<PAGE>
As filed with the Securities and Exchange Commission on January ,2000
Registration No. 333-91723
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2/A-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ESYNCH CORPORATION
------------------------------------------
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 5961 87-0461856
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
15502 Mosher Avenue, Tustin, California 92780 (714) 258-1900
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(Address and telephone number of registrant's principal executive offices)
15502 Mosher Avenue, Tustin, California 92780
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(Address of principal place of business)
Thomas Hemingway
15502 Mosher Avenue, Tustin, California 92780
(714) 258-1900
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(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
Nicholas J. Yocca, Esq.
Stradling Yocca Carlson & Rauth, P.C.
660 Newport Center Drive, #1600
Newport Beach, California 92660
Telephone (949) 725-4120 Fax (949) 823-5120
Approximate date of commencement of proposed sale to the public: From time to
time after the registration statement becomes effective.
If this form is filed to register additional securities for an offering under
Rule 462(b) under the Securities Act of 1933, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed under Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. / /
<PAGE>
If this form is a post-effective amendment filed under Rule 462(d) under the
Securities Act, check the following box and list the Securities Act Registration
Statement number of the earlier effective Registration Statement for the same
offering. / /
If delivery of the prospectus is expected to be made under Rule
434, please check the following box. / /
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis under Rule 415 of the Securities Act, check the
following box. /XX/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount Being Offering Price Per Aggregate Amount of
To Be Registered Registered Unit/Share(1) Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock,
par value $.001 175,000 $6.03125 $1,055,469 $278.64
Common Stock,
par value $.001
underlying Series J
Convertible Preferred
Stock (2)(3) 1,571,424(4) $6.03125 $9,477,675 $2,502.11
Common Stock,
par value $.001,
underlying Warrants (2)(3) 393,750(4) $6.03125 $2,374,805 $626.95
Total registration fee $3,407.70
Registration fee previously paid $1,815.82
Registration fee due with this amendment $1,591.88
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high ($6.3125) and the
low ($5.75) sale prices reported on the Nasdaq over-the-counter bulletin
board on January 10, 2000.
(2) Under Rule 416 there are also being registered such additional shares as
may be issued as a result of the anti-dilution provisions of the Series J
Convertible Preferred Stock and the accompanying Warrants.
(3) Securities being registered for resale only.
(4) Equal to 200% of the number of shares of Common Stock initially issuable
upon conversion or exercise of the Series J Convertible Preferred Stock and
accompanying Warrants.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall become effective on that date in accordance with Section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the Commission, acting under said Section 8(a), may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED January 14, 2000
PROSPECTUS
up to 2,140,174 shares of Common Stock, par value $.001 each
------------------
eSynch Corporation
15502 Mosher Avenue, Tustin, California 92780
(714) 258-1900
------------------
Selling security holders are offering shares of common stock underlying
warrants and convertible preferred stock. The Common Stock may be offered from
time to time by the selling security holders. They are offering all of the
Common Stock for their own benefit.
Our Common Stock is listed on the OTC Bulletin Board maintained by the
NASD under the symbol "ESYN." On January 14, 2000, the last reported sale price
of the Company's Common Stock was $7.59375.
- ------------------------------------------------------------------------------
THESE ARE SPECULATIVE SECURITIES AND THIS INVESTMENT INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 2.
- ------------------------------------------------------------------------------
Information regarding the selling security holders is set forth in
"Selling Security Holders" and "Plan of Distribution." All or a portion of the
shares of Common Stock offered hereby may be offered for sale, from time to
time, on the over-the-counter bulletin board, or otherwise, at prices and terms
then obtainable, or in negotiated transactions.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of the prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is January 14, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PROSPECTUS SUMMARY 1
RISK FACTORS 2
FORWARD-LOOKING AND CAUTIONARY STATEMENTS 9
USE OF PROCEEDS 9
SELLING SECURITY HOLDERS 10
PLAN OF DISTRIBUTION 12
LEGAL PROCEEDINGS 14
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 22
DESCRIPTION OF SECURITIES 24
INTEREST OF NAMED EXPERTS AND COUNSEL 29
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES 29
DESCRIPTION OF BUSINESS 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 36
DESCRIPTION OF PROPERTY 39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 41
EXECUTIVE COMPENSATION 42
FINANCIAL STATEMENTS 46
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 77
</TABLE>
Electronic Digital Distribution, eSynch, Kiss Software, Kissco, AtoZWare,
AtoZWare.com, Modem Wizard, NetMonitor, WebSnake, Speed Surfer Internet
Toolbox, Oxford Media, and all product or service names of eSynch used in
this Prospectus, are unregistered trademarks, service marks and trade names of
eSynch. The logos associated with such names are unregistered trademarks and
service marks of eSynch. Other brand names or trademarks appearing in this
prospectus are the property of their respective owners.
<PAGE>
ESYNCH CORPORATION PROSPECTUS SUMMARY
INTRODUCTION
Please read this prospectus carefully. We have not authorized anyone to provide
you with any information except the information contained in this prospectus.
You must not rely on any unauthorized information.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of any
sale of common stock.
This prospectus does not offer to sell or buy any shares in any jurisdiction
where it is unlawful.
In this prospectus, "eSynch," "we," "us," "our" and the "Company" refer to
eSynch Corporation and subsidiaries.
THE OFFERING
Common stock offered up to 2,140,174 shares (1)
Use of Proceeds: The proceeds from the sale
of each selling security
holder's Common Stock will
belong to the selling
security holder. The
Company will not receive
any of the proceeds, except
any amount thereof paid to
the Company by selling
security holders as the
exercise price of warrants.
Trading Symbol ESYN
Trading Market Nasdaq over-the-counter
Bulletin Board
(1) The total amount registered includes 1,965,178 shares of Common Stock for
sale by certain of the selling security holders. This amount is equal to 200%
of the number of shares of Common Stock initially issuable to the selling
security holders upon their conversion of shares of preferred stock and their
exercise of warrants. We are initially required to register this amount of
shares by agreement with these selling security holders.
-1-
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. Additional risks, and
uncertainties not presently known to us or that we currently deem immaterial,
may also impair our business operations. If any of the following risks actually
occur, our business could be harmed. In such case, the shares of our common
stock that you purchase could decline in value and you may lose all or part of
your investment. You should consider carefully these risk factors before you
decide to purchase our shares.
We have a limited operating history and revenues have been minimal to date
- --------------------------------------------------------------------------
To date we have generated only minimal revenues. As a result, we have not yet
generated cash from operations and have had to rely on proceeds from sales of
our shares to fund our operations. Also we have only a limited operating history
on which our business can be evaluated and our business must be considered in
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development that are entering
into new and rapidly evolving markets. These risks include the following:
* The limited resources that we have to compete with more established
competitors who have greater brand name recognition and greater resources.
* The need to raise additional capital to sustain operations and the absence
of any assurance that such financing will be obtainable, when needed, on
acceptable terms, if at all.
* The need to establish alliances or partnerships with established companies.
* The need to develop brand name recognition and to continually strengthen
customer loyalty and satisfaction.
* Uncertainty as to our business model.
* Anticipated continued losses from operations.
* The difficulties of managing growth.
* The difficulty of anticipating and adapting to technological, market and
other changes.
* The difficulties of attracting, integrating and motivating qualified
personnel.
We must, among other things, successfully implement and execute our business and
strategy, continue to develop and upgrade our technology, enhance our services
and products to meet the needs of a changing market, and provide superior
customer service.
-2-
<PAGE>
Our future operating results are unpredictable
- ----------------------------------------------
Our operating results are unpredictable and we expect them to fluctuate in the
future due to a number of factors, many of which are outside our control. These
factors include:
* the ability of competitors to provide services and products that are
competitive with our own.
* competition from larger companies with greater brand name recognition or
greater financial, marketing or management resources that those available
to us.
* adverse changes in consumer trends or general economic conditions.
* our ability to keep pace with technological developments.
As a strategic response to changes in the competitive environment, we may from
time to time make certain decisions that temporarily harm our business. As a
result, our operating results at times may be below expectations. If this
happens, it is likely that the value of our common stock would decline.
We need additional capital
- --------------------------
Our business model indicates that it is likely that we will incur operating
losses over the next several months. As a result of those losses and the funds
needed for managing acquisitions, working capital and infrastructure
development, we anticipate that we will have to raise substantial additional
capital to sustain us during this period. We may not be able to obtain the
financing that our business requires. Even if we can obtain financing when it is
needed, it may not be on favorable terms. In addition, a financing could have
the effect of reducing the percentage of our shares owned by our existing
stockholders, including investors purchasing shares in this offering. A
financing could have the additional effect of diluting or reducing the value of
the outstanding shares. We may sell shares or grant options or warrants to buy
shares at prices lower than the prevailing value of your shares.
Management owns a controlling interest in eSynch Corporation
- ------------------------------------------------------------
Our officers and directors currently own or control a substantial majority of
our outstanding common stock. If they act in concert, they will continue to be
able to exercise voting control over eSynch for the foreseeable future and will
be able to elect the entire Board of Directors and generally determine our
management policy. Also this management control could prevent, or make more
difficult, a sale of eSynch.
The loss of key personnel could adversely affect operations
- -----------------------------------------------------------
Thomas Hemingway and others play a key role in our operations and in the further
development of our business. The loss of the services of any of them could
adversely impact our business and chances for success.
-3-
<PAGE>
A failure to attract key personnel could adversely affect our plans
- -------------------------------------------------------------------
Our performance also will greatly depend on our ability to hire, train, retain
and motivate additional officers and other key employees. However, competition
for highly skilled managerial, technical, marketing and customer service
personnel is intense. We may not be able to successfully attract, integrate or
retain sufficiently qualified personnel and, in that event, our business could
suffer.
We face competition in the markets we serve
- -------------------------------------------
There is intense competition among companies selling services and products on
the Internet. Increased competition is likely to bring both strong price and
quality competition. As a result, in order to remain competitive, we might have
to make additional expenditures on research and development, marketing, and
customer service or to reduce our pricing, or both, which would adversely affect
our ability to achieve and maintain profitability.
There are several other companies involved in media and digital distribution
channels that have far greater financial and management resources and greater
name brand recognition than we have. If any of those companies were to compete
with us, we could find it difficult to attract new and retain existing users of
our services as a result of such competition.
There is a sporadic trading market for our common stock
- -------------------------------------------------------
The public market for our common stock is sporadic. After this offering, you may
not be able to resell your shares at or above the public offering price due to a
number of factors, including:
* actual or anticipated fluctuations in our operating results or annualized
contract values.
* changes in expectations as to our future financial performance.
* changes in securities analysts' financial estimates.
* the operating and stock price performance of our competitors and other
comparable companies.
-4-
<PAGE>
Volatility and stock market risk
- --------------------------------
In addition, the stock market in general, and the stocks of web-based businesses
in particular, have experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of our common
stock, regardless of our actual operating performance.
A large amount of shares will become available for future sale
- --------------------------------------------------------------
We expect the trading price of our Common Stock to fluctuate depending on the
supply of our shares in the public market. We estimate that the amount of our
shares traded publicly has not been more than 1,800,000. That represents less
than 10% of the number of shares that are outstanding on a fully diluted basis.
Many of the shares that are outstanding are or will within the next 6 months
become available for sale in the public market. Rule 144, this offering, and our
registration of shares under the 1999 Stock Incentive Plan or other options will
result in a large number of shares being available for public sale as compared
with the number of shares historically traded. A large supply of shares, unless
met by an equal or greater demand, could result in lower trading prices.
Sales by the selling security holders could depress our stock price
- -------------------------------------------------------------------
The availability of shares and the trading prices may fluctuate based upon
factors other than intrinsic value of our stock. The selling security holders
(whose shares will become convertible on January 28, 2000 or when the SEC allows
this offering to be effective, whichever is sooner) may act independently of
each other and cause confusion in the market. The selling security holders have
not informed us of an intention to sell shares through underwriters and may sell
through ordinary broker transactions. Purchasers of Common Stock in this
offering may be affected by subsequent sales by the selling security holders.
Because the conversion rate of the Series J Preferred Shares will increase when
the share price of the Common Stock is lower, the holders of Series J Preferred
Stock may elect to exercise at times when it is disadvantageous to holders of
Common Stock.
Future issuances of stock could adversely affect holders of common stock
- ------------------------------------------------------------------------
The Board of Directors is authorized to issue additional shares of preferred
stock without approval from holders of common stock. Preferred stock can have
rights and preferences, as may be determined by the Board of Directors, that are
senior to the common stock. The Board of Directors is authorized to issue
additional shares of common stock without approval from holders of common stock.
Additional common stock may be issued or reserved for issuance on terms and at
prices as may be determined by the Board of Directors. Among other things, such
authority may make it more difficult for a person to acquire eSynch. In turn,
this may make it less likely that holders of common stock will receive a premium
price for their shares.
-5-
<PAGE>
We run a risk of system capacity constraints and system failure
- ---------------------------------------------------------------
We are largely dependent upon our communications and computer hardware and
software. A high volume of traffic and transactions on our servers could exceed
their capacity. If our digital content were to load slowly, this may potentially
drive away customers. Based on our experience and the experience of other
e-commerce companies, we anticipate that we will experience periodic system
interruptions in the future. Any system interruptions that result in the
unavailability of our service or in reduced customer activity could lead our
users to seek out our competitors. In such an event, we might find it difficult
and might have to incur additional marketing costs to get our users to return to
our servers. Also our systems are vulnerable to damage from earthquake, fire,
flood, power loss, telecommunication failure, break-in and similar catastrophic
events. A substantial interruption in the operability of these systems would
harm our business. We also do not have any business interruption insurance that
would compensate us for any resulting losses we might incur.
Our Internet business is vulnerable to third party misconduct
- -------------------------------------------------------------
Despite our implementation of network and firewall security, our servers are
vulnerable to computer viruses, physical or electronic break-ins, deliberate
attempts by third parties to exceed the capacity of our systems and similar
disruptive problems. Computer viruses, break-ins or other problems caused by
third parties could lead to interruptions, delays, and losses of data. The
occurrence of any of these risks could harm our business.
We rely on trade secret protection to protect some of our rights
- ----------------------------------------------------------------
To date we have relied to a significant degree on trade secret laws and
technical measures to establish and protect our proprietary rights. Secrecy,
copyrights and other methods to protect our intellectual property rights may
prove to be ineffective or inadequate to prevent imitation of our services or
products or to prevent others from claiming violations of their proprietary
rights by us. In addition, others may assert rights in our proprietary rights.
Our customer lists are also of great value to our business, and if a competitor
acquired these lists, it could harm our business.
-6-
<PAGE>
We will depend on acceptance of our brand names
- -----------------------------------------------
We believe that the development of brand name recognition is critical to the
success of most businesses, including our own, particularly with the recent and
growing increase in the number of companies that are conducting business on the
Internet. Development and awareness of the eSynch brand name will depend largely
on our success in increasing our customer base and strategic relationships. If
consumers do not perceive us as offering a desirable way to access digital
content and software or other e-commerce companies do not perceive us as an
effective marketing and sales channel for their products or services, we would
be unsuccessful in promoting our brand name.
We need to protect our business names
- -------------------------------------
We have only recently commenced a program designed to obtain trademark
registrations for our software and our business names and service mark
registrations for our service names. We may be unable to obtain such
protections. Registrations or other protections of names may prove to be
inadequate to prevent imitation of our names or to prevent others from claiming
violations of their trademarks and service marks by us. In addition, others may
assert rights in our trademarks and service marks.
We could face liability for materials disseminated through the Internet
- -----------------------------------------------------------------------
The law relating to the liability of Internet service companies for information
carried on or disseminated through their services is currently unsettled. It is
possible that claims could be made against Internet service companies under both
U.S. and foreign law for defamation, libel, invasion of privacy, negligence,
copyright or trademark infringement, or other theories based on the nature and
content of the materials disseminated through their services. Furthermore, the
growth and development of the market for Internet commerce may prompt calls for
more stringent consumer protection laws that may impose additional burdens on
companies conducting business over the Internet. The adoption of any additional
laws or regulations may decrease the growth of the Internet, which, in turn,
could decrease the demand for our Internet auctions and other services. This
could increase our cost of doing business or otherwise harm our business.
Our evolving business plan may change
- -------------------------------------
We intend to continue to develop our business plan and to explore opportunities
to expand the breadth and depth of our products and services. Changes in how
business is generally conducted could prevent us from achieving our business
objectives. Financially more powerful providers that offer competitive services
or products could also prevent us from achieving our business objectives.
-7-
<PAGE>
Year 2000 readiness statement
- -----------------------------
The computer systems of many businesses face the risk of malfunction in the year
2000. This malfunction is the result of computer programs that were designed to
use two digits rather than four digits to define an applicable year. This could
cause a system failure or miscalculations in the processing of data which, in
turn, could lead to disruptions in business operations and inability to process
transactions or engage in other business transactions.
We have conducted some limited testing of our systems and services and on that
basis we believe, though we cannot be certain, that they will function properly
in the year 2000. However, we also utilize third-party equipment and software
that may not be year 2000 compliant. We rely on the Internet for customers to
access our web sites and there is no guarantee that the operation of the
Internet itself will be unaffected by the year 2000. If our equipment or
software, or any third-party equipment or software on which we rely for our
operations, fails to properly process date-sensitive data, or if similar
problems impact the Internet or the economy generally, we could suffer
interruptions in our services and might have to incur unanticipated expenses to
remedy any such problems. We do not presently have a contingency plan in place
if one of our third-party providers, such as Internet backbone providers, should
experience system failure due to failure to comply with year 2000 issues, and we
do not intend to establish such a contingency plan.
Additional Risks
- ----------------
In addition to matters affecting the Company's industry generally, factors which
could cause actual results to differ from expectations include, but are not
limited to (i) sales of the Company's software which may not rise to the level
of profitability; (ii) due to the rapidly changing and intensely competitive
nature of the industry, competitors may introduce new products with significant
competitive advantages over the Company's products; (iii) the Company may not
have sufficient resources, including any future financing it is able to obtain,
to sustain marketing and other operations; (iv) the Company may be unable to
attract and retain sufficient management and technical expertise, or may lose
key employees; (v) the Company's contractual or legal efforts to protect its
confidential information or intellectual property may be inadequate or
ineffective to provide protection, and the Company may be unable financially to
pursue legal remedies that may be available; (vi) the Company's selection, due
diligence, execution, and integration of acquisitions may not prove effective or
reasonable; (vii) the Company may suffer in material respects from the direct or
indirect effects of the "Year 2000" problem on public utilities,
telecommunications networks, customers, vendors, service providers, and the
economy or financial markets generally; (viii) the Company may suffer from other
technical or communications problems, such as power outages, system failures,
system crashes, or hacking; and (ix) the Company may be subjected to unknown
risks and uncertainties, or be unable to assess risks and uncertainties as may
exist.
-8-
<PAGE>
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act") and such
forward-looking statements are subject to the safe harbors created thereby. For
this purpose, any statements contained in this prospectus except for historical
information may be deemed to be forward-looking statements. Also, words such as
"may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate"
or "continue" or the negative or other variations thereof or comparable
terminology are intended to help you identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements include, but are not limited to,
statements regarding:
* Our expectations about the marketplace and consumer acceptance.
* Our marketing and sales plans.
* Our expectations regarding the growth of our business and that our
business model will succeed.
* Our ability to introduce new services and products and improve technology.
* The success of our technology.
These statements are not guarantees of future performance. Future performance is
subject to risks, uncertainties and assumptions that are difficult to predict
and may be beyond our control. Therefore, our actual results could differ
materially from anticipated results. These risks and uncertainties include those
noted in "Risk Factors" above.
We do not undertake any obligation to update or revise any forward-looking
statements contained in this prospectus for any reason, even if new information
becomes available or other events occur in the future.
USE OF PROCEEDS
The proceeds from the sale of each selling security holder's Common Stock will
belong to the selling security holder. The Company will not receive any proceeds
from such sales of the Common Stock, except any amount thereof paid by
selling security holders to the Company in payment of the exercise price of
warrants. The shares of Common Stock that may be sold in this offering
include some shares that may be purchased by selling security holders upon
exericse of warrants that they hold.
-9-
<PAGE>
SELLING SECURITY HOLDERS
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
BEFORE THE OFFERING AFTER THE OFFERING
SERIES J PREFERRED COMMON(1) PREFERRED COMMON(1)
-------------------- --------------- --------- ---------
NAME OF SELLING SECURITY HOLDER NUMBER PERCENT NUMBER PERCENT NUMBER NUMBER
------------------------------- ------ ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Amro International, S.A.(2)(3)(11) 50 18.2% 180,357 1.8% (15) (15)
Austinvest Anstalt Balzers(3)(4)(11) 50 18.2% 180,357 1.8% (15) (15)
Esquire Trade & Finance Inc.(3)(5)(11) 50 18.2% 180,357 1.8% (15) (15)
Manchester Asset Management, Ltd.(6)(7)(11) 40 14.5% 144,285 1.4% (15) (15)
Gilston Corporation, Ltd.(6)(8)(11) 35 12.7% 126,250 1.3% (15) (15)
Triton Private Equity Fund L.P.(9)(11) 25 9.1% 90,178 0.9% (15) (15)
Talbiya Investments Ltd.(10)(11) 12.5 4.5% 45,089 0.5% (15) (15)
Intercoastal Financial Services Corp.(12)(11) 12.5 4.5% 35,714 0.4% (15) (15)
Sam Katz (13) 0 0 75,000 0.8% (15) (15)
Harrington, Chase, PLC (14) 0 0 100,000 1.0% (15) (15)
Total (selling security holders
combined)(15) 275.0 100.0% 1,157,587 10.3%(11) (15) (15)
</TABLE>
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(1) Beneficial ownership of Common Stock for purposes of this table is
calculated based on the maximum number of shares of Common Stock issuable upon
conversion of Series J Preferred Stock (assuming a conversion price of $3.50),
and exercise of all of the warrants. However, the terms of the Series J
Preferred Stock will not permit the conversion of Series J Preferred Stock by a
selling security holder if it and its affiliates would thereby own more than
4.99% of the outstanding Common Stock. The Series J conversion price is
initially equal to $3.50, subject to adjustment (see "Description of
Securities-Preferred Stock-Series J Preferred Stock"). The Series J Preferred
Stock becomes convertible on January 28, 2000 or any earlier date on which the
SEC determines this offering becomes effective.
(2) Address: 40 Ultra Finance, Grossmuenster Platz, #6, Zurich, Switzerland
CH822.
(3) Includes 37,500 shares issuable upon exercise of warrants and 142,857 shares
issuable upon conversion of preferred stock.
(4) Address: Landstrasse 938, 9494 Furstentum, Vaduz/Liechtenstein, Austria.
(5) Address: P.O. Box 146, Road Town, Tortola, British Virgin Islands.
(6) Address: P.O. Box N-9204, Charlotte House, Charlotte Street, Nassau,
Bahamas.
(7) Includes 30,000 shares issuable upon exercise of warrants and 114,285 shares
issuable upon conversion of preferred stock.
(8) Includes 26,250 shares issuable upon exercise of warrants and 100,000 shares
issuable upon conversion of preferred stock.
(footnotes continue on next page)
-10-
<PAGE>
(Footnotes continued)
(9) Address: 225 North Market Street, Suite 220, Wichita, Kansas 67202. Includes
18,750 shares issuable upon exercise of warrants and 71,428 shares issuable upon
conversion of preferred stock.
(10) Address: Ragnall House, 18 Peel Road, Douglas, Isle of Man, 1M14L2
United Kingdom. Includes 9,275 shares issuable upon exercise of warrants and
35,714 shares issuable upon conversion of preferred stock.
(11) A total of 196,875 shares are issuable upon exercise of warrants and
785,712 shares are issuable upon conversion of preferred stock. This would
aggregately represent 9.5% beneficial ownership. Under the terms of the Series J
Preferred Stock, the selling security holders cannot convert shares of Series J
Preferred Stock to the extent that a holder and its affiliates would then own
more than 4.99% of the outstanding Common Stock. The selling security holders
disclaim beneficial ownership of any shares issuable upon conversion to the
extent that any holder and its affiliates would then own more than 4.99% of the
outstanding Common Stock.
(12) Address: 760 US Highway One - Suite 206, North Palm Beach, FL 33408.
(13) Address: 1180 Nassau Street, Delray Beach, FL 33483-6716.
(14) Address: 21 Bedford Square, London, WC1 B3HH United Kingdom.
(15) Selling security holders may offer any or all of the shares of Common
Stock from time to time. The selling security holders are not required to
sell any or all of the shares of Common Stock. They may retain the Common
Stock indefinitely.
-11-
<PAGE>
PLAN OF DISTRIBUTION
The Company is presently aware of no arrangements or understandings, formal or
informal, pertaining to the distribution of the shares of Common Stock described
herein. The Company may file a supplemented Prospectus, pursuant to Rule 424(b)
under the Securities Act, if it is required to do so and if it is notified by a
selling security holder that any material arrangement has been entered into with
a broker-dealer for the sale of shares of Common Stock bought through a block
trade, special offering, exchange distribution or secondary distribution.
All or a portion of the shares of Common Stock offered hereby may be offered for
sale, from time to time, on the over-the-counter bulletin board, or otherwise,
at fixed prices which may be changed, at market prices at the time of sale, at
prices related to market prices, at prices and terms then obtainable, or in
negotiated transactions. In addition, the shares of Common Stock offered hereby
may be sold by one or more of the following: (a) a block trade in which the
broker or dealer so engaged will attempt to sell the shares of Common Stock as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this Prospectus; and
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers. In effecting sales, brokers or dealers engaged by the
selling security holders may arrange for other brokers or dealers to
participate.
The selling security holders may effect these transactions by selling the common
stock to or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from the selling security holders or the
purchasers of the common stock for whom the broker-dealer may act as an agent or
to whom they may sell the common stock as a principal, or both. The compensation
to a particular broker-dealer may be in excess of customary commissions.
Each selling security holder may indemnify any broker-dealer that participates
in transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
The selling security holders and broker-dealers who act in connection with the
sale of the common stock may be considered "underwriters" within the meaning of
the Securities Act, and any commissions received by such broker-dealers and
profits on any resale of the common stock as a principal may be considered
underwriting discounts and commissions under the Securities Act.
-12-
<PAGE>
We have agreed to bear expenses in connection with the registration and sale of
the common stock offered by the selling security holders (other than selling
commissions). The selling security holders will pay all brokers' commissions,
concessions or discounts. Our obligation includes paying the filing fees and
costs of filings. Filings will be made with the SEC, markets on which our Common
Stock trades, and state securities or "blue sky" commissioners. We also will pay
attorneys' fees and costs of a special legal counsel to the selling security
holders to a maximum of $25,000. We have also agreed to indemnify the selling
security holders (and their brokers, agents investment advisors and controlling
persons) from liabilities arising under the Securities Act, except liabilities
relating to information provided by the selling security holder specifically for
inclusion in this prospectus.
We estimate our out-of-pocket costs will be $150,000 initially, including
payment of related legal fees of selling security holders. Also we have agreed
to keep this prospectus updated continuously until the securities are sold or
the selling security holders are able to sell the securities under Rule 144(k).
We estimate the out-of-pocket costs for such updating at approximately $25,000
per year. The updating obligation could reasonably be expected to continue for
up to five years.
Under our registration rights agreement with the holders of Series J Preferred
Stock, we are required to pay damages to holders of Series J Preferred Stock in
the event we fail to file the registration statement that includes this
prospectus on November 30, 1999, the SEC does not declare that registration
statement effective by February 28, 2000, amendments are not filed within 20
days after they are required, amendments of the registration statement are not
declared effective within 30 days after filing, our stock is delisted from the
over-the-counter bulleting board, or we breach in any material respect our
agreements with the holders of Series J Preferred Stock. The damages payable are
equal to 2% of the holder's original purchase price for 30-day period or portion
thereof, until the breach or event is cured, not pro rated for periods of breach
of less than 30 days. Additional damages are 3% of such holder's purchase price
for each subsequent 30-day period until the breach is cured, with this amount
pro rated for periods of less than 30 days.
-13-
<PAGE>
LEGAL PROCEEDINGS
ESYNCH
- ------
On April 15, 1999, Bremer Public Relations, Inc. obtained a default judgment in
the amount of $32,980.85 against us based on a complaint filed in the Third
Judicial District for the City of Salt Lake City, State of Utah. The Company has
been attempting to negotiate a settlement of the amounts owed but has not done
so to date.
SOFTKAT
- -------
We acquired SoftKat, Inc. in November 1998 and sold SoftKat, Inc. in 1999.
Although SoftKat has been sold by us, there may be asserted and unasserted
claims against us based on alleged SoftKat, Inc. liabilities or obligations.
Some of the claims against SoftKat have been asserted either in pending
litigation or threatened litigation. We are aware of several other creditors of
SoftKat, Inc., which have made claims against SoftKat for amounts owed based on
good and/or services provided to SoftKat. In most cases, we do not know the
identity of these creditors, the amounts that they claim are due and owing or
the circumstances of their claims. Regarding unasserted claims against SoftKat,
there is a reasonable likelihood that some of the plaintiffs/creditors will seek
to satisfy their claims against the Company on theories of either successor
liability or alter ego.
Three lawsuits against us that were based upon a theory that we succeeded to
SoftKat, Inc.'s liability, were dismissed in the quarter ended September 30,
1999.
In a SoftKat related matter, we recently obtained a summary judgment in our
favor in a lawsuit filed against us in the Sonoma County Superior Court, State
of California. On September 25, 1998, Diamar Interactive Corp. had filed a
complaint in that court alleging that we owe $44,183 for goods and services
provided to SoftKat, Inc., based on a theory of successor liability. We filed an
answer denying that we are obligated to pay any amounts incurred by SoftKat, and
later we filed a motion for summary judgment, which the court granted us.
We recently obtained a summary judgment in our favor in a lawsuit filed against
us in the Orange County Superior Court, State of California. On January 21,
1999, Interplay Entertainment Corp. had filed a complaint in that court. The
complaint alleged that we owe Interplay $86,041 for goods and services provided
to SoftKat, Inc., based on a theory of successor liability. We filed an answer
denying that we are obligated to pay any liability incurred by SoftKat, and
later we filed a motion for summary judgment, which the court granted us.
-14-
<PAGE>
On February 2, 1999, RPS, Inc. filed a complaint against us in the United States
District Court, Central District of California. The complaint alleges that we
owe $52,555.58 for delivery services provided to SoftKat, Inc., based on a
theory of successor liability. We have filed an answer denying that we are
liable for any amounts owed by SoftKat.
On February 24, 1999, Muramatsu, Inc. filed a complaint against us in the Orange
County Superior Court, State of California. The complaint alleges that we and a
subsidiary, Intermark, owe $42,207.65 for convention display services provided
to SoftKat, Inc., based on a theory of successor liability. We have filed an
answer denying that they are obligated to pay any amounts due from SoftKat.
Recently a plaintiff voluntarily dismissed its complaint against us. On April 7,
1999, Sunclipse, Inc. had filed the complaint against us in the Orange County
Superior Court, State of California. The complaint alleged that we owe
$131,752.06 for goods and services provided to SoftKat, Inc., based on a theory
of successor liability. On May 24, 1999, Sunclipse filed a first amended
complaint seeking the same relief against us as it sought in its original
complaint. We filed an answer denying that we are obligated to pay any debts
incurred by SoftKat. Sunclipse decided not to pursue the complaint after the
case had proceeded into the discovery phase.
On April 30, 1999, Digital Leisure, Inc. filed a complaint against us in the
Orange County Superior Court, State of California. The complaint alleges that we
owe $125,715 for goods and services provided to SoftKat, Inc., based on a theory
of successor liability. We have filed an answer denying that we are obligated to
pay any amounts due that were incurred by SoftKat.
On May 18, 1999, Frank Grange filed a complaint against us in the Sonoma County
Superior Court, State of California. The complaint alleges that we owe
$84,801.40 for damages resulting from a lease between that plaintiff and
SoftKat, Inc., and a judgment obtained against SoftKat for unpaid rent, based on
a theory of successor liability. We have filed an answer denying that we are
obligated to pay any of these claims.
We recently obtained a summary judgment in our favor in another lawsuit filed
against us concerning SoftKat, Inc. On May 25, 1999, Transworld Systems, Inc.
had filed suit against us for $3,998.15 for collection work done on behalf of
SoftKat, Inc. We filed an answer denying that we are obligated to pay any claims
for amounts owed by SoftKat, and later we filed a motion for summary judgment,
which the court granted us.
On June 4, 1999, Cambrix Publishing, Inc. filed a complaint against us in the
Orange County Superior Court, Harbor Justice Center, State of California. The
complaint alleges that we owe $12,067.05 for goods and services provided to
SoftKat, Inc., based on a theory of successor liability. We have filed an answer
denying any liability for these amounts.
-15-
<PAGE>
INTERMARK
- ---------
Intermark Corporation became our subsidiary on August 5, 1998.
On February 5, 1999, Lawrence Tyson filed a complaint against us and a
subsidiary, Intermark, in the San Mateo County Superior and Municipal Courts,
State of California. The complaint alleges that we owe $8,000 on a promissory
note issued by Intermark. We have filed an answer denying that any amount is
owed.
In September, 1999, a lawsuit was filed against Intermark seeking $99,110 for
goods that were claimed to be purchased by Intermark. In October, 1999, the
plaintiff amended the complaint and reduced the amount it is seeking to $81,326.
KISS SOFTWARE CORPORATION
- -------------------------
Kiss Software Corporation became our subsidiary on April 1, 1999.
In May 1999, we settled a lawsuit filed by DS Technologies related to product
royalties and other claims. We paid $51,293 plus 9,303 shares of Common Stock
and our insurance carrier paid $100,000. Kissco had previously accrued
approximately $43,500 toward the settlement.
-16-
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table and paragraphs set forth the names of and certain
information concerning the directors of the Company:
<TABLE>
<CAPTION>
NAME POSITION(S) WITH THE COMPANY AGE
------------------------------------------------------------------------
<S> <C> <C>
Thomas Hemingway Director and Chief Executive Officer 43
T. Richard Hutt Director, Vice President and 60
Secretary/Treasurer
James H. Budd Director and Vice President of Marketing 58
Donald C. Watters, Jr. Director and President and 42
Chief Operating Officer
Norton Garfinkle(2) Director 68
</TABLE>
- -----------
(1) The Company does not have a nominating committee of the Board of
Directors.
(2) A member of the audit committee of the Board of Directors of the
Company, along with Robert Orbach, a former director of the Company,
neither of whom is an employee of the Company.
(3) The Board of Directors acting as a whole performs the functions of the
compensation committee.
-17-
<PAGE>
Thomas ("Tom") Hemingway
- ------------------------
On August 5, 1998, Mr. Hemingway became the Chief Executive Officer and a
director of the Company pursuant to the Agreement and Plan of Share Exchange
among the Company, Intermark Corporation, a California corporation
("Intermark"), and Intermark's securityholders upon the consummation of that
transaction. A co-founder of Intermark, from October 1995 to the present Mr.
Hemingway has served as Chief Executive Officer and in other senior
management positions at Intermark, a software publishing, sales and marketing
company. From August 1994 to September 1995, Mr. Hemingway operated a
consulting business specializing in software sales and marketing. From
January 1994 to July 1994, Mr. Hemingway was chief operating officer at
Ideafisher Systems, an artificial intelligence / associative processing
software company. From August 1993 to December 1993, Mr. Hemingway was
serving as a consultant with L3, an edutainment software company. From
January 1993 to July 1993, Mr. Hemingway was involved in computer-related
consulting in the capacity of chief executive officer of Becker/Smart House,
LV, a home automation enterprise. In 1992, Mr. Hemingway was involved in
making private investments in various industries. Previously, from 1987 to
1991, Mr. Hemingway founded and served as president of Intellinet Information
Systems, a provider of network services and systems. Earlier in his career,
Mr. Hemingway was a founder of Omni Advanced Technologies, a research and
development firm developing products for the computer and communications
industry.
James H. ("Jim") Budd
- ---------------------
Mr. Budd was elected to the Board of Directors on October 27, 1998. In
August, 1998, Mr. Budd became a Vice President of the Company pursuant to the
Agreement and Plan of Share Exchange among the Company, Intermark and
Intermark's securityholders. A co-founder of Intermark, from October 1995 to
the present Mr. Budd has served as Vice President of Marketing and in other
executive capacities of Intermark, a software publishing, sales and marketing
company. From August 1994 to September 1995, Mr. Budd operated a consulting
business specializing in software sales and marketing. From March 1994 to
July 1994, Mr. Budd was vice president of marketing at Ideafisher Systems, an
artificial intelligence / associative processing software company. From
November 1993 to February 1994, Mr. Budd was involved in making private
investments in various industries. Previously, from July 1978 to October
1993, Mr. Budd was founder and chief executive officer of Command Business
Systems, a developer of business software products. Earlier in his career,
Mr. Budd held marketing and sales management positions at Unisys, Nixdorf,
Tymshare, and Prime Computer.
-18-
<PAGE>
T. Richard ("Dick") Hutt
- ------------------------
Mr. Hutt was elected to the Board of Directors on October 27, 1998. In August,
1998, Mr. Hutt became a Vice President and the Secretary of the Company pursuant
to the Agreement and Plan of Share Exchange among the Company, Intermark and
Intermark's securityholders. A co-founder of Intermark, from October 1995 to the
present Mr. Hutt has served as Vice President of Sales and Secretary of
Intermark. From September 1992 to September 1995, Mr. Hutt was distribution
sales manager for Strategic Marketing Partners, a leading national software and
technology marketing firm. Previously, he was in the communications and
mini-computer industry with TRW where he formed the Canadian subsidiary as vice
president of sales. He moved to TRW's Redondo Beach headquarters and managed the
western division until Fujitsu acquired the business unit. Before joining TRW,
he was with NCR's financial sales division in Canada. Prior to that he managed
the VAR division at Wang Laboratories. Moving to Matsushita, he played a key
role in the development of the distribution channel for their Panasonic
products.
Donald C. Watters, Jr.
- ----------------------
Donald Watters, Jr. was elected to the Board of Directors on November 15, 1999.
From April 1, 1999 to the present, Mr. Watters has been the President and Chief
Operating Officer of eSynch Corporation. Formerly, Mr. Watters was President and
CEO of Kiss Software Corporation (KISSCO), a publisher/developer of Internet
software utilities. Prior to Kissco, Mr. Watters was vice president of worldwide
sales of Touchstone Software (Nasdaq: TSSW).
Norton Garfinkle
- ----------------
Norton Garfinkle, who was elected to the Board of Directors on November 15,
1999, is Chairman of Oxford Management Corporation, an investment company
that specializes in building new technology companies. He also serves as
Chairman of several of these portfolio companies, including: Cambridge
Parallel Processing, Cambridge Management Advanced Systems Corporation and
ERS International.
-19-
<PAGE>
BOARD MEETINGS AND COMMITTEES
There were 3 meetings of the Board of Directors of the Company during the fiscal
year of the Company ended December 31, 1998. The Board of Directors established
a standing Audit Committee and a Compensation Committee. In the fiscal year
ended December 31, 1998, the Audit Committee held 2 meetings and the
Compensation Committee held 2 meetings. Each of the directors attended at least
75% of the meetings of the Board and committees on which the director served
during fiscal 1998.
The Audit Committee's function is to review, act on, and report to the Board of
Directors with respect to various auditing and accounting matters, including the
selection of the Company's independent public accountants, the scope of the
annual audits, the nature of non-audit services, fees to be paid to the
independent public accountants, the performance of the Company's independent
public accountants, and the accounting practices of the Company.
The Compensation Committee's function is to review the performance of the
executive officers of the Company and review the compensation programs for other
key employees, including salary and cash incentive payment levels and option
grants.
There is no standing nominating committee or other committee performing a
similar function.
COMPENSATION OF DIRECTORS
We issued a warrant to purchase 350,000 shares of Common Stock to Mr. Norton
Garfinkle upon his election to the Board of Directors.
We have engaged the consulting services of Mr. Garfinkle in connection
with developing our "video-on-demand" business, and have agreed to issue him
additional warrants to purchase shares of Common Stock.
Our non-employee Directors are not currently compensated for attendance at
Board of Director meetings. Non-employee directors from time to time have
been, and in the future may be, granted, on an ad hoc basis, stock options
upon being appointed to the Board. The Company may adopt a formal director
compensation plan in the future. All of the Directors are reimbursed for
their expenses for each Board and committee meeting attended.
-20-
<PAGE>
EXECUTIVE OFFICERS
For information on the business background of Messrs. Hemingway, Budd,
Hutt and Watters, see "Directors" above. The following table and paragraphs set
forth the names of and certain information concerning other executive officers
of the Company:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE POSITION(S) WITH THE COMPANY AGE
--------------------------------------------------------------------
<S> <C> <C>
David Noyes Chief Financial Officer 57
Robert B. Way Vice President 57
</TABLE>
David Noyes -- Mr. Noyes became the Chief Financial Officer of the
Company in July 1999. Mr. Noyes also currently is President of Monarch Capital
(1993 to Present) and President, Chief Financial Officer and a Director of
Directional Recovery Systems, LLC (1995 to Present). In addition he was Chief
Executive Officer, Chief Financial Officer and a Director of American
Furnishings Corp. and California Mattress (1996 to 1997), President, Chief
Financial Officer and Director of California Software Products, Inc. (1996)
and Director and Interim Chief Financial Officer of Griswold Industries(1994
to 1995).
Robert B. Way -- Mr. Way became a Vice President of the Company in
April 1999. Previously, Mr. Way was the Senior Vice President and General
Manager of Kiss Software Corporation , where he served in that capacity from
January, 1997. Before that, Mr. Way was an independent consultant in software
business management specializing in product planning, development and
support. Mr. Way was Vice President and General Manager of California
Software Products, Inc. from 1976 to 1995.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
See "Executive Compensation."
-21-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MANAGEMENT. The following table sets forth as of January 10, 2000, information
regarding beneficial ownership of the Company's stock by each director and each
executive officer, and by all directors and executive officers of the Company as
a group. Each named person and all directors and executive officers as a group
are deemed to be the beneficial owners of shares that may be acquired within 60
days upon exercise of stock options. Accordingly, the number of shares and
percentages set forth next to the name of such person and all directors and
executive officers as a group include the shares issuable upon stock options
exercisable within 60 days. However, the shares so issuable upon such exercise
by any such person are not included in calculating the percentage of shares
beneficially owned by any other stockholder. Based in part upon the absence of
any Schedule 13G or Schedule 13D filings, the Company is not aware of any other
person or group with beneficial ownership in excess of 5% of the Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
COMMON PREFERRED
------ ---------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ ------ ------- ------ -------
<S> <C> <C> <C> <C>
Thomas Hemingway(1) 1,730,609 15.7% 0 0%
T. Richard Hutt(2) 1,234,091 11.6% 0 0%
James H. Budd(3) 1,227,715 11.6% 0 0%
Donald C. Watters, Jr.(4) 1,208,759 10.7% 0 0%
David Noyes(5) 312,500 2.9% 0 0%
Robert Way(6) 295,381 2.7% 0 0%
Norton Garfinkle(7) 460,000 4.4% 0 0%
All Directors and Executive Officers
as a group 7 Persons)(8) 6,469,055 51.3% 0 0%
</TABLE>
- ------------
(1) Includes 542,500 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable. Includes
140,395 shares of Ms. Detra Mauro Hemingway, the spouse of Mr.
Hemingway.
(2) Includes 117,000 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(3) Includes 117,000 shares which may be purchased pursuant to stock options
hich are currently, or within the next 60 days will be, exercisable.
(4) Includes 748,568 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(5) Includes 312,500 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(6) Includes 262,951 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(7) Includes shares held by a corporation and two trusts that are controlled
by him.
(8) Includes all of the shares and options referred to in notes (1) through
(7) above.
-22-
<PAGE>
STOCK OWNERSHIP OF SELLING SECURITY HOLDERS
- -------------------------------------------
The table under "Selling Security Holders" sets forth information regarding
ownership of the Preferred Stock and the Common Stock by those individuals or
groups who own more than five percent (5%) of the Series J Preferred Stock
outstanding. See "Selling Security Holders."
-23-
<PAGE>
DESCRIPTION OF SECURITIES
AUTHORIZED AND OUTSTANDING STOCK
- --------------------------------
The authorized capital stock of eSynch consists of 50,000,000 shares of Common
Stock, $.001 par value, and 1,000,000 shares of Preferred Stock, $.001 par
value. 275 shares of the Preferred Stock are designated as Series J Preferred
Stock and 200 shares are designated as Series K Preferred Stock.
As of January 10, 2000, there were 10,505,463 shares of Common Stock
outstanding, which were held by approximately 350 stockholders of record and
held by approximately 1,279 stockholders beneficially. At the same date,
there were 275 shares of Series J Preferred Stock outstanding and 150 shares
of Series K Preferred Stock outstanding. (See "Preferred Stock" below.)
COMMON STOCK
- ------------
Subject to legal and contractual restrictions on payment of dividends, the
holders of common stock are entitled to receive such lawful dividends as may be
declared by the Board of Directors. In the event of liquidation, dissolution or
winding up of eSynch, the holders of shares of common stock are entitled to
receive all of the remaining assets of eSynch available for distribution to its
stockholders after satisfaction of all its liabilities and the preferences on
Preferred Stock. Holders of our common stock do not have any preemptive,
conversion or redemption rights and there are no sinking fund provisions
applicable to our common stock.
Record holders of our common stock are entitled to vote at all meetings of
stockholders and at those meetings are entitled to cast one vote for each share
of record that they own on all matters on which stockholders may vote.
Stockholders do not presently have cumulative voting rights in the election of
eSynch's directors. As a result, the holders of a plurality of the outstanding
shares can elect all of the directors of eSynch, and the holders of the
remaining shares are not able to elect any of eSynch's directors.
All outstanding shares of common stock are fully paid and nonassessable, and
all shares of common stock to be offered and sold in this offering will be
fully paid and nonassessable.
-24-
<PAGE>
COMMON STOCK OPTIONS
- --------------------
eSynch has a 1999 Stock Incentive Plan. 3,000,000 shares of common stock have
been reserved under the 1999 Stock Incentive Plan for grants. The grants may be
in the form of options, stock purchase rights or stock grants. The Board of
Directors, or a committee designated by the Board of Directors, has discretion
to determine the terms of the grants and the recipients of grants.
Options can be issued with an option term of up to ten years. Options and
restricted stock may be subject to vesting restrictions. Vesting may be either
(a) over a period of time, (b) immediately upon grant, (c) upon the occurrence
of certain events, (d) upon attainment of performance goals, or (e) a
combination of any of these.
At January 10, 2000, apart from the 1999 Stock Incentive Plan, there were
outstanding options to purchase another 2,230,000 shares of common stock,
approximately.
PREFERRED STOCK
- ---------------
The Board of Directors has the authority, without further action by the
stockholders, to issue the authorized and unissued shares of preferred stock in
one or more series and to fix the rights, preferences and privileges thereof,
including voting rights, terms of redemption, redemption prices, liquidation
preferences, number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. Although it
presently has no intention to do so, the Board of Directors, without stockholder
approval, may issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of common stock. This
provision may be deemed to have a potential anti-takeover effect, and the
issuance of preferred stock in accordance with such provision may delay or
prevent a change of control of eSynch.
-25-
<PAGE>
Series J Preferred Stock
- ------------------------
The Series J Preferred Stock was issued for cash in the amount of $10,000 per
share.
The holders of Series J Preferred Stock are entitled to dividends at the rate of
7% per year. The dividends are not required to be paid until conversion or
redemption of the shares or an acquisition of eSynch; however unpaid dividends
will cumulate. We have the option of paying the dividends either in cash or in
our common stock (in the latter case, based on the conversion price then in
effect).
The holders of Series J Preferred Stock are entitled to a preference in the
event we liquidate our corporation. That preference is in an amount of $10,000
per share, plus cumulated and unpaid dividends. Any and all of the remaining
assets could be distributed to holders of junior securities (e.g., other shares
of preferred stock or Common Stock), in order of seniority.
We must give holders of Series J Preferred Stock 45 days' notice prior to a
merger or acquisition of eSynch. Such a transaction can only be effected if the
holders of the Series J Preferred Stock maintain their relative rights,
preferences and privileges. A transaction that is inconsistent with this
provision is prohibited.
Holders of Series J Preferred Stock are not entitled to vote in the election of
directors. The vote of holders of three-fourths of the Series J Preferred Stock
outstanding is required, however, to reclassify any of our outstanding
securities (e.g., a stock split), to make a distribution with respect to any
stock that is junior to the Series J Preferred Stock (e.g., any dividend to
holders of Common Stock), or to authorize any securities senior to the Series J
Preferred Stock or having rights on a parity with the Series J Preferred stock.
The Series J Preferred Stock does not become convertible into Common Stock until
January 28, 2000 or any earlier date on which the SEC determines this offering
becomes effective. Also, the terms of the Series J Preferred Stock will not
permit the conversion of Series J Preferred Stock by a selling security holder
if it and its affiliates would thereby own more than 4.99% of the outstanding
Common Stock.
The Series J conversion price is initially equal to $3.50, subject to
adjustment. The conversion price of Series J Preferred Stock is subject to a
floor price of $3.50 until January 28, 2000. At the floor price, the number of
shares of Common Stock issuable upon conversion of one shares of Series J
Preferred Stock is $10,000.00 divided by $3.50.
After January 28, 2000, the conversion price is the lower of $3.50 or 80% of the
average of the six lowest closing bid prices in the twenty-trading-day period
ending on the day before conversion.
-26-
<PAGE>
For illustration, the shares of Series J Preferred Stock would be convertible
into the following numbers of shares of Common Stock at these trailing average
prices as of a day when the Series J Preferred Stock are converted:
<TABLE>
<CAPTION>
Average Per Series J Common Stock Percentage of
of Lowest Conversion Conversion Issuable Outstanding
Closing Bids Price Rate on Full Conversion Common Stock
- ------------ --------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
$4.375 or more $3.50 2,857 shs. 785,714 7.8%
$4.25 $3.40 2,941 shs. 808,823 8.0%
$3.75 $3.00 3,333 shs. 916,666 8.9%
$3.25 $2.60 3,846 shs. 1,057,692 10.2%
$2.75 $2.20 4,545 shs. 1,250,000 11.8%
</TABLE>
For instance, the lowest closing bid prices of the Common Stock, in the
period ended November 26, 1999, were $2.8125, $2.9375, $3.2812, $3.5312,
$3.5312, and $3.50. Their average is $3.2656, which would have resulted in a
conversion price of $2.61 on November 27, 1999.
The conversion price is also subject to ordinary adjustments to prevent
dilution. Cash is payable in lieu of issuing any fractional shares upon
conversion.
The Series J Preferred Stock would be automatically converted into Common
Stock on the third anniversary of the issuance of the Series J Preferred
Stock (the third anniversaries falling between August and October, 2002),
with extensions in certain events until not more than two years later. The
conversion price is the same as the normal conversion price that is
applicable on the date conversion becomes mandatory.
We have the right to redeem all or any of the outstanding Series J Preferred
Stock for cash. The redemption price is $12.000 per share, plus cumulated
dividends. eSynch is required to give the holders 30 days' notice and to
deposit the redemption price in escrow.
In the event of our merger, acquisition, or sale of all of our assets, we are
required to redeem all of the outstanding Series J Preferred Stock. The
redemption price in this event will be the greater of $12,500 per share or
the value of the number of shares of Common Stock issuable upon conversion
based on the closing bid price of the Common Stock, on the day preceding the
consummation of the transaction. The redemption price in such event is
payable at least $12,500 per share in cash and the balance, if any, in cash
or our shares of Common Stock, at our election.
Each holder of Series J Preferred Stock has a right to require us to redeem
all or a portion of his Series J Preferred Stock for cash if we breach any
agreement or representation made to the holders of Series J Preferred Stock
in a material respect, or in the event the registration statement that
includes this prospectus is not declared effective by February 28, 2000, its
effectiveness lapses or trading is suspended for a period of five consecutive
business days, or if we fail to perform our obligations to such holders
-27-
<PAGE>
concerning delivery of Common Stock upon conversion within ten business days.
The redemption price in this event will be the greater of $12,500 per share or
the value of the number of shares of Common Stock issuable upon conversion based
on the closing bid price of the Common Stock, on the day preceding the
triggering event.
Series K Preferred Stock
- ------------------------
The Series K Preferred Stock was issued for cash in the amount of $10,000 per
share.
The holders of Series K Preferred Stock are entitled to dividends at the rate
of 7% per year. The dividends are not required to be paid until conversion or
redemption of the shares or an acquisition of eSynch; however unpaid
dividends will cumulate. We have the option of paying the dividends either
in cash or in our common stock (in the latter case, based on the conversion
price then in effect).
The holders of Series K Preferred Stock are entitled to a preference in the
event we liquidate our corporation. That preference is in an amount of
$10,000 per share, plus cumulated and unpaid dividends. Any and all of the
remaining assets could be distributed to holders of junior securities (e.g.,
other shares of preferred stock or Common Stock), in order of seniority.
We must give holders of Series K Preferred Stock 45 days' notice prior to a
merger or acquisition of eSynch. Such a transaction can only be effected if
the holders of the Series K Preferred Stock maintain their relative rights,
preferences and privileges. A transaction that is inconsistent with this
provision is prohibited.
Holders of Series K Preferred Stock are not entitled to vote in the election
of directors. The vote of holders of three-fourths of the Series K Preferred
Stock outstanding is required, however, to reclassify any of our outstanding
securities (e.g., a stock split), to make a distribution with respect to any
stock that is junior to the Series K Preferred Stock (e.g., any dividend to
holders of Common Stock), or to authorize any securities senior to the Series
K Preferred Stock or having rights on a parity with the Series K Preferred
stock.
The Series K Preferred Stock does not become convertible into Common Stock
until April 29, 2000 or any earlier date on which the SEC determines this
offering becomes effective. Also, the terms of the Series K Preferred Stock
will not permit the conversion of Series K Preferred Stock by a selling
security holder if it and its affiliates would thereby own more than 4.99% of
the outstanding Common Stock.
The Series K conversion price is initially equal to $3.50, subject to
adjustment. The conversion price of Series K Preferred Stock is subject to a
floor price of $3.50 until January 28, 2000. At the floor price, the number
of shares of Common Stock issuable upon conversion of one shares of Series
K Preferred Stock is $10,000.00 divided by $3.50.
After April 29, 2000, the conversion price is the lower of $3.50 or 80% of
the average of the six lowest closing bid prices in the twenty-trading-day
period ending on the day before conversion.
For illustration, the shares of Series K Preferred Stock would be convertible
into the following numbers of shares of Common Stock at these trailing
average prices as of a day when the Series K Preferred Stock are converted:
<TABLE>
<CAPTION>
Average Per Series K Common Stock Percentage of
of Lowest Conversion Conversion Issuable Outstanding
Closing Bids Price Rate on Full Conversion Common Stock
- -------------- ----------- ------------ ------------------- --------------
<S> <C> <C> <C> <C>
$4.375 or more $3.50 2,857 shs. 785,714 7.8%
$4.25 $3.40 2,941 shs. 808,823 8.0%
$3.75 $3.00 3,333 shs. 916,666 8.9%
$3.25 $2.60 3,846 shs. 1,057,692 10.2%
$2.75 $2.20 4,545 shs. 1,250,000 11.8%
</TABLE>
For instance, the lowest closing bid prices of the Common Stock, in the
period ended January 7, 2000, were $3.828, $4.313, $4.875, $5.188, $5.438,
and $5.625. Their average is $4.878, which would have resulted in a
conversion price of $3.50 on January 7, 2000 because 80% of $4.878 is $3.90.
The conversion price is also subject to ordinary adjustments to prevent
dilution. Cash is payable in lieu of issuing any fractional shares upon
conversion.
The Series K Preferred Stock would be automatically converted into Common
Stock on the third anniversary of the issuance of the Series K Preferred
Stock (the third anniversaries falling between December, 2002 and January
2003), with extensions in certain events until not more than two years later.
The conversion price is the same as the normal conversion price that is
applicable on the date conversion becomes mandatory.
We have the right to redeem all or any of the outstanding Series K Preferred
Stock for cash. The redemption price is $12.000 per share, plus cumulated
dividends. eSynch is required to give the holders 30 days' notice and to
deposit the redemption price in escrow.
In the event of our merger, acquisition, or sale of all of our assets, we
are required to redeem all of the outstanding Series K Preferred Stock. The
redemption price in this event will be the greater of $12.500 per share or the
value of the number of shares of Common Stock issuable upon conversion based
on the closing bid price of the Common Stock, on the day preceding the
consummation of the transaction. The redemption price in such event is
payable at least $12.500 per share in cash and the balance, if any, in cash
or our shares of Common Stock, at our election.
Each holder of Series K Preferred Stock has a right to require us to redeem
all or a portion of his Series K Preferred Stock for cash if we breach any
agreement or representation made to the holders of Series K Preferred Stock
in a material respect, or in the event the registration statement that
includes this prospectus is not declared effective by February 28, 2000, its
effectiveness lapses or trading is suspended for a period of five consecutive
business days, or if we fail to perform our obligations to such holders
concerning delivery of Common Stock upon conversion within ten business days.
The redemption price in this event will be the greater of $12.500 per share
or the value of the number of shares of Common Stock issuable upon conversion
based on the closing bid price of the Common Stock, on the day preceding the
triggering event.
WARRANTS
- --------
The warrants held by the selling security holders entitle
those holders to purchase shares of Common Stock. They include warrants
expiring August 13, 2002 to purchase 112.500 shares at approximately $3.00
each, warrants expiring September 30, 2000 to purchase 75,000 shares at
approximately $5.17 each, and an additional warrant expiring October 29, 2002
to purchase 9,375 shares at a price of approximately $3.45 per share.
Also, there are warrants outstanding held by others to purchase approximately an
additional 1,935,508 shares at various prices and expiring at various times.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
- -------------------------------------------
The Delaware Corporations Code, certain terms of the Series J Preferred Stock,
and our ability to issue the authorized and available shares of Preferred Stock
and Common Stock, each may prevent or delay a takeover of our company. Thus the
holders of Common Stock might not be able to realize a premium price for their
shares.
REGISTRATION RIGHTS
- -------------------
This offering is being registered with the SEC pursuant to a registration rights
agreement with the holders of Series J Preferred Stock and registration
rights agreements with two holders of Common Stock. See "Plan of
Distribution."
We also have granted piggyback registration rights to holders of shares of
Common Stock, warrants or options. In addition to the shares in this offering,
those shares of Common Stock may become eligible for registration.
TRANSFER AGENT AND REGISTRAR
- ---------------------------
The stock transfer agent and registrar for our common stock is Interwest
Transfer Company, Inc., located at 1981 E. Murray Holladay Road, Salt Lake City,
Utah 84117.
-28-
<PAGE>
DIVIDEND POLICY
- ---------------
Under applicable law, dividends cannot be paid until we have generated earnings.
Also we are prohibited from paying cash dividends to the holders of Common Stock
while any Series J Preferred Stock of Series K Preferred Stock is outstanding.
However, it will be our policy to retain internally generated funds to support
future expansion of our business. Accordingly, even if we do generate earnings,
and even if we are not prohibited from paying dividends, we will not declare or
pay cash dividends on our common stock, at least for the foreseeable future.
INTEREST OF NAMED EXPERTS AND COUNSEL
We are indebted to Stradling Yocca Carlson & Rauth, P.C. for unpaid fees and
costs in the amount of approximately $100,000. Members of the firm own shares of
our Common Stock or options to acquire such shares in an aggregate amount of
less than 1% of the number of shares presently outstanding.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
eSynch's Restated Certificate of Incorporation requires eSynch to indemnify any
and all persons who may serve or who have served at any time as directors or
officers, or who, at the request of the board of directors of eSynch, may serve,
or at any time have served as directors or officers of another corporation in
which eSynch at such time owned or may own shares of stock, or which it was or
may be a creditor, and the respective heirs, administrators, successors, and
assigns. Indemnification is required to the full extent permitted by the General
Corporation Law of Delaware as it may from time to time be amended. Subject to
that limitation, eSynch is required to provide indemnification against any and
all expenses, including amounts paid on judgment, counsel fees, and amounts paid
in settlement (before or after suit is commenced), actually or necessarily by
such persons in connection with the defense or settlement or any claim, action,
suit, or proceeding in which they, or any of them, are made parties, or a party,
or which may be assessed against them or any of them, by reason of being or
having been directors or officers of eSynch, or such other corporation.
eSynch's Restated Certificate of Incorporation provides that a director of
eSynch shall have no personal liability to eSynch or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (i) for
any breach of a director's duty of loyalty to eSynch or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under section 174 of the
General Corporation Law of Delaware as it may from time to time be amended or
any successor provision thereto (which concerns unlawful payment of dividends
or stock redemptions), or (iv) for any transaction from which a director
derived an improper personal benefit.
-29-
<PAGE>
The Bylaws of eSynch permit indemnification of persons who were directors,
officers, employees or agents of eSynch or of another enterprise if the person
was serving at the request of the board of directors of eSynch as a director,
officer, employee or agent of that enterprise. The indemnification is permitted
either (a) if the person is successful on the merits in defending the claim or
(b) if indemnification is authorized in the specific instance by eSynch. If
claims are brought in eSynch's name against the indemnified person,
indemnification is permitted only if the person was acting in good faith and in
a manner reasonably believed to be in the best interests of eSynch. If the
person is unsuccessful in defending a claim brought in eSynch name,
indemnification is only permitted if the court acting in the matter specifically
allows it. eSynch is authorized to advance expenses to a person upon that
person's agreement to repay eSynch if ultimately such person is not entitled to
indemnification.
eSynch has indemnification agreements with its directors and certain officers.
These agreements require us to indemnify the parties to these agreements to the
maximum extent permitted by applicable law and to advance expenses to that party
upon that party's agreement to repay eSynch if ultimately such person is not
entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
-30-
<PAGE>
DESCRIPTION OF BUSINESS
We were incorporated in Delaware on December 21, 1988, as Tri-Nem, Inc. On
October 5, 1994, the Company changed its name to Innovus Corporation. On
November 9, 1998, the Company changed its name to ESYNCH CORPORATION.
On August 5, 1998, we were acquired through a reverse merger agreement with
Intermark Corporation. Our headquarters was moved from Utah to Southern
California. See "Certain Relationships and Related Transactions."
During the first half of 1998, we shrunk our operations in order to conserve
cash. We stopped manufacturing or developing our multimedia authoring
software. After the acquisition, we focused our efforts on debt reduction and
winding up the former business of Innovus Multimedia Corporation. We began a
new business direction with the software publishing and distribution business
of Intermark and development of its proprietary Electronic Digital Delivery
technology.
In November 1998, all of the shares of common stock were reclassified and
combined in a one-for-ten reverse stock split.
In November 1998, we acquired the stock of SoftKat, Inc. We experienced
difficulties with its business and finances, and sold the company in 1999.
On April 1, 1999, we acquired the stock of Kiss Software Corporation
(KISSCO), of Newport Beach, California. Kissco develops, publishes and sells
Internet utility products.
On September 30, 1999 eSynch acquired the stock of Oxford Media Corporation,
a leading designer and developer of digital technologies for video-on-demand.
eSynch strategy
- ---------------
Our business objective is to become a market leader for digital distribution.
We provide advanced computer Internet utility programs and video-on-demand
products, and we market and sell software and video on the Internet. We
believe that we will become a leader in Electronic Digital Distribution.
Electronic Digital Distribution is the delivery of software, video or audio
content from a wide range of sources.
We employ a proprietary Electronic Digital Distribution system that allows a
digital product to be wrapped in a secure digital envelope and distributed
across the Internet and cable and satellite networks. We also employ the
system in eSynch's online malls. The ESD system automates an optimized
electronic delivery, security, tracking, and accountability protocol. Our
target customers include dealers, resellers and end-users. We generate
revenue by selling digital content or software and by selling advertising
space in our digital delivery process, which allows for banner advertising.
We face competition in the electronic delivery market, including competition
from larger, well-financed companies.
-31-
<PAGE>
Recent Announcements
- --------------------
During the first quarter of 1999, we opened 800MALL.com, a web ite that sells
software, directly to consumers, through Yahoo!, and also began to sell our
"Health Optimizer" software on AOL. In 1999 to September 30, visits to eSynch
web sites exceeded 22 million. In the same period, we estimate that 32 percent
of our electronic revenues were generated through international sales. Our
Internet malls are accessible to 118 countries.
In the first quarter, Kissco, our new wholly-owned subsidiary, through its
Japanese partners, Winning Run and Supreme Resources International, and in
conjunction with MediaVision, established channel bundling agreements with Canon
Sales. Canon is the major distributor of Compaq in Japan. Canon has bundled
Kissco's Speed Surfer-J and MediaVision's Web Driver with Compaq and IBM
computers in Japan.
In July 1999, we entered a licensing agreement with Ingram Micro,
headquartered in Santa Ana, Calif., one of the largest wholesale providers of
technology products and services. Under the agreement, eSynch is entitled to
offer Ingram Micro's entire product line through the eSynch e-commerce
system. Our associated web site is in the development and testing phase. We
anticipate intense competition from the companies named above and others.
In August, we commenced a bundling arrangement with MindSpring Enterprises Inc.,
a leading national Internet service provider. Under terms of the agreement,
customers who purchase eSynch/Kissco utilities, including Modem Wizard 4.0, Undo
& Recover Toolbox, and WebSnake, will find the MindSpring software included with
the utility. The software will allow customers to start a free 30-day trial
subscription to MindSpring's Internet Service and they will waive the $25
activation fee.
With our recent introduction of "video-on-demand," we believe we can become a
leader in the Electronic Digital Distribution-TM- market. Oxford is now a
leader in DVD development, working with several film libraries and
independent production companies to digitize film and video. Oxford offers
the full range of MPEG compression/encoding, Dolby Digital audio, authoring,
graphics and design, with capabilities for multiple languages, subtitling,
interactivity and Internet access. Oxford Media Corp., revolutionized the
video on-demand industry with new innovative proprietary digital programming
technologies in MPEG 1 and MPEG 2. Oxford became one of the first companies
to utilize MPEG compression for full-length movies and play on-demand high
quality images.
-32-
<PAGE>
We also offer proprietary software, including:
* Modem Wizard and NetMonitor
* Undo & Recover Toolbox
* WebSnake
* CoolCat
* Speed Surfer
Modem Wizard is our best-selling software utility. It is an Internet optimizer,
troubleshooter, and fix-it tool that works on any Internet connection (including
cable modem, DSL, and T1). In May, we had begun shipping Modem Wizard 4.0.
recently we also announced Modem Wizard, version 4.5, with several added
features.
NetMonitor is a stand-alone program within Modem Wizard. In just six weeks, our
offer of free downloads of NetMonitor generating 15 million visits to our web
site, and 7 million banner views. The increase in web site visits produced a
record month for eSynch's Internet sales. In the beginning of June, NetMonitor
premiered on ZDNet, and within 48 hours, had amassed over 50,000
downloads---making it the #1 download of the week on the ZDNet web site. Shortly
thereafter, due to the massive response our free NetMonitor received, we
partnered with Ziff-Davis (NYSE: ZD) to distribute our free NetMonitor, through
CD-ROM to all Ziff-Davis publications (including PC Magazine, PC Computing,
etc.)
Undo & Recover Toolbox is a utility to undo step-by-step any changes the user
has made to computer setup files. In the August issue of PC World, Undo &
Recover Toolbox was given a "Best Buy" award by the editors at the publication.
WebSnake automates Web searching, filters Web data and retrieves specified
information, so you can review it later at PC speeds, bypassing Web bottlenecks.
CoolCat is an easy-to-use HTML editor, with professional features such as tag
sets for every flavor of HTML, WebTV, Cold Fusion and JavaScript; comprehensive
project-wide document management with integrated FTP; a built-in preview
browser, and extended support for every significant HTML layout feature. It has
pop-up property windows for links, font sizing and colors, horizontal rules,
text formatting, and easy table and image layout handling.
We face intense competition in the software utilities market, including from
much larger, well-financed software developers and publishers. Microsoft
Corporation, for instance, has historically succeeded at incorporating utilities
into its operating systems.
-33-
<PAGE>
Patents, trademarks and copyrights
- ----------------------------------
We have a non-exclusive license from Oxford Management Corporation to its
video-on-demand technology and patents. We have applied for federal registration
of various trademarks and service marks." If we receive the registration for
these trademarks, the trademark will be effective for ten (10) years and may be
renewed every ten (10) years indefinitely. Under common law, these trademarks
have an unlimited duration. We have not applied for federal copyright
registration for our software.
Employees
- ---------
As of January 2000 eSynch had 23 full-time employees and no part-time
employees. Of our full-time employees, 4 were in marketing and sales, 6 were
in senior management, 5 were in administration, 5 were in development and 3
were in operations. We also plan to hire approximately 20 people to handle
customer support functions.
We believe that our relations with our employees are satisfactory. We are not a
party to any collective bargaining agreements and we have never experienced any
work stoppage. As eSynch continues to grow and introduce more products and
services, we expect to hire additional personnel.
Research and Development
- ------------------------
We estimate that during the past two years we have spent approximately
$ on research and development activities. We have borne substantially
all of this cost ourselves without receiving research and development
payments from our customers.
Costs to comply with environmental laws
- ---------------------------------------
We have not incurred any substantial cost related to complying with any
environmental laws (federal, state and local) and do not foresee any such
substantial costs.
More information available from the SEC
- ---------------------------------------
We file reports with the Securities and Exchange Commission. We have filed
reports with the SEC on Forms 10-KSB, 10-QSB, 8-K, and Schedule 14A. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding us and other issuers that file
electronically with the SEC. The address of the site is http:\\www.sec.gov.
Also, you may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the Public Reference Room by calling the SEC at
1-800-SEC-0330.
-34-
<PAGE>
Governmental Regulation and Legal Uncertainties
- -----------------------------------------------
eSynch is currently subject to various laws and regulations relating to our
business. Few laws or regulations are currently directly applicable to our
current and expected activities on the Internet. However, new laws and
regulations relating to the following areas may be adopted because of the
Internet's popularity and growth:
* Online content.
* User privacy.
* Taxation.
* Access charges.
* Copyrights.
* Characteristics and quality of products and services.
* Consumer protection.
Such government regulation may impose additional burdens on our business. They
may also impede the growth in Internet use and thereby decrease the demand for
our products and services or otherwise have a material adverse effect on our
business, operations and financial condition.
Additionally, U.S. and foreign laws applicable to e-commerce or Internet
communications are becoming more prevalent. These laws have been recently
enacted and there is uncertainty regarding their impact on the marketplace. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could materially adversely affect
us. If we were alleged to violate federal, state or foreign civil or criminal
laws, even if we could successfully defend such claims, it could materially
adversely affect us.
Several telecommunications carriers are supporting regulation of the Internet
by the FCC in the same manner that the FCC regulates other telecommunications
services. These carriers have alleged that the growing popularity and use of
the Internet has burdened the existing telecommunications infrastructure,
resulting in interruptions in phone service. Local telephone carriers such as
Pacific Bell, a subsidiary of SBC Communications Inc., have petitioned the
FCC to regulate Internet service providers in a manner similar to
long-distance telephone carriers and to impose access fees on Internet
service providers. Any such regulations could substantially increase the
costs of communicating on the Internet. This, in turn, could slow the growth
in Internet use and thereby decrease the demand for our products and services
or otherwise have a material adverse effect on our business, financial
condition and operating results.
-35-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following Selected Financial Data should be read in conjunction with the
financial statements and notes thereto found elsewhere herein.
The financial statements have been prepared on the basis of the Company
continuing as a going concern. The Company has incurred losses from operations
and negative cash flows from operating activities and has accumulated a negative
tangible net worth at September 30, 1999 in the amount of $1,902,264. These
conditions raise substantial doubt regarding the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
<TABLE>
<CAPTION>
Year Ended December 31,1998 December 31, 1997
---------------- -----------------
<S> <C> <C>
Sales $ 203,571 $ 496,070
Cost of Sales 156,617 229,032
Gross Profit 46,954 267,038
Operating Expenses
General and Administrative 1,999,340 857,094
Amortization of Goodwill 228,330
Interest 132,641 16,253
Amortization of Debt Discount 355,567
Impairment loss on assets to be sold 2,323,841
Loss Before Extraordinary Item (4,992,765) (606,309)
Debt Forgiveness 14,423
Net Loss $ (4,978,342) $ (606,309)
</TABLE>
Year ended December 31, 1998 compared to year ended December 31, 1997
- ---------------------------------------------------------------------
Net sales were $203,571 in 1998 compared to $496,070 in 1997. 1998 included
$109,000 from SoftKat operations for the period November 17, 1998 through
December 31, 1998. The Company's decision in 1998 to focus on ESD reduced the
direct product sales activity and marketing services were discontinued.
Substantial customer returns and credits reduced SoftKat sales activity from
operational activity prior to its acquisition.
The cost of product sold in 1998 was 77% compared to 46% in 1997. This was
due to the sales of the lower margin SoftKat product through its retail
distribution and lower sales activity.
-36-
<PAGE>
General and administrative expenses were $ 1,999,340 in 1998 compared with
$857,094 in 1997. Legal and accounting expenses increased to $321,000 in 1998
from $24,855 due to costs incurred with the Innovus merger and with the SoftKat
acquisition. Costs associated with the beneficial conversion feature of notes
payable was $355,567 and interest expense was $132,641 in 1998 versus $16,253 in
1997, respectively. In addition, cost associated with the issuance of stock was
$393,000 and stock options $69,000 in 1998 versus $251,000 and $0 in 1997. Costs
associated with amounts accrued for payroll taxes and penalties were $362,000 in
1998 versus $129,000 in 1997. Outside services were $201,000 in 1998 versus
$58,000 in 1997 with the increase activity in stockholder relations of being a
public Company.
Amortization of goodwill was $228,330 and represented amortization of the
goodwill generated by the SoftKat acquisition of $2,670,000 and written off on
the straight-line basis using an estimated useful life of 3.63 years.
The net loss was $ 4,978,342 for 1998 compared with $606,309 in 1997. The loss
in 1998 included $2,323,841 on the loss recorded on the sale of SoftKat,
$228,330 on the amortization of the goodwill generated by the SoftKat
acquisition and SoftKat operating loss for the period November 17, 1998 through
December 31, 1998 in the amount of $111,359. In addition, the Company has
accrued additional expenses for the SoftKat disposal of $100,000 and estimated
that other expenses incurred in 1998 relating to the SoftKat acquisition and
operations approximated $250,000 which were included in general and
administrative expenses. On May 25, 1999 SoftKat was sold to a third party for
$50,000 cash and a note receivable of $100,000 which resulted in the above loss
of $2,323,841. Only the $50,000 cash received is recognized in the calculation
of the loss. The subsequent sale and resulting loss provided evidence of
conditions for accounting purposes.
Nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998
- ----------------------------------------------------------------------
During the nine months ended September 30, 1999, net sales were $917,400
compared to $15,293 for the comparable period of the prior year. The sales
amount for the nine months ended September 30, 1999 included sales for SoftKat
in the amount of $477,011. SoftKat has been sold to a third party.
The costs of products sold in the nine months ended September 30, 1999 was
$459,944 compared with $ 9,940 for the comparable period in the prior year.
Operating losses for the nine months ended September 30, 1999 were $6,533,658
compared to an operating loss of $1,192,503 for the comparable period in the
prior year. The increased operating loss was due to the difficulties associated
with SoftKat operations and increased public relations due to the Company being
a publicly traded company.
Stock issued for services was $1,622,164 for the nine months ended September 30,
1999 and stock based compensation associated with stock options and warrants
amounted to $2,021,347 for the same period in the 1998 fiscal year.
-37-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At September 30 1999 the Company had $734,490 of cash and a deficit in working
capital (current liabilities in excess of current assets) of $2,555,066.
The Company has been relying upon short-term borrowings from affiliates and
others, as well as proceeds from issuances of common stock and preferred stock.
The Company estimates that during the third fiscal quarter of 1999 it was using
approximately $300,000 more cash each month than was generated by operations.
At December 31, 1998 the Company had $1,413 of cash and cash equivalents and a
deficit in working capital (current liabilities in excess of current assets) of
$2,154,676. The Company has been relying upon short-term borrowings and proceeds
from issuances of stock. The proceeds from the issuance of long-term debt were
$558,000 in 1998 versus $85,000 in 1997. In addition stock was issued for
services of $393,000 in 1998 versus $251,000 in 1997.
Subsequent to December 31, 1998, the Company issued 310,377 shares of stock for
cash and notes in the amount of $715,000 and issued 168,500 shares of stock for
services in the amount $477,000.
In August, September and October 1999, the Company received an investment
in the aggregate amount of $2,625,000 for 262 1/2 shares of Series J
Preferred Stock and accompanying warrants.
-38-
<PAGE>
DESCRIPTION OF PROPERTY
In 1999, our headquarters was moved to a single-tenant facility in Tustin,
California of approximately 30,000 square feet under a long-term lease.
Management believes that the space will adequately provides for our warehousing
and distribution requirements, as well as expansion of our publishing,
marketing and sales operations. Management believes the amount of space will
be adequate for the foreseeable future. The condition of the property is
generally good. The property is located in an office and industrial area with
nearby access to freeways and airports.
-39-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 1, 1999, the Company acquired Kiss Software Corporation, a
California corporation ("Kissco"). Donald C. Watters, Jr. was a major
shareholder of Kissco and received in that acquisition 381,270 shares of Common
Stock, and the Company also assumed a Kissco option entitling Mr. Watters to
acquire 48,568 shares of Common Stock at a price of $ 2.11 per share. Robert B.
Way was also a shareholder of Kissco and received in the acquisition 32,430
shares of Common Stock, and the Company also assumed a Kissco option entitling
Mr. Way to acquire 19,427 shares of Common Stock at $ 2.11 per share.
On September 30, 1999, the Company acquired Oxford Media Corporation, a Delaware
corporation, for 450,000 shares of the Company's Common Stock. Oxford Media
Corporation was controlled by Mr. Norton Garfinkle. In addition, for consulting
services and services as a director of the Company, Mr. Garfinkle has received
warrants to purchase 350,000 shares of Common Stock.
CHANGE IN CONTROL
On August 5, 1998, the Company finalized an Agreement and Plan of Share Exchange
with Intermark Corporation ("Intermark"). Under the Agreement, as amended, the
shareholders of Intermark exchanged all of the outstanding capital stock of
Intermark for 103,367 shares of common stock of the Company and for 2,665 shares
of the Company's newly created Series H Preferred stock convertible into
approximately 4,427,224 shares of Common Stock. In addition, the Company assumed
Intermark options which are now exercisable to purchase up to 631,800 shares of
the Company's common stock.
On May 8, 1998, after the close of business, the Company had entered into an
Agreement and Plan of Share Exchange dated as of May 8, 1998 (the "Agreement")
by and among the Company and Intermark Corporation, a California corporation
("Intermark"), and the securityholders of Intermark Corporation
("Exchanging Securityholders"). On June 17, 1998, the Company entered into the
First Amendment of Agreement and Plan of Share Exchange dated as of May 8, 1998.
On July 30, 1998, the Company entered into the Second Amendment of Agreement and
Plan of Share Exchange dated as of May 8, 1998 ("Second Amendment").
The closing of the transactions contemplated by the Agreement ("Closing")
occurred on August 5, 1998. The Closing resulted in a change in control of
the Company. The Agreement, as amended by the First Amendment and the Second
Amendment, provided for the Exchanging Securityholders to deliver and
exchange all of the outstanding capital stock of Intermark and options or
other rights to purchase such capital stock for capital stock of the Company
aggregately having voting power equal to 77.5% of the capital stock of the
Company aggregately outstanding as of immediately after the Closing.
Accordingly Messrs. Hemingway, Budd and Hutt became the beneficial owners of
approximately 62% of the Company's capital stock as of the Closing. Intermark
became a wholly-owned subsidiary of the Company upon the Closing.
-40-
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is currently quoted on the OTC Bulletin Board, Symbol ESYN. The
following table reflects the high and low closing bid
quotations reported by the OTC Bulletin Board. Such prices represent
inter-dealer quotations, do not include markups, markdowns, or commissions and
may not reflect actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
Year Ended December 31, 1998
(As adjusted for 1 for 10 reverse stock split)
-----------------------------
<S> <C> <C>
-----------------------------
January 1 to March 31, 1998 $ 2.10 $ 0.70
April 1 to June 30, 1998 $ 4.20 $ 1.50
July 1 to September 30, 1998 $ 3.20 $ 1.20
October 1 to December 31, 1998 $ 1.56 $ 1.00
Year Ended December 31, 1999
------------------------------------------
January 1 to March 31, 1999 $ 4.87 $ 1.00
April 1 to June 30, 1999 $ 3.50 $ 2.06
July 1 to September 30, 1999 $ 4.75 $ 1.69
October 1, 1999 to December 31, 1999 $ 7.25 $ 2.81
</TABLE>
The Company has not paid any cash dividends since its inception. The Company is
prohibited from paying dividends on its Common Stock while it has outstanding
any shares of Series K Preferred Stock or Series J Preferred Stock and until it
has surplus funds legally available. The Company currently intends to retain
future earnings in the operation and expansion of its business and does not
expect to pay any cash dividends in the foreseeable future.
From November, 1995 to November, 1997, the Company's Common Stock was listed
on the Nasdaq SmallCap market. In November, 1997, the Company was de-listed
from Nasdaq.
As of September 27, 1999 there were 342 holders of record of the Common
Stock.
-41-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation received by the Company's Chief
Executive Officer and by each of the persons who were, for the fiscal year ended
December 31, 1998, the other four most highly compensated executive officers of
the Company whose total compensation during that year exceeded $100,000 (the
"Named Officers"), for the three fiscal years ended December 31, 1998 or for the
shorter period during which the Named Officer was compensated by the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- --------------------------
NAME AND SECURITIES
PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)(2) COMPENSATION
- - ------------- ---- ------ ----- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Hemingway 1998 $ 88,789 292,500 shs.
CEO
James H. Budd 1998 $ 52,868 117,000 shs.
Vice President
T. Richard Hutt 1998 $ 64,281 117,000 shs.
Vice President
</TABLE>
- - ----------
(1) Perquisites and other personal benefits did not for any Named Officer in
the aggregate equal or exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported in this table for such person.
(2) The amounts in the table represent shares of the Company's Common Stock
covered by stock options of the named individual assumed by eSynch
Corporation from Intermark Corporation effective August 5, 1998.
-42-
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has an employment agreement with each Executive Officers listed
below. The terms of those employment agreements is summarized in the following
table:
<TABLE>
<CAPTION>
CURRENT BASE OPTION OTHER BENEFITS DUE ON
NAME COMPENSATION GRANT BENEFITS TERMINATION
- ----------- ------------ -------- ------------- ----------------------------------
<S> <C> <C> <C> <C>
Thomas C. Hemingway $150,000 250,000 Any If he is terminated by the Company
CEO at $1.00 benefits without cause, he is paid an amount
each, for other equal to 12 months' base salary and
fully officers, all other benefits and perquisites
vested and 3 weeks continue for 12 months and
vacation the Company will be
per year required to repurchase
all his stock and options
at the 30-day average market price.
Donald Watters, Jr. $150,000 250,000 Any If he is terminated by the Company
President and COO at $1.00 each, benefits without cause, he is paid an amount
fully vested for other equal to 12 months' base salary and
and 450,000 officers, all other benefits and perquisites
shares and 3 weeks continue for 12 months and
at $0.50 vacation the Company will be
each, per year required to repurchase
fully vested all his stock and options
at the 30-day average market price.
James H. Budd $130,000 Any If he is terminated by the Company
Vice President benefits without cause, he is paid an amount
for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 2 weeks continue for 3 months and all stock
vacation options held by him vest and
per year become exercisable.
Robert Way $110,000 250,000 Any If he is terminated by the Company
Vice President at $1.00 each, benefits without cause, he is paid an amount
fully vested for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 3 weeks continue for 3 months and all stock
vacation options held by him vest and
per year become exercisable.
T. Richard Hutt $130,000 Any If he is terminated by the Company
Vice President benefits without cause, he is paid an amount
for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 2 weeks continue for 3 months and all stock
vacation options held by him vest and become
per year exercisable.
David P. Noyes $150,000 250,000 at Any If he is terminated by the
Company $1.00 each, benefits without cause, he is paid an amount
CFO fully vested, for other equal to 6 months' base salary and
and 250,000 officers. all other benefits and perquisites
at $1.00 each, and 3 weeks continue for 6 months and all stock
vesting vacation options held by him vest and become
ratably over per year exercisable.
two years
</TABLE>
-43-
<PAGE>
OPTION GRANTS DURING FISCAL 1998
The following table sets forth information on all grants of stock
options during the fiscal year ended December 31, 1998, to Named Officers:
<TABLE>
<CAPTION>
OPTION GRANTS TABLE
OPTION GRANTS IN FISCAL YEAR 1998
INDIVIDUAL GRANTS POTENTIAL
-------------------------------------------------- REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM($)(4)
NAME GRANTED(1) YEAR(2) ($/SHARE) DATE(3) 5% 10%
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Hemingway 292,500 46.3% $0.94 April, 2008 $1,386,148 $2,193,861
James H. Budd 117,000 18.5% $0.94 April, 2008 $ 554,459 $ 877,545
T. Richard Hutt 117,000 18.5% $0.94 April, 2008 $ 554,459 $ 877,545
</TABLE>
- - --------
(1) The amounts in the table represent shares of the Company's Common Stock
covered by stock options assumed by the Company that had been granted by
Intermark Corporation. Each option is exercisable in full.
(2) Options to purchase an aggregate of 631,800 shares of common stock were
assumed by the Company during the fiscal year ended December 31, 1998 that
had been granted to employees, including the Named Officers.
(3) Options held by the Named Officers have a term of 10 years, subject to
earlier termination in certain events related to termination of
employment.
(4) These columns present hypothetical future values of the stock obtainable
upon exercise of the options net of the options' exercise price, assuming
that the closing market price of the Company's common stock, as reported
on the Nasdaq over-the-counter Bulleting Board on October 5, 1999,
appreciates at a 5% and 10% compound annual rate over the ten year term of
the options. The 5% and 10% rates of stock price appreciation are
presented as examples pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and do not necessarily reflect
management's estimate or projection of the Company's future stock price
performance. The potential realizable values presented are not intended to
indicate the value of the options.
-44-
<PAGE>
OPTION EXERCISES IN FISCAL 1998 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options
which were exercised during, or held at the end of, fiscal 1998 by the Named
Officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
ACQUIRED ON REALIZED -----------------------------------------------------
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tom Hemingway -0- -0- 542,500 -0- $1,509,425 -0-
James H. Budd -0- -0- 117,000 -0- $ 328,770 -0-
T,. Richard Hutt -0- -0- 117,000 -0- $ 328,770 -0-
</TABLE>
- - ----------
(1) Market value of underlying securities at exercise date or year end, as
the case may be, minus the exercise or base price of "in-the-money"
options. The value of options is based on the closing sale price for the
Company's common stock as of October 5, 1999 as reported on the Nasdaq
OTC Bulletin Board, which was $3.75, minus the exercise price.
-45-
<PAGE>
FINANCIAL STATEMENTS
ESYNCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants 47
Consolidated Balance Sheet - December 31, 1998 48
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 50
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1997 and 1998 51
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 52
Notes to Consolidated Financial Statements 53
</TABLE>
-46-
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East Broadway, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
eSynch Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of eSynch
Corporation and Subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eSynch Corporation
and Subsidiaries as of December 31, 1998 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 in the
financial statements, the Company has suffered substantial and recurring losses
from operations and negative cash flows from operating activities. At December
31, 1998, the Company has negative working capital and a capital deficiency.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plan in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
June 10, 1999
-47-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical (Note 2)
---------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 1,413 $ 1,413
Inventory 13,693 13,693
Other receivable - 50,000
----------- ----------
Total Current Assets 15,106 65,106
----------- ----------
Equipment 162,194 162,194
Less accumulated depreciation (109,988) (109,988)
----------- ----------
Net Equipment 52,206 52,206
----------- ----------
Assets to be sold - primarily goodwill 4,552,847 -
----------- ----------
Total Assets
$ 4,620,159 $ 117,312
=========== ==========
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current Liabilities
Trade accounts payable $1,120,281 $1,120,281
Accrued liabilities 692,840 692,840
Notes payable 406,661 406,661
Liabilities relating to assets to be sold 4,502,847 -
---------- ----------
Total Current Liabilities 6,722,629 2,219,782
---------- ----------
Redeemable Preferred Stock - $0.001 par value;
600,000 shares authorized; 600,000 shares of
Series I issued and outstanding; liquidation
preference - $600,000 600 600
---------- ----------
Stockholders' Deficit
Preferred stock - $0.001 par value; 400,000 shares
authorized; none issued or outstanding - -
Common stock - $0.001 par value; 20,000,000 shares
authorized; 6,889,829 issued and outstanding 6,889 6,889
Additional paid-in capital 3,541,295 3,541,295
Accumulated deficit (5,651,254) (5,651,254)
---------- ----------
Total Stockholders' Deficit (2,103,070) (2,103,070)
---------- ----------
Total Liabilities and Stockholders' Deficit $4,620,159 $ 117,312
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-49-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Product Sales $ 203,571 $ 496,070
Cost of Goods Sold 156,617 229,032
----------- ----------
Gross Profit 46,954 267,038
----------- ----------
Operating and Other Expenses
General and administrative 1,999,340 857,094
Amortization of goodwill 228,330 -
Interest 132,641 16,253
Amortization of debt discount 355,567 -
Impairment loss on assets to be sold 2,323,841 -
----------- ----------
Total Operating and Other Expenses 5,039,719 873,347
----------- ----------
Loss Before Extraordinary Item (4,992,765) (606,309)
Extraordinary Gain From Debt Forgiveness 14,423 -
----------- ----------
Net Loss $(4,978,342) $ (606,309)
=========== ==========
Basic and Diluted Loss per Common Share
Loss before extraordinary item $ (0.91) $ (12.54)
Extraordinary gain from debt forgiveness - -
----------- ----------
Net Loss $ (0.91) $ (12.54)
=========== ==========
Weighted Average Number of Common Shares
Used in Per Share Calculation 5,476,874 48,345
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-50-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
--------------------- ------------------ Paid-In Accumulated Stockholder
Shares Amount Shares Amount Capital Deficit Deficit
--------- ---------- ---------- ------ -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 16,378 $ 16 21,350 $ 21 $ 7,963 (66,603) (58,603)
Shares issued for services 51,788 52 68,007 68 251,045 - 251,165
Net loss for the year - - - - - (606,309) (606,309)
--------- ----- ---------- ------- ---------- --------- -----------
Balance - December 31, 1997 68,166 68 89,357 89 259,008 (672,912) (413,747)
Shares issued for services 2,692 3 1,461 1 276,981 - 276,985
Acquisition of Innovus - - 1,215,375 1,215 (861,286) - (860,071)
Conversion of preferred shares (80,286) (80) 4,516,088 4,516 (4,436) - -
Beneficial conversion feature - - - - 355,567 - 355,567
Shares issued for conversion of
notes payable and accrued interest 9,428 9 172,548 173 567,918 - 568,100
Acquisition of SoftKat - - 720,000 720 2,668,680 - 2,669,400
Shares issued for services - - 100,000 100 115,900 - 116,000
Shares issued for conversion of
accounts payable - - 20,000 20 24,980 - 25,000
Shares issued for interest payment
on note payable - - 55,000 55 68,695 - 68,750
Compensation relating to the grant
of stock options - - - - 69,288 - 69,288
Net loss for the year - - - - - (4,978,342) (4,978,342)
--------- ----- ---------- ------- ---------- ----------- -----------
Balance - December 31, 1998 - - 6,889,829 $ 6,889 $3,541,295 $(5,651,254) $(2,103,070)
========= ===== ========== ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-51-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(4,978,342) $ (606,309)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortization of goodwill 228,330 -
Depreciation 36,910 5,254
Stock issued for interest 68,750 -
Amortization of debt discount 355,567 -
Stock issued for services 392,985 251,165
Compensation from stock options granted 69,289 -
Impairment loss on assets to be sold 2,323,841 -
Forgiveness of debt (14,423) -
Changes in assets to be sold 610,103 -
Changes in liabilities relating to assets
to be sold (498,744) -
Payment of company expenses by employee - 4,507
Changes in operating assets and liabilities,
net of effects of businesses acquired:
Accounts receivable 25,000 3,220
Inventory (13,693) -
Other receivables - 40,000
Accounts payable 259,305 99,950
Accrued liabilities 410,489 166,099
------------ ----------
Net Cash Used By Operating Activities (724,633) (36,114)
------------ ----------
Cash Flows From Investing Activities
Payments for the purchase of equipment (5,823) (19,923)
------------ ----------
Net Cash Used By Investing Activities (5,823) (19,923)
------------ ----------
Cash Flows From Financing Activities
Proceeds from issuance of debt 806,071 73,482
Principal payments on notes payable (74,202) (19,048)
------------ ----------
Net Cash Provided By Financing Activities 731,869 54,434
------------ ----------
Net Increase (Decrease) In Cash 1,413 (1,603)
Cash - Beginning of Year - 1,603
------------ ----------
Cash - End of Year $ 1,413 $ -
============ ==========
</TABLE>
Supplemental cash flow information and noncash investing and
Financing activities - Note 8
The accompanying notes are an integral part of these financial statements.
-52-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Intermark Corporation ("Intermark") was
incorporated under the laws of the State of California in October 1995. On
August 5, 1998, Intermark was reorganized into Innovus Corporation, a
publicly-held shell corporation, as explained in Note 2. By shareholder action,
Innovus Corporation, the parent company, changed its name to eSynch Corporation
("eSynch") on November 9, 1998. On November 17, 1998, eSynch acquired SoftKat
Inc. ("SoftKat"). Subsequent to December 31, 1998, SoftKat was sold to a
third-party. See Note 2.
The primary activities of eSynch, the consolidated company, have consisted of
raising capital, acquiring Innovus Corporation and SoftKat Inc., and limited
retail and turnkey sales of software games and various other programs and
related marketing services through distribution channels and through the
Internet.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Intermark Corporation ("Intermark") for all
periods presented, the accounts of Innovus Corporation and SoftKat, Inc. from
the dates of their acquisitions on August 5, 1998 and November 17, 1998,
respectively. These entities are collectively referred to as "eSynch" or the
"Company". All inter-company transactions and balances have been eliminated in
consolidation. In accordance with the accounting treatment on the impairment of
long-lived assets to be disposed of, the accounts of SoftKat has been
consolidated under two line items on the financial statements, "Assets to be
sold" and "Liabilities relating to assets to be sold", respectively. The
carrying amount of assets to be sold has been adjusted by the impairment loss
on the subsequent sale of SoftKat.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumption that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BUSINESS CONDITION - The financial statements have been prepared on the basis
of the Company continuing as a going concern. The Company has incurred losses
from operations and negative cash flows from operating activities and has
accumulated a deficit at December 31, 1998 in the amount of $5,651,253. These
conditions raise substantial doubt regarding the Company's ability to continue
as a going concern. Management's plan to mitigate the impact of these
conditions is to obtain additional equity financing through the issuance of the
Company's common stock, convertible preferred stock or warrants. As discussed
in Note 12, the Company has obtained a signed commitment from an investment
source for equity financing in the aggregate amount of $2,500,000. The Company
is also currently in negotiations for additional financing arrangements.
However, realization of the proceeds form these potential transactions is not
assured. These financial statements do not include any adjustments relating to
the
-53-
<PAGE>
recoverability and classification of recorded assets or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS - The Company operates exclusively in
the software industry, accordingly, segment information relating to operations
in different industries is not presented in these financial statements. The
concentration of business in the highly competitive software industry subjects
the Company to concentrated market risk. During the year ended December 31,
1997, sales to three major customers totaled 31%, 19%, and 15% of sales,
respectively. Sales to any major customer in 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The amounts reported as cash, accounts
payable, notes payable, and liabilities relating to assets to be sold are
considered to reasonable approximations of their fair values. The fair value
estimates were based on market information available to management at the time
of the preparation of the financial statements.
INVENTORY - Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventory balance at year-end
consisted of packaged software.
EQUIPMENT - Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the equipment, which
are five to seven years. Maintenance and repairs of equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale, or
other disposition of equipment, the cost and accumulated depreciation are
eliminated from the accounts and gain or loss is included in operations.
STOCK-BASED COMPENSATION - Stock-based compensation to employees is measured by
the intrinsic value method. This method recognizes compensation expense related
to stock options granted to employees based on the difference between the fair
value of the underlying common stock and the exercise price of the stock option
on the date granted. Compensation expense related to stock options granted to
non-employees is determined based upon the fair value of the stock options on
the date granted.
ADVERTISING COSTS - Advertising costs have been recognized as expense when
incurred, and amounted to none and $13,056 during the years ended December 31,
1998 and 1997, respectively
LOSS PER SHARE - The Company computes basic and diluted loss per share in
accordance with Statement of Financial Accounting Standards No. 128, ("SFAS
128"), "Earnings Per Share." Basic loss per common share is computed by
dividing net loss available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted loss per share
is calculated to give effect to stock warrants, options and convertible notes
payable except during loss periods when those potentially
-54-
<PAGE>
issuable common shares would decrease the loss per share. The effects of
1,751,800 potentially issuable common shares outstanding at December 31, 1998
were excluded from the calculation of diluted loss per share for the year ended
December 31, 1998, as they would have decreased the loss per share.
REVENUE RECOGNITION - The Company sells software products at fixed prices for
which the right to return is granted to the buyer. Accordingly, revenue is
recognized when the buyer has paid for the products and the amount of future
returns can be reasonably estimated. Cost of products sold is recognized at the
date the sale is recognized less an estimate for sales returns. Until the sale
is recognized, products purchased from publishers are accounted for as
consigned product from publishers and the related cost is not reflected in the
financial statements with the exception of a limited amount of software
inventory owned by the Company at year-end.
NEW ACCOUNTING STANDARDS - In March 1998, the AICPA issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company is currently analyzing the impact of this statement,
which is required to be adopted in 1999, and does not expect this statement to
have a material impact on the Company's financial position, results of
operations or cash flows.
The Financial Accounting Standard Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" in June 1998. This statement is
effective for the year beginning January 1, 2000 and will not require
retroactive restatement of prior period financial statements. The Company does
not believe the new statement will have any impact on the financial statements
but it has not completed its evaluation of SFAS 133.
NOTE 2--ACQUISITIONS
INNOVUS - In May 1998, Intermark entered into an Agreement and Plan of Share
Exchange (the "Agreement") with Innovus Corporation (Innovus), a publicly held
Delaware corporation, which had discontinued its operations by May 1998.
Innovus had 1,215,375 (post 1-for-10 split) common shares outstanding on August
5, 1998 when the Agreement was completed. Under the terms of the Agreement, the
shareholders of Intermark exchanged all of the 3,783,875 Intermark common
shares for 1,033,669 shares of common stock and 78,706 shares of Series H
preferred stock of Innovus and Intermark was reorganized into a newly-formed
subsidiary of Innovus. The Series H preferred shares had voting rights
equivalent to the 4,427,213 common shares into which they were convertible. As
a result, the Intermark shareholders became the majority shareholders of the
Company in a transaction intended to qualify as a tax-free reorganization. The
transactions were accounted for as the recapitalization of Intermark at
historical cost and the issuance of common stock in exchange for the net
liabilities of Innovus in the amount of $860,071 which were recorded at their
historical cost. The operations of Innovus were not significant to the
operations of the Company; therefore, pro forma results of operations are not
presented.
-55-
<PAGE>
SOFTKAT - On November 17, 1998, the Company acquired SoftKat, Inc,. a
California corporation primarily engaged in the wholesale distribution of
computer software games. In exchange for the SoftKat common shares, the Company
issued 720,000 common shares and 600,000 shares of Series I redeemable,
convertible preferred shares. Up to an additional 720,000 common shares are
contingently issuable based upon the difference between the market price of the
common stock one year from the date of acquisition and a target market price of
$3.00 per share. The acquisition was accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value of the
common and preferred stock issued and the addition contingently issuable common
shares, was $2,670,000. The excess of the purchase price over the estimated
fair value of the identifiable acquired assets less liabilities assumed was
$6,882,300, which was recognized as goodwill. The results of operations of
SoftKat have been included in the 1998 consolidated financial statements from
the date of acquisition and consisted of sales of $109,317 and a net loss of
$111,359. Goodwill expense was recognized from the acquisition date on the
straight-line basis using an estimated useful life of 3.6 years.
In February 1999, Management of the Company decided to dispose of SoftKat
because it did not meet the core business objectives of the Company. On May 25,
1999, SoftKat was sold to a third party for $50,000 cash and a note receivable
for $100,000 which resulted in the recognition of an impairment loss of
$2,323,841. The subsequent sale and resulting loss provided evidence of
conditions that existed at December 31, 1998; therefore, an impairment loss was
recognized in 1998 in accordance with SFAS No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
impairment loss was determined by the excess of the carrying amount of the
assets in excess of the $50,000 subsequently collected and the amount of the
related liabilities. The $100,000 note receivable was not considered in the
computation of the impairment loss or the resulting carrying value of the
assets to be sold, but will be recognized when and if collected. The resulting
amount of the assets to be sold and the related liabilities assumed by the
buyer have been presented separately in the accompanying balance sheet. The
unaudited pro forma consolidated balance sheet is to present the Company's
financial position had the disposition of SoftKat occurred on December 31,
1998.
Pro forma information, assuming the acquisition and subsequent sale occurred on
January 1, 1998 and 1997, would have exact opposite reporting effects,
effectively netting to the pro forma results presented in the historical
operations of the Company. Therefore, pro forma operating information relating
to SoftKat is not presented.
-56-
<PAGE>
NOTE 3--EQUIPMENT
Equipment consisted of the following:
Furniture and fixtures $ 3,233
Computer equipment 155,882
Office equipment 3,079
---------
Total $ 162,194
=========
Depreciation expense for the years ended December 31, 1998 and 1997 was $36,910
and $ 5,254, respectively.
NOTE 4--NOTES PAYABLE
Notes payable consisted of the following:
Capital lease obligations for equipment $ 768
12% Line of credit payable to a bank; secured by all
assets of the Company; due September 30, 1998; in default 22,893
40% Convertible note payable to a shareholder; unsecured;
due March 15, 1999 300,000
10% Series A Convertible debentures payable to three
shareholders; secured by all assets of the Company;
due October 31, 1998; in default 75,000
Note payable to a shareholder; no stated rate of
interest; payable on demand; unsecured 8,000
---------
Total Notes Payable $ 406,661
=========
In September 1997, the Company established a line of credit with a limit of
$25,000, with a bank. The note was due September 8, 1998. The loan is
guaranteed by three officers of the Company and bears interest at 3% over the
prime rate (12% at December 31, 1998). The Company has not made any principal
payments since the inception of the loan and the loan is currently in default.
From January through October 1998, the Company issued convertible notes payable
totaling $495,500. The notes bore interest at 10% in addition to the
amortization of the discount resulting from the beneficial conversion feature.
The notes were converted into 142,383 shares of common stock and 9,428 shares
of Series H preferred stock in October 1998.
-57-
<PAGE>
The $300,000 note payable to a shareholder is convertible into common shares at
$3.00 per share. The conversion period began on the date of the note and
terminates on the due date of March 15, 1999 unless the entire principal
payment of the note is not made by the due date at which time the conversion
right reverts back to the holder indefinitely. In December 1998, the Company
issued 55,000 common shares to the note holder as interest on the note. The
amount recorded as interest expense for these shares was $68,750. During 1999,
the Company made cash payments of $30,000 interest and $125,000 principal to
the holder. The Company is currently in default on the remaining balance of the
loan.
The 10% Series A convertible debentures in the amount of $25,000 each were
issued in April 1998 to three shareholders. The note holders are entitled, at
their option, to convert the debenture principal face amount then outstanding,
together with accrued interest, into shares of the Company's common stock at a
conversion price of $0.125 per share. The Company is currently in default on
the debentures.
NOTE 5--INCOME TAXES
There was no provision for or benefit from income tax for any period. The
components of the net deferred tax asset at December 31, 1998 are shown below:
Operating loss carry forwards $ 1,190,549
Valuation Allowance (1,190,549)
-----------
Net Deferred Tax Asset $ -
===========
For tax reporting purposes, the Company has net operating loss carry forwards
in the amount of $2,896,848 which will expire beginning in the year 2011.
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Tax at statutory rate (34%) $(1,692,637) $ (206,145)
Non-deductible expenses 1,083,122 10,327
Change in valuation allowance 919,440 233,075
State tax benefit, net of federal
tax effect (313,636) (38,197)
Change in effective tax rate 3,711 940
----------- ----------
Net Income Tax Expense $ - $ -
=========== ==========
</TABLE>
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<PAGE>
NOTE 6--ACCRUED LIABILITIES
Included in accrued liabilities are $612,170 in obligations to states and the
federal government for overdue payroll taxes from previous years and the
estimated interest and penalties owing on such tax and obligations for
estimated payroll taxes, interest and penalties on 1996, 1997, and 1998 officer
wages and 1998 employee wages that have not been reported to the respective
governmental agencies.
NOTE 7--COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENTS - On January 5, 1998, the Company entered into a software
programming consulting agreement with an unrelated third party. Under the terms
of the agreement, the consultant received cash payments of $2,000 in 1998 and
$10,000 in 1999 upon completion of the project on April 12, 1999. The
consultant was also issued 45,000 shares of common stock on April 12, 1999. The
amount of expense recognized during 1999 on the shares issued was $146,250.
On August 27, 1998, the Company entered into a marketing consulting agreement
with an unrelated third party. Under the terms of the agreement, the consultant
was issued 30,000 shares of common stock for $100. The Company is obligated to
issue 30,000 common shares each three months to the consultant. The agreement
is through August 1999 and is cancelable by either party. The amount of expense
recognized on the shares issued under this agreement is calculated using the
market value of the stock at the end of the three month period.
LEASE COMMITMENTS - The Company leases office and warehouse facilities under
two-year agreements accounted for as operating leases. Lease expense for the
years ended December 31, 1998 and 1997 was $56,400 and $51,875. In July 1998,
the Company renewed one lease through May 31, 2000 at $4,700 per month. In May
1999, the Company moved to a new office and warehouse facility and entered into
a new five-year operating lease. The lessor of the existing lease granted the
Company an unconditional release from the lease effective as of the date of
relocation. Monthly minimum rental payments on the new lease are $20,010 to be
adjusted upwards by 4% for each succeeding year during the term of the lease.
The following is a schedule of future minimum rental payments required under
existing leases and the new lease.
Years Ending December 31:
1999 $ 178,880
2000 249,725
2001 259,714
2002 270,102
2003 280,906
Thereafter 97,381
----------
Total $1,336,708
==========
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<PAGE>
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH
INVESTING AND FINANCING ACTIVITIES
Supplemental Cash Flow Information -
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
Cash paid for interest $ 256 $ 3,876
NONCASH INVESTING AND FINANCING ACTIVITIES -
During the year ended December 31, 1998, the Company converted $25,000 of
accounts payable to common stock. The Company also converted notes payable in
the amount of $558,131 and accrued interest in the amount of $9,967 into common
stock.
During August 1998, the Company issued 1,215,375 shares of common stock in
exchange for the assets and liabilities of Innovus Corporation.
Liabilities were assumed as follows:
Fair value of assets acquired $ 46,670
Common stock issued 860,071
-----------
Liabilities Assumed $ 906,741
===========
On November 17, 1998, the Company issued 600,000 shares of Series I Preferred
Stock and 720,000 shares of common stock in exchange for all of the issued and
outstanding common stock of SoftKat, Inc. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired
other than goodwill $ 789,670
Goodwill 6,882,300
Common and preferred stock issued (2,670,000)
-----------
Liabilities Assumed $ 5,001,591
===========
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<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY
On August 5, 1998, Intermark was recapitalized as discussed in Note 2. To
effect the recapitalization, the Intermark shareholders at that date
exchanged all of the 3,783,875 outstanding Intermark common shares for
78,706 shares of Series H preferred stock and 1,033,669 common shares of
Innovus (now eSynch Corporation). The recapitalization of Intermark was
accounted for at historical cost. The accompanying financial statements,
including the following description of equity transactions, have been
restated for all periods presented to reflect the preferred and common
shares issued in the recapitalization. On November 9, 1998, the shareholders
approved a 1-for-10 reverse stock split of all common shares outstanding at
that date. The accompanying financial statements have also been restated for
all periods presented to reflect the stock split on a retroactive basis.
The Series I redeemable preferred stock has a liquidation preference of $1.00.
The Company is required to redeem 200,000 shares of the preferred stock at
$1.00 per share upon obtaining financing of $1,500,000 or more from any source
and must redeem an additional 200,00 shares of preferred stock upon obtaining
an additional $3,000,000 in funding. Dividends on the preferred stock are
payable prior and in preference to any declaration or payment of any dividends
on the common stock, when, as, and if declared by the Board of Directors.
However, there is no stated dividend rate. The preferred stock is convertible,
at the option of the holder, into common stock at the lesser of $3.00 per share
or the average closing bid price of the common stock over the ten trading days
ending on either November 16, 1999 or an earlier date on which the Company
receives a second funding of at least $3,000,000 mentioned above. The preferred
stock has voting rights equivalent to the number of common shares into which it
can be converted and has additional voting rights with respect to approval of
any issuance of a senior series of preferred shares.
On October 3, 1995, the Company issued 16,254 shares of Series H preferred
stock and 21,350 common shares for $8,000 cash at $0.01 per common equivalent
share. On May 19, 1997, the Company issued 44,697 shares of Series H preferred
stock and 58,699 common shares to members of the Board of Directors as
compensation for their services during 1995. The shares were valued at $22,000,
or $0.01 per common equivalent share, which was the fair value of the services
provided and the fair value of the preferred and common shares issued as
established by management of the Company and based upon the value at which
shares were issued for cash during 1995. The Company issued 7,091 shares of
Series H preferred stock and 9,308 common shares effectively in July 1997 for
services valued at $229,165, or $0.56 per share.
-61-
<PAGE>
On August 5, 1998, 1,112 shares of Series H preferred stock and 1,461 common
shares were issued for services valued at $164,876, or $2.58 per common
equivalent share. The value of these services was determined based upon the
trading price of the Company's common stock at that date. On September 16,
1998, the Company issued 1,580 shares of Series H preferred stock to third
parties for services. The services were valued at $112,108 based upon the
trading price of the Company's common shares into which the preferred shares
were convertible, or $1.26 per common equivalent share on the date issued.
On August 5, 1998, for financial reporting purposes, the Company issued
1,215,375 common shares to acquire Innovus, as further discussed in Note 2.
Innovus was a shell corporation with no operations and nominal assets.
Therefore, the shares were recorded at the historical cost of the net
liabilities assumed of $860,071.
During 1998, the Company issued 9,428 shares of Series H Preferred stock and
172,548 common shares for notes payable and accrued interest. The value of the
notes converted was $558,131 and the value of the accrued interest converted
was $9,969.
On November 9, 1998, the Series H preferred shareholders converted 80,286
shares of Series H preferred stock, pursuant to their terms, into 4,516,088
common shares at the rate of 56.25 common shares for each preferred share
converted.
The Company recognized $355,567 of interest expense relating to beneficial debt
conversion features associated with notes payable issued during 1998. The value
of the conversion feature was determined based upon the difference between the
fair value of the Company's common stock on the dates the notes were issued and
the conversion rates. The proceeds received were allocated $355,567 to the
beneficial conversion feature and the remainder to the notes. The resulting
discount on the notes was recognized as interest expense through the dates the
notes were first convertible which were the same dates as the notes were
issued.
On November 17, 1998, the Company acquired SoftKat, Inc. in exchange for the
issuance of 720,000 common shares and 600,000 redeemable, convertible Series I
preferred shares. Up to an additional 720,000 common shares are contingently
issuable based upon the difference between the market price of the common stock
one year from the date of acquisition and a target price of $3.00 per share.
The purchase price, based upon the fair value of the common and preferred stock
issued was $2,670,000.
An officer of SoftKat was issued 100,000 common shares as compensation. The
value of these shares was $116,000. The value of the services was determined
based upon the fair value of the services provided and the fair value of the
preferred and common shares.
On December 18, 1998, the Company issued 20,000 common shares as a settlement
of accounts payable. The value of the accounts payable was $25,000.
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<PAGE>
As described in Note 4, on December 8, 1998, the Company issued 55,000 common
shares to a note holder as interest on a note payable. The value of these
shares was $68,750 and was determined using the fair value of the common shares
on the date of issuance.
NOTE 10 - FORGIVENESS OF DEBT
The Company negotiated reductions in accounts payable during 1998 and paid the
negotiated amounts. The amount of the debt forgiveness is $14,423 and has been
accounted for as an extraordinary gain.
NOTE 11 - STOCK OPTIONS
The Board of Directors approved a stock option plan in April of 1998 which
authorized options to purchase 600,000 shares of common stock. Options to
purchase 540,000 common shares were granted under the plan on April 24, 1998,
with a weighted-average exercise price of $0.99 per shares. The Plan was
approved and the options were granted. The options became exercisable
immediately. 450,000 of the unexercised options expire on April 24, 2003 and
the remaining 90,000 unexercised options expire on April 24, 2008. Compensation
relating to the options of $69,288 was recognized when the shares vested which
was on the date of grant. After the merger with Innovus, the number of options
and the price of the options were recalculated. The number of options now
exercisable is 631,800 with a weighted average exercise price of $0.90. 549,900
of the options expire on April 24, 2003 and the remaining 81,900 options expire
on April 24, 2008. No additional expense needs to be recognized in association
with the recalculation of the options outstanding and the exercise price.
A summary of the status of the Company's stock options as of December 31, 1998
and changes during the year then ended are presented below:
<TABLE>
<CAPTION>
1998
-----------------------------
Weighted-Average
Shares Exercise Price
------------ ----------------
<S> <C> <C>
Outstanding at beginning of year - -
Granted 1,031,800 $ 0.90
------------
Outstanding at end of year 1,031,800 0.90
============
Options exercisable at year-end 631,800 0.84
============
Weighted-average fair value of
of options granted during the year $ 0.91
============
</TABLE>
-63-
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/98 Life Price At 12/13/98 Price
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.25 81,900 9.32 years $0.21 81,900 $0.21
$0.855 - $1.00 949,900 4.70 $0.96 549,900 $0.94
</TABLE>
The Company measures compensation under stock-based options and plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations.
Stock-based compensation charged to operations was $69,288 and $0 for the years
ended December 31, 1998 and 1997. Had compensation cost for the Company's
options been determined based on the fair value at the grant dates consistent
with the alternative method set forth under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, net loss and loss
per share would have increased to the pro forma amounts indicated below for the
year ended December 31, 1998:
Net loss:
As reported $ (4,978,342)
Pro forma (5,415,327)
Basic and diluted loss per share:
As reported $ (0.91)
Pro forma (0.99)
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: dividend yield of
0.0% for both periods; expected volatility of 73.0% and 0%; risk-free interest
rate of 5.63%, 5.68% and 0% and expected life of the options of 5.0 years, 10.0
years and 0.0 years.
NOTE 12 - SUBSEQUENT EVENTS
On January 13, 1999, the Company entered into a one-year agreement with a
consulting firm to provide financial advisory services for the Company. As
consideration for these services, the Company issued 200,000 five-year warrants
to purchase shares of the Company's common stock at $1.25 per share. In
addition, the Company has agreed to compensate the consulting firm based on the
total consideration the Company receives in the future from the consulting
firm's efforts as follows: 5% on the first $1,000,000, 4% on the next
$1,000,000, 3% on the next $1,000,000, and 2% on any balance.
-64-
<PAGE>
On January 28, 1999, the Company entered into consulting agreements whereby
the consultants are to provide various services to the Company including
negotiating contracts on behalf of the Company and introducing the Company
to various Internet companies. As consideration for these services, the
consultants received 310,000 shares of common stock. The 1999 expense
recognized for these shares will be $450,500.
On April 1,1999, the Company acquired Kiss Software Corporation ("Kiss"), a
California corporation engaged in the wholesale and retail distribution of
computer and Internet utility software products. Under the agreement,
shareholders of Kiss agreed to exchange each of their common shares for
0.181557136 common shares of eSynch and each of their preferred shares for
0.4183964 common shares of eSynch. The exchange resulted in the Company issuing
1,428,134 common shares to Kiss shareholders. The Company also issued 163,187
options in conjunction with the purchase. These options are exercisable at
$2.05 each. The acquisition has been accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value of the
common stock and options issued, was estimated at $4,141,978 (unaudited). The
excess of the purchase price over the estimated fair value of the identifiable
acquired assets less liabilities assumed was $5,237,979 (unaudited), which will
be recognized as goodwill. Goodwill will be amortized over 3.11 years on a
straight-line basis.
On March 19, 1999, the Company borrowed $250,000 from an unrelated third party.
The related note is unsecured and interest accrues at the rate of 5.0% per
annum. The note and accrued interest are payable on or before July 5, 1999.
On March 15, 1999, the Company entered into a lease agreement for new
facilities. The base monthly rental is $20,010 and is adjusted each year by 4%
over the previous years base rent after adjustment. The term of the lease is
for five years and the Company has the option to extend the lease for an
additional five years.
On March 25, 1999, an officer of the Company loaned the Company $90,000 at an
interest rate of 10%. The principal amount of the note was repaid shortly
thereafter.
On April 22, 1999, the Company entered into a one year agreement with a
consultant to assist the Company in raising equity financing. The advisor is to
receive 5% of the gross amount of the proceeds of any equity financing
consummated by the Company during the term of the agreement.
On May 25, 1999, the Company sold all of the stock of SoftKat, Inc. to an
unrelated third party for $50,000 cash and a note receivable of $100,000 due
180 days after the date of sale. See Note 2.
-65-
<PAGE>
On June 1, 1999, the Company entered into a one year agreement with a
consulting firm whereby the firm is to provide ongoing stock market support for
the Company. The agreement is renewable for successive one year periods. As
consideration for these services, the Company is to pay $48,000 ($4,000
monthly) plus reasonable expenses. For the period of June 1, 1999 through
August 31, 1999, the monthly amount is to be paid in commons shares of the
Company. The first cash payment of $4,000 was due September 1, 1999.
On June 10, 1999, the Company issued 75,000 shares of common stock for
$150,000 in cash. (Unaudited.)
On June 11, 1999, the Company agreed to pay $50,000 in cash and agreed to issue
9,039 shares of common stock as a compromise and settlement of a lawsuit
relating to a legal dispute between Kiss Corporation and a third-party.
(Unaudited.)
Subsequent to December 31, 1998, the Company issued 478,500 shares of common
stock to various individuals for services provided to the Company. The expense
recognized from the issuance of these shares will be $927,175.
(Unaudited.)
Effective August 13, 1999, the Company entered into an Agreement from an
investing source for equity financing in an aggregate amount of $2,500,000,
subject to certain terms and conditions. The financing is in the form of
preferred stock and warrants issued by the Company. The Company issued 262.5
shares of Series J Preferred Stock, with each share convertible into common
stock under certain conditions as described. In addition the Company issued
warrants to purchase 187,500 shares of the Company common stock at a price
equal to 115% of the closing stock price on the date before the closing date.
The Company has agreed to sell, for $125,000 in cash, an additional 12.5 shares
of Series J Preferred Stock and warrants to purchase 9,375 shares of Common
Stock.
The Series J Preferred Stock is convertible into the Company's common stock at
a price equal to the lower of 80% of the average closing bid price on the
lowest six trading days in the consecutive 20 days prior to conversion or the
average closing price for the five trading days before closing, subject to a
$3.50 floor in the conversion price to January 28, 1999.
The Company is obligated, at its expense, to file for the registration of the
common stock issuable upon conversion within 60 days of closing, with an
effective date within 150 days after closing or the investors will be entitled
to a registration payment equal to 2% of the purchase price for the first 30
days the Company is tardy and 3% for every 30 day period thereafter.
-66-
<PAGE>
INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
ESYNCH CORPORATION
TABLE OF CONTENTS
Condensed Consolidated Balance Sheet - September 30, 1999
(Unaudited)
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 734,490
Inventory . . . . . . . . . . . . . . . . . . . . . . . 87,593
Other receivable. . . . . . . . . . . . . . . . . . . . 14,608
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 92,203
-----------
Total Current Assets. . . . . . . . . . . . . . . . . 928,894
-----------
Property and Equipment, net . . . . . . . . . . . . . . . . 668,724
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 67,788
Software licenses 144,902
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . 4,247,815
-----------
Total Assets. . . . . . . . . . . . . . . . . . . . . $ 6,058,123
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 1,589,134
Accrued liabilities. . . . . . . . . . . . . . . . . . . 879,306
Value of Common Stock to be Issued . . . . . . . . . . . 440,625
Notes payable. . . . . . . . . . . . . . . . . . . . . . 380,491
-----------
Total Current Liabilities . . . . . . . . . . . . . . 3,289,556
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . 422,153
Redeemable Preferred Stock - Series I, $0.001 par value;
600,000 shares authorized; 600,000 shares issued
and outstanding; liquidation preference - $600,000. . . . . 600
Redeemable Preferred Stock - Series J, $0.001 par value
275 shares authorized: 262.5 shares and outstanding;
liquidation preference - $2,625,000 263
-----------
Stockholders' Equity
Preferred stock - $0.001 par value; 400,000 shares
authorized; none issued or outstanding. . . . . . . . . -
Common stock - $0.001 par value; 20,000,000 shares
authorized; 9,797,143 shares issued and outstanding . . 9,797
Additional paid-in capital. . . . . . . . . . . . . . . 14,683,713
Note receivable from shareholder . . . . . . . . . . . . (163,047)
Accumulated deficit. . . . . . . . . . . . . . . . . . . (12,184,912)
-----------
Total Stockholders' Equity. . . . . . . . . . . . . . 2,345,551
-----------
Total Liabilities and Stockholders' Equity. . . . . . . . . $ 6,058,123
===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
-68-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Product Sales. . . . . . . . . $ 917,400 $ 15,293
----------- -----------
Costs and Operating Expenses
Costs of products sold . . . . . 459,944 9,940
General and administrative . . . 2,555,008 738,068
Stock Issued for Services. . . . 1,622,164 112,108
Stock Based Compensation . . . . 2,021,347 -
Amortization of Debt
Discount . . . . . . . . . . . 355,567
Amortization of Goodwill . . . . 818,756 -
----------- -----------
Total Costs and Operating
Expenses. . . . . . . . . . . 7,477,219 1,215,683
----------- -----------
Operating Loss . . . . . . . . . . (6,559,819) (1,200,390)
Other Income . . . . . . . . . . . 87,000 13,458
Interest expense . . . . . . . . . (60,839) (5,571)
----------- -----------
Net Loss . . . . . . . . . . $(6,533,658) $(1,192,503)
=========== ===========
Basic and Diluted Loss Per
Common Share . . . . . . . . . . . $ (.78) $ (.26)
=========== ===========
Weighted average number of
common shares used in per
share calculation . . . . . . . . 8,389,358 4,548,202
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
-69-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss. . . . . . . . . . . . . . . . . . . . $(6,533,658) $(1,192,503)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . 27,765 29,834
Amortization of goodwill . . . . . . . . . . 818,756
Stock issued for services. . . . . . . . . . 1,429,944 112,108
Amortization of Debt Discount. . . . . . . . 355,567
Liability for stock to be issued for
services . . . . . . . . . . . . . . . . 440,625 -
Stock issued for settlement of lawsuit . . . 26,456 -
Stock Based Compensation . . . . . . . . . . 2,021,347 -
Changes in operating assets and liabilities
net of the effects of the acquisitions
Accounts receivable . . . . . . . . . . . . ( 2,353) 54,767
Inventory . . . . . . . . . . . . . . . . . (12,211) -
Prepaid expenses . . . . . . . . . . . . . . (53,881) -
Other assets . . . . . . . . . . . . . . . . (56,611) -
Accounts payable . . . . . . . . . . . . . . ( 9,723) 223,221
Accrued liabilities. . . . . . . . . . . . . (168,766)
----------- -----------
Net Cash Used in Operating Activities . . . . (2,072,310) (417,006)
----------- -----------
Cash Flows From Investing Activities
Proceeds from sale of SoftKat, net. . . . . . . 50,000 -
Acquisition of property and equipment . . . . . ( 69,185) -
Kiss cash acquired. . . . . . . . . . . . . . . 49,233 -
----------- -----------
Net Cash Used in Investing Activities . . . . 30,048 (771)
----------- -----------
Cash Flows From Financing Activities
Stock issued for cash 2,650,000 -
Cash received on notes receivable issued for
common stock . . . . . . . . . . . . . . . . . 322,509 -
Proceeds from borrowing . . . . . . . . . . . . 371,070 428,071
Payments on notes payable . . . . . . . . . . . (568,240) -
----------- -----------
Net Cash Provided by Financing Activities. . 2,775,339 428,071
----------- -----------
Net Increase in Cash . . . . . . . . . . . . . . . 733,077 11,065
Cash at Beginning of Period. . . . . . . . . . . . 1,413 -
----------- -----------
Cash at End of Period. . . . . . . . . . . . . . . $ 734,490 $ 11,065
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
-70-
<PAGE>
eSYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS -- Intermark Corporation("Intermark") was
incorporated under the laws of the State of California in October 1995. On
August 5, 1998, Intermark was reorganized into Innovus Corporation, a
publicly-held shell corporation. By shareholder action, Innovus Corporation, the
parent company, changed its name to eSynch Corporation ("eSynch") on November 9,
1998. On November 17, 1998, eSynch acquired SoftKat Inc. ("SoftKat"). On May 25,
1999, SoftKat was sold to a third-party. See Note 2.
On April 1, 1999, eSynch consummated an acquisition of Kiss Software Corporation
("Kiss")whereby under the terms of an Agreement and Plan of Merger Kiss became a
wholly owned subsidiary of eSynch. Kiss was incorporated under the laws of
California on February 14, 1997. The primary activities of Kiss have consisted
of distributing computer utility software principally through wholesale
distribution channels.
On September 30, 1999, eSynch consummated an acquisition of Oxford Media Corp.
("Oxford") whereby under the terms of an Agreement and Plan of Merger, Oxford
became a wholly owned subsid1ary of eSynch. Oxford was incorporated in January,
1999 and is a developer of digital technologies for video-on-demand and DVD
Conversion.
The primary activities of eSynch, the consolidated company, have consisted of
raising capital, and acquiring Companies in the Internet, Software and related
areas.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of Intermark and eSynch for all periods
presented, and the accounts of SoftKat, Inc. to May 25, 1999, the accounts of
Kiss since April 1, 1999 and Oxford Media Corp. since September 30, 1999. These
entities are collectively referred to as "eSynch" or the "Company". All
inter-company transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumption that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM UNAUDITED FINANCIAL INFORMATION -- The accompanying condensed financial
statements have been prepared by the Company and are not audited. In the opinion
of management, all adjustments necessary for a fair presentation have been
included and consist only of normal recurring adjustments except as disclosed
herein. The financial position and results of operations presented in the
accompanying financial statements are not necessarily indicative of the results
to be generated for the remainder of 1999.
-71-
<PAGE>
These financial statements have been condensed pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in financial statements have been condensed
or omitted. These financial statements should be read in connection with
annual financial statements included in the Company's Form 10-KSB dated
December 31, 1998.
BUSINESS CONDITION -- The financial statements have been prepared on the basis
of the Company continuing as a going concern. The Company has incurred losses
from operations and negative tangible net worth of $1,902,264. These conditions
raise substantial doubt regarding the Company's ability to continue as a going
concern. Management's plan to mitigate the impact of these conditions is to
obtain additional equity financing through the issuance of the Company's common
stock, convertible preferred stock or warrants.
The Company is also currently in negotiations for additional financing
arrangements. However, realization of the proceeds from these potential
transactions is not assured. These financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS -- The Company operates exclusively in
the software industry, accordingly, segment information relating to operations
in different industries is not presented in these financial statements. The
concentration of business in the highly competitive software industry subjects
the Company to concentrated market risk. Sales to any major customer during the
quarters and nine months September 30, 1999 and 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The amounts reported as cash, accounts
payable, notes payable, and liabilities relating to assets to be sold are
considered to reasonable approximations of their fair values. The fair value
estimates were based on market information available to management at the time
of the preparation of the financial statements.
LOSS PER SHARE -- The Company computes basic and diluted loss per share in
accordance with Statement of Financial Accounting Standards No. 128, ("SFAS
128"), Earnings Per Share. Basic loss per common share is computed by dividing
net loss available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted loss per share is
calculated to give effect to stock warrants, options and convertible notes
payable except during loss periods when those potentially issuable common shares
would decrease the loss per share. 3,560,026 and 151,133 potentially issuable
common shares outstanding at September 30, 1999 and 1998 were excluded from the
calculation of diluted loss per share for the quarters ended September 30, 1999
and 1998, as they would have decreased the loss per share, respectively.
-72-
<PAGE>
REVENUE RECOGNITION -- The Company sells software products at fixed prices for
which the right to return is granted to the buyer. Accordingly, revenue is
recognized when the buyer has paid for the products and the amount of future
returns can be reasonably estimated. Cost of products sold is recognized at the
date the sale is recognized less an estimate for sales returns. Until the sale
is recognized, products purchased from publishers are accounted for as consigned
product from publishers and the related cost is not reflected in the financial
statements with the exception of a limited amount of software inventory owned by
the Company at period-end.
NOTE 2--ACQUISITIONS
SOFTKAT -- On November 17, 1998, the Company acquired SoftKat, Inc,. a
California corporation primarily engaged in the wholesale distribution of
computer software games. In exchange for the SoftKat common shares, the Company
issued 720,000 common shares and 600,000 shares of Series I redeemable,
convertible preferred shares. Up to an additional 720,000 common shares are
contingently issuable based upon the difference between the market price of the
common stock one year from the date of acquisition and a target market price. In
November, 1999 the target market price was achieved and the share were no longer
issuable. The acquisition was accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value of the
common and preferred stock issued and the additional contingently issuable
common shares, was $2,670,000. The excess of the purchase price over the
estimated fair value of the identifiable acquired assets less liabilities
assumed was $6,882,300, which was recognized as goodwill. The results of
operations of SoftKat have been included in the June 30, 1999 (through May 25,
1999 date of sale) condensed consolidated financial statements.
In February 1999, Management of the Company decided to dispose of SoftKat
because it did not meet the core business objectives of the Company. On May 25,
1999, SoftKat was sold to a third party for $50,000 cash and a note receivable
for $100,000 which resulted in the recognition of an impairment loss of
$2,323,841. The subsequent sale and resulting loss provided evidence of
conditions that existed at December 31, 1998; therefore, an impairment loss was
recognized in 1998 in accordance with SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The impairment
loss was determined by the excess of the carrying amount of the assets in excess
of the $50,000 subsequently collected and the amount of the related liabilities.
The $100,000 note receivable was not considered in the computation of the
impairment loss or the resulting carrying value of the assets to be sold, but
will be recognized when collected. The resulting amount of the assets to be sold
and the related liabilities assumed by the buyer have been presented separately
in the accompanying balance sheet.
-73-
<PAGE>
Effective April 1, 1999, the Company completed the acquisition of Kiss Software
Corporation, California corporation engaged in the wholesale and retail
distribution of computer and Internet utility software products. Under the
agreement, shareholders of Kiss agreed to exchange each of their common shares
for.181557136 common shares of eSynch and each of their preferred shares for
.4183964 common shares of eSynch. The exchange resulted in the Company issuing
1,428,134 common shares to Kiss shareholders. The Company also issued 163,187
options in conjunction with the purchase. These options are exercisable at $2.05
per share. During the second quarter 1999, the acquisition was accounted for
using the purchase method of accounting. The acquisition purchase price, based
upon the fair value of the common stock and options issued, has been estimated
at $3,965,570. The excess of the purchase price over the estimated fair value of
the identifiable acquired assets less liabilities assumed was $5,061,571
(unaudited), which was recognized as goodwill. Goodwill is being amortized over
approximately 3 years on a straight-line basis.
Effective September 30, 1999, the Company completed the acquisition of Oxford
Media Corp., ("Oxford") engaged in DVD video encoding, compression and
authoring. Under the Agreement the shareholders of Oxford exchanged all the
outstanding shares of
-74-
<PAGE>
Oxford Common Stock for 450,000 shares of the Company's Common Stock. During
the third quarter, the acquisition was accounted for using the purchase
method of accounting and the purchase price of the acquired assets was
computed to be $720,000 which was attributed to the assets acquired including
software licenses in the amount of $144,902. Oxford received a non-exclusive
license from Oxford Management Corporation, a Nevada corporation, which is a
license of proprietary software and source code for a video-on-demand hotel
pay-for-view system. The value of the licenses is being amortized over three
years.
In addition, the Company entered into another license agreement with Oxford
Management. In this license agreement, the Company granted Oxford Management a
license to sell advertising and promotional offers that will be displayed by
means of operation of certain software products of the Company or its
subsidiaries.
NOTE 3--PREPAID EXPENSES
In June 1999, the Company prepaid consulting services by issuing 54,000 common
shares of stock to third-party consultants. The prepaid services recognized from
the issuance of these shares was $111,380. As of September 30, 1999, $57,751 of
the prepaid services had been performed by the consultants and therefore, were
expensed by the Company.
NOTE 4--NOTES PAYABLE
In August 1999, the Company repaid $250,000 borrowed from a third-party. Notes
Payable long-term include a note to an Officer-Shareholder in the amount of
$195,270.
NOTE 5--STOCK BASED COMPENSATION
The Company issued stock options for 885,000 shares of Common stock to Officers
and Employees in connection with Employment Agreements signed on April 1,
1999.The options allowed for the exercise of options over various periods at a
price of $1.00 per share. In addition, on April 1, 1999, an officer of the
Company was granted warrants to purchase 400,000 shares of common stock at $0.05
per share. In September, 1999 the Company modified the previously granted
warrants to 450,000 shares at $0.50 per share and granted new stock options
under Employment Agreements of 390,000 shares at a price of $1.00 per share and
granted an officer warrants to purchase 250,000 shares at $1.00 per share. The
charge under stock based compensation was $204,000 and $2,021,347 for the three
months and nine months ended September 30, 1999.
-75-
<PAGE>
NOTE 6--STOCKHOLDERS' EQUITY
On July 16, 1999 the Company issued 2,000 shares of common stock for interest of
$6,000.
During the three months ended September 30, 1999, the Company issued 105,000 and
shares of common stock for services. The value of the services was determined
based upon the trading price of the Company's common stock on the date of
issuance. The services were valued at $308,238 and were expensed in the three
month period ended September 30, 1999.
The Series I redeemable preferred stock has a liquidation preference of $1.00.
The Company is required to redeem 200,000 shares of the preferred stock at $1.00
per share upon obtaining financing of $1,500,000 or more
from any source and must redeem an additional 200,000 shares of preferred stock
upon obtaining an additional $3,000,000 in funding. Dividends on the preferred
stock are payable prior and in preference to any declaration or payment of any
dividends on the common stock, when, as, and if declared by the Board of
Directors. However, there is no stated dividend rate. The preferred stock is
convertible, at the option of the holder, into common stock at the lesser of
$3.00 per share. The preferred stock has voting rights equivalent to the number
of common shares into which it can be converted and has additional voting rights
with respect to approval of any issuance of a senior series of preferred shares.
Effective August 13, 1999, the Company entered into an Agreement from an
investing source for equity financing in an aggregate amount of $2,625,000,
subject to certain terms and conditions. The financing is in the form of
preferred stock and warrants issued by the Company. The Company will have issued
275 shares of Series J Preferred Stock aggregately, with each share convertible
into common stock under certain conditions as described. In addition the Company
issued warrants to purchase 187,500 shares of the Company common stock at a
price equal to 115% of the closing stock price on the date before the closing
date. The Series J Preferred Stock is convertible into the Company's common
stock at a price equal to the lower of 80% of the average closing stock price
the lowest six trading days in the consecutive 20 days prior to conversion
subject to a floor in the conversion price. The Company had received $2,500,000
of the total amount as of September 30, 1999. The shares are redeemable by the
Company for cash upon 30 days prior written notice for a price of 120% of the
original issue price plus accrued dividends. Dividends accrue at the rate of 7%
of from the original issue date, but are payable only upon conversion or
redemption.
The Company is obligated, at its expense, to file for the registration of the
common stock issuable upon conversion within 60 days of September 30, 1999,
with an effective date within 150 days after September 30, 1999 or the
investors will be entitled to a registration payment equal to 2% of the
purchase price for the first 30 days the Company is tardy and 3% for every 30
day period thereafter.
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<PAGE>
NOTE 7--COMMITMENTS AND CONTINGENCIES
Litigation:
The Company has been name as an additional defendant in claims against SoftKat
under the theory of successor liability. Whereas the Company has been successful
in obtaining dismissals of several such suits, there is no certainty that the
Company will successfully defend the suits in the future. No provisions have
been made for possible loss from these claims.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On June 1, 1998, the Company's Board of Directors elected to retain Hansen
Barnett & Maxwell, a professional corporation as its independent auditor and to
dismiss Grant Thornton LLP ("Grant"). Theretofore Grant had acted as the
Company's independent auditor for each of the two years in the period ended
December 31, 1996. The decision to change auditors was recommended by the
Company's Board of Directors.
The reports of Grant on the financial statements of the Company for each of the
two fiscal years in the period ended December 31, 1996, did not contain any
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. The reports state that the
financial statements were prepared on the basis of the Company continuing as a
going concern, but that there was substantial doubt about the Company's ability
to continue as a going concern. Grant had not issued an audit report for the
year ended December 31, 1997.
During the Company's two most recent fiscal years and all subsequent interim
periods preceding such change in auditors, there was no disagreement with Grant
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of the former accountant, would have caused it to make a reference
to the subject matter of the disagreements in connection with its report; nor
has Grant ever presented a written report, or otherwise communicated in writing
to the Company or its Board of Directors the existence of any "disagreement" or
"reportable event" within the meaning of Item 304 of Regulation S-K.
Hansen Barnett & Maxwell had previously audited the Company's financial
statements for the three years ended December 31, 1994.
-77-
<PAGE>
up to 1,965,174 SHARES
ESYNCH CORPORATION
COMMON STOCK,
PAR VALUE $.001 EACH
PROSPECTUS
JANUARY 14, 2000
PROSPECTUS DELIVERY OBLIGATIONS
Until ________, _____, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The information set forth under the heading "DISCLOSURE OF COMMISSION
POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES" is incorporated
herein by this reference.
Item 25. Other Expenses of Issuance and Distribution
The following sets forth the costs and expenses, all of which shall be borne by
eSynch, in connection with the offering pursuant to this registration statement:
SEC registration fees $ 1,912.12*
Legal fees and expenses 125,000.00*
Accounting fees and expenses 10,000.00*
Blue sky filing fees 10,000.00*
Miscellaneous 3,088.88*
-----------
TOTAL $ 150,000.00*
- --------------
* Estimated.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
During the fourth quarter of 1997, the Company issued the following shares
without registration under the Securities Act of 1933:
The Company issued approximately 184,069 common shares on conversion of
previously outstanding Series C Preferred Stock. The shares were issued to a
single accredited investor in exchange for outstanding securities of the
Company. The Company believes such issuance was exempt pursuant to Sections
3(a)(9), 4(2) and 4(6) of the Securities Act of 1933.
During the third quarter of 1998, the Company issued Series H Preferred Stock
and Common Stock to the shareholders of Intermark in exchange for their shares.
Subsequently, the Series H Preferred Stock was automatically converted to Common
Stock, concurrent with the Company's one-for-ten reverse stock split.
During the fourth quarter of 1998, the Company issued the following shares
without registration under the Securities Act of 1933:
The Company issued approximately 600,000 shares of Series I Preferred Stock and
720,000 shares of Common Stock. The Series I Preferred shares were issued in
exchange for the notes payable by SoftKat, Inc. The shares of Common Stock were
issued in exchange for common stock of SoftKat, Inc.
The Company issued shares of Common Stock in exchange for securities of Kiss
Software Corporation.
The Company also issued 335,000 additional shares for reduction of a note and
services.
Subsequent to December 31, 1998, the Company issued 310,377 shares of stock for
cash and notes in the amount of $715,000 and issued 478,500
shares of stock for services in the amount $927,175 and the Company issued
shares of Series J Preferred Stock and accompanying warrants to the selling
security holders.
The Company believes such issuances were exempt pursuant to Regulation D,
Section 4(2) and/or 4(6) of the Securities Act of 1933.
II-2
<PAGE>
Item 27. Exhibits
(c) Exhibits
Exhibit No. Description
2.1(1) Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
Omitted are the following schedules or attachments
to the agreement identified immediately above:
(A) Form of Certificate of Designation of
Series H Convertible Preferred Stock;
(B) Intermark Corporation Financial Statements
(Unaudited) for its 1997 Fiscal Year;
(C) Confidentiality Agreement dated March 1998
between the Registrant and Intermark
Corporation;
(D) Disclosure Schedule of Intermark Corporation;
(E) Disclosure Schedule of the Registrant.
2.2(2) First Amendment, dated as of June 17, 1998, of
Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
2.3(2) Second Amendment, dated as of July 30, 1998, of
Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
2.4(9) Agreement and Plan of Merger dated as of
February 26, 1999 among the Company; SoftKat, Inc.,
a California corporation ("SoftKat"); certain
stockholders, of SoftKat, and INUS-Softkat Acquisition
Corporation, a wholly-owned subsidiary of the
Company. Omitted are the following schedules
or ancillary documents to the agreement identified
immediately above:
(A) Disclosure Schedule of SoftKat;
(B) Disclosure Schedule of the Company.
II-3
<PAGE>
2.5(4) Agreement and Plan of Merger dated as of
February 26, 1999 among the Company; Kiss
Software Corporation, a California corporation
("Kissco"); certain stakeholders,
of Kissco; and ESYN Kissco Acquisition
Corporation, a wholly-owned subsidiary of the
Registrant. Omitted are the following schedules
or ancillary documents to the agreement identified
immediately above:
(A) Escrow Agreement;
(B) Disclosure Schedule of Kissco;
(C) Disclosure Schedule of the Registrant.
2.6(11) Agreement and Plan of Reorganization dated as of
September 30, 1999 among the Registrant, OMC
Acquisition Corp., a Delaware corporation, Oxford
Media Corp., a Delaware corporation ("OMC") and
Norton Garfinkle, individually and as trustee of
each of The Gillian Garfinkle S Corporation Trust
and The Nicholas Garfinkle S Corporation Trust.
Omitted from this Form 8-K filing are the following
schedules or ancillary documents to the agreement
identified immediately above: List of Assets of OMC
2.7(11) Non-Exclusive License Agreement between Oxford
Management Corporation, a Nevada corporation,
and Oxford Media Corporation.
2.8(13) Registration Rights Agreement dated September 30,
1999 between the Registrant and Norton Garfinkle,
individually and as trustee of each of The Gillian
Garfinkle S Corporation Trust and The Nicholas
Garfinkle S Corporation Trust
3.1(13) Restated Certificate of Incorporation of the Company
3.2(8) Bylaws of the Company
4.1(6) January 1999 Stock Plan, including 310,000
shares of Esynch Common Stock granted and
issued to individual consultants named on the
attached Corporate Resolutions**
4.2(6) Corporate Resolutions relating to January, 1999 Stock Plan**
4.11(7) Certificate of Designation - Series I Preferred Stock
4.19.1(13) Certificate of Designation - Series J Preferred Stock
4.19.2(13) First Amendment of Certificate of Designation - Series J
Preferred Stock
4.19.3(13) Second Amendment of Certificate of Designation - Series J
Preferred Stock
II-4
<PAGE>
5.0* Opinion of counsel to the Company
10.4(7) Registration Rights Agreement dated August 4, 1998 among the
Company and those holders of the Company's stock listed in
Exhibit A thereto
10.5(7) Form of Stock Option Agreement dated April 24, 1998
between Intermark Corporation and each of Thomas
Hemingway, T. Richard Hutt and James Budd**
10.6(2) Instrument of Option Assumption dated August 4,
1998 between the Company and each of the optionees
named in Exhibit 10.5, among others, resulting in
the Company's assumption of options as follows:
Thomas Hemingway 331,541 shares of common stock at $.83 each
T. Richard Hutt 132,616 shares of common stock at $.83 each
James Budd 132,616 shares of common stock at $.83 each**
10.7.1(10) Employment Agreement dated as of March 1, 1999 between the
Company and Thomas Hemingway.**
10.7.2(11) Employment Agreement dated as of March 1, 1999 between the
Company and Donald C. Watters, Jr.;
Employment Agreement dated as of April 1, 1999 between the
Company and James H. Budd;
Employment Agreement dated as of April 1, 1999 between the
Company and T. Richard Hutt;
Employment Agreement dated as of April 1, 1999 between the
Company and Robert Way; and
Employment Agreement dated as of September 8, 1999 between the
Company and David Noyes.**
10.8 1999 Stock Incentive Plan.**
10.9 Form of Indemnification Agreement entered into with certain
officers and directors of the Company.**
10.10 Lease agreement for the Company's headquarters
10.11.1 Series J Convertible Preferred Stock Purchase Agreement
dated as of July 22, 1999
10.11.2 Amendment dated as of October 29, 1999 to the Series J
Convertible Stock Purchase Agreement
10.12 Registration Rights Agreement dated as of July 22, 1999
II-5
<PAGE>
10.13 Form of Warrant issued in the placement of Series J
Preferred Stock in the following respective amounts:
<TABLE>
<CAPTION>
EXP. EXERCISE
DATE AMOUNT HOLDER PRICE
-------- ------ ---------------------------- --------
<S> <C> <C> <C>
08/13/02 37,500 Amro International, S.A. $3.00
09/30/02 37,500 Austinvest Anstalt Balzers $5.17
09/30/02 37,500 Esquire Trade & Finance Inc. $5.17
08/13/02 30,000 Manchester Asset Management, Ltd. $3.00
08/13/02 26,250 Gilston Corporation, Ltd. $3.00
08/13/02 18,750 Triton Private Equity Fund L.P. $3.00
10/29/02 9,375 Talbiya Investments Ltd. $3.45
</TABLE>
23.2* Consent of the Company's legal counsel.
23.1* Consent of accountants.
25.0(13) Power of Attorney (included on the signature page).
99(9) Press Release on sale of SoftKat, Inc.
--------------
* To be filed by amendment.
** Indicates management compensation arrangements.
(1) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed May 12, 1998.
(2) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed August 20, 1998.
(4) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed April 19, 1999.
(5) Incorporated by reference to Exhibit A to the Company's Schedule 14A
filed October 7, 1998.
(6) Incorporated by reference to the like-numbered exhibit to the
Company's Form S-8 filed February 1, 1999.
(7) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed November 25, 1998.
(8) Incorporated by reference to the like-numbered exhibit to the
Company's Registration Statement (Registration No. 33-33136-D).
(9) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-KSB filed June 25, 1999.
(10) Incorporated by reference to the like-numbered exhibit to the Company's
Form 10-QSB filed August 19, 1999.
(11) Incorporated by reference to the like-numbered exhibit to the Company's
Form 8-K filed October 15, 1999.
(12) Incorporated by reference to the like-numbered exhibit to the Company's
Form 10-QSB filed November 15, 1999.
(13) Incorporated by reference to the like-numbered exhibit to the
Company's Form SB-2 filed November 29, 1999.
II-6
<PAGE>
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities
Act, treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be deemed the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(f) (1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act (sections 230.424(b)(1), (4) or 230.497(h)) as
part of this registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of securities at that time as the initial bona
fide offering of those securities.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Tustin,
State of California, on January 14, 2000.
ESYNCH CORPORATION
By: THOMAS C. HEMINGWAY
--------------------------------------------
Thomas C. Hemingway, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ THOMAS C. HEMINGWAY Chairman, Chief Executive January 14, 2000
- ------------------------ Officer and Director
Thomas C. Hemingway
/s/ T. RICHARD HUTT* Secretary, Vice President January 14, 2000
- ------------------------ and Director
T. Richard Hutt
/s/ DAVID NOYES* Chief Financial Officer January 14, 2000
- ------------------------ (Chief Financial and
David Noyes Accounting Officer)
/s/ DONALD WATTERS, JR.* President and Director January 14, 2000
- ------------------------
Donald Watters, Jr.
/s/ JAMES H. BUDD* Vice President and Director January 14, 2000
- ------------------------
James H. Budd
/s/ NORTON GARFINKLE* Director January 14, 2000
- ------------------------
Norton Garfinkle
* By: /s/ THOMAS C. HEMINGWAY
------------------------
Attorney-in-Fact
II-8
<PAGE>
eSYNCH CORPORATION
1999 STOCK INCENTIVE PLAN
This 1999 STOCK INCENTIVE PLAN (the "Plan") is hereby established by eSynch
Corporation, a Delaware corporation (the "Company"), as adopted by its Board
of Directors as of August __, 1999 (the "Effective Date").
PURPOSES OF THE PLAN.
The purposes of the Plan are (a) to enhance the Company's ability to
attract and retain the services of qualified employees, officers and
directors (including non-employee officers and directors), and consultants
and other service providers upon whose judgment, initiative and efforts the
successful conduct and development of the Company's business largely depends,
and (b) to provide additional incentives to such persons or entities to
devote their utmost effort and skill to the advancement and betterment of the
Company, by providing them an opportunity to participate in the ownership of
the Company and thereby have an interest in the success and increased value
of the Company.
DEFINITIONS.
For purposes of this Plan, the following terms shall have the meanings
indicated:
Administrator.
"Administrator" means the Board or, if the Board delegates
responsibility for any matter to the Committee, the term Administrator shall
mean the Committee.
Affiliated Company.
"Affiliated Company" means any "parent corporation" or "subsidiary
corporation" of the Company, whether now existing or hereafter created or
acquired, as those terms are defined in Sections 424(e) and 424(f) of the Code,
respectively.
Board.
"Board" means the Board of Directors of the Company.
Change in Control.
"Change in Control" shall mean (i) the acquisition, directly or
indirectly, by any person or group (within the meaning of Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended) of the beneficial ownership of
securities of the Company possessing more than fifty percent (50%) of the total
combined voting power of all outstanding securities of the Company; (ii) a
merger or consolidation in which the Company is not the surviving entity, except
for a transaction in which the holders of the outstanding voting securities of
the Company immediately prior to such merger or consolidation hold, in the
aggregate, securities possessing more than fifty percent (50%) of the total
combined voting power of all outstanding voting securities of the surviving
entity immediately after
<PAGE>
such merger or consolidation; (iii) a reverse merger in which the Company is
the surviving entity but in which securities possessing more than fifty
percent (50%) of the total combined voting power of all outstanding voting
securities of the Company are transferred to or acquired by a person or
persons different from the persons holding those securities immediately prior
to such merger; (iv) the sale, transfer or other disposition (in one
transaction or a series of related transactions) of all or substantially all
of the assets of the Company; or (v) the approval by the stockholders of a
plan or proposal for the liquidation or dissolution of the Company.
Code.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
Committee.
"Committee" means a committee of two or more members of the Board
appointed to administer the Plan, as set forth in Section 7.1 hereof.
Common Stock.
"Common Stock" means the Common Stock, par value $0.001 per share,
of the Company, subject to adjustment pursuant to Section 4.2 hereof.
Continuous Service.
"Continuous Service" shall mean--
(a) employment by either the Company or any parent or subsidiary
corporation of the Company, or by a corporation or a parent or
subsidiary of a corporation issuing or assuming a stock option in
a transaction to which Section 424(a) of the Code applies, which
is uninterrupted except for vacations, illness (except for
permanent disability, as defined in Section 22(e)(3) of the Code),
or leaves of absence which are approved in writing by the Company
or any of such other employer corporations, if applicable,
(b) service as a member of the Board of Directors of the Company until
Optionee resigns, is removed from office, or Optionee's term of
office expires and he or she is not reelected, or
(c) so long as Optionee is engaged as a consultant or service provider
to the Company or any corporation referred to in clause (a) above.
Disability.
"Disability" means permanent and total disability as defined in
Section 22(e)(3) of the Code. The Administrator's determination of a
Disability or the absence thereof shall be conclusive and binding on all
interested parties.
Effective Date.
"Effective Date" means the date on which the Plan is adopted by the
Board, as set forth on the first page hereof.
Exercise Price.
"Exercise Price" means the purchase price per share of Common Stock
payable upon exercise of an Option.
2
<PAGE>
Fair Market Value.
"Fair Market Value" on any given date means the value of one share
of Common Stock, determined as follows:
(a) If the Common Stock is then listed or admitted to trading on the
Nasdaq Stock Market or a stock exchange which reports closing sale
prices, the Fair Market Value shall be the closing sale price on
the date of valuation as so reported by the principal system or
exchange on which the Common Stock is traded, or, if no closing
sale price is reported on such day, then the Fair Market Value
shall be the closing sale price of the Common Stock as so reported
on the next preceding day on which a closing sale price is
reported.
(b) If the Common Stock is not then listed or admitted to trading on
the Nasdaq Stock Market or a stock exchange which reports closing
sale prices, the Fair Market Value shall be the average of the
reported closing bid and asked prices of the Common Stock in the
over-the-counter market on the date of valuation.
(c) If neither (a) nor (b) is applicable as of the date of valuation,
then the Fair Market Value shall be determined by the
Administrator in good faith using any reasonable method of
evaluation, which determination shall be conclusive and binding on
all interested parties.
Hostile Takeover.
"Hostile Takeover" shall mean either of the following events effecting
a change in control or ownership of the Company:
(a) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Company or a person that directly
or indirectly controls, is controlled by, or is under common
control with, the Company) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power
of the Company's outstanding securities pursuant to a tender or
exchange offer made directly to the Company's stockholders which
the Board does not recommend such stockholders to accept, or
(b) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of
the Board members ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who
either (A) have been Board members continuously since the
beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a
majority of the Board members described in clause (A) who were
still in office at the time the Board approved such election or
nomination.
Incentive Option.
"Incentive Option" means any Option designated and qualified as an
"incentive stock option" as defined in Section 422 of the Code.
NASD Dealer.
"NASD Dealer" means a broker-dealer that is a member of the National
Association of Securities Dealers, Inc.
Nonqualified Option.
"Nonqualified Option" means any Option that is not an Incentive Option.
To the extent that any Option designated as an Incentive Option fails in whole
or in part to qualify as an Incentive Option, including, without limitation, for
failure to meet the limitations applicable to a 10%
3
<PAGE>
Stockholder or because it exceeds the annual limit provided for in Section
5.6 below, it shall to that extent constitute a Nonqualified Option.
Offeree.
"Offeree" means a Participant to whom a Right to Purchase has been
offered or who has acquired Restricted Stock under the Plan.
Option.
"Option" means any option to purchase Common Stock granted pursuant to
the Plan.
Option Agreement.
"Option Agreement" means the written agreement entered into between
the Company and the Optionee with respect to an Option granted under the Plan.
Optionee.
"Optionee" means a Participant who holds an Option.
Participant.
"Participant" means an individual or entity who holds an Option, a
Right to Purchase or Restricted Stock under the Plan.
Public Offering.
"Public Offering" shall mean the sale to the public and closing of
an underwritten public offering of the Company's Common Stock that is
registered under the Securities Act of 1933.
Purchase Price.
"Purchase Price" means the purchase price per share of Restricted Stock
payable upon acceptance of a Right to Purchase.
Restricted Stock.
"Restricted Stock" means shares of Common Stock issued, subject to any
restrictions and conditions as are established, pursuant to Section 6.
Restricted Stock Purchase Agreement.
"Restricted Stock Purchase Agreement" means the written agreement
entered into between the Company and the Offeree with respect to a Right to
Purchase offered under the Plan.
Right to Purchase.
"Right to Purchase" means a right to purchase Restricted Stock granted
to an Offeree pursuant to Section 6 hereof.
4
<PAGE>
Service Provider.
"Service Provider" means a consultant or other person or entity who
provides advice or other services to the Company or an Affiliated Company and
who the Administrator authorizes to become a Participant in the Plan.
10% Stockholder.
"10% Stockholder" means a person who, as of a relevant date, owns or
is deemed to own (by reason of the attribution rules applicable under Section
424(d) of the Code) stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of an Affiliated
Company.
ELIGIBILITY.
Incentive Options.
Officers and other key employees of the Company or of an Affiliated
Company (including members of the Board if they are employees of the Company
or of an Affiliated Company) are eligible to receive Incentive Options under
the Plan.
Nonqualified Options and Rights to Purchase.
Officers and other key employees of the Company or of an Affiliated
Company, members of the Board (whether or not employed by the Company or an
Affiliated Company), and Service Providers are eligible to receive
Nonqualified Options or Rights to Purchase under the Plan.
Limitation on Shares.
In no event shall any Participant be granted Options or Rights to
Purchase in any one calendar year pursuant to which more than 500,000 shares
of Common Stock may be acquired.
PLAN SHARES.
Shares Subject to the Plan.
A total of 3,000,000 shares of Common Stock may be issued under the
Plan, subject to adjustment as to the number and kind of shares pursuant to
Section 4.2 hereof. For purposes of this limitation, in the event that
(a) all or any portion of any Option or Right to Purchase granted or
offered under the Plan can no longer under any circumstances be
exercised, or
(b) any shares of Common Stock are reacquired by the Company pursuant
to an Option Agreement or Restricted Stock Purchase Agreement, the
shares of Common Stock allocable to the unexercised portion of
such Option or such Right to Purchase, or the shares so
reacquired, shall again be available for grant or issuance under
the Plan.
5
<PAGE>
Changes in Capital Structure.
If the then outstanding shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of
shares or other securities of the Company by reason of a recapitalization,
stock split, combination of shares, reclassification, stock dividend, or
other similar change in the capital structure of the Company, then
appropriate adjustments shall be made by the Administrator to the aggregate
number and kind of shares subject to this Plan, and the number and kind of
shares and the price per share subject to outstanding Option Agreements,
Rights to Purchase and Restricted Stock Purchase Agreements in order to
preserve, as nearly as practical, but not to increase, the benefits to
Participants.
OPTIONS.
Option Agreement.
Each Option granted pursuant to this Plan shall be evidenced by an
Option Agreement which shall specify the number of shares subject thereto,
the Exercise Price per share, and whether the Option is an Incentive Option
or Nonqualified Option. As soon as is practical following the grant of an
Option, an Option Agreement shall be duly executed and delivered by or on
behalf of the Company to the Optionee to whom such Option was granted. Each
Option Agreement shall be in such form and contain such additional terms and
conditions, not inconsistent with the provisions of this Plan, as the
Administrator shall, from time to time, deem desirable, including, without
limitation, the imposition of any first rights of refusal and resale
restrictions or repurchase rights upon any shares of Common Stock acquired
pursuant to an Option Agreement. Each Option Agreement may be different from
each other Option Agreement in any respect.
Exercise Price.
The Exercise Price per share of Common Stock covered by each Option
shall be determined by the Administrator, subject to the following:
(a) the Exercise Price of an Incentive Option shall not be less than
100% of Fair Market Value on the date the Incentive Option is
granted,
(b) the Exercise Price of a Nonqualified Option shall not be less than
85% of Fair Market Value on the date the Nonqualified Option is
granted (or 100% as to a Nonqualified Option granted to a 10%
Stockholder), and
(c) if the person to whom an Incentive Option is granted is a 10%
Stockholder on the date of grant, the Exercise Price shall not be
less than 110% of Fair Market Value on the date the Option is
granted.
Payment of Exercise Price.
Payment of the Exercise Price shall be made upon exercise of an Option
and may be made, in the discretion of the Administrator, subject to any legal
restrictions, by--
(a) cash;
(b) check;
(c) the surrender of shares of Common Stock owned by the Optionee that
have been held by the Optionee for at least six (6) months, which
surrendered shares shall be valued at Fair Market Value as of the
date of such exercise;
(d) the Optionee's promissory note in a form and on terms
acceptable to the Administrator;
(e) the cancellation of indebtedness of the Company to the Optionee;
6
<PAGE>
(f) the waiver of compensation due or accrued to the Optionee for
services rendered;
(g) provided that a public market for the Common Stock exists, a
"same day sale" commitment from the Optionee and an NASD Dealer
whereby the Optionee irrevocably elects to exercise the Option
and to sell a portion of the shares so purchased to pay for the
Exercise Price and whereby the NASD Dealer irrevocably commits
upon receipt of such shares to forward the Exercise Price
directly to the Company;
(h) provided that a public market for the Common Stock exists, a
"margin" commitment from the Optionee and an NASD Dealer whereby
the Optionee irrevocably elects to exercise the Option and to
pledge the shares so purchased to the NASD Dealer in a margin
account as security for a loan from the NASD Dealer in the amount
of the Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such shares to forward the Exercise Price
directly to the Company; or
(i) any combination of the foregoing methods of payment or any other
consideration or method of payment as shall be permitted by
applicable corporate law.
Term and Termination of Options.
The term and provisions for termination of each Option shall be as
fixed by the Administrator, but no Option may be exercisable more than ten
(10) years after the date it is granted. An Incentive Option granted to a
person who is a 10% Stockholder on the date of grant shall not be exercisable
more than five (5) years after the date it is granted.
Vesting and Exercise of Options.
Each Option shall vest and become exercisable in one or more
installments at such time or times and subject to such conditions, including
without limitation the achievement of specified performance goals or
objectives, as shall be determined by the Administrator; provided, however
that Options granted to employees who are not officers, directors or Service
Providers shall vest and become exercisable in installments at a minimum rate
of 20% per year over a period of five (5) years from the date the Option is
granted.
Annual Limit on Incentive Options.
To the extent required for "incentive stock option" treatment under
Section 422 of the Code, the aggregate Fair Market Value (determined as of
the time of grant) of the Common Stock shall not, with respect to which
Incentive Options granted under this Plan and any other plan of the Company
or any Affiliated Company become exercisable for the first time by an
Optionee during any calendar year, exceed $100,000. To the extent such dollar
limitation is exceeded, the excess portion of such Option shall be
exercisable as a Nonqualified Option under the Federal tax laws.
Limited Transferability.
No Incentive Option or Nonqualified Options shall be assignable or
transferable except by will or the laws of descent and distribution, and during
the life of the Optionee shall be exercisable only by such Optionee.
Notwithstanding the foregoing, shares purchased upon exercise of Nonqualified
Options may be transferred, if the transferee agrees to be bound by the same
transfer restrictions applicable to the Participant, in connection with the
Optionee's estate plan, be assigned in whole or in part, during the Optionee's
lifetime to one or more members of the Optionee's immediate family, including
any parent, descendant, spouse, brother, sister, grandparent, grandchild,
dependent, or member of their immediate families, or to a trust established
exclusively for one or more such persons. The terms applicable to the assigned
portion of the shares shall be the same as those in effect
7
<PAGE>
for the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Administrator may deem
appropriate. In the event that applicable tax law and federal and state
securities laws permit transfer of Options in any particular case, then with
the consent of the Administrator in such case, an Option may be transferred
consistent with restrictions under law and subject to any terms or
restrictions imposed by the Administrator.
Rights as Stockholder.
An Optionee or permitted transferee of an Option shall have no
rights or privileges as a stockholder with respect to any shares covered by
an Option until such Option has been duly exercised and certificates
representing shares purchased upon such exercise have been issued to such
person.
Company's Repurchase Rights.
In the event of termination of a Participant's Continuous Service
for any reason whatsoever (including death or disability), the Option
Agreement may provide, in the discretion of the Administrator, that the
Company, or its assignee, shall have the right, exercisable at the discretion
of the Administrator, to repurchase shares of Common Stock acquired pursuant
to the exercise of an Option at any time, at any price, and on any terms as
set forth in the Option Agreement evidencing such Options.
Restrictions on Underlying Shares of Common Stock.
Shares of Common Stock issued pursuant to the exercise of an Option
may not be sold, assigned, transferred, pledged or otherwise encumbered or
disposed of except as specifically provided in the Option Agreement.
RIGHTS TO PURCHASE.
Nature of Right to Purchase.
A Right to Purchase granted to an Offeree entitles the Offeree to
purchase, for a Purchase Price determined by the Administrator, shares of
Common Stock subject to such terms, restrictions and conditions as the
Administrator may determine at the time of grant ("Restricted Stock"). Such
conditions may include, but are not limited to, Continuous Service or the
achievement of specified performance goals or objectives. The Administrator
shall have the discretion to grant options, or amend outstanding options,
such that the unvested portion of options are exercisable for Restricted
Stock.
Acceptance of Right to Purchase.
An Offeree shall have no rights with respect to the Restricted Stock
subject to a Right to Purchase unless the Offeree shall have accepted the Right
to Purchase within ten (10) days (or such longer or shorter period as the
Administrator may specify) following the grant of the Right to Purchase by
making payment of the full Purchase Price to the Company in the manner set forth
in Section 6.3 hereof and by executing and delivering to the Company a
Restricted Stock Purchase Agreement. Each Restricted Stock Purchase Agreement
shall be in such form, and shall set forth the Purchase Price and such other
terms, conditions and restrictions of the Restricted Stock, not
8
<PAGE>
inconsistent with the provisions of this Plan, as the Administrator shall,
from time to time, deem desirable. Each Restricted Stock Purchase Agreement
may be different from each other Restricted Stock Purchase Agreement.
Payment of Purchase Price.
Subject to any legal restrictions, payment of the Purchase Price
upon acceptance of a Right to Purchase Restricted Stock may be made, in the
discretion of the Administrator, by--
(a) cash;
(b) check;
(c) the surrender of shares of Common Stock owned by the Offeree that
have been held by the Offeree for at least six (6) months, which
surrendered shares shall be valued at Fair Market Value as of the
date of such exercise;
(d) the Offeree's promissory note in a form and on terms acceptable to
the Administrator;
(e) the cancellation of indebtedness of the Company to the Offeree;
(f) the waiver of compensation due or accrued to the Offeree for
services rendered; or
(g) any combination of the foregoing methods of payment or any other
consideration or method of payment as shall be permitted by
applicable corporate law.
Rights as a Stockholder.
Upon complying with the provisions of Section 6.2 hereof, an Offeree
shall have the rights of a stockholder with respect to the Restricted Stock
purchased pursuant to the Right to Purchase, including voting and dividend
rights, subject to the terms, restrictions and conditions as are set forth in
the Restricted Stock Purchase Agreement. Unless the Administrator shall
determine otherwise, certificates evidencing shares of Restricted Stock shall
remain in the possession of the Company in accordance with the terms of the
Restricted Stock Purchase Agreement until such shares have vested.
Restrictions.
Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of except as specifically
provided in the Restricted Stock Purchase Agreement or by the Administrator
in the particular case. In the event of termination of a Participant's
employment, service as a director of the Company or Service Provider status
for any reason whatsoever (including death or disability), the Restricted
Stock Purchase Agreement may provide, in the discretion of the Administrator,
that the Company shall have the right, exercisable at the discretion of the
Administrator, to repurchase
(i) at the original Purchase Price, any shares of Restricted Stock
which have not vested as of the date of termination, and
(ii) at Fair Market Value, any shares of Restricted Stock which have
vested as of such date, on such terms as may be provided in the
Restricted Stock Purchase Agreement;
provided that, for Restricted Stock granted to employees who are not
officers, directors or Service Providers, the Company's Repurchase Right at the
original purchase price lapses at a minimum rate of 20% per year over a period
of five (5) years from the date the Right to Purchase was granted.
9
<PAGE>
Vesting of Restricted Stock.
The Restricted Stock Purchase Agreement shall specify the date or
dates, the performance goals or objectives which must be achieved, and any other
conditions on which the Restricted Stock may vest.
Dividends.
If payment for shares of Restricted Stock is made by promissory note,
any cash dividends paid with respect to the Restricted Stock may be applied, in
the discretion of the Administrator, to repayment of such note.
Limited Assignability of Rights.
No Right to Purchase shall be assignable or transferable except by will
or the laws of descent and distribution. Restricted Stock may, in connection
with the Participant's estate plan, be assigned in whole or in part during the
Participant's lifetime to one or more members of the Participant's immediate
family, including any parent, descendant, spouse, brother, sister, grandparent,
grandchild, dependent, or member of their immediate families, or to a trust
established exclusively for one or more such persons, or to a trust established
exclusively for one or more such family members. The terms applicable to the
assigned portion shall be the same as those in effect for the Restricted Stock
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Plan Administrator may deem appropriate. In the
event that applicable tax law and federal and state securities laws permit
transfer of Restricted Stock in any other particular case, then with the consent
of the Administrator in such case, Restricted Stock may be transferred
consistent with restrictions under law and subject to any terms or restrictions
imposed by the Administrator.
ADMINISTRATION OF THE PLAN.
Administrator.
Authority to control and manage the operation and administration of the
Plan shall be vested in the Board, which may delegate such responsibilities in
whole or in part to a committee consisting of two (2) or more members of the
Board (the "Committee"). Members of the Committee may be appointed from time to
time by, and shall serve at the pleasure of, the Board. As used herein, the term
"Administrator" means the Board or, with respect to any matter as to which
responsibility has been delegated to the Committee, the term Administrator shall
mean the Committee.
Powers of the Administrator.
In addition to any other powers or authority conferred upon the
Administrator elsewhere in the Plan or by applicable law, the Administrator
shall have full power and authority, at any time and from time to time:
(a) to determine the persons to whom, and the time or times at which,
Incentive Options or Nonqualified Options shall be granted and
Rights to Purchase shall be offered, the number of shares to be
represented by each Option and Right to Purchase and the
consideration to be received by the Company upon the exercise
thereof;
(b) to interpret the Plan;
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(c) to create, amend or rescind rules and regulations relating to the
Plan;
(d) to determine the terms, conditions and restrictions contained in,
and the form of, Option Agreements and Restricted Stock Purchase
Agreements;
(e) to determine the identity or capacity of any persons who may be
entitled to exercise a Participant's rights under any Option or
Right to Purchase under the Plan;
(f) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any Option Agreement or Restricted
Stock Purchase Agreement;
(g) to extend the exercise date of any Option or acceptance date of any
Right to Purchase;
(h) to provide for first rights of refusal and/or repurchase rights;
(i) to effect, with the consent of the affected Participant, the
cancellation of any or all outstanding Options and to grant, in
substitution, new options covering the same or different number of
shares of Common Stock but with an exercise price per share based
on the Fair Market Value on the new grant date; and
(i) to amend outstanding Option Agreements and Restricted Stock
Purchase Agreements to provide for, among other things, any change
or modification to a provision which the Administrator could have
provided for upon the grant of an Option or Right to Purchase or
upon the issuance of Restricted Stock or in furtherance of the
powers provided for herein; and
(j) to make all other determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to
the express provisions of the Plan.
Any action, decision, interpretation or determination made in good
faith by the Administrator in the exercise of its authority conferred upon it
under the Plan shall be final and binding on the Company and all Participants.
Limitation on Liability.
No employee of the Company or member of the Board or Committee shall be
subject to any liability with respect to duties under the Plan unless the person
acts fraudulently or in bad faith. To the extent permitted by law, the Company
shall indemnify each member of the Board or Committee, and any employee of the
Company with duties under the Plan, who was or is a party, or is threatened to
be made a party, to any threatened, pending or completed proceeding, whether
civil, criminal, administrative or investigative, by reason of such person's
conduct in the performance of duties under the Plan.
MERGERS AND OTHER REORGANIZATIONS.
Mergers and Other Reorganizations.
The Option Agreement or Restricted Stock Purchase Agreement shall make
provision for what, if anything, shall happen in the event that the Company at
any time proposes to enter into any transaction approved by the Board to
dissolve, liquidate, sell substantially all of its assets, or merge or
consolidate, or acquire property or shares, separate or reorganize, with any
other entity or entities, corporate or otherwise, as a result of which either
the Company is not the surviving corporation or the Company is the surviving
corporation. The Plan and outstanding Options, Rights of Purchase, or Restricted
Stock shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
Change in Control.
In the event of a Change in Control of the Company, concurrent with and
conditioned upon the effective date of the proposed transaction, any outstanding
unexercised Options and Rights to Purchase that have not yet vested shall be
accelerated and vest at such time to the extent that the
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Option Agreement or Restricted Stock Purchase Agreement provides.
Notwithstanding the foregoing, the Administrator in its discretion may take
one or more of the following actions:
(i) provide for the purchase or exchange of this Option for an amount of
cash or other property having a value equal to the difference, or
spread, between
(x) the value of the cash or other property that the Optionee would
have received pursuant to such Change in Control transaction in
exchange for the shares issuable upon exercise of this Option had
this Option been exercised immediately prior to such Change in
Control transaction and
(y) the Exercise Price,
(ii) adjust the terms of this Option in a manner determined by the
Administrator to reflect the Change in Control,
(iii) cause this Option to be assumed, or new rights substituted therefor,
by another entity, through the continuance of the Plan and the
assumption of this Option, or the substitution for this Option of a
new option of comparable value covering shares of a successor
corporation, with appropriate adjustments as to the number and kind
of shares and Exercise Price, in which event the Plan and this
Option, or the new option substituted therefor, shall continue in
the manner and under the terms so provided, or
(iv) make such other provision as the Administrator may consider equitable.
If the Administrator does not take any of the forgoing actions, this
Option shall terminate upon the consummation of the Change in Control and the
Administrator shall cause written notice of the proposed transaction to be given
to the Optionee not less than fifteen (15) days prior to the anticipated
effective date of the proposed transaction.
Hostile Takeover.
The Administrator shall have the discretionary authority to structure
Option Agreements and Restricted Stock Purchase Agreements such that the
Company's Repurchase Rights shall terminate and such shares shall vest
automatically upon the consummation of a Hostile Take-Over, to condition the
automatic acceleration of one or more Options and the termination of one or more
of the Company's Repurchase Rights under Restricted Stock Purchase Agreements
upon the involuntary termination of the Participant's Continuous Service within
a designated period (not to exceed eighteen (18) months) following the effective
date of a Hostile Take-Over, and to make provision that each Option so
accelerated shall remain exercisable for fully-vested shares until a date not
later than the expiration of the option term.
AMENDMENT AND TERMINATION OF THE PLAN.
Amendments.
The Board shall have full power and authority (subject to certain
amendments requiring stockholder approval pursuant to applicable laws or
regulations) from time to time to alter, amend, suspend or terminate the Plan in
any or all respects as the Board may deem advisable. No such alteration,
amendment, suspension or termination shall be made which shall substantially
affect or impair the rights of any Participant under an outstanding Option
Agreement or Restricted Stock Purchase Agreement without such Participant's
consent. The Board may alter or amend the Plan to comply with requirements under
the Code relating to Incentive Options or other types of options which give
Optionees more favorable tax treatment than that applicable to Options granted
under this Plan. Upon any such alteration or amendment, any outstanding Option
granted hereunder may, if the Administrator so determines and if permitted by
applicable law, be subject to the more favorable tax treatment afforded to an
Optionee pursuant to such terms and conditions.
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Plan Termination.
Unless the Plan shall theretofore have been terminated, the Plan shall
terminate on the tenth (10th) anniversary of the Effective Date and no Options
or Rights to Purchase may be granted under the Plan thereafter, but Option
Agreements, Restricted Stock Purchase Agreements and Rights to Purchase then
outstanding shall continue in effect in accordance with their respective terms.
TAX WITHHOLDING.
The Company shall have the power to withhold, or require a Participant
to remit to the Company, an amount sufficient to satisfy any applicable Federal,
state, and local tax withholding requirements with respect to any Options
exercised or Restricted Stock issued under the Plan. The Company's obligation to
deliver shares of Common Stock upon the exercise of Options or the issuance or
vesting of Common Stock under the Plan shall be subject to the satisfaction of
all applicable Federal, state and local income and employment tax withholding
requirements. To the extent permissible under applicable tax, securities and
other laws, the Administrator may, in its sole discretion and upon such terms
and conditions as it may deem appropriate, permit a Participant to satisfy his
or her obligation to pay any such tax, in whole or in part, up to an amount
determined on the basis of the highest marginal tax rate applicable to such
Participant, by--
(a) directing the Company to apply shares of Common Stock to which the
Participant is entitled as a result of the exercise of an Option
or as a result of the purchase of or lapse of restrictions on
Restricted Stock or
(b) delivering to the Company shares of Common Stock owned by the
Participant. The shares of Common Stock so applied or delivered in
satisfaction of the Participant's tax withholding obligation shall
be valued at their Fair Market Value as of the date of measurement
of the amount of income subject to withholding.
MISCELLANEOUS.
Benefits Not Alienable.
Other than as provided above, benefits under the Plan may not be
transferred, assigned or alienated, whether voluntarily or involuntarily or by
operation of law. Any unauthorized attempt at assignment, transfer, pledge or
other disposition shall be void and without force or effect whatsoever.
No Creation or Enlargement of Participant's Rights to Continue in any Capacity.
This Plan is strictly a voluntary undertaking on the part of the
Company and shall not be deemed to constitute a contract between the Company and
any Participant for, or to be consideration for, or an inducement to, or a
condition of, the continuation of any Participant's services to the Company in
any capacity. Nothing contained in the Plan shall be deemed to give the right to
any Participant to be retained in the service of the Company or any Affiliated
Company or to interfere with the right of the Company or any Affiliated Company
(which rights are hereby expressly reserved by each) to discharge or discontinue
the services of any Participant at any time for any reason, with or without
cause.
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Application of Funds.
The proceeds received by the Company from the sale of Common Stock
pursuant to Option Agreements and Restricted Stock Purchase Agreements, except
as otherwise provided herein, will be used for general corporate purposes.
Annual and Other Periodic Reports.
The Company shall furnish or make available to Participants copies of
all annual and other periodic financial and informational reports that the
Company distributes generally to its stockholders.
The Participants shall in any event receive financial statements at
least annually, except if all Participants are key employees with duties that
assure the equivalent access to information.
Compliance with Section 25102(o).
At no time shall the number of shares issuable upon the exercise of all
outstanding options and the total number of shares provided for under any stock
bonus or similar plan of the Company exceed the applicable percentage as
calculated in accordance with the conditions and exclusions of Title 10.,
Sections 260.140.45 of the California Code of Regulations, based on the shares
of the Company outstanding at the time the calculation is made. In the event the
any or all requirements of Section 25102(o) of the California Corporate
Securities Law of 1968, or applicable provisions of Title 10., including
Sections 260.140.41, 42, 45, or 46, of the California Code of Regulations, or
Rule 701 promulgated under the U.S. Securities Act of 1933 are inconsistent with
the Plan in any way, or become inconsistent hereafter because such laws or rules
are changed, replaced or superseded, this Plan and any outstanding securities
under the Plan shall be modified in the Administrator's best judgment and sole
discretion consistent with the new requirements or consistent with any other
available exemptions under federal or state securities laws.
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<PAGE>
Option No.
ESYNCH CORPORATION
STOCK OPTION AGREEMENT
TYPE OF OPTION (CHECK ONE): [ ]INCENTIVE [ ]NONQUALIFIED
This Stock Option Agreement (the "Agreement") is entered into as of , by
and between eSynch Corporation, a Delaware corporation (the "Company") and
(the "Optionee") pursuant to the Company's 1999 Stock Incentive Plan (the
"Plan").
GRANT OF OPTION.
The Company hereby grants to Optionee an option (the "Option") to
purchase all or any portion of a total of ( ) shares (the "Shares") of
the Common Stock of the Company at a purchase price of ( ) per share
(the "Exercise Price"), subject to the terms and conditions set forth herein
and the provisions of the Plan. If the box marked "Incentive" above is
checked, then this Option is intended to qualify as an "incentive stock
option" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). If this Option fails in whole or in part to qualify as
an incentive stock option, or if the box marked "Nonqualified" is checked,
then this Option shall to that extent constitute a nonqualified stock option.
VESTING OF OPTION.
Vesting Schedule.
The right to exercise this Option shall vest in installments, and
this Option shall be exercisable from time to time in whole or in part as to
any vested installment. Vesting will be measured from (the "Vesting
Measurement Date"). No additional Shares shall vest after the date of
termination of Optionee's "Continuous Service" (the "Service Termination
Date"). As used herein, the term "Continuous Service" has the meaning given
in the Plan. Except as may otherwise be provided in this Agreement, the
vesting schedule is as follows:
On or After:........................................Option Exercisable As To:
The vesting schedule of this Option would result, assuming the
Service Termination Date shall not have theretofore occurred, in this Option
being exercisable as to One Hundred Percent (100%) of the Shares covered by
this Option ON THE _________ ANNIVERSARY of the Vesting Measurement Date.
Acceleration on Change in Control or Public Offering.
In the event of a Change in Control (as defined in the Plan) or a
Public Offering of the Company, concurrent with and conditioned upon the
effective date of the proposed transaction, unexercised Options under this
Agreement that have not yet vested shall be accelerated and vest at
<PAGE>
such time to the extent that they would have vested as if the Vesting
Measurement Date were ______ years earlier than it actually is.
Notwithstanding the foregoing, the Administrator in its discretion may take
one or more of the following actions:
(i) provide for the purchase or exchange of this Option for an amount of
cash or other property having a value equal to the difference, or
spread, between
(x) the value of the cash or other property that the Optionee would
have received pursuant to such Change in Control transaction in
exchange for the shares issuable upon exercise of this Option
had this Option been exercised immediately prior to such Change
in Control transaction and
(y) the Exercise Price,
(ii) adjust the terms of this Option in a manner determined by the
Administrator to reflect the Change in Control,
(iii) cause this Option to be assumed, or new rights substituted therefor,
by another entity, through the continuance of the Plan and the
assumption of this Option, or the substitution for this Option of a
new option of comparable value covering shares of a successor
corporation, with appropriate adjustments as to the number and kind
of shares and Exercise Price, in which event the Plan and this
Option, or the new option substituted therefor, shall continue in
the manner and under the terms so provided, or
(iv) make such other provision as the Administrator may consider equitable.
If the Administrator does not take any of the forgoing actions, this
Option shall terminate upon the consummation of the Change in Control and the
Administrator shall cause written notice of the proposed transaction to be
given to the Optionee not less than fifteen (15) days prior to the anticipated
effective date of the proposed transaction.
TERM OF OPTION.
Optionee's right to exercise any vested portion of this Option shall
terminate upon the first to occur of the following:
Maximum Term.
the expiration of _______ (___) years from the date of this Agreement;
Involuntary Termination without Cause.
the expiration of three (3) months from the Service Termination Date
if such termination occurs for any reason OTHER THAN permanent disability,
death, voluntary resignation; or for "cause;" provided, however, that if
Optionee dies during such three-month period the provisions of subsection 3.5
below shall apply;
Voluntary Resignation.
the expiration of one (1) month from the Service Termination Date if
such termination occurs due to voluntary resignation; provided, however, that
if Optionee dies during such one-month period the provisions of subsection
3.5 below shall apply;
Permanent Disability.
the expiration of one (1) year from the Service Termination Date if
such termination is due to permanent disability of the Optionee (as defined
in Section 22(e)(3) of the Code);
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<PAGE>
Death.
the expiration of one (1) year from the Service Termination Date if
such termination is due to Optionee's death or if death occurs during either
the three-month or one-month period following the Service Termination Date
pursuant to subsection 3.2 or subsection 3.3 above, as the case may be;
Change in Control.
upon the consummation of a "Change in Control" (as defined in the
Plan), unless otherwise provided by the Administrator pursuant to Section 2.2
above; and
Termination for Cause.
in the event Optionee's Continuous Service is terminated by the
Company for "cause," defined hereby to mean the performance of those acts
identified in Section 2924 of the California Labor Code, then this Option,
whether or not exercisable on the Service Termination Date, shall terminate
immediately and become void and of no effect.
EXERCISE OF OPTION.
Persons Permitted to Exercise Option.
This Option may be exercised in whole or in part only by the
Optionee or by a Successor designated in Section 5 below.
Exercise as to Vested Portion of Option.
This Option may be exercised only on or after the vesting of any
portion of this Option in accordance with Section 2 above, and only as to the
cumulative amount vested at the date of exercise, except pursuant to
provisions made, if any, by the Administrator pursuant to subsection 4.5
below.
No Exercise after Termination.
This Option may not be exercised at the time of, or any time after,
termination of this Option in accordance with Section 3 above.
Mechanics of Exercise.
Exercise of this Option shall be made by delivery of the following
to the Company at its principal executive offices:
(a) a written notice of exercise which identifies this Agreement and
states the number of Shares then being purchased (but no fractional
Shares may be purchased);
(b) a check or cash in the amount of the Exercise Price (or payment of the
Exercise Price in such other form of lawful consideration as the
Administrator may approve from time to time under the provisions of
the Plan);
(c) a check or cash in the amount reasonably requested by the Company to
satisfy the Company's withholding obligations under federal, state or
other applicable tax laws with respect to the taxable income, if any,
recognized by the Optionee in connection with the exercise of this
Option (unless the Company and Optionee shall have made other
arrangements for deductions or withholding from Optionee's wages,
bonus or other compensation payable to Optionee, or by the
withholding of Shares issuable upon exercise of this
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<PAGE>
Option or the delivery of Shares owned by the Optionee in accordance
with the provisions of the Plan, provided such arrangements satisfy
the requirements of applicable tax laws); and
(d) a letter, if requested by the Company, in such form and substance as
the Company may require, setting forth the investment intent of the
Optionee, or of a Successor designated in Section 5, as the case may
be.
Exercise Prior to Vesting; Purchase of Restricted Stock.
The Administrator also has discretion, but not the obligation, to
permit this Option to be exercised as to the unvested portion prior to
vesting, and in that case to deliver Restricted Shares to the Optionee upon
exercise of this Option. The Administrator's determination to permit exercise
of the unvested portion of this Option shall be evidenced by the Company's
and the Optionee's mutual execution and delivery of a Restricted Stock
Purchase Agreement in form and substance determined by the Administrator,
having the same or a different Vesting Measurement Date and vesting schedule,
as the Administrator and the Optionee may agree.
TRANSFERS ON DEATH OF OPTIONEE; RESTRICTIONS ON LIFETIME ASSIGNMENTS.
Any attempt to sell, pledge, assign, hypothecate, transfer or
dispose of this Option in contravention of this Agreement or the Plan shall
be void and shall have no effect.
No Assignment of Incentive Stock Options.
If and to the extent that this Option comprises an incentive stock
option, this Option can be assigned or transferred (subject to all other
restrictions in this Agreement) only as follows:
the rights of the Optionee under this Agreement may not be assigned or
transferred except by will or by the laws of descent and
distribution,
this Option may be exercised during the lifetime of the Optionee only
by such Optionee;
if the Optionee's Continuous Service terminates as a result of his or
her death, and provided Optionee's rights hereunder shall have
vested pursuant to Section 2 hereof, Optionee's legal
representative, his or her legatee, or the person who acquired
the right to exercise this Option by reason of the death of the
Optionee (with regard to incentive stock options, each
individually, a "Successor") shall succeed to the Optionee's
rights and obligations under this Agreement.; and
after the death of the Optionee, only a Successor may exercise this
Option.
In the context of incentive stock options, the term "Successor" refers
to each of the transferees, successors or assigns described in this
subsection 5.1.
Limited Assignability of Nonqualified Stock Options.
If and to the extent that this Option comprises a nonqualified stock
option, this Option can be assigned or transferred (subject to all other
restrictions in this Agreement) only as follows:
the rights of the Optionee under this Agreement may be assigned or
transferred by will or by the laws of descent and distribution,
and Optionee's legal representative, his or her legatee, or the
person who acquired the right to exercise this Option by reason of
the death of the Optionee shall succeed to the Optionee's rights
and obligations under this Agreement, and
the rights of the Optionee under this Agreement also may be assigned
and transferred by the Optionee for estate planning purposes to
members of the immediate family of the Optionee, including for
this purpose, but not limited to, spouses, parents, descendants,
brothers and sisters, or to trusts established for the benefit of
such persons.
In the context of nonqualified stock options, the term "Successor"
refers to each of the transferees, successors or assigns described in
this subsection 5.2.
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<PAGE>
REPRESENTATIONS AND WARRANTIES OF OPTIONEE.
Investment Intent as to Options.
Optionee represents and warrants that this Option is being acquired
by Optionee for Optionee's personal account, for investment purposes only,
and not with a view to the distribution, resale or other disposition thereof.
Investment Intent as to Shares.
Optionee acknowledges that the Company may issue Shares upon the
exercise of the Option without registering such Shares under the Securities
Act of 1933, as amended (the "Act"), on the basis of certain exemptions from
such registration requirement. Accordingly, Optionee agrees that his or her
exercise of the Option may be expressly conditioned upon his or her delivery
to the Company of an investment certificate and agreement including such
representations and undertakings as the Company may reasonably require in
order to assure the availability of such exemptions, including
representations, warranties and agreements that--
(a) The Optionee is purchasing the Shares solely for the Optionee's own
account for investment and not with a view to or for sale or
distribution of the Shares or any portion thereof and not with any
present intention of selling, offering to sell or otherwise disposing
of or distributing the Shares or any portion thereof. The Optionee
also represents that the entire legal and beneficial interest of the
Shares the Optionee is purchasing is being purchased for, and will be
held for the account of, the Optionee only and neither in whole nor
in part for any other person.
(b) The Optionee has discussed the Company and its plans, operations and
financial condition with its officers and that the Optionee has
received all such information as the Optionee deems necessary and
appropriate to enable the Optionee to evaluate the financial risk
inherent in making an investment in the Shares of the Company, and has
received satisfactory and complete information concerning the business
and financial condition of the Company in response to all inquiries in
respect thereof.
(c) The Optionee realizes that the purchase of the Shares will be a highly
speculative investment.
(d) The Optionee is able, without impairing the Optionee's financial
condition, to hold the Shares for an indefinite period of time and to
suffer a complete loss on the investment.
(e) The Optionee acknowledges that he is aware that the Shares to be
issued to him by the Company pursuant to this Agreement have not been
registered under the Act, and--
(i) the Shares must be held indefinitely unless a transfer of them
is subsequently registered under the Act or an exemption from
such registration is available;
(ii) the share certificate(s) representing the Shares will be stamped
with the legends restricting transfer as specified in this
Agreement; and
(iii) the Company will make a notation in its records of the
aforementioned restrictions on transfer and legends as described
in this Agreement.
(f) The Optionee understands that the Shares are restricted securities
within the meaning of Rule 144 promulgated under the Act; that the
exemption from registration under Rule 144 will not be available in
any event for at least one year from the date of sale of the Shares
to the Optionee, and even then will not be available unless (i) a
public trading market then exists for the Shares of the Company, (ii)
adequate current public information concerning the Company is then
available to the public, (iii) the Optionee has been the beneficial
owner and the Optionee has paid the full purchase price for the
Shares at least one year prior to the sale, and (iv) other terms and
conditions of Rule 144 are complied with; and that any sale of the
Shares may be made by it only in limited amounts in accordance with
such terms and conditions of Rule 144, as amended from time to time.
(g) Without in any way limiting any of the other provisions of this
Agreement, Optionee's further agreement that the Optionee shall in no
event make any disposition of all or any portion of the Shares which
the Optionee is purchasing unless and until:
(i) there is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made
in accordance with said Registration Statement; or
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<PAGE>
(ii) (A) the Optionee shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed
disposition, (B) the Optionee shall have furnished the Company
with an opinion of counsel to the effect that such disposition
will not require registration of such shares under the Act,
and (C) such opinion of counsel shall have been concurred in by
counsel for the Company and the Company shall have advised the
Optionee of such concurrence.
(h) The Optionee acknowledges that the Optionee has been furnished with a
copy of the Plan, has read the Plan and this Agreement, and
understands that all rights and obligations connected with this
Agreement are set forth in this Agreement and in the Plan.
ADJUSTMENTS UPON CHANGES IN CAPITAL STRUCTURE.
In the event that the outstanding shares of Common Stock of the
Company are hereafter changed into or exchanged for a different number or
kind of shares or other securities of the Company by reason of a
recapitalization, stock split, combination of shares, reclassification, stock
dividend (in excess of two percent (2%)) or other change in the capital
structure of the Company, then appropriate adjustments shall be made by the
Administrator to the number of Shares subject to the unexercised portion of
this Option and to the Exercise Price per share, in order to preserve, as
nearly as practical, but not to increase, the benefits of the Optionee under
this Option, in accordance with the provisions of the Plan. No fractional
share shall be issued under this Option or upon any such adjustment.
NO CREATION OR ENLARGEMENT OF OPTIONEE'S RIGHTS TO CONTINUE IN ANY CAPACITY.
The right of the Company and any Affiliated Company (as defined in
the Plan) to terminate at will the Optionee's services to the Company or any
Affiliated Company at any time (whether by dismissal, discharge or
otherwise), with or without cause, is specifically reserved. Nothing in this
Agreement shall diminish or impair in any manner whatsoever the right or
power of the Company or any Affiliated Company to terminate the Optionee's
Continuous Service for any reason, with or without cause.
RIGHTS AS STOCKHOLDER.
The Optionee (or transferee of this option by will or by the laws of
descent and distribution) shall have no rights as a stockholder with respect
to any Shares covered by this Option until the date of the issuance of a
stock certificate or certificates to him or her for such Shares,
notwithstanding the exercise of this Option.
"MARKET STAND-OFF" AGREEMENT.
Optionee agrees that, if requested by the Company or the managing
underwriter of any proposed public offering of the Company's securities,
Optionee will not sell or otherwise transfer or dispose of any Shares held by
Optionee without the prior written consent of the Company or such
underwriter, as the case may be, during such period of time, not to exceed
180 days following the effective date of the registration statement filed by
the Company with respect to such offering, as the Company or the underwriter
may specify.
6
<PAGE>
RESTRICTIVE LEGENDS.
In addition to all other legends that the Company or its legal
counsel consider appropriate under applicable securities laws, the
certificates representing any Shares purchased pursuant to this Agreement
shall bear substantially the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (INCLUDING ANY
SECURITIES ISSUABLE ON EXERCISE OR WITH RESPECT TO ANY OTHER
RIGHT CONNECTED HEREWITH) HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER
FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE
AUTHORIZED UNDER THE SECURITIES ACT OF 1933, AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER. IN ADDITION ANY TRANSFEREE
OR ISSUEE OF SUCH SECURITIES MAY BE REQUIRED TO PROVIDE
APPROPRIATE INVESTMENT REPRESENTATIONS PRIOR TO ANY SUCH
TRANSFER OR ISSUANCE.
STOP-TRANSFER NOTICES.
Optionee understands and agrees that, in order to ensure compliance
with the restrictions referred to herein, the Company may issue appropriate
"stop-transfer" instructions to its transfer agent, if any, and that, if the
Company transfers its own securities, it may make appropriate notations to
the same effect in its own records.
INTERPRETATION.
This Option is granted pursuant to the terms of the Plan, and shall
in all respects be interpreted in accordance therewith. The Administrator
shall interpret and construe this Option and the Plan, and any action,
decision, interpretation or determination made in good faith by the
Administrator shall be final and binding on the Company and the Optionee. As
used in this Agreement, the term "Administrator" shall refer to the committee
of the Board of Directors of the Company appointed to administer the Plan,
and if no such committee has been appointed, the term Administrator shall
mean the Board of Directors.
NOTICES.
Any notice, demand or request required or permitted to be given
under this Agreement shall be in writing and shall be deemed given when
delivered personally or three (3) days after being deposited in the United
States mail, as certified or registered mail, with postage prepaid, and
7
<PAGE>
addressed, if to the Company, at its principal place of business, Attention:
the Chief Financial Officer, and if to the Optionee, at his or her most
recent address as shown in the records of the Company.
GOVERNING LAW.
The validity, construction, interpretation, and effect of this
Option shall be governed by and determined in accordance with the laws of the
State of California.
SEVERABILITY.
Should any provision or portion of this Agreement be held to be
unenforceable or invalid for any reason, the remaining provisions and
portions of this Agreement shall be unaffected by such holding.
ENTIRE AGREEMENT.
This Agreement and the Plan constitute the entire agreement between
the parties with respect to the subject matter hereof and supersede all prior
or contemporaneous written or oral agreements and understandings of the
parties, either express or implied. The option evidenced hereby may, in the
discretion of the Company, also be evidenced by a certificate in such form as
the Company may approve, in which case such option certificate and this
Agreement shall evidence one and the same option, which shall be governed by
and construed in accordance with this Agreement and the Plan.
AMENDMENT.
The Board shall have full power and authority (subject to certain
amendments requiring stockholder approval pursuant to applicable laws or
regulations) from time to time to alter, amend, suspend or terminate the Plan
in any or all respects as the Board may deem advisable, and to alter this
Agreement in ways which shall not substantially adversely affect or impair
the Optionee's rights under this Agreement No such alteration, amendment,
suspension or termination shall be made which shall substantially affect or
impair the rights of any Optionee under an outstanding Option Agreement
without such Optionee's consent. The Board may alter or amend the Plan to
comply with requirements under the Code relating to Incentive Options or
other types of options which give Optionees more favorable tax treatment than
that applicable to Options granted under the Plan. Upon any such alteration
or amendment, any outstanding Option granted hereunder may, if the
Administrator so determines and if permitted by applicable law, be subject to
the more favorable tax treatment afforded to an Optionee pursuant to such
terms and conditions.
COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument. Execution and delivery of this
Agreement or any notices, certificates or instruments contemplated
8
<PAGE>
herein by fax, facsimile, or telecopier shall be deemed the execution and
delivery of an originally signed agreement, notice or instrument, as the case
may be.
IN WITNESS WHEREOF, the parties have executed this Stock Option Agreement as
of the date first above written.
eSynch Corporation
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
"OPTIONEE"
---------------------------------
(Signature)
---------------------------------
(Type or print name)
9
<PAGE>
RSPA No.
ESYNCH CORPORATION
RESTRICTED STOCK PURCHASE AGREEMENT
UNDER 1999 STOCK INCENTIVE PLAN
This Restricted Stock Purchase Agreement is entered into as of , by and
between eSynch Corporation, a Delaware corporation (the "Company"), and
(the "Purchaser") pursuant to the Company's 1999 Stock Incentive Plan (the
"Plan").
R E C I T A L S:
A. Purchaser is an employee, officer, member of the Board of Directors,
member of the Board of Advisors, consultant, or service provider of the
Company, and in such capacity is key to the future success of the Company.
B. The Company desires to issue and the Purchaser desires to purchase Common
Stock of the Company on the terms and conditions hereinafter set forth.
AGREEMENT
PURCHASE AND SALE OF SHARES.
The Purchaser hereby agrees to purchase from the Company, and the
Company hereby agrees to sell to the Purchaser, ( ) shares of its Common
Stock (the "Shares") for a purchase price of ( ) per share. The Shares
shall be duly issued and a certificate or certificates for the Shares are
concurrently herewith being issued in the name of Purchaser. Purchaser shall
thereupon be a stockholder with respect to all of the Shares represented by
such certificate(s) and shall have all of the rights of a stockholder with
respect to all of the Shares, including the right to vote the Shares and to
receive all dividends and other distributions paid with respect to the
Shares, subject to the transfer restrictions provided in this Agreement. The
purchase price is payable as follows:
(a) by delivery of cash,
(b) by check;
(c) by delivery of a promissory note payable to the Company, bearing
interest from the date hereof and substantially in the form attached
as EXHIBIT A; or
(d) any combination of cash and promissory note, so long as the total
consideration equals the aggregate purchase price as set forth above.
In the event payment of any portion or all of the purchase price is to be
made by delivery of a promissory note, Purchaser shall deliver to the
Company a pledge of the Shares or other securities or assets which may be
listed in the Pledge Agreement dated the date hereof and substantially in
the form attached as EXHIBIT B. If the note is to be unsecured by the
Shares or other collateral, the Pledge Agreement shall so indicate.
The Purchaser's rights to acquire the Shares hereunder are
nontransferable other than
by will or the laws of descent and distribution, and Purchaser's
legal representative, his or her legatee, or the person who
acquired the Purchaser rights to acquire the Shares by reason of
the death of the
<PAGE>
Purchaser shall succeed to the Purchaser's rights
and obligations under this Agreement, and
the rights of the Purchaser under this Agreement also may be assigned and
transferred by the Purchaser for estate planning purposes to members
of the immediate family of the Purchaser, including for this purpose,
but not limited to, spouses, parents, descendants, brothers and
sisters, or to trusts established for the benefit of such persons.
INTERNAL REVENUE CODE SECTION 83(b) ELECTION.
Purchaser hereby agrees to file the election provided under Section
83(b) of the Internal Revenue Code of 1986, as amended (herein called the
"Code"), within thirty (30) days of the transfer of the Shares, substantially
in the form attached as EXHIBIT C hereto and, if required, a comparable form
of election with the California Franchise Tax Board. The parties hereto
acknowledge and agree that the total fair market value of the Shares on the
date hereof is per Share, or an aggregate of for Shares.
COMPANY REPURCHASE OPTION.
In addition to all other restrictions imposed by this Agreement or
applicable caw, the Shares acquired by the Purchaser pursuant to this
Agreement shall be subject to the following restrictions and repurchase
options.
Vesting Schedule.
Vesting will be measured from _____ (the "Vesting Measurement Date").
The Shares acquired hereunder shall vest and become "Vested Shares" in
accordance with the following vesting schedule:
On or After:...............................................Shares Vested As To:
The vesting schedule of this Agreement would result, assuming
Continuous Service shall have theretofore not terminated, in One Hundred
Percent (100%) of the Restricted Shares being Vested Shares on the ________
ANNIVERSARY of the Vesting Measurement Date. Shares which have not yet become
vested are herein called "Unvested Shares." In the event Purchaser ceases his
Continuous Service (the "Service Termination Date"), all vesting shall cease
unless otherwise determined by the Board of Directors. As used herein, the
term "Continuous Service" has the meaning given in the Plan.
In the event of a Change in Control or a Public Offering of the
Company, concurrent with and conditioned upon the effective date of the
proposed transaction, outstanding Unvested Shares shall, to the extent, and
only to the extent, that they would have vested as if the Vesting Measurement
Date were _____ years earlier than it actually had been, be accelerated and
vest. Notwithstanding the foregoing, the Administrator in its discretion may
take one or more of the following actions:
(i) provide for the purchase or exchange of this Option for an amount of
cash or other property having a value equal to the difference, or
spread, between
(x) the value of the cash or other property that the Optionee would
have received pursuant to such Change in Control transaction in
exchange for the shares issuable upon exercise of this Option
had this Option
2
<PAGE>
been exercised immediately prior to such Change in Control
transaction and
(y) the Exercise Price,
(ii) adjust the terms of this Option in a manner determined by the
Administrator to reflect the Change in Control,
(iii) cause this Option to be assumed, or new rights substituted therefor,
by another entity, through the continuance of the Plan and the
assumption of this Option, or the substitution for this Option of a
new option of comparable value covering shares of a successor
corporation, with appropriate adjustments as to the number and kind
of shares and Exercise Price, in which event the Plan and this
Option, or the new option substituted therefor, shall continue in
the manner and under the terms so provided, or
(iv) make such other provision as the Administrator may consider
equitable.
If the Administrator does not take any of the forgoing actions,
this Option shall terminate upon the consummation of the Change in Control
and the Administrator shall cause written notice of the proposed transaction
to be given to the Optionee not less than fifteen (15) days prior to the
anticipated effective date of the proposed transaction.
Company Option to Repurchase Shares following Termination of Continuous
Service.
Concurrent with the Service Termination Date and for the period and
under the procedures set forth in Section 3.3 below, the Company shall have
the option to repurchase (the "Repurchase Option") all or any portion of the
Purchaser's Vested and Unvested Shares on the terms and subject to the
limitations set forth herein.
Procedures for Exercise of Repurchase Option.
For sixty (60) days after the Service Termination Date or other
event described in this Section 3, the Company may exercise its Repurchase
Option by giving Purchaser and/or any other person obligated to sell written
notice of the number of Shares which the Company desires to purchase. The
Company shall pay for such Shares by the delivery of its check in the
aggregate amount of the repurchase price determined pursuant to Section 3.5
below against delivery of the certificate(s) representing the Shares.
Deposit of Shares.
In aid of the repurchase provisions set forth herein, Purchaser
shall, immediately upon receipt of the certificate or certificates
representing the Shares, deposit the certificate or certificates, together
with a stock power or other instrument of transfer appropriately endorsed in
blank, with the Company as escrow holder of the certificate(s). In the event
that the repurchase rights are not exercised by the Company following any
Service Termination Date, the Company shall cause the certificate or
certificates to be delivered into the possession of Purchaser.
Repurchase Price.
The per share price for the Unvested Shares ("Repurchase Price")
repurchased by the Company pursuant to this Section 3 shall be an amount
equal to the per share purchase price, without interest, paid for the Shares
by the Purchaser pursuant to Section 1 above.
Assignment of Rights.
The Company may assign its rights under this Section 3.
3
<PAGE>
RECAPITALIZATION.
In the event that, as the result of a stock split or stock dividend
or combination of shares or any other change, or exchange for other
securities, by reclassification, or recapitalization of the Shares, Purchaser
shall be entitled to new or additional or different shares of stock or
securities, the certificate or certificates for, or other evidences of, such
new or additional or different shares or securities shall be imprinted with
the legend(s) provided in Section 5, and shall be deposited with the Company
as escrow holder under the terms and conditions provided in Section 3.4
herein, together with a stock power or other instrument or transfer
appropriately endorsed. In such event, any and all new, substituted or
additional securities or other property (other than cash) to which the
Purchaser is entitled by reason of his ownership of the Shares shall be
immediately subject to the Repurchase Right and be included in the word
"Shares" for all purposes of the Repurchase Right with the same force and
effect as the Shares subject to the Repurchase Right under the terms of
Section 3. While the total Repurchase Price shall remain the same after each
such event, the per share price shall be appropriately adjusted. Shares
acquired as provided in this Section 4 shall be deemed to have been acquired
at the time of acquisition of the Shares on which such Shares were
distributed.
RESTRICTIVE LEGENDS.
In addition to all other legends that the Company or its legal
counsel consider appropriate under applicable securities laws, the
certificates representing any Shares, whether Vested Shares or Unvested
Shares, purchased pursuant to this Agreement shall bear substantially the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (INCLUDING ANY
SECURITIES ISSUABLE WITH RESPECT TO ANY RIGHT CONNECTED
HEREWITH) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND
MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED, OR
OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE
SECURITIES ACT OF 1933, AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER. IN ADDITION ANY TRANSFEREE OR ISSUEE
OF SUCH SECURITIES MAY BE REQUIRED TO PROVIDE APPROPRIATE
INVESTMENT REPRESENTATIONS PRIOR TO ANY SUCH TRANSFER OR
ISSUANCE.
Until such time as the Company's Repurchase Rights terminate fully,
the stock certificates for the Shares purchased pursuant to this Agreement
shall be endorsed with substantially the following legend:
ANY DISPOSITION OF ANY INTEREST IN THE SECURITIES REPRESENTED
BY THIS CERTIFICATE (INCLUDING ANY SECURITIES ISSUABLE WITH
4
<PAGE>
RESPECT TO ANY RIGHT CONNECTED HEREWITH) IS SUBJECT TO
RESTRICTIONS, AND THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO A REPURCHASE RIGHT CONTAINED IN A
RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE REGISTERED
HOLDER (OR HIS PREDECESSOR IN INTEREST) AND THE CORPORATION.
THESE SECURITIES ARE NOT TRANSFERABLE EXCEPT BY WILL OR
PURSUANT TO THE LAWS OF DESCENT AND DISTRIBUTION, OR AS
EXPRESSLY PERMITTED IN THE RESTRICTED STOCK PURCHASE AGREEMENT
AND THE PLAN AS DEFINED THEREIN. A COPY OF SUCH AGREEMENT AND
SUCH PLAN ARE ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY,
AND A COPY THEREOF WILL BE MAILED TO ANY HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE WITHIN 5 DAYS OF RECEIPT BY THE
CORPORATION OF A WRITTEN REQUEST THEREFOR.
STOP-TRANSFER NOTICES.
Purchaser understands and agrees that, in order to ensure compliance
with the restrictions referred to herein, the Company may issue appropriate
"stop-transfer" instructions to its transfer agent, if any, and that, if the
Company transfers its own securities, it may make appropriate notations to
the same effect in its own records.
REPRESENTATIONS AND WARRANTIES OF PURCHASER.
The Purchaser warrants and represents to the Company as follows:
(a) The Purchaser is purchasing the Shares solely for the Purchaser's own
account for investment and not with a view to or for sale or
distribution of the Shares or any portion thereof and not with any
present intention of selling, offering to sell or otherwise disposing
of or distributing the Shares or any portion thereof. The Purchaser
also represents that the entire legal and beneficial interest of the
Shares the Purchaser is purchasing is being purchased for, and will be
held for the account of, the Purchaser only and neither in whole nor in
part for any other person.
(b) The Purchaser has heretofore discussed the Company and its plans,
operations and financial condition with its officers, has heretofore
received all such information as the Purchaser deems necessary and
appropriate to enable the Purchaser to evaluate the financial risk
inherent in making an investment in the Shares of the Company, and has
received satisfactory and complete information concerning the business
and financial condition of the Company in response to all inquiries in
respect thereof.
(c) The Purchaser realizes that the purchase of the Shares will be a
highly speculative investment.
(d) The Purchaser is able, without impairing the Purchaser's financial
condition, to hold the Shares for an indefinite period of time and
to suffer a complete loss on the investment.
(e) The Purchaser acknowledges that he is aware that the Shares to be
issued to him by the Company pursuant to this Agreement have not
been registered under the Act. The Purchaser hereby acknowledges
that:
(i) the Shares must be held indefinitely unless a transfer of them
is subsequently registered under the Act or an exemption from
such registration is available;
(ii) the share certificate(s) representing the Shares will be stamped
with the legends restricting transfer as
5
<PAGE>
specified in this Agreement; and
(iii) the Company will make a notation in its records of the
aforementioned restrictions on transfer and legends.
(f) The Purchaser understands that the Shares are restricted securities
within the meaning of Rule 144 promulgated under the Act; that the
exemption from registration under Rule 144 will not be available in any
event for at least one year from the date of sale of the Shares to the
Purchaser, and even then will not be available unless (i) a public
trading market then exists for the Shares of the Company, (ii) adequate
current public information concerning the Company is then available to
the public, (iii) the Purchaser has been the beneficial owner and the
Purchaser has paid the full purchase price for the Shares at least one
year prior to the sale, and (iv) other terms and conditions of Rule 144
are complied with; and that any sale of the Shares may be made by it
only in limited amounts in accordance with such terms and conditions of
Rule 144, as amended from time to time.
(g) Without in any way limiting any of the other provisions of this
Agreement, the Purchaser further agrees that the Purchaser shall in no
event make any disposition of all or any portion of the Shares which
the Purchaser is purchasing unless and until:
(i) there is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made
in accordance with said Registration Statement; or
(ii) (A) the Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with
a detailed statement of the circumstances surrounding the
proposed disposition, (B) the Purchaser shall have furnished
the Company with an opinion of counsel to the effect that such
disposition will not require registration of such shares under
the Act, and (C) such opinion of counsel shall have been
concurred in by counsel for the Company and the Company shall
have advised the Purchaser of such concurrence.
(h) The Purchaser acknowledges that the Purchaser has been furnished with a
copy of the Plan, has read the Plan and this Agreement, and understands
that all rights and obligations connected with this Agreement are set
forth in this Agreement and in the Plan.
UNPERMITTED TRANSFERS.
The Company shall not be required (a) to transfer on its books any
Shares of the Company which shall have been sold or transferred in violation
of any of the provisions set forth in this Agreement or (b) to treat as owner
of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares shall have been so
transferred.
"MARKET STAND-OFF" AGREEMENT.
Purchaser agrees that, if requested by the Company or the managing
underwriter of any proposed Public Offering of the Company's securities,
Purchaser will not sell or otherwise transfer or dispose of any Shares held
by Purchaser without the prior written consent of the Company or such
underwriter, as the case may be, during such period of time, not to exceed
180 days following the effective date of the registration statement filed by
the Company with respect to such Public Offering, as the Company or the
underwriter may specify.
ENTIRE AGREEMENT.
This Agreement and the Plan constitutes the entire agreement between
the parties pertaining to its subject matter and supersedes all
contemporaneous written or oral agreements and understandings of the parties,
either express or implied. The parties agree to execute such further
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
6
<PAGE>
NO CREATION OR ENLARGEMENT OF PARTICIPANT'S RIGHTS TO CONTINUE IN ANY CAPACITY.
The right of the Company and any Affiliated Company (as defined in
the Plan) to terminate at will the Purchaser's services to the Company or any
Affiliated Company at any time (whether by dismissal, discharge or
otherwise), with or without cause, is specifically reserved. Nothing in this
Agreement shall diminish or impair in any manner whatsoever the right or
power of the Company or any Affiliated Company to terminate the Purchaser's
Continuous Service for any reason, with or without cause.
NOTICES.
Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit
in the United States Post Office, by certified mail with postage and fees
prepaid, addressed to the other party at the address hereinafter shown below
his or its signature or at such other address as such party may designate by
ten days' advance written notice to the other party.
SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of the successors and
assigns of the Company and be binding upon the Purchaser and his heirs,
executors, administrators, successors and assigns.
GOVERNING LAW.
This Agreement shall be governed by and interpreted under the laws
of the State of California.
INTERPRETATION.
This Agreement is entered into pursuant to the terms of the Plan,
and shall in all respects be interpreted in accordance therewith. The
Administrator shall interpret and construe this Agreement and the Plan, and
any action, decision, interpretation or determination made in good faith by
the Administrator shall be final and binding on the Company and the
Purchaser. As used in this Agreement, the term "Administrator" shall refer to
the committee of the Board of Directors of the Company appointed to
administer the Plan, and if no such committee has been appointed, the term
Administrator shall mean the Board of Directors.
COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument. Execution and delivery of this
Agreement or any notices, certificates or instruments contemplated herein by
fax, facsimile, or telecopier shall be deemed the execution and delivery of
an originally signed agreement, notice or instrument, as the case may be.
7
<PAGE>
SEVERABILITY.
Should any provision or portion of this Agreement be held to be
unenforceable or invalid for any reason, the remaining provisions and
portions of this Agreement shall be unaffected by such holding.
AMENDMENT.
The Board shall have full power and authority (subject to certain
amendments requiring stockholder approval pursuant to applicable laws or
regulations) from time to time to alter, amend, suspend or terminate the Plan
in any or all respects as the Board may deem advisable, and to alter this
Agreement in ways which shall not substantially adversely affect or impair
the Purchaser's rights under this Agreement No such alteration, amendment,
suspension or termination shall be made which shall substantially affect or
impair the rights of any Purchaser under an outstanding Restricted Stock
Purchase Agreement without such purchaser's consent.
IN WITNESS WHEREOF, the parties have executed this Restricted Stock Purchase
Agreement as of the day and year first above written.
eSynch Corporation
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
PURCHASER:
------------------------------------
(SIGNATURE)
------------------------------------
(TYPE OR PRINT NAME)
Address:----------------------------
----------------------------
8
<PAGE>
CONSENT OF SPOUSE
I acknowledge that I have read the foregoing Agreement and that I
know its contents. I am aware that by its provisions, my spouse agrees, among
other things, to the granting of rights to repurchase and to the imposition
of certain restrictions on the transfer of the shares of eSynch Corporation,
a Delaware corporation (the "Company"), including my community interest
therein (if any), which rights and restrictions may survive my spouse's
death. I hereby consent to such rights and restrictions and approve of the
provisions of the Agreement.
I further agree that in the event of a dissolution of the marriage
between myself and my spouse, in connection with which I secure or am awarded
shares of the common stock of the Company, or any interest therein through
property settlement agreement or otherwise, I shall receive and hold said
shares subject to all the provisions and restrictions contained in the
foregoing Agreement, including any option of a stockholder or the Company to
purchase such shares or interest from me.
I also acknowledge that I have been advised to obtain independent
counsel to represent my interests with respect to this Agreement but that I
have declined to do so and I hereby expressly waive my right to such
independent counsel.
Date:
---------------------------------
Signature:
----------------------------
Print Name:
---------------------------
Spouse of
9
<PAGE>
EXHIBIT A
TO RESTRICTED STOCK PURCHASE AGREEMENT
PROMISSORY NOTE
(_____ YEAR, [_____]%* Interest)
___________________, _____ _________________, California
For value received, the undersigned promises to pay eSynch
Corporation , a California Corporation (the "Company"), at the address of its
principal office, the sum of ____________ Dollars ($_____) in full by or
before the ________ anniversary date of the date hereof, together with
interest thereon as hereinafter provided.
The undersigned shall have the right to prepay said principal amount at
any time in whole or in part without penalty. Simple annual interest at the rate
(1) of ____________ percent (_____%) per annum on unpaid principal shall be paid
annually on each anniversary of the date hereof and upon each prepayment of
principal, if any.
The entire outstanding principal and interest shall be due and payable
if any one or more of the following events shall have occurred:
(a) The making by the undersigned of any assignment for the benefit of
creditors or the filing by or against the undersigned of any petition
in bankruptcy if such proceeding not be discharged within ninety (90)
days of any such making or filing.
(b) The occurrence of any termination of Continuous Service as set forth in
the Restricted Stock Purchase Agreement of even date herewith between
the undersigned and the Company.
If any installment of principal and/or interest is not paid when due,
the holder hereof may, at its option, declare the entire amount of this note
immediately due and payable.
All payments hereon shall be credited first to accrued but unpaid
interest, and the balance, if any, shall be credited to principal.
If legal action is instituted for the collection of this note, the
undersigned promises to pay such sum as the Court may adjudge reasonable as
attorneys' fees.
This note is given pursuant to that certain Restricted Stock Purchase
Agreement of even date herewith, between the Company and the undersigned and is
subject to all of the terms, rights and remedies set forth therein. This note is
secured by a Pledge Agreement of even date herewith between the Company and the
undersigned.
- ------------------------
(1) A fixed rate of interest is to be determined from time to time by action
of the Board of Directors in accordance with prevailing rates and the
Internal Revenue Service prescribed interest rules.
<PAGE>
EXHIBIT B
TO RESTRICTED STOCK PURCHASE AGREEMENT
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT ("Agreement') is executed as of this _____ day of
____________, ____, between eSynch Corporation, a Delaware corporation (the
"Company"), and ("Purchaser").
WITNESSETH:
For the considerations and undertakings set forth herein, the parties
do hereby agree as follows:
1. To secure payment to the Company of a promissory note ("Note") in the
face amount of _______________________ Dollars ($__________), and
extensions or renewals thereof, which was executed concurrently with
the execution of this Pledge Agreement pursuant to a Restricted Stock
Purchase Agreement of even date herewith between the Company and
Purchaser, Purchaser hereby assigns and grants to the Company a
security interest in ___________________ (______) shares ("Shares") of
the Common Stock of the Company acquired under the Restricted Stock
Purchase Agreement, together with securities or other collateral (if
any) other than such Shares, all described as follows:
Issuer:_____________________________
Certificate Number:_________________
Number of Shares:___________________
Registered Owner:___________________
Purchaser does hereby deposit with the Company, as pledge holder, such
certificates, together with duly executed stock transfer powers.
2. Subject to any obligations of Purchaser under the Restricted Stock
Purchase Agreement, the Company agrees that within a reasonable time
after all or any portion of the Note is paid by Purchaser, the Company
shall release and deliver to Purchaser the number of Shares held
hereunder for which such payment was received. The Company, in its
discretion, may release portions of the Shares upon periodic principal
payments or deposit of other or additional security under the Note. All
Shares released and delivered to Purchaser shall be free and clear of
the restrictions of this Pledge Agreement.
3. Unless and until Purchaser defaults in his performance under the terms
of the Note, the terms of this Pledge Agreement and/or the terms of the
Restricted Stock Purchase Agreement, the Shares held by the Company at
any time under this Pledge Agreement shall remain registered in the
name of Purchaser on the records of the Company, and Purchaser may vote
the Shares on all corporate questions (if the same shall be entitled to
voting rights) and shall be entitled to receive all dividends and other
amounts accruing as a result of his ownership of the Shares.
4. In the event the Purchaser defaults in the performance of any of the
terms of the Note, this Pledge Agreement or the Restricted Stock
Purchase Agreement, the Company may exercise any and all rights which
it may have under the California Uniform Commercial Code or any other
applicable statute, case, ruling regulation or law; subject, however,
to all permits, orders, consents, rules and regulations of the
California Commissioner of Corporations and the Securities and Exchange
Commission and the Federal Reserve Board relating hereto, to which
Purchaser agrees to be bound.
5. If during the term of this Pledge Agreement the Company should become
a party to any merger, consolidation or other reorganization, this
Pledge Agreement shall be adjusted so as to apply to the securities
to which a holder of the Shares subject to this Pledge Agreement
would have been entitled upon such merger, consolidation or
reorganization; and, if during the term of this Pledge Agreement the
Company shall be dissolved or its existence otherwise terminated,
then that portion of the assets and consideration to which a holder
of the Shares subject to this Pledge Agreement would have been
entitled in such transaction shall be the subject matter of this
Pledge Agreement for the remainder of its term. This shall in no
way limit the right of the Company to repurchase shares under the
Restricted Stock Purchase
<PAGE>
Agreement.
6. This Pledge Agreement shall inure to the benefit of and be binding upon
the heirs, executors and administrators of the parties hereto.
7. The rights, powers and remedies given to the Company by this Agreement
shall be in addition to all rights, powers and remedies given to the
Company under the Restricted Stock Purchase Agreement or any statute or
rule of law. Any forbearance or failure or delay by the Company in
exercising any right, power or remedy hereunder shall not be deemed to
be a waiver of such right, power or remedy, nor shall any single or
partial exercise of any right, power or remedy preclude the further
exercise thereof.
8. The Board of Directors may demand and receive payment or additional
security if for any reason the collateral hereunder is insufficient to
meet minimum requirements established under federal or state securities
or banking regulations or as may be necessary to bring the Note and the
security into compliance with any such law or regulations. Any failure
of Purchaser to meet any such demand shall be deemed a default under
this Pledge Agreement and under the note secured hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and
year first above written.
PURCHASER
----------------------------------------
Address:
----------------------------------------
----------------------------------------
eSynch Corporation
By:
-------------------------------------
Name:
Title:
<PAGE>
EXHIBIT C
TO RESTRICTED STOCK PURCHASE AGREEMENT
-----------, ------
Internal Revenue Service Center
5045 East Butler Avenue
Fresno, California 93888
---------------------------------------------------------
RE: ELECTION UNDER SECTION 83(B) OF THE INTERNAL REVENUE
CODE
---------------------------------------------------------
Dear Sir or Madam:
The undersigned performed services in connection with which property
was transferred to the undersigned that, at the time of transfer [NOTE: if the
Shares were acquired upon exercise of an "incentive stock option" add
- ---pursuant to the exercise of an "incentive stock option" as defined in Section
422 of the Internal Revenue Code], was not transferable by the undersigned and
was subject to a substantial risk of forfeiture. The undersigned hereby makes
this election pursuant to Section 83(b) of the Internal Revenue Code.
In connection with this election, the undersigned hereby provides you
with the following information:
1. The undersigned's name, address, social security number, and the
taxable year of the person who performed the services are as follows:
Name and Address:
---------------------------
---------------------------
---------------------------
Social Security No.: ---------------------------
Taxable Year: Calendar Year
2. A description of the property with respect to which the election is
being made:
shares of Common Stock (the "Shares") of eSynch Corporation, a
Delaware corporation (the "Company").
3. The date on which the property was transferred: _____________________
4. A description of the nature of the restrictions to which the property
is subject:
<PAGE>
The Company may reacquire all or any part of the Shares from the
undersigned in accordance with a repurchase schedule set forth in a Restricted
Stock Purchase Agreement (the "Agreement") between the undersigned and the
Company. In the event the undersigned should cease to be a service provider to
the Company at any time, the Company may repurchase vested Shares at the then
fair market value of the Shares, and unvested Shares may be repurchased by the
Company at the original price paid by the undersigned. The Shares acquired under
the Agreement shall vest and become "Vested Shares" from and after (the "Vesting
Measurement Date") in accordance with the following vesting schedule:
On or After:................................................Shares Vested As To:
Shares which have not yet become vested are herein called "Unvested
Shares." In the event Purchaser ceases his employment or service provider status
with the Company, all vesting shall cease unless otherwise determined by the
Board of Directors.
6. The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its terms
will never lapse) of the property with respect to which the election is
being made:
per share, which equals an aggregate fair market value of .
7. The amount paid for such property:
per share for , or an aggregate amount paid of .
There are enclosed herewith two copies of this written statement for
filing. Please stamp the third copy enclosed herewith as having been received
and return it to the undersigned in the enclosed, self-addressed, postage-paid
envelope.
The undersigned has also submitted a copy of this statement to the
person for whom the services were performed.
If you have any questions or comments, or if any additional information
is required, please do not hesitate to contact:
--------------------------
--------------------------
--------------------------
--------------------------
(---) --------
Very truly yours,
-----------------------------
c-4
<PAGE>
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT ("Agreement") is made on June __,1999,
between eSynch Corporation, a Delaware corporation (the "Company"), and
_____________ ("Indemnitee"), an officer and/or member of the Board of
Directors of the Company.
WHEREAS, the Company desires the benefits of having Indemnitee serve as
an officer and/or director secure in the knowledge that expenses, liabilities
and losses incurred by him in his good faith service to the Company will be
borne by the Company or its successors and assigns in accordance with
applicable law; and
WHEREAS, the Company desires that Indemnitee resist and defend against
what Indemnitee may consider to be unjustified investigations, claims,
actions, suits and proceedings which have arisen or may arise in the future
as a result of Indemnitee's service to the Company notwithstanding that
conditions in the insurance markets may make directors' and officers'
liability insurance coverage unavailable or available only at premium levels
which the Company may deem inappropriate to pay; and
WHEREAS, the parties believe it appropriate to memorialize and reaffirm
the Company's indemnification obligations to Indemnitee and, in addition, set
forth the indemnification agreements contained herein;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties agree as follows:
1. INDEMNIFICATION. Indemnitee shall be indemnified and held
harmless by the Company to the fullest extent permitted by its Certificate of
Incorporation, Bylaws and applicable law, as the same exists or may hereafter
be amended, against all expenses, liabilities and loss (including attorneys'
fees, judgments, fines, and amounts paid or to be paid in any settlement
approved in advance by the Company, such approval not to be unreasonably
withheld) (collectively, "Indemnifiable Expenses") actually reasonably
incurred or suffered by Indemnitee in connection with any present or future
threatened, pending or contemplated investigation, claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative
(collectively, "Indemnifiable Litigation"), (i) to which Indemnitee is or was
a party or is threatened to be made a party by reason of any action or
inaction in Indemnitee's capacity as a director or officer of the Company, or
(ii) with respect to which Indemnitee is otherwise involved by reason of the
fact that Indemnitee is or was serving as a director, officer, employee or
agent of the Company, or of any subsidiary or division, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Notwithstanding the foregoing, Indemnitee shall have no right to
indemnification for expenses and the payment of profits arising from the
purchase and sale by Indemnitee of securities in violation of Section 16(b)
of the Securities Exchange Act of 1934, as amended.
<PAGE>
2. INTERIM EXPENSES. The Company agrees to pay Indemnifiable
Expenses incurred by Indemnitee in connection with any Indemnifiable
Litigation in advance of the final disposition thereof, provided that the
Company has received an undertaking by or on behalf of Indemnitee,
substantially in the form attached hereto as EXHIBIT A, to repay the amount
so advanced to the extent that it is ultimately determined that Indemnitee is
not entitled to be indemnified by the Company under this Agreement or
otherwise. The advances to be made hereunder shall be paid by the Company to
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the Company.
3. PROCEDURE FOR MAKING DEMAND. Indemnitee shall, as a condition
precedent to his right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address set forth in Section 10 hereof (or such
other address as the Company shall designate in writing to Indemnitee).
Notice shall be deemed received three business days after the date postmarked
and sent by certified or registered mail, properly addressed; otherwise
notice shall be deemed received when such notice shall actually be received
by the Company. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be
within Indemnitee's power. Any indemnification provided for in Section 1
shall be made no later than forty-five (45) days after receipt of the written
request of Indemnitee.
4. FAILURE TO INDEMNIFY.
(a) If a claim under this Agreement, or any statute, or under any
provision of the Company's Certificate of Incorporation or Bylaws providing
for indemnification, is not paid in full by the Company, within forty-five
(45) days after a written request for payment thereof has been received by
the Company, Indemnitee may, but need not, at any time thereafter bring an
action against the Company to recover the unpaid amount of the claim and,
subject to Section 11 of this Agreement, if successful in whole or in part,
Indemnitee shall also be entitled to be paid for the expense (including
attorneys' fees) of bringing such action.
(b) It shall be a defense to such action (other than an action
brought to enforce a claim for expenses incurred in connection with any
action, suit or proceeding in advance of its final disposition) that
Indemnitee has not met the standard of conduct which make it permissible
under applicable law for the Company to indemnify Indemnitee for the amount
claimed, but the burden of proving such defense shall be on the Company and
Indemnitee shall be entitled to receive interim payments of interim expenses
pursuant to Section 2 hereof unless and until such defense may be finally
adjudicated by court order or judgment from which no further right of appeal
exists. It is the parties' intention that if the Company contests
Indemnitee's right to indemnification, the question of Indemnitee's right to
indemnification shall be for the court to decide, and neither the failure of
the Company (including its board of directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its board of directors, any committee
or subgroup of the board of directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
2
<PAGE>
5. NOTICE TO INSURERS. If, at the time of the receipt of a notice of
a claim pursuant to Section 3 thereof, the Company has director and/or
officer liability insurance in effect, the Company shall give prompt notice
of the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to
pay, on behalf of the Indemnitee, all amounts payable as a result of such
proceeding in accordance with the terms of such policies.
6. RETENTION OF COUNSEL. In the event that the Company shall be
obligated to pay Indemnifiable Expenses as a result of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee, which
approval shall not be unreasonably withheld, upon the delivery to Indemnitee
of written notice of its election to do so. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by
the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by that Indemnitee
with respect to that same proceeding, provided that (i) Indemnitee shall have
the right to employ his or her counsel in any such proceeding at Indemnitee's
expense, and (ii) if (A) the employment of counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not,
in fact, have employed counsel to assume defense of such proceeding, then the
fees and expenses of Indemnitee's counsel shall be at the expense of the
Company.
7. SUCCESSORS. This Agreement establishes contract rights which shall
be binding upon, and shall inure to the benefit of, the successors, assigns,
heirs and legal representatives of the parties hereto.
8. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may
prohibit the Company from indemnifying its directors and officers under this
Agreement or otherwise. Indemnitee understands and acknowledges that the
Company may be required in the future to undertake to the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee, and, in that event, the Indemnitee's rights
and the Company's obligations hereunder shall be subject to that
determination.
9. CONTRACT RIGHTS NOT EXCLUSIVE. The contract rights conferred by
this Agreement shall be in addition to, but not exclusive of, any other right
which Indemnitee may have or may hereafter acquire under any statute,
provision of the Company's Certificate of Incorporation or Bylaws, agreement,
vote of shareholders or disinterested directors, or otherwise.
10. INDEMNITEE'S OBLIGATIONS. The Indemnitee shall promptly advise the
Company in writing of the institution of any investigation, claim, action,
suit or proceeding which is or may be subject to this Agreement and keep the
Company generally informed of, and consult with the Company with respect to,
the status of any such investigation, claim, action, suit or proceeding.
Notices to the Company shall be directed to the Company, at its principal
executive office, Attn: Chief Executive Officer (or other such address as
the Company shall designate in writing to Indemnitee). Notice shall be
deemed received three days after the date postmarked if sent by certified or
registered mail, properly addressed. In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's
3
<PAGE>
power.
11. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, a court of competent
jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the
Company under this Agreement, or to enforce or interpret any other terms of
this Agreement, Indemnitee shall be entitled to be paid all court costs and
expenses, including attorneys' fees, incurred by Indemnitee in defense of
such action (including with respect to Indemnitee's counterclaims and
cross-claims made in such action), unless as a part of such action the court
determines that each of Indemnitee's material defenses to such action were
made in bad faith or were frivolous.
12. SEVERABILITY. Should any provision of this Agreement, or any
clause hereof, be held to be invalid, illegal or unenforceable, in whole or
in part, the remaining provisions and clauses of this Agreement shall remain
fully enforceable and binding on the parties.
13. MODIFICATION AND WAIVER. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall
be deemed or shall constitute a waiver of any other provisions hereof
(whether of not similar) nor shall such waiver constitute a continuing waiver.
14. CHOICE OF LAW. The validity, interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
Delaware.
IN WITNESS WHEREOF, the parties have executed this Indemnification
Agreement as of the day and year first written above.
ESYNCH CORPORATION:
By:
---------------------------------------
Its:
---------------------------------------
INDEMNITEE:
--------------------------------------------
Name:
4
<PAGE>
EXHIBIT A
UNDERTAKING AGREEMENT
This UNDERTAKING AGREEMENT is made on _______________, 19__, between
eSynch Corporation, a Delaware corporation (the "Company") and _______________,
an officer and/or member of the board of directors of the Company
("Indemnitee").
WHEREAS, Indemnitee may become involved in investigations, claims,
actions, suits or proceedings which have arisen or may arise in the future as
a result of Indemnitee's service to the Company; and
WHEREAS, Indemnitee desires that the Company pay any and all expenses
(including, but not limited to, attorneys' fees and court costs) actually and
reasonably incurred by Indemnitee or on Indemnitee's behalf in defending or
investigating any such suits or claims and that such payment be made in
advance of the final disposition of such investigations, claims, actions,
suits or proceedings to the extent that Indemnitee has not been previously
reimbursed by insurance; and
WHEREAS, the Company is willing to make such payments but, in accordance
with Section 145 of the General Corporation Law of the State of Delaware, the
Company may make such payments only if it receives an undertaking to repay
from Indemnitee; and
WHEREAS, Indemnitee is willing to give such an undertaking;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties agree as follows:
1. In regard to any payments made by the Company to Indemnitee
pursuant to the terms of the Indemnification Agreement dated __________,
19__, between the Company and Indemnitee, Indemnitee hereby undertakes and
agrees to repay to the Company any and all amounts so paid promptly and in
any event within thirty (30) days after the disposition, including any
appeals, of any litigation or threatened litigation on account of which
payments were made, but only to the extent that Indemnitee is ultimately
found not entitled to be indemnified by the Company under the Bylaws of the
Company and Section 145 of the General Corporation Law of the State of
Delaware, or other applicable law.
2. This Agreement shall not affect in any manner rights which
Indemnitee may have against the Company, any insurer or any other person to
seek indemnification for or reimbursement of any expenses referred to herein
or any judgment which may be rendered in any litigation or proceeding.
IN WITNESS WHEREOF, the parties have caused this Undertaking Agreement
to be executed on the date first above written.
INDEMNITEE: ESYNCH CORPORATION:
SIGNATURE: By:
--------------------------- ------------------------------
PRINT NAME: Title:
-------------------------- ---------------------------
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provisions").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, February 26, 1999, is made by and between Bixby Land Company, a
California Corporation ("LESSOR") and eSynch Corporation, a Delaware
Corporation ("LESSEE"), (collectively the "PARTIES," or individually a
"PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, commonly known by the street address of 15502 Mosher Avenue, located
in the City of Tustin, County of Orange, State of California, with zip code
92710, as outlined on Exhibit A attached hereto ("PREMISES"). The "Building"
is that certain building containing the Premises and generally described as
(describe briefly the nature of the Building): that certain two-story
Office/R&D/Industrial building located at the Southeast corner of Valencia &
Mosher in the City of Tustin, CA (assessor's parcel number 430-233-18). In
addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have
any rights to the roof, exterior walls or utility raceways of the Building or
to any other buildings in the Industrial Center. The Premises, the Building,
the Common Areas, the land upon which they are located, along with all other
buildings and improvements thereon, are herein collectively referred to as
the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: See Addendum unreserved vehicle parking spaces
("UNRESERVED PARKING SPACES"); and See Addendum reserved vehicle parking
spaces ("RESERVED PARKING SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: five years and no months ("ORIGINAL TERM") commencing
April 1, 1999 (See Addendum) ("COMMENCEMENT DATE") and ending April 30, 2004
("EXPIRATION DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: ___________________ ("EARLY POSSESSION
DATE"). (Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $20,010.00 per month ("BASE RENT"), payable on the
first day of each month commencing April 1, 1999 (Also see Paragraph 4.)
[x] if this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum paragraph 1.5, attached hereto.
1.6(a) Base Rent Paid Upon Execution: $20,010.00 as Base Rent for the
period 4/01/99 through 4/30/99.
1.6(b) Lessee's Share of Common Area Operating Expenses: thirty-eight
point 72 percent (38.72%) ("Lessee's Share") as determined by ? prorata
square footage of the Premises as compared to the total square footage of the
Building or ? determined by agreement between Lessor and Lessee.
1.7 SECURITY DEPOSIT: $60,030.00 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: Corporate, administrative and sales offices,
assembly, light manufacturing and storage of computer related software
products ("PERMITTED USE") (Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[x] Voit Commercial Brokerage represents Lessor exclusively ("LESSOR'S
BROKER");
[x] Mclean Irvine Properties represents Lessee exclusively ("LESSEE'S
BROKER"); or
[ ] _______________________________________ represents both Lessor and Lessee
("Dual
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Page 1 of 26
<PAGE>
Agency". (Also see Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by
both Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and Lessor's Broker.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by none ("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
signed by Lessor and Lessee which shall constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all
of the terms, covenants and conditions set forth in this Lease. Unless
otherwise provided herein, any statement of square footage set forth in this
Lease, or that may have been used in calculating rental and/or Common Area
Operating Expenses, is an approximation which Lessor and Lessee agree is
reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b))
based thereon is not subject to revision whether or not the actual square
footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean
and free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems, and loading doors, if any, in the Premises,
other than those constructed by Lessee, shall be in good operating condition
on the Commencement Date. If a non-compliance with said warranty exists as
of the Commencement Date, Lessor shall, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants that to the best of its knowledge any improvements (other
than those constructed by Lessee or at Lessee's direction) on or in the
Premises which have been constructed or installed by Lessor or with Lessor's
consent or at Lessor's direction shall comply with all applicable covenants
or restrictions of record and applicable building codes, regulations and
ordinances in effect on the Commencement Date. Lessor further warrants to
Lessee that Lessor has no knowledge of any claim having been made by any
governmental agency that a violation or violations of applicable building
codes, regulations, or ordinances exist with regard to the Premises as of the
Commencement Date. Said warranties shall not apply to any Alterations or
Utility Installations (defined in Paragraph 7.3(a)) made or to be made by
Lessee. If the Premises do not comply with said warranties, Lessor shall,
except as otherwise provided in this Lease, promptly after receipt of written
notice from Lessee given within six (6) months following the Commencement
Date and setting forth with specificity the nature and extent of such
non-compliance, take such action, at Lessor's: expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that
the Permitted Use in Paragraph 1.8 is permitted for the Premises under
Applicable Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including, but not limited to, the electrical and
fire sprinkler systems, security, environmental aspects, seismic and
earthquake requirements, and compliance with the Americans with Disabilities
Act and applicable zoning, municipal, county, state and federal laws,
ordinances and regulations, and any covenants or restrictions of record
(collectively, "Applicable Laws") and the present and future suitability of
the Premises for Lessee's intended use; (b) that Lessee has made such
investigation as it deems necessary with reference to such matters, is
satisfied with reference thereto, and assumes all responsibility therefore as
the same relate to Lessee's occupancy of the Premises and/or the terms of
this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made
any oral or written representations or warranties with respect to said
matters other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor
in this Paragraph 2 shall be of no force or effect if immediately prior to
the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.
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Page 2 of 26
<PAGE>
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number
of Unreserved Parking Spaces and Reserved Parking Spaces specified in
Paragraph 1.2(b) on those portions of the Common Areas designated from time
to time by Lessor for parking. Lessee shall not use more parking spaces than
said number. Said parking spaces shall be used for parking by vehicles no
larger than full-size passenger automobiles or pick-up trucks, herein called
"Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall
be parked and loaded or unloaded as directed by Lessor in the Rules and
Regulations (as defined in Paragraph 40) issued by Lessor. (Also see
Paragraph 2.9.) (See Addendum)
(a) Lessee shall not permit or allow any vehicles that
belong to or are controlled by Lessee or Lessee's employees, suppliers,
shippers, customers, contractors or invitees to be loaded, unloaded, or
parked in areas other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may
have, to remove or tow away the vehicle involved and charge the cost to
Lessee, which cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease
provide the parking facilities required by Applicable Law.
2.7 COMMON AREAS -- DEFINITION. The term "COMMON AREAS" is
defined as all areas and facilities outside the Premises and within the
exterior boundary line of the Industrial Center and interior utility raceways
within the Premises that are provided and designated by the Lessor from time
to time for the general nonexclusive use of Lessor, Lessee and other lessees
of the Industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways and landscaped areas.
2.8 COMMON AREAS -- LESSEE'S RIGHTS. Lessor hereby grants to
Lessee, for the benefit of Lessee and its employees, suppliers, shippers,
contractors, customers and invitees, during the term of this Lease, the
non-exclusive right to use, in common with others entitled to such use, the
Common Areas as they exist from time to time, subject to any rights, powers,
and privileges reserved by Lessor under the terms hereof or under the terms
of any rules and regulations or restrictions governing the use of the
Industrial Center. Under no circumstances shall the right herein granted to
use the Common Areas be deemed to include the right to store any property,
temporarily or permanently, in the Common Areas. Any such storage shall be
permitted only by the prior written consent of Lessor or Lessor's designated
agent, which consent may be revoked at any time. In the event that any
unauthorized storage shall occur then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor. (See Addendum)
2.9 COMMON AREAS -- RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time,
to establish, modify, amend and enforce reasonable Rules and Regulations with
respect thereto in accordance with Paragraph 40. Lessee agrees to abide by
and conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS -- CHANGES. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, landscaped areas, walkways and utility
raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
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(d) To add additional buildings and improvements to the
Common Areas;
(e) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Industrial Center, or
any portion thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgment, deem to be
appropriate.
3. Term.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after
the Early Possession Date but prior to the Commencement Date, the obligation
to pay Base Rent shall be abated for the period of such early occupancy. All
other terms of this Lease, however, (including, but not limited to, the
obligations to pay Lessee's Share of Common Area Operating Expenses and to
carry the insurance required by Paragraph 8) shall be in effect during such
period. Any such early possession shall not affect nor advance the
Expiration Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by
the Commencement Date, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease, or the obligations
of Lessee hereunder, or extend the term hereof, but in such case. Lessee
shall not, except as otherwise provided herein, be obligated to pay rent or
perform any other obligation of Lessee under the terms of this Lease until
Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date. Lessee may, at its option, by notice in writing to Lessor
within ten (10) days after the end of said sixty (60) day period, cancel this
Lease, in which event the Parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee
is not received by Lessor within said ten (10) day period, Lessee's right to
cancel this Lease hereunder shall terminate and be of no further force or
effect. Except as may be otherwise provided, and regardless of when the
Original Term actually commences, if possession is not tendered to Lessee
when required by this Lease and Lessee does not terminate this Lease, as
aforesaid, the period free of the obligation to pay Base Rent, if any, that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to the period during which the
Lessee would have otherwise enjoyed under the terms hereof, but minus any
days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or
charges, as the same may be adjusted from time to time, to Lessor in lawful
money of the United States, without offset or deduction, on or before the day
on which it is due under the terms of this Lease. Base Rent and all other
rent and charges for any period during the term hereof which is for less than
one full month shall be prorated based upon the actual number of days of the
month involved. Payment of Base Rent and other charges shall be made to
Lessor at its address stated herein or to such other persons or at such other
addresses as Lessor may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share (as
specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as
hereinafter defined, during each calendar year of the term of this Lease, in
accordance with the following provisions:
(a) "Common Area Operating Expenses" are defined, for
purposes of this Lease, as all costs incurred by Lessor relating to the
ownership and operation of the Industrial Center, including, but not limited
to, the following:
(i) The operation, repair and maintenance, in neat,
clean, good order and condition, of the following:
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(aa) The Common Areas, including parking areas,
loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers, irrigation systems,
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone
to service the Common Areas.
(iii) Trash disposal, property management and security
services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of
Common Areas.
(v) Real Property Taxes (as defined in Paragraph
10.2) to be paid by Lessor for the Building and the Common Areas under
Paragraph 10 hereof.
(vi) The costs of the premiums for the insurance
policies maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss
concerning the Building or the Common Areas.
(viii) Any other services to be provided by Lessor that
are stated elsewhere in this Lease to be a Common Area Operating Expense
including, but not limited to, Paragraph 7.2 below.
(b) Any Common Area Operating Expenses and Real Property
Taxes that are specifically attributable to the Building or to any other
building in the Industrial Center or to the operation, repair and maintenance
thereof, shall be allocated entirely to the Building or to such other
building. However, any Common Area Operating Expenses and Real Property
Taxes that are not specifically attributable to the Building or to any other
building or to the operation, repair and maintenance thereof, shall be
equitably allocated by Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose an
obligation upon Lessor to either have said improvements or facilities or to
provide those services unless the Industrial Center already has the same,
Lessor already provides the services, or Lessor has agreed elsewhere in this
Lease to provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall
be payable by Lessee within ten (10) days after a reasonably detailed
statement of actual expenses is presented to Lessee by Lessor. At Lessor's
option, however, an amount may be estimated by Lessor from time to time of
Lessee's Share of annual Common Area Operating Expenses and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each 12-month
period of the Lease term, on the same day as the Base Rent is due hereunder.
Lessor shall deliver to Lessee within sixty (60) days after the expiration of
each calendar year a reasonably detailed statement showing Lessee's Share of
the actual Common Area Operating Expenses incurred during the preceding year.
If Lessee's payments under this Paragraph 4.2(d) during said preceding year
exceed Lessee's Share as indicated on said statement, Lessee shall be
credited the amount of such overpayment against Lessee's Share of Common Area
Operating Expenses next becoming due. If Lessee's payments under this
Paragraph 4.2(d) during said preceding year were less than Lessee's Share as
indicated on said statement, Lessee shall pay to Lessor the amount of the
deficiency within ten (10) days after delivery by Lessor to Lessee of said
statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security
for Lessee's faithful performance of Lessee's obligations under this Lease.
If Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor
may use, apply or retain all or any portion of said Security Deposit for the
payment of any amount due Lessor or to reimburse or compensate Lessor for any
liability, cost, expense, loss or damage (including attorneys' fees) which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all
or any portion of said Security Deposit, Lessee shall within ten (10) days
after written request therefore deposit
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monies with Lessor sufficient to restore said Security Deposit to the full
amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that
the total amount of the Security Deposit shall at all times bear the same
proportion to the then current Base Rent as the initial Security Deposit
bears to the initial Base Rent set forth in Paragraph 1.5. Lessor shall not
be required to keep all or any part of the Security Deposit separate from its
general accounts. Lessor shall, at the expiration or earlier termination of
the term hereof and after Lessee has vacated the Premises, return to Lessee
(or, at Lessor's option, to the last assignee, if any, of Lessee's interest
herein), that portion of the Security Deposit not used or applied by Lessor.
Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increment for its use, or to be prepayment for any monies to be paid by
Lessee under this Lease. (SEE ADDENDUM)
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, and for no other purpose. Lessee
shall not use or permit the use of the Premises in a manner that is unlawful,
creates waste or a nuisance, or that disturbs owners and/or occupants of, or
causes damage to the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or
delay its consent to any written request by Lessee, Lessee's assignees or
subtenants, and by prospective assignees and subtenants of Lessee, its
assignees and subtenants, for a modification of said Permitted Use, so long
as the same will not impair the structural integrity of the improvements on
the Premises or in the Building or the mechanical or electrical systems
therein, does not conflict with uses by other lessees, is not significantly
more burdensome to the Premises or the Building and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects
to withhold such consent, Lessor shall within five (5) business days after
such request give a written notification of same, which notice shall include
an explanation of Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or
effect, either by itself or in combination with other materials expected to
be on the Premises, is either: (i) potentially injurious to the public
health, safety or welfare, the environment, or the Premises; (ii) regulated
or monitored by any governmental authority; or (iii) a basis for potential
liability of Lessor to any governmental agency or third party under any
applicable statute or common law theory. Hazardous Substance shall include,
but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any
products or by-products thereof. Lessee shall not engage in any activity in
or about the Premises which constitutes a Reportable Use (as hereinafter
defined) of Hazardous Substances without the express prior written consent of
Lessor and compliance in a timely manner (at Lessee's sole cost and expense)
with all Applicable Requirements (as defined in Paragraph 6.3). REPORTABLE
USE" shall mean (i) the installation or use of any above or below ground
storage tank; (ii) the generation, possession, storage, use, transportation,
or disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is required
to be flied with, any governmental authority; and (iii) the presence in, on
or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the
foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary
and customary materials reasonably required to be used by Lessee in the
normal course of the Permitted Use, so long as such use is not a Reportable
Use and does not expose the Premises or neighboring properties to any
meaningful risk of contamination or damage or expose Lessor to any liability
therefor. In addition, Lessor may (but without any obligation to do so)
condition its consent to any Reportable Use of any Hazardous Substance by
Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in
its reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefor, including, but not limited to, the installation (and, at
Lessor's option, removal on or before Lease expiration or earlier
termination) of reasonably necessary protective modifications to the Premises
(such as concrete encasements) and/or the deposit of an additional Security
Deposit under Paragraph 5 hereof.
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(b) DUTY TO INFORM LESSOR. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance has come to be
located in, on, under or about the Premises or the Building, other than as
previously consented to by Lessor, Lessee shall immediately give Lessor
written notice thereof, together with a copy of any statement, report,
notice, registration, application, permit, business plan, license, claim,
action, or proceeding given to, or received from, any governmental authority
or private party concerning the presence, spill, release, discharge of, or
exposure to, such Hazardous Substance including, but not limited to, all such
documents as may be involved in any Reportable Use involving the Premises.
Lessee shall not cause or permit any Hazardous Substances to be spilled or
released in, on, under or about the Premises (including, without limitation,
through the plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground lessor, if
any, and the Premises, harmless from and against any and all damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, loss of
permits and attorneys' and consultants' fees arising out of or involving any
Hazardous Substance brought onto the Premises by or for Lessee or by anyone
under Lessee's control. Lessee's obligations under this Paragraph 6.2(c)
shall include, but not be limited to, the effects of any contamination or
injury to person, property or the environment created or suffered by Lessee,
and the cost of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at
Lessee's sole cost and expense, fully, diligently and in a timely manner,
comply with all "APPLICABLE REQUIREMENTS," which term is used in this Lease
to mean all laws, rules, regulations, ordinances, directives, covenants,
easements and restrictions of record, permits, the requirements of any
applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any
manner to the Premises (including, but not limited to, matters pertaining to
(i) industrial hygiene; (ii) environmental conditions on, in, under or about
the Premises, including soil and groundwater conditions; and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill, or release of any Hazardous Substance), now
in effect or which may hereafter come into effect. Lessee shall, within five
(5) days after receipt of Lessor's written request, provide Lessor with
copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving failure by
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDERS") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the
condition of the Premises and for verifying compliance by Lessee with this
Lease and all Applicable Requirements (as defined in Paragraph 6.3), and
Lessor shall be entitled to employ experts and/or consultants in connection
therewith to advise Lessor with respect to Lessee's activities, including but
not limited to Lessee's installation, operation, use, monitoring,
maintenance, or removal of any Hazardous Substance on or from the Premises.
The costs and expenses of any such inspections shall be paid by the party
requesting same, unless a Default or Breach of this Lease by Lessee or a
violation of Applicable Requirements or a contamination, caused or materially
contributed to by Lessee, is found to exist or to be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result
of any such existing or imminent violation or contamination. In such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case
may be, for the costs and expenses of such inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition),
2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2
(Lessor's Obligations), 9 (Damage or Destruction),
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and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at
all times, keep the Premises and every part thereof in good order, condition
and repair (whether or not such portion of the Premises requiring repair, or
the means of repairing the same, are reasonably or readily accessible to
Lessee, and whether or not the need for such repairs occurs as a result of
Lessee's use, any prior use, the elements or the age of such portion of the
Premises), including, without limiting the generality of the foregoing, all
equipment or facilities specifically serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire hose connections if within
the Premises, fixtures, interior walls, interior surfaces of exterior walls,
ceilings, floors, windows, doors, plate glass, and skylights, but excluding
any items which are the responsibility of Lessor pursuant to Paragraph 7.2
below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep
the Premises and all improvements thereon or a part thereof in good order,
condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure
and maintain a contract, with copies to Lessor, in customary form and
substance for and with a contractor specializing and experienced in the
inspection, maintenance and service of the heating, air conditioning and
ventilation system for the Premises. However, Lessor reserves the right,
upon notice to Lessee, to procure and maintain the contract for the heating,
air conditioning and ventilating systems, and (f) Lessor so elects, Lessee
shall reimburse Lessor, upon demand, for the cost thereof. (See Addendum)
(c) If Lessee fails to perform Lessee's obligations under
this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days'
prior written notice to Lessee (except in the case of an emergency, in which
case no notice shall be required), perform such obligations on Lessee's
behalf, and put the Premises in good order, condition and repair, in
accordance with Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's
Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor,
subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order,
condition and repair the foundations, exterior walls, structural condition of
interior bearing walls, exterior roof, fire sprinkler and/or standpipe and
hose (if located in the Common Areas) or other automatic fire extinguishing
system including fire alarm and/or smoke detection systems and equipment,
fire hydrants, parking lots, walkways, parkways, driveways, landscaping,
fences, signs and utility systems serving the Common Areas and all parts
thereof, as well as providing the services for which there is a Common Area
Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated
to paint the exterior or interior surfaces of exterior walls nor shall Lessor
be obligated to maintain, repair or replace windows, doors or plate glass of
the Premises. Lessee expressly waives the benefit of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Building, Industrial Center or Common Areas in good
order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning
equipment, plumbing, and fencing in, on or about the Premises. The term
"TRADE FIXTURES" shall mean Lessee's machinery and equipment which can be
removed without doing material damage to the Premises. The term
"ALTERATIONS" shall mean any modification of the improvements on the Premises
which are provided by Lessor under the terms of this Lease, other than
Utility Installations or Trade Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR
UTILITY INSTALLATIONS" are defined as Alterations and/or Utility
Installations made by Lessee that are not yet owned by Lessor pursuant to
Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations
or Utility Installations in, on, under or about the Premises without Lessor's
prior written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible
from the outside of the Premises, do not involve puncturing, relocating or
removing the roof or any existing walls, or changing or interfering with the
fire sprinkler or fire detection systems and the cumulative cost thereof
during the term of this Lease as extended does not exceed $10,000,00.
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(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent
specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring
all applicable permits required by governmental authorities; (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon; and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and be in compliance with all Applicable Requirements. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation
that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and
completion bond in an amount equal to one and one-half times the estimated
cost of such Alteration or Utility Installation. (See Addendum)
(c) LIEN PROTECTION. Lessee shall pay when due all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on, or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense, defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises.
If Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor, in an amount equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises
free from the effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorneys' fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter
provided in this Paragraph 7.4, all Alterations and Utility Installations
made to the Premises by Lessee shall be the property of and owned by Lessee,
but considered a part of the Premises. Lessor may, at any time and at its
option, elect in writing to Lessee to be the owner of all or any specified
part of the Lessee-Owned Alterations and Utility Installations. Unless
otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned
Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon the
Premises and be surrendered with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed, by the expiration or earlier termination of this Lease,
notwithstanding that their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any
Alterations or Utility Installations made without the required consent of
Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier
termination date, clean and free of debris and in good operating order,
condition and state of repair, ordinary wear and tear excepted. Ordinary
wear and tear shall not include any damage or deterioration that would have
been prevented by good maintenance practice or by Lessee performing all of
its obligations under this Lease Except as otherwise agreed or specified
herein, the Premises, as surrendered, shall include the Alterations and
Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and
Utility Installations, as well as the removal of any storage tank installed
by or for Lessee, and the removal, replacement, or remediation of any soil,
material or ground water contaminated by Lessee, all as may then be required
by Applicable Requirements and/or good practice Lessee's Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee subject to its
obligation to repair and restore the Premises per this Lease.
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8. Insurance; Indemnity.
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the
insurance policies maintained by Lessor under this Paragraph 8 shall be a
Common Area Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for
policy periods commencing prior to, or extending beyond, the term of this
Lease shall be prorated to coincide with the corresponding Commencement Date
or Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in
force during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee, Lessor and any Lender(s) whose names have been
provided to Lessee in writing (as additional insureds) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000
per occurrence with an "Additional Insured-Managers or Lessors of Premises"
endorsement and contain the "Amendment of the Pollution Exclusion"
endorsement for damage caused by heat, smoke or fumes from a hostile fire.
The policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an "Insured Contract" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance
required by this Lease or as carried by Lessee shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance to be carried by Lessee shall be primary to and not contributory
with any similar insurance carried by Lessor, whose insurance shall be
considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any Lender(s), insuring against
loss or damage to the Premises. Such insurance shall be for full replacement
cost, as the same shall exist from time to time, or the amount required by
any Lender(s), but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age
of the improvements involved, such latter amount is less than full
replacement cost. Lessee-Owned Alterations and Utility Installations, Trade
Fixtures and Lessee's personal property shall be insured by Lessee pursuant
to Paragraph 8.4. If the coverage is available and commercially appropriate,
Lessor's policy or policies shall insure against all risks of direct physical
loss or damage (except the perils of flood and/or earthquake unless required
by a Lender), including coverage for any additional costs resulting from
debris removal and reasonable amounts of coverage for the enforcement of any
ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Building required to be demolished or removed by
reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered loss, but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in lieu
of any co-insurance clause, waiver of subrogation, and inflation guard
protection causing an increase in the annual property insurance coverage
amount by a factor of not less than the adjusted U.S. Department of Labor
Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in
force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of
the full rental and other charges payable by all lessees of the Building to
Lessor for one year (including all Real Property Taxes, insurance costs, all
Common Area Operating Expenses and any scheduled rental increases). Said
insurance may provide that in the event the Lease is terminated by reason of
an insured loss, the period of indemnity for such coverage shall be extended
beyond the date of the completion of repairs or replacement of the Premises,
to provide for one full year's loss of rental revenues from the date of any
such loss. Said insurance shall contain an agreed valuation provision in
lieu of any co-insurance clause, and the amount of coverage shall be adjusted
annually to reflect the projected rental income, Real Property Taxes,
insurance premium costs and other expenses, if any, otherwise payable, for
the next 12-month period. Common Area Operating Expenses shall include any
deductible amount in the event of such loss.
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(c) ADJACENT PREMISES. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common
Areas or other buildings in the Industrial Center if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring
Party, Lessor shall not be required to insure Lessee-Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures and
Lessee-Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by Lessor as the Insuring Party
under Paragraph 8.3(a). Such insurance shall be full replacement cost
coverage with a deductible not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the replacement of
personal property and the restoration of Trade Fixtures and Lessee-Owned
Alterations and Utility Installations. Upon request from Lessor, Lessee
shall provide Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in this Paragraph 8. Lessee shall cause to be
delivered to Lessor, within seven (7) days after the earlier of the Early
Possession Date or the Commencement Date, certified copies of, or
certificates evidencing the existence and amounts of, the insurance required
under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days' prior written notice
to Lessor. Lessee shall, at least thirty (30) days prior to the expiration
of such policies, furnish Lessor with evidence of renewals or "insurance
binders" evidencing renewal thereof, or Lessor may order such insurance and
charge the cost thereof to Lessee, which amount shall be payable by Lessee to
Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss or damage to their property arising out of or
incident to the perils required to be insured against under Paragraph 8. The
effect of such releases and waivers of the right to recover damages shall not
be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto. Lessor and Lessee agree to have their
respective insurance companies issuing property damage insurance waive any
right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor,
partners and Lenders, from and against any and all claims, loss of rents
and/or damages, costs, liens, judgments, penalties, loss of permits,
attorneys' and consultants' fees, expenses and/or liabilities arising out of,
involving, or in connection with, the occupancy of the Premises by Lessee,
the conduct of Lessee's business, any act, omission or neglect of Lessee, its
agents, contractors, employees or invitees, and out of any Default or Breach
by Lessee in the performance in a timely manner of any obligation on Lessee's
part to be performed under this Lease. The foregoing shall include, but not
be limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of claims made
against Lessor) litigated and/or reduced to judgment. In case any action or
proceeding be brought against Lessor by reason of any of the foregoing
matters, Lessee, upon notice from Lessor, shall defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether said injury or damage results from
conditions arising upon the Premises or upon other portions of the Building
of which the Premises
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are a part, from other sources or places, and regardless of whether the cause
of such damage or injury or the means of repairing the same is accessible or
not. Lessor shall not be liable for any damages arising from any act or
neglect of any other lessee of Lessor nor from the failure by Lessor to
enforce the provisions of any other lease in the Industrial Center.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. Damage or Destruction.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less than
fifty percent (50%) of the then Replacement Cost (as defined in Paragraph
9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility
Installations and Trade Fixtures) immediately prior to such damage or
destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building) of the
Building shall, at the option of Lessor, be deemed to be Premises Total
Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to
their condition existing immediately prior thereto, including demolition,
debris removal and upgrading required by the operation of applicable building
codes, ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in,
on, or under the Premises.
9.2 PREMISES PARTIAL DAMAGE -- INSURED LOSS. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's
expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. In the event, however,
that there is a shortage of insurance proceeds and such shortage is due to
the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, Lessor shall
complete them as soon as reasonably possible and this Lease shall remain in
full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within such ten (10) day period, and if
Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any
right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood
or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if
made by either Party.
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9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense and this Lease shall continue in full force and effect), Lessor may,
at Lessor's option, either (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in
full force and effect, or (ii) give written notice to Lessee within thirty
(30) days after receipt by Lessor of knowledge of the occurrence of such
damage of Lessor's desire to terminate this Lease as of the date sixty (60)
days following the date of such notice. In the event Lessor elects to give
such notice of Lessor's intention to terminate this Lease, Lessee shall have
the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the repair of such
damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following such commitment from Lessee. In
such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such repairs as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and
provide the funds or assurance thereof within the times specified above, this
Lease shall terminate as of the dale specified in Lessor's notice of
termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if Premises Total Destruction occurs (including any destruction required by
any authorized public authority), this Lease shall terminate immediately
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee. Lessor shall have the right to recover Lessor's
damages from Lessee except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of the term of this Lease there is damage for which the cost to
repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor
may, at Lessor's option, terminate this Lease effective thirty (30) days
following the date of occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within thirty (30) days after the date
of occurrence of such damage. Provided, however, if Lessee at that time has
an exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this Lease by (a) exercising such option, and (b)
providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten (10) days after Lessee's receipt of Lessor's written
notice purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option during
such period and provides Lessor with funds (or adequate assurance thereof) to
cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense,
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
and provide such funds or assurance during such period, then this Lease shall
terminate as of the date set forth in the first sentence of this Paragraph
9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible,
the Base Rent, Common Area Operating Expenses and other charges, if any,
payable by Lessee hereunder for the period during which such damage or
condition, its repair, remediation or restoration continues, shall be abated
in proportion to the degree to which Lessee's use of the Premises is
impaired, but not in excess of proceeds from insurance required to be carried
under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area
Operating Expenses and other charges, if any, as aforesaid, all other
obligations of Lessee hereunder shall be performed by Lessee, and Lessee
shall have no claim against Lessor for any damage suffered by reason of any
such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in
a substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Lessee gives such notice
to Lessor and such Lenders and such repair or restoration is not commenced
within thirty (30) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after the receipt of such notice, this Lease shall continue in full force and
effect. "Commence" as
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used in this Paragraph 9.6 shall mean either the unconditional authorization
of the preparation of the required plans, or the beginning of the actual work
on the Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which
case Lessee shall make the investigation and remediation thereof required by
Applicable Requirements and this Lease shall continue in full force and
effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph
13), Lessor may, at Lessor's option, either (i) investigate and remediate
such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in
full force and effect, or (ii) if the estimated cost to investigate and
remediate such condition exceeds twelve (12) times the then monthly Base Rent
or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of
such Hazardous Substance Condition of Lessor's desire to terminate this Lease
as of the date sixty (60) days following the date of such notice. In the
event Lessor elects to give such notice of Lessor's intention to terminate
this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's
commitment to pay for the excess costs of (a) investigation and remediation
of such Hazardous Substance Condition to the extent required by Applicable
Requirements, over (b) an amount equal to twelve (12) times the then monthly
Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor
with the funds required of Lessee or satisfactory assurance thereof within
thirty (30) days following said commitment by Lessee. In such event this
Lease shall continue in full force and effect, and Lessor shall proceed to
make such investigation and remediation as soon as reasonably possible after
the required funds are available. If Lessee does not give such notice and
provide the required funds or assurance thereof within the time period
specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance
payment made by Lessee to Lessor and so much of Lessee's Security Deposit as
has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises and the Building with respect to the termination of this Lease and
hereby waive the provisions of any present or future statute to the extent it
is inconsistent herewith.
10. Real Property Taxes.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any such amounts shall be included in
the calculation of Common Area Operating Expenses in accordance with the
provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Industrial Center by any
authority having the direct or indirect power to tax, including any city,
state or federal government, or any school, agricultural, sanitary, fire,
street, drainage, or other improvement district thereof, levied against any
legal or equitable interest of Lessor in the Industrial Center or any portion
thereof, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in Applicable Law taking
effect, during the term of this Lease, including, but not limited to, a
change in the ownership of the Industrial Center or in the improvements
thereon, the execution of this Lease, or any modification, amendment or
transfer thereof, and whether or not contemplated by the Parties. In
calculating Real Property Taxes for any calendar year, the Real Property
Taxes for any real estate tax year shall be included in the calculation of
Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall
not include Real Property Taxes specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the
Industrial Center by other lessees or by Lessor for the exclusive enjoyment
of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall,
however, pay to Lessor at the time Common Area Operating Expenses are payable
under Paragraph
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4.2, the entirety of any increase in Real Property Taxes if assessed solely
by reason of Alterations, Trade Fixtures or Utility Installations placed upon
the Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable
proportion of the Real Property Taxes for all of the land and improvements
included within the tax parcel assessed, such proportion to be determined by
Lessor from the respective valuations assigned in the assessor's work sheets
or such other information as may be reasonably available. Lessor's
reasonable determination thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee-Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all
personal property of Lessee contained in the Premises or stored within the
Industrial Center. When possible, Lessee shall cause its Lessee-Owned
Alterations and Utility Installations, Trade Fixtures, furnishings, equipment
and all other personal property to be assessed and billed separately from the
real property of Lessor. If any of Lessee's said property shall be assessed
with Lessor's real property, Lessee shall pay Lessor the taxes attributable
to Lessee's property within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services
supplied to the Premises, including, but not limited to; electricity,
telephone, security, gas and cleaning of the Premises, together with any
taxes thereon. If any such utilities or services are not separately metered
to the Premises or separately billed to the Premises, Lessee shall pay to
Lessor a reasonable proportion to be determined by Lessor of all such charges
jointly metered or billed with other premises in the Building, in the manner
and within the time periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber (collectively,
"assign") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject
to the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis,
of twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of
Lessee, as hereinafter defined, by an amount equal to or greater than
twenty-five percent (25%) of such Net Worth of Lessee as it was represented
to Lessor at the time of full execution and delivery of this Lease or at the
time of the most recent assignment to which Lessor has consented, or as it
exists immediately prior to said transaction or transactions constituting
such reduction, at whichever time said Net Worth of Lessee was or is greater,
shall be considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent. "Net Worth of Lessee" for purposes of this
Lease shall be the net worth of Lessee (excluding any Guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1, or a
non-curable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unconsented to assignment or subletting as a
non-curable Breach, Lessor shall have the right to either: (i) terminate this
Lease, or (ii) upon thirty (30) days' written notice ("Lessor's Notice"),
increase the monthly Base Rent for the Premises to the greater of the then
fair market rental value of the Premises, as reasonably determined by Lessor,
or one hundred ten percent (110%) of the Base Rent then in effect. Pending
determination of the new fair market rental value, if disputed by Lessee,
Lessee shall pay the amount set forth in Lessor's Notice, with any
overpayment credited against the next installment(s) of Base Rent coming due,
and any underpayment for the period retroactively to the effective date of
the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, the
purchase
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price of any option to purchase the Premises held by Lessee shall be subject
to similar adjustment to the then fair market value as reasonably determined
by Lessor (without the Lease being considered an encumbrance or any deduction
for depreciation or obsolescence, and considering the Premises at its highest
and best use and in good condition) or one hundred ten percent (110%) of the
price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio
as the new rental bears to the Base Rent in effect immediately prior the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND
SUBLETTING. (See Addendum)
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
assignee or sublessee. However, Lessor may consent to subsequent sublettings
and assignments of the sublease or any amendments or modifications thereto
without notifying Lessee or anyone else liable under this Lease or the
sublease and without obtaining their consent, and such action shall not
relieve such persons from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of the Lessee's
obligations under this Lease, including any sublessee, without first
exhausting Lessor's remedies against any other person or entity responsible
therefor to Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including, but not
limited to, the intended use and/or required modification of the Premises, if
any, together with a non-refundable deposit of $1,000 or ten percent (10%) of
the monthly Base Rent applicable to the portion of the Premises which is the
subject of the proposed assignment or sublease, whichever is greater, as
reasonable consideration for Lessor's considering and processing the request
for consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall,
by reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
(g) The occurrence of a transaction described in Paragraph
12.2(c) shall give Lessor the right (but not the obligation) to require that
the Security Deposit be increased by an amount equal to six (6) times the
then monthly Base Rent, and Lessor may make the actual receipt by Lessor of
the Security Deposit increase a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment schedule of
the rent payable under this Lease be adjusted
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to what is then the market value and/or adjustment schedule for property
similar to the Premises as then constituted, as determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all
or a portion of the Premises heretofore or hereafter made by Lessee, and
Lessor may collect such rent and income and apply same toward Lessee's
obligations under this Lease; provided, however, that until a Breach (as
defined in Paragraph 13.1) shall occur in the performance of Lessee's
obligations under this Lease, Lessee may, except as otherwise provided in
this Lease, receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of the foregoing provision or any
other assignment of such sublease to Lessor, nor by reason of the collection
of the rents from a sublessee, be deemed liable to the sublessee for any
failure of Lessee to perform and comply with any of Lessee's obligations to
such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessee shall rely upon any such statement and
request from Lessor and shall pay such rents and other charges to Lessor
without any obligation or right to inquire as to whether such Breach exists
and notwithstanding any notice from or claim from Lessee to the contrary.
Lessee shall have no right or claim against such sublessee, or, until the
Breach has been cured, against Lessor, for any such rents and other charges
so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of
its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall
further assign or sublet all or any part of the Premises without Lessor's
prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice.
The sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee. (See Addendum)
13. Default; Breach; Remedies.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney
is consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), a reasonable minimum sum per such occurrence for legal
services and costs in the preparation and service of a notice of Default is
Lessor's actual costs and fees, and that Lessor may include the cost of such
services and costs in said notice as rent due and payable to cure said
default. A "DEFAULT" by Lessee is defined as a failure by Lessee to observe,
comply with or perform any of the terms, covenants, conditions or rules
applicable to Lessee under this Lease. A "BREACH" by Lessee is defined as
the occurrence of any one or more of the following Defaults, and, where a
grace period for cure after notice is specified herein, the failure by Lessee
to cure such Default prior to the expiration of the applicable grace period,
and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3;
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent, Lessee's Share of
Common Area Operating Expenses, or any other monetary payment required to be
made by Lessee hereunder as and when due, the failure by Lessee to provide
Lessor with reasonable evidence of insurance or surety bond required under
this Lease, or the failure of Lessee to fulfill any obligation under this
Lease which endangers or threatens life or
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property, where such failure continues for a period of three (3) days
following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this Lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under
Paragraph 40 hereof that are to be observed, complied with or performed by
Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c),
above, where such Default continues for a period of thirty (30) days after
written notice thereof by or on behalf of Lessor to Lessee; provided,
however, that if the nature of Lessee's Default is such that more than thirty
(30) days are reasonably required for its cure, then it shall not be deemed
to be a Breach of this Lease by Lessee if Lessee commences such cure within
said thirty (30) day period and thereafter diligently prosecutes such cure to
completion.
(e) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including, but not limited to, the obtaining of
reasonably required bonds, insurance policies, or governmental licenses,
permits or approvals. The costs and expenses of any such performance by
Lessor shall be due and payable by Lessee to Lessor upon invoice therefor.
If any check given to Lessor by Lessee shall not be honored by the bank upon
which it is drawn, Lessor, at its own option, may require all future payments
to be made under this Lease by Lessee to be made only by cashier's check. In
the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1),
with or without further notice or demand, and without limiting Lessor in the
exercise of any right or remedy which Lessor may have by reason of such
Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at the
time of the award of the unpaid rent which had been earned at the time of
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termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including, but not limited to, the cost
of recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank District in which the Premises are located at the time
of award plus one percent (1%). Efforts by Lessor to mitigate damages caused
by Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall
have the right to recover in such proceeding the unpaid rent and damages as
are recoverable therein, or Lessor may reserve the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a
notice and grace period required under Subparagraphs 13.1(b), (c) or (d) was
not previously given, a notice to pay rent or quit, or to perform or quit, as
the case may be, given to Lessee under any statute authorizing the forfeiture
of leases for unlawful detainer shall also constitute the applicable notice
for grace period purposes required by Subparagraph 13.1(b), (c) or (d). In
such case, the applicable grace period under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure
of Lessee to cure the Default within the greater of the two (2) such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after
Lessee's Breach and recover the rent as it becomes due, provided Lessee has
the right to sublet or assign, subject only to reasonable limitations.
Lessor and Lessee agree that the limitations on assignment and subletting in
this Lease are reasonable. Acts of maintenance or preservation, efforts to
relet the Premises, or the appointment of a receiver to protect the Lessor's
interest under this Lease, shall not constitute a termination of the Lessee's
right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by
Lessor for free or abated rent or other charges applicable to the Premises,
or for the giving or paying by Lessor to or for Lessee of any cash or other
bonus, inducement or consideration for Lessee's entering into this Lease, all
of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS"
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provisions of this Paragraph 13.3 unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges which may be imposed
upon Lessor
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by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The Parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. Condemnation. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the portion of the Common Areas designated for Lessee's parking, is
taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced in the same proportion
as the rentable floor area of the Premises taken bears to the total rentable
floor area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for
the taking of all or any part of the Premises under the power of eminent
domain or any payment made under threat of the exercise of such power shall
be the property of Lessor, whether such award shall be made as compensation
for diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's share of the legal
and other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall
be responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are
the procuring cause of this Lease.
15.2 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each
represent and warrant to the other that it has had no dealings with any
person, firm, broker or finder other than as named in Paragraph 1.10(a) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and that no broker or other person, firm or
entity other than said named Broker(s) is entitled to any commission or
finder's fee in connection with said transaction. Lessee and Lessor do each
hereby agree to indemnify, protect, defend and hold the other harmless from
and against liability for compensation or charges which may be claimed by any
such unnamed broker, finder or other similar party by reason of any dealings
or actions of the indemnifying Party, including any costs, expenses, and/or
attorneys' fees reasonably incurred with respect thereto.
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16. Tenancy and Financial Statements.
16.1 TENANCY STATEMENT. Each Party (as "Responding Party") shall
within ten (10) days after written notice from the other Party (the
"Requesting Party") execute, acknowledge and deliver to the Requesting Party
a statement in writing in a form similar to the then most current "Tenancy
Statement" form published by the American Industrial Real Estate Association,
plus such additional information, confirmation and/or statements as may be
reasonably requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance,
or sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including, but not limited
to, Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In
the event of a transfer of Lessor's title or interest in the Premises or in
this Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15.3, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding only upon the
Lessor as hereinabove defined. (See Addendum)
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties
under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned
herein, and no other prior or contemporaneous agreement or understanding
shall be effective. Lessor and Lessee each represents and warrants to the
Brokers that it has made, and is relying solely upon, its own investigation
as to the nature, quality, character and financial responsibility of the
other Party to this Lease and as to the nature, quality and character of the
Premises. Brokers have no responsibility with respect thereto or with
respect to any default or breach hereof by either Party.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or
registered mail or U.S. Postal Service Express Mail, with postage prepaid, or
by facsimile transmission during normal business hours, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may
by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail, the notice shall be deemed given forty-
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eight (48) hours after the same is addressed as required herein and mailed
with postage prepaid. Notices delivered by United States Express Mail or
overnight courier that guarantees next day delivery shall be deemed given
twenty-four (24) hours after delivery of the same to the United States Postal
Service or courier. If any notice is transmitted by facsimile transmission
or similar means, the same shall be deemed served or delivered upon telephone
or facsimile confirmation of receipt of the transmission thereof, provided a
copy is also delivered via delivery or mail. If notice is received on a
Saturday or a Sunday or a legal holiday, it shall be deemed received on the
next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of monies or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall
be of no force or effect whatsoever unless specifically agreed to in writing
by Lessor at or before the time of deposit of such payment.
25. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this
Paragraph 26 then the Base Rent payable from and after the time of the
expiration or earlier termination of this Lease shall be increased to one
hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding such expiration or earlier termination. Nothing
contained herein shall be construed as a consent by Lessor to any holding
over by Lessee.
26. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
27. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
28. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be
governed by the laws of the state in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
29. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
29.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have
no duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
29.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or
(iii) be bound by prepayment of more than one (1) month's rent.
29.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including
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any options to extend the term hereof, will not be disturbed so long as
Lessee is not in Breach hereof and attorns to the record owner of the
Premises.
29.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document
any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
30. Attorneys' Fees. If any Party brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorneys' fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "PREVAILING PARTY"
shall include, without limitation, a Party who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgement, or the abandonment by the other Party of its claim or
defense. The attorneys' fee award shall not be computed in accordance with
any court fee schedule, but shall be such as to fully reimburse all
attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys'
fees, costs and expenses incurred in preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal
action is subsequently commenced in connection with such Default or resulting
Breach.
31. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of
an emergency, and otherwise at reasonable times for the purpose of showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or Building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred eighty (180) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs.
All such activities of Lessor shall be without abatement of Rent or liability
to Lessee.
32. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without
first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent.
33. SIGNS. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may, with Lessor's prior written
consent, install (but not on the roof) such signs as are reasonably required
to advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation
of any sign on the Premises by or for Lessee shall be subject to the
provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade
Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor
reserves all rights to the use of the roof of the Building, and the right to
install advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs. (See Addendum)
34. TERMINATION; MERGER. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the
mutual termination or cancellation hereof, or a termination hereof by Lessor
for Breach by Lessee, shall automatically terminate any sublease or lesser
estate in the Premises; provided, however, Lessor shall, in the event of any
such surrender, termination or cancellation, have the option to continue any
one or all of any existing subtenancies. Lessor's failure within ten (10)
days following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
35. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a Party is
required to an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable costs and
expenses (including, but not limited to, architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response
to, a request by Lessee for any Lessor consent pertaining to this Lease or
the Premises, including, but not limited to, consents to an assignment, a
subletting or
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the presence or use of a Hazardous Substance, shall be paid by Lessee to
Lessor upon receipt of an invoice and supporting documentation therefor. In
addition to the deposit described in Paragraph 12.2(e), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee
deposit with Lessor an amount of money (in addition to the Security Deposit
held under Paragraph 5) reasonably calculated by Lessor to represent the cost
Lessor will incur in considering and responding to Lessee's request. Any
unused portion of said deposit shall be refunded to Lessee without interest.
Lessor's consent to any act, assignment of this Lease or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
impositions by Lessor at the time of consent of such further or other
conditions as are then reasonable with reference to the particular matter for
which consent is being given.
36. Guarantor.
36.1 FORM OF GUARANTY. If there are to be any Guarantors of this
Lease per Paragraph 1.11, the form of the guaranty to be executed by each
such Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the
same obligations as Lessee under this Lease, including, but not limited to,
the obligation to provide the Tenancy Statement and information required in
Paragraph 16.
36.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or
refuses, upon reasonable request by Lessor to give: (a) evidence of the due
execution of the guaranty called for by this Lease, including the authority
of the Guarantor (and of the party signing on Guarantor's behalf) to obligate
such Guarantor on said guaranty, and resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signatures of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to
time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
37. Quiet Possession. Upon payment by Lessee of the Rent for the Premises
and the performance of all of the covenants, conditions and provisions on
Lessee's part to be observed and performed under this Lease, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to
all of the provisions of this Lease.
38. OPTIONS. (SEE ADDENDUM)
38.1 DEFINITION. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease.
38.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph
1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised
by any person or entity other than said original Lessee while the original
Lessee is in full and actual possession of the Premises and without the
intention of thereafter assigning or subletting. The Options, if any, herein
granted to Lessee are not assignable, either as a part of an assignment of
this Lease or separately or apart therefrom, and no Option may be separated
from this Lease in any manner, by reservation or otherwise.
38.3 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three (3) or more notices of separate Default
under Paragraph 13.1 during the twelve (12) month period immediately
preceding the exercise of the Option, whether or not the Defaults are cured.
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(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability
to exercise an Option because of the provisions of Paragraph 39.4(a).
(c) 17.1(a) All rights of Lessee under the provisions of an
Option shall terminate and be of no further force or effect, notwithstanding
Lessee's due and timely exercise of the Option, if, after such exercise and
during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary
obligation of Lessee for a period of thirty (30) days after such obligation
becomes due (without any necessity of Lessor to give notice thereof to
Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate
Defaults under Paragraph 13.1 during any twelve (12) month period, whether or
not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
39. Rules and Regulations. Lessee agrees that it will abide by, and keep
and observe all reasonable rules and regulations ("Rules and Regulations")
which Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants
or tenants of the Building and the Industrial Center and their invitees.
40. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
41. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way,
utility raceways, and dedications that Lessor deems necessary, and to cause
the recordation of parcel maps and restrictions, so long as such easements,
rights of way, utility raceways, dedications, maps and restrictions do not
reasonably interfere with the use of the Premises by Lessee. Lessee agrees
to sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
43. AUTHORITY. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of
such entity represents and warrants that he or she is duly authorized to
execute and deliver this Lease on its behalf. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after request by
Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority.
(See Addendum)
44. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
45. OFFER. Preparation of this Lease by either Lessor or Lessee or
Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor
shall not be deemed an offer to lease. This Lease is not intended to be
binding until executed and delivered by all Parties hereto.
46. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
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47. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee,
the obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT
THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND
STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION
IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL
ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN
ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
THE PARTIES HERETO HAVE EXECUTED THIS LEASE AT THE PLACE AND ON THE DATES
SPECIFIED ABOVE THEIR RESPECTIVE SIGNATURES.
EXECUTED AT: LONG BEACH, CALIFORNIA EXECUTED AT: NEWPORT BEACH, CALIFORNIA
ON: MARCH 16, 1999 ON: MARCH 15, 1999
BY LESSOR: BY LESSEE:
BIXBY LAND COMPANY, a California eSynch Corporation, a Delaware
corporation corporation
By: A. Terrance Dickens By: Tom Hemingway
----------------------------- ---------------------------
Name Printed: A. Terrance Dickens Name Printed: Tom Hemingway
Title: President Title: President and Chief Executive
Officer
By: Mark L. Bixby By: T. Richard Hutt
----------------------------- ---------------------------
Name Printed: Mark L. Bixby Name Printed: T. Richard Hutt
Title: Secretary/V.P. Title: Secretary
Address: 4525 Atherton Street Address: 15502 Mosher Avenue
Long Beach, CA 90815-3700 Tustin, CA 92710
Telephone: (502) 494-8250 Telephone: (949) 833-1220
Facsimile: (502) 494-8275 Facsimile: (949) 833-1204
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, California
90017. (213) 687-8777
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ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
MULTI-TENANT LEASE-MODIFIED NET
("ADDENDUM")
THIS ADDENDUM is entered into by and between BIXBY LAND COMPANY, a
California corporation ("Lessor"), and eSYNCH CORPORATION, a Delaware
corporation ("Lessee").
That certain STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT
LEASE-MODIFIED NET (the "Lease") by and between Lessor and Lessee is hereby
supplemented by the following (the following paragraphs are numbered
according to the corresponding Paragraphs of the Lease; and any capitalized
terms used herein shall have the meanings given them in the Lease):
1.2(b). PARKING: Exhibit "B", attached hereto and made a part
hereof, shows the parking areas for the Building. Those sixty nine (69)
parking spaces marked by diagonal lines on Exhibit "B" are reserved for the
exclusive use of the other tenant of the Building and may not be used at any
time nor in any manner by Lessee. The remaining parking spaces shown on
Exhibit "B" are Unreserved Parking Spaces for the non-exclusive use of
Lessee. However, Lessor agrees to use commercially reasonable efforts to
obtain permission from the other tenant of the Building to allow Lessee to
use thirty (30) of the Unreserved Parking Spaces (to be located at Lessee's
entrance on Mosher Avenue) as reserved spaces for Lessee's use only; provided
that: (i) in the event Lessor is unable to obtain the necessary permission
from the other tenant of the Building, then the Lease and all of Lessee's
obligations under the Lease shall nevertheless continue in full force and
effect; and (ii) if such permission is obtained, Tenant's use of such
reserved parking spaces shall be subject to the applicable terms of the Lease
including, but not limited to, Paragraphs 2.6 and 2.9 of the Lease.
1.5 BASE RENT: The Base Rent shall commence as of the date of April
1, 1999, and shall commence regardless of whether or not the Alterations
referenced in Paragraph 7.3 of this Addendum are completed. Commencing as of
the date of April 1, 2000, and on each anniversary of said date thereafter
during the Original Term of the Lease, the Base Rent shall be increased by
four percent (4%) over and above the then Base Rent, as previously increased
pursuant hereto if applicable.
1.8. PERMITTED USE: In no event shall Lessee have the right to use
the Premises for any of the following uses: (i) any business which is
restricted to adults only; (ii) a bar, tavern or cocktail lounge; (iii) an
adult book store, adult video store, or any establishment engaged in the
business of selling, exhibiting, or delivering pornographic or obscene
materials; (iv) a gym or exercise/aerobics studio (other than for Lessee's
employee's only); or (v) an entertainment or recreation facility including,
but not limited to, a theater, dance hall, billiard or pool hall, massage
parlor or other similar activity. Further, Lessee shall not be permitted to
use any area outside of the Premises for storage including, but not limited
to, the storage of materials, equipment, barrels, pallets, boxes, containers
and/or any trash that is not placed in a proper trash receptacle. No storage
of any cars, trucks, trailers, boats, campers, recreational vehicles or
motorcycles, etc. will be permitted. It shall be at Lessor's reasonable
discretion to determine if a vehicle is being stored.
5. SECURITY DEPOSIT: So long as Lessee is not then in default
under the Lease, and so long as the Security Deposit has not been previously
applied, in whole or in part, to any default of Lessee, Lessee, upon written
notice thereof to Lessor, shall have the right to apply the applicable
portion of the Security Deposit to the payment of the Base Rent for the
twenty-fifth (25th) month and the thirty-sixth (36th) month of the Original
Term of the Lease. Lessor shall continue to hold the remaining portion of the
Security Deposit in accordance with Paragraph 5 of the Lease.
7.2 LESSOR'S OBLIGATIONS. During the Original Term of the Lease,
Lessor shall be responsible for maintenance and repair of the roof and HVAC
systems for the Premises. Following the Original Term, the cost thereof
shall be included in the Common Area Operating Expenses.
7.3. UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS: Lessor has
agreed to make certain alterations ("Alterations") on behalf of Lessee as
follows:
(i) Lessee shall submit to Lessor, for Lessor's approval, an
estimate and a bid for labor, materials, and miscellaneous costs for installing
carpet in the Premises and/or for window covering for the Premises (provided
that the carpet and window covering shall be bid separately); all of which shall
be subject to Lessor's prior written approval, which approval shall not be
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unreasonably withheld. Upon Lessor's approval, Lessor shall contract and pay
for said carpet and/or window covering, subject to the "Maximum Reimbursement
Amount" set forth in subparagraph (iii) below.
(ii) Lessee shall also submit to Lessor, for Lessor's
approval, which approval shall not be unreasonably withheld, plans for
removing and replacing certain interior walls and doors. Lessor shall
provide an estimate and bid from Lessor's contractor for Lessee's approval,
which approval shall not be unreasonably withheld. Upon Lessee's approval,
Lessor shall contract and pay for said improvements subject to the "Maximum
Reimbursement Amount" set forth in subparagraph (iii) below.
(iii) In no event shall Lessor be required to expend a sum
greater than Sixty Thousand Thirty Dollars ($60,030.00) (the "Maximum
Reimbursement Amount") with respect to all of the foregoing Alterations and
in the event that the cost thereof exceeds the Maximum Reimbursement Amount,
then, prior to the commencement of such Alterations, Lessee shall pay to
Lessor in cash the amount of the cost in excess of the Maximum Reimbursement
Amount. However, in the event the cost of the foregoing Alterations is less
than the Maximum Reimbursement Amount, then Lessor agrees to credit the
amount of the difference toward Lessee's rental obligation for the calendar
month immediately following the calendar month in which the Alterations are
completed.
12. ASSIGNMENT AND SUBLETTING. Any sublease by Lessee shall be
subject to Paragraph 12 of the Lease, but Lessor agrees not to unreasonably
withhold its consent thereto.
17. LESSOR'S LIABILITY: Anything in the Lease to the contrary
notwithstanding, Lessee agrees that it shall look solely to the estate and
property of Lessor in and to the Building for the collection, satisfaction or
enforcement of any judgment requiring the payment of money by Lessor in the
event of any default by Lessor under the Lease, and no other assets of Lessor
shall be subject to levy, execution or other procedures for the satisfaction
of Lessee's remedies. Further, Lessor and Lessee hereby waive trial by jury
in any action, proceeding, or claim brought by either of the parties hereto
against the other on any matters whatsoever arising under the Lease.
34. SIGNS. Subject to the terms and conditions of this Paragraph,
Lessee may, at Lessee's sole cost and expense, have signage in three (3)
locations: above the entrance on Mosher Avenue; on the top portion (not
including the roof) of the Building at the corner of Valencia and Mosher; and
a monument sign in the lawn area at the corner of Valencia and Mosher.
However, the foregoing shall be subject to the following: (i) the approval of
all applicable governmental agencies; (ii) all approvals required under any
recorded Covenants Conditions and Restrictions (CC&Rs) which encumber the
Premises. In the event such approvals are obtained, Lessee's total signage
shall not be in excess of Lessee's proportionate share of the total signage
allowed by applicable governmental authorities and by the CC&Rs for the
Building and all tenants thereof. In the event that such approvals cannot be
obtained, then the Lease and all of Lessee's obligations thereunder shall
nevertheless continue in full force and effect.
39. OPTIONS. The sole "Option" which Lessee shall have under the
Lease is an option to extend the Original Term of the Lease for one (1)
additional period of five (5) years (the "Option Term") commencing upon
expiration of the Original Term, subject, however, to the terms and
conditions set forth in Paragraph 39 of the Lease and to the following
additional conditions: (i) the Option to extend the term of the Lease may be
exercised by Lessee only by written notice (the "Option Notice") delivered to
Lessor at least ninety (90) days prior to expiration of the Original Term of
the Lease; (ii) the Option Term shall be upon all of the terms and provisions
of the Lease, except that the Base Rent payable by Tenant during the first
year of the Option Term shall be equal to the greater of (a) the Fair Market
Rental Value of the Premises as of the commencement date of the Option Term,
or (b) the Base Rent in effect during the last year of the Original Term;
(iii) for the purposes hereof, the Fair Market Rental Value of the Premises
shall be the rental rate at which tenants lease comparable space (i.e.
comparable in size, location and quality to the Premises) for a term
comparable to the Option Term, as reasonably determined by Lessor and Lessee;
(iv) in the event Lessor and Lessee are unable to agree upon the Fair Market
Rental Value of the Premises within thirty (30) days after Lessee delivers
the Option Notice to Lessor, then the Fair Market Rental Value shall be
determined by the largest commercial and industrial real estate brokerage
company with offices in Orange County, California; and (v) the Base Rent as
so determined shall then be subject to annual increases during the remainder
of the Option Term (commencing as of the first day of the second year of the
Option Term, and continuing on each anniversary thereof) in the amount of
four percent (4%) per year on a compounded basis.
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44. AUTHORITY: Concurrently upon execution of the Lease, Lessee
shall furnish Lessor with a certified corporate resolution from Lessee's
board of directors attesting to the authority of the officers to execute the
Lease on behalf of Lessee.
In the event of any conflict between the Lease and this Addendum, the
terms and provisions of this Addendum shall be deemed to be controlling.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the
dates indicated hereinbelow.
"LESSOR" "LESSEE"
BIXBY LAND COMPANY, eSYNCH CORPORATION,
a California corporation a Delaware corporation
By: A. Terrance Dickens By: Thomas Hemingway
---------------------------- --------------------------
Name: A. Terrance Dickens Name: Thomas Hemingway
Its: President/CEO Its: Pres./CEO
By: Mark L. Bixby By: T. Richard Hutt
---------------------------- --------------------------
Name: Mark L. Bixby Name: T. Richard Hutt
Its: Secretary, V.P. Its: Secretary
Date: March 16, 1999 Date: March 15, 1999
3
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EXHIBIT "A"
PREMISES
15502 MOSHER AVENUE
TUSTIN, CA 92710
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EXHIBIT B
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SERIES J CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT
Dated as of July 22, 1999
among
ESYNCH CORPORATION
and
THE PURCHASERS LISTED ON EXHIBIT A
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TABLE OF CONTENTS
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<S> <C>
ARTICLE I Purchase and Sale of Preferred Stock 1
Section 1.1 Purchase and Sale of Stock 1
Section 1.2 The Conversion Shares 1
Section 1.3 Purchase Price and Closing 2
Section 1.4 Warrants 2
ARTICLE II Representations and Warranties 3
Section 2.1 Representation and Warranties of the Company 3
(a) Organization, Good Standing and Power 3
(b) Authorization; Enforcement 3
(c) Capitalization 4
(d) Issuance of Shares 4
(e) No Conflicts 4
(f) Commission Documents, Financial Statements 5
(g) Subsidiaries 6
(h) No Material Adverse Change 6
(i) No Undisclosed Liabilities 6
(j) No Undisclosed Events or Circumstances 7
(k) Indebtedness 7
(1) Title to Assets 7
(m) Actions Pending 7
(n) Compliance with Law 7
(o) Taxes 8
(p) Certain Fees 8
(q) Disclosure 8
(r) Operation of Business 8
(s) Environmental Compliance 8
(t) Books and Record Internal Accounting Controls 9
(u) Material Agreements 9
(v) Transactions with Affiliates 10
(w) Securities Act of 1933 10
(x) Governmental Approvals 10
(y) Employees 10
(z) Absence of Certain Developments 11
(aa) Use of Proceeds 12
(ab) Public Utility Holding Company Act and Investment
Company Act Status 12
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(ac) ERISA 12
(ad) Dilutive Effect 13
Section 2.2 Representations and Warranties of the Purchasers 13
(a) Organization and Standing of the Purchasers 13
(b) Authorization and Power 13
(c) No Conflicts 13
(d) Acquisition for Investment 14
(e) Accredited Purchasers 14
(f) Rule 144 14
(g) Conversion Restrictions 14
(h) General 15
(i) Residence 15
ARTICLE III Covenants 15
Section 3.1 Securities Compliance 15
Section 3.2 Registration and Listing 15
Section 3.3 Inspection Rights 16
Section 3.4 Compliance with Laws 16
Section 3.5 Keeping of Records and Books of Account 16
Section 3.6 Reporting Requirements 16
Section 3.7 Amendments 17
Section 3.8 Other Agreements 17
Section 3.9 Distributions 17
Section 3.10 Status of Dividends 17
Section 3.11 Regulation S 18
Section 3.12 Right of First Refusal 18
Section 3.13 Reservation of Shares 19
Section 3.14 Transfer Agent Instructions 19
ARTICLE IV Conditions 20
Section 4.1 Conditions Precedent to the Obligation of the Company
to Sell the Shares 20
(a) Accuracy of Each Purchaser's Representations
and Warranties 20
(b) Performance by the Purchasers 20
(c) No Injunction 20
Section 4.2 Conditions Precedent to the Obligation of the
Purchasers to Purchase the Shares 20
(a) Accuracy of the Company's Representations and
Warranties 20
(b) Performance by the Company 21
(c) Minimum Purchase 21
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(d) No Suspension, Etc 21
(e) No Injunction 21
(f) No Proceedings or Litigation 21
(g) Certificate of Designations of Rights and Preferences 21
(h) Opinion of Counsel, Etc. 21
(i) Registration Rights Agreement 21
(j) Preferred Stock Certificates 22
(k) Resolutions 22
(l) Reservation of Shares 22
(m) Transfer Agent Instructions 22
(n) Secretary's Certificate 22
ARTICLE V Registration Rights 23
ARTICLE VI Stock Certificate Legend 23
Section 6.1 Legend 23
ARTICLE VII Intentionally Omitted 24
ARTICLE VIII Indemnification 24
Section 8.1 General Indemnity 24
Section 8.2 Indemnification Procedure 24
Miscellaneous 25
Section 9.1 Fees and Expenses 25
Section 9.2 Specific Enforcement, Consent to Jurisdiction 26
Section 9.3 Entire Agreement; Amendment 26
Section 9.4 Notices 27
Section 9.5 Waivers 28
Section 9.6 Headings 28
Section 9.7 Successors and Assigns 28
Section 9.8 No Third Party Beneficiaries 28
Section 9.9 Governing Law 28
Section 9.10 Survival 28
Section 9.11 Counterparts 29
Section 9.12. Publicity 29
Section 9.13 Severability 29
Section 9.14 Further Assurances 29
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SERIES J CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT
This SERIES J CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the
"Agreement") is dated as of July 22, 1999 by and among eSynch Corporation, a
Delaware corporation (the "Company"), and each of the Purchasers of shares of
Series J Convertible Preferred Stock of the Company whose names are set forth
on Exhibit A hereto (individually, a "Purchaser" and collectively, the
"Purchasers").
The parties hereto agree as follows:
ARTICLE I
Purchase and Sale of Preferred Stock
Section 1.1 PURCHASE AND SALE OF STOCK. Upon the following terms and
conditions, the Company shall issue and sell to the Purchasers and each of
the Purchasers shall purchase from the Company, the number of shares of the
Company's Series J Convertible Preferred Stock, par value $001 per share (the
"Preferred Shares"), at a purchase price of $10,000 per share, set forth with
respect to such Purchaser on Exhibit A hereto. Upon the following terms and
conditions, the Purchasers shall be issued Warrants, in substantially the
form attached hereto as Exhibit B (the "Warrants"), to purchase the Company's
Common Stock, par value $.001 per share (the "Common Stock") The aggregate
purchase price for the Preferred Shares and the Warrants shall be $2,500,000
which may be funded in two or more tranches as agreed upon by the Company and
the Purchasers. The designation, rights, preferences and other terms and
provisions of the Series J Convertible Preferred Stock are set forth in the
Certificate of Designation of the Relative Rights and Preferences of the
Series J Convertible Preferred Stock attached hereto as Exhibit C (the
"Certificate of Designations"). The Company and the Purchasers are executing
and delivering this Agreement in accordance with and in reliance upon the
exemption from securities registration afforded by Rule 506 of Regulation D
("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "Securities Act") or Section 4(2) of the Securities Act.
Section 1.2 THE CONVERSION SHARES. The Company has authorized and has
reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, a sufficient number of its
authorized but unissued shares of its Common Stock, to effect the conversion
of the Preferred Shares and exercise of the Warrants. Any shares of Common
Stock issuable upon conversion of the Preferred Shares and exercise of the
Warrants (and such shares when issued) are herein referred to as the
"Conversion Shares" and the "Warrant Shares", respectively. The Preferred
Shares, the Conversion Shares and the Warrant Shares are sometimes
collectively referred to as the "Shares".
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Section 1.3 PURCHASE PRICE AND CLOSING. The Company agrees to issue and
sell to the Purchasers and, in consideration of and in express reliance upon
the representations, warranties, covenants, terms and conditions of this
Agreement, the Purchasers, severally but not jointly, agree to purchase that
number of the Preferred Shares set forth opposite their respective names on
Exhibit A.
The aggregate purchase price of the Preferred Shares being acquired by
each Purchaser is set forth opposite such Purchaser's name on Exhibit A. The
closing of the purchase and sale of each tranche of Preferred Shares (each, a
"Closing") to be acquired by the Purchasers from the Company under this
Agreement shall take place at the offices of Parker Chapin Flattau & Klimpl,
LLP at 10:00 a.m. Pacific Time (i) on the date on which the last to be
fulfilled or waived of the conditions set forth in Article IV hereof and
applicable to such Closing shall be fulfilled or waived in accordance
herewith or (ii) such other time and place or on such date as the Purchasers
and the Company may agree upon (each, a "Closing Date"). This Agreement shall
be effective as of the Closing Date of the first tranche of Preferred Shares.
On or before each Closing Date, the Company shall deliver to the escrow agent
(the "Escrow Agent") identified in the Escrow Agreement attached hereto as
Exhibit D (the "Escrow Agreement") the certificates for the number and series
of Preferred Shares set forth opposite each Purchaser's name under the
heading "Number of Preferred Shares to be Purchased" on Exhibit A hereto,
registered in such Purchaser's name (or its nominee) and prior to each
Closing Date each Purchaser shall pay by wire transfer of funds into escrow
the purchase price set forth opposite each such Purchaser's name on Exhibit
A. In addition, each party shall deliver all documents, instruments and
writings required to be delivered by such party pursuant to this Agreement at
or prior to each Closing. This Agreement shall terminate if the Closing of
the first tranche of Preferred Shares (the "Tranche I Closing") has not
occurred by August 31, 1999. The Company's sole obligation upon termination
of this Agreement shall be to pay the Purchasers' attorneys' fees and escrow
fees. The Company acknowledges that (i) the purchase price of Gilston
Corporation, Ltd.'s ("Gilston") pro rata portion of the Preferred Shares and
Warrants was advanced and evidnced by a promissory note issued by the Company
in favor of Gilston for the principal amount of $300,000 and (ii) the
purchase price of Manchester Asset Management, Ltd.'s ("Manchester") pro rata
portion of the Preferred Shares and Warrants was advanced and evidenced by a
promissory note issued by the Company in favor of Manchester for the
principal amount of $250,000 (collectively, the "Promissory Notes"). At the
Tranche I Closing, the Company shall deliver to the Escrow Agent stock
certificates (in such denominations as Gilston and Manchester shall request)
representing the shares of Preferred Stock equal to the total amount of
principal and interest accrued and outstanding under the Promissory Notes on
the date of the Tranche I Closing. Notwithstanding anything to the contrary
set forth in this Agreement, the aggregate number of Preferred Stock to be
sold hereunder shall not exceed two hundred and seventy-fifty (275).
Section 1.4 WARRANTS. The Company agrees to issue to the Purchasers the
Warrants to purchase 75,000 shares of Common Stock per $1,000,000 invested
(or such pro rata amount if more or less than $1,000,000 is purchased). The
Warrants shall have an exercise price equal to the Warrant Price (as defined
in the Warrant) and shall expire on the third anniversary of the issuance
date of such Warrant.
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ARTICLE II
Representations and Warranties
Section 2.1 REPRESENTATION AND WARRANTIES OF THE COMPANY. The Company
hereby makes the following representations and warranties to the Purchasers,
except as set forth in the Company's disclosure schedule delivered with this
Agreement as follows:
(a) ORGANIZATION GOOD STANDING AND POWER. The Company is a
corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware and has the requisite corporate power to
own, lease and operate its properties and assets and to conduct its business
as it is now being conducted. The Company does not have any subsidiaries
except as set forth in the Company's Form 10-KSB for the year ended December
31, 1998, including the accompanying financial statements (the "Form
10-KSB"), or in the Company's Form 10-QSB for the fiscal quarters ended March
31, 1999, September 30, 1998 or June 30, 1998 (collectively, the "Form
10-QSB"), or on SCHEDULE 2. 1(g) hereto. The Company and each such subsidiary
is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted
or property owned by it makes such qualification necessary except for any
jurisdiction(s) (alone or in the aggregate) in which the failure to be so
qualified will not have a material adverse effect on the Company's financial
condition.
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Escrow Agreement, the Transfer Agent Instructions (as defined in Section
3.14), Registration Rights Agreement attached hereto as Exhibit E (the
"Registration Rights Agreement") and the Warrants (collectively, the
"Transaction Documents") and to issue and sell the Shares in accordance with
the terms hereof, the Certificate of Designations and the Warrants. The
execution, delivery and performance of the Transaction Documents and the
Certificate of Designations by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required. This Agreement has been duly executed and delivered by the Company.
The Registration Rights Agreement will have been duly executed and delivered
by the Company at the Tranche I Closing. Each of the Transaction Documents
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor's rights and remedies or by other
equitable principles of general application.
(c) CAPITALIZATION. The authorized capital stock of the Company
and the shares thereof currently issued and outstanding as of July 22, 1999
are set forth on SCHEDULE 2. 1(c) hereto. All of the outstanding shares of
the Company's Common Stock and Series I Convertible Preferred
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Stock have been duly and validly authorized. Except as set forth in this
Agreement and the Registration Rights Agreement and as set forth in the Form
l0-KSB, Form 10-QSB, Form 8-K for the period ending April 1, 1999 (the "Form
8-K") or on SCHEDULE 2. 1(c) hereto, no shares of Common Stock or Series I
Convertible Preferred Stock are entitled to preemptive rights or registration
rights and there are no outstanding options, warrants, scrip, rights to
subscribe to, call or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company. Furthermore, except as set forth in this Agreement and the
Registration Rights Agreement and as set forth in the Form 10-KSB, Form
10-QSB, Form 8-K or on SCHEDULE 2.1 (c), there are no contracts, commitments,
understandings, or arrangements by which the Company is or may become bound
to issue additional shares of the capital stock of the Company or options,
securities or rights convertible into shares of capital stock of the Company.
Except for customary transfer restrictions contained in agreements entered
into by the Company in order to sell restricted securities or as provided in
the Form 10-KSB, Form 10-QSB or on SCHEDULE 2.1 (c) hereto, the Company is
not a party to any agreement granting registration or anti-dilution rights to
any person with respect to any of its equity or debt securities. The Company
is not a party to, and it has no knowledge of, any agreement restricting the
voting or transfer of any shares of the capital stock of the Company. Except
as set forth in the Form 10-KSB, Form 10-QSB or on SCHEDULE 2. 1(c) hereto,
the offer and sale of all capital stock, convertible securities, rights,
warrants, or options of the Company issued prior to each Closing complied
with all applicable Federal and state securities laws, and no stockholder has
a right of rescission or damages with respect thereto which would have a
Material Adverse Effect (as defined in Section 2.1(e) herein) on the
Company's financial condition or operating results. The Company has furnished
or made available to the Purchasers true and correct copies of the Company's
Certificate of Incorporation as in effect on the date hereof (the
"Articles"), and the Company's Bylaws as in effect on the date hereof (the
"Bylaws").
(d) ISSUANCE OF SHARES. The Preferred Shares to be issued at
each Closing have been duly authorized by all necessary corporate action and,
when paid for or issued in accordance with the terms hereof, the Preferred
Shares shall be validly issued and outstanding, fully paid and nonassessable
and entitled to the rights and preferences set forth in the Certificate of
Designations. When the Conversion Shares and the Warrant Shares are issued in
accordance with the terms of the Preferred Shares as set forth in the
Certificate of Designations and the Warrants, respectively, such shares will
be duly authorized by all necessary corporate action and validly issued and
outstanding, fully paid and nonassessable, and the holders shall be entitled
to all rights accorded to a holder of Common Stock.
(e) NO CONFLICTS. Except as disclosed in Schedule 2.1(e), the
execution, delivery and performance of the Transaction Documents by the
Company, the performance by the Company of its obligations under the
Certificate of Designations and the consummation by the Company of the
transactions contemplated herein and therein do not (i) violate any provision
of the Company's Articles or Bylaws, (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, mortgage, deed of trust,
indenture, note, bond, license, lease agreement, instrument or obligation to
which the Company is a party, (iii) create
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or impose a lien, charge or encumbrance on any property of the Company under
any agreement or any commitment to which the Company is a party or by which
the Company is bound or by which any of its respective properties or assets
are bound, or (iv) result in a violation of any federal, state, local or
foreign statute, rule, regulation, order, judgment or decree (including
Federal and state securities laws and regulations) applicable to the Company
or any of its subsidiaries or by which any property or asset of the Company
or any of its subsidiaries are bound or affected, except, in all cases other
than violations pursuant to clause (i) above, for such conflicts, defaults,
terminations, amendments, acceleration, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect. For
the purposes of this Agreement, "Material Adverse Effect" means any adverse
effect on the business, operations, properties, prospects, or financial
condition of the Company or its subsidiaries and which is material to such
entity or other entities controlling or controlled by such entity. The
business of the Company and its subsidiaries is not being conducted in
violation of any laws, ordinances or regulations of any governmental entity,
except for possible violations which singularly or in the aggregate do not
and will not have a Material Adverse Effect. The Company is not required
under Federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency in order for it to execute, deliver or perform any of
its obligations under the Transaction Documents or the Certificate of
Designations, or issue and sell the Preferred Shares, the Conversion Shares
and the Warrant Shares in accordance with the terms hereof or thereof (other
than any filings which may be required to be made by the Company with the
Commission or state securities administrators subsequent to each Closing, any
registration stateent which may be filed pursuant hereto, and the Certificate
of Designations); provided that, for purposes of the representation made in
this sentence, the Company is assuming and relying upon the accuracy of the
relevant representations and agreements of the Purchasers herein.
(f) COMMISSION DOCUMENTS. FINANCIAL STATEMENTS. The Common Stock of
the Company is registered pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, except
as disclosed in the Form 10-KSB, Form 10-QSB, Form 8-K or on Schedule 2.1(f),
the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the Commission pursuant to
the reporting requirements of the Exchange Act, including material filed
pursuant to Section 13(a) or 15(d) of the Exchange Act (all of the foregoing
including filings incorporated by reference therein being referred to herein
as the "Commission Documents"). The Company has delivered or made available
to each of the Purchasers true and complete copies of the Commission
Documents filed with the Commission since December 31, 1998. The Company has
not provided to the Purchasers any material non-public information or other
information which, according to applicable law, rule or regulation, was
required to have been disclosed publicly by the Company but which has not
been so disclosed, other than with respect to the transactions contemplated
by this Agreement. As of their respective dates, the Form l0-KSB for the year
ended December 31, 1998 and the Form 10-QSB for the fiscal quarter ended
March 31, 1999 complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder and other federal, state and local laws, rules and regulations
applicable to such documents, and, as of their respective dates, none of the
Form 10-KSB and the Form 10-QSB referred to above contained any
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untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the
Commission Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the Commission or other applicable rules and regulations with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent
basis during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto or (ii) in the case of
unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements), and fairly present in all material
respects the financial position of the Company and its subsidiaries as of the
dates thereof and the results of operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments).
(g) SUBSIDIARIES. The Form 10-KSB, Form 10-QSB, Form 8-K or
SCHEDULE 2.1(g) hereto sets forth each subsidiary of the Company, showing the
jurisdiction of its incorporation or organization and showing the percentage
of each person's ownership of the outstanding stock or other interests of
such subsidiary. For the purposes of this Agreement, "subsidiary" shall mean
any corporation or other entity of which at least a majority of the
securities or other ownership interest having ordinary voting power
(absolutely or contingently) for the election of directors or other persons
performing similar functions are at the time owned directly or indirectly by
the Company and/or any of its other subsidiaries. All of the outstanding
shares of capital stock of each subsidiary have been duly authorized and
validly issued, and are fully paid and nonassessable. There are no
outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any subsidiary for the
purchase or acquisition of any shares of capital stock of any subsidiary or
any other securities convertible into, exchangeable for or evidencing the
rights to subscribe for any shares of such capital stock. Neither the Company
nor any subsidiary is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of the capital stock of
any subsidiary or any convertible securities, rights, warrants or options of
the type described in the preceding sentence. Neither the Company nor any
subsidiary is party to, nor has any knowledge of, any agreement restricting
the voting or transfer of any shares of the capital stock of any subsidiary.
(h) NO MATERIAL ADVERSE CHANGE. Since March 31, 1999, the date
through which the most recent quarterly report of the Company on Form 10-QSB
has been prepared and filed with the Commission, a copy of which is included
in the Commission Documents, the Company has not experienced or suffered any
Material Adverse Effect, except as disclosed on SCHEDULE 2.1(h) hereto.
(i) NO UNDISCLOSED LIABILITIES. Except as disclosed in the Form
10-KSB, Form 10-QSB or on SCHEDULE 2.1(i) hereto, neither the Company nor any
of its subsidiaries has any liabilities, obligations, claims or losses
(whether liquidated or unliquidated, secured or unsecured, absolute, accrued,
contingent or otherwise) other than those incurred in the ordinary course of
the Company's or its subsidiaries respective businesses since December 31,
1998 and which, individually
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or in the aggregate, do not or would not have a Material Adverse Effect on
the Company or its subsidiaries.
(j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. No event or
circumstance has occurred or exists with respect to the Company or its
subsidiaries or their respective businesses, properties, prospects,
operations or financial condition, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed.
(k) INDEBTEDNESS. The Form 10-KSB, Form 10-QSB, Form 8-K or
SCHEDULE 2.1(k) hereto sets forth as of the date hereof all outstanding
secured and unsecured Indebtedness of the Company or any subsidiary, or for
which the Company or any subsidiary has commitments. For the purposes of this
Agreement, "Indebtedness" shall mean (a) any liabilities for borrowed money
or amounts owed in excess of $25,000 (other than trade accounts payable
incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent 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 (c) the present value of any lease
payments in excess of $25,000 due under leases required to be capitalized in
accordance with GAAP. Neither the Company nor any subsidiary is in default
with respect to any Indebtedness.
(1) TITLE TO ASSETS. Each of the Company and the subsidiaries has
good and marketable title to all of its real and personal property reflected
in the Commission Documents, free of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for those indicated in the
Form l0-KSB, Form 10-QSB, Form 8-K or on SCHEDULE 2.1(1) HERETO or such that,
individually or in the aggregate, do not cause a Material Adverse Effect on
the Company's financial condition or operating results. All said leases of
the Company and each of its subsidiaries are valid and subsisting and in full
force and effect.
(m) ACTIONS PENDING. There is no action, suit, claim, investigation
or proceeding pending or, to the knowledge of the Company, threatened against
the Company or any subsidiary which questions the validity of this Agreement
or the transactions contemplated hereby or any action taken or to be taken
pursuant hereto or thereto. Except as set forth in the Form 10-KSB, Form
10-QSB, Form 8-K or on SCHEDULE 2.1(m) hereto, there is no action, suit,
claim, investigation or proceeding pending or, to the knowledge of the
Company, threatened, against or involving the Company, any subsidiary or any
of their respective properties or assets. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any subsidiary or any
officers or directors of the Company or subsidiary in their capacities as
such.
(n) COMPLIANCE WITH LAW. The business of the Company and the
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except as set forth in the Form 10-KSB, Form
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10-QSB or on SCHEDULE 2.1(n) or such that, individually or in the aggregate,
do not cause a Material Adverse Effect. The Company and each of its
subsidiaries have all franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals necessary for the
conduct of its business as now being conducted by it unless the failure to
possess such franchises, permits, licenses, consents and other governmental
or regulatory authorizations and approvals, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect.
(o) TAXES. Except as set forth in the Form 10-KSB, Form 10-QSB or
on SCHEDULE 2.1(o), the Company and each of the subsidiaries has accurately
prepared and filed all federal, state and other tax returns required by law
to be filed by it, has paid or made provisions for the payment of all taxes
shown to be due and all additional assessments, and adequate provisions have
been and are reflected in the financial statements of the Company and the
subsidiaries for all current taxes and other charges to which the Company or
any subsidiary is subject and which are not currently due and payable. None
of the federal income tax returns of the Company or any subsidiary for the
years subsequent to December 31, 1998 have been audited by the Internal
Revenue Service. The Company has no knowledge of any additional assessments,
adjustments or contingent tax liability (whether federal or state) pending or
threatened against the Company or any subsidiary for any period, nor of any
basis for any such assessment, adjustment or contingency.
(p) CERTAIN FEES. Except as set forth on SCHEDULE 2.1(p) hereto,
no brokers, finders or financial advisory fees or commissions will be payable
by the Company or any subsidiary or any Purchaser with respect to the
transactions contemplated by this Agreement.
(q) DISCLOSURE. To the best of the Company's knowledge, neither
this Agreement or the Schedules hereto nor any other documents, certificates
or instruments furnished to the Purchasers by or on behalf of the Company or
any subsidiary in connection with the transactions contemplated by this
Agreement contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made herein or
therein, in the light of the circumstances under which they were made herein
or therein, not misleading.
(r) OPERATION OF BUSINESS. The Company and each of the
subsidiaries owns or possesses all patents, trademarks, service marks, trade
names, copyrights, licenses and authorizations as set forth in the Form
l0-KSB, Form 10-QSB, Form 8-K and on SCHEDULE 2.1(r) hereto, and all rights
with respect to the foregoing, which are necessary for the conduct of its
business as now conducted without any conflict with the rights of others.
(s) ENVIRONMENTAL COMPLIANCE. The Company and each of its
subsidiaries have obtained all material approvals, authorization,
certificates, consents, licenses, orders and permits or other similar
authorizations of all governmental authorities, or from any other person,
that are required under any Environmental Laws. The Form 10-KSB or Form
10-QSB hereto sets forth all material permits, licenses and other
authorizations issued under any Environmental Laws to the Company or its
subsidiaries. "Environmental Laws" shall mean all applicable laws relating to
the protection of the environment including, without limitation, all
requirements pertaining to reporting,
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licensing, permitting, controlling, investigating or remediating emissions,
discharges, releases or threatened releases of hazardous substances, chemical
substances, pollutants, contaminants or toxic substances, materials or wastes,
whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
material or wastes, whether solid, liquid or gaseous in nature. The Company has
all necessary governmental approvals required under all Environmental Laws and
used in its business or in the business of any of its subsidiaries. The Company
and each of its subsidiaries are also in compliance with all other limitations,
restrictions, conditions, standards, requirements, schedules and timetables
required or imposed under all Environmental Laws. Except for such instances as
would not individually or in the aggregate have a Material Adverse Effect, there
are no past or present events, conditions, circumstances, incidents, actions or
omissions relating to or in any way affecting the Company or its subsidiaries
that violate or may violate any Environmental Law after each Closing or that may
give rise to any environmental liability, or otherwise form the basis of any
claim, action, demand, suit, proceeding, hearing, study or investigation (i)
under any Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling, or the emission,
discharge, release or threatened release of any hazardous substance.
"Environmental Liabilities" means all liabilities of a person (whether such
liabilities are owed by such person to governmental authorities, third parties
or otherwise) whether currently in existence or arising hereafter which arise
under or relate to any Enviromental Law.
(t) BOOKS AND RECORD INTERNAL ACCOUNTING CONTROLS. The records and
documents of the Company and its subsidiaries accurately reflect in all material
respects the information relating to the business of the Company and the
subsidiaries, the location and collection of their assets, and the nature of all
transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary. The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient, in the judgment of the
Company's board of directors, to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate actions is taken
with respect to any differences.
(u) MATERIAL AGREEMENTS. Except as set forth in the Form 10-KSB, Form
10-QSB, Form 8-K, or on SCHEDULE 2.1(u) hereto, neither the Company nor any
subsidiary is a party to any written or oral 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-3 or applicable form (collectively, "Material
Agreements") if the Company or any subsidiary were registering securities
under the Securities Act. The Company and each of its subsidiaries has in all
material respects performed all the obligations required to be performed by
them to date under the foregoing agreements, have received no notice of
default and, to the best of the
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Company's knowledge are not in default under any Material Agreement now in
effect, the result of which could cause a Material Adverse Effect. No written or
oral contract, instrument, agreement, commitment, obligation, plan or
arrangement of the Company or of any subsidiary limits or shall limit the
payment of dividends on the Company's Preferred Shares, other Preferred Stock,
if any, or its Common Stock.
(v) TRANSACTIONS WITH AFFILIATES. Except as set forth in the Form 10-KSB,
Form 10-QSB or on SCHEDULE 2.1 (v) hereto, there are no loans, leases,
agreements, contracts, royalty agreements, management contracts or arrangements
or other continuing transactions exceeding $100,000 between (a) the Company, any
subsidiary or any of their respective customers or suppliers on the one hand,
and (b) on the other hand, any officer, employee, consultant or director of the
Company, or any of its subsidiaries, or any person owning any capital stock of
the Company or any subsidiary 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.
(w) SECURITIES ACT OF 1933. Based in material part upon the
representations herein of the Purchasers, 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 Preferred Shares and the Warrants hereunder.
Neither the Company nor anyone acting on its behalf, directly or indirectly, has
or will sell, offer to sell or solicit offers to buy the Preferred Shares, the
Warrants or similar securities to, or solicit offers with respect thereto from,
or enter into any preliminary conversations or negotiations relating thereto
with, any person, or has taken or will take any action so as to bring the
issuance and sale of the Preferred Shares and the Warrants under the
registration provisions of the Securities Act and applicable state securities
laws, and neither the Company nor any of its affiliates, nor any person acting
on its or their behalf has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D under the Securities
Act) in connection with the offer or sale of the Preferred Shares and the
Warrants.
(x) GOVERNMENTAL APPROVALS. Except as set forth in the Form 10-KSB or Form
10-QSB, and except for the filing of any notice prior or subsequent to each
Closing that may be required under applicable state and/or Federal securities
laws (which if required, shall be filed on a timely basis), including the filing
of a registration statement or statements pursuant to the Registration Rights
Agreement, and the filing of the Certificate of Designations with the Secretary
of State for the State of Delaware, no authorization, consent, approval,
license, exemption of, 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 or
delivery of the Preferred Shares, or for the performance by the Company of its
obligations under the Transaction Documents or the Certificate of Designations.
(y) EMPLOYEES. Neither the Company nor any subsidiary has any collective
bargaining arrangements or agreements covering any of its employees, except as
set forth in the Form
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10-KSB, Form 1O-QSB or on SCHEDULE 2.1(y) hereto. Except as set forth in the
Form 10-KSB, Form 10-QSB or on SCHEDULE 2.1(y) hereto, neither the Company nor
any subsidiary has any employment contract, agreement regarding proprietary
information, non-competition agreement, non-solicitation agreement,
confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be
employed or engaged by the Company or such subsidiary. Since December 31, 1998,
no officer, consultant or key employee of the Company or any subsidiary whose
termination, either individually or in the aggregate, could have a Material
Adverse Effect, has terminated or, to the knowledge of the Company, has any
present intention of terminating his or her employment or engagement with the
Company or any subsidiary.
(z) ABSENCE OF CERTAIN DEVELOPMENTS. Except as provided in Form 10-KSB,
10-QSB, Form 8-K or in SCHEDULE 2.1(z) hereto, since December 31, 1998, neither
the Company nor any subsidiary has:
(i) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;
(ii) 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 or such subsidiary's business;
(iii) 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;
(iv) 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;
(v) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business;
(vi) sold, assigned or transferred any patent rights, trademarks, trade
names, copyrights, trade secrets or other intangible assets or intellectual
property rights, or disclosed any proprietary confidential information to any
person except to customers in the ordinary course of business or to the
Purchasers or their representatives;
(vii) suffered any substantial losses or waived any rights of material
value, whether or not in the ordinary course of business, or suffered the
loss of any material amount of prospective business;
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(viii) made any changes in employee compensation except in the ordinary
course of business and consistent with past practices;
(ix) made capital expenditures or commitments therefor that aggregate
in excess of $100,000;
(x) entered into any other transaction other than in the ordinary
course of business, or entered into any other material transaction, whether
or not in the ordinary course of business;
(xi) made charitable contributions or pledges in excess of $25,000;
(xii) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;
(xiii) experienced any material problems with labor or management in
connection with the terms and conditions of their employment;
(xiv) effected any two or more events of the foregoing kind which in
the aggregate would be material to the Company or its subsidiaries; or
(xv) entered into an agreement, written or otherwise, to take any of
the foregoing actions.
(aa) USE OF PROCEEDS. The proceeds from the sale of the Preferred Shares
will be used by the Company for working capital and general corporate
purposes.
(ab) PUBLIC UTILITY HOLDING COMPANY ACT AND INVESTMENT COMPANY ACT
STATUS. The Company is not a "holding company" or a "public utility company"
as such terms are defined in the Public Utility Holding Company Act of 1935,
as amended. The Company is not, and as a result of and immediately upon each
Closing will not be, an "investment company" or a company controlled" by an
"investment company," within the meaning of the Investment Company Act of
1940, as amended.
(ac) ERISA. No liability to the Pension Benefit Guaranty Corporation has
been incurred with respect to any Plan by the Company or any of its
subsidiaries which is or would be materially adverse to the Company and its
subsidiaries. The execution and delivery of this Agreement and the issue and
sale of the Preferred Shares will not involve any transaction which is
subject to the prohibitions of Section 406 of ERISA or in connection with
which a tax could be imposed pursuant to Section 4975 of the Internal Revenue
Code of 1986, as amended, provided that, if any of the Purchasers, or any
person or entity that owns a beneficial interest in any of the Purchasers, is
an "employee pension benefit plan" (within the meaning of Section 3(2) of
ERISA) with respect to which the Company is a "party in interest" (within the
meaning of Section 3(14) of ERISA), the requirements of Sections 407(d)(5)
and 408(e) of ERISA, if applicable, are met. As used in this
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Section 2. 1(ac), the term "Plan" shall mean an "employee pension benefit
plan" (as defined in Section 3 of ERISA) which is or has been established or
maintained, or to which contributions are or have been made, by the Company
or any subsidiary or by any trade or business, whether or not incorporated,
which, together with the Company or any subsidiary, is under common control,
as described in Section 4 14(b) or (c) of the Code.
(ad) DILUTIVE EFFECT. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Preferred Shares
and the Warrant Shares issuable upon exercise of the Warrants will increase
in certain circumstances. The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Preferred Shares
in accordance with this Agreement and the Certificate of Designations and its
obligations to issue the Warrant Shares upon the exercise of the Warrants in
accordance with this Agreement and the Warrants, is, in each case, absolute
and unconditional regardless of the dilutive effect that such issuance may
have on the ownership interest of other stockholders of the Company.
Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of
the Purchasers hereby makes the following representations and warranties to
the Company with respect solely to itself and not with respect to any other
Purchaser:
(a) ORGANIZATION AND STANDING OF THE PURCHASERS. If the Purchaser is an
entity, such Purchaser is a corporation or partnership duly incorporated or
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.
(b) AUTHORIZATION AND POWER. The Purchaser has the requisite power and
authority to enter into and perform this Agreement and to purchase the
Preferred Shares being sold to it hereunder. The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by such
Purchaser and the consummation by it of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate or
partnership action (if the Purchaser is an entity), and no further consent or
authorization of such Purchaser or its Board of Directors, stockholders, or
partners, as the case may be, is required. Each of this Agreement and the
Registration Rights Agreement has been duly authorized, executed and
delivered by such Purchaser.
(c) NO CONFLICTS. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement and the consummation by such
Purchaser of the transactions contemplated hereby and thereby or relating
hereto do not and will not, assuming consent of the holders of the Company's
Series I Preferred Stock, (i) result in a violation of such Purchaser's
charter documents or bylaws or (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of any agreement, indenture or instrument to
which such Purchaser is a party, or result in a violation of any law, rule,
or regulation, or any order, judgment or decree of any court or governmental
agency applicable to such Purchaser or its properties (except for such
conflicts, defaults and violations as would not, individually or in the
aggregate, have a Material Adverse Effect on such Purchaser). Such Purchaser
is not required to obtain any consent,
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authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or the Registration Rights Agreement or to
purchase the Preferred Shares in accordance with the terms hereof, provided that
for purposes of the representation made in this sentence, such Purchaser is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Company herein.
(d) ACQUISITION FOR INVESTMENT. Such Purchaser is purchasing the
Preferred Shares solely for its own account for the purpose of investment and
not with a view to or for sale in connection with distribution. Such
Purchaser does not have a present intention to sell the Preferred Shares, nor
a present arrangement (whether or not legally binding) or intention to effect
any distribution of the Preferred Shares to or through any person or entity;
PROVIDED, HOWEVER, that by making the representations herein and subject to
Section 2.2(f) below, such Purchaser does not agree to hold the Preferred
Shares for any minimum or other specific term and reserves the right to
dispose of the Preferred Shares at any time in accordance with Federal and
state securities laws applicable to such disposition. Such Purchaser
acknowledges that it is able to bear the financial risks associated with an
investment in the Preferred Shares and that it has been given full access to
such records of the Company and the subsidiaries and to the officers of the
Company and the subsidiaries and received such information as it has deemed
necessary or appropriate to conduct its due diligence investigation.
(e) ACCREDITED PURCHASERS. Such Purchaser is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act.
(f) RULE 144. Such Purchaser understands that the Shares must be held
indefinitely unless such Shares are registered under the Securities Act or an
exemption from registration is available. Such Purchaser acknowledges that
such person is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule
144"), and that such person has been advised that Rule 144 permits resales
only under certain circumstances. Such Purchaser understands that to the
extent that Rule 144 is not available, such person will be unable to sell any
Preferred Shares without either registration under the Securities Act or the
existence of another exemption from such registration requirement.
(g) CONVERSION RESTRICTIONS. Notwithstanding anything to the contrary
set forth herein or in the Certificate of Designations, in no event shall any
holder be entitled to convert Series J Preferred Stock in excess of that
number of shares of Series J Convertible Preferred Stock which, upon giving
effect to such conversion, would cause the aggregate number of shares of
Common Stock beneficially owned by the holder and its affiliates to exceed
4.99% of the outstanding shares of the Common Stock following such
conversion. For purposes of the foregoing proviso, the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates
shall include the number of shares of Common Stock issuable upon conversion
of the shares of Series J Convertible Preferred Stock with respect to which
the determination of such proviso is being made, but shall exclude the number
of shares of Common Stock which would be issuable upon (i)
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conversion of the remaining, nonconverted shares of Series J Convertible
Preferred Stock beneficially owned by the holder and its affiliates, and (ii)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company (including, without limitation, any warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by the holder and its affiliates. Except
as set forth in the preceding sentence, for purposes of this Section 2(a),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended.
(h) GENERAL. Such Purchaser understands that the Shares are being
offered and sold in reliance on a transactional exemption from the
registration requirement of Federal and state securities laws and the Company
is relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings of such Purchaser set forth
herein in order to determine the applicability of such exemptions and the
suitability of such Purchaser to acquire the Shares.
(i) RESIDENCE. Such Purchaser's permanent domicile is as set forth in
Exhibit A.
ARTICLE III
Covenants
The Company covenants with each of the Purchasers as follows, which
covenants are for the benefit of the Purchasers and their permitted assignees
(as defined herein).
Section 3.1 SECURITIES COMPLIANCE.
(a) The Company shall notify the Commission in accordance with
their rules and regulations, of the transactions contemplated by any of the
Transaction Documents, including filing a Form D with respect to the
Preferred Shares, Warrants, Conversion Shares and Warrants Shares as required
under Regulation D, and shall take all other necessary action and proceedings
as may be required and permitted by applicable law, rule and regulation, for
the legal and valid issuance of the Preferred Shares and the Warrant Shares
to the Purchasers or subsequent holders.
(b) The Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings
of such Purchasers set forth herein in order to determine the applicability
of Federal and state securities laws exemptions and the suitability of such
Purchasers to acquire the Preferred Shares.
Section 3.2 REGISTRATION AND LISTING. The Company will cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, will comply with all requirements related to any registration
statement filed pursuant to this Agreement or the Registration Rights Agreement,
and will not take any action or file any document (whether or not permitted by
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the Securities Act or the rules promulgated thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under the Exchange Act or Securities Act, except as permitted
herein. The Company will take all action necessary to continue the listing or
trading of its Common Stock on the over-the-counter electronic bulletin board.
Section 3.3 Inspection Rights. The Company shall permit, during normal
business hours and upon reasonable request and reasonable notice, each
Purchaser or any employees, agents or representatives thereof, so long as
such Purchaser shall be obligated hereunder to purchase the Preferred Shares
or shall beneficially own any Preferred Shares, or shall own Conversion
Shares which, in the aggregate, represent more than 2% of the total combined
voting power of all voting securities then outstanding, for purposes
reasonably related to such Purchaser's interests as a stockholder to examine
and make reasonable copies of and extracts from the records and books of
account of, and visit and inspect the properties, assets, operations and
business of the Company and any subsidiary, and to discuss the affairs,
finances and accounts of the Company and any subsidiary with any of its
officers, consultants, directors, and key employees.
Section 3.4 COMPLIANCE WITH LAWS. The Company shall comply, and cause
each subsidiary to comply, with all applicable laws, rules, regulations and
orders, noncompliance with which could have a Material Adverse Effect.
Section 3.5 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company shall
keep and cause each subsidiary to keep adequate records and books of account,
in which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and
other purposes in connection with its business shall be made.
Section 3.6 REPORTING REQUIREMENTS. If the Company ceases to file its
periodic reports with the Commission, or if the Commission ceases making
these periodic reports available via the Internet without charge, then the
Company shall furnish the following to each Purchaser so long as such
Purchaser shall be obligated hereunder to purchase the Preferred Shares or
shall beneficially own any Preferred Shares, or shall own Conversion Shares
which, in the aggregate, represent more than 2% of the total combined voting
power of all voting securities then outstanding:
(a) Quarterly Reports filed with the Commission on Form 1O-QSB as
soon as available, and in any event within 45 days after the end of each of
the first three fiscal quarters of the Company;
(b) Annual Reports filed with the Commission on Form 10-KSB as soon
as available, and in any event within 90 days after the end of each fiscal
year of the Company; and
(c) Copies of all notices and information, including without
limitation notices and proxy statements in connection with any meetings, that
are provided to holders of shares of Common
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Stock, contemporaneously with the delivery of such notices or information to
such holders of Common Stock.
Section 3.7 AMENDMENTS. The Company shall not amend or waive any
provision of the Articles or Bylaws of the Company, or Registration Rights
Agreement in any way that would adversely affect the liquidation preferences,
dividends rights, conversion rights, voting rights or redemption rights of
the holders of the Preferred Shares.
Section 3.8 Other Agreements. The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any subsidiary under any
Transaction Document or the Certificate of Designations.
Section 3.9 DISTRIBUTIONS. So long as any Preferred Shares or Warrants
remain outstanding, the Company agrees that it shall not (i) declare or pay
any dividends or make any distributions to any holder(s) of Common Stock or
(ii) purchase or otherwise acquire for value, directly or indirectly, any
Common Stock or other equity security of the Company.
Section 3.10 STATUS OF DIVIDENDS. The Company covenants and agrees that
(i) no Federal income tax return or claim for refund of Federal income tax or
other submission to the Internal Revenue Service will adversely affect the
Preferred Shares, any other series of its Preferred Stock, or the Common
Stock, and any deduction shall not operate to jeopardize the availability to
Purchasers of the dividends received deduction provided by Section 243 (a)
(1) of the Code or any successor provision, (ii) in no report to shareholders
or to any governmental body having jurisdiction over the Company or otherwise
will it treat the Preferred Shares other than as equity capital or the
dividends paid thereon other than as dividends paid on equity capital unless
required to do so by a governmental body having jurisdiction over the
accounts of the Company or by a change in generally accepted accounting
principles required as a result of action by an authoritative accounting
standards setting body, and (iii) other than pursuant to this Agreement or
the Certificate of Designations, it will take no action which would result in
the dividends paid by the Company on the Preferred Shares out of the
Company's current or accumulated earnings and profits being ineligible for
the dividends received deduction provided by Section 243(a)(1) of the Code.
The preceding sentence shall not be deemed to prevent the Company from
designating the Preferred Stock as "Convertible Preferred Stock" in its
annual and quarterly financial statements in accordance with its prior
practice concerning other series of preferred stock of the Company.
Notwithstanding the foregoing, the Company shall not be required to restate
or modify its tax returns for periods prior to each Closing Date. In the
event that the Purchasers have reasonable cause to believe that dividends
paid by the Company on the Preferred Shares out of the Company's current or
accumulated earnings and profits will not be treated as eligible for the
dividends received deduction provided by Section 243(a)(1) of the Code, or
any succesor provision, the Company will, at the reasonable request of the
Purchasers of 51% of the outstanding Preferred Shares, join with the
Purchasers in the submission to the Service of a request for a ruling that
dividends paid on the Shares will be so eligible for Federal income tax
purposes, at the Purchasers expense. In addition, the Company will reasonably
cooperate with the Purchasers (at Purchasers' expense) in any litigation,
appeal or other proceeding challenging or contesting any
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ruling, technical advice, finding or determination that earnings and profits
are not eligible for the dividends received deduction provided by Section
243(a)(1) of the Code, or any successor provision to the extent that the
position to be taken in any such litigation, appeal, or other proceeding is
not contrary to any provision of the Code or incurred in connection with any
such submission, litigation, appeal or other proceeding. Notwithstanding the
foregoing, nothing herein contained shall be deemed to preclude the Company
from claiming a deduction with respect to such dividends if (i) the Code
shall hereafter be amended, or final Treasury regulations thereunder are
issued or modified, to provide that dividends on the Preferred Shares or
Conversion Shares should not be treated as dividends for Federal income tax
purposes or that a deduction with respect to all or a portion of the
dividends on the Shares is allowable for Federal income tax purposes, or (ii)
in the absence of such an amendment, issuance or modification and after a
submission of a request for ruling or technical advice, the service shall
rule or advise that dividends on the shares should not be treated as
dividends for Federal income tax purposes. If the Service determines that the
Preferred Shares or Conversion Shares constitute debt, the Company may file
protective claims for refund.
Section 3.11 REGULATION S. The Company covenants and agrees that if the
Company fails to register the Conversion Shares within 150 days from the
Closing Date of the final tranche of Preferred Shares (the "Final Closing
Date") under the terms and conditions of the Registration Rights Agreement
attached hereto as Exhibit E, then for so long as such Registration Statement
is not effective and as any of the Preferred Shares or Conversion Shares
remain outstanding and continue to be "restricted securities" within the
meaning of Rule 144 under the Securities Act, the Company shall, in order to
permit resales of the Preferred Shares or Conversion Shares pursuant to
Regulation S under the Securities Act, (a) continue to file all material
required to be filed pursuant to Section 13(a) or 15(d) of the Exchange Act,
and (b) not knowingly engage in directed selling efforts in connection with
the resale of securities by any Purchaser under Regulation S.
Section 3.12 RIGHT OF FIRST REFUSAL. The Company covenants and agrees
that during the nine (9) month period after the Final Closing Date the
Purchasers shall have a right of first refusal with respect to any subsequent
offer or sale of Common Stock or any securities convertible or exchangeable
into Common Stock based on variable rates of conversion (meaning based on a
market price of the Common Stock as of the date of conversion or exchange)
which the Company proposes or intends to consummate with any third parties
(the "Subsequent Financing"). The Company will promptly notify the Purchasers
in writing of the terms and conditions of the proposed Subsequent Financing.
The Purchasers shall have the right for ten (10) trading days to consummate
the Subsequent Financing, in whole but not in part, with the Company on the
same terms and conditions as the proposed Subsequent Financing. If the
Purchasers do not consummate the Subsequent Financing, the Company shall have
45 days thereafter to consummate the Subsequent Financing with such third
parties, on the same or substantially the same terms, or on terms more
favorable to the Company. The rights of the Purchaser herein specifically
exclude any Subsequent Financing with the parties set forth in Schedule 3.12.
PROVIDED, that (i) if the Subsequent Financing with such parties is an offer
or sale of Common Stock at a price equal to less than 50% of the market price
of Common Stock, the proceeds from such sale shall be used first to redeem
the outstanding Preferred Shares of
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the Purchasers upon consummation of the Subsequent Financing at a redemption
price equal to 125% of the Liquidation Preference (as defined in the
Certificate of Designation) plus accrued and unpaid dividends and (ii) if the
Subsequent Financing is an offer or sale of securities convertible or
exchangeable into Common Stock, such conversion or exchange shall be based on
a fixed rate.
Section 3.13 RESERVATION OF SHARES. So long as any of the Preferred
Shares or Warrants remain outstanding, the Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 200% of the aggregate number of shares of Common Stock
needed to provide for the issuance of the Conversion Shares and the Warrant
Shares.
Section 3.14 TRANSFER AGENT INSTRUCTIONS. The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of each Purchaser or its
respective nominee(s), for the Conversion Shares and the Warrant Shares in
such amounts as specified from time to time by each Purchaser to the Company
upon conversion of the Preferred Shares or exercise of the Warrants in the
form of Exhibit F attached hereto (the "Irrevocable Transfer Agent
Instructions"). Prior to registration of the Conversion Shares and the
Warrant Shares under the Securities Act, all such certificates shall bear the
restrictive legend specified in Section 6.1 of this Agreement. The Company
warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 3.14 will be given by the Company to
its transfer agent and that the Shares shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. Nothing in this Section 3.14
shall affect in any way each Purchaser's obligations and agreements set forth
in Section 6.1 to comply with all applicable prospectus delivery
requirements, if any, upon resale of the Shares. If a Purchaser provides the
Company with an opinion of counsel, in a generally acceptable form, to the
effect that a public sale, assignment or transfer of the Shares may be made
without registration under the Securities Act or the Purchaser provides the
Company with reasonable assurances that the Shares can be sold pursuant to
Rule 144 without any restriction as to the number of securities acquired as
of a particular date that can then be immediately sold, the Company shall
permit the transfer, and, in the case of the Conversion Shares and the
Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by such
Purchaser and without any restrictive legend. The Company acknowledges that
abreach by it of its obligations under this Section 3.14 will cause
irreparable harm to the Purchasers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 3.14
will be inadequate and agrees, in the event of a breach or threatened breach
by the Company of the provisions of this Section 3.14, that the Purchasers
shall be entitled, in addition to all other available remedies, to an order
and/or injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required.
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ARTICLE IV
Conditions
Section 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO
SELL THE SHARES. The obligation hereunder of the Company to issue and sell
the Preferred Shares and the Warrants to the Purchasers is subject to the
satisfaction or waiver, at or before each Closing, of each of the conditions
set forth below. These conditions are for the Company's sole benefit and may
be waived by the Company at any time in its sole discretion.
(a) ACCURACY OF EACH PURCHASER'S REPRESENTATIONS AND WARRANTIES.
The representations and warranties of each Purchaser shall be true and
correct in all material respects as of the date when made and as of each
Closing Date as though made at that time, except for representations and
warranties that are expressly made as of a particular date, which shall be
true and correct in all material respects as of such date.
(b) PERFORMANCE BY THE PURCHASERS. Each Purchaser shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by such Purchaser at or prior to such
Closing.
(c) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions contemplated by
this Agreement.
(d) MINIMUM PURCHASE. The Escrow Agent shall hold $2.5 million or
more of immediately available funds pursuant to the Escrow Agreement received
from the Purchasers, and the Purchasers shall make the minimum purchase
described in Section 4.2(c).
Section 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO
PURCHASE THE SHARES. The obligation hereunder of each Purchaser to acquire
and pay for the Preferred Shares and the Warrants is subject to the
satisfaction or waiver, at or before each Closing, of each of the conditions
set forth below. These conditions are for each Purchaser's sole benefit and
may be waived by such Purchaser at any time in its sole discretion.
(a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. Each
of the representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of each
Closing Date as though made at that time (except for representations and
warranties that speak as of a particular date), which shall be true and
correct in all material respects as of such date.
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(b) PERFORMANCE BY THE COMPANY. The Company shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to such Closing.
(c) MINIMUM PURCHASE. Under the terms and conditions of this
Agreement, the Company shall make sales of the Preferred Shares to the
Purchasers resulting in gross proceeds of a minimum of $2,500,000 to the
Company, less fees and legal expenses payable to the Purchasers pursuant to a
written agreement describing said fees.
(d) NO SUSPENSION. ETC. From the date hereof to each Closing Date,
trading in the Company's Common Stock shall not have been suspended by the
Commission (except for any suspension of trading of limited duration agreed
to by the Company, which suspension shall be terminated prior to each
Closing), and, at any time prior to each Closing, trading in securities
generally as reported by Bloomberg Financial Markets ("Bloomberg") shall not
have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by Bloomberg, or on the
New York Stock Exchange, nor shall a banking moratorium have been declared
either by the United States or New York State authorities, nor shall there
have occurred any material outbreak or escalation of hostilities or other
national or international calamity or crisis of such magnitude in its effect
on, or any material adverse change in any financial market which, in each
case, in the judgment of such Purchaser, makes it impracticable or
inadvisable to purchase the Preferred Shares.
(e) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions contemplated by
this Agreement.
(f) NO PROCEEDINGS OR LITIGATION. No action, suit or proceeding
before any arbitrator or any governmental authority shall have been
commenced, and no investigation by any governmental authority shall have been
threatened, against the Company or any subsidiary, or any of the officers,
directors or affiliates of the Company or any subsidiary seeking to restrain,
prevent or change the transactions contemplated by this Agreement, or seeking
damages in connection with such transactions.
(g) CERTIFICATE OF DESIGNATIONS OF RIGHTS AND PREFERENCES. Prior
to each Closing, the Certificate of Designations of the Rights and
Preferences for the Preferred Shares in the form of Exhibit C attached hereto
shall have been filed with the Secretary of State of Delaware.
(h) OPINION OF COUNSEL. ETC. At each Closing, the Purchasers shall
have received an opinion of counsel to the Company, dated the date of such
Closing, in the form of Exhibit G hereto, and such other certificates and
documents as the Purchasers or its counsel shall reasonably require incident
to such Closing.
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(i) REGISTRATION RIGHTS AGREEMENT. At the Tranche I Closing, the
Company shall have executed and delivered the Registration Rights Agreement
to each Purchaser.
(j) PREFERRED STOCK CERTIFICATES. The Company shall have executed
and delivered to the Escrow Agent the stock certificates (in such
denominations as such Purchaser shall request) for the Preferred Shares being
purchased by such Purchaser at such Closing.
(k) RESOLUTIONS. The Board of Directors of the Company shall have
adopted resolutions consistent with Section 2.1(b) above in a form reasonably
acceptable to such Purchaser (the "Resolutions").
(l) RESERVATION OF SHARES. As of each Closing Date, the Company
shall have reserved out of its authorized and unissued Common Stock, solely
for the purpose of effecting the conversion of the Preferred Shares and the
exercise of the Warrants, a number of shares of Common Stock equal to at
least 200% of the aggregate number of Conversion Shares issuable upon
conversion of the Preferred Shares outstanding on such Closing Date and the
number of Warrant Shares issuable upon exercise of the number of Warrants
assuming such Warrants were granted on such Closing Date (after giving effect
to the Preferred Shares and the Warrants to be issued on such Closing Date
and assuming all such Preferred Shares and Warrants were fully convertible or
exercisable on such date regardless of any limitation on the timing or amount
of such conversions or exercises).
(m) TRANSFER AGENT INSTRUCTIONS. The Irrevocable Transfer Agent
Instructions, in the form of Exhibit F attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.
(n) SECRETARY'S CERTIFICATE. The Company shall have delivered to
such Purchaser a secretary's certificate, dated as of each Closing Date, as
to (i) the Resolutions, (ii) the Articles, (iii) the Bylaws, (iv) the
Certificate of Designations, each as in effect at such Closing, and (iv) the
authority and incumbency of the officers of the Company executing the
Transaction Documents and any other documents required to be executed or
delivered in connection therewith.
(o) ESCROW AGREEMENT. At the Tranche I Closing, the Company shall
have executed and delivered the Escrow Agreement to each Purchaser.
(p) CANCELLATION OF PROMISSORY NOTES. At the Tranche I Closing the
Purchasers shall deliver or cause the delivery to the Company of the original
Promissory Notes marked "Canceled" and "Paid-In-Full".
(q) OFFICER'S CERTIFICATE. The Company shall have delivered to
such Purchaser a certificate of an executive officer of the Company, dated as
of each Closing Date, confirming the accuracy of the Company's
representations, warranties and covenants as of such Closing Date and
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confirming the compliance by the Company with the conditions precedent set
forth in this Section 4.2 as of such Closing Date.
ARTICLE V
Registration Rights
At the Tranche I Closing, the Company and Purchasers shall enter into a
Registration Rights Agreement in the form attached hereto as Exhibit E (the
"Registration Rights Agreement").
ARTICLE VI
Stock Certificate Legend
Section 6.1 LEGEND. Each certificate representing the Preferred Shares,
and, if appropriate, securities issued upon conversion thereof, shall be
stamped or otherwise imprinted with a legend substantially in the following
form (in addition to any legend required by applicable state securities or
"blue sky" laws):
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE
"SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THAT ACT AND
UNDER APPLICABLE STATE SECURITIES LAWS OR ESYNCH CORP.
(THE "COMPANY") SHALL HAVE RECEIVED AN OPINION OF ITS
COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THAT
ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED.
The Company agrees to reissue certificates representing the Preferred
Shares without the legend set forth above if at such time, prior to making
any transfer of any Preferred Shares or Conversion Shares, such holder
thereof shall give written notice to the Company describing the manner and
terms of such transfer and removal as the Company may reasonably request.
Such proposed transfer will not be effected until: (a) the Company has
notified such holder that either (i) in the opinion of Company counsel, the
registration of such Preferred Shares or Conversion Shares under the
Securities Act is not required in connection with such proposed transfer; or
(ii) a registration statement under the Securities Act covering such proposed
disposition has been filed by the Company with the Commission and has become
effective under the Securities Act; and (b) the Company has notified such
holder that either: (i) in the opinion of Company counsel, the registration
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or qualification under the securities or "blue sky" laws of any state is not
required in connection with such proposed disposition, or (ii) compliance
with applicable state securities or "blue sky" laws has been effected. The
Company will use its best efforts to respond to any such notice from a holder
within ten (10) days. In the case of any proposed transfer under this Section
6, the Company will use reasonable efforts to comply with any such applicable
state securities or "blue sky" laws, but shall in no event be required, in
connection therewith, to qualify to do business in any state where it is not
then qualified or to take any action that would subject it to tax or to the
general service of process in any state where it is not then subject. The
restrictions on transfer contained in Section 6.1 shall be in addition to,
and not by way of limitation of, any other restrictions on transfer contained
in any other section of this Agreement.
ARTICLE VII
Intentionally Omitted.
ARTICLE VIII
Indemnification
Section 8.1 GENERAL INDEMNITY. The Company agrees to indemnify and hold
harmless the Purchasers and any finder (and their respective directors,
officers, affiliates, agents, successors and assigns) from and against any
and all losses, liabilities, deficiencies, costs, damages and expenses
(including, without limitation, reasonable attorney's fees, charges and
disbursements) incurred by the Purchasers as a result of any inaccuracy in or
breach of the representations, warranties or covenants made by the Company
herein. Each Purchaser severally but not jointly agrees to indemnify and hold
harmless the Company and its directors, officers, affiliates, agents,
successors and assigns from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation,
reasonable attorneys fees, charges and disbursements) incurred by the Company
as result of any inaccuracy in or breach of the representations, warranties
or covenants made by such Purchaser herein.
Section 8.2 INDEMNIFICATION PROCEDURE. Any party entitled to
indemnification under this Article VIII (an "indemnified party") will give
written notice to the indemnifying party of any matters giving rise to a
claim for indemnification; provided, that the failure of any party entitled
to indemnification hereunder to give notice as provided herein shall not
relieve the indemnifying party of its obligations under this Article VIII
except to the extent that the indemnifying party is actually prejudiced by
such failure to give notice. In case any action, proceeding or claim is
brought against an indemnified party in respect of which indemnification is
sought hereunder, the indemnifying party
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shall be entitled to participate in and, unless in the reasonable judgment of
the indemnified party a conflict of interest between it and the indemnifying
party may exist with respect of such action, proceeding or claim, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party. In the event that the indemnifying party advises an indemnified party
that it will contest such a claim for indemnification hereunder, or fails,
within thirty (30) days of receipt of any indemnification notice to notify,
in writing, such person of its election to defend, settle or compromise, at
its sole cost and expense, any action, proceeding or claim (or discontinues
its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise
or pay such action or claim. In any event, unless and until the indemnifying
party elects in writing to assume and does so assume the defense of any such
claim, proceeding or action, the indemnified party's costs and expenses
arising out of the defense, settlement or compromise of any such action,
claim or proceeding shall be losses subject to indemnification hereunder. The
indemnified party shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all
information reasonably available to the indemnified party which relates to
such action or claim. The indemnifying party shall keep the indemnified party
fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. If the indemnifying party elects to defend
any such action or claim, then the indemnified party shall be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense. The indemnifying party shall not be liable for any settlement of any
action, claim or proceeding effected without its prior written consent.
Notwithstandinganything in this Article VIII to the contrary, the
indemnifying party shall not, without the indemnified party's prior written
consent, settle or compromise any claim or consent to entry of any judgment
in respect thereof which imposes any future obligation on the indemnified
party or which does not include, as an unconditional term thereof, the giving
by the claimant or the plaintiff to the indemnified party of a release from
all liability in respect of such claim. The indemnification required by this
Article VIII shall be made by periodic payments of the amount thereof during
the course of investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred, so long as the indemnified
party irrevocably agrees to refund such moneys if it is ultimately determined
by a court of competent jurisdiction that such party was not entitled to
indemnification. The indemnity agreements contained herein shall be in
addition to (a) any cause of action or similar rights of the indemnified
party against the indemnifying party or others, and (b) any liabilities the
indemnifying party may be subject to pursuant to the law.
ARTICLE IX
Miscellaneous
Section 9.1 FEES AND EXPENSES. Except as otherwise set forth in this
Agreement, the Registration Rights Agreement or the Certificate of
Designations, each party shall pay the fees and
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expenses of its advisors, counsel, accountants and other experts, if any, and
all other expenses, incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement, provided
that the Company shall pay, at the Closing, all attorneys fees and expenses
(exclusive of disbursements and out-of-pocket expenses) incurred by the
Purchasers up to $25,000 in connection with the preparation, negotiation,
execution and delivery of this Agreement, the Registration Rights Agreement
and the transaction contemplated hereunder. In addition, the Company shall
pay all reasonable fees and expenses incurred by the Purchasers in connection
with any amendments, modifications or waivers of this Agreement or any of the
other Transaction Documents, or incurred in connection with the enforcement
of this Agreement or any of the other Transaction Documents, including,
without limitation, all reasonable attorneys fees and expenses. The Company
shall pay all stamp or other similar taxes and duties levied in connection
with issuance of the Preferred Shares pursuant hereto.
Section 9.2 SPECIFIC ENFORCEMENT CONSENT TO JURISDICTION.
(a) The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of
this Agreement or the Registration Rights Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement
or the Registration Rights Agreement and to enforce specifically the terms
and provisions hereof or thereof, this being in addition to any other remedy
to which any of them may be entitled by law or equity.
(b) Each of the Company and the Purchasers (i) hereby irrevocably
submits to the jurisdiction of the United States District Court sitting in
the Southern District of New York for the purposes of any suit, action or
proceeding arising out of or relating to this Agreement or the Registration
Rights Agreement and (ii) hereby waives, and agrees not to assert in any such
suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of such court, that the suit, action or proceeding is
brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper. Each of the Company and the Purchasers consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof Nothing in this Section 9.2 shall
affect or limit any right to serve process in any other manner permitted by
law.
Section 9.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the
entire understanding of the parties with respect to the matters covered
hereby and, except as specifically set forth herein or in the Transaction
Documents or the Certificate of Designations, neither the Company nor any of
the Purchasers makes any representations, warranty, covenant or undertaking
with respect to such matters. No provision of this Agreement may be waived or
amended other than by a written instrument signed by the Company and the
holders of at least two-thirds (2/3) of the Preferred Shares then
outstanding, and no provision hereof may be waived other than by an a written
instrument signed
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by the party against whom enforcement of any such amendment or waiver is
sought. No such amendment shall be effective to the extent that it applies to
less than all of the holders of the Preferred Shares then outstanding. No
consideration shall be offered or paid to any person to amend or consent to a
waiver or modification of any provision of any of the Transaction Documents
or the Certificate of Designations unless the same consideration is also
offered to all of the parties to the Transaction Documents or holders of
Preferred Shares, as the case may be.
Section 9.4 NOTICES. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer
back received), telecopy or facsimile at the address or number designated
below (if delivered on a business day during normal business hours where such
notice is to be received), or the first business day following such delivery
(if delivered other than on a business day during normal business hours where
such notice is to be received) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to
such address, or upon actual receipt of such mailing, whichever shall first
occur. The addresses for such communications shall be:
If to the Company: Thomas Hemingway, CEO
eSynch Corporation
15502 Mosher Avenue
Tustin, California 92780
Telephone Number: (714) 258-1900
Facsimile Number: (714) 258-7177
with copies to: Nicholas J. Yocca, Esq.
Stradling Yocca Carlson & Rauth
660 Newport Beach, California 92660
Telephone Number: (949)725-4120
Facsimile Number: (949) 823-5120
If to any Purchaser: At the address of such Purchaser set forth on
Exhibit A to this Agreement, with copies to
Purchaser's counsel as set forth on Exhibit A
or as specified in writing by such Purchaser
with copies to:
Christopher S. Auguste, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone Number: (212) 704-6000
Fax: (212) 704-6288
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H. Glenn Bagwell, Jr., Esq.
3005 Anderson Drive, Suite 204
Raleigh, N.C. 27609
Telephone Number: (919) 785-3113
Fax: (919)785-3116
Any party hereto may from time to time change its address for notices by
giving at least ten (10) days written notice of such changed address to the
other party hereto.
Section 9.5 WAIVERS. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provisions, condition or requirement hereof, nor shall any delay or omission
of any party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter.
Section 9.6 HEADINGS. The article, section and subsection headings in
this Agreement are for convenience only and shall not constitute a part of
this Agreement for any other purpose and shall not be deemed to limit or
affect any of the provisions hereof.
Section 9.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and assigns.
After any Closing, the assignment by a party to this Agreement of any rights
hereunder shall not affect the obligations of such party under this Agreement.
Section 9.8 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
Section 9.9 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York,
without giving effect to the choice of law provisions.
Section 9.10 SURVIVAL. The representations and warranties of the Company
and the Purchasers contained in Sections 2.1(o) and (s) should survive
indefinitely and those contained in Article II, with the exception of
Sections 2.1(o) and (s), shall survive the execution and delivery hereof and
the Closings until the date two years from the Final Closing Date, and the
agreements and covenants set forth in Articles I, III, V, VII, VIII and IX of
this Agreement shall survive the execution and delivery hereof and the
Closings hereunder until the Purchasers in the aggregate beneficially own
(determined in accordance with Rule 13d-3 under the Exchange Act) less than
2% of the total combined voting power of all voting securities then
outstanding, provided, that Sections 3.1, 3.2, 3.4, 3.5, 3.7, 3.8, 3.9, 3.10,
3.11 and 3.12 shall not expire until the Registration Statement
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required by Section 2 of the Registration Rights Agreement is no longer
required to be effective under the terms and conditions of Registration
Rights Agreement.
Section 9.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the
same instrument and shall become effective when counterparts have been signed
by each party and delivered to the other parties hereto, it being understood
that all parties need not sign the same counterpart. In the event any
signature is delivered by facsimile transmission, the party using such means
of delivery shall cause four additional executed signature pages to be
physically delivered to the other parties within five days of the execution
and delivery hereof
Section 9.12. PUBLICITY. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of the Purchasers,
unless and until such disclosure is required by law or applicable regulation,
and then only to the extent of such requirement.
Section 9.13 SEVERABILITY. The provisions of this Agreement, the
Certificate of Designations and the Registration Rights 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 the provisions
contained in this Agreement, the Certificate of Designations or the
Registration Rights 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, the Certificate of Designations or the Registration Rights
Agreement shall be reformed and construed as if such invalid or illegal or
unenforceable provision, or part of such provision, had never been contained
herein, so that such provisions would be valid, legal and enforceable to the
maximum extent possible.
Section 9.14 FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of any Purchaser or the Company, each of the
Company and the Purchasers shall execute and deliver such instrument,
documents and other writings as may be reasonably necessary or desirable to
confirm and carry out and to effectuate fully the intent and purposes of this
Agreement, the Preferred Shares, the Conversion Shares, the Warrants, the
Warrant Shares, the Certificate Designations, and the Registration Rights
Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorize officer as of the date first above
written.
ESYNCH CORPORATION
By: Thomas Hemingway
Name: Thomas Hemingway
Title: CEO
GILSTON CORPORATION, LTD.
By: Anthony L.M. Inder Rieden
Name: Anthony L.M. Inder Rieden
Title: Director
MANCHESTER ASSET MANAGEMENT, LTD.
By: Dawn E. Davies
Name: Dawn E. Davies
Title: Director
TRITON PRIVATE EQUITY FUND L.P.
TRITON CAPITAL MANAGEMENT LLC (G.P.)
By: John C. Tausche
Name: John C. Tausche
Title: Managing Member of G.P.
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AMRO INTERNATIONAL, S.A.
By: H.U. Bachofen
Name: H.U. Bachofen
Title: Director
ESQUIRE TRADE & FINANCE INC.
By: Roland Winiger
Name: Roland Winiger
Title: Director
AUSTINVEST ANSTALT BALZERS
By: Walter Grill
Name: Walter Grill
Title: Director
TALBIYA INVESTMENTS LTD.
By: David Grin
Name: David Grin
Title: Director
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EXHIBIT A to the
SERIES J CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
FOR ESYNCH CORP.
<TABLE>
<CAPTION>
Names and Address Number of Preferred Shares Dollar Amount
of Purchasers & Warrants Purchased of Investment
------------- -------------------- -------------
<S> <C> <C>
Gilston Corporation, Ltd. Preferred Shares: 35 $350,000
Charlotte House Warrants: 26,250
Charlotte Street
P.O. Box N-9204
Nassau, Bahamas
Tel. No.: (242)394-2700
Fax No: (242) 394-8348
Attn: Anthony L. M. Inder Rieden
Manchester Asset Management, Preferred Shares: 40 $400,000
Ltd. Warrants: 30,000
Charlotte House
Charlotte Street
P.O. Box N-9204
Nassau, Bahamas
Tel. No.: (242) 394-2700
Fax No: (242) 394-8348
Attn: Anthony L. M. Inder Rieden
Triton Private Equity Preferred Shares: 25 $250,000
c/o Triton Capital Management Warrants 18,750
L.L.C.
225 North Market Street
Suite 220
Wichita, Kansas 67202
Attn: Mr. John C. Tausche
Tel. No.: (316) 262-8874
Fax No.: (316) 262-6801
Amro International, S.A. Preferred Shares: 50 $500,000
40 Ultra Finance Warrants: 37,500
Grossmuenster Platz #6
Zurich, Switzerland CH822
Attn: H.U. Bachofen
Fax No. 011-411-262-5515
<PAGE>
EXHIBIT A to the
SERIES J CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
FOR ESYNCH CORP.
(continued)
<CAPTION>
Names and Address Number of Preferred Shares Dollar Amount
of Purchasers & Warrants Purchased of Investment
- --------------- -------------------- -------------
<S> <C> <C>
Esquire Trade & Finance Inc. Preferred Shares: 50 $500,000
Trident Chambers Warrants: 37,500
P.O. Box 146
Road Town, Tortola, BVI
Tel. No.: 011-041-769-1069
Fax No: 011-041-760-1031
Attn: Roland Winiger
Austinvest Anstalt Balzers Preferred Shares: 50 $500,000
Landstrasse 938 Warrants: 37,500
9494 Furstentum
Vaduz/Liechtenstein
Austria
Tel. No.: 011-431-534-532951
Fax No: 011-431-534-532895
Attn: Walter Grill
Talbiya Investments Ltd. Preferred Shares: 12.5 $125,000
Ragnall House Warrants: 9,375
18 Peel Road
Douglas, Isle of Man
1M14L2 United Kingdom
Tel. No.: 011-972-354-64891
Fax No: 011-972-360-50756
Attn: David Grin
</TABLE>
<PAGE>
ESYNCH CORPORATION
15502 Mosher Avenue
Tustin, California 92780
(714) 258-1900
Fax (714) 258-7177
as of October 29, 1999
To each of the Entities Listed
on Schedule A attached hereto
RE: AMENDMENT TO THE SECURITIES PURCHASE AGREEMENT
RELATING TO THE SERIES J CONVERTIBLE PREFERRED STOCK
Gentlemen:
Reference is made to (i) the Securities Purchase Agreement, dated
as of July 22, 1999 (the "Purchase Agreement"), among eSynch Corporation (the
"Company") and each of the purchasers listed on Schedule A attached hereto
(collectively, the "Purchasers"), (ii) the Registration Rights Agreement,
dated as of July 22, 1999 (the "Registration Rights Agreement"), among the
Company and the Purchasers, and (iii) the Escrow Agreement, dated as of July
22, 1999 (the "Escrow Agreement"), among the Company, the Purchasers and the
Escrow Agent named therein. Capitalized terms used and not otherwise defined
herein shall have the meanings respectively assigned to them in the Purchase
Agreement.
Each of the Purchasers and the Company agree and acknowledge that
as of the date of this letter agreement, the Purchasers have purchased in the
aggregate 250 shares of Preferred Stock and Warrants to purchase 187,500
shares of the Company's common stock, par value $.001 per share (the "Common
Stock") for an aggregate purchase price of $2,500,000.
Notwithstanding anything to the contrary contained in any of the
Transaction Documents, including but not limited to Section 1.1 of the
Purchase Agreement, each of the Purchasers, the Company and Talbiya
Investments Ltd. (the "Additional Purchaser") agrees and acknowledges that
the Company shall sell and issue to the Additional Purchaser, and the
Additional Purchaser agrees to purchase from the Company, 12.5 shares of
Preferred Stock and Warrants to purchase 9,375 shares of Common Stock for an
aggregate purchase price of $125,000 (the "Purchase Price"). Each of the
Purchasers, the Company and the Additional Purchaser agrees and acknowledges
that the Additional Purchaser shall become a party to the Purchase Agreement,
the Registration Rights Agreement and the Escrow Agreement and upon execution
of such documents and payment of the Purchase Price shall be considered a
"Purchaser" therein.
<PAGE>
Notwithstanding anything to the contrary contained herein or in any
of the Transaction Documents, each of the Company, the Purchasers and the
Additional Purchaser agrees and acknowledges that the term "Final Closing
Date" for purposes of the Purchase Agreement, the Registration Rights
Agreement and the other Transaction Documents shall mean September 30, 1999,
the closing date of the second tranche of $1,000,000 of Preferred Stock and
Warrants. Accordingly, the Filing Date (as that term is used in the
Registration Rights Agreement) of the Registration Statement shall mean
November 29, 1999 and the Effectiveness Date (as that term is used in the
Registration Rights Agreement) shall mean February 28, 2000.
Except as set forth in this letter agreement, this letter agreement
does not in any manner amend any of the Transaction Documents and the
Transaction Documents shall remain and continue in full force and effect.
Please acknowledge your agreement to the foregoing by signing in
the space provided below and returning an executed copy of this letter
agreement to the Company.
Very truly yours,
ESYNCH CORPORATION
By: Thomas E. Hemingway
---------------------------------------
Name: Thomas E. Hemingway
Title: CEO
AGREED AND ACKNOWLEDGED:
GILSTON CORPORATION, LTD.
By:
------------------------------
Name:
Title:
MANCHESTER ASSET MANAGEMENT, LTD.
By:
------------------------------
Name:
Title:
-2-
<PAGE>
TRITON PRIVATE EQUITY FUND L.P.
By: Triton Capital Management LLC, its General Partner
By:
------------------------------
Name:
Title:
AMRO INTERNATIONAL, S.A.
By:
------------------------------
Name:
Title:
ESQUIRE TRADE & FINANCE INC.
By:
------------------------------
Name:
Title:
AUSTINVEST ANSTALT BALZERS
By:
------------------------------
Name:
Title:
TALBIYA INVESTMENTS LTD.
By:
------------------------------
Name:
Title:
-3-
<PAGE>
SCHEDULE A
Gilston Corporation, Ltd.
Charlotte House
Charlotte Street
P.O. Box N-9204
Nassau, Bahamas
Tel. No.: (242)394-2700
Fax No: (242) 394-8348
Attn: Anthony L. M. Inder Rieden
Manchester Asset Management, Ltd.
Charlotte House
Charlotte Street
P.O. Box N-9204
Nassau, Bahamas
Tel. No.: (242) 394-2700
Fax No: (242) 394-8348
Attn: Anthony L. M. Inder Rieden
Triton Private Equity Fund L.P.
225 North Market Street, Suite 220
Wichita, Kansas 67202
Tel. No.: (316) 262-8874
Fax No.: (316) 262-6801
Attn: Mr. John C. Tausche
Amro International S.A.
40 Ultra Finance
Grossmuenster Platz #6
Zurich, Switzerland CH822
Tel. No.: (316) 262-8874
Fax No.: (316) 262-6801
Esquire Trade & Finance Inc.
Trident Chambers
P.O. Box 146
Road Town, Tortola, BVI
Tel. No.: 011-041-769-1069
Fax No: 011-041-760-1031
Attn: Roland Winiger
-4-
<PAGE>
Austinvest Anstalt Balzers
Landstrasse 938
9494 Furstentum
Vaduz/Liechtenstein
Austria
Tel. No.: 011-431-534-532951
Fax No: 011-431-534-532895
Attn: Walter Grill
Talbiya Investments Ltd.
Ragnall House
18 Peel Road
Douglas, Isle of Man
1M14L2 United Kingdom
Attn: David Grin
-5-
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of July 22, 1999, among eSynch Corporation, a Delaware
corporation (the "Company"), and each of the Purchasers listed on Schedule 1
attached hereto. Each of the Purchasers listed on Schedule I attached hereto
is referred to herein as a "PURCHASER" and are collectively referred to
herein as the "PURCHASERS."
This Agreement is being entered into pursuant to the Series J
Convertible Preferred Stock Purchase Agreement, dated as of the date hereof,
by and among the Company and the Purchasers (the "PURCHASE AGREEMENT").
The Company and the Purchasers hereby agree as follows:
1. DEFINITIONS.
Capitalized terms used and not otherwise defined herein shall have
the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"ADVICE" shall have the meaning set forth in Section 3(m).
"AFFILIATE" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "CONTROL,"
when used with respect to any Person, means the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities,
by contract or otherwise; and the terms of "AFFILIATED," "controlling" and
"CONTROLLED" have meanings correlative to the foregoing.
"BLACKOUT PERIOD" shall have the meaning set forth in Section 3(n).
"BOARD" shall have the meaning set forth in Section 3(n).
"BUSINESS DAY" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of California generally are authorized or required by law or other
government actions to close.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Company's Common Stock, par value $001 per
share.
"EFFECTIVENESS DATE" means with respect to the Registration
Statement the 15OTH day following the Final Closing Date.
1
<PAGE>
"EFFECTIVENESS PERIOD" shall have the meaning set forth in Section
2(a).
"EVENT" shall have the meaning set forth in Section 7(e)(i).
"EVENT DATE" shall have the meaning set forth in Section 7(e)(i).
"Exchange ACT" means the Securities Exchange Act of 1934, as amended
"FILING DATE" means the 60th day following the Final Closing Date.
"HOLDER" or "HOLDERS" means the holder or holders, as the case may
be, from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section
5(C).
"INDEMNIFYING PARTY" shall have the meaning set forth in Section
5(C).
"LOSSES" shall have the meaning set forth in Section 5(A).
"OTC BULLETIN BOARD" shall mean the over-the-counter electronic
bulletin board.
"PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"PREFERRED STOCK" means the Series J Convertible Preferred Stock,
par value $001 per share and stated value $10,000 per share, of the Company
issued to the Purchasers pursuant to the Purchase Agreement.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated under
the Securities Act), as amended or supplemented by any prospectus supplement,
with respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments
and supplements to the Prospectus, including post-effective amendments, and
all material incorporated by reference in such Prospectus.
"Registrable SECURITIES" means (i) the shares of Common Stock
issuable upon conversion of the Preferred Stock (the "Conversion Shares") and
exercise of the Warrants (the "Warrant Shares"), and upon any stock split,
stock dividend, recapitalization or similar event with respect to such
Conversion Shares, Warrant Shares or any Preferred Stock, (ii) the shares of
2
<PAGE>
Common Stock issuable upon exercise of warrants issued to the placement
advisor in connection with the sale of the Preferred Stock and the Warrants,
(iii) the shares of Common Stock issued upon any redemption of Preferred
Stock pursuant to Section 8 of the Certificate of Designation and (iv) any
other dividend or other distribution with respect to, conversion or exchange
of, or in replacement of, Registrable Securities; PROVIDED, HOWEVER, that
Registrable Securities shall include (but not be limited to) a number of
shares of Common Stock equal to no less than 200% of the maximum number of
shares of Common Stock which would be issuable upon conversion of the
Preferred Stock and upon exercise of the Warrants, assuming such conversion
and exercise occurred on the Final Closing Date or the Filing Date, whichever
date would result in the greater number of Registrable Securities.
Notwithstanding anything herein contained to the contrary, such registered
shares of Common Stock shall be allocated among the Holders pro rata based on
the total number of Registrable Securities issued or issuable as of each date
that a Registration Statement, as amended, relating to the resale of the
Registrable Securities is declared effective by the Commission.
Notwithstanding anything contained herein to the contrary, if the actual
number of shares of Common Stock issuable upon conversion of the Preferred
Stock and upon exercise of the Warrants exceeds 200% of the number of shares
of Common Stock issuable upon conversion of the Preferred Stock and upon
exercise of the Warrants based upon a computation as at the Final Closing
Date or the Filing Date, the term "Registrable Securities" shall be deemed to
include such additional shares of Common Stock.
"Registration STATEMENT" means the registration statements and any
additional registration statements contemplated by Section 2(a), including
(in each case) the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference
in such registration statement.
"RULE 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SPECIAL COUNSEL" means any special counsel to the Holders, for
which the Holders will be reimbursed by the Company pursuant to Section 4.
2. REGISTRATION
(a) REQUIRED REGISTRATION. On or prior to the Filing Date the
Company shall prepare and file with the Commission a Registration Statement
covering all Registrable Securities for
3
<PAGE>
an offering to be made on a continuous basis pursuant to Rule 415. The
Registration Statement shall be on Form SB-2 (except if the Company is not
then eligible to register for resale the Registrable Securities on Form SB-2,
in which case such registration shall be on another appropriate form in
accordance herewith). The Company shall (i) not permit any securities other
than the Registrable Securities to be included in the Registration Statement
and (ii) use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event prior to the Effectiveness Date, and to keep
such Registration Statement continuously effective under the Securities Act
until such date as is the earlier of (x) the date when all Registrable
Securities covered by such Registration Statement have been sold or (y) the
date on which the Registrable Securities may be sold without any restriction
pursuant to Rule 144(k) as determined by the counsel to the Company pursuant
to a written opinion letter, addressed to the Company's transfer agent to
such effect (the "EFFECTIVENESS PERIOD"). If an additional Registration
Statement is required to be filed because the actual number of shares of
Common Stock into which the Preferred Stock is convertible and the Warrants
are exercisable exceeds the number of shares of Common Stock initially
registered in respect of the Conversion Shares and the Warrant Shares based
upon the computation on the Final Closing Date, the Company shall have twenty
(20) Business Days to file such additional Registration Statement, and the
Company shall use its best efforts to cause such additional Registration
Statement to be declared effective by the Commission as soon as possible, but
in no event later than thirty (30) days after filing.
(b) SHELF REGISTRATION. As soon as possible but no later than
thirty (30) days after becoming eligible to file a registration statement for
a secondary or resale offering of the Registrable Securities on Form S-3, the
Company shall prepare and file with the Commission a post-effective amendment
to Form SB-2 (or such other applicable form filed in accordance with Section
2(a) above) on Form S-3 to continue the registration of all Registrable
Securities pursuant to a "shelf' Registration Statement on Form S-3 covering
all Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. Notwithstanding anything to the contrary contained
herein, at no time during the Effectiveness Period shall any of the
Registrable Securities cease being registered.
3. REGISTRATION PROCEDURES.
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement on Form SB-2 (or if the Company is not then
eligible to register for resale the Registrable Securities on Form SB-2 such
registration shall be on another appropriate form in accordance herewith) in
accordance with the method or methods of distribution thereof as specified by
the Holders (except if otherwise directed by the Holders), and cause the
Registration Statement to become effective and remain effective as provided
herein; PROVIDED, HOWEVER, that not less than five (5) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated therein by reference), the Company shall (i) furnish to the
Holders and any Special Counsel, copies of all such documents proposed to be
filed, which documents (other than those incorporated by reference) will be
subject to the review of such Holders and such Special Counsel, and (ii) at
the request of any
4
<PAGE>
Holder cause its officers and directors, counsel and independent certified
public accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of counsel to such Holders, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file the Registration Statement or any such Prospectus or any amendments or
supplements thereto to which the Holders of a majority of the Registrable
Securities or any Special Counsel shall reasonably object in writing within
three (3) Business Days of their receipt thereof
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare
and file with the Commission such additional Registration Statements in order
to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented
by any required Prospectus supplement, and as so supplemented or amended to
be filed pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; (iii) respond as promptly as possible
to any comments received from the Commission with respect to the Registration
Statement or any amendment thereto and as promptly as possible provide the
Holders true and complete copies of all correspondence from and to the
Commission relating to the Registration Statement; and (iv) comply in all
material respects with the provisions of the Securities Act and the Exchange
Act with respect to the disposition of all Registrable Securities covered by
the Registration Statement during the applicable period in accordance with
the intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold and any
Special Counsel as promptly as possible (and, in the case of (i)(A) below,
not less than five (5) Business Days prior to such filing) and (if requested
by any such Person) confirm such notice in writing no later than one (1)
Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is
proposed to be filed; (B) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement and (C) with
respect to the Registration Statement or any post-effective amendment, when
the same has become effective; (ii) of any request by the Commission or any
other Federal or state governmental authority for amendments or supplements
to the Registration Statement or Prospectus or for additional information;
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement covering any or all of the
Registrable Securities or the initiation of any Proceedings for that purpose;
(iv) if at any time any of the representations and warranties of the Company
contained in any agreement contemplated hereby ceases to be true and correct
in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement
made in the Registration Statement or Prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any material
respect or that requires any revisions to the Registration Statement,
Prospectus or other documents so that, in the case of the Registration
Statement or the Prospectus, as the case may be, it will not contain any
untrue statement of a material fact or omit to state any material fact
required
5
<PAGE>
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of, (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale
in any jurisdiction, at the earliest practicable moment.
(e) If requested by the Holders of a majority in interest of the
Registrable Securities, (i) promptly incorporate in a Prospectus supplement
or post-effective amendment to the Registration Statement such information as
the Company reasonably agrees should be included therein and (ii) make all
required filings of such Prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received notification
of the matters to be incorporated in such Prospectus supplement or
post-effective amendment.
(f) Furnish to each Holder and any Special Counsel, without charge,
at least one conformed copy of each Registration Statement and each amendment
thereto, including financial statements and schedules, all documents
incorporated or deemed to be incorporated therein by reference, and all
exhibits to the extent requested by such Person (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission.
(g) Promptly deliver to each Holder and any Special Counsel,
without charge, as many copies of the Prospectus or Prospectuses (including
each form of prospectus) and each amendment or supplement thereto as such
Persons may reasonably request; and the Company hereby consents to the use of
such Prospectus and each amendment or supplement thereto by each of the
selling Holders in connection with the offering and sale of the Registrable
Securities covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders and
any Special Counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder requests in writing, to
keep each such registration or qualification (or exemption therefrom)
effective during the Effectiveness Period and to do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions
of the Registrable Securities covered by a Registration Statement; PROVIDED,
HOWEVER, that the Company shall not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be sold
pursuant to a Registration Statement, which certificates shall be free of all
restrictive legends, and to enable such Registrable Securities to
6
<PAGE>
be in such denominations and registered in such names as any Holder may
request at least two (2) Business Days prior to any sale of Registrable
Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as possible, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, and file any other required document
so that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the OTC Bulletin
Board and any other securities exchange, quotation system, market or
over-the-counter bulletin board, if any, on which similar securities issued
by the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any
12-month period (or 90 days after the end of any 12-month period if such
period is a fiscal year) commencing on the first day of the first fiscal
quarter of the Company after the effective date of the Registration
Statement, which statement shall conform to the requirements of Rule 158.
(m) Require each selling Holder to furnish to the Company
information regarding such Holder and the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration
Statement, and the Company may exclude from such registration the Registrable
Securities of any such Holder who fails to furnish such information within a
reasonable time prior to the filing of each Registration Statement,
supplemented Prospectus and/or amended Registration Statement.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (if such reference to such Holder by name or
otherwise is not required by the Securities Act or any similar federal
statute then in force) the deletion of the reference to such Holder in any
amendment or supplement to the Registration Statement filed or prepared
subsequent to the time that such reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated
by Section 3(c) and (ii) it and its officers, directors or Affiliates, if
any, will comply with the prospectus delivery requirements of the Securities
Act as applicable to them in connection with sales of Registrable Securities
pursuant to the Registration Statement.
7
<PAGE>
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence
of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of
such Registrable Securities under the Registration Statement until such
Holder's receipt of the copies of the supplemented Prospectus and/or amended
Registration Statement contemplated by Section 3(j), or until it is advised
in writing (the "Advice") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.
(n) If (i) there is material non-public information regarding the
Company which the Company's Board of Directors (the "Board") reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including, but not limited to, the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available
to the Company which the Board reasonably determines not to be in the
Company's best interest to disclose and which the Company would be required
to disclose under the Registration Statement, then the Company may postpone
or suspend filing or effectiveness of a registration statement for a period
not to exceed 20 consecutive days, provided that the Company may not postpone
or suspend its obligation under this Section 3(n) for more than 45 days in
the aggregate during any 12 month period (each, a "BLACKOUT PERIOD");
PROVIDED, HOWEVER, that no such postponement or suspension shall be permitted
for consecutive 20 day periods, arising out of the same set of facts,
circumstances or transactions.
4. REGISTRATION EXPENSES
All fees and expenses incident to the performance of or compliance
with this Agreement by the Company shall be borne by the Company whether or
not the Registration Statement is filed or becomes effective and whether or
not any Registrable Securities are sold pursuant to the Registration
Statement. The fees and expenses referred to in the foregoing sentence shall
include, without limitation, (i) all registration and filing fees (including,
without limitation, fees and expenses (A) with respect to filings required to
be made with the OTC Bulletin Board and each other securities exchange or
market on which Registrable Securities are required hereunder to be listed,
(B) with respect to filings required to be made with the Commission, (C) with
respect to filings required to be made under the OTC Bulletin Board and (C)
in compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of counsel for the Holders in connection
with Blue Sky qualifications of the Registrable Securities and determination
of the eligibility of the Registrable Securities for investment under the
laws of such jurisdictions as the Holders of a majority of Registrable
Securities may designate)), (ii) printing expenses (including, without
limitation, expenses of printing certificates for Registrable Securities and
of printing prospectuses if the printing of prospectuses is requested by the
holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses,
(iv) fees and disbursements of counsel for the Company and Special Counsel
for the Holders, in the case of the Special Counsel, to a maximum amount of
$25,000, (v) Securities Act liability insurance, if the Company so desires
such insurance, and (vi) fees and expenses of all other Persons retained by
the Company in connection with the consummation of the transactions
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contemplated by this Agreement, including, without limitation, the Company's
independent public accountants (including the expenses of any comfort letters
or costs associated with the delivery by independent public accountants of a
comfort letter or comfort letters). In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.
5. INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold
harmless each Holder, the officers, directors, agents, brokers (including
brokers who offer and sell Registrable Securities as principal as a result of
a pledge or any failure to perform under a margin call of Common Stock),
investment advisors and employees of each of them, each Person who controls
any such Holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation and
attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising
out of or relating to any untrue or alleged untrue statement of a material
fact contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they were
made) not misleading, except to the extent, but only to the extent, that such
untrue statements or omissions are based solely upon information regarding
such Holder furnished in writing to the Company by such Holder expressly for
use therein, which information was reasonably relied on by the Company for
use therein or to the extent that such information relates to such Holder or
such Holder's proposed method of distribution of Registrable Securities and
was reviewed and expressly approved in writing by such Holder expressly for
use in the Registration Statement, such Prospectus or such form of Prospectus
or in any amendment or supplement thereto. The Company shall notifythe
Holders promptly of the institution, threat or assertion of any Proceeding of
which the Company is aware in connection with the transactions contemplated
by this Agreement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of an Indemnified Party
and shall survive the transfer of the Registrable Securities by the Holders.
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, the directors,
officers, agents and employees, each Person who controls the Company (within
the meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act), and the directors, officers, agents or employees of such
controlling Persons, to the fullest extent permitted by applicable law, from
and against all Losses, as incurred, arising solely out of or based solely
upon any untrue statement of a material fact contained in the Registration
Statement, any Prospectus, or any form of prospectus, or arising solely out
of or based solely upon any omission of a material fact required to be stated
therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in the light of the
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<PAGE>
circumstances under which they were made) not misleading, to the extent, but
only to the extent, that such untrue statement or omission is contained in or
omitted from any information so furnished in writing by such Holder to the
Company specifically for inclusion in the Registration Statement or such
Prospectus and that such information was reasonably relied upon by the
Company for use in the Registration Statement, such Prospectus or such form
of prospectus or to the extent that such information relates to such Holder
or such Holder's proposed method of distribution of Registrable Securities
and was reviewed and expressly approved in writing by such Holder expressly
for use in the Registration Statement, such Prospectus or such form of
Prospectus Supplement. Notwithstanding anything to the contrary contained
herein, the Holder shall be liable under this Section 5(b) for only that
amount as does not exceed the net proceeds to such Holder as a result of the
sale of Registrable Securities pursuant to such Registration Statement.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall
be brought or asserted against any Person entitled to indemnity hereunder (an
"INDEMNIFIED PARTY"), such Indemnified Party promptly shall notify the Person
from whom indemnity is sought (the "Indemnifying PARTY) in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment
of counsel reasonably satisfactory to the Indemnified Party and the payment
of all fees and expenses incurred in connection with defense thereof,
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant
to this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall
have failed promptly to assume the defense of such Proceeding and to employ
counsel reasonably satisfactory to such Indemnified Party in any such
Proceeding; or (3) the named parties to any such Proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall have been advised by counsel that a
conflict of interest is likely to exist if the same counsel were to represent
such Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects
to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within
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ten (10) Business Days of written notice thereof to the Indemnifying Party
(regardless of whether it is ultimately determined that an Indemnified Party
is not entitled to indemnification hereunder provided, that the Indemnifying
Party may require such Indemnified Party to undertake to reimburse all such
fees and expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section 5(a)
or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then
each Indemnifying Party, in lieu of indemnifying such Indemnified Party,
shall contribute to the amount paid or payable by such Indemnified Party as a
result of such Losses, in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party and Indemnified Party in connection
with the actions, statements or omissions that resulted in such Losses as
well as any other relevant equitable considerations. The relative fault of
such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or omission or
alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying, Party or Indemnified Party, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action, statement or omission. The
amount paid or payable by a party as a result of any Losses shall be deemed
to include, subject to the limitations set forth in Section 5(c), any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification provided
for in this Section was available to such party in accordance with its terms.
Notwithstanding anything to the contrary contained herein, the Holder shall
be liable or required to contribute under this Section 5(c) for only that
amount as does not exceed the net proceeds to such Holder as a result of the
sale of Registrable Securities pursuant to such Registration Statement.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11 (f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to
the Indemnified Parties
6. RULE 144.
As long as any Holder owns Preferred Shares, Conversion Shares,
Warrants or Warrant Shares, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period)
all reports required to be filed by the Company after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly
furnish the Holders with true and complete copies of all such filings. As
long as any Holder owns Preferred Shares, Conversion Shares, Warrants or
Warrant Shares, if the Company is not required to file reports
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<PAGE>
pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare and
furnish to the Holders and make publicly available in accordance with Rule
144(c) promulgated under the Securities Act annual and quarterly financial
statements, together with a discussion and analysis of such financial
statements in form and substance substantially similar to those that would
otherwise be required to be included in reports required by Section 13(a) or
15(d) of the Exchange Act, as well as any other information required thereby,
in the time period that such filings would have been required to have been
made under the Exchange Act. The Company further covenants that it will take
such further action as any Holder may reasonably request, all to the extent
required from time to time to enable such Person to sell Conversion Shares
and Warrant Shares without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 promulgated under the
Securities Act, including providing any legal opinions of counsel to the
Company referred to in the Purchase Agreement. Upon the request of any
Holder, the Company shall deliver to such Holder a written certification of a
duly authorized officer as to whether it has complied with such requirements.
7. MISCELLANEOUS.
(a) REMEDIES. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement. The Company and each Holder agree that monetary damages would not
provide adequate compensation for any losses incurred by reason of a breach
by it of any of the provisions of this Agreement and hereby further agrees
that, in the event of any action for specific performance in respect of such
breach, it shall waive the defense that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of its
subsidiaries has, as of the date hereof entered into and currently in effect,
nor shall the Company or any of its subsidiaries, on or after the date of
this Agreement, enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof except for registration rights
provisions disclosed in the Company's Disclosure Schedule to the Purchase
Agreement. Except for registration rights provisions disclosed in the
Company's Disclosure Schedule to the Purchase Agreement, neither the Company
nor any of its subsidiaries has previously entered into any agreement
currently in effect granting any registration rights with respect to any of
its securities to any Person. Without limiting the generality of the
foregoing, without the written consent of the Holders of a majority of the
then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject in
all respects to the prior rights in full of the Holders set forth herein, and
are not otherwise in conflict with the provisions of this Agreement. This
Section 7(b) shall not prohibit the Company from entering into any agreements
concerning the registration of securities on Form S-8 or Form S-4
(c) NO PIGGYBACK ON REGISTRATIONS. Neither the Company nor any of
its security holders (other than the Holders in such capacity pursuant
hereto) may include securities of the Company in the Registration Statement,
and the Company shall not after the date hereof enter into any agreement
providing such right to any of its security holders, unless the right so
granted is subject
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in all respects to the prior rights in full of the Holders set forth herein,
and is not otherwise in conflict with the provisions of this Agreement.
(d) PIGGY-BACK REGISTRATIONS. If at any time when there is not an
effective Registration Statement covering (i) Conversion Shares or (ii)
Warrant Shares, the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated
under the Securities Act) or its then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with stock
option or other employee benefit plans, the Company shall send to each holder
of Registrable Securities written notice of such determination and, if within
thirty (30) days after receipt of such notice, any such holder shall so
request in writing (which request shall specify the Registrable Securities
intended to be disposed of by the Purchasers), the Company will cause the
registration under the Securities Act of all Registrable Securities which the
Company has been so requested to register by the holder, to the extent
requisite to permit the disposition of the Registrable Securities so to be
registered, provided that if at any time after giving written notice of its
intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register or to delay
registration of such securities, the Company may, at its election, give
written notice of such determination to such holder and, thereupon, (i) in
the case of a determination not to register, shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay expenses in accordance with
Section 4 hereof), and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable
Securities being registered pursuant to this Section 7(d) for the same period
as the delay in registering such other securities. The Company shall include
in such registration statement all or any part of such Registrable Securities
such holder requests to be registered; PROVIDED, HOWEVER, that the Company
shall not be required to register any Registrable Securities pursuant to this
Section 7(d) that are eligible for sale pursuant to Rule 144(k) of the
Securities Act. In the case of an underwritten public offering, if the
managing underwriter(s) or underwriter(s) should reasonably object to the
inclusion of the Registrable Securities in such registration statement, then
if the Company after consultation with the managing underwriter should
reasonably determine that the inclusion of such Registrable Securities, would
materially adversely affect the offering contemplated in such registration
statement, and based on such determination recommends inclusion in such
registration statement of fewer or none of the Registrable Securities of the
Holders, then (x) the number of Registrable Securities of the Holders
included in such registration statement shall be reduced pro-rata among such
Holders (based upon the number of Registrable Securities requested to be
included in the registration), if the Company after consultation with the
underwriter(s) recommends the inclusion of fewer Registrable Securities, or
(y) none of the Registrable Securities of the Holders shall be included in
such registration statement, if the Company after consultation with the
underwriter(s) recommends the inclusion of none of such Registrable
Securities; PROVIDED, HOWEVER, that if securities are being offered for the
account of other persons or entities as well as the Company, such reduction
shall not represent a greater fraction of the number of Registrable
Securities intended to be offered by the Holders than the fraction of similar
reductions imposed on such other persons or entities (other than the Company).
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(e) FAILURE TO FILE REGISTRATION STATEMENT AND OTHER EVENTS. The
Company and the Purchasers agree that the Holders will suffer damages if the
Registration Statement is not filed on or prior to the Filing Date and not
declared effective by the Commission on or prior to the Effectiveness Date
and maintained in the manner contemplated herein during the Effectiveness
Period or if certain other events occur. The Company and the Holders further
agree that it would not be feasible to ascertain the extent of such damages
with precision. Accordingly, if (i) the Registration Statement is not filed
on or prior to the Filing Date, or is not declared effective by the
Commission on or prior to the Effectiveness Date (or in the event an
additional Registration Statement is filed because the actual number of
shares of Common Stock into which the Preferred Stock is convertible and the
Warrants are exercisable exceeds the number of shares of Common Stock
initially registered is not filed and declared effective within the time
periods set forth in Section 2(a)), or (ii) the Company fails to file with
the Commission a request for acceleration in accordance with Rule 1 2d1-2
promulgated under the Exchange Act within five (5) Business Days of the date
that the Company is notified (orally or in writing, whichever is earlier) by
the Commission that a Registration Statement will not be "reviewed," or not
subject to further review, or (iii) the Registration Statement is filed with
and declared effective by the Commission but thereafter ceases to be
effective as to all Registrable Securities at any time prior to the
expiration of the Effectiveness Period, without being succeeded immediately
by a subsequent Registration Statement filed with and declared effective by
the Commission, or (iv) trading in the Common Stock shall be suspended or if
the Common Stock is delisted from the OTC Bulletin Board for any reason for
more than three Business Days in the aggregate, or (v) the conversion rights
of the Holders are suspended for any reason, including by the Company, or
(vi) the Company breaches in a material respect any covenant or other
material term or condition to this Agreement, the Certificate of Designation,
the Purchase Agreement (other than a representation or warranty contained
therein) or any other agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated hereby and
thereby, and such breach continues for a period of thirty days after written
notice thereof to the Company, or (vii) the Company has breached Section 3(n)
of this Agreement (any such failure or breach being referred to as an
Event"), the Company shall pay in cash as liquidated damages for such failure
and not as a penalty to each Holder an amount equal to 2% of such Holder's
pro rata share of the purchase price paid by all Holders for all shares of
Series J Preferred Stock purchased and then outstanding pursuant to the
Purchase Agreement for the initial thirty (30) day period until the
applicable Event has been cured, which shall be pro rated for such periods
less than thirty (30) days and 3% of such Holder's pro rata share of the
purchase price paid by all Holders forall shares of Series J Preferred Stock
purchased and then outstanding pursuant to the Purchase Agreement for each
subsequent thirty (30) day period, until the applicable Event has been cured,
which shall be pro rated for such periods less than thirty (30) days (the
"Periodic Amount"). Payments to be made pursuant to this Section 7(e) shall
be due and payable immediately upon demand in immediately available funds.
The parties agree that the Periodic Amount represents a reasonable estimate
on the part of the parties, as of the date of this Agreement, of the amount
of damages that may be incurred by the Holders if the Registration Statement
is not filed on or prior to the Filing Date or has not been declared
effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Period
or if any other Event as described herein has occurred.
(f) SPECIFIC ENFORCEMENT, CONSENT TO JURISDICTION.
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(i) The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of
this Registration Rights Agreement or the Purchase Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent or cure breaches of the provisions of this
Registration Rights Agreement or the Purchase Agreement and to enforce
specifically the terms and provisions hereof or thereof, this being in
addition to any other remedy to which any of them may be entitled by law or
equity.
(ii) Each of the Company and the Purchasers (i) hereby
irrevocably submits to the jurisdiction of the United States District Court
sitting in the Southern District of New York for the purposes of any suit,
action or proceeding arising out of or relating to this Agreement or the
Purchase Agreement and (ii) hereby waives, and agrees not to assert in any
such suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of such court, that the suit, action or proceeding is
brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper. Each of the Company and the Purchasers consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof Nothing in this Section 7(f) shall
affect or limit any right to serve process in any other manner permitted by
law.
(g) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may not be given, unless the same shall be in writing and signed by
the Company and each of the Holders. Notwithstanding the foregoing, a waiver
or consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders and that does not directly or
indirectly affect the rights of other Holders may be given by Holders of at
least a majority of the Registrable Securities to which such waiver or
consent relates; PROVIDED, HOWEVER, that the provisions of this sentence may
not be amended, modified, or supplemented except in accordance with the
provisions of the immediately preceding sentence.
(h) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earlier of (i) the date of
transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified for notice prior to 5:00 p.m.,
pacific standard time, on a Business Day, (ii) the Business Day after the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified for notice later than
5:00 p.m., pacific standard time, on any date and earlier than 11:59 p.m.,
pacific time, on such date, (iii) the Business Day following the date of
mailing, if sent by nationally recognized overnight courier service or (iv)
actual receipt by the party to whom such notice is required to be given. The
addresses for such communications shall be with respect to each Holder at its
address set forth under its name on SCHEDULE I attached hereto, or with
respect to the Company, addressed to:
eSynch Corporation
15502 Mosher Avenue
Tustin, California 92780
Attention: Thomas Hemingway, CEO
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Telephone No.: (714) 258-1900
Facsimile No.: (714) 258-7177
or to such other address or addresses or facsimile number or numbers as any
such party may most recently have designated in writing to the other parties
hereto by such notice. Copies of notices to any Holder shall be sent to the
addresses listed on Schedule 1 attached hereto, if applicable. Copies of
notices to the Company shall be sent to Stradling Yocca Carlson & Rauth, PC,
660 Newport Center Drive, Suite 1600, Newport Beach, California 92660,
Attention: Nicholas J. Yocca, Esq., Telephone No.: (949) 725-4120, Facsimile
No.: (949) 823-5120. Copies of notices to the Holders shall be sent to (i)
Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New York,
New York 10036, Attention: Christopher S. Auguste, Esq., Telephone No.: (212)
704-6000, Facsimile No.: (212) 704-6288 and (ii) H. Glenn Bagwell, Jr., Esq.,
3005 Anderson Drive, Suite 204, Raleigh, N.C. 27609, Telephone No.: (919)
785-3113, Facsimile No.: (919) 785-3116..
(i) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns and shall inure to the benefit of each Holder and its successors and
assigns. The Company may not assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of each Holder. Each
Purchaser may assign its rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
(j) ASSIGNMENT OF REGISTRATION RIGHTS. The rights of each Holder
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall
be automatically assignable by each Holder to any transferee of such Holder
of all or a portion of the shares of Preferred Stock or the Registrable
Securities if: (i) the Holder agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to
the Company within a reasonable time after such assignment, (ii) the Company
is, within a reasonable time after such transfer or assignment, furnished
with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to which such registration
rights are being transferred or assigned, (iii) following such transfer or
assignment the further disposition of such securities by the transferee or
assignees is restricted under the Securities Act and applicable state
securities laws, (iv) at or before the time the Company receives the written
notice contemplated by clause (ii) of this Section, the transferee or
assignee agrees in writing with the Company to be bound by all of the
provisions of this Agreement, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement. In
addition, each Holder shall have the right to assign its rights hereunder to
any other Person with the prior written consent of the Company, which consent
shall not be unreasonably withheld. The rights to assignment shall apply to
the Holders (and to subsequent) successors and assigns.
(k) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party. executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such facsimile signature were the
original thereof
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(l) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
regard to principles of conflicts of law thereof
(m) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(n) SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held to be invalid, illegal, void or unenforceable in
any respect, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties hereto shall
use their reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by
such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any
of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(o) HEADINGS. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof
(p) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company
or its Affiliates (other than any Holder or transferees or successors or
assigns thereof if such Holder is deemed to be an Affiliate solely by reason
of its holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage and shall not be counted as outstanding.
(q) NOTICE OF EFFECTIVENESS. Within two (2) business days after
the Registration Statement which includes the Registrable Securities is
ordered effective by the Commission, the Company shall deliver, and shall
cause legal counsel for the Company to deliver, to the transfer agent for
such Registrable Securities (with copies to the Holders whose Registrable
Securities are included in such Registration Statement) confirmation that the
Registration Statement has been declared effective by the Commission in the
form attached hereto as EXHIBIT A.
[Remainder of Page Intentionally Left Blank]
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed by their respective authorized persona
as of the date first indicated above.
ESYNCH CORPORATION
By: Thomas Hemingway
Name: Thomas Hemingway
Title: CEO
GILSTON CORPORATION, LTD.
By: Anthony L.M. Inder Rieden
Name: Anthony L.M. Inder Rieden
Title: Director
MANCHESTER ASSET MANAGEMENT, LTD.
By: Dawn E. Davies
Name: Dawn E. Davies
Title: Director
TRITON PRIVATE EQUITY FUND L.P.
TRITON CAPITAL MANAGEMENT, LLC (G.P.)
By: John C. Tausche
Name: John C. Tausche
Title: Managing Member of G.P.
AMRO INTERNATIONAL, S.A.
By: H.U. Bachofen
Name: H.U. Bachofen
Title: Director
ESQUIRE TRADE & FINANCE INC.
By: Roland Winiger
Name: Roland Winiger
Title: Director
AUSTINVEST ANSTALT BALZERS
By: Walter Grill
Name: Walter Grill
Title: Director
TALBIYA INVESTMENTS LTD.
By: David Grin
Name: David Grin
Title: Director
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
Interwest Transfer Co., Inc.
1981 E. Murray Holladay Road
Salt Lake City, UT 84117
Attn: ______________
Re: ESYNCH CORPORATION Ladies and Gentlemen:
We are counsel to eSynch Corporation, a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Series J Convertible Preferred Stock Purchase Agreement (the "Purchase
Agreement"), dated as of July __ 1999, by and among the Company and the
purchasers named therein (collectively, the "Holders") pursuant to which the
Company issued to the Holders shares of its Series J Convertible Preferred
Stock, par value $.001 per share, (the "Preferred Shares") and may issue
warrants (the "Warrants") to purchase shares of the Company's common stock,
par value $.001 per share (the "Common Stock"). Pursuant to the Purchase
Agreement, the Company has also entered into a Registration Rights Agreement
with the Holders (the "Registration Rights Agreement"), dated as of July __,
1999, pursuant to which the Company agreed, among other things, to register
the Registrable Securities (as defined in the Registration Rights Agreement),
including the shares of Common Stock issuable upon conversion of the
Preferred Shares and exercise of the Warrants, under the Securities Act of
1933, as amended (the "1933 Act"). In connection with the Company's
obligations under the Registration Rights Agreement, on ____________ ___,
1999, the Company filed a Registration Statement on Form ___ (File No.
333-______) (the "Registration Statement") with the Securities and Exchange
Commission (the "SEC") relating to the resale of the Registrable Securities
which names each of the Holders as a selling stockholder thereunder
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at
[ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no
knowledge, after telephonic inquiry of a member of the SEC's staff, that any
stop order suspending its effectiveness has been issued or that any
proceedings for that purpose are pending before, or threatened by, the SEC
and the Registrable Securities are available for resale under the 1933 Act
pursuant to the Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By:
cc: [LIST NAMES OF HOLDERS]
<PAGE>
SCHEDULE 1 to the
REGISTRATION RIGHTS AGREEMENT
FOR ESYNCH CORP.
NAMES AND ADDRESS OF PURCHASERS
- -------------------------------
Gilston Corporation, Ltd.
Charlotte House
Charlotte Street
P.O. Box N-9204
Nassau, Bahamas
Tel. No.: (242)394-2700
Fax No: (242) 394-8348
Attn: Anthony L. M. Inder Rieden
Manchester Asset Management, Ltd.
Charlotte House
Charlotte Street
P.O. Box N-9204
Nassau, Bahamas
Tel. No.: (242) 394-2700
Fax No: (242) 394-8348
Attn: Anthony L. M. Inder Rieden
Triton Private Equity Fund L.P.
c/o Triton Capital Management, L.L.C.
225 North Market Street, Suite 220
Wichita, Kansas 67202
Attn: Mr. John C. Tausche
Tel. No.: (316) 262-8874
Fax No.: (316) 262-6801
Amro Internationa, S.A.
40 Ultra Finance
Grossmuenster Platz #6
Zurich, Switzerland CH822
Attn: H.U. Bachofen
Fax No. 011-411-262-5515
<PAGE>
SCHEDULE 1 to the
REGISTRATION RIGHTS AGREEMENT
FOR ESYNCH CORP.
(continued)
NAMES AND ADDRESS OF PURCHASERS
- -------------------------------
Esquire Trade & Finance Inc.
Trident Chambers
P.O. Box 146
Road Town, Tortola, BVI
Tel. No.: 011-041-769-1069
Fax No: 011-041-760-1031
Attn: Roland Winiger
Austinvest Anstalt Balzers
Landstrasse 938
9494 Furstentum
Vaduz/Liechtenstein
Austria
Tel. No.: 011-431-534-532951
Fax No: 011-431-534-532895
Attn: Walter Grill
Talbiya Investments Ltd.
Ragnall House
18 Peel Road
Douglas, Isle of Man
1M14L2 United Kingdom
Tel. No.: 011-972-354-64891
Fax No: 011-972-360-50756
Attn: David Grin
<PAGE>
WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR ESYNCH CORPORATION SHALL HAVE RECEIVED
AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER
THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
ESYNCH CORPORATION
Expires [B]________, 2002
No.: W-J-[A] Number of Shares: [C]___
Date of Issuance: [D]_____, 1999
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, eSynch Corporation, a Delaware corporation (together with its
successors and assigns, the "Issuer"), hereby certifies that
[E]________________________ or its registered assigns is entitled to subscribe
for and purchase, during the period specified in this Warrant, up to [C]______
shares (subject to adjustment as hereinafter provided) of the duly authorized,
validly issued, fully paid and non-assessable Common Stock of the Issuer, at an
exercise price per share equal to the Warrant Price then in effect, subject,
however, to the provisions and upon the terms and conditions hereinafter set
forth. Capitalized terms used in this Warrant and not otherwise defined herein
shall have the respective meanings specified in Section 7 hereof
1. Term. The right to subscribe for and purchase shares of Warrant
Stock represented hereby shall commence on the date of issuance of this Warrant
and shall expire at 5:00 p.m., pacific time, on [B]_________, 2002 (such period
being the "Term").
2. METHOD OF EXERCISE PAYMENT: ISSUANCE OF NEW WARRANT: TRANSFER AND
EXCHANGE.
(a) TIME OF EXERCISE. The purchase rights represented by this Warrant
may be exercised in whole or in part at any time and from time to time during
the Term.
<PAGE>
(b) METHOD OF EXERCISE. The Holder hereof may exercise this Warrant,
in whole or in part, by the surrender of this Warrant (with the exercise form
attached hereto duly executed) at the principal office of the Issuer, and by the
payment to the Issuer of an amount of consideration therefor equal to the
Warrant Price in effect on the date of such exercise multiplied by the number of
shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable at such Holder's election (i) by certified or official bank
check or (ii) by surrender to the Issuer for cancellation of a portion of this
Warrant representing that number of unissued shares of Warrant Stock which is
equal to the quotient obtained by dividing (A) the product obtained by
multiplying the Warrant Price by the number of shares of Warrant Stock being
purchased upon such exercise by (B) the difference obtained by subtracting the
Warrant Price from the Per Share Market Value as of the date of such exercise,
or (iii) by a combination of the foregoing methods of payment selected by the
Holder of this Warrant. In any case where the consideration payable upon such
exercise is being paid in whole or in part pursuant to the provisions of clause
(ii) of this subsection (b), such exercise shall be accompanied by written
notice from the Holder of this Warrant specifying the manner of payment thereof
and containing a calculation showing the number of shares of Warrant Stock with
respect to which rights are being surrendered thereunder and the net number of
shares to be issued after giving effect to such surrender.
(c) ISSUANCE OF STOCK CERTIFICATES. In the event of any exercise of
the rights represented by this Warrant in accordance with and subject to the
terms and conditions hereof, (i) certificates for the shares of Warrant Stock so
purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Stock so purchased as of the date of such
exercise, and (ii) unless this Warrant has expired, a new Warrant representing
the number of shares of Warrant Stock, if any, with respect to which this
Warrant shall not then have been exercised (less any amount thereof which shall
have been canceled in payment or partial payment of the Warrant Price as
hereinabove provided) shall also be issued to the Holder hereof at the Issuer's
expense within such time.
(d) TRANSFERABILITY OF WARRANT. Subject to Section 2(e), this Warrant
may be transferred by a Purchaser without the consent of the Company. If
transferred pursuant to this paragraph and subject to the provisions of
subsection (e) of this Section 2, this Warrant may be transferred on the books
of the Issuer by the Holder hereof in person or by duly authorized attorney,
upon surrender of this Warrant at the principal office of the Issuer, properly
endorsed (by the Holder executing an assignment in the form attached hereto) and
upon payment of any necessary transfer tax or other governmental charge imposed
upon such transfer. This Warrant is exchangeable at the principal office of the
Issuer for Warrants for the purchase of the same aggregate number of shares of
Warrant Stock, each new Warrant to represent the right to purchase such number
of shares of Warrant Stock as the Holder hereof shall designate at the time of
such exchange. All Warrants issued on transfers or exchanges shall be dated the
Original Issue Date and shall be identical with this Warrant except as to the
number of shares of Warrant Stock issuable pursuant hereto.
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<PAGE>
(e) COMPLIANCE WITH SECURITIES LAWS.
(i) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant or the shares of Warrant Stock to be
issued upon exercise hereof are being acquired solely for the Holder's
own account and not as a nominee for any other party, and for investment,
and that the Holder will not offer, sell or otherwise dispose of this
Warrant or any shares of Warrant Stock to be issued upon exercise hereof
except pursuant to an effective registration statement, or an exemption
from registration, under the Securities Act and any applicable state
securities laws.
(ii) Except as provided in paragraph (iii) below, this Warrant
and all certificates representing shares of Warrant Stock issued upon
exercise hereof shall be stamped or imprinted with a legend in
substantially the following form:
THIS WARRANT AND THE SHARES OF COMMON
STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF UNLESS REGISTERED
UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR ESYNCH CORPORATION
SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL
THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
(iii) The restrictions imposed by this subsection (e) upon the
transfer of this Warrant or the shares of Warrant Stock to be purchased
upon exercise hereof shall terminate (A) when such securities shall have
been resold pursuant to being effectively registered under the Securities
Act, (B) upon the Issuer's receipt of an opinion of counsel, in form and
substance reasonably satisfactory to the Issuer, addressed to the Issuer
to the effect that such restrictions are no longer required to ensure
compliance with the Securities Act and state securities laws or (C) upon
the Issuer's receipt of other evidence reasonably satisfactory to the
Issuer that such registration and qualification under state securities
laws is not required. Whenever such restrictions shall cease and
terminate as to any such securities, the Holder thereof shall be entitled
to receive from the Issuer (or its transfer agent and registrar), without
expense (other than applicable transfer taxes, if any), new Warrants (or,
in the case of shares of Warrant Stock, new stock certificates) of like
tenor not bearing the applicable legend required by paragraph (ii) above
relating to the Securities Act and state securities laws.
(f) CONTINUING RIGHTS OF HOLDER. The Issuer will, at the time of or at
any time after each exercise of this Warrant, upon the request of the Holder
hereof, acknowledge in writing the extent, if any, of its continuing obligation
to afford to such Holder all rights to which such Holder shall continue to be
entitled after such exercise in accordance with the terms of this Warrant,
PROVIDED that
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<PAGE>
if any such Holder shall fail to make any such request, the failure shall not
affect the continuing obligation of the Issuer to afford such rights to such
Holder.
3. STOCK FULLY PAID: RESERVATION AND LISTING OF SHARES: COVENANTS.
(a) STOCK FULLY PAID. The Issuer represents, warrants, covenants and
agrees that all shares of Warrant Stock which may be issued upon the exercise of
this Warrant or otherwise hereunder will, upon issuance, be duly authorized,
validly issued, fully paid and non-assessable and free from all taxes, liens and
charges created by or through Issuer. The Issuer further covenants and agrees
that during the period within which this Warrant may be exercised, the Issuer
will at all times have authorized and reserved for the purpose of the issue upon
exercise of this Warrant a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
(b) RESERVATION. If any shares of Common Stock required to be reserved
for issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this Warrant shall be entitled to receive upon the exercise of this Warrant
if at the time any securities of the same class shall be listed on such
securities exchange or market by the Issuer.
(c) COVENANTS. The Issuer shall not by any action including, without
limitation, amending the Certificate of Incorporation or the by-laws of the
Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to
protect the rights of the Holder hereof against dilution (to the extent
specifically provided herein) or impairment. Without limiting the generality of
the foregoing, the Issuer will (i) not permit the par value, if any, of its
Common Stock to exceed the then effective Warrant Price, (ii) not amend or
modify any provision of the Certificate of Incorporation or by-laws of the
Issuer in any manner that would adversely affect in any way the powers,
preferences or relative participating, optional or other special rights of the
Common Stock or which would adversely affect the rights of the Holders of the
Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, claims, encumbrances and
restrictions (other than as provided herein) upon the exercise of this Warrant,
and (iv) use its best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
reasonably necessary to enable the Issuer to perform its obligations under this
Warrant.
-4-
<PAGE>
(d) LOSS. THEFT. DESTRUCTION OF WARRANTS. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
(e) RIGHTS AND OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENT.
The shares of Warrant Stock are entitled to the benefits and subject to the
terms of the Registration Rights Agreement dated as of even date herewith
between the Issuer and the Holders listed on the signature pages thereof (as
amended from time to time, the "Registration Rights Agreement"). The Issuer
shall keep or cause to be kept a copy of the Registration Rights Agreement, and
any amendments thereto, at its chief executive office and shall furnish, without
charge, copies thereof to the Holder upon request.
4. ADJUSTMENT OF WARRANT PRICE AND WARRANT SHARE NUMBER. The number
and kind of Securities purchasable upon the exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events as follows:
(a) RECAPITALIZATION, REORGANIZATION, RECLASSIFICATION, CONSOLIDATION,
MERGER OR SALE. (i) In case the Issuer after the Original Issue Date shall do
any of the following (each, a "Triggering Event"): (a) consolidate with or merge
into any other Person and the Issuer shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) permit any other Person to
consolidate with or merge into the Issuer and the Issuer shall be the continuing
or surviving Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged for Securities of
any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect
a capital reorganization or reclassification of its Capital Stock, then, and in
the case of each such Triggering Event, proper provision shall be made so that,
upon the basis and the terms and in the manner provided in this Warrant, the
Holder of this Warrant shall be entitled (x) upon the exercise hereof at any
time after the consummation of such Triggering Event, to the extent this Warrant
is not exercised prior to such Triggering Event, to receive at the Warrant Price
in effect at the time immediately prior to the consummation of such Triggering
Event in lieu of the Common Stock issuable upon such exercise of this Warrant
prior to such Triggering Event, the Securities, cash and property to which such
Holder would have been entitled upon the consummation of such Triggering Event
if such Holder had exercised the rights represented by this Warrant immediately
prior thereto, subject to adjustments (subsequent to such corporate action) as
nearly equivalent as possible to the adjustments provided for in Section 4
hereof or (y) to sell this Warrant (or, at such Holder's election, a portion
hereof) concurrently with the Triggering Event to the Person continuing after or
surviving such Triggering Event, or to the Issuer (if Issuer is the continuing
or surviving Person) at a sales price equal to the amount of cash, property
and/or Securities to which a holder of the number of shares of Common Stock
which would otherwise have been delivered upon the exercise of this Warrant
would have been entitled upon the effective date or closing of any such
Triggering Event (the "Event Consideration"), less the amount or portion of such
Event Consideration having a fair value equal to the aggregate Warrant Price
applicable to this Warrant or the portion hereof so sold.
-5-
<PAGE>
(ii) Notwithstanding anything contained in this Warrant to the
contrary, the Issuer will not effect any Triggering Event unless, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any Securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the obligations of the Issuer
under this Warrant (and if the Issuer shall survive the consummation of such
Triggering Event, such assumption shall be in addition to, and shall not release
the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (B) the obligation to deliver to such Holder such shares of Securities, cash
or property as, in accordance with the foregoing provisions of this subsection
(a), such Holder shall be entitled to receive, and such Person shall have
similarly delivered to such Holder an opinion of counsel for such Person, which
counsel shall be reasonably satisfactory to such Holder, stating that this
Warrant shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the provisions of this subsection (a))
shall be applicable to the Securities, cash or property which such Person may be
required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
(iii) if with respect to any Triggering Event, the Holder of this
Warrant has exercised its right as provided in clause (y) of subparagraph (i) of
this subsection (a) to sell this Warrant or a portion thereof, the Issuer agrees
that as a condition to the consummation of any such Triggering Event the Issuer
shall secure such right of Holder to sell this Warrant to the Person continuing
after or surviving such Triggering Event and the Issuer shall not effect any
such Triggering Event unless upon or prior to the consummation thereof the
amounts of cash, property and/or Securities required under such clause (y) are
delivered to the Holder of this Warrant. The obligation of the Issuer to secure
such right of the Holder to sell this Warrant shall be subject to such Holder's
cooperation with the Issuer, including, without limitation, the giving of
customary representations and warranties to the purchaser in connection with any
such sale. Prior notice of any Triggering Event shall be given to the Holder of
this Warrant in accordance with Section 11 hereof
(b) SUBDIVISION OR COMBINATION OF SHARES. If the Issuer, at any time
while this Warrant is outstanding, shall subdivide or combine any shares of
Common Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of Holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant Price shall be proportionately increased (as at the effective date of
such combination or, if the Issuer shall take a record of Holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of shares of
Common Stock outstanding as a result of such combination.
(c) CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Issuer, at any time
while this Warrant is outstanding, shall:
(i) STOCK DIVIDENDS. Pay a dividend in, or make any other
distribution to its stockholders (without consideration therefor) of,
shares of Common Stock, the Warrant Price shall be adjusted, as at the
date the Issuer shall take a record of the Holders of the Issuer's
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<PAGE>
Capital Stock for the purpose of receiving such dividend or other
distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying
the Warrant Price in effect immediately prior to such record date (or if
no such record is taken, then immediately prior to such payment or other
distribution), by a fraction (1) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to
such dividend or distribution, and (2) the denominator of which shall be
the total number of shares of Common Stock outstanding immediately after
such dividend or distribution (plus in the event that the Issuer paid
cash for fractional shares, the number of additional shares which would
have been outstanding had the Issuer issued fractional shares in
connection with said dividends); or
(ii) OTHER DIVIDENDS. Pay a dividend on, or make any
distribution of its assets upon or with respect to (including, but not
limited to, a distribution of its property as a dividend in liquidation
or partial liquidation or by way of return of capital), the Common Stock
(other than as described in clause (i) of this subsection (c)), or in the
event that the Company shall offer options or rights to subscribe for
shares of Common Stock, or issue any Common Stock Equivalents, to all of
its holders of Common Stock, then on the record date for such payment,
distribution or offer or, in the absence of a record date, on the date of
such payment, distribution or offer, the Holder shall receive what the
Holder would have received had it exercised this Warrant in full
immediately prior to the record date of such payment, distribution or
offer or, in the absence of a record date, immediately prior to the date
of such payment, distribution or offer.
(d) ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. If the Issuer, at
any time while this Warrant is outstanding, shall issue any Additional Shares of
Common Stock (otherwise than as provided in the foregoing subsections (a)
through (c) of this Section 4), at a price per share less than the Warrant Price
then in effect or less than the Per Share Market Value then in effect or without
consideration, then the Warrant Price upon each such issuance shall be adjusted
to that price (rounded to the nearest cent) determined by multiplying the
Warrant Price then in effect by a fraction:
(i) the numerator of which shall be equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock PLUS (B) the number of
shares of Common Stock (rounded to the nearest whole share) which the
aggregate consideration for the total number of such Additional Shares of
Common Stock so issued would purchase at a price per share equal to the
greater of the Per Share Market Value then in effect and the Warrant
Price then in effect, and
(ii) the denominator of which shall be equal to the number of
shares of Common Stock outstanding immediately after the issuance of such
Additional Shares of Common Stock.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b) or (c)
of this Section 4. No adjustment of the Warrant Price shall be made under this
subsection (d) upon the issuance of any Additional Shares of Common Stock which
are issued pursuant to any Common Stock Equivalent if upon the issuance of such
Common Stock Equivalent (x) any adjustment shall have been made pursuant to
subsection (e) of this
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<PAGE>
Section 4 or (Y) no adjustment was required pursuant to subsection (e) of this
Section 4. No adjustment of the Warrant Price shall be made under this
subsection (d) in an amount less than $.01 per share, but any such lesser
adjustment shall be carried forward and shall be made at the time and together
with the next subsequent adjustment, if any, which together with any adjustments
so carried forward shall amount to $.0l per share or more, provided that upon
any adjustment of the Warrant Price as a result of any dividend or distribution
payable in Common Stock or Convertible Securities or the reclassification,
subdivision or combination of Common Stock into a greater or smaller number of
shares, the foregoing figure of$.01 per share (or such figure as last adjusted)
shall be adjusted (to the nearest one-half cent) in proportion to the adjustment
in the Warrant Price.
(e) ISSUANCE OF COMMON STOCK EQUIVALENTS, If the Issuer, at any time
while this Warrant is outstanding, shall issue any Common Stock Equivalent and
the price per share for which Additional Shares of Common Stock may be issuable
thereafter pursuant to such Common Stock Equivalent shall be less than the
Warrant Price then in effect or less than the Per Share Market Value then in
effect, or if, after any such issuance of Common Stock Equivalents, the price
per share for which Additional Shares of Common Stock may be issuable thereafter
is amended or adjusted, and such price as so amended shall be less than the
Warrant Price or less than the Per Share Market Value in effect at the time of
such amendment, then the Warrant Price upon each such issuance or amendment
shall be adjusted as provided in the first sentence of subsection (d) of this
Section 4 on the basis that (1) the maximum number of Additional Shares of
Common Stock issuable pursuant to all such Common Stock Equivalents shall be
deemed to have been issued (whether or not such Common Stock Equivalents are
actually then exercisable, convertible or exchangeable in whole or in part) as
of the earlier of (A) the date on which the Issuer shall enter into a firm
contract for the issuance of such Common Stock Equivalent, or (B) the date of
actual issuance of such Common Stock Equivalent, and (2) the aggregate
consideration for such maximum number of Additional Shares of Common Stock shall
be deemed to be the minimum consideration received or receivable by the Issuer
for the issuance of such Additional Shares of Common Stock pursuant to such
Common Stock Equivalent. No adjustment of the Warrant Price shall be made under
this subsection (e) upon the issuance of any Convertible Security which is
issued pursuant to the exercise of any warrants or other subscription or
purchase rights therefor, if any adjustment shall previously have been made in
the Warrant Price then in effect upon the issuance of such warrants or other
rights pursuant to this subsection (e). if no adjustment is required under this
subsectin (e) upon issuance of any Common Stock Equivalent or once an adjustment
is made under this subsection (e) based upon the Per Share Market Value in
effect on the date of such adjustment, no further adjustment shall be made under
this subsection (e) based solely upon a change in the Per Share Market Value
after such date.
(f) PURCHASE OF COMMON STOCK BY THE ISSUER. if the Issuer at any time
while this Warrant is outstanding shall, directly or indirectly through a
Subsidiary or otherwise, purchase, redeem or otherwise acquire any shares of
Common Stock at a price per share greater than the Per Share Market Value then
in effect, then the Warrant Price upon each such purchase, redemption or
acquisition shall be adjusted to that price determined by multiplying such
Warrant Price by a fraction (i) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such purchase,
redemption or acquisition minus the number of shares of Common Stock which the
aggregate consideration for the total number of such shares of Common Stock so
purchased, redeemed or acquired would purchase at the Per Share Market Value;
and (ii) the denominator of which shall be the number of shares of Common Stock
outstanding immediately after
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such purchase, redemption or acquisition. For the purposes of this subsection
(f), the date as of which the Per Share Market Value shall be computed shall be
the earlier of(x) the date on which the Issuer shall enter into a firm contract
for the purchase, redemption or acquisition of such Common Stock, or (y) the
date of actual purchase, redemption or acquisition of such Common Stock. For the
purposes of this subsection (f), a purchase, redemption or acquisition of a
Common Stock Equivalent shall be deemed to be a purchase of the underlying
Common Stock, and the computation herein required shall be made on the basis of
the full exercise, conversion or exchange of such Common Stock Equivalent on the
date as of which such computation is required hereby to be made, whether or not
such Common Stock Equivalent is actually exercisable, convertible or
exchangeable on such date.
(g) OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION 4.
The following provisions shall be applicable to the making of adjustments in the
Warrant Price hereinbefore provided in Section 4:
(i) COMPUTATION OF CONSIDERATION. The consideration received by
the Issuer shall be deemed to be the following: to the extent that any
Additional Shares of Common Stock or any Common Stock Equivalents shall
be issued for a cash consideration, the consideration received by the
Issuer therefor, or if such Additional Shares of Common Stock or Common
Stock Equivalents are offered by the Issuer for subscription, the
subscription price, or, if such Additional Shares of Common Stock or
Common Stock Equivalents are sold to underwriters or dealers for public
offering without a subscription offering, the public offering price, in
any such case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any compensation,
discounts, commissions, or expenses paid or incurred by the Issuer for or
in connection with the underwriting thereof or otherwise in connection
with the issue thereof, to the extent that such issuance shall be for a
consideration other than cash, then, except as herein otherwise expressly
provided, the fair market value of such consideration at the, time of
such issuance as determined in good faith by the Board. The consideration
for any Additional Shares of Common Stock issuable pursuant to any Common
Stock Equivalents shall be the consideration received by the Issuer for
issuing such Common Stock Equivalents, plus the additional consideration
payable to the Issuer upon the exercise, conversion or exchange of such
Common Stock Equivalents. In case of the issuance at any time of any
Additional Shares of Common Stock or Common Stock Equivalents in payment
or satisfaction of any dividend upon any class of Capital Stock of the
Issuer other than Common Stock, the Issuer shall be deemed to have
received for such Additional Shares of Common Stock or Common Stock
Equivalents a consideration equal to the amount of such dividend so paid
or satisfied. In any case in which the consideration to be received or
paid shall be other than cash, the Board shall notify the Holder of this
Warrant of its determnation of the fair market value of such
consideration prior to payment or accepting receipt thereof If, within
thirty days after receipt of said notice, the Majority Holders shall
notify the Board in writing of their objection to such determination, a
determination of the fair market value of such consideration shall be
made by an Independent Appraiser selected by the Majority Holders with
the approval of the Board (which approval shall not be unreasonably
withheld), whose fees and expenses shall be paid by the Issuer.
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(ii) READJUSTMENT OF WARRANT PRICE. Upon the expiration or
termination of the right to convert, exchange or exercise any Common
Stock Equivalent the issuance of which effected an adjustment in the
Warrant Price, if such Common Stock Equivalent shall not have been
converted, exercised or exchanged in its entirety, the number of shares
of Common Stock deemed to be issued and outstanding by reason of the fact
that they were issuable upon conversion, exchange or exercise of any such
Common Stock Equivalent shall no longer be computed as set forth above,
and the Warrant Price shall forthwith be readjusted and thereafter be the
price which it would have been (but reflecting any other adjustments in
the Warrant Price made pursuant to the provisions of this Section 4 after
the issuance of such Common Stock Equivalent) had the adjustment of the
Warrant Price been made in accordance with the issuance or sale of the
number of Additional Shares of Common Stock actually issued upon
conversion, exchange or issuance of such Common Stock Equivalent and
thereupon only the number of Additional Shares of Common Stock actually
so issued shall be deemed to have been issued and only the consideration
actually received by the Issuer (computed as in clause (i) of this
subsection (g)) shall be deemed to have been received by the Issuer.
(iii) OUTSTANDING COMMON STOCK. The number of shares of Common
Stock at any time outstanding shall (A) not include any shares thereof
then directly or indirectly owned or held by or for the account of the
Issuer or any of its Subsidiaries, and (B) be deemed to include all
shares of Common Stock then issuable upon conversion, exercise or
exchange of any then outstanding Common Stock Equivalents or any other
evidences of Indebtedness, shares of Capital Stock (including, without
limitation, the Preferred Stock) or other Securities which are or may be
at any time convertible into or exchangeable for shares of Common Stock
or Other Common Stock.
(h) OTHER ACTION AFFECTING COMMON STOCK. In case after the Original
Issue Date the Issuer shall take any action affecting its Common Stock, other
than an action described in any of the foregoing subsections (a) through (g) of
this Section 4, inclusive, and the failure to make any adjustment would not
fairly protect the purchase rights represented by this Warrant in accordance
with the essential intent and principle of this Section 4, then the Warrant
Price shall be adjusted in such manner and at such time as the Board may in good
faith determine to be equitable in the circumstances.
(i) ADJUSTMENT OF WARRANT SHARE NUMBER. Upon each adjustment in the
Warrant Price pursuant to any of the foregoing provisions of this Section 4, the
Warrant Share Number shall be adjusted, to the nearest one hundredth of a whole
share, to the product obtained by multiplying the Warrant Share Number
immediately prior to such adjustment in the Warrant Price by a fraction, the
numerator of which shall be the Warrant Price immediately before giving effect
to such adjustment and the denominator of which shall be the Warrant Price
immediately after giving effect to such adjustment. If the Issuer shall be in
default under any provision contained in Section 3 of this Warrant so that
shares issued at the Warrant Price adjusted in accordance with this Section 4
would not be validly issued, the adjustment of the Warrant Share Number provided
for in the foregoing sentence shall nonetheless be made and the Holder of this
Warrant shall be entitled to purchase such greater number of shares at the
lowest price at which such shares may then be validly issued under applicable
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law. Such exercise shall not constitute a waiver of any claim arising against
the Issuer by reason of its default under Section 3 of this Warrant.
(j) FORM OF WARRANT AFTER ADJUSTMENTS. The form of this Warrant need
not be changed because of any adjustments in the Warrant Price or the number and
kind of Securities purchasable upon the exercise of this Warrant.
5. NOTICE OF ADJUSTMENTS. Whenever the Warrant Price or Warrant Share
Number shall be adjusted pursuant to Section 4 hereof (for purposes of this
Section 5, each an "adjustment"), the Issuer shall cause its Chief Financial
Officer to prepare and execute a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant
Price and Warrant Share Number after giving effect to such adjustment, and shall
cause copies of such certificate to be delivered to the Holder of this Warrant
promptly after each adjustment. Any dispute between the Issuer and the Holder of
this Warrant with respect to the matters set forth in such certificate may at
the option of the Holder of this Warrant be submitted to one of the national
accounting firms currently known as the "big five" selected by the Holder,
PROVIDED that the Issuer shall have ten days after receipt of notice from such
Holder of its selection of such firm to object thereto, in which case such
Holder shall select another such firm and the Issuer shall have no such right of
objection. The firm selected by the Holder of this Warrant as provided in the
preceding sentence shall be instructed to deliver a written opinion as to such
matters to the Issuer and such Holder within thirty days after submission to it
of such dispute. Such opinion shall be final and binding on the parties hereto.
The fees and expenses of such accounting firm shall be paid by the Issuer.
6. FRACTIONAL SHARES. No fractional shares of Warrant Stock will be
issued in connection with and exercise hereof, but in lieu of such fractional
shares, the Issuer shall make a cash payment therefor equal in amount to the
product of the applicable fraction multiplied by the Per Share Market Value then
in effect.
7. DEFINITIONS. For the purposes of this Warrant, the following terms
have the following meanings:
"Additional Shares of Common Stock" means all shares of Common
Stock issued by the Issuer after the Original Issue Date, and all shares
of Other Common, if any, issued by the Issuer after the Original Issue
Date, except any shares of Common Stock presently outstanding, any shares
of Common Stock issued upon the exercise of any existing or future stock
options or grants issued to any directors, officers, employees or
consultants of the Issuer under any employee incentive stock option
and/or any stock option plan approved by the Board, the Warrant Stock and
the Preferred Shares.
"Board" shall mean the Board of Directors of the Issuer.
"Capital Stock" means and includes (i) any and all shares,
interests, participations or other equivalents of or interests in
(however designated) corporate stock, including, without limitation,
shares of preferred or preference stock, (ii) all partnership interests
(whether
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general or limited) in any Person which is a partnership, (iii) all membership
interests or limited liability company interests in any limited liability
company, and (iv) all equity or ownership interests in any Person of any other
type.
"Certificate of Incorporation" means the Certificate of Incorporation of
the Issuer as in effect on the Original Issue Date, and as hereafter from time
to time amended, modified, supplemented or restated in accordance with the terms
hereof and thereof and pursuant to applicable law.
"Common Stock" means the Common Stock, $.00l par value, of the Issuer and
any other Capital Stock into which such stock may hereafter be changed.
"Common Stock Equivalent" means any Convertible Security or warrant,
option or other right to subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Security.
"Convertible Securities" means evidences of Indebtedness, shares of
Capital Stock or other Securities which are or may be at any time convertible
into or exchangeable for Additional Shares of Common Stock. The term
"Convertible Security" means one of the Convertible Securities.
"Governmental Authority" means any governmental, regulatory or
self-regulatory entity, department, body, official, authority, commission,
board, agency or instrumentality, whether federal, state or local, and whether
domestic or foreign.
"Holders" mean the Persons who shall from time to time own any Warrant.
The term "Holder" means one of the Holders.
"Independent Appraiser" means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Issuer) that is regularly engaged in the business of
appraising the Capital Stock or assets of corporations or other entities as
going concerns, and which is not affiliated with either the Issuer or the Holder
of any Warrant.
"Issuer" means eSynch Corporation, a Delaware corporation, and its
successors.
"Majority Holders" means at any time the Holders of Warrants exercisable
for a majority of the shares of Warrant Stock issuable under the Warrants at the
time outstanding.
"Original Issue Date" means August 13, 1999.
"Other Common" means any other Capital Stock of the Issuer of any class
which shall be authorized at any time after the date of this Warrant (other than
Common Stock) and which shall have the right to participate in the distribution
of earnings and assets of the Issuer without limitation as to amount.
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"OTC Bulletin Board" means the over-the-counter electronic bulletin
board.
"Person" means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint
venture, Governmental Authority or other entity of whatever nature.
"Per Share Market Value" means on any particular date (a) the closing bid
price per share of the Common Stock on such date on the OTC Bulletin Board or
other registered national stock exchange on which the Common Stock is then
listed or if there is no such price on such date, then the closing bid price on
such exchange or quotation system on the date nearest preceding such date, or
(b) if the Common Stock is not listed then on the OTC Bulletin Board or any
registered national stock exchange, the closing bid price for a share of Common
Stock in the over-the-counter market, as reported by the OTC Bulletin Board or
in the National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the OTC Bulletin
Board or the National Quotation Bureau Incorporated (or similar organization or
agency succeeding to its functions of reporting prices), then the average of the
"Pink Sheet" quotes for the relevant conversion period, as determined in good
faith by the holder, or (d) if the Common Stock is not then publicly traded the
fair market value of a share of Common Stock as determined by an Independent
Appraiser selected in good faith by the Majority Holders; PROVIDED, HOWEVER,
that the Issuer, after receipt of the determination by such Independent
Appraiser, shall have the right to select an additional Independent Appraiser,
in which case, the fair market value shall be equal to the average of the
determinations by each such Independent Appraiser; and PROVIDED, FURTHER that
all determinations of the Per Share Market Value shall be appropriately adjusted
for any stock dividends, stock splits or other similar transactions during such
period. The determination of fair market value by an Independent Appraiser shall
be based upon the fair market value of the Issuer determined on a going concern
basis as between a willing buyer and a willing seller and taking into account
all relevant factors determinative of value, and shall be final and binding on
all parties. In determining the fair market value of any shares of Common Stock,
no consideration shall be given to any restrictions on transfer of the Common
Stock imposed by agreement or by federal or state securities laws, or to the
existence or absence of, or any limitations on, voting rights.
"Preferred Shares" means Common Stock issuable upon the conversion of any
Preferred Stock.
"Preferred Stock" means the Series J Preferred Stock issued and sold
pursuant to the Purchase Agreement.
"Purchase Agreement" means the Series J Convertible Preferred Stock
Purchase Agreement dated as of July 22, 1999 among the Issuer and the investors
a party thereto.
"Registration Rights Agreement" has the meaning specified in Section 3(e)
hereof.
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"Securities" means any debt or equity securities of the Issuer, whether
now or hereafter authorized, any instrument convertible into or exchangeable for
Securities or a Security, and any option, warrant or other right to purchase or
acquire any Security. "Security" means one of the Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose outstanding
Voting Stock shall at the time be owned directly or indirectly by the Issuer or
by one or more of its Subsidiaries, or by the Issuer and one or more of its
Subsidiaries.
"Trading Day" means (a) a day on which the Common Stock is traded on the
over the counter market as reported by the OTC Bulletin Board, or (b) if the
Common Stock is not listed on the OTC Bulletin Board, a day on which the Common
Stock is traded on any other registered national stock exchange, or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); PROVIDED, HOWEVER, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Term" has the meaning specified in Section 1 hereof
"Voting Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) having ordinary
voting power for the election of a majority of the members of the Board of
Directors (or other governing body) of such corporation, other than Capital
Stock having such power only by reason of the happening of a contingency.
"Warrants" means the Warrants issued and sold pursuant to the Purchase
Agreement, including, without limitation, this Warrant, and any other warrants
of like tenor issued in substitution or exchange for any thereof pursuant to the
provisions of Section 2(c), 2(d) or 2(e) hereof or of any of such other
Warrants.
"Warrant Price" means initially 115% of the closing bid price of the
Common Stock on the trading day immediately preceding each Closing Date (as such
term is defined in the Purchase Agreement), as such price may be adjusted from
time to time as shall result from the adjustments specified in Section 4 hereof
"Warrant Share Number" means at any time the aggregate number of shares
of Warrant Stock which may at such time be purchased upon exercise of this
Warrant, after giving effect to all prior adjustments and increases to such
number made or required to be made under the terms hereof.
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"Warrant Stock" means Common Stock issuable upon exercise of any Warrant
or Warrants or otherwise issuable pursuant to any Warrant or Warrants.
8. OTHER NOTICES. In case at any time:
(A) the Issuer shall make any distributions to
the holders of Common Stock; or
(B) the Issuer shall authorize the granting to
all holders of its Common Stock of rights to
subscribe for or purchase any shares of
Capital Stock of any class or of any Common
Stock Equivalents or Convertible Securities
or other rights; or
(C) there shall be any reclassification of the
Capital Stock of the Issuer; or
(D) there shall be any capital reorganization by
the Issuer; or
(E) there shall be any (i) consolidation or
merger involving the Issuer or (ii) sale,
transfer or other disposition of all or
substantially all of the Issuer's property,
assets or business (except a merger or other
reorganization in which the Issuer shall be
the surviving corporation and its shares of
Capital Stock shall continue to be
outstanding and unchanged and except a
consolidation, merger, sale, transfer or
other disposition involving a wholly-owned
Subsidiary); or
(F) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the
Issuer or any partial liquidation of the
Issuer or distribution to holders of Common
Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
days prior to the action in question and not less than twenty days prior to the
record date or the date on which the Issuer's transfer books are closed in
respect thereto. The Issuer shall give to the Holder notice of all meetings and
actions by written consent of its stockholders, at the same time in the same
manner as notice of any meetings of stockholders is required to be given to
stockholders who do not waive such notice (or, if such requires no notice,
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then two Trading Days written notice thereof describing the matters upon which
action is to be taken). The Holder shall have the right to send two
representatives selected by it to each meeting, who shall be permitted to
attend, but not vote at, such meeting and any adjournments thereof This Warrant
entitles the Holder to receive copies of all financial and other information
distributed or required to be distributed to the holders of the Common Stock.
9. AMENDMENT AND WAIVER. Any term, covenant, agreement or condition
in this Warrant may be amended, or compliance therewith may be waived (either
generally or in a particular instance and either retroactively or
prospectively), by a written instrument or written instruments executed by the
Issuer and the Majority Holders; PROVIDED, HOWEVER that no such amendment or
waiver shall reduce the Warrant Share Number, increase the Warrant Price,
shorten the period during which this Warrant may be exercised or modify any
provision of this Section 9 without the consent of the Holder of this Warrant.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW.
11. NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., pacific standard time,
on a Business Day, (ii) the Business Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified for notice later than 5:00 p.m., pacific standard time, on any
date and earlier than 11:59p.m., pacific standard time, on such date, (iii) the
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) actual receipt by the party to whom such
notice is required to be given. The addresses for such communications shall be
with respect to the Holder of this Warrant or of Warrant Stock issued pursuant
hereto, addressed to such Holder at its last known address or facsimile number
appearing on the books of the Issuer maintained for such purposes, or with
respect to the Issuer, addressed to:
eSynch Corporation
15502 Mosher Avenue
Tustin, California 92780
Telephone Number: (714) 258-1900
Facsimile Number: (714) 258-7177
Attention: Thomas Hemingway, C.E.O.
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Issuer shall be sent to Nicholas J.
Yocca, Stradling Yocca Carlson & Rauth, PC, 660 Newport Center Drive, Suite
1600, Newport Beach, CA 92660, Facsimile no.: (949) 823-5120. Copies of notices
to the Holder shall be sent to (a) Parker Chapin Flattau & Klimpl, LLP, 1211
Avenue of the Americas, New York, New York 10036, Attention: Christopher S.
Auguste, Esq., Facsimile no.:
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(212) 704-6288 and (b) H. Glenn Bagwell, Jr., Esq., 3005 Anderson Drive, Suite
204, Raleigh, N.C. 27609, Facsimile no.: (919) 785-3116.
12. WARRANT AGENT. The Issuer may, by written notice to each Holder of
this Warrant, appoint an agent having an office in New York, New York for the
purpose of issuing shares of Warrant Stock on the exercise of this Warrant
pursuant to subsection (b) of Section 2 hereof, exchanging this Warrant pursuant
to subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any
such issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.
13. REMEDIES. The Issuer stipulates that the remedies at law of the
Holder of this Warrant in the event of any default or threatened default by the
Issuer in the performance of or compliance with any of the terms of this Warrant
are not and will not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
14. SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
assigns of the Issuer, the Holder hereof and (to the extent provided herein) the
Holders of Warrant Stock issued pursuant hereto, and shall be enforceable by any
such Holder or Holder of Warrant Stock
15. MODIFICATION AND SEVERABILITY. If, in any action before any court
or agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
16. HEADINGS. The headings of the Sections of this Warrant are for
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
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IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day
and year first above written.
ESYNCH CORPORATION
By:/s/ THOMAS HEMINGWAY
---------------------
Name: Thomas Hemingway
Title: Chairman of the Board
and Chief Executive Officer
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EXERCISE FORM
[NAME OF ISSUER]
The undersigned , pursuant to the provisions of the
within Warrant, hereby elects to purchase shares of Common Stock
of ___________________ covered by the within Warrant.
Dated: Signature
Address
ASSIGNMENT
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
___________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint , attorney, to transfer the said Warrant on
the books of the within named corporation.
Dated: Signature
Address
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: Signature
Address
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-_____ cancelled (or transferred or exchanged) this _____ day
of____________, ______ shares of Common Stock issued therefor in the name
of____________, Warrant No. W-_____ issued for ____ shares of Common Stock in
the name of .
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