operations
Net of Income Taxes of $316,000 ( 516,764) - 0 -
Gain on Disposal of Discontinued Operations
Net of Income Taxes of $8,159,000 13,313,225 - 0 -
---------- ----------
NET INCOME $14,132,206 $ 697,152
RETAINED EARNINGS - BEGINNING 30,372,736 29,024,881
---------- ----------
RETAINED EARNINGS - ENDING $44,504,942 $29,722,033
========== ==========
Earnings Per Common Share
Basic:
Continuing Operations $ .20 $.12
Discontinued Operations 1.93 .00
---- ---
Net Income $2.13 $.12
==== ===
Diluted:
Continuing Operations $ .18 $.11
Discontinued Operations 1.69 .00
---- ---
Net Income $1.87 $.11
==== ===
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ALLOU HEALTH & BEAUTY CARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months Ended
June 30,
1999 1998
---- ----
Cash Flows From Operating Activities
- ------------------------------------
<S> <C> <C>
Net Income $14,132,206 $ 697,152
Adjustments to Reconcile Net Income to Net Cash
Used in Operating Activities:
Depreciation and Amortization 195,624 192,858
Decrease (Increase) In Assets:
Accounts Receivable 4,714,305 1,964,640
Inventories (17,907,035) (18,131,144)
)
Prepaid Purchases and Other Assets 15,564,037 ( 4,781,934)
Note Receivable ( 8,900,000) -0-
Increase (Decrease) In Liabilities:
Accounts Payable and Accrued Expenses (15,453,243) 4,217,423
Income Taxes Payable 7,068,391 -0-
------------ ----------
Net Cash Used In Operating Activities ( 585,715) (15,841,005)
------------ ----------
Cash Flows Used in Investing Activities
Acquisition of Property and Equipment ( 550,617) ( 292,949)
Disposition of Property and Equipment 676,750 -0-
------------ ----------
Net Cash Provided by Investing Activities 126,133 ( 292,949)
------------ ----------
Cash Flows From Financing Activities
Net Increase in Amounts Due Bank 443,953 12,945,454
Borrowings 39,132 3,108,704
Repayment of Debt ( 328,892) ( 272,215
Net Proceeds From Exercise of Options and Warrants 134,240 525,029
------------ ----------
Net Cash Provided By Financing Activities 288,433 16,306,972
------------ ----------
INCREASE (DECREASE) IN CASH ( 171,149) 173,018
CASH AT BEGINNING OF PERIOD 400,090 46,675
------------ ----------
CASH AT END OF PERIOD $ 228,941 $ 219,693
============ ==========
Supplemental Disclosures of Cash Flow Information:
Cash Paid For:
Interest $ 2,184,859 $ 2,402,314
Income Taxes $ -0- $ 239,604
</TABLE>
During the three months ended June 30, 1999 and 1998 the Company issued notes
for $39,132 and $3,108,704, respectively.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLOU HEALTH & BEAUTY CARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying interim consolidated financial statements of Allou Health &
Beauty Care Inc. (the Company) have been prepared in conformity with generally
accepted accounting principles consistent in all material respects with those
applied in the Annual Report on Form 10-K for the year ended March 31, 1999. The
interim financial information is unaudited, but reflects all normal adjustments
which are, in the opinion of management, necessary to provide a fair statement
of results for the interim periods presented. The interim financial statements
should be read in connection with the financial statements in the Company's
Annual Report on Form 10-K for the year March 31, 1999.
2. On April 23, 1999, the Company sold 69% of its interest in The Fragrance
Counter Inc. for net proceeds of $11,296,584 in cash and $8,900,000 in notes,
bearing interest at 3/8% above the prime rate, $400,000 is due in July, 1999
plus accrued interest and $8,500,000 is due in April, 2000 plus accrued
interest. The Company retains a 13% minority interest. As a result of the
disposition, the Company recognized a gain of $21,472,225 and has provided for
$8,159,000 of related taxes of which $3,230,000 has been deferred to fiscal
2001, when the $8,500,000 note is due.
3. Earnings per share (EPS) for the current and prior period has been presented
in conformity with the provisions of SFAS 128. The following table is a
reconciliation of the weighted-average shares (denominator) used in the
computation of basic and diluted EPS for the statement of operation periods
presented herein.
June 30,
1999 1998
---- ----
Basic 6,639,873 5,822,848
Assumed exercise of stock options 918,072 757,148
---------- ----------
Diluted 7,557,945 6,579,996
========= =========
Net income as presented in the consolidated statement of operations is
used as the numerator in the EPS calculation for both the basic and diluted
computations.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
A. RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998.
Revenues for the three months ended June 30, 1999 were $78,147,211
representing a 13.8% increase over revenues of $68,634,713 for the three months
ended June 30, 1998.
This increase in revenues is attributable to increased sales.
Contributions to revenues by product segment is as follows:
Health and beauty aids increased 9.5% when compared to the same period
in the previous year. This increase in revenue is due to an increase in same
store sales and an expanded customer base.
Sales of prestige designer fragrances were relatively unchanged when
compared to the same period in the prior year.
Sales of nationally advertised non-perishable branded food products
grew 81% when compared to the same period in the prior year due to this segment
of our business being categorized by our ability to purchase off-price
non-perishable branded foods from the manufacturers. During the quarter that
ended June 30, 1999, the Company was able to take advantage of an increased
level of promotional goods offered to the Company by manufacturers which the
Company then sold to its customers thus resulting in increased sales.
Sales of pharmaceutical items increased 21% within the Company's
wholly-owned subsidiary, M. Sobol, Inc. when compared to the same period in the
prior year. This was a result of new products introduced by the pharmaceutical
manufacturers and an expanded customer base which has resulted in an increase in
the volume of products sold.
Gross profit as a percentage of revenues decreased to 13.9% for the
three months ended June 30, 1999 when compared to 15.1% for the same period in
the previous year. This decrease was primarily due to the Company's higher
replacement cost of fragrance inventory destroyed as a result of a fire that
occurred in a section in the Company's warehouse premises during the 4th quarter
of Fiscal 1999. The loss was fully insured.
Warehouse, delivery, selling, general and administrative expenses
decreased as a percentage of sales to 8.5% for the three months ended June 30,
1999 from 9.9% when compared to the same period in the prior year. This decrease
in operating expenses is due primarily to expenses that are no longer incurred
as a result of the sale of a majority interest in the Company's e-commerce
subsidiary The Fragrance Counter, Inc.
7
<PAGE>
Inventories increased by approximately $10.2 million or 7.8% in fiscal
1999 when compared to the same period in fiscal 1998. This increase in inventory
is attributable to merchandise purchased in anticipation of increased sales.
Interest expense for the three months ended June 30, 1999 decreased to
2.8% from 3.5% when compared to the three months ended June 30, 1998. This
decrease is due to a reduced interest rate.
Net income for the three months ended June 30, 1999 was $14,132,206
which includes a one time gain of $12,796,461 (net of taxes) which was realized
from the sale of a majority interest in the Company's e-commerce subsidiary, The
Fragrance Counter, Inc. Net income from operations for the three months ended
June 30, 1999, was $1,335,748 representing a 92% increase over net income of
$697,148 for the comparable period in 1998. This increase in net income is due
primarily to the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its working capital requirements from internally
generated funds and from a financing agreement with a consortium of banks led by
the First National Bank of Boston for financing the Company's accounts
receivable and inventory. As of June 30, 1999, the Company had $123,815,181
outstanding under its $145,000,000 bank line of credit. The loan is collaterized
by the Company's inventory and accounts receivable. Interest on the loan balance
is payable monthly at 3/8% above the prime rate or 2.0% above the Eurodollar
rate, at the option of the Company. The effective interest rate charged to the
Company at June 30, 1999 was 7.18% which, was based on a combination of 2.0%
above the Eurodollar rate and 3/8% above the prime rate. The Company utilizes
cash generated from operations to reduce short-term borrowings, which in turn
acts to increase loan availability consistent with the Company's financing
agreement.
The Company's accounts receivable increased to $45,448,145 at June 30,
1999 from $42,153,271 at June 30, 1998 representing an increase of 7.8%. This
increase in accounts receivable is due to increased revenues during this period.
The Company has minimal capital investment requirements and any
significant capital expenditures are financed through long term lease agreements
that would not adversely impact cash flow. The Company believes that its
internally generated funds and its current and future bank line of credit will
be sufficient to meet its anticipated cash and capital needs through the fiscal
year ending March 31, 2000.
INFLATION AND SEASONALITY
Inflation has not had any significant adverse effects on the Company's
business and the Company does not believe it will have any significant affect on
its future business. The
8
<PAGE>
Company's fragrance business is seasonal, with greater sales during the
Christmas season then in other seasons. The Company's other product lines are
not seasonal.
YEAR 2000
The Company does not expect that the cost of modify or replace software
that it uses, so that such software will properly recognize dates beyond
December 31, 1999 ("Year 2000 Compliance") will be material. The Company has
initiated formal communications with its significant vendors and customers to
determine the extent that Year 2000 Compliance issues of such parties may affect
the Company. There can be no guarantee that the systems of such other companies
will be timely converted, or that their conversion will be compatible with
information included in the Company's systems, without a material adverse effect
on the Company's business, financial condition, or results of operations.
9
<PAGE>
Part II
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit Description
10.17 Stock Purchase Agreement among the Company, The Fragrance
Counter, Inc. and the Purchasers named therein dated as
of April 23, 1999.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1999.
10
<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.
/s/ Herman Jacobs
-------------------------------------
Herman Jacobs
President and Chief Operating Officer
/s/ David Shamilzadeh
------------------------------------
David Shamilzadeh
Chief Financial Officer
Dated: August 16, 1999
11
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
10.17 Stock Purchase Agreement among the Company, The Fragrance
Counter, Inc. and the Purchasers named therein dated as
of April 23, 1999.
27.1 Financial Data Schedule
12
STOCK PURCHASE AGREEMENT
dated as of April 23, 1999
by and between
THE FRAGRANCE COUNTER, INC.
and
ALLOU HEALTH & BEAUTY CARE, INC.
and
THE PURCHASERS NAMED HEREIN
------------------------
Series A Convertible Preferred Stock
of
The Fragrance Counter, Inc.
<PAGE>
TABLE OF CONTENTS
----------------------
PAGE
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS...........................................1
SECTION 1.02. ACCOUNTING TERMS................................................9
ARTICLE 2
PURCHASE AND SALE
SECTION 2.01. PURCHASE PRICES AND CLOSING....................................10
SECTION 2.02. USE OF PROCEEDS................................................11
SECTION 2.03. REPRESENTATIONS BY THE SEVERAL PURCHASERS......................12
SECTION 2.04. REPRESENTATIONS BY SUDBURY AND KEYSTONE........................14
ARTICLE 3
CONDITIONS TO PURCHASERS' AND COMPANY'S AND PARENT COMPANY'S
OBLIGATIONS
SECTION 3.01. PURCHASER CONDITIONS...........................................16
SECTION 3.02. COMPANY AND PARENT COMPANY CONDITIONS..........................20
ARTICLE 4
REPRESENTATIONS, WARRANTIES, ETC. OF THE COMPANY AND THE PARENT
COMPANY
SECTION 4.01. ORGANIZATION AND STANDING......................................22
SECTION 4.02. CORPORATE ACTION...............................................22
SECTION 4.03. GOVERNMENTAL APPROVALS.........................................23
SECTION 4.04. LITIGATION.....................................................23
SECTION 4.05. CERTAIN AGREEMENTS OF OFFICERS AND EMPLOYEES...................24
SECTION 4.06. COMPLIANCE WITH OTHER INSTRUMENTS..............................25
SECTION 4.07. TITLE TO ASSETS, INTELLECTUAL PROPERTY RIGHTS..................25
SECTION 4.08. FINANCIAL INFORMATION..........................................27
SECTION 4.09. TAXES..........................................................28
SECTION 4.10. ERISA..........................................................28
SECTION 4.11. TRANSACTIONS WITH AFFILIATES AND PARENT COMPANY................28
SECTION 4.12. ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER
PERSONS........................................................28
SECTION 4.13. INVESTMENTS IN OTHER PERSONS...................................29
i
<PAGE>
PAGE
SECTION 4.14. SECURITIES ACT OF 1933.........................................29
SECTION 4.15. DISCLOSURE.....................................................29
SECTION 4.16. BROKERS OR FINDERS.............................................29
SECTION 4.17. CAPITALIZATION; STATUS OF CAPITAL STOCK........................30
SECTION 4.18. REGISTRATION RIGHTS............................................30
SECTION 4.19. INSURANCE......................................................31
SECTION 4.20. BOOKS AND RECORDS..............................................31
SECTION 4.21. MATERIAL AGREEMENTS............................................31
SECTION 4.22. ABSENCE OF CERTAIN DEVELOPMENTS................................31
SECTION 4.23. ENVIRONMENTAL AND SAFETY LAWS..................................32
SECTION 4.24. U.S. REAL PROPERTY HOLDING CORPORATION.........................34
SECTION 4.25. TITLE TO OUTSTANDING SHARES....................................34
SECTION 4.26. INVESTMENT REPRESENTATION......................................34
SECTION 4.27. YEAR 2000 COMPLIANCE...........................................35
SECTION 4.28. NON-CONTRAVENTION..............................................35
SECTION 4.29. SELECTED FINANCIAL INFORMATION.................................35
ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.01. REPORTING REQUIREMENTS.........................................36
SECTION 5.02. BOOKS AND RECORDS..............................................36
SECTION 5.03. CONDUCT OF BUSINESS............................................36
SECTION 5.04. PAYMENT OF TAXES; COMPLIANCE WITH LAWS.........................37
SECTION 5.05. ADVERSE CHANGES................................................37
SECTION 5.06. INSURANCE......................................................37
SECTION 5.07. MAINTENANCE OF PROPERTIES......................................37
SECTION 5.08. AFFILIATED TRANSACTIONS........................................38
SECTION 5.09. MANAGEMENT COMPENSATION........................................38
SECTION 5.10. INSPECTION.....................................................38
SECTION 5.11. PROPRIETARY RIGHTS AGREEMENT...................................38
SECTION 5.12. MAINTENANCE OF CORPORATE EXISTENCE, ETC........................39
SECTION 5.13. CONDUCT OF BUSINESS PENDING THE CLOSING........................39
SECTION 5.14. CERTAIN AGREEMENTS AND FILINGS.................................41
SECTION 5.15. ISSUANCE OF AOL WARRANT........................................41
ARTICLE 6
COVENANTS OF THE PARENT COMPANY
SECTION 6.01. CONDUCT OF COMPANY BUSINESS PENDING THE CLOSING................42
SECTION 6.02. CONCERNING REPRESENTATIONS AND WARRANTS........................42
ii
<PAGE>
PAGE
SECTION 6.03. CERTAIN INTELLECTUAL PROPERTY RIGHTS MATTERS...................42
SECTION 6.04. COVENANT NOT TO COMPETE........................................42
SECTION 6.05. CERTAIN INSURANCE MATTERS......................................43
SECTION 6.06. UNDERTAKINGS RESPECTING TAXES AND ACCOUNTING...................43
SECTION 6.07. CERTAIN DISCLOSURES............................................44
SECTION 6.08. FORGIVENESS OF INTERCOMPANY DEBT...............................44
ARTICLE 7
COVENANTS OF PARENT COMPANY, COMPANY AND PURCHASERS
SECTION 7.01. BEST EFFORTS; FURTHER ASSURANCES...............................44
ARTICLE 8
REGISTRATION RIGHTS
SECTION 8.01. PIGGY-BACK REGISTRATIONS.......................................45
SECTION 8.02. DEMAND REGISTRATION............................................46
SECTION 8.03. REGISTRATIONS ON FORM S-3......................................47
SECTION 8.04. EFFECTIVENESS..................................................48
SECTION 8.05. INDEMNIFICATION BY THE COMPANY.................................48
SECTION 8.06. INDEMNIFICATION BY HOLDERS OF REGISTRABLE SHARES...............51
SECTION 8.07. EXCHANGE ACT REGISTRATION......................................53
SECTION 8.08. DAMAGES........................................................53
SECTION 8.09. FURTHER OBLIGATIONS OF THE COMPANY.............................54
SECTION 8.10. EXPENSES.......................................................56
SECTION 8.11. TRANSFERABILITY................................................56
SECTION 8.12. "LOCK-UP" AGREEMENT............................................57
SECTION 8.13. MERGERS, ETC...................................................57
ARTICLE 9
RIGHTS OF FIRST REFUSAL
SECTION 9.01. RIGHTS OF FIRST REFUSAL........................................58
SECTION 9.02. NOTICE OF APPEARANCE...........................................59
SECTION 9.03. CONDITIONS TO ACCEPTANCE AND PURCHASE..........................59
SECTION 9.04. FURTHER SALE...................................................60
SECTION 9.05. TERMINATION AND WAIVER OF RIGHT OF FIRST REFUSAL...............60
SECTION 9.06. EXCEPTIONS.....................................................61
iii
<PAGE>
PAGE
ARTICLE 10
INDEMNIFICATION
SECTION 10.01. INDEMNIFICATION OF COMPANY....................................62
SECTION 10.02. TAX INDEMNIFICATION BY PARENT COMPANY.........................63
SECTION 10.03. EXPIRATION OF INDEMNIFICATION OBLIGATIONS.....................63
SECTION 10.04. DEFENSE OF CLAIMS.............................................63
SECTION 10.05. STOCK INDEMNIFICATION.........................................64
SECTION 10.06. LIMITATIONS UPON INDEMNIFICATION..............................64
ARTICLE 11
POST-CLOSING AUDIT
SECTION 11.01. AUDIT OF COMPANY FINANCIAL STATEMENTS.........................65
SECTION 11.02. ACCESS........................................................65
SECTION 11.03. DETERMINATION OF INDEMNIFIABLE LOSSES.........................65
SECTION 11.04. DISPUTES......................................................66
ARTICLE 12
MISCELLANEOUS
SECTION 12.01. NO WAIVER; CUMULATIVE REMEDIES................................67
SECTION 12.02. AMENDMENTS, WAIVERS AND CONSENTS..............................67
SECTION 12.03. ADDRESSES FOR NOTICES.........................................67
SECTION 12.04. COSTS, EXPENSES AND TAXES.....................................69
SECTION 12.05. EFFECTIVENESS; BINDING EFFECT; ASSIGNMENTS....................70
SECTION 12.06. BOARD OF DIRECTORS............................................70
SECTION 12.07. SURVIVAL OF REPRESENTATIONS AND WARRANTIES....................70
SECTION 12.08. PRIOR AGREEMENTS..............................................70
SECTION 12.09. SEVERABILITY..................................................71
SECTION 12.10. CONFIDENTIALITY...............................................71
SECTION 12.11. GOVERNING LAW; INTERPRETATION.................................71
SECTION 12.12. HEADINGS......................................................71
SECTION 12.13. COUNTERPARTS..................................................71
iv
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of April 23, 1999 (this
"AGREEMENT"), by and between THE FRAGRANCE COUNTER, INC., a New York corporation
(the "COMPANY"), and ALLOU HEALTH & BEAUTY CARE, INC., a Delaware corporation
(the "PARENT COMPANY"), and the Purchasers named herein.
W I T N E S S E T H:
WHEREAS, the Company wishes to sell to certain of the several
Purchasers, and such Purchasers severally and not jointly wish to purchase from
the Company, upon the terms and subject to the conditions of this Agreement, the
respective number of Newly Issued Shares (such capitalized term and all other
capitalized terms used in this Agreement having the respective meanings provided
in Article 1) shown opposite their names on Schedule 2.01;
WHEREAS, the Parent Company wishes to sell to certain of the several
Purchasers, and such Purchasers severally and not jointly wish to purchase from
the Parent Company, upon the terms and subject to the conditions of this
Agreement, the respective number of Outstanding Shares shown opposite their
names on Schedule 2.01; and
WHEREAS, the Parent Company wishes to sell to Sudbury and Keystone, and
each of Sudbury and Keystone wishes to purchase from the Parent Company, upon
the terms and subject to the conditions of this Agreement, the number of
Outstanding Shares shown opposite their names on Schedule 2.01;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. (a) The terms Agreement,
Company and Parent Company shall have the respective meanings provided in the
introductory paragraph of this Agreement.
<PAGE>
(b) As used in this Agreement, the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
"AFFILIATE" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or under common control with the subject Person. For purposes of
the term "Affiliate," the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise.
"AGREEMENT" means this Stock Purchase Agreement as from time to time
amended and in effect between the parties, including all Exhibits and Schedules
hereto.
"AOL" means America Online, Inc., a Delaware corporation.
"AOL AGREEMENT" means the Interactive Marketing Agreement, dated as of
May 29, 1998, between AOL and the Company.
"AOL PREPAYMENT" means the prepayment by the Company of certain of
its obligations to AOL.
"AOL WARRANT" means Common Stock Purchase Warrants to purchase an
aggregate of 260,000 shares of Common Stock (after giving effect to the
Certificate of Amendment) at a price of $9.00 per share, which expire on June
28, 2004 and which vest and shall have the other terms and conditions set forth
in the AOL Agreement.
"AVAILABLE UNDERSUBSCRIPTION AMOUNT" shall have the meaning assigned to
that term in Section 9.02.
"BASIC AMOUNT" shall have the meaning assigned to that term in
Section 9.01.
"BOARD OF DIRECTORS" or "BOARD" means the board of directors of the
Company as constituted from time to time.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
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"CERTIFICATE OF AMENDMENT" means the Certificate of Amendment of the
Certificate of Incorporation of the Company in the form attached hereto as
Exhibit A.
"CLAIMS" shall have the meaning assigned to that term in Section 10.01.
"CLOSING" shall have the meaning assigned to that term in Section
2.01(d).
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLATERAL AGENT" means Parker Chapin Flattau & Klimpl, LLP, as
Collateral Agent pursuant to the Sudbury Pledge Agreement.
"COMMISSION" shall mean the United States Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act or the Exchange Act.
"COMMON STOCK" means the Company's Common Stock, $.01 par value.
"COMPANY" means The Fragrance Counter, Inc., a New York corporation,
and its successors and permitted assigns.
"COMPANY PURCHASE PRICE" shall have the meaning assigned to that term
in Section 2.01.
"COMPETITIVE ACTIVITY" means
(1) the transmission of descriptive or other content regarding the
promotion or offering for sale of fragrances, cosmetics or other high-end or
upscale health or beauty products (including, without limitation, aromatherapy
and candles) through the Internet;
(2) the sale of fragrances, cosmetics or other high-end or upscale
health or beauty products, (including, without limitation, aromatherapy and
candles) to any Person whose business shall have substantial sales or consist in
whole or in substantial part of the sale of such products through the Internet;
PROVIDED, HOWEVER, that for purposes of this clause (2), sales of such products
to a Person whose business so consists of sales through the Internet shall not
be a Competitive Activity so long as such Person makes substantial sales of such
products other than through the Internet. For purposes hereof, "substantial
sales" shall mean that sales of such products by such Person through mediums or
avenues other than the Internet are substantial in relation to the total sales
of such products by such Person through the Internet; or
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(3) the provision of fulfillment services to any Person for sales of
fragrances, cosmetics or other high-end or upscale health or beauty products
(including, without limitation, aromatherapy and candles) by such Person whose
business shall have substantial sales or consist in whole or in part of the sale
of such products through the Internet, subject to the proviso in clause (2)
above.
"CONSULTING AGREEMENTS" means the Consulting Agreements between the
Company and certain consultants in the form attached hereto as Exhibit B.
"DESIGNATED PURCHASERS" means Sudbury and Keystone.
"ENVIRONMENTAL COSTS AND LIABILITIES" means any and all liabilities,
obligations, damages, deficiencies, losses, fines, penalties, judgments,
assessments, costs and expenses (including without limitation, reasonable fees,
costs and disbursements of legal counsel, experts, engineers and consultants)
arising from (a) any violation by the Company of Environmental Laws or
Environmental Permits, including any costs incurred to remedy any such
violation; (b) any Remedial Action with respect to any property currently or
formerly owned by the Company; (c) damages to property or natural resources
resulting from the Release by the Company of Hazardous Materials at any property
currently or formerly owned by the Company; (d) human exposure to Hazardous
Materials in connection with the Company's operations or (e) the Release of
Hazardous Materials at any property at which any Hazardous Material generated by
the Company was disposed of.
"ENVIRONMENTAL LAW" means any and all foreign, federal, state and local
statutes, ordinances, regulations, rules and judicial or administrative
decisions and orders relating to environmental quality, pollution control,
natural resources, health, safety, the handling and disposal of Hazardous
Materials, contamination and clean-up, including, without limitation, the Clean
Air Act, 42 U.S.C. Section 7401 ET SEQ.; the Clean Water Act, 33 U.S.C. Section
1251 ET SEQ., and the Water Quality Act of 1987; the Federal Insecticide,
Fungicide, and Rodenticide Act 7 U.S.C. Section 136 ET SEQ.; the Marine
Protection, Research and Sanctuaries Act, 33 U.S.C. Section 1401 ET SEQ.; the
National Environmental Policy Act, 42 U.S.C. Section 4321 ET SEQ.; the Noise
Control Act, 42 U.S.C. Section 4901 ET SEQ.; the Occupational Safety and Health
Act, 29 U.S.C. Section 651 ET SEQ.; the Resource Conservation and Recovery Act
42 U.S.C. Section 6901 ET SEQ., as amended by the Hazardous and Solid Waste
Amendments of 1984; the Safe Drinking Water Act; 42 U.S.C. Section 300f ET SEQ.;
CERCLA; the Toxic Substances Control Act 15 U.S.C. Section 2601 ET SEQ.; the
Atomic Energy Act, 42 U.S.C. Section 2011 ET SEQ.; and the Nuclear Waste Policy
Act of 1982, 42 U.S.C. Section 10101 ET SEQ.; and state and local environmental
statutes and ordinances with implementing regulations and rules.
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"ENVIRONMENTAL PERMITS" means any permit, Approval, authorization,
license, variance, registration or permission required under any applicable
Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
(or of any other Federal agency then administering the Exchange Act) thereunder,
all as the same shall be in effect at the time.
"FINANCIAL STATEMENTS" shall have the meaning assigned to that term in
Section 4.08.
"FINAL COMPANY FEDERAL TAX RETURNS" shall have the meaning assigned to
that term in Section 6.06(a).
"GOVERNMENTAL AUTHORITY" means any foreign, United States, Federal,
State municipal or other governmental department, commission, administration,
board, bureau, agency or instrumentality.
"HAZARDOUS MATERIAL" means any of the following, including mixtures
thereof: any substance, pollutant, contaminant, waste, by-product or constituent
regulated under or subject to the requirements of CERCLA; oil and petroleum
products and natural gas, natural gas liquids, liquefied natural gas and
synthetic gas usable for fuel; pesticides regulated under the Federal
Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Section 136 ET SEQ.,
friable asbestos and friable asbestos-containing materials, PCB's, urea
formaldehyde foam insulation and other substances regulated under the Toxic
Substances Control Act, 15 U.S.C. Section 2601 ET SEQ.; source material, special
nuclear material, by-product material and any other radioactive materials or
radioactive wastes, however produced, regulated under the Atomic Energy Act or
the Nuclear Waste Policy Act of 1982; chemicals subject to the OSHA Hazard
Communication Standard, 29 C.F.R. Section 1910.1200 ET SEQ., industrial process
and pollution control wastes, whether or not hazardous within the meaning of the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ.; medical
waste and special waste; and any other substance defined in or regulated under
Environmental Laws.
"INDEBTEDNESS" means (i) any liability for borrowed money or evidenced
by a note or similar obligation given in connection with the acquisition of any
property or other assets (other than trade accounts payable incurred in the
ordinary course of business); (ii) all guaranties, endorsements and other
contingent
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obligations, in respect of Indebtedness of others, whether or not the same are
or should be reflected in the Company's balance sheet (or the notes thereto),
except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business, and (iii)
the present value of any lease payments due under leases required to be
capitalized in accordance with applicable Statements of Financial Accounting
Standards, determined by discounting all such payments at the interest rate
determined in accordance with applicable Statements of Financial Accounting
Standards.
"INDEMNIFIABLE LOSS" shall have the meaning assigned to that term in
Section 10.01(b).
"INDEMNIFIED PARTY" shall have the meaning assigned to that term in
Section 10.01.
"INDEMNITY SHARES" means the shares of Common Stock issuable pursuant
to Section 10.05.
"INITIAL PUBLIC OFFERING" means the first underwritten public offering
of shares of Common Stock for the account of the Company, if any, offered on a
"firm commitment" or "best efforts" basis pursuant to an offering registered
under the Securities Act with the Commission on Form S-1, Form SB-1, Form SB-2
or their then equivalents.
"INTELLECTUAL PROPERTY RIGHTS" means any and all, whether domestic or
foreign, patents, patent applications, patent right, trade secrets, confidential
business information, customer data bases, formula, processes, algorithms,
copyrights, claims of infringement against third parties, licenses, permits,
license rights, contract rights with employees, consultants and third parties,
trademarks, trademark rights, domain names, inventions and discoveries
(including any registrations or applications for registration of the foregoing),
and other such rights generally classified as intangible, intellectual property
assets in accordance with generally accepted accounting principles.
"JACOBS FAMILY MEMBER" means Mr. Herman Jacobs, Mr. Jack Jacobs
and Mr. Victor Jacobs.
"KEY EMPLOYEE" means and includes the Chairman, President, Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, or any
other individual so designated by the Board of Directors.
"KEYSTONE" means Keystone Group, LLC, a New York limited liability
company.
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"KEYSTONE NOTE" means the Non-Recourse Promissory Note to be issued by
Keystone in the form attached hereto as Exhibit C.
"KEYSTONE PLEDGE AGREEMENT" means the Pledge Agreement by Keystone in
favor of the Parent Company to be entered into in connection with the issuance
of the Keystone Note in the form attached hereto as Exhibit D.
"LEGAL PROCEEDING" means any judicial, administrative or arbitral
action, suit, investigation, proceeding (public or private) or governmental
proceeding.
"NASD" means the National Association of Securities Dealers, Inc.
"NEWLY ISSUED SHARES" means the shares of Series A Preferred Stock to
be purchased by the Purchasers from the Company pursuant to this Agreement in
the respective numbers and aggregate number shown in Schedule 2.01.
"NON-FEDERAL COMPANY TAX RETURNS" shall have the meaning assigned to
that term in Section 6.06(b).
"NOTICE OF ACCEPTANCE" shall have the meaning assigned to that term in
Section 9.02.
"OFFER" shall have the meaning assigned to that term in Section 9.01.
"OFFERED SECURITIES" shall have the meaning assigned to that term in
Section 9.01.
"OTHER HOLDERS" shall have the meaning assigned to that term in
Section 9.01.
"OUTSTANDING SHARES" means the 2,670,940 shares of Series A Preferred
Stock to be purchased by the Purchasers in the aggregate from the Parent Company
pursuant to this Agreement.
"PARENT COMPANY PURCHASE PRICE" shall have the meaning assigned to that
term in Section 2.01.
"PERSON" means an individual, corporation, partnership, joint venture,
limited liability company, trust, university, or unincorporated organization, or
a government, or any agency or political subdivision thereof.
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"PREPAYMENT NOTE" means the Promissory Note to be issued by the Company
to the Parent Company in the principal amount of $400,000 in the form attached
hereto as Exhibit G.
"PURCHASERS" means Sudbury, Keystone and the other Purchasers named on
the signature pages to this Agreement, and shall also include any other holder
of any of the Shares.
"REFUSED SECURITIES" shall have the meaning assigned to that term in
Section 9.03.
"REGISTRABLE SHARES" means and includes the Shares, the Indemnity
Shares and any other securities into which or for which any of the Shares or the
Indemnity Shares may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets, share exchange or
otherwise; PROVIDED, HOWEVER, that shares of Common Stock which are Registrable
Shares shall cease to be Registrable Shares upon the consummation of any sale
pursuant to a registration statement, Section 4(1) of the Securities Act or Rule
144 under the Securities Act.
"RELEASE" means any discharge, emission, spill, leakage, deposit,
injection, migration on or into the indoor or outdoor environment or into or out
of any property, including, but not limited to, a "Release" as defined in CERCLA
at 42 U.S.C. Section 9601(22).
"REMEDIAL ACTION" means all actions, including any capital
expenditures, required by any Governmental Authority or under any Environmental
Laws or which a reasonable person would undertake voluntarily to (i) clean up,
remove, treat, or in any other way address any Hazardous Materials or other
substance; (ii) prevent the Release or threat of Release, or minimize the
further Release of any Hazardous Materials; (iii) perform pre-remedial studies
and investigations or post- remedial monitoring, operations, maintenance and
care; or (iv) bring facilities and operations at or on any property owned,
operated or leased by the Company and its Affiliates into compliance with all
Environmental Laws and Environmental Permits.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
replacement or successor federal statute, and the rules and regulations of the
Commission (or of any other federal agency then administering the Securities
Act) thereunder, all as the same shall be in effect at the time.
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"SERVICES AND SUPPLY AGREEMENT" means the Services and Supply Agreement
between the Parent Company and the Company in the form attached hereto as
Exhibit H.
"SERIES A PREFERRED STOCK" means the Company's Series A Convertible
Preferred Stock, $.01 par value.
"SHARES" means the Newly Issued Shares and the Outstanding Shares.
"SUBSIDIARY" or "SUBSIDIARIES" means with respect to any Person any
other Person of which such Person and/or any of its other Subsidiaries (as
herein defined) directly or indirectly owns at the time at least fifty percent
(50%) of the outstanding voting shares of every class or similar interests of
such other Person, other than directors' qualifying shares.
"SUDBURY" means The Sudbury Group LLC, a Delaware limited liability
company.
"SUDBURY NOTE" means the Non-Recourse Promissory Note to be issued by
Sudbury in the form attached hereto as Exhibit E.
"SUDBURY PLEDGE AGREEMENT" means the Pledge Agreement by Sudbury in
favor of the Parent Company to be entered into in connection with the issuance
of the Note in the form attached hereto as Exhibit F.
"UNDERSUBSCRIPTION AMOUNT" shall have the meaning assigned to that
term in Section 9.01.
"YEAR 2000 COMPLIANT" means the ability to provide the following
functions: consistently handle date information before, during and after January
1, 2000, including, but not limited to, accepting date input, providing the date
output, and performing calculations on dates or portions of dates; function
accurately and without interruption before, during and after January 1, 2000,
without any change in operations associated with the advent of the new century;
respond to two-digit date input in a way that resolves any ambiguity as to
century in a disclosed, defined and predetermined manner; and store and provide
output of date information in ways that are unambiguous as to century.
SECTION 1.02. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistently applied, and all financial data submitted
pursuant to this Agreement shall be prepared in accordance with such principles.
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ARTICLE 2
PURCHASE AND SALE
SECTION 2.01. PURCHASE PRICES AND CLOSING. (a) In consideration of and
in express reliance upon the representations, warranties, covenants, terms, and
conditions of this Agreement, the Company agrees to issue and sell to certain of
the several Purchasers and such Purchasers severally and not jointly agree to
purchase from the Company the respective number of Newly Issued Shares shown
opposite their names on Schedule 2.01, at a price of $4.68 per Newly Issued
Share, for an aggregate purchase price therefor for each Purchaser as shown
opposite such Purchaser's name on Schedule 2.01 (each, a "COMPANY PURCHASE
PRICE").
(b) In consideration of and in express reliance upon the
representations, warranties, covenants, terms, and conditions of this Agreement,
the Parent Company agrees to sell to certain of the several Purchasers and such
Purchasers severally and not jointly agree to purchase from the Parent Company
the respective number of Outstanding Shares shown opposite their names on
Schedule 2.01, at a price of $4.68 per Outstanding Share, for an aggregate
purchase price therefor for each Purchaser as shown opposite such Purchaser's
name on Schedule 2.01 (each, a "PARENT COMPANY PURCHASE PRICE").
(c) In consideration of and express reliance upon the representations,
warranties, covenants, terms and conditions of this Agreement, the Parent
Company agrees to sell to Sudbury and Keystone and Sudbury and Keystone each
agrees to purchase from the Parent Company the respective number of Outstanding
Shares shown opposite their names on Schedule 2.01 for an aggregate purchase
price therefor of $6,500,000 from Sudbury and $2,000,000 from Keystone,
respectively, payable by the issuance by Sudbury and Keystone to the Parent
Company of the Sudbury Note and the Keystone Note in such respective principal
amounts.
(d) The closing of the purchase and sale of the Newly Issued Shares to
be acquired by the Purchasers from the Company, the purchase and sale of the
Outstanding Shares to be acquired by the Purchasers from the Company and the
purchase and sale of the Outstanding Shares to be acquired by Sudbury and
Keystone from the Parent Company under this Agreement shall take place at Davis
Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, at 10:00 a.m.,
New York City time, on April 23, 1999, or at such time and date thereafter as
the Purchasers, the Company and the Parent Company may agree as soon thereafter
as the conditions to the parties' respective obligations set forth in Article 3
hereof have been satisfied or waived (the "CLOSING"). At the Closing
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(i) the Company will deliver to each Purchaser who is purchasing Newly
Issued Shares one or more certificates for the Newly Issued Shares
being purchased by such Purchaser by wire transfer, registered in such
Purchaser's name (or the name of its nominee), against payment by such
Purchaser by wire transfer of immediately available funds to or upon
the order of the Company, in an amount equal to the Company Purchase
Price to be paid by such Purchaser;
(ii) the Parent Company will deliver to each Purchaser one or more
certificates for the Outstanding Shares being purchased by such
Purchaser, duly endorsed in blank or accompanied by stock powers in
blank duly executed on behalf of the Parent Company, in proper form for
transfer, with signature guaranties, against payment by such Purchaser
by wire transfer of immediately available funds to or upon the order of
the Parent Company, in an amount equal to the Parent Company Purchase
Price to be paid by such Purchaser;
(iii) the Parent Company will deliver to Sudbury and Keystone one or
more certificates for the Outstanding Shares being purchased by Sudbury
and Keystone, duly endorsed in blank or accompanied by stock powers in
blank duly executed on behalf of the Parent Company, in proper form for
transfer, with signature guaranties, against issuance and delivery by
Sudbury and Keystone to the Parent Company of the Sudbury Note and the
Keystone Note, respectively, each duly executed on behalf of Sudbury
and Keystone and registered in the name of the Parent Company; and
(iv) Sudbury and Keystone will deliver to the Collateral Agent the
respective certificates for the Outstanding Shares delivered to Sudbury
and Keystone pursuant to Section 2.01(d)(iii), together with any stock
powers delivered by the Parent Company to Sudbury and Keystone in
connection therewith, to be held by the Collateral Agent pursuant to
the Sudbury Pledge Agreement and the Keystone Pledge Agreement,
respectively.
SECTION 2.02. USE OF PROCEEDS. The Company shall use the proceeds from
the sale of the Newly Issued Shares as follows: (i) to repay to the Parent
Company on the date of the Closing $6,000,000, which amount includes $1,100,000
of the AOL Prepayment obligations; the parties agree that such $6,000,000 amount
represents all outstanding obligations of the Company to the Parent Company,
other than the $400,000 principal amount due under the Prepayment Note; (ii) to
pay on the date of the Closing the fees due Tower Hill Securities, Inc. pursuant
to Section 12.04; (iii) to pay on the date of the Closing
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the Company's and the Purchasers' costs and expenses in connection with the
transactions contemplated by this Agreement in accordance with Section 12.04;
and (iv) the balance of the proceeds shall be used by the Company for working
capital.
SECTION 2.03. REPRESENTATIONS BY THE SEVERAL PURCHASERS. Each
Purchaser who is purchasing Newly Issued Shares severally and not jointly
represents and warrants to the Company as follows:
(a) INVESTMENT REPRESENTATIONS. It is such Purchaser's intention to
acquire the Newly Issued Shares to be purchased by it pursuant to this Agreement
for its own account and such Newly Issued Shares are being and will be acquired
by it for the purpose of investment and not with a view to public distribution
or resale thereof. The acquisition by such Purchaser of the Newly Issued Shares
to be purchased by it pursuant to this Agreement shall constitute a confirmation
of this representation by such Purchaser. Each Purchaser understands and agrees
that, until registered under the Securities Act or transferred pursuant to the
provisions of Rule 144 as promulgated by the Commission under the Securities
Act, all certificates evidencing any of the Newly Issued Shares purchased by it
pursuant to this Agreement, whether upon initial issuance or upon any transfer
thereof, shall bear a legend, prominently stamped or printed thereon, reading
substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or applicable state
securities laws. These securities have been acquired for investment and
not with a view to public distribution or resale. These securities may
not be offered for sale, sold, delivered after sale or transferred in
the absence of an effective registration statement covering such
securities under the Securities Act of 1933 and any applicable state
securities laws, or the availability, in the opinion of counsel,
reasonably satisfactory to the Company, of an exemption from
registration thereunder. These securities are subject to restrictions
contained in a Stock Purchase Agreement, a copy of which is available
for inspection from the Company."
(b) ACCESS TO INFORMATION. Prior to the purchase of such Newly Issued
Shares, such Purchaser has had the opportunity to ask questions of and receive
answers from management of the Company concerning the terms and conditions of
the offering of such Newly Issued Shares and additional information, documents,
records and books relative to the business, assets, financial condition, results
of operations and liabilities (contingent or otherwise) of the Company. Such
Purchaser has taken advantage of such opportunity to obtain information
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about the Company and its business to the satisfaction of such Purchaser
(assuming the accuracy and completeness of the information provided by the
Company and the Parent Company to such Purchaser) and, except as specifically
provided in this Agreement, such Purchaser is not relying on any statements or
representations from the Company or its representatives in making its decision
to purchase such Newly Issued Shares.
(c) GENERAL ACCESS. Such Purchaser has received and read or reviewed,
and is familiar with, this Agreement and the other agreements executed or
delivered in connection herewith, and confirms that, assuming the accuracy and
completeness of the representations and warranties in Article 4 and of the
responses of the Company and the Parent Company to the inquiries of such
Purchaser, all documents, records and books of the Company pertaining to the
Purchaser's investment in the Company and requested by such Purchaser have been
made available or delivered to such Purchaser.
(d) SOPHISTICATION AND KNOWLEDGE. Such Purchaser has such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of the purchase of the Newly Issued Shares to be
purchased by such Purchaser; and such Purchaser can bear the economic risks of
investment in such Newly Issued Shares and can afford a complete loss of such
Purchaser's investment in such Newly Issued Shares.
(e) TRANSFER RESTRICTIONS IMPOSED BY SECURITIES LAWS. Such Purchaser
understands that: the Newly Issued Shares to be purchased by such Purchaser
pursuant to this Agreement have not been registered under the Securities Act or
applicable state securities laws, and, therefore, cannot be resold unless they
are subsequently registered under the Securities Act and applicable state
securities laws or unless an exemption from such registration is available; such
Purchaser is and must be purchasing such Newly Issued Shares for investment for
the account of such Purchaser and not for the account or benefit of others, and
not with any present view toward resale or other distribution thereof. Such
Purchaser shall not resell or otherwise dispose of all or any part of such Newly
Issued Shares, except as permitted by law, including, without limitation, any
regulations under the Securities Act and applicable state securities laws; such
Purchaser understands that the Company does not have any present intention and
is under no obligation to register the Newly Issued Shares acquired by such
Purchaser pursuant to this Agreement under the Securities Act and applicable
state securities laws, except as and to the extent provided in Article 8 hereof;
and such Purchaser understands that Rule 144 or Rule 144A under the Securities
Act may not be available as a basis for exemption from registration of such
Newly Issued Shares.
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(f) LACK OF LIQUIDITY. Such Purchaser has no present need for
liquidity in connection with its purchase of the Newly Issued Shares to be
purchased by such Purchaser.
(g) SUITABILITY AND INVESTMENT OBJECTIVES. The purchase of Newly
Issued Shares by such Purchaser is consistent with the general investment
objectives of such Purchaser. Such Purchaser understands that the purchase of
Newly Issued Shares involves a high degree of risk in view of the fact that,
among other things, the Company is an early-stage enterprise, and there is no
market for the Company's securities.
(h) ACCREDITED INVESTOR. Such Purchaser is an "accredited investor" as
that term is defined in Regulation D under the Securities Act.
(i) AUTHORIZATION. This Agreement has been duly authorized, executed
and delivered by such Purchaser and constitutes the legal, valid and binding
obligation of such Purchaser, enforceable against such Purchaser in accordance
with its terms.
(j) NO BROKERS OR FINDERS. Except as provided in Section 12.04, no
Person has or will have, as a result of the transactions contemplated by this
Agreement, any right, interest or valid claim against or upon the Company for
any commission, fee or other compensation as a finder or broker because of any
act or omission by such Purchaser or its agents.
SECTION 2.04. REPRESENTATIONS BY SUDBURY AND KEYSTONE. Each of the
Designated Purchasers severally, but not jointly, represents and warrants to the
Parent Company as follows:
(a) INVESTMENT REPRESENTATIONS. It is such Designated Purchaser's
intention to acquire the Outstanding Shares to be purchased by such Designated
Purchaser for its own account and such Outstanding Shares are being and will be
acquired by it for the purpose of investment and not with a view to public
distribution or resale thereof. The acquisition by such Designated Purchaser of
such Outstanding Shares shall constitute a confirmation of this representation
by such Designated Purchaser. Each Designated Purchaser understands and agrees
that, until registered under the Securities Act or transferred pursuant to the
provisions of Rule 144 as promulgated by the Commission under the Securities
Act, all certificates evidencing any of such Outstanding Shares shall bear a
legend, prominently stamped or printed thereon, reading substantially as
follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or applicable state
securities laws.
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These securities have been acquired for investment and not with a view
to public distribution or resale. These securities may not be offered
for sale, sold, delivered after sale or transferred in the absence of
an effective registration statement covering such securities under the
Securities Act of 1933 and any applicable state securities laws, or the
availability, in the opinion of counsel, reasonably satisfactory to the
Company, of an exemption from registration thereunder. These securities
are subject to restrictions contained in a Stock Purchase Agreement, a
copy of which is available for inspection from the Company."
(b) TRANSFER RESTRICTIONS IMPOSED BY SECURITIES LAWS. Each Designated
Purchaser understands that: the Outstanding Shares to be purchased by such
Designated Purchaser have not been registered under the Securities Act or
applicable state securities laws, and, therefore, cannot be resold unless they
are subsequently registered under the Securities Act and applicable state
securities laws or unless an exemption from such registration is available; such
Designated Purchaser is and must be purchasing such Outstanding Shares for
investment for the account of such Designated Purchaser and not for the account
or benefit of others, and not with any present view toward resale or other
distribution thereof. Such Designated Purchaser shall not resell or otherwise
dispose of all or any part of such Outstanding Shares, except as permitted by
law, including, without limitation, any regulations under the Securities Act and
applicable state securities laws; such Designated Purchaser understands that the
Company does not have any present intention and is under no obligation to
register such Outstanding Shares under the Securities Act and applicable state
securities laws, except as and to the extent provided in Article 8 hereof; and
such Designated Purchaser understands that Rule 144 or Rule 144A under the
Securities Act may not be available as a basis for exemption from registration
of such Outstanding Shares.
(c) SUDBURY AUTHORIZATION ACTION. Sudbury represents and warrants
that: this Agreement, the Sudbury Note and the Sudbury Pledge Agreement have
been duly authorized by Sudbury; this Agreement has been duly executed and
delivered by Sudbury; and this Agreement, the Sudbury Note and the Sudbury
Pledge Agreement, when the Sudbury Note is issued and delivered by Sudbury to
the Parent Company in payment of the purchase price of the Outstanding Shares to
be purchased by Sudbury, will be duly executed and delivered by Sudbury and will
constitute, the legal, valid and binding obligations of Sudbury, enforceable
against Sudbury in accordance with their respective terms.
(d) KEYSTONE AUTHORIZATION ACTION. Keystone represents and warrants
that: this Agreement, the Keystone Note and the Keystone Pledge Agreement have
been duly authorized by Keystone; this Agreement has been duly executed
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and delivered by Keystone; and this Agreement, the Keystone Note and the
Keystone Pledge Agreement, when the Keystone Note is issued and delivered by
Keystone to the Parent Company in payment of the purchase price of the
Outstanding Shares to be purchased by Keystone, will be duly executed and
delivered by Keystone and will constitute, the legal, valid and binding
obligations of Keystone, enforceable against Keystone in accordance with their
respective terms.
ARTICLE 3
CONDITIONS TO PURCHASERS' AND COMPANY'S AND PARENT COMPANY'S
OBLIGATIONS
SECTION 3.01. PURCHASER CONDITIONS. The obligations of the several
Purchasers to purchase the Newly Issued Shares to be purchased by each Purchaser
and to pay the respective Company Purchase Price therefor at the Closing; the
obligations of the several Purchasers to purchase the Outstanding Shares to be
purchased by each Purchaser and to pay the respective Parent Company Purchase
Price therefor at the Closing and the obligations of Sudbury and Keystone to
purchase the Outstanding Shares to be purchased by Sudbury and Keystone and to
issue the Sudbury Note and the Keystone Note, respectively, in payment of the
purchase price therefor are subject to the satisfaction of the following
conditions at or before the Closing (any or all of which may be waived by such
Purchaser at or prior to the Closing):
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the
representations and warranties of the Company and the Parent Company set forth
in this Agreement shall be true, accurate and correct on the date of the Closing
as if made on the date of the Closing. The Company and the Parent Company shall
have performed all obligations and covenants contained in this Agreement
required to be performed by either of them prior to the Closing.
(b) DOCUMENTATION AT CLOSING. Each Purchaser shall have received,
prior to or at the Closing, all of the following materials, each in form and
substance satisfactory to such Purchaser and its counsel, if any, and each of
the following events shall have occurred, or each of the following documents
shall have been delivered, prior to or simultaneous with the Closing:
(i) Copies of (A) the Certificate of Incorporation of the Company, as
amended or restated to the date of the Closing, together with such
evidence as may be available of the filing thereof with the Secretary
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of State of the State of New York; (B) the By-laws of the Company, and
(C) the resolutions of the Board of Directors providing for the
approval of this Agreement and the consummation of the transactions
contemplated hereby, the issuance of the Newly Issued Shares and all
other agreements, documents, instruments or matters contemplated hereby
or executed in connection herewith, including, without limitation, the
Certificate of Amendment; all of which shall have been certified by the
Secretary of the Company, as of the date of the Closing, to be true,
complete and correct; and certified copies of all documents evidencing
other necessary corporate action, if any, required to be obtained at or
prior to the Closing with respect to this Agreement and the
transactions contemplated hereby.
(ii) A certificate of the Secretary or an Assistant Secretary of the
Company, dated the date of the Closing, which shall certify the names
of the officers of the Company authorized to sign this Agreement, the
certificates for the Newly Issued Shares and the other documents,
instruments or certificates to be delivered pursuant to this Agreement
by the Company or any of its officers, the incumbency of such officers,
and the true specimen signatures of such officers.
(iii) A certificate of the President of the Company, dated the date of
the Closing, stating that the representations and warranties of the
Company contained in Article 4 and otherwise made by the Company in
writing in connection with the transactions contemplated hereby are
true and correct at the time of the Closing as if made at the time of
the Closing and that all obligations and covenants in this Agreement
required to be performed by the Company prior to or at the Closing have
been performed as of the time of Closing.
(iv) Copies of (A) the Certificate of Incorporation of the Parent
Company, as amended or restated to the date of the Closing, together
with such evidence as may be available of the filing thereof with the
Secretary of State of the State of Delaware; (B) the By-laws of the
Parent Company, and (C) the resolutions of the Board of Directors
providing for the approval of this Agreement and the consummation of
the transactions contemplated hereby, the sale of the Outstanding
Shares and all other agreements, documents, instruments or matters
contemplated hereby or executed in connection herewith; all of which
shall have been certified by the Secretary of the Parent Company, as of
the date of the Closing, to be true, complete and correct; and
certified copies of all documents evidencing other necessary corporate
action, if any, required to be obtained at or prior to the Closing with
respect to this Agreement and the transactions contemplated hereby.
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(v) A certificate of the Secretary or an Assistant Secretary of the
Parent Company, dated the date of the Closing, which shall certify the
names of the officers of the Parent Company authorized to sign this
Agreement, to endorse the certificates for the Outstanding Shares or to
execute the stock powers delivered therewith and the other documents,
instruments or certificates to be delivered pursuant to this Agreement
by the Parent Company or any of its officers, the incumbency of such
officers, and the true specimen signatures of such officers.
(vi) A certificate of the Chairman of the Board and the President of
the Parent Company, dated the date of the Closing, stating that the
representations and warranties of the Parent Company contained in
Article 4 hereof and otherwise made by the Parent Company in writing in
connection with the transactions contemplated hereby are true and
correct at the time of the Closing as if made at the time of the
Closing and that all obligations and covenants in this Agreement
required to be performed by the Parent Company prior to or at the
Closing have been performed as of the time of Closing.
(vii) A binding letter or other instrument from BankBoston, N.A. in the
form of Exhibit I attached hereto which shall have (A) released all
liens, security interests, claims, equities and encumbrances in its
favor on all outstanding shares of Series A Preferred Stock and all
shares of Common Stock exchanged prior to the Closing for the
Outstanding Shares, (B) released the Company from all obligations and
liabilities to BankBoston, N.A., and (C) released all liens, security
interests, claims, equities and encumbrances on any of the property or
assets of the Company; and BankBoston, N.A. shall have (i)
unconditionally delivered possession to the Parent Company of the
certificates for all outstanding shares of Common Stock which the
Parent Company exchanged prior to the Closing for the Outstanding
Shares and (ii) delivered to the Purchasers duly executed UCC
Termination Statements for filing in all jurisdictions where
appropriate to evidence such releases.
(viii) The Company shall have obtained any and all consents, waivers or
approvals necessary to be obtained at or prior to the Closing to
execute and deliver this Agreement and the other agreements and
instruments executed and delivered by the Company in connection
herewith, to issue the Newly Issued Shares and to carry out the
transactions contemplated hereby and thereby, and such consents,
waivers and approvals shall be in full force and effect at the Closing.
All corporate and other action and governmental filings necessary to
effectuate the terms
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of this Agreement and the other agreements and instruments executed and
delivered by the Company in connection herewith and the issuance of the
Newly Issued Shares shall have been taken or made.
(ix) The Parent Company shall have obtained any and all consents,
waivers or approvals necessary to be obtained at or prior to the
Closing to execute and deliver this Agreement and the other agreements
and instruments executed and delivered by the Parent Company in
connection herewith, to sell the Outstanding Shares and to carry out
the transactions contemplated hereby and thereby, and such consents,
waivers and approvals shall be in full force and effect at the Closing.
All corporate and other action and governmental filings necessary to
effectuate the terms of this Agreement and the other agreements and
instruments executed and delivered by the Parent Company in connection
herewith and the sale of the Outstanding Shares shall have been taken
or made.
(x) A Certificate of the Secretary of State of the State of New York,
dated a recent date, as to the due incorporation and good standing of
the Company.
(xi) The favorable opinion addressed to the Purchasers of Parker Chapin
Flattau & Klimpl, LLP, counsel for the Company, dated the date of the
Closing, in the form attached hereto as Exhibit J.
(xii) Two of the Jacobs Family Members and no more than two other
persons designated by the Jacobs Family Members shall have been elected
directors of the Company.
(xiii) Dr. Samuel D. Waksal and seven other persons designated by Sudbury
shall have been elected directors of the Company.
(xiv) The Certificate of Amendment shall have been filed by the
Secretary of State of the State of New York and each Purchaser shall
have received evidence of such filing. The By-laws of the Company shall
have been amended and restated as set forth in Exhibit K attached
hereto.
(xv) Each of Mr. Herman Jacobs, Mr. Jack Jacobs and Mr. Victor Jacobs
shall have executed and delivered to the Company and the Purchasers a
Confidentiality, Proprietary Information and Non- Competition Agreement
in the form attached hereto as Exhibit L or Exhibit M as applicable.
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(xvi) The Parent Company and the Company shall have executed and
delivered, one to the other, the Services and Supply Agreement in the
form attached hereto as Exhibit H.
(xvii) Each of Mr. Herman Jacobs and Mr. Jack Jacobs shall have executed
and delivered to the Company a Consulting Agreement in the form
attached hereto as Exhibit B.
(xviii) AOL shall have confirmed in a writing reasonably satisfactory to
the Purchasers that (A) the issuance of the AOL Warrant to AOL shall be
deemed for all purposes of the AOL Agreement to satisfy the
requirements of Section 4.1.1 of the AOL Agreement for the issuance of
the "WARRANTS" (as defined therein) as if such issuance had occurred
within the "ISSUANCE PERIOD" (as defined in the AOL Agreement) and (B)
by reason of such issuance of the AOL Warrant, the Company shall be
obligated for payment of the guaranteed amounts of $12,400,000 payable
by the Company pursuant to Section 4.1.1 of the AOL Agreement and shall
not be obligated for payment of the guaranteed amounts of $24,400,000
provided in Section 4.1.2 of the AOL Agreement.
(xix) Executed letters of resignation, effective immediately after the
Closing, from (A) each director of the Company other than those
directors whose service continues pursuant to Section 3.01(b)(xii) and
(B) each officer of the Company.
(c) ABSENCE OF CERTAIN PROCEEDINGS. No action, suit, investigation or
other proceeding shall have been instituted or threatened which seeks to
restrain or prohibit or to obtain substantial damages with respect to the
consummation of the transactions contemplated hereby and no order, injunction,
judgment, decree or other ruling of any governmental authority of competent
jurisdiction shall be in effect which restrains, enjoins or otherwise prohibits
the consummation of the transactions contemplated hereby.
SECTION 3.02. COMPANY AND PARENT COMPANY CONDITIONS. The obligations of
the Company to issue to each Purchaser the Newly Issued Shares being purchased
by such Purchaser at the Closing and the obligations of the Parent Company to
sell to each Purchaser the Outstanding Shares being purchased by such Purchaser
at the Closing are subject to the satisfaction of the following conditions at or
before the Closing (any or all of which may be waived by the Company or the
Parent Company at or prior to the Closing):
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the
representations and warranties of such Purchaser set forth in Section 2.03 and
2.04
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hereof shall be true, accurate and correct on the date of the Closing as if made
on the date of the Closing. Such Purchaser shall have performed all obligations
and covenants contained in this Agreement required to be performed by such
Purchaser prior to the Closing.
(b) DOCUMENTATION AT CLOSING. The Company and the Parent Company shall
have received, prior to or at the Closing, all of the following materials, each
in form and substance satisfactory to the Company, the Parent Company and their
counsel, and each of the following events shall have occurred and each of the
following documents shall have been delivered prior to or simultaneous with the
Closing:
(i) Copies of (A) the Certificate of Formation of Sudbury, together
with such evidence as may be available of the filing thereof with the
Secretary of State of the State of Delaware; and (B) the Limited
Liability Company Agreement of Sudbury; each of which shall have been
certified by the Managing Member of Sudbury.
(ii) A certificate of the Managing Member of Sudbury, dated the date of
the Closing, which shall certify the names of the members of Sudbury
authorized to sign this Agreement, the Sudbury Note and the Sudbury
Pledge Agreement, the incumbency of such members and the true specimen
signatures of such members.
(iii) A certificate of an executive officer or Managing Member of each
Purchaser, if applicable, or from such Purchaser, dated the date of the
Closing, stating that the representations and warranties of such
Purchaser contained in Article 2 and otherwise made by such Purchaser
in writing in connection with the transactions contemplated hereby are
true and correct at the time of the Closing as if made at the time of
the Closing.
(c) DELIVERY TO PARENT COMPANY. The Company shall have executed and
delivered the Prepayment Note in the form attached hereto as Exhibit G to the
Parent Company to evidence the Company's obligation to repay the Parent Company
an amount advanced to the Company in respect of the AOL Prepayment.
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ARTICLE 4
REPRESENTATIONS, WARRANTIES, ETC. OF THE COMPANY AND THE PARENT
COMPANY
The Company represents and warrants to, and covenants and agrees with,
the Purchasers as set forth in Sections 4.01 through 4.24, and in Section 4.27;
and the Parent Company represents and warrants to, and covenants and agrees
with, the Purchasers as set forth in Sections 4.01, 4.02, 4.09, 4.25, 4.26, 4.28
and 4.29, as follows (PROVIDED, HOWEVER, that with respect to Sections 4.01 and
4.02, the Company only makes the representations therein insofar as they relate
to the Company and the Newly Issued Shares and the Parent Company only makes the
representations therein insofar as they relate to the Parent Company and the
Outstanding Shares):
SECTION 4.01. ORGANIZATION AND STANDING. Each of the Company and the
Parent Company is a duly organized and validly existing corporation in good
standing under the laws of the state of its incorporation and has all requisite
corporate power and authority for the ownership and operation of its properties
and for the carrying on of its business as now conducted and as now proposed to
be conducted and to execute and deliver this Agreement, and, in the case of the
Company, to issue, sell and deliver the Newly Issued Shares, and, in the case of
the Parent Company, to sell and deliver the Outstanding Shares and, in each such
case, to perform its other obligations pursuant hereto and thereto. The Company
is duly licensed or qualified and in good standing as a foreign corporation
authorized to do business in all jurisdictions wherein the character of the
property owned or leased or the nature of the activities conducted by it makes
such licensing or qualification necessary, except where the failure to be so
licensed or qualified would not have a material adverse effect on the business,
operations, condition (financial or otherwise) or prospects of the Company. The
Company has no Subsidiaries or equity investment in any Person.
SECTION 4.02. CORPORATE ACTION. This Agreement and the other agreements
and instruments executed by the Company and the Parent Company in connection
herewith have been duly authorized, executed and delivered by the Company and
the Parent Company and constitute the legal, valid and binding obligations of
the Company and the Parent Company, enforceable against the Company and the
Parent Company in accordance with their respective terms. The Shares have been
duly authorized. The issuance, sale and delivery of the Newly Issued Shares has
been duly authorized by all required corporate action on the part of the
Company; and the Newly Issued Shares, when issued and paid for in accordance
with this Agreement, will be validly issued, fully paid and nonassessable, and
will be free and clear of all liens, charges, restrictions, claims
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and encumbrances imposed by or through the Company or the Parent Company except
as set forth in this Agreement. Immediately prior to the Closing, the Parent
Company will exchange 2,670,940 outstanding shares of Common Stock owned by it
for a like number of shares of Series A Preferred Stock which shall constitute
the Outstanding Shares. Immediately prior to the Closing, the Company shall
issue to Mr. Herman Jacobs, Mr. Victor Jacobs and Mr. Jack Jacobs 282,828,
282,829 and 282,828 shares, respectively, of Series A Preferred Stock in
exchange for a like number of shares of Common Stock held by such Person and to
be transferred and surrendered to the Company by such Person. The sale and
delivery of the Outstanding Shares has been duly authorized by all required
corporate action on the part of the Parent Company; the Outstanding Shares are
validly issued, fully paid and nonassessable; and the Outstanding Shares, when
delivered to Purchasers, will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company or the
Parent Company, except as set forth in this Agreement and except with respect to
the Outstanding Shares purchased by Sudbury and Keystone, as set forth in the
Sudbury Pledge Agreement and the Keystone Pledge Agreement.
SECTION 4.03. GOVERNMENTAL APPROVALS. Except as set forth on Schedule
4.03 and except for the filing of any notice prior or subsequent to the Closing
that may be required under applicable state and/or federal securities laws
(which, if required, shall be filed by the Company or the Parent Company on a
timely basis), no authorization, consent, approval, license, exemption of or
filing or registration with any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, is or will be
necessary for, or in connection with, the execution and delivery by the Company
or the Parent Company of this Agreement for the offer, issue, sale, execution or
delivery of the Shares or for the performance by the Company or the Parent
Company of its obligations under this Agreement.
SECTION 4.04. LITIGATION. Except as disclosed in Schedule 4.04, there
is no litigation or governmental proceeding or investigation pending or, to the
knowledge of the Company, threatened against the Company affecting any of its
properties or assets, or against any officer, Key Employee or the holder of more
than ten percent (10%) of the outstanding capital stock of the Company relating
to the Company or its business, nor, to the knowledge of the Company, has there
occurred any event or does there exist any condition on the basis of which any
litigation, proceeding or investigation might properly be instituted with any
substantial chance of a recovery which would be materially adverse to the
Company. The Company is not in default with respect to any order, writ,
injunction, decree, ruling or decision of any court, commission, board or other
government agency, which default might have a material adverse effect on the
business, assets, liabilities, operations, results of operations, Intellectual
Property
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Rights, management, condition (financial or other) or prospects of the Company.
There are no actions or proceedings pending or, to the knowledge of the Company,
threatened against the Company or the Parent Company which might result, either
in any case or in the aggregate, in any material adverse change in the business,
assets, liabilities, operations, results of operations, Intellectual Property
Rights, management, condition (financial or other) or prospects of the Company,
or which might call into question the validity of this Agreement, any of the
Shares, or any action taken or to be taken pursuant hereto. The foregoing
sentences include, without limiting their generality, actions pending or, to the
knowledge of the Company, threatened involving the prior employment or
engagement of any of the Company's or the Parent Company's officers, employees
or consultants or their use in connection with the Company's or the Parent
Company's business of any information or techniques allegedly proprietary to any
of their former employers or to any other Person. Without limitation to the
foregoing representations, a brief summary of the Company's material litigation
and, as it relates to the Company or its business, the Parent Company's material
litigation and the disposition of such matters is set forth on Schedule 4.04.
SECTION 4.05. CERTAIN AGREEMENTS OF OFFICERS AND EMPLOYEES. (a) All of
the Company's employment contracts, patent disclosure agreements, proprietary
information agreements, noncompetition agreements, nonsolicitation agreements,
confidentiality agreements, and any other similar contracts, agreements or
restrictive covenants are set forth on Schedule 4.05 hereto and copies thereof
have been furnished by the Company to the Purchasers. No officer, employee or
consultant of the Company is, or, to the Company's knowledge, is now anticipated
to be, in violation of any material term of any employment contract, patent
disclosure agreement, proprietary information agreement, noncompetition
agreement, nonsolicitation agreement, confidentiality agreement, or any other
similar contract or agreement or any restrictive covenant, including those set
forth on Schedule 4.05, relating to the right of any such officer, employee, or
consultant to be employed or engaged by the Company because of the nature of the
business conducted or to be conducted by the Company or relating to the use of
trade secrets or proprietary information of others, and the continued employment
or engagement of the Company's officers, employees or consultants shall not
subject the Company or any Purchaser to any liability with respect to any of the
foregoing matters.
(b) No officer, consultant or Key Employee of the Company whose
termination, either individually or in the aggregate, could have a material
adverse effect on the business, assets, liabilities, operations, results of
operations, condition (financial or otherwise) or prospects of the Company, has
been terminated since the date hereof, or to the best knowledge of the Company,
has
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any present intention of terminating, such Person's employment or engagement
with the Company, except as set forth on Schedule 4.05.
SECTION 4.06. COMPLIANCE WITH OTHER INSTRUMENTS. The Company and the
Parent Company are in compliance in all respects with the terms and provisions
of this Agreement, and the Company is in compliance in all material respects
with the terms and provisions of its Certificate of Incorporation and Bylaws,
each as amended and/or restated to date, and in all respects with the material
terms and provisions of all mortgages, indentures, leases, agreements and other
instruments to which it is a party, by which it is bound or to which it or any
of its properties or assets are subject. The Company is in compliance in all
material respects with all judgments, decrees, governmental orders, laws,
statutes, rules or regulations by which it is bound or to which it or any of its
properties or assets are subject. None of the execution and delivery of this
Agreement by the Company, the issuance of the Newly Issued Shares by the Company
or the consummation of any transaction contemplated hereby, has constituted or
resulted in or will constitute or result in a default (or an event which with
notice or the passing of time, or both, would constitute a default) or violation
of any term or provision of the Company's Certificate of Incorporation or
By-laws, each as amended or restated to date, or any mortgage, indenture, lease,
agreement or other instrument, judgment, decree, order, statute, or, to the
knowledge of the Company, rule or regulation to which the Company is a party or
by which it is bound or any of its properties or assets are subject. A schedule
of Indebtedness of the Company as of the date of this Agreement (including lease
obligations required to be capitalized in accordance with applicable Statements
of Financial Accounting Standards) is attached as Schedule 4.06.
SECTION 4.07. TITLE TO ASSETS, INTELLECTUAL PROPERTY RIGHTS. (a) The
Company has good and merchantable title to all of its assets, now carried on its
books, which assets consist of those reflected in the most recent balance sheet
of the Company which is included in Schedule 4.08C, or acquired since the date
of such balance sheet (except personal property disposed of since said date in
the ordinary course of business) free of any mortgages, pledges, charges, liens,
security interests or other encumbrances except as set forth on Schedule 4.07.
The Company enjoys peaceful and undisturbed possession under all leases under
which it is operating, and all said leases are valid and subsisting and in full
force and effect. The Company does not own any real property.
(b) The Company owns or has a valid right to use the Intellectual
Property Rights being used to conduct its business as now operated and as now
proposed by the Company to be operated; a complete list of licenses and
registrations of such Intellectual Property Rights is attached hereto as
Schedule 4.07; and the conduct of the Company's business as now operated and as
now
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proposed to be operated do not and, to the best knowledge of the Company, will
not conflict with or infringe upon the Intellectual Property Rights of others.
Except as set forth on Schedule 4.07, no claim is pending or, to the knowledge
of the Company, threatened against the Company or the Parent Company or any of
their respective officers, employees or consultants to the effect that any such
Intellectual Property Right owned or licensed by the Company, or which the
Company otherwise has the right to use, is invalid or unenforceable by the
Company. Except pursuant to the terms of any licenses specified on Schedule
4.07, the Company has no obligation to compensate any Person for the use of any
such Intellectual Property Rights and the Company has not granted any Person any
license or other right to use any of the Intellectual Property Rights of the
Company, whether requiring payment of royalties or not.
(c) The Company and the Parent Company have taken all reasonable
measures to protect and preserve the security, confidentiality and value of the
Company's Intellectual Property Rights, including its trade secrets and other
confidential information. To the best knowledge of the Company, no employee or
consultant of the Company has used any trade secrets or other confidential
information of any other person in the course of such employee's or consultant's
work for the Company. Except as set forth on Schedule 4.07, the Company is the
exclusive owner of all right, title and interest in the Intellectual Property
Rights which individually or in the aggregate are material to the Company, and
such Intellectual Property Rights are valid and in full force and effect. Except
as set forth on Schedule 4.07, neither the Company nor any of its Key Employees
or consultants has received notice of, and to the best of the Company's
knowledge, there are no claims that the Company's Intellectual Property Rights
or the use or ownership thereof by the Company infringes, violates or conflicts
with any right of any third party. The Company owns or has adequate rights to
use, without payment to any Person, all Intellectual Property Rights necessary
or desirable to conduct its business as currently conducted and as proposed to
be conducted. The Company has made all filings and taken all other actions
necessary to acquire, maintain, register, renew and perfect the rights of the
Company to all Intellectual Property Rights used by the Company in its business
or in which it has an interest in all jurisdictions where such rights are used
by it. The Company is in compliance with all material terms and conditions of
its agreements relating to its Intellectual Property Rights. To the knowledge of
the Company, none of the products or services which the Company is researching,
developing, proposes to research and develop, makes, has made, uses, or sells,
infringes or misappropriates any Intellectual Property Right of any third party.
None of the trademarks and service marks the Company uses infringes the
trademark or service mark rights of any third party. The Company has not entered
into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property Right and none of the material
computer software,
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processes and formulae, research and development results and other know-how
relating to the Company's business, the value of which to the Company is
contingent upon maintenance of the confidentiality thereof, has been disclosed
to any Person other than Persons bound by written confidentiality agreements.
The Company has provided the Purchasers with copies of (i) all of its records
relating to Intellectual Property Rights of the Company and third parties,
including all claims or disputes relating thereto, (ii) the names and telephone
numbers of (A) all officers and employees of the Company or any of its
Affiliates responsible for Intellectual Property Rights matters and (B) all
legal counsel responsible for Intellectual Property Rights matters, together
with all invoices submitted by such counsel during the past two years, and (iii)
all trademark search reports in the Company's, its Affiliates', or its counsel's
possession relating to trademarks of the Company.
SECTION 4.08. FINANCIAL INFORMATION. The Company's unaudited
consolidating Income Statements, Statements of Stockholders' Equity (Deficit)
and Statements of Cash Flow for the fiscal year ended March 31, 1998 and
consolidated Balance Sheet as of March 31, 1998, copies of which are attached
hereto as Schedule 4.08A, present fairly in all material respects the results of
operations, cash flows and financial position of the Company for the periods
covered thereby and as of the date thereof and have been prepared in accordance
with generally accepted accounting principles consistently applied. The
Company's unaudited Income Statement and Statement of Cash Flows for the nine
months ended December 31, 1998 and unaudited Balance Sheet as of December 31,
1998, copies of which are attached hereto as Schedule 4.08B, and unaudited
Income Statement and Statement of Cash Flows for the period ended February 28,
1999 and unaudited Balance Sheet as of February 28, 1999, copies of which are
attached hereto as Schedule 4.08C, in each case present fairly the Company's
results of operations and cash flows for the periods covered thereby and
financial position as of the dates thereof in accordance with generally accepted
accounting principles consistently applied, it being understood that such
financial statements are unaudited and are subject to normal recurring
adjustments, none of which is material. The Company maintains books and records
which accurately record the financial transactions of the Company and the
Financial Statements of the Company have been prepared based on such books and
records.
The financial statements attached as Schedule 4.08A, 4.08B and 4.08C
are referred to herein as the "FINANCIAL STATEMENTS". The Company has no
reasonable grounds to know of, any liability, contingent or otherwise, not
adequately reflected in or reserved against in the Financial Statements. Since
February 28, 1999, except as disclosed in the Financial Statements or this
Agreement, there has been no material adverse change in the business, assets,
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liabilities, operations, results of operations, Intellectual Property Rights,
condition (financial or other) or prospects of the Company.
SECTION 4.09. TAXES. The Company has accurately prepared and timely
filed all federal, state and other tax returns required by law to be filed by
it, has paid or made provision for the payment of all taxes shown to be due and
all additional assessments, and adequate provisions have been made and are
reflected in the Financial Statements for all current taxes and other charges to
which the Company is subject and which are not currently due and payable. None
of the federal income tax returns of or which include the Company has been
audited by the Internal Revenue Service or any state tax authority. Neither the
Company nor the Parent Company knows of any additional assessments, adjustments
or contingent tax liability (whether federal or state) pending or threatened for
any period, and there is no basis for any such assessment, adjustment or
contingency. Neither the Company nor, to the best of the Company's knowledge,
any of its stockholders, has ever filed a consent pertaining to the Company
pursuant to section 341(f) of the Code relating to collapsible corporations.
SECTION 4.10. ERISA. The Company does not make any contributions to
any employee pension benefit plan for its employees which plan is subject to
ERISA.
SECTION 4.11. TRANSACTIONS WITH AFFILIATES AND PARENT COMPANY. Except
as set forth in Schedule 4.11, there are no loans, leases, royalty or other
agreements between (a) the Company or any of its material customers or
suppliers, on the one hand, and (b) any officer, employee, consultant or
director of the Company or any Person owning five percent (5%) or more of the
outstanding capital stock of the Company or the Parent Company or any member of
the immediate family of such officer, employee, consultant, director or
stockholder or any corporation or other entity controlled by such officer,
employee, consultant, director or stockholder, or a member of the immediate
family of such officer, employee, consultant, director or stockholder, on the
other hand. There are no obligations of the Company to the Parent Company or any
of its Subsidiaries or Affiliates (other than the Company) or any officer,
director, employee or stockholder of the Parent Company or any of its
Subsidiaries or Affiliates which will continue after the Closing except as shall
arise under this Agreement, the Services and Supply Agreement, the Consulting
Agreements or the Prepayment Note.
SECTION 4.12. ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER
PERSONS. The Company has not assumed, guaranteed, endorsed, or otherwise become
directly or contingently liable on (including, without limitation, liability by
way of agreement, contingent or otherwise, to purchase, to provide funds for
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payment, to supply funds to or otherwise invest in the debtor or otherwise to
assure the creditor against loss), any Indebtedness of any other Person except
as set forth in Schedule 4.12.
SECTION 4.13. INVESTMENTS IN OTHER PERSONS. Except as set forth in
Schedule 4.13, the Company has not made any loan or advance to any Person which
is outstanding on the date of this Agreement, nor is it committed or obligated
to make any such loan or advance, nor does the Company own any capital stock,
assets comprising the business of, obligations of, or any interest in, any
Person. The Company does not have, and has not since its incorporation had, any
Subsidiaries.
SECTION 4.14. SECURITIES ACT OF 1933. The Company has complied and will
comply with all applicable federal and state securities laws in connection with
the offer, issuance and sale of the Newly Issued Shares hereunder. Neither the
Company nor anyone acting on its behalf has or will sell, offer to sell or
solicit offers to buy the Shares or similar securities to, or solicit offers
with respect thereto from, or enter into any preliminary conversations or
negotiations relating thereto with, any Person, so as to bring the issuance and
sale of the Newly Issued Shares under the registration provisions of the
Securities Act and applicable state securities laws.
SECTION 4.15. DISCLOSURE. Neither this Agreement or the Financial
Statements, nor any other agreement, document, certificate or written statement
furnished or to be furnished to any Purchaser or its counsel by or on behalf of
the Company or the Parent Company in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary in order to make
the statements contained herein or therein, in light of the circumstances in
which made, not misleading. There is no fact which has not been disclosed herein
or in writing to the Purchasers and which materially adversely affects, or in
the future could, materially adversely affect, the business, assets,
liabilities, operations, results of operations, Intellectual Property Rights,
condition (financial or other), or prospects of the Company.
SECTION 4.16. BROKERS OR FINDERS. No Person has or will have, as a
result of the transactions contemplated by this Agreement, any right, interest
or valid claim against or upon any Purchaser for any commission, fee or other
compensation in cash, securities or any other property or rights as a finder or
broker because of any act or omission by the Company or the Parent Company or
their respective agents.
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SECTION 4.17. CAPITALIZATION; STATUS OF CAPITAL STOCK. As of the
Closing, the Company will have a total authorized capitalization consisting of
30,000,000 shares of Common Stock and 20,000,000 shares of preferred stock, $.01
par value, of which 9,400,000 shares will be designated as Series A Preferred
Stock. As of the Closing, 1,329,060 shares of Common Stock and 3,519,425 shares
of Series A Preferred Stock will be issued and outstanding, without giving
effect to the issuance of the Newly Issued Shares. The Certificate of Amendment
has been approved by the Board of Directors and the stockholders of the Company
in accordance with the New York Business Corporation Law. A complete list of the
class and number of shares of the capital stock of the Company which have been
previously issued and the names in which such capital stock is registered on the
stock transfer book of the Company is set forth in Schedule 4.17. All the
outstanding shares of capital stock of the Company have been duly authorized,
and are validly issued, fully paid and non-assessable. Except as set forth in
Schedule 4.17, no options, warrants, subscriptions or purchase rights of any
nature to acquire from the Company, or commitments of the Company to issue or
sell, shares of capital stock or other securities of the Company are authorized,
issued or outstanding, nor is the Company obligated in any other manner to issue
or sell shares or rights to acquire any capital stock or other securities of the
Company except as contemplated by this Agreement with regard to the Newly Issued
Shares. Neither the Outstanding Shares nor any other shares of Common Stock
owned by the Parent Company are not subject to any restriction or agreement
entered into by the Parent Company with respect thereto; including, without
limitation, any voting agreement, pledge, agreement for purchase or sale, right
of first refusal, other than this Agreement. Except as set forth in Schedule
4.17, none of the Company's outstanding securities or authorized capital stock
is subject to any rights of redemption, repurchase, rights of first refusal,
preemptive rights or other similar rights, whether contractual, statutory or
otherwise, for the benefit of the Company, any stockholder, or any other Person,
except pursuant hereto. Except as set forth in Schedule 4.17, there are no
restrictions on the transfer of shares of capital stock of the Company other
than those imposed by relevant federal and state securities laws and as
otherwise contemplated by this Agreement. Except as set forth in Schedule 4.17,
there are no agreements, understandings, trusts or other collaborative
arrangements or understandings concerning the voting or transfer of the capital
stock of the Company.
SECTION 4.18. REGISTRATION RIGHTS. Except as set forth on Schedule
4.18, and except for the rights granted to the Purchaser pursuant to Article 8
hereof, no Person has demand or other rights to cause the Company to file any
registration statement under the Securities Act relating to any securities of
the Company or any right to participate in any such registration statement.
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SECTION 4.19. INSURANCE. The Parent Company maintains and has
maintained since the commencement of business by the Company the insurance
policies in effect on the date hereof covering the Company's properties and
business which are listed, together with copies thereof, on Schedule 4.19
attached thereto.
SECTION 4.20. BOOKS AND RECORDS. The books of account, ledgers, order
books, records and documents of the Company accurately and completely reflect
all material information relating to the business of the Company, the location
and collection of its assets, and the nature of all transactions giving rise to
the obligations or accounts receivable of each of the Company.
SECTION 4.21. MATERIAL AGREEMENTS. Except as set forth in Schedule
4.21, the Company is not a party to any written contract, instrument, agreement,
commitment, obligation, plan or arrangement, a copy of which would be required
to be filed with the Commission as an exhibit to a registration statement on
Form S-1 if the Company were registering securities under the Securities Act, or
any other agreement which could materially adversely affect the business,
assets, liabilities, operations, results of operations, Intellectual Property
Rights, condition (financial or other) or prospects of the Company. Except as
set forth in Schedule 4.21, each of the contracts or agreements listed in
Schedule 4.21 is in full force and effect with no default or material failure of
performance or observance of any obligations or conditions contained therein by
the Company or any of the other parties thereto.
SECTION 4.22. ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth on
Schedule 4.22 and as contemplated herein, since March 31, 1998 the Company
has not:
(a) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;
(b) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in the
ordinary course of business which are comparable in nature and amount to the
current liabilities incurred in the ordinary course of business during the
comparable portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the Company's business;
(c) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current liabilities
paid in the ordinary course of business consistent with past practices;
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(d) declared or made any payment or distribution of cash or other
property to stockholders with respect to its stock, or purchased or redeemed, or
made any agreements so to purchase or redeem, any shares of its capital stock;
(e) mortgaged or pledged any of its assets, tangible or intangible, or
subjected them to any lien, charge or other encumbrance, except liens for
current property taxes not yet due and payable;
(f) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business
consistent with past practices;
(g) sold, assigned or transferred any patents, patent rights,
trademarks, trade names, copyrights, trade secrets or other intangible assets or
intellectual property rights, or disclosed any proprietary confidential
information to any persons except to potential customers, investors or corporate
or academic partners or collaborators in the ordinary course of business
consistent with past practices;
(h) made any changes in employee compensation except in the ordinary
course of business and consistent with past practices;
(i) made capital expenditures or commitments therefor that aggregate
in excess of $200,000.00;
(j) made charitable contributions or pledges in excess of $5,000 in
the aggregate;
(k) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;
(l) experienced any problems with labor or management in connection
with the terms and conditions of their employment; or
(m) effected or agreed to do any of the foregoing.
SECTION 4.23. ENVIRONMENTAL AND SAFETY LAWS. (a) The operations of the
Company are currently and have at all times been in compliance in all material
respects with all applicable Environmental Laws. To the knowledge of the Company
(after due inquiry), there are not currently nor have there ever been any
underground storage tanks on any real property owned, operated or leased by the
Company. No Hazardous Material has been stored, generated, treated, discharged
or Released in or upon any real property owned, operated or leased by the
Company during the period of such ownership or before the period of the
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Company's ownership, lease or operation in violation of, or in a quantity
reportable under, any Environmental Law or that is reasonably likely to result
in any material Environmental Costs and Liabilities. The Company is not subject
to any Environmental Costs and Liabilities, and, to the knowledge of the Company
(after due inquiry), no facts or circumstances exist which could give rise to
any Environmental Costs and Liabilities.
(b) Schedule 4.23 lists all Environmental Permits maintained by the
Company or by the Parent Company in connection with the Company's business. Such
Environmental Permits constitute all of the Environmental Permits necessary or
desirable for the Company's operations and: (i) the Company is in compliance in
all material respects with such Environmental Permits; (ii) there are no Legal
Proceedings pending nor, to the Company's knowledge, threatened to revoke such
Environmental Permits; (iii) neither the Company nor the Parent Company has
received any notice from any Governmental Authority to the effect that there is
lacking any Environmental Permit required for the current use or operation of
any property owned, operated or leased by the Company, and (iv) the consummation
of the transactions contemplated hereby will not constitute a transfer or
assignment of any such Environmental Permits nor will such consummation require
any filing or registration with or notice to any Governmental Authority and all
such Environmental Permits shall remain in full force after the Closing.
(c) Neither the Company nor, to the knowledge of the Company (after
due inquiry), any predecessor of the Company, is subject to any outstanding
written order of any Governmental Authority or other Person, or, to the
knowledge of the Company, any federal, state, local or foreign investigation
respecting: (i) actual or alleged violations of Environmental Laws, (ii) any
Remedial Action or (iii) any Environmental Costs and Liabilities. Neither the
Company or any of its Affiliates nor, to the knowledge of the Company (after due
inquiry), any predecessor of the Company or any of its Affiliates has received
any written notice from any Governmental Authority respecting any violation of
Environmental Laws.
(d) There are no Legal Proceedings pending or, to the knowledge of the
Company (after due inquiry), threatened against the Company, alleging the
violation of any Environmental Law or Environmental Permit.
(e) Neither the Company nor, to the knowledge of the Company, any
predecessor of the Company, has filed any notice under federal, state or local
law indicating past or present treatment, storage, or disposal of or reporting a
Release of any Hazardous Material.
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(f) None of the operations of the Company or, to the knowledge of the
Company, of any predecessor of the Company, involves or previously involved the
generation, transportation, treatment, storage or disposal of Hazardous Waste,
as defined under 40 C.F.R Parts 260-270 or any state, local or foreign
equivalent.
(g) The Company has not received notice of liability or potential
liability at, nor are there any pending or threatened Legal Proceedings with
respect to, any facility at which the Company, or to the knowledge of the
Company, any predecessor of the Company, has transported, disposed of, or
arranged for the transportation at or disposal of any Hazardous Material. There
is no friable asbestos, friable asbestos-containing building materials,
polychlorinated biphenyls, or urea formaldehyde presently in use or otherwise
located at any real property currently owned, operated or leased by the Company.
(h) There has been no environmental investigation, study, audit, test,
review or other analysis conducted in relation to the current or prior business
of the Company or any of its Subsidiaries, nor to the knowledge of the Company
(after due inquiry), any predecessor of the Company or any property or facility
now or previously owned or leased by the Company.
SECTION 4.24. U.S. REAL PROPERTY HOLDING CORPORATION. The Company is
not now and has never been a "UNITED STATES REAL PROPERTY HOLDING
CORPORATION" as defined in section 897(c)(2) of the Code and section 1.897-2(b)
of the Regulations promulgated by the Internal Revenue Service.
SECTION 4.25. TITLE TO OUTSTANDING SHARES. The Parent Company has good
and marketable title to all the Outstanding Shares, free and clear of any and
all liens, pledges, charges, encumbrances, and claims and rights of others of
any nature whatsoever, and each Purchaser, if it is without notice of any
adverse claim with respect to the Outstanding Shares purchased by it pursuant
hereto, upon consummation of the transactions contemplated hereby, will acquire
good and marketable title to the Outstanding Shares purchased by it pursuant
hereto, free and clear of any and all liens, pledges, charges, encumbrances, and
claims and rights of others of any nature whatsoever other than, in the case of
Sudbury and Keystone, the respective liens on the Outstanding Shares purchased
by Sudbury and Keystone pursuant hereto arising under the Sudbury Pledge
Agreement and the Keystone Pledge Agreement, respectively.
SECTION 4.26. INVESTMENT REPRESENTATION. The Sudbury Note and the
Keystone Note to be acquired by the Parent Company as provided in this Agreement
are being acquired by the Parent Company for its own account for investment and
not with a view to the distribution thereof; the Parent Company is an
"ACCREDITED INVESTOR" (as that term is defined in Rule 501(a)(3) of Regulation
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D under the Securities Act); and the Parent Company will not distribute the
Sudbury Note, the Keystone Note or any portion thereof in violation of
applicable state securities or "BLUE SKY" laws or the 1933 Act or the applicable
rules and regulations of the Commission thereunder. The Parent Company
understands that each of the Sudbury Note and the Keystone Note will bear a
restrictive legend and that the transfer of the Sudbury Note and the Keystone
Note will be restricted under applicable securities laws.
SECTION 4.27. YEAR 2000 COMPLIANCE. Except as set forth on Schedule
4.27, all computer and information programs and technology included in the
assets of the Company are Year 2000 Compliant.
SECTION 4.28. NON-CONTRAVENTION. None of the execution and delivery of
this Agreement by the Company and the Parent Company, the issuance of the Newly
Issued Shares by the Company, the sale of the Outstanding Shares by the Parent
Company or the consummation of any transaction contemplated hereby, has
constituted or resulted in or will constitute or result in a default (or an
event which with notice or the passing of time, or both, would constitute a
default) or violation of any term or provision of the Company's or the Parent
Company's Certificate of Incorporation or By-laws, each as amended or restated
to date, or any mortgage, indenture, lease, agreement or other instrument,
judgment, decree, order, statute, rule or regulation to which the Company or the
Parent Company is a party or by which it is bound or any of its properties or
assets are subject.
SECTION 4.29. SELECTED FINANCIAL INFORMATION. (a) The amounts of each
of the following items set forth in the Financial Statements as of and for the
period ended February 28, 1999 are true and correct as of such date:
(i) Accounts receivable,
(ii) Inventory,
(iii) Prepaid expenses,
(iv) Accounts payable and accrued expenses,
(v) Amounts due to the Parent Company (including obligations
relating to the AOL Prepayment), and
(vi) Gross sales.
(b) The amount of the Company's fixed assets as set forth on Schedule
4.29 attached hereto is true and correct.
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ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.01. REPORTING REQUIREMENTS. Until the Company completes
the Initial Public Offering, the Company will furnish the following to the
Purchasers:
(a) QUARTERLY REPORTS. As soon as available and in any event within 45
days after the end of each of the first three fiscal quarters of each fiscal
year, a consolidated statements of income, cash flow and retained earnings of
the Company and its Subsidiaries for such fiscal quarter, and a consolidated
balance sheet of the Company and its Subsidiaries as of the end of such fiscal
quarter, setting forth in each case in comparative form the corresponding
figures for the corresponding period of the prior fiscal year;
(b) ANNUAL REPORTS. As soon as available and in any event within 90
days after the end of each fiscal year of the Company, a consolidated balance
sheet of the Company and its Subsidiaries as of the end of such fiscal year and
consolidated statements of income, cash flow and returned earnings of the
Company and its Subsidiaries for such fiscal year, setting forth in each case in
comparative form the corresponding figures for the preceding fiscal year, all
such consolidated statements to be duly certified by the chief financial officer
of the Company; and, within 100 days after the end of each fiscal year (or such
earlier date as such audit is complete and available for distribution to
stockholders of the Company) audited financial statements as described in this
paragraph (b) for such fiscal year, accompanied by an unqualified audit report
of independent public accountants selected by the Board of Directors; and
(c) BUDGETS AND OPERATING PLAN. As soon as available, a business plan
and annual budget which includes monthly and quarterly operating budgets for
each fiscal year; as promptly as practicable, any changes to such budget or
business plan; and copies of such business plan.
SECTION 5.02. BOOKS AND RECORDS. The Company shall, and shall cause its
Subsidiaries to, maintain a system of accounts in accordance with generally
accepted accounting principles and keep full and complete financial records.
SECTION 5.03. CONDUCT OF BUSINESS. The Company shall, and shall cause
its Subsidiaries to, engage in (a) the development of programming material for
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distribution through online service providers and the Internet and the sale of
products through its web site and (b) the business of selling, distributing and
marketing health, beauty wellness and other products and services including, but
not limited to, perfumes and cosmetics principally through the Internet and/or
as the Board of Directors may from time to time determine are in the best
interests of the Company. The Company shall, and shall cause its Subsidiaries,
to keep in full force and effect their respective corporate existence and all
patents and other Intellectual Property Rights useful in their respective
business and comply with all applicable laws and regulations in the conduct of
their respective businesses.
SECTION 5.04. PAYMENT OF TAXES; COMPLIANCE WITH LAWS. The Company
shall, and shall cause its Subsidiaries to, pay and discharge all lawful taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property before the same shall become in default, as well as all
lawful claims for labor, materials and supplies which, if not paid when due,
might become a lien or charge upon its property or any part thereof; PROVIDED,
HOWEVER, that the Company shall not be required or require its Subsidiaries to
pay and discharge any such tax, assessment, charge, levy, or claim so long as
the validity thereof is being contested by the Company or its Subsidiary in good
faith by appropriate proceedings and an adequate reserve therefor has been
established on its books. The Company shall, and shall cause its Subsidiaries
to, comply with all applicable laws and regulations in the conduct of its
business.
SECTION 5.05. ADVERSE CHANGES. The Company shall promptly advise the
Purchasers of any event which represents a material adverse change in the
condition or business, financial or otherwise, of the Company or its
Subsidiaries. The Company shall also promptly notify the Purchasers of any facts
which, if such facts had existed at the Closing, would have constituted a breach
of the representations and warranties contained herein.
SECTION 5.06. INSURANCE. The Company and its Subsidiaries shall keep
their insurable properties insured by financially sound and reputable insurers
against the perils of liability, casualty, fire and extended coverage in amounts
of coverage at least equal to those customarily maintained by companies in the
same or a similar business of similar size. The Company and its Subsidiaries
shall also maintain with such insurers insurance against other hazards and risks
and liability to persons and property to the extent and in the manner customary
for companies engaged in the same or a similar business of similar size.
SECTION 5.07. MAINTENANCE OF PROPERTIES. The Company shall, and shall
cause its Subsidiaries to, maintain all properties used or useful in the conduct
of its business in good repair, working order and condition as necessary to
permit such business to be properly and advantageously conducted.
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SECTION 5.08. AFFILIATED TRANSACTIONS. All transactions by and between
the Company and/or any of its Subsidiaries on the one hand, and any officer, Key
Employee or stockholder of the Company or any of its Subsidiaries or persons
controlled by or affiliated with such officer, Key Employee or stockholder, on
the other hand, shall be conducted on an arm's-length basis, shall be on terms
and conditions no less favorable to the Company or the Subsidiary, as
applicable, than could be obtained from non-related persons and shall be
approved in advance by the Board of Directors of the Company, after full
disclosure of the terms thereof; PROVIDED, HOWEVER, that the approval of the
Board of Directors of the Company shall not be required for any transaction or
series of transactions involving in the aggregate an expenditure or transfer of
not more than $2,500 in money or money's worth; and PROVIDED FURTHER, however,
that nothing herein shall prohibit the Company from engaging in transactions
pursuant to the Services and Supply Agreement on the terms provided therein.
SECTION 5.09. MANAGEMENT COMPENSATION. Compensation paid by the Company
or by any of its Subsidiaries to their respective management shall not be in
excess of amounts reasonably comparable to compensation paid to management in
companies in similar industries of similar size in comparable geographic
locations and in a similar stage of development; PROVIDED, HOWEVER, that nothing
herein shall limit the compensation payable to Messrs. Spiessbach and Katz
pursuant to employment agreements with them that have been or will be approved
by the Directors of the Company.
SECTION 5.10. INSPECTION. The Company shall permit the Purchasers and
their authorized representatives to visit and inspect any of the properties of
the Company, including its books of account (and to make copies thereof and take
extracts therefrom), and to discuss its affairs, finances and accounts with its
officers, employees, independent accountants, consultants and attorneys, all at
such reasonable times and as often as may be reasonably requested.
SECTION 5.11. PROPRIETARY RIGHTS AGREEMENT. The Company understands
that a material inducement and factor upon which each Purchaser is relying in
making its decision to purchase Shares is the covenants not to compete to be
contained in the Confidentiality, Proprietary Information and Non-Competition
Agreements referred to in Section 3.01(b)(xv). The Company agrees (x) not to
waive, amend or modify such covenants not to compete in any respect which is
materially adverse to the Company, without the prior approval by a majority of
the whole Board of Directors (excluding for this purpose the Person whose
covenant not to compete is proposed to be amended) and (y) to use its
commercially reasonable best efforts to enforce such covenants. Promptly after
the date of the Closing, the Company shall use its best efforts to cause each of
its employees to execute and deliver to the Company a Confidentiality,
Proprietary
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Information and Non-Competition Agreement substantially in the form attached
hereto as Exhibit L or such other form as shall be approved by the Board of
Directors. The Company shall, and shall cause its Subsidiaries to, diligently
enforce all of their respective rights under any of their proprietary rights
agreements. All employees of the Company and its Subsidiaries, upon commencing
employment with the Company or its Subsidiaries, as applicable, shall execute
and deliver to the Company a Confidentiality, Proprietary Information and
Non-Competition Agreement substantially in the form attached hereto as Exhibit L
as such form of Agreement may be revised from time to time with the approval of
the Board of Directors.
SECTION 5.12. MAINTENANCE OF CORPORATE EXISTENCE, ETC. The Company
shall maintain in full force and effect its corporate existence, rights and
franchises and all licenses and other rights in or to use patents, processes,
licenses, trademarks, trade names or copyrights owned or possessed by it or any
subsidiary and deemed by the Company to be necessary to the conduct of its or
such subsidiary's business without, to the Company's best knowledge, any
conflict with any rights of others to use such patents, processes, licenses,
trademarks, trade names or copyrights.
SECTION 5.13. CONDUCT OF BUSINESS PENDING THE CLOSING. During the
period from the date of this Agreement to the date of the Closing, the Company
agrees (which agreement shall be joint and several with the Parent Company's
agreement pursuant to Section 6.01) that, unless otherwise approved by a
majority in interest of the Purchasers:
(a) ORDINARY COURSE. The Company's businesses shall be conducted only
in the ordinary course of business and in a manner consistent with past
practice. The Company shall use commercially reasonable efforts to preserve
substantially intact the Company's business organization, to keep available the
services of its present officers, employees and consultants and to preserve its
present relationships with customers, suppliers and other Persons with which it
has a significant business relationship.
(b) GOVERNING DOCUMENTS. The Company shall not, amend or propose to
amend its Certificate of Incorporation or By-laws except for the Certificate of
Amendment and the amendment of the By-laws provided in Exhibit K attached
hereto.
(c) ISSUANCE OF SECURITIES. The Company shall not issue, deliver,
sell, redeem, acquire, authorize or propose to issue, deliver, sell, redeem,
acquire or authorize any shares of its capital stock of any class, any debt or
any securities convertible into, or any rights, warrants or options to acquire,
any such shares,
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debt or convertible securities or other ownership interest, except that the
Company shall (1) issue the AOL Warrant to AOL, (2) issue shares of Series A
Preferred Stock to the Parent Company in exchange for outstanding shares of
Common Stock as contemplated by Section 4.02 and (3) the issuance of shares of
Series A Preferred Stock to Jacobs Family Members in exchange for outstanding
shares of Common Stock as contemplated by Section 4.02.
(d) DIVIDENDS; CHANGES IN STOCK. The Company shall not, nor shall it
propose to: (i) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock; or (ii) reclassify, combine, split, subdivide or redeem,
purchase or otherwise acquire, directly or indirectly, any of its capital stock.
(e) NO ACQUISITIONS. The Company shall not acquire or agree to acquire
by merging or consolidating with, or by purchasing a substantial equity interest
in or a substantial portion of the assets of, or in any other manner, any
business or any Person or division thereof or otherwise acquire or agree to
acquire any material amounts of assets.
(f) NO DISPOSITIONS. Other than (i) as may be required by law to
consummate the transactions contemplated hereby; or (ii) dispositions in the
ordinary course of business consistent with past practice which are not
material, individually or in the aggregate, to the Company shall not sell,
lease, encumber or otherwise dispose of, or agree to sell, lease (whether such
lease is an operating or capital lease), encumber or otherwise dispose of any of
its assets.
(g) INDEBTEDNESS; LEASES. The Company shall not incur any Indebtedness
for borrowed money (other than in the ordinary course of business and consistent
with past practice) or guarantee any such Indebtedness or issue or sell any debt
securities or warrants or rights to acquire any of its debt securities or
guarantee any Indebtedness of others or enter into, cancel, surrender, amend or
modify any lease or sublease (whether such lease is an operating or capital
lease) or permit, allow or suffer any of its assets to be subject to any lien,
other than in each case in the ordinary course of business.
(h) ADVICE OF CHANGES; FILINGS. The Company shall confer on a regular
and frequent basis with the Purchasers, report on operational matters relating
to the Company and promptly advise the Purchasers in writing of any change or
event occurring after the date hereof having a material adverse effect on the
Company. The Company shall promptly provide the Purchasers (or their legal
counsel) with copies of all filings made by either of them with any governmental
entity in connection with this Agreement and the transactions contemplated
hereby.
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(i) EMPLOYEE ARRANGEMENTS. The Company shall not: (i) increase or
agree to increase the compensation payable or to become payable to its officers,
employees or consultants, or modify, change, terminate or supplement its
employee benefits, except for increases in salary or wages of employees (other
than its officers (whether in such capacity or otherwise)) in accordance with
past practices; (ii) except as provided in accordance with the provisions of any
employee benefit plan or arrangement in effect on the date hereof and disclosed
to the Purchasers in this Agreement, grant any severance or termination pay to,
or enter into any employment or severance agreement with, any of its officers or
employees; (iii) enter into or amend any collective bargaining agreement; or
(iv) establish, adopt, enter into or amend any employee benefit or fringe
benefit plans or arrangements for the benefit of any of its directors, officers
or employees.
(j) NO DISSOLUTION, ETC. The Company shall not authorize, recommend,
propose or announce an intention to adopt a plan of complete or partial
liquidation or dissolution.
(k) PAYMENTS. Unless it shall have given at least two business days
prior notice thereof to a majority in interest of the Purchasers, the Company
shall not make any payment or series of payments to any third party in excess of
$50,000.
(l) NO ACTION. The Company shall not take or agree or commit to take
any action that: (i) is reasonably likely to make any of its representations or
warranties hereunder inaccurate; or (ii) is prohibited pursuant to the
provisions of this Section 5.13.
SECTION 5.14. CERTAIN AGREEMENTS AND FILINGS. On or before the time of
the Closing, the Company shall execute and deliver to the other parties thereto
the Services and Supply Agreement, the Confidentiality, Proprietary Information
and Non-Competition Agreements referred to in Section 3.01(b)(xv) and the
Consulting Agreements.
SECTION 5.15. ISSUANCE OF AOL WARRANT. At or before the time of the
Closing, the Company shall issue the AOL Warrant to AOL.
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ARTICLE 6
COVENANTS OF THE PARENT COMPANY
SECTION 6.01. CONDUCT OF COMPANY BUSINESS PENDING THE CLOSING. The
Parent Company agrees (which agreement shall be joint and several with the
Company's agreement pursuant to Section 5.13) not to permit the Company to take
any action prohibited by Section 5.13 and to cause the Company to take all
actions required by Section 5.13.
SECTION 6.02. CONCERNING REPRESENTATIONS AND WARRANTS. During the
period from the date of this Agreement to the date of the Closing, the Parent
Company shall not take or agree or commence to take any action that is
reasonably likely to make any of its or the Company's representations and
warranties hereunder inaccurate.
SECTION 6.03. CERTAIN INTELLECTUAL PROPERTY RIGHTS MATTERS. From and
after the Closing Date, Parent Company (a) shall not use or do business, or
assist any third party in using or doing business, under the names or marks
"FRAGRANCECOUNTER.COM", "COSMETICSCOUNTER.COM", "COSMETICCOUNTER.COM",
"BEAUTYCOUNTER.COM", "SPACOUNTER.COM", "PERFUME.NET", "FRAGRANCECOUNTER.NET" or
any other Intellectual Property Right of the Company or any other names or marks
similar thereto or being a variant thereof and (b) shall take all further action
necessary to transfer and assign to the Company all Intellectual Property Rights
(whether or not identified on Schedule 4.07) being used by the Company to
conduct its business as now operated and is proposed by the Company to be
operated and (c) shall not directly or indirectly use, or transfer (other than
to the Company) any rights with respect to, such Intellectual Property Rights.
SECTION 6.04. COVENANT NOT TO COMPETE. During the period from the date
of the Closing to the date which is three years after the date of the Closing
the Parent Company shall not, and shall not permit any of its Subsidiaries or
Affiliates to, directly or indirectly, whether alone or in concert with others
or as a partner, consultant, agent, stockholder of any company or holder of an
equity interest in any commercial enterprise or otherwise, engage in any
Competitive Activity. During such period, the Parent Company, affiliates,
subsidiaries, management, employees or Jacobs Family Members will not, directly
or indirectly, either alone or in concert with others, solicit or encourage any
employee or officer of or consultant to the Company (x) to leave or otherwise
terminate his or her relationship with the Company or (y) to engage directly or
indirectly in any Competitive Activity. Ownership of stock, partnership
interests or other securities of any entity not in excess of one percent of any
class of such
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stock, interests or other securities which are publicly traded shall not, in and
of itself, be considered to be engaging in Competitive Activity. If the Parent
Company violates, or fails to cause any of its Subsidiaries or Affiliates not to
violate, any provision of this Section 6.04, then such violation shall toll the
running of the time period specified in this Section 6.04 from the date such
violation commences until the date such violation ceases. The Parent Company
hereby represents, warrants, covenants and agrees that the terms of this Section
6.04 are reasonable and understands that they are a material inducement to the
Purchasers to execute and deliver this Agreement. The Parent Company recognizes
and agrees that the Company and the Purchasers will not have an adequate remedy
at law if the Parent Company fails to comply with this Section 6.04 and that
damages may not be readily ascertainable, and the Parent Company expressly
agrees that, in the event of such failure, the Company and the Purchasers shall
be entitled to obtain specific performance of the Parent Company's obligations
and to obtain immediate injunctive relief and the Parent Company shall not
oppose any application by the Company or any Purchaser requiring specific
performance of any and all provisions hereof or enjoining the Company from
continuing to commit any such breach of this Section 6.04.
SECTION 6.05. CERTAIN INSURANCE MATTERS. In order that, after the date
of the Closing, the Company may benefit from insurance coverage maintained prior
to the date of the Closing by the Parent Company for the benefit of the Company,
the Parent Company agrees that any rights in respect of any claim for insurance
coverage and any recovery or other benefit under such insurance coverage
relating to the business of the Company prior to the date of the Closing shall
be the rights and property of the Company. The Parent Company shall use its best
efforts to assist the Company in making any such claim for coverage and seeking
recovery thereunder, and shall hold any amount received by the Parent Company in
trust for the Company and shall promptly pay the same to the Company. The
Company will reimburse the Parent Company for its costs and expenses, including
attorneys' fees, incurred in connection with making any such claim and seeking
any such recovery for the benefit of the Company; PROVIDED that all such
expenses are approved in advance by the Company. The Company shall have the
right to control and manage all aspects of such claim, including the selection
of counsel therefor in which event the Company shall pay all fees and expenses
of such counsel.
SECTION 6.06. UNDERTAKINGS RESPECTING TAXES AND ACCOUNTING. (a) The
Parent Company and the Purchasers acknowledge and agree that the income and
operations of the Company through the date of the Closing have been or will be
included in the consolidated federal income tax returns of the Parent Company
required to be filed in respect of all fiscal periods through the date of the
Closing (the "FINAL COMPANY FEDERAL TAX RETURNS"), and the Parent Company shall
pay
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all taxes reflected on such Final Company Federal Tax Returns. The Company shall
prepare such Final Company Federal Tax Returns and shall file the same with the
appropriate governmental authorities.
(b) The Parent Company and the Purchasers acknowledge and agree that
the state and local income and franchise tax, real and personal property tax,
sales and use tax, premium tax, excise tax and any other tax returns (other than
the Final Company Federal Tax Returns) required to be filed in respect of all
fiscal periods through the date of the Closing (the "NON-FEDERAL COMPANY TAX
RETURNS") will be filed by the Company and, subject to Article 10 of this
Agreement, the Company shall pay all taxes reflected on the Non-Federal Company
Tax Returns. The Company shall prepare and file the same with the appropriate
governmental authorities.
(c) The Parent Company shall report the transactions contemplated by
this Agreement in a manner consistent with the Company for accounting, tax, and
reporting purposes whether public or private.
SECTION 6.07. CERTAIN DISCLOSURES. Without the prior written consent of
the Company, the Parent Company shall not, and shall not permit any of its
directors, officers, Subsidiaries or Affiliates to, prior to the earlier of (x)
the date which is six months after the date of the Closing and (y) the date
which is 30 days after the completion of the Initial Public Offering, make any
public announcement of any plan or proposal relating to, the sale of healthcare
or other products through the Internet or any business venture or transaction
with any other Person (other than the Company) concerning any such business
activity.
SECTION 6.08. FORGIVENESS OF INTERCOMPANY DEBT. Prior to the Closing,
the Parent Company shall forgive and cancel all Indebtedness of the Company owed
to the Parent Company in excess of $6,400,000 (as referred to in Section 2.02),
and the Parent Company shall provide the Purchasers with reasonable evidence of
such forgiveness.
ARTICLE 7
COVENANTS OF PARENT COMPANY, COMPANY AND PURCHASERS
SECTION 7.01. BEST EFFORTS; FURTHER ASSURANCES. Subject to the terms
and conditions of this Agreement, the Company, the Parent Company and each
Purchaser will use their best efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary or desirable under
applicable laws
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and regulations to consummate the transactions contemplated by this Agreement.
The Parent Company and each Purchaser agree, and the Parent Company, prior to
the Closing, and each Purchaser, after the Closing, agree to cause the Company
to execute and deliver such other documents, certificates, agreements and other
writings and to take such other actions as may be necessary or desirable in
order to consummate or implement expeditiously the transactions contemplated by
this Agreement.
ARTICLE 8
REGISTRATION RIGHTS
SECTION 8.01. PIGGY-BACK REGISTRATIONS. If at any time the Company
shall determine to register for its own account or the account of others under
the Securities Act (including pursuant to the Initial Public Offering or a
demand for registration of any stockholder of the Company) any of its equity
securities, other than on Form S-4 or Form S-8 or their then equivalents
relating to shares of Common Stock to be issued solely in connection with any
acquisition of any entity or business or shares of Common Stock issuable in
connection with stock option or other employee benefit plans or any other form
for registration of securities under the Securities Act which does not permit
registration of securities for sales by selling stockholders, it shall send to
each holder of Registrable Shares who is entitled to registration rights under
this Section 8.01 written notice of such determination and, if within thirty
(30) days after receipt of such notice, such holder shall so request in writing,
the Company shall use its best efforts to include in such registration statement
all or any part of the Registrable Shares such holder requests to be registered,
except that if, in connection with the Initial Public Offering the managing
underwriter shall impose a limitation on the number of shares of such Common
Stock which may be included in the registration statement because, in its
judgment, such limitation is necessary to effect an orderly public distribution,
then the Company shall be obligated to include in such registration statement
only such portion of the Registrable Shares with respect to which such holder
has requested inclusion hereunder. Any exclusion of Registrable Shares shall be
made pro rata among the Purchasers (or their assigns who are entitled to and
have requested registration under this Section 8.01) seeking to include
Registrable Shares, in proportion to the number of Registrable Shares sought to
be included by such Purchasers (or their assigns who are entitled to and have
requested registration under this Section 8.01); PROVIDED, HOWEVER, that the
Company shall not exclude any Registrable Shares unless the Company has first
excluded all outstanding securities the holders of which are not entitled by
right under this Agreement to inclusion of securities in such registration
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statement; and PROVIDED FURTHER, however, that any exclusion of Registrable
Shares shall be made pro rata with holders of other securities having the right
pari passu with the holders of Registrable Shares to include such securities in
the registration statement. No incidental right under this Section 8.01 shall be
construed to limit any registration required under Section 8.02. The obligations
of the Company to each Purchaser under this Section 8.01 may be waived by such
Purchaser at any time and shall expire on the seventh anniversary following the
consummation of an Initial Public Offering or at any time after the Company has
effected five registrations for the benefit of such Purchaser under this Section
8.01; PROVIDED, HOWEVER, that if any such Purchaser (or its assigns who are
entitled to and have requested registration under this Section 8.01) shall have
had any Registrable Shares excluded from any registration statement in
accordance with this Section 8.01, such Purchaser or such assign shall be
entitled to include in an additional registration statement filed by the Company
the Registrable Shares so excluded; PROVIDED FURTHER, however, that if, at the
time the Company would otherwise be required to register Registrable Shares
under this Section 8.01, any Purchaser (or any such assign) is entitled pursuant
to Rule 144(k) under the Securities Act (or any successor or replacement
provision) to sell all Registrable Shares held by such Purchaser (or such
assign) within any period of three months without the giving of any notice and
without restriction on the manner of sale thereof, then the Company shall not be
obligated to include such Purchaser's (or such assign's) Registrable Shares in
such registration statement pursuant to this Section 8.01. The Company shall not
grant rights of the kind provided in this Section 8.01 to any Person which
rights would entitle such Person to include any securities of the Company held
by such Person in a registration statement unless all Registrable Securities
which the Purchasers (and all such assigns) are entitled to include and wish to
include in such registration statement have been so included.
SECTION 8.02. DEMAND REGISTRATION. If at any time after the earlier of
(A) the Initial Public Offering or (B) provided that such holders include
Sudbury, the date that is two years after the date of the Closing, holders of
Registrable Shares who are entitled to registration rights under this Section
8.02 shall notify the Company in writing that it or they intend to offer or
cause to be offered for public sale Registrable Shares held by such holders
which shares (A) constitute at least twenty percent (20%) of the aggregate of
the Registrable Shares, or (B) have an anticipated aggregate offering price, net
of underwriting discounts and commissions, equal to more than $1,500,000, based
on the market price of the shares of Common Stock at the time such holders
notify the Company, if a public trading market for shares of Common Stock exists
at such time, or based on the written advice (a copy of which shall be furnished
to the Company) of a securities underwriting firm retained by such holders, if
no such public trading market exists at such time, then the Company will so
notify all holders of Registrable Shares.
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Upon written request of any holder of Registrable Shares given within fifteen
(15) days after the receipt by such holder from the Company of such
notification, the Company will cause such of the Registrable Shares as may be
requested by any holder thereof (including the holder or holders giving the
initial notice of intent to offer) to be registered under the Securities Act as
expeditiously as possible. The Company shall not be required to file a
registration statement with the Commission pursuant to this Section 8.02 at any
time while another registration statement (other than on Form S-3, S-4 or S-8 or
their then equivalents) of the Company has been filed with the Commission and is
not yet effective or within three months (or such longer period imposed by
underwriters in accordance with Section 8.12) after the effective date of
another registration statement (other than on Form S-3, S-4 or S-8 or their then
equivalents) filed by the Company with the Commission. The Company shall not be
required to effect more than one registration during any twelve (12) month
period pursuant to this Section 8.02 and three such registrations in the
aggregate. Notwithstanding any other provision of this Agreement, in addition to
the three registrations hereinabove provided in this Section 8.02, if any
Purchaser at the time is an "AFFILIATE" (as defined in Rule 144 under the
Securities Act) of the Company, such Purchaser shall be entitled upon request to
the Company to one additional registration hereunder for Registrable Shares held
by such Purchaser and all other Purchasers entitled to include shares in such
additional Registration Statement. Such additional registration provided for in
the preceding sentence shall otherwise be subject to the terms and provisions of
this Agreement, except that the Company shall include in such registration only
Registrable Shares of such Purchaser. Notwithstanding any other provision of
this Section 8.02, if at the time the Company would otherwise be required to
register Registrable Shares under this Section 8.02, any holder of Registrable
Shares who is entitled to registration rights under this Section 8.02 is
entitled pursuant to Rule 144(k) under the Securities Act (or any successor or
replacement provision) to sell all Registrable Shares held by such holder within
any period of three months without the giving of any notice and without
restriction on the manner of sale thereof, then the Company shall not be
obligated to include such holder's Registrable Shares in any such registration
statement pursuant to this Section 8.02.
SECTION 8.03. REGISTRATIONS ON FORM S-3. In addition to the rights
provided the holders of Registrable Shares in Sections 8.01 and 8.02, if the
registration of Registrable Shares under the Securities Act can be effected on
Form S-3 (or any similar form promulgated by the Commission), then upon the
written request of one or more holders of Registrable Shares who are entitled to
registration rights under this Section 8.03 for the registration of a number of
Registrable Shares held by such holders which have an anticipated aggregate
offering price, net of underwriting discounts and commissions, of at least
$500,000, based on the market price at the time such request is made, the
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Company will so notify each holder of Registrable Shares, including each holder
who has a right to acquire Registrable Shares, and then will, as expeditiously
as possible, effect qualification and registration under the Securities Act on
Form S- 3 (or such similar form) of all or such portion of the Registrable
Shares as the holder or holders shall specify in the initial request to the
Company or upon written request of a holder to the Company given within fifteen
(15) days after the receipt by such holder from the Company of such
notification; PROVIDED, HOWEVER, the Company shall not be required to effect a
registration pursuant to this Section 8.03 unless the market value of the
Registrable Shares to be sold in any such offering, less underwriting discounts
and commissions, shall be estimated to be at least $500,000 at the time of
filing such registration statement; and PROVIDED FURTHER, however, that the
Company shall not be required to effect more than one (1) registration during
any twelve (12) month period pursuant to this Section 8.03 and three (3) such
registrations in the aggregate. Subject to the foregoing, no registration of
Registrable Shares pursuant to this Section 8.03 shall be construed to limit any
registration required under (or to count against the maximum number of
registrations under) Section 8.01 or 8.02.
SECTION 8.04. EFFECTIVENESS. The Company will use its best efforts to
maintain the effectiveness for up to 180 days (or such shorter period of time as
the holders of the Registrable Shares need to complete the distribution of the
registered offering, or two years in the case of a "shelf" registration
statement on Form S-3 or any similar form promulgated by the Commission) of any
registration statement pursuant to which any of the Registrable Shares are being
offered, and from time to time will amend or supplement such registration
statement and the prospectus contained therein to the extent necessary to comply
with the Securities Act and any applicable state securities statute or
regulation. The Company will also provide each holder of Registrable Shares with
as many copies of the prospectus contained in any such registration statement as
it may reasonably request.
SECTION 8.05. INDEMNIFICATION BY THE COMPANY. (a) In the event that the
Company registers any of the Registrable Shares under the Securities Act, the
Company will indemnify and hold harmless each holder and each underwriter of the
Registrable Shares (including their respective officers, directors, affiliates
and partners) so registered (including any broker or dealer through whom such
shares may be sold) and each Person, if any, who controls such holder or any
such underwriter within the meaning of Section 15 of the Securities Act, from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several, to which they or any of them become subject under the Securities
Act, applicable state securities laws or under any other statute or at common
law or otherwise, as incurred, and, except as hereinafter provided, will
reimburse each such holder, each such underwriter and each such controlling
Person, if any, for
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any legal or other expenses reasonably incurred by them or any of them in
connection with investigating or defending any actions whether or not resulting
in any liability, as incurred, insofar as such losses, claims, damages,
expenses, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement, in any preliminary or amended preliminary prospectus or
in the final prospectus (or the registration statement or prospectus as from
time to time amended or supplemented by the Company) or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act or any state securities laws
applicable to the Company and relating to action or inaction required of the
Company in connection with such registration, unless in the case of such holder,
underwriter or controlling Person (i) such untrue statement or alleged untrue
statement or omission or alleged omission was made in such registration
statement, preliminary or amended preliminary prospectus or final prospectus in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by such holder (in the case of indemnification
of such holder), any such underwriter (in the case of indemnification of such
underwriter) or any such controlling Person (in the case of indemnification of
such controlling Person) expressly for use therein, or unless (ii) in the case
of a sale directly by such holder of Registrable Shares (including a sale of
such Registrable Shares through any underwriter retained by such holder of
Registrable Shares to engage in a distribution solely on behalf of such holder
of Registrable Shares), such untrue statement or alleged untrue statement or
omission or alleged omission was contained in a preliminary prospectus and
corrected in a final or amended prospectus copies of which were delivered to
such holder of Registrable Shares or such underwriter on a timely basis, and
such holder of Registrable Shares failed to deliver a copy of the final or
amended prospectus at or prior to the confirmation for the sale of the
Registrable Shares to the person asserting any such loss, claim, damage or
liability in any case where such delivery is required by the Securities Act.
(b) Promptly after receipt by any holder of Registrable Shares, any
such underwriter or any such controlling Person of notice of the commencement of
any action in respect of which indemnity may be sought against the Company, such
holder of Registrable Shares, or such underwriter or such controlling Person, as
the case may be, will notify the Company in writing of the commencement thereof
(PROVIDED, that failure by any such Person to so notify the Company shall not
relieve the Company from any liability it may have hereunder to such Person,
except to the extent the Company has been materially prejudiced by such Person's
failure to notify the Company, and failure by any such Person to so notify the
Company shall not relieve the Company from any liability it may have hereunder
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to any other Person entitled to claim indemnity or contribution hereunder) and,
subject to the provisions hereinafter stated, the Company shall be entitled to
assume the defense of such action (including the employment of counsel, who
shall be counsel reasonably satisfactory to such holder of Registrable Shares,
such underwriter or such controlling Person, as the case may be), and the
payment of expenses insofar as such action shall relate to any alleged liability
in respect of which indemnity may be sought against the Company.
(c) Such holder of Registrable Shares, any such underwriter or any
such controlling Person shall have the right to employ separate counsel in any
such action and to participate in the defense thereof but the fees and expenses
of such counsel subsequent to any assumption of the defense by the Company shall
not be at the expense of the Company unless the employment of such counsel has
been specifically authorized in writing by the Company. The Company shall not be
liable to indemnify any Person for any settlement of any such loss, claim,
damage, expense, liability or action effected without the Company's written
consent or unless the counsel employed by the Company has a conflict of interest
in representing both the Company and any one or more of such holders, any such
underwriter or any such controlling persons or in the written opinion of counsel
there are or may be defenses available to any such holder, underwriter or
controlling person that are different than those available to the Company, in
either of which cases the Company shall be liable for the fees and expenses of
one such counsel (and one local counsel in each jurisdiction in which an action
is pending) for all such holders, underwriters and controlling persons. The
Company shall not, except with the written approval of each party being
indemnified under this Section 8.05, 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 the parties being so indemnified of an
unconditional release from all liability in respect to such claim or litigation.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which any holder of
Registrable Shares exercising rights under this Article 8, or any controlling
Person of any such holder, makes a claim for indemnification pursuant to this
Section 8.05 but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification may
not be enforced in such case notwithstanding the fact that this Section 8.05
provides for indemnification in such case, then, the Company and such holder or
such controlling Person will contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (after contribution from others) in
such proportion as is appropriate to reflect the relative fault of the Company
on the one hand and of the holder of Registrable Shares or such controlling
Person, as the case may be, on the
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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. The relative fault of the Company on the one hand and of the
holder of Registrable Shares or such controlling Person, 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
on the one hand or by the holder of Registrable Shares or such controlling
Person, as the case may be, on the other, and each party's relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; PROVIDED, HOWEVER, that, in any such case, (A) no such
holder or controlling Person will be required to contribute any amount in excess
of the public offering price of all such Registrable Shares offered by it
pursuant to such registration statement, net of any underwriting discounts or
commissions paid by such holder or controlling Person; and (B) no person or
entity guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
SECTION 8.06. INDEMNIFICATION BY HOLDERS OF REGISTRABLE SHARES. (a)In
the event that the Company registers any of the Registrable Shares under the
Securities Act, each holder of the Registrable Shares so registered will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed or otherwise participated in the preparation of the
registration statement, each underwriter of the Registrable Shares so registered
(including any broker or dealer through whom such of the shares may be sold) and
each Person, if any, who controls the Company within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages,
expenses or liabilities, joint or several, to which they or any of them may
become subject under the Securities Act, applicable state securities laws or
under any other statute or at common law or otherwise, and, except as
hereinafter provided, will reimburse the Company and each such director,
officer, underwriter or controlling Person for any legal or other expenses
reasonably incurred by them or any of them in connection with investigating or
defending any actions whether or not resulting in any liability, insofar as such
losses, claims, damages, expenses, liabilities or actions arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement, in any preliminary or amended
preliminary prospectus or in the final prospectus (or in the registration
statement or prospectus as from time to time amended or supplemented) or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, but only insofar as any such statement or
omission was made in reliance upon and in conformity with
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information furnished in writing to the Company in connection therewith by such
holder of Registrable Shares expressly for use therein; PROVIDED, HOWEVER, that
such holder's obligations hereunder shall be limited to an amount equal to the
aggregate public offering price of the Registrable Shares sold by such holder in
such registration, net of any underwriting discounts or commissions paid by such
holder.
(b) Promptly after receipt of notice of the commencement of any action
in respect of which indemnity may be sought against such holder of Registrable
Shares hereunder, the Company will notify such holder of Registrable Shares in
writing of the commencement thereof (PROVIDED, that failure by the Company to so
notify such holder shall not relieve such holder from any liability it may have
hereunder to any other Person entitled to claim indemnity or contribution
hereunder), and such holder of Registrable Shares shall, subject to the
provisions hereinafter stated, be entitled to assume the defense of such action
(including the employment of counsel, who shall be counsel reasonably
satisfactory to the Company) and the payment of expenses insofar as such action
shall relate to the alleged liability in respect of which indemnity may be
sought against such holder of Registrable Shares. The Company and each such
director, officer, underwriter or controlling Person shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel subsequent to any assumption
of the defense by such holder of Registrable Shares shall not be at the expense
of such holder of Registrable Shares unless employment of such counsel has been
specifically authorized in writing by such holder of Registrable Shares. Such
holder of Registrable Shares shall not be liable to indemnify any Person for any
settlement of any such loss, claim, damage, expense, or liability or action
effected without such holder's written consent.
(c) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which the Company or another
Person entitled to indemnification pursuant to this Section 8.06 makes a claim
for indemnification pursuant to this Section 8.06, but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding that this Section 8.06 provides for indemnification, in such
case, then, the Company and such holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion as is appropriate to reflect the relative fault
of the Company on the one hand and of the holder of Registrable Shares 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. The relative fault of the Company on the one hand and of the
holder of Registrable Shares on the other shall be
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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 on the one hand or
by the holder of Registrable Shares on the other, and each party's relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission; PROVIDED, HOWEVER, that, in any such case, (A) no
such holder will be required to contribute any amount in excess of the public
offering price of all such Registrable Shares offered by it pursuant to such
registration statement, net of any underwriting discounts or commissions paid by
such holder; and (B) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation.
SECTION 8.07. EXCHANGE ACT REGISTRATION. If the Company at any time
shall list any class of equity securities of the type which may be issued upon
the conversion of the Series A Preferred Stock or exercise of the Warrants on
any national securities exchange or obtain authorization for shares of such
class to be quoted on an automated quotation system and shall register such
class of equity securities under the Exchange Act, the Company will, at its
expense, simultaneously list on such exchange or qualify for trading on such
automated quotation system and maintain such listing or authorization of, the
shares of such class. If the Company becomes subject to the reporting
requirements of either Section 13 or Section 15(d) of the Exchange Act, the
Company will use its best efforts to timely file with the Commission such
information as the Commission may require under either of said Sections; and in
such event, the Company shall use its best efforts to take all action as may be
required as a condition to the availability of Rule 144 or Rule 144A under the
Securities Act (or any successor exemptive rule hereafter in effect) with
respect to such Class A Common Stock. The Company shall furnish to any holder of
Registrable Shares forthwith upon request (i) a written statement by the Company
as to its compliance with the reporting requirements of Rule 144, (ii) a copy of
the most recent annual or quarterly report of the Company as filed with the
Commission, and (iii) such other reports and documents as a holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing a holder to sell any such Registrable Shares without
registration. After the occurrence of the Initial Public Offering, the Company
agrees to use its commercially reasonable best efforts to facilitate and
expedite transfers of the Shares pursuant to Rule 144 under the Securities Act,
which efforts shall include timely notice to its transfer agent to expedite such
transfers of Shares.
SECTION 8.08. DAMAGES. The Company recognizes and agrees that the
holder of Registrable Shares will not have an adequate remedy if the Company
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fails to comply with this Article 8 or Article 9 hereof and that damages may not
be readily ascertainable, and the Company expressly agrees that, in the event of
such failure, the holders shall be entitled to obtain specific performance of
the Company's obligations and to obtain immediate injunctive relief and it shall
not oppose an application by the holder of Registrable Shares or any other
Person entitled to the benefits of this Article 8 requiring specific performance
of any and all provisions hereof or enjoining the Company from continuing to
commit any such breach of this Article 8 or Article 9 hereof, as the case may
be.
SECTION 8.09. FURTHER OBLIGATIONS OF THE COMPANY. Whenever under the
preceding Sections of this Article 8, the Company is required hereunder to
register Registrable Shares, it agrees that it shall also do the following:
(a) Furnish to each selling holder of Registrable Shares such copies
of each preliminary and final prospectus and such other documents as said holder
may reasonably request to facilitate the public offering of its Registrable
Shares;
(b) Use its best efforts to register or qualify the Registrable Shares
covered by said registration statement under the applicable securities or "blue
sky" laws of such jurisdictions as any selling holder may reasonably request;
PROVIDED, HOWEVER, that the Company shall not be obligated to qualify to do
business in any jurisdictions where it is not then so qualified or to take any
action which would subject it to the service of process in suits other than
those arising out of the offer or sale of the securities covered by the
registration statement in any jurisdiction where it is not then so subject;
(c) Furnish to each selling holder of Registrable Shares a signed
counterpart, addressed to the selling holders of Registrable Shares, of
(i) an opinion of counsel for the Company, dated the effective
date of the registration statement, and
(ii) "comfort" letters signed by the Company's independent public
accountants who have examined and reported on the Company's financial
statements included in the registration statement, to the extent
permitted by the standards of the American Institute of Certified
Public Accountants, covering substantially the same matters with
respect to the registration statement (and the prospectus included
therein) and (in the case of the accountants' "comfort" letters) with
respect to events subsequent to the date of the financial statements,
as are customarily covered in opinions of issuer's counsel and in
accountants' "comfort" letters delivered to the underwriters in
underwritten public offerings of securities, to the extent that the
Company is required to deliver or cause
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the delivery of such opinion or "comfort" letters to the underwriters
in an underwritten public offering of securities;
(d) Permit each selling holder of Registrable Shares or such holders
counsel or other representatives to inspect and copy such corporate documents
and records as may reasonably be requested by them;
(e) Furnish to each selling holder of Registrable Shares a copy of all
documents filed with and all correspondence from or to the Commission in
connection with any such offering of securities;
(f) Use its commercially reasonable best efforts to insure the
obtaining of all necessary approvals from the NASD;
(g) Cause all Registrable Shares so registered pursuant hereto to be
listed on any securities exchange or authorized for quotation in any automated
quotation system on or in which outstanding shares of such class are listed or
authorized for quotation at the time such registration is declared effective by
the Commission if the listing of such Registrable Shares is permitted under the
rules and regulations of such exchange or system in effect at such time;
(h) Designate a transfer agent and registrar for the class or classes
of shares which include such Registrable Shares and obtain a CUSIP number for
such class or classes of shares, in each case not later than the date such
registration is declared effective by the Commission; and
(i) Otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security holders,
as soon as reasonably practicable, an earnings statement covering the period of
at least twelve months, but not more than eighteen months, beginning with the
first month after the effective date of the registration statement covering the
Initial Public Offering, which earnings statement shall satisfy the provisions
of Section 11(a) of the Securities Act and Rule 158 thereunder.
Whenever under the preceding Sections of this Article 8 the holders of
Registrable Shares are registering such shares pursuant to any registration
statement, each such holder agrees to (i) timely provide to the Company, at its
request, such information in writing and materials as it may reasonably request
in order to effect the registration of such Registrable Shares and (ii) convert
all shares of Series A Preferred Stock into the shares of Common Stock included
in any registration statement, such conversion to be effective at or before, and
contingent upon, the closing of such offering pursuant to such registration
statement.
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SECTION 8.10. EXPENSES. In the case of each registration effected under
Section 8.01, 8.02 or 8.03, the Company shall bear all reasonable costs and
expenses of each such registration on behalf of the selling holders of
Registrable Shares, including, but not limited to, the Company's printing, legal
and accounting fees and expenses, Commission and NASD filing fees and "Blue Sky"
fees; PROVIDED, HOWEVER, that the Company shall have no obligation to pay or
otherwise bear any portion of the underwriters' commissions or discounts
attributable to the Registrable Shares being offered and sold by the holders of
the Registrable Shares, the fees and expenses of counsel for the selling holders
of Registrable Shares in connection with the registration of the Registrable
Shares or stock transfer taxes imposed on the selling holder of Registrable
Shares. The Company shall pay all expenses of the holders of the Registrable
Shares in connection with any registration initiated pursuant to this Article 8
which is withdrawn or abandoned at the request of the Company, except if such
withdrawal or abandonment is caused by the fraud, material misstatement or
omission of a material fact by any holder of Registrable Shares to be included
in such registration, in which case such expenses shall be paid by the holder or
holders who have caused such withdrawal or abandonment. If a registration
requested by holders of Registrable Shares pursuant to Section 8.02 shall be
withdrawn prior to becoming effective under the Securities Act at the request of
the holders of all Registrable Shares included therein, and in connection with
such withdrawal such holders agree that, notwithstanding such withdrawal, for
purposes of this Agreement such withdrawn registration shall satisfy the
Company's obligation for one of the registrations which the Company is required
to provide pursuant to Section 8.02, then the Company shall pay the expenses of
such registration to the extent provided in the first sentence of this Section
8.10; PROVIDED, HOWEVER, that if such registration statement is withdrawn by
reason of the fact that, prior to effectiveness of such registration statement,
the registration statement filed or to be filed with the Commission contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, and the Company shall have failed, within a reasonable time after
receipt of written notice thereof from any such holder to take reasonable
measures to correct such deficiency, such holders shall not be responsible for
the costs of such registration (other than expenses described in the proviso to
the first sentence of this Section 8.10).
SECTION 8.11. TRANSFERABILITY. For all purposes of Article 8 of this
Agreement, the holder of Registrable Shares shall include not only the Purchaser
thereof but (i) any assignee or transferee of the Registrable Shares who
acquires or becomes the beneficial owner of Registrable Shares and who is not a
competitor of the Company, or (ii) any assignee or transferee of a Purchaser
which is a partnership if such assignee or transferee is a general or limited
partner of such Purchaser, or any assignee or transferee of a Purchaser which is
a limited liability
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company if such assignee or transferee is a member of such Purchaser; PROVIDED,
HOWEVER, that such transfer of Registrable Shares is made in accordance with
applicable securities laws and that such assignee or transferee agrees in
writing to be bound by all of the provisions of this Agreement, including,
without limitation, Section 8.12 hereof.
SECTION 8.12. "LOCK-UP" AGREEMENT. Each holder of Registrable Shares
agrees, if so requested by the Company and an underwriter of Common Stock or
other securities of the Company, not to sell, grant any option or right to buy
or sell, or otherwise transfer or dispose of in any manner, whether in
privately- negotiated or open-market transactions, any Common Stock or other
securities of the Company held by it or which it has the right to acquire during
the 180-day period following the effective date of a registration statement
filed with the Commission in connection with such offering or such shorter
period as such underwriter shall have advised the Company in writing is adequate
to permit the successful and orderly distribution of such Common Stock or other
securities and which is imposed on other stockholders of the Company who are not
holders of Registrable Shares; PROVIDED, HOWEVER, that such "lock-up" agreement
shall be in writing and in form and substance reasonably satisfactory to the
Company and such underwriter. The Company may impose stop-transfer instructions
with respect to the shares subject to the foregoing restrictions until the end
of said 180- day or shorter period. The Company shall not issue any shares of
Common Stock or any other class of common stock, or any securities convertible
into, exchangeable for, or otherwise entitling the holder to acquire, shares of
Common Stock or such other class of common stock (other than in an underwritten
public offering of securities registered under the Securities Act) unless the
holder thereof agrees in writing with the Company to be bound by restrictions on
the same terms as this Section 8.12 and agrees not to transfer such securities
(other than in an offering of such securities registered under the Securities
Act) to any transferee unless such transferee likewise agrees in writing with
the Company at or prior to the time of such transfer. In connection with the
preparation and filing of any such registration statement, the Company shall
enforce the obligations of its stockholders (and any Person who shall have the
right to acquire capital stock of the Company) who have agreed with the Company
to enter into "lock-up" or "market stand-off" agreements.
SECTION 8.13. MERGERS, ETC. The Company shall not, directly or
indirectly, enter into any merger, consolidation or reorganization in which the
Company shall not be the surviving corporation unless the proposed surviving
corporation shall, prior to such merger, consolidation or reorganization, agree
in writing to assume the obligations of the Company under this Article 8 of this
Agreement, and for that purpose references hereunder to Registrable Shares shall
be deemed to be references to the securities which the Purchasers would be
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entitled to receive in exchange for Registrable Shares under any such merger,
consolidation or reorganization; PROVIDED, HOWEVER, that the provisions of this
Section 8.12 shall not apply in the event of any merger, consolidation, or
reorganization in which the Company is not the surviving corporation if all
stockholders are entitled to receive in exchange for their Registrable Shares
consideration consisting solely of (i) cash, (ii) securities of the acquiring
corporation which may be immediately sold to the public without further
registration under the Securities Act, and/or (iii) securities of the acquiring
corporation which the acquiring corporation has agreed to register within 90
days of completion of the transaction for resale to the public pursuant to the
Securities Act on terms comparable to this Article 8.
ARTICLE 9
RIGHTS OF FIRST REFUSAL
SECTION 9.01. RIGHTS OF FIRST REFUSAL. Subject to Section 9.05, before
the Company shall issue, sell or exchange, agree or obligate itself to issue,
sell or exchange, or reserve or set aside for issuance, sale or exchange
(unless, in the case of an agreement, obligation, reservation or setting aside,
the same is expressly subject to the rights of the Purchasers under the
provisions of this Article 9), any (i) shares of Common Stock, (ii) any other
equity security of the Company, including without limitation, shares of any
series of any class of the Company's preferred stock, (iii) any convertible or
exchangeable debt security of the Company, including without limitation, any
debt security which by its terms is convertible into or exchangeable for any
equity security of the Company, (iv) any security of the Company that is a
combination of debt and equity, or (v) any option, warrant or other right to
subscribe for, purchase or otherwise acquire any such equity security or any
such debt security of the Company, the Company shall, in each case, first offer
to sell such securities (the "OFFERED SECURITIES") to those Purchasers then
holding Shares as follows: The Company shall offer to sell to each Purchaser (a)
that portion of the Offered Securities as the number of Shares then held by a
Purchaser bears to the sum of (i) the total number of Shares held by all
Purchasers plus (ii) the total number of shares of capital stock of the Company
(other than the Shares) in respect of which the holders (the "OTHER HOLDERS")
are entitled to purchase Offered Securities on the same or similar terms to this
Article (the "BASIC AMOUNT"), and (b) such additional portion of the Offered
Securities pro rata in accordance with the number of Shares held by a Purchaser
should any other Purchaser subscribe for less than such other Purchaser's Basic
Amount entitled to purchase (collectively, the "UNDERSUBSCRIPTION AMOUNT"), at a
price and on such other terms as shall have
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been specified by the Company in writing delivered to the Purchasers (the
"OFFER"), which Offer by its terms shall remain open and irrevocable for a
period of thirty (30) days from receipt by each Purchaser of the Offer.
SECTION 9.02. NOTICE OF APPEARANCE. Notice of each Purchaser's
intention to accept, in whole or in part, any Offer made pursuant to Section
9.01 shall be evidenced by a writing, in form, scope and substance reasonably
satisfactory to the Company, signed by such Purchaser and delivered to the
Company prior to the end of the 30-day period of such Offer, setting forth such
of the Purchaser's Basic Amount as such Purchaser elects to purchase and, if
such Purchaser shall elect to purchase all of its Basic Amount, such
Undersubscription Amount as such Purchaser shall elect to purchase (the "NOTICE
OF ACCEPTANCE"). If the sum of (i) the Basic Amounts subscribed for by all
Purchasers plus (ii) the total amount of Offered Securities subscribed for by
all Other Holders is less than the total Offered Securities, then each Purchaser
who has set forth an Undersubscription Amount in its Notice of Acceptance shall
purchase, in addition to the Basic Amount subscribed for, all Undersubscription
Amounts it has subscribed for; PROVIDED, HOWEVER, that should the sum of (i) the
Undersubscription Amounts subscribed for plus (ii) the amounts subscribed for by
Other Holders pursuant to rights similar to the rights of Purchasers to
subscribe for Undersubscription Amounts exceed the amount by which the Offered
Securities exceed the sum of (i) the Basic Amounts subscribed for plus (ii) the
amounts subscribed for by Other Holders pursuant to rights similar to the rights
of Purchasers to subscribe for Undersubscription Amounts (such excess, the
"AVAILABLE UNDERSUBSCRIPTION AMOUNT"), each Purchaser who has subscribed for any
Undersubscription Amount shall purchase only that portion of the Available
Undersubscription Amount as the Undersubscription Amount subscribed for by such
Purchaser bears to the sum of (i) the total Undersubscription Amounts subscribed
for by all Purchasers plus (ii) the amounts subscribed for by Other Holders
pursuant to rights similar to the rights of Purchasers to subscribe for
Undersubscription Amounts, subject to rounding up by the Board of Directors to
the extent it reasonably deems necessary.
SECTION 9.03. CONDITIONS TO ACCEPTANCE AND PURCHASE. (a) PERMITTED
SALES OF REFUSED SECURITIES. In the event that Notices of Acceptance given by
the Purchasers and notices to purchase Offered Securities by Other Holders are
insufficient for the purchase of all the Offered Securities, the Company shall
have ninety (90) days from the end of said 30-day period to sell any such
Offered Securities as to which a Notice of Acceptance has not been given by the
Purchasers or such notice has not been given by an Other Holder (the "REFUSED
SECURITIES") to the Person or Persons specified in the Offer, but only for an
amount and kind (or the cash equivalent thereof) of consideration and otherwise
in all respects upon the terms and conditions, including, without limitation,
unit
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price and interest rates, which are no more favorable, in the aggregate, to such
other Person or Persons or less favorable to the Company (as determined in good
faith by the Board of Directors) than those set forth in the Offer.
(b) REDUCTION IN AMOUNT OF OFFERED SECURITIES. In the event the
Company shall propose to sell less than all of the Refused Securities (any such
sale to be in the manner and on the terms specified in Section 9.03(a) above),
then each Purchaser may reduce the number of shares or other units of the
Offered Securities specified in its respective Notices of Acceptance to an
amount which shall be not less than the amount of the Offered Securities which
the Purchaser elected to purchase pursuant to Section 9.02 multiplied by a
fraction, (i) the numerator of which shall be the amount of Offered Securities
which the Company actually proposes to sell, and (ii) the denominator of which
shall be the amount of all Offered Securities. In the event that any Purchaser
so elects to reduce the number or amount of Offered Securities specified in its
respective Notices of Acceptance, the Company may not sell or otherwise dispose
of more than the reduced amount of the Offered Securities until such securities
have again been offered to the Purchasers in accordance with Section 9.01.
(c) CLOSING. At the closing of the sale to such other Person or
Persons of all or less than all the Refused Securities, the Purchasers shall
purchase from the Company, and the Company shall sell to the Purchasers, the
number of Offered Securities specified in the Notices of Acceptance, as reduced
pursuant to Section 9.03(b) if the Purchasers have so elected, upon the terms
and conditions specified in the Offer, including, without limitation, payment in
full for such Offered Securities. The purchase by the Purchasers of any Offered
Securities is subject in all cases to the preparation, execution and delivery by
the Company and the Purchasers of a purchase agreement relating to such Offered
Securities in form and substance as is offered to the purchasers or proposed
purchasers of the Offered Securities who are not Purchasers.
SECTION 9.04. FURTHER SALE. In each case, any Offered Securities not
purchased by the Purchasers, Other Holders or other Person or Persons in
accordance with Section 9.03 may not be sold or otherwise disposed of until they
are again offered to the Purchasers under the procedures specified in Section
9.01, 9.02 and 9.03.
SECTION 9.05. TERMINATION AND WAIVER OF RIGHT OF FIRST REFUSAL. The
rights of a Purchaser under this Article 9 shall terminate immediately prior to
the effectiveness of the registration statement with respect to the Initial
Public Offering, but expressly conditioned on the consummation of the Initial
Public Offering. However, such right of a Purchaser under this Article 9 shall
survive any business combination or corporate reorganization or other
extraordinary
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corporate transaction, (including but not limited to a merger, consolidation or
sale of all or substantially all of the assets of the Company), except where the
the surviving entity pursuant to such transaction is a reporting company under
the Exchange Act and quoted on the Nasdaq Stock Market, Inc., the American Stock
Exchange or the New York Stock Exchange, Inc., or any successors to such
exchanges.
SECTION 9.06. EXCEPTIONS. The rights of the Purchasers under this
Article 9 shall not apply to:
(a) Common Stock issued as a stock dividend to holders of Common Stock
or upon any subdivision or combination of shares of Common Stock;
(b) preferred stock of a particular series issued as a dividend to
holders of preferred stock of such series or upon any subdivision or combination
of shares of preferred stock of such series;
(c) up to 1,900,000 shares of Common Stock, or options exercisable
therefor, issued after the date of this Agreement to directors, officers,
employees or consultants of the Company and any Subsidiary pursuant to any
qualified or non-qualified stock option plan or agreement, employee stock
ownership plan, employee benefit plan, stock purchase agreement, stock plan,
stock restriction agreement, or consulting agreement or such other options,
arrangements, agreements or plans approved by the compensation or similar
committee of the Board of Directors or, if no such committee exists, by the
Board of Directors of the Company;
(d) securities described in clause (i) through (v) of Section 9.01
which are to be issued as all or part of the consideration in a business
combination involving the acquisition by merger or otherwise by the Company of
all or part of the stock (or other equity interest), business or assets of
another Person; or
(e) shares of Common Stock issuable upon exercise of (i) the warrants
held by the Jacobs Family Members prior to the Closing, (ii) the warrants issued
to Tower Hill Securities, Inc. described in Section 12.04; (iii) the warrant for
the purchase of 600,000 shares of Common Stock at $4.68 per share to be issued
to an entity controlled by Keith Barish in connection with marketing services
performed by such entity; (iv) the warrant for the purchase of 250,000 shares at
$6.50 per share to be issued to Alexander Enterprise Holdings Corporation in
consideration for consulting services to be provided to the Company; and (v) the
AOL Warrant.
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The numerical limit set forth in the immediately preceding clause (c)
shall be subject to equitable adjustment in the event of any stock dividend,
stock split, combination, reorganization, recapitalization, reclassification or
other similar event.
ARTICLE 10
INDEMNIFICATION
SECTION 10.01. INDEMNIFICATION OF COMPANY. The Company hereby agrees to
indemnify and hold harmless the Purchasers and their respective officers,
directors and Affiliates (collectively, the "INDEMNIFIED PARTIES", and
individually, an "INDEMNIFIED PARTY") from and against any and all claims,
suits, actions, and proceedings, of any nature whatsoever ("CLAIMS") against any
of the Indemnified Parties which
(a) shall arise out of or result from:
(i) federal, state or local income tax, franchise tax, real and
personal property tax, sales and use tax, premium tax, excise tax,
withholding tax, unemployment tax and any other taxes of any state,
jurisdiction or the federal government, or any deficiencies, interest
or penalties imposed against the Company, the Parent Company or any
Purchaser in respect of, or measured by, the revenues, income,
earnings, profits or operations of the Company, in each case for any
period (or portion thereof) ending before the date of the Closing;
(ii) any representation, warranty, covenant, agreement or undertaking
made by the Company or the Parent Company in this Agreement or in any
certificate or other document furnished by the Company or the Parent
Company in connection with this Agreement or the Transactions
contemplated hereby being false or misleading in any material respect
when made or delivered, including, without limitation, inaccuracies in
the Financial Statements determined pursuant to the post-closing audit
provided in Article 11;
(iii) any amount for which the Company is liable which (A) relates to
any period of time prior to the date of the Closing, (B) is not
reserved against or reflected in the Balance Sheet of the Company set
forth in Schedule 4.08C attached hereto and in accordance with
generally accepted accounting principles should be reflected in such
balance sheet
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and (C) arises from or relates to any matter not disclosed to the
Purchasers in this Agreement;
and which in any such case referred to in this Section 10.01(a)
(b) results in or causes any Indemnified Party or the Company to
incur, sustain or suffer any damage, liability, loss, expense, assessment, tax,
penalty, judgment or deficiency of any nature whatsoever (including, without
limitation, reasonable attorneys' fees and disbursements) (individually an
"INDEMNIFIABLE LOSS" and collectively the "INDEMNIFIABLE LOSSES").
SECTION 10.02. TAX INDEMNIFICATION BY PARENT COMPANY. The Parent
Company hereby agrees to indemnify and hold harmless the Indemnified Parties and
the Company from and against all claims against any of the Indemnified Parties
or the Company which shall arise out of or result from any matter or event
covered by clause (i) of Section 10.01(a) and which results in or causes any
Indemnified Party or the Company to incur, sustain or suffer any Indemnifiable
Loss. All such Indemnifiable Losses shall be paid in cash to the Indemnified
Parties or the Company, as the case may be. The Parent Company's obligations
under this Section 10.02 shall be absolute and unconditional, without taking
into account any obligations, actions or failure to act of the Company pursuant
to Section 10.01 with respect to Claims arising under Section 10.01(a)(i).
SECTION 10.03. EXPIRATION OF INDEMNIFICATION OBLIGATIONS. The indemnity
contained in Section 10.01 shall expire two years after the date of the Closing;
PROVIDED, HOWEVER, that rights to indemnity based on the matters referred to in
Section 10.01(a)(i) shall expire six years after the date of filing of the Final
Company Federal Tax Returns; and PROVIDED, FURTHER, that any rights to
indemnification for specified Claims for which an Indemnified Party shall have
given written notice prior to the expiration of the foregoing periods shall
survive the expiration of such period.
SECTION 10.04. DEFENSE OF CLAIMS. Any Indemnified Party will give
prompt notice to the Parent Company of any Claim made (including, without
limitation, an audit by any taxing authority), of which such Indemnified Party
is aware and with respect to which the Parent Company may have liability under
the indemnification contained in Section 10.02, stating the nature and basis of
such Claim and, within ten days after receipt of any such notice, the Parent
Company shall notify the Indemnified Party that the Parent Company shall, at its
sole cost and expense, defend against any such Claim; PROVIDED, HOWEVER, that if
at any time following the Parent Company's assumption of such defense, any
Indemnified Party should determine that pursuing such defense is inadvisable,
such Indemnified Party may waive its rights to indemnification with respect to
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such Claim and require the Parent Company to settle such Claim at the sole cost
and expense of such Indemnified Party. If the Parent Company fails to so notify
each Indemnified Party, any one or more of the Indemnified Parties may, at the
sole cost and expense of the Parent Company, defend any such Claim. In the event
the Parent Company undertakes the defense of any Claim, it shall be entitled to
be represented by counsel of its own choosing. The parties agree to render to
each other such assistance as may reasonably be required in order to insure the
proper and adequate defense of any such Claim. Except as otherwise expressly
provided herein, the Parent Company shall have all of the Indemnified Parties'
rights with respect to any Claim for which any Indemnified Party is indemnified
pursuant to Sections 10.01 through 10.06, including, without limitation, the
right to commence its own action or to compromise or settle such Claim;
PROVIDED, HOWEVER, that any such Claim shall not be settled or compromised by
the Parent Company to the extent such settlement or compromise includes terms
binding on any Indemnified Party without the prior written consent of such
Indemnified Party, which consent shall not be unreasonably withheld. None of the
Indemnified Parties shall make any settlement or compromise of any Claims
covered by Section 10.02 without the prior written consent of the Parent
Company, which consent shall not be unreasonably withheld.
SECTION 10.05. STOCK INDEMNIFICATION. Each Purchaser may elect to
receive payment for any Indemnifiable Losses from the Company in the form of
newly issued shares of Common Stock in lieu of a cash payment. If the Purchasers
so elect, the Company shall issue, sell, transfer and deliver to such
Purchasers, severally pro rata based on the ratio of the number of Newly Issued
Shares purchased by each such Purchaser to the number of Newly Issued Shares
purchased by all such Purchasers, a number of shares of Common Stock equal to
the quotient obtained by dividing (i) the amount of the Indemnifiable Losses by
(ii) $4.68 (subject to equitable adjustment from time to time after the Closing
for stock splits, stock dividends, combinations, recapitalizations and similar
transactions). The foregoing provisions of this Section 10.05 are not in lieu of
but are in addition to any rights which any Indemnified Party, and any
obligations which the parties or any other person, may otherwise have. Except
for reducing the Company's obligation to pay Indemnifiable Losses in cash to the
extent such amounts are paid in stock, any compliance by any party with this
Section 10.05 shall not relieve such party from any liability it may otherwise
have.
SECTION 10.06. LIMITATIONS UPON INDEMNIFICATION. (a) The indemnity
payment obligations of the Company set forth in clauses (ii) and (iii) of
Section 10.01(a) shall be effective only after the aggregate amount of
Indemnifiable Losses under such indemnity obligations exceeds $250,000) in which
case the Company shall indemnify all amounts in excess of $250,000.
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(b) The indemnity payment obligations of the Company set forth in
Section 10.05 shall be effective only after the aggregate amount of
Indemnifiable Losses under this Article 10 exceeds $500,000 in which case the
Company shall indemnify all amounts in excess of $500,000 by issuing shares of
Common Stock as provided in Section 10.05.
(c) The Parent Company shall be liable for the payment of the entire
amount of Indemnifiable Losses pursuant to Section 10.02; PROVIDED, HOWEVER,
that the Parent Company shall only be liable for indemnification under Section
10.02 with respect to the Company's sales tax liabilities if such liabilities
determined as of February 28, 1999 exceed $7,069.00.
ARTICLE 11
POST-CLOSING AUDIT
SECTION 11.01. AUDIT OF COMPANY FINANCIAL STATEMENTS. On or before the
earlier of (x) the date which is 45 days after the date of the Closing or (y)
the date the Parent Company completes the audit of its financial statements for
the fiscal year ending March 31, 1999, the Parent Company shall prepare and
deliver to the Purchasers and the Company an audited Balance Sheet of the
Company as of February 28, 1999 and an audited Income Statement and Statement of
Cash Flows for the period ending as of February 28, 1999, together with notes
thereto (collectively, the "AUDITED FINANCIAL STATEMENTS"). The Audited
Financial Statements shall be prepared at the Parent Company's expense in
accordance with generally accepted accounting principles consistently applied
and shall be audited by Mayer Rispler & Company, P.C. (the "PARENT COMPANY
AUDITORS") and be accompanied by their unqualified opinion thereon and a copy of
all work papers used in such audit.
SECTION 11.02. ACCESS. The Company shall provide the Parent Company and
its agents, including the Parent Company Auditors, full access to the books and
records, work papers and other documents of the Company reasonably required in
connection with the preparation by the Parent Company of the Audited Financial
Statements. In conducting its audit of the Audited Financial Statements, the
Parent Company Auditors shall consult with the Company's independent accountants
(the "COMPANY AUDITORS") and any consultants designated by the Company, and
permit the Company Auditors and/or such Company consultants to observe the audit
of the Audited Financial Statements and to examine the work papers of the Parent
Company Auditors in connection therewith as the audit proceeds.
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SECTION 11.03. DETERMINATION OF INDEMNIFIABLE LOSSES. In the event that
a comparison of the Audited Financial Statements and the unaudited Financial
Statements of the Company set forth on Schedule 4.08B and Schedule 4.08C
attached hereto (collectively, the "UNAUDITED FINANCIAL STATEMENTS") reveal any
of the following shortfall amounts:
(i) total accounts payable shown on the Unaudited Financial Statements
are less than such accounts payable shown on the Audited Financial
Statements;
(ii) total accrued expenses shown on the Unaudited Financial Statements
are less than such accrued expenses shown on the Audited Financial
Statements; or
(iii) total inventory shown on the Audited Financial Statements is less
than such amount shown on the Unaudited Financial Statements;
then the aggregate amount of such shortfalls determined in clauses (i)-(iii)
above shall be deemed to be Indemnifiable Losses of the Indemnified Parties for
purposes of Article 10 of this Agreement. A statement of any such Indemnifiable
Losses shall be provided by the Parent Company to the Purchasers when the
Audited Financial Statements are delivered to the Purchasers.
SECTION 11.04. DISPUTES. Any dispute which may arise between the Parent
Company and the Purchasers as to the amount of the Indemnifiable Losses
determined in accordance with Section 11.03 shall be resolved in the following
manner:
(a) Any Purchaser, if it disputes the amount of the Indemnifiable
Losses determined in accordance with Section 11.03, shall notify the Parent
Company in writing within 30 days after the delivery to the Purchasers and the
Company of the report of the Parent Company's Auditors pursuant to Section 11.01
that the Purchaser disputes such amount; and such notice shall specify in
reasonable detail the nature of the dispute;
(b) during the 30 day period following the date of such notice, the
Parent Company and the Purchasers shall attempt to resolve such dispute and to
determine the accuracy of the Audited Financial Statements and the amounts of
such Indemnifiable Losses; and
(c) if at the end of the 30 day period specified in subsection (b)
above, the Parent Company and the Purchasers shall have failed to reach a
written agreement with respect to such dispute, the matter shall be referred to
a nationally
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recognized accounting firm jointly designated by the Parent Company Auditors and
the Company Auditors (the "ARBITRATOR"), which shall act as an arbitrator and
shall issue its report as to such Indemnifiable Losses within thirty (30) days
after such dispute is referred to the Arbitrator. Each of the parties hereto
shall bear all costs and expenses incurred by it in connection with such
arbitration, and the fees and expenses of the Arbitrator hereunder shall be
borne equally by the Purchasers and the Parent Company. This provision for
arbitration shall be specifically enforceable by the parties and the decision of
the Arbitrator in accordance with the provisions hereof shall be final and
binding and there shall be no right of appeal therefrom.
ARTICLE 12
MISCELLANEOUS
SECTION 12.01. NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on
the part of any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy hereunder.
The remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
SECTION 12.02. AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this
Agreement to the contrary notwithstanding, and except as hereinafter provided or
as otherwise specifically provided herein, changes in, termination or amendments
of or additions to this Agreement may be made, and compliance with any covenant
or provision set forth herein may be omitted or waived, only if set forth in an
instrument executed and delivered by the party to be charged with enforcement
thereof. Any waiver or consent may be given subject to satisfaction of
conditions stated therein and any waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
SECTION 12.03. ADDRESSES FOR NOTICES. All notices, requests, demands
and other communications provided for hereunder shall be in writing (including
telegraphic communication) and mailed, telegraphed or delivered as follows:
If to a particular Purchaser, at such Purchasers address or telephone
line facsimile transmission number shown on Schedule 2.01 or on its signature
page to this Agreement or at such other address as to which such Purchaser or
its
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successor in interest may inform the other parties in writing in compliance with
the terms of this Section;
If to any other holder of the Shares, at such holder's address for
notice as set forth in the register maintained by the Company or at such other
address as shall be designated by such Person in a written notice to the other
parties complying as to delivery with the terms of this Section;
If to the Company:
c/o Gnome Partners, LLC
650 Madison Avenue
21st Floor
New York, New York 10021
Attention: Dr. Samuel D. Waksal, Chairman of the Board
Facsimile No.: (212) 223-0161
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Phillip R. Mills
Facsimile No.: (212) 450-4800
or at such other address as shall be designated by the Company in a
written notice to the other parties complying as to delivery with the terms of
this Section; and
If to the Parent Company:
Allou Health & Beauty Care, Inc.
50 Emjay Boulevard
Brentwood, New York 11717
Attention: President
Facsimile No: (516) 273-5318
with a copy to:
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<PAGE>
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attention: Henry I. Rothman, Esq.
Facsimile No.: (212) 704-6288
or at such other address as shall be designated by the Parent Company in a
written notice to the other parties complying as to delivery with the terms of
this Section.
All such notices, requests, demands and other communications shall,
when mailed (which mailing must be accomplished by first class mail, postage
prepaid, electronic facsimile transmission, express overnight courier service,
or registered or certified mail, return receipt requested) or telegraphed, and
shall be considered to be delivered three (3) days after dispatch, if mailed, or
upon receipt, if sent by any other such means.
SECTION 12.04. COSTS, EXPENSES AND TAXES. The Parent Company and the
Company shall each pay their respective costs in connection with the negotiation
of and the Closing under this Agreement and the documents referred to herein,
including, without limitation, the fees and out-of-pocket expenses of their
respective legal counsel, accountants, consultants and outside experts retained
by them and which shall include, in the case of the Parent Company, any such
costs incurred by the Company (excluding the Purchasers' costs) in excess of
$250,000; and, if the Closing shall occur, the Company shall pay such costs of
each Purchaser (with respect to fees for legal counsel only, up to a limit of
$200,000 in total for all such fees incurred by all Purchasers) (if the Closing
does not occur, the Purchasers shall each pay their respective costs). In
addition (x) the Parent Company shall pay the reasonable fees and out-of-pocket
expenses of legal counsel, independent public accountants, consultants and other
outside experts retained by any Purchaser in connection with any amendment or
waiver to this Agreement initiated by the Parent Company or, in the event of a
material breach of this Agreement by the Company or the Parent Company, the
successful enforcement of this Agreement by any Purchaser and (y) each Purchaser
shall pay the reasonable fees and out-of-pocket expenses of legal counsel,
independent public accountants, consultants and other outside experts retained
by the Parent Company in connection with any amendment or waiver of this
Agreement initiated by such Purchaser or, in the event of a material breach of
this Agreement by such Purchaser, the successful enforcement of this Agreement
by the Parent Company. The Parent Company shall pay any and all stamp, or other
similar taxes (other than any such tax which is payable based on or computed
with reference to the income of any Purchaser) payable or determined to be
payable in
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connection with the execution and delivery of this Agreement, the issuance or
sale of the Shares and the execution and delivery of the other instruments and
documents to be delivered hereunder or thereunder, and agrees to save the
Purchasers harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes. If the Closing
occurs, the Company shall be obligated to pay fees to Tower Hill Securities,
Inc. or its designee as follows: in an aggregate amount (x) in cash equal to 6%
of the aggregate Company Purchase Price paid by the Purchasers and (y) warrants
to purchase a number of shares of Preferred Stock equal to 10% of the number of
Newly Issued Shares purchased by the Purchasers, which warrants shall have an
exercise price equal to $4.68 per share.
SECTION 12.05. EFFECTIVENESS; BINDING EFFECT; ASSIGNMENTS. (a) This
Agreement shall become binding between the Company and the Parent Company and
each Purchaser when counterparts hereof shall have been executed and delivered,
one to the other, by the Company, the Parent Company and such Purchaser.
Subsequent to the Closing, any Person to whom any Shares are transferred and
which Person meets the requirements of Section 8.11 may become a party hereto
for purposes of Article 8, Article 9, Article 10, Article 11 and this Article 12
and the related definitions and entitled with respect thereto to the same rights
as such Purchaser, subject to and upon compliance with Section 8.11, by
execution and delivery to the Company of a counterpart of this Agreement.
(b) Except as provided in Section 8.11, this Agreement shall be
binding upon and inure to the benefit of the Company, the Parent Company and the
Purchasers and their respective heirs, successors and assigns, except that
neither the Company nor the Parent Company shall have the right to delegate its
obligations hereunder under circumstances in which the Company or the Parent
Company is relieved from its obligations hereunder or to assign its rights
hereunder or any interest herein without the prior written consent of the
Purchasers.
SECTION 12.06. BOARD OF DIRECTORS. Subject to the Shareholders
Agreement of even date herewith, each Shareholder entitled to vote for the
election of directors to the Board agrees that it will vote its Shares or
execute written consents, as the case may be, and take all other necessary
action (including action by written consent or causing the Company to call a
special meeting of shareholders) in order to ensure that the composition of the
Board is as set forth in this Agreement.
SECTION 12.07. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations, warranties and covenants made in this Agreement or any other
instrument or document delivered in connection herewith or therewith, shall
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<PAGE>
survive the execution and delivery hereof or thereof notwithstanding any
investigation made by or on behalf of the party to whom such representations,
warranties and covenants are made. Although the Purchasers and their legal
counsel and advisers, if any, may have assisted the Company and the Parent
Company in preparing the various Exhibits and Schedules to this Agreement, the
content and accuracy of such Exhibits and Schedules shall remain solely the
responsibility of the Company and the Parent Company.
SECTION 12.08. PRIOR AGREEMENTS. This Agreement and the other
agreements executed and delivered in connection herewith, constitute the entire
agreement between the parties with respect to the subject matter hereof and
thereof and supersede any prior understandings or agreements concerning the
subject matter hereof.
SECTION 12.09. SEVERABILITY. The provisions of this Agreement are
severable and, in the event that any court of competent jurisdiction shall
determine that any one or more of the provisions or part of a provision
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of a provision of
this Agreement; but this Agreement shall be reformed and construed as if such
invalid or illegal or unenforceable provision, or part of a provision, had never
been contained herein, and such provisions or part reformed so that it would be
valid, legal and enforceable to the maximum extent possible.
SECTION 12.10. CONFIDENTIALITY. Each Purchaser agrees that it will keep
confidential and will not disclose or divulge any confidential, proprietary or
secret information which such Purchaser may obtain from the Company pursuant to
financial statements, reports and other materials submitted by the Company to
such Purchaser pursuant to this Agreement, or pursuant to visitation or
inspection rights granted hereunder, unless such information is known, or until
such information becomes known, to the public; PROVIDED, HOWEVER, that any
Purchaser may disclose such information (i) on a confidential basis to its
attorneys, accountants, consultants and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, (ii) to any prospective purchaser of any Shares, from such Purchaser as
long as such prospective purchaser agrees in writing to be bound by the
provisions of this Section 12.10, (iii) to any affiliate or partner of such
Purchaser and (iv) as required by applicable law or legal process.
SECTION 12.11. GOVERNING LAW; INTERPRETATION. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
New York, and without giving effect to choice of laws provisions. Although this
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<PAGE>
Agreement has been prepared by counsel for the Purchasers, the parties agree
that no presumption shall arise to construe this Agreement more strictly against
any one party hereto then against any other party hereto.
SECTION 12.12. HEADINGS. Article, section and subsection headings and
footers in this Agreement are included herein for convenience of reference only
and shall not constitute a part of this Agreement for any other purpose.
SECTION 12.13. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Agreement by
signing any such counterpart. A facsimile transmission of this Agreement bearing
a signature on behalf of a party hereto shall be legal and binding on such
party.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be duly executed by their respective officers or other
representatives thereunto duly authorized as of the date first above written.
THE FRAGRANCE COUNTER, INC.
By: /s/ Herman Jacobs
Name: Herman Jacobs
Title: Chief Executive Officer
ALLOU HEALTH & BEAUTY CARE, INC.
By: /s/ Herman Jacobs
Name: Herman Jacobs
Title: President and
Chief Operating Officer
THE PURCHASERS
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000846538
<NAME> ALLOU HEALTH & BEAUTY CARE, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 228,941
<SECURITIES> 0
<RECEIVABLES> 47,224,109
<ALLOWANCES> 1,775,964
<INVENTORY> 140,824,946
<CURRENT-ASSETS> 215,093,493
<PP&E> 7,959,372
<DEPRECIATION> 4,390,131
<TOTAL-ASSETS> 225,943,168
<CURRENT-LIABILITIES> 150,721,739
<BONDS> 0
0
0
<COMMON> 6,643
<OTHER-SE> 74,595,847
<TOTAL-LIABILITY-AND-EQUITY> 225,943,168
<SALES> 78,147,211
<TOTAL-REVENUES> 78,147,211
<CGS> 67,306,080
<TOTAL-COSTS> 67,306,080
<OTHER-EXPENSES> 6,495,629
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,190,757
<INCOME-PRETAX> 2,154,745
<INCOME-TAX> 819,000
<INCOME-CONTINUING> 1,335,745
<DISCONTINUED> 12,796,461
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,132,206
<EPS-BASIC> 2.13
<EPS-DILUTED> 1.87
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