SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Schedule 13D
Under the Securities Exchange Act of 1934
(Amendment No. _)*
DIGITAL GENERATION SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Issuer)
Common Stock
- --------------------------------------------------------------------------------
(Title of Class of Securities)
253921 10 0
- --------------------------------------------------------------------------------
(CUSIP Number)
Pamela K. Hagenah
Integral Capital Partners
2750 Sand Hill Road
Menlo Park, California 94025
(650) 233-0360
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications)
August 26, 1997
- --------------------------------------------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G
to report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box
[ ].
NOTE: Six copies of this statement, including all exhibits, should be
filed with the Commission. See Rule 13d-1(a) for other parties to whom copies
are to be sent.
*The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not
be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 ("Act") or otherwise subject to the liabilities of that section of
the Act but shall be subject to all other provisions of the Act (however, see
the Notes).
(Continued on following pages)
Page 1 of 53 Pages
Exhibit Index Contained on Page 10
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CUSIP NO. 253921 10 0 13D Page 2 of 53 Pages
- ----------------------------------------------------------- --------------------------------------------------
- ----------- ------------------------------------------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Integral Capital Management III, L.P. ("ICM3")
- ----------- ------------------------------------------------------------------------------------------------------------------
CHECK APPROPRIATE BOXS IF A MEMBER OF A GROUP
(a) [ ] (b) [X]
- ----------- ------------------------------------------------------------------------------------------------------------------
3 SEC USE ONLY
- ----------- ------------------------------------------------------------------------------------------------------------------
4 SOURCE OF FUNDS* WC
- ----------- ------------------------------------------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDING IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) [ ]
- ----------- ------------------------------------------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware (limited partnership)
- --------------------------------------- --------- ----------------------------------------------------------------------------
7 SOLE VOTING POWER -0-
--------- ----------------------------------------------------------------------------
NUMBER 8 SHARED VOTING POWER
OF 728,430 shares, of which 594,180 shares are directly owned by
SHARES Integral Capital Partners III, L.P. ("ICP3") and 134,250 shares
BENEFICIALLY are directly owned by Integral Capital Partners International
OWNED BY EACH III, L.P. ("ICPI3"). ICM3 is the general partner of ICP3 and the
REPORTING investment general partner of ICPI3.
PERSON
WITH
--------- ----------------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER -0-
--------- ----------------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
728,430 shares (see response to Item 8)
- ----------- ------------------------------------------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
728,430 shares
- ----------- ------------------------------------------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN
SHARES* [ ]
- ----------- ------------------------------------------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 5.68%
- ----------- ------------------------------------------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON* PN
- ----------- ------------------------------------------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
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CUSIP NO. 253921 10 0 13D Page 3 of 53 Pages
- ----------------------------------------------------------- --------------------------------------------------
- ----------- ------------------------------------------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Integral Capital Partners III, L.P. ("ICP3")
- ----------- ------------------------------------------------------------------------------------------------------------------
2 CHECK APPROPRIATE BOXS IF A MEMBER OF A GROUP*
(a) [ ] (b) [X]
- ----------- ------------------------------------------------------------------------------------------------------------------
3 SEC USE ONLY
- ----------- ------------------------------------------------------------------------------------------------------------------
4 SOURCE OF FUNDS* WC
- ----------- ------------------------------------------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDING IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e) [ ]
- ----------- ------------------------------------------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware (limited partnership)
- --------------------------------------- --------- ----------------------------------------------------------------------------
7 SOLE VOTING POWER -0-
--------- ----------------------------------------------------------------------------
NUMBER 8 SHARED VOTING POWER
OF 594,180 shares are directly owned by ICP3. Integral Capital
SHARES Management III, L.P. is the general partner of ICP3.
BENEFICIALLY
OWNED BY EACH
REPORTING
PERSON
WITH
--------- ----------------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER -0-
--------- ----------------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
594,180 shares (see response to Item 8)
- ----------- ------------------------------------------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
594,180 shares
- ----------- ------------------------------------------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN
SHARES* [ ]
- ----------- ------------------------------------------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 4.68%
- ----------- ------------------------------------------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON* PN
- ----------- ------------------------------------------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
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- ----------------------------------------------------------- --------------------------------------------------
CUSIP NO. 253921 10 0 13D Page 4 of 53 Pages
- ----------------------------------------------------------- --------------------------------------------------
- ----------- ------------------------------------------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Integral Capital Partners International III, L.P. ("ICPI3")
- ----------- ------------------------------------------------------------------------------------------------------------------
2 CHECK APPROPRIATE BOXS IF A MEMBER OF A GROUP*
(a) [ ] (b) [X]
- ----------- ------------------------------------------------------------------------------------------------------------------
3 SEC USE ONLY
- ----------- ------------------------------------------------------------------------------------------------------------------
4 SOURCE OF FUNDS* WC
- ----------- ------------------------------------------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDING IS REQUIRED PURSUANT TO
ITEMS 2(d) OR 2(e)
[ ]
- ----------- ------------------------------------------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Cayman Islands (limited partnership)
- --------------------------------------- --------- ----------------------------------------------------------------------------
7 SOLE VOTING POWER -0-
--------- ----------------------------------------------------------------------------
NUMBER 8 SHARED VOTING POWER
OF 134,250 shares are directly owned by ICPI3. Integral Capital
SHARES Management III, L.P. is the investment general partner of ICPI3.
BENEFICIALLY
OWNED BY EACH
REPORTING
PERSON
WITH
--------- ----------------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER -0-
--------- ----------------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
134,250 shares (see response to Item 8)
- ----------- ------------------------------------------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
134,250 shares
- ----------- ------------------------------------------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN
SHARES* [ ]
- ----------- ------------------------------------------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 1.10%
- ----------- ------------------------------------------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON* PN
- ----------- ------------------------------------------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
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Page 5 of 53
ITEM 1. SECURITY AND ISSUER
The title of the class of equity securities to which this
statement relates is shares of the Common Stock of Digital Generation Systems,
Inc., a California corporation (the "Issuer"). The address of the principal
executive offices of the Issuer is:
875 Battery Street, 2nd Floor
San Francisco, CA 94111
ITEM 2. IDENTITY AND BACKGROUND
This statement is being filed by Integral Capital Management
III, L.P., a Delaware limited partnership ("ICM3"). The principal business
address of ICM3 is 2750 Sand Hill Road, Menlo Park, California 94025. The names,
business addresses, occupations and citizenships of all the general partners of
ICM3 are set forth on Exhibit B hereto.
ICM3 is the general partner of Integral Capital Partners III,
L.P., a Delaware limited partnership ("ICP3"), and the investment general
partner of Integral Capital Partners International III, L.P., a Cayman Islands
exempted limited partnership ("ICPI3"). ICP3 and ICPI3 are private investment
funds that invest in securities of publicly traded and private companies,
predominantly in the areas of information sciences and life sciences. With
respect to ICM3 and the general partners of ICM3, this statement relates only to
ICM3's indirect, beneficial ownership of shares of the Series A Convertible
Preferred Stock of the Issuer (the "Series A Preferred Stock"). Each share of
the Series A Preferred Stock is convertible into one share of Common Stock. The
shares of Series A Preferred Stock have been purchased by ICP3 and ICPI3, and
none of ICM3 or the general partners of ICM3 directly or otherwise hold any
shares of capital stock of the Issuer. Management of the business affairs of
ICM3, including decisions respecting disposition and/or voting of the shares of
Series A Preferred Stock, resides in a majority of the general partners of ICM3
listed on Exhibit B, such that no single general partner of ICM3 has voting
and/or dispositive power of the shares.
To the best of ICM3's knowledge, none of the persons listed on
Exhibit B hereto has, during the last five years, been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or been a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or prohibiting or
mandating activities subject to federal or state securities laws or finding any
violation with respect to such laws.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
The aggregate amount of consideration required by ICP3 and
ICPI3 to purchase the 728,430 shares of Series A Preferred Stock to which this
statement relates was approximately $2.575 million. The consideration was
obtained from the working capital of ICP3 and ICPI3.
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Page 6 of 53
ITEM 4. PURPOSE OF TRANSACTION
The purchases of the Series A Preferred Stock by ICP3 and
ICPI3 were made pursuant to a Preferred Stock Purchase Agreement, dated as of
July 14, 1997, as amended by Amendment to Preferred Stock Purchase Agreement
dated as of July 23, 1997 (as so amended, the "Series A Agreement"). Pursuant to
the Series A Agreement, ICP3 and ICPI3 purchased 594,180 shares and 134,250
shares, respectively, of Series A Preferred Stock. The purchases of the shares
were not made for the purpose of acquiring control of the Issuer. From time to
time, ICM3 may, in the ordinary course of its role as general partner of ICP3
and the investment general partner of ICPI3, direct ICP3 and/or ICPI3 to
purchase additional shares or sell all or a portion of the shares now held by
ICP3 or ICPI3.
Except as set forth above, none of ICM3 nor the persons listed
on Exhibit B hereto has any current plans or proposals that relate to or would
result in the occurrence of any of the actions or events enumerated in clause
(a) through (j) of Item 4 of Schedule 13D.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER
A. Integral Capital Management III, L.P. ("ICM3")
(a) Amount Beneficially Owned: 728,430
Percent of Class: 5.68%
(b) Number of shares as to which such person has:
1. Sole power to vote or to direct vote: -0-
2. Shared power to vote or to direct vote: 728,430
3. Sole power to dispose or to direct the disposition: -0-
4. Shared power to dispose or to direct the disposition:
728,430
(c) To the best knowledge of ICM3, none of ICP3, ICPI3, ICM3, nor any
of the persons listed as general partners of ICM3 on Exhibit B has directly
effected any transactions in shares of capital stock of the Issuer during the 60
days prior to the date hereof, other than the purchase of shares of Series A
Preferred Stock pursuant to the Series A Agreement.
(d) ICM3 is the general partner of Integral Capital Partners III, L.P.,
a Delaware limited partnership ("ICP3"), and the investment general partner of
Integral Capital Partners International III, L.P., a Cayman Islands exempted
limited partnership ("ICPI3"). Roger B. McNamee, John A. Powell and Pamela K.
Hagenah are the general partners of ICM3. Decisions respecting the voting of the
Series A Preferred Stock and disposition of the proceeds from the sale of Series
A Preferred Stock are determined by a majority of the general partners. Under
certain circumstances set forth in the limited partnership agreements of ICP3,
ICPI3 and ICM3, the general and limited partners of such entities may receive
dividends from, or the proceeds from the sale of shares of Series A Preferred
Stock or Common Stock of the Issuer owned, directly or indirectly, by each such
entity.
(e) Not applicable.
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Page 7 of 53
B. Integral Capital Partners III, L.P.
(a) Aggregate number of Shares owned: 594,180
Percentage:4.68%
(b) 1. Sole power to vote or to direct vote: -0-
2. Shared power to vote or to direct vote: 594,180
3. Sole power to dispose or to direct the disposition:-0-
4. Shared power to dispose or to direct the disposition:
594,180
(c) See Item 5A(c) above.
(d) See Item 5A(d) above.
(e) Not applicable.
C. Integral Capital Partners International III, L.P.
(a) Aggregate number of Shares owned: 134,250
Percentage: 1.10%
(b) 1. Sole power to vote or to direct vote: -0-
2. Shared power to vote or to direct vote: 134,250
3. Sole power to dispose or to direct the disposition:-0-
4. Shared power to dispose or to direct the disposition:
134,250
(c) See Item 5A(c) above.
(d) See Item 5A(d) above.
(e) Not applicable.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS, OR RELATIONSHIPS WITH RESPECT
TO SECURITIES OF THE ISSUER
Except as set forth herein, there are no contracts,
arrangements, understandings or relationships among ICM3 and any of the persons
named in Item 2 or between ICM3 and any other person with respect to the shares
of Series A Preferred Stock of the Issuer held by ICP3 and ICPI3. The purchases
of the Series A Preferred Stock by ICP3 and ICPI3 were made pursuant to the
Series A Agreement. Pursuant to the Series A Agreement, so long as the
purchasers of the Series A Preferred Stock own 10% of the total outstanding
stock of the Issuer (as calculated pursuant to Section 16(b) of the Securities
Exchange Act of 1934, as amended), the Issuer agrees to take necessary action to
cause a designee of the holders of Series A Preferred Stock to be nominated, and
to use its best efforts to cause such designee to be elected, to the Board of
Directors. In addition, ICP3 and ICPI3 have rights to acquire future privately
offered equity securities of the Issuer as described in Section 4.8 of the
Series A Purchase Agreement. The description herein of the Series A Purchase
Agreement is qualified in its entirety by reference to such agreements, copies
of which are attached as Exhibit C and Exhibit D.
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Page 8 of 53
ITEM 7. MATERIALS TO BE FILED AS EXHIBITS
Exhibit A: Agreement of Joint Filing
Exhibit B: List of General Partners of Integral Capital Management
III, L.P.
Exhibit C: Preferred Stock Purchase Agreement by and among Digital
Generation Systems, Inc. and the parties named therein,
dated as of July 14,1997
Exhibit D: Amendment to Preferred Stock Purchase Agreement, dated
as of July 23, 1997
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Page 9 of 53
SIGNATURE
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
Dated: September 3, 1997
INTEGRAL CAPITAL MANAGEMENT III, L.P.
/s/ Pamela K. Hagenah
By: -----------------------------------
Pamela K. Hagenah
a General Partner
INTEGRAL CAPITAL PARTNERS III, L.P.
By Integral Capital Management III, L.P.,
its General Partner
/s/ Pamela K. Hagenah
By: -----------------------------------
Pamela K. Hagenah
a General Partner
INTEGRAL CAPITAL PARTNERS INTERNATIONAL III, L.P.
By Integral Capital Management III, L.P.,
its Investment General Partner
/s/ Pamela K. Hagenah
By: -----------------------------------
Pamela K. Hagenah
a General Partner
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Page 10 of 53
EXHIBIT INDEX
Found on
Sequentially
Exhibit Numbered Page
- ------- -------------
Exhibit A: Agreement of Joint Filing 11
Exhibit B: List of General Partners of Integral Capital 12
Management III, L.P.
Exhibit C: Preferred Stock Purchase Agreement by and among 13
Digital Generation Systems, Inc. and the parties
named therein, dated as of July 14,1997
Exhibit D: Amendment to Preferred Stock Purchase Agreement, 48
dated as of July 23, 1997
<PAGE>
Page 11 of 53
EXHIBIT A
Agreement of Joint Filing
The undersigned hereby agree that they are filing jointly
pursuant to Rule 13d-1(f)(1) of the Act the statement dated September 3, 1997,
containing the information required by Schedule 13D, for 728,430 shares of
capital stock of Digital Generation Systems, Inc. held by Integral Capital
Partners III, L.P., a Delaware limited partnership and Integral Capital Partners
International III, L.P., a Cayman Islands exempted limited partnership.
Date: September 3, 1997
INTEGRAL CAPITAL MANAGEMENT III, L.P.
/s/ Pamela K. Hagenah
By: -----------------------------------
Pamela K. Hagenah
a General Partner
INTEGRAL CAPITAL PARTNERS III, L.P.
By Integral Capital Management III, L.P.,
its General Partner
/s/ Pamela K. Hagenah
By: -----------------------------------
Pamela K. Hagenah
a General Partner
INTEGRAL CAPITAL PARTNERS INTERNATIONAL III, L.P.
By Integral Capital Management III, L.P., its Investment General
Partner
/s/ Pamela K. Hagenah
By: -----------------------------------
Pamela K. Hagenah
a General Partner
<PAGE>
Page 12 of 53
EXHIBIT B
General Partners of
Integral Capital Management III, L.P.
Set forth below, with respect to each general partner of
Integral Capital Management, III L.P., is the following: (a) name; (b) business
address; (c) principal occupation; and (d) citizenship.
1. (a) Roger B. McNamee
(b) c/o Integral Capital Partners
2750 Sand Hill Road,
Menlo Park, CA 94025
(c) General Partner of Integral Capital Management, L.P.,
Integral Capital Management II,
L.P. and Integral Capital Management III, L.P.
(d) United States Citizen
2. (a) John A. Powell
(b) c/o Integral Capital Partners
2750 Sand Hill Road,
Menlo Park, CA 94025
(c) General Partner of Integral Capital Management, L.P.,
Integral Capital Management II,
L.P. and Integral Capital Management III, L.P.
(d) United States Citizen
3. (a) Pamela K. Hagenah
(b) c/o Integral Capital Partners
2750 Sand Hill Road,
Menlo Park, CA 94025
(c) General Partner of Integral Capital Management II, L.P.
and Integral Capital
Management III, L.P.
(d) United States Citizen
<PAGE>
Page 13 of 53
EXHIBIT C
PREFERRED STOCK PURCHASE AGREEMENT
by and among
DIGITAL GENERATION SYSTEMS, INC.,
PEQUOT PRIVATE EQUITY FUND, L.P.,
PEQUOT PARTNERS FUND, L.P.
PEQUOT OFFSHORE PRIVATE EQUITY FUND, INC.
PEQUOT INTERNATIONAL FUND, INC.
and
GE CAPITAL INFORMATION TECHNOLOGY SOLUTIONS
dated as of
July 14, 1997
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Page 14 of 53
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Table of Contents
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Page
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SECTION 1. Issuance and Sale of Series A Preferred Stock........................................................1
1.1. The Purchase........................................................................................1
1.2. The Closing.........................................................................................2
1.3. Conditions to Closing...............................................................................3
1.4. Purchase Price Adjustment...........................................................................5
SECTION 2. Representations and Warranties of the Company.........................................................6
2.1. Organization and Good Standing; Power and Authority; Qualifications.................................6
2.2. Authorization of the Documents......................................................................6
2.3. Capitalization......................................................................................7
2.4. Authorization and Issuance of Capital Stock.........................................................7
2.5. SEC Reports.........................................................................................8
2.6. Financial Statements................................................................................8
2.7. Absence of Undisclosed Liabilities..................................................................9
2.8. Absence of Material Changes.........................................................................9
2.9. No Conflict........................................................................................10
2.10. Agreements........................................................................................11
2.11. Intellectual Property Rights......................................................................12
2.12. Equity Investments; Subsidiaries..................................................................13
2.13. Title to Assets and Properties; Insurance.........................................................14
2.14. Employee Benefit Plans............................................................................14
2.15. Labor Relations; Employees........................................................................15
2.16. Litigation; Orders................................................................................16
2.17. Compliance with Laws; Permits.....................................................................16
2.18. Offering Exemption................................................................................17
2.19. Disclosure........................................................................................17
2.20. Taxes ............................................................................................17
2.21. Environmental Matters.............................................................................18
2.22. Consents..........................................................................................19
2.23. Brokers ..........................................................................................20
2.24. Suppliers and Customers...........................................................................20
2.25. Use of Proceeds...................................................................................20
2.26. Holding Company Act and Investment Company Act....................................................20
SECTION 3. Representations and Warranties of the Purchasers.....................................................21
SECTION 4. Certain Covenants....................................................................................22
4.1. Access to Records..................................................................................22
4.2. Affirmative Covenants..............................................................................22
4.3. Insurance..........................................................................................24
4.4. Merger, etc........................................................................................24
4.5. Transactions with Affiliates.......................................................................24
4.6. Notice of Breach...................................................................................25
4.7. Matters Related to Directors.......................................................................25
4.8. Rights of First Offer..............................................................................27
4.9. Completion of Certain Matters......................................................................27
4.10. Subsidiary Stock..................................................................................27
SECTION 5. Transfer Taxes ......................................................................................27
SECTION 6. Survival of Representations, Warranties, Agreements and Covenants, etc...............................28
SECTION 7. Expenses ............................................................................................28
SECTION 8. Indemnification .....................................................................................29
8.1. General Indemnification............................................................................29
8.2. Indemnification Principles.........................................................................29
8.3. Claim Notice.......................................................................................30
SECTION 9. Remedies.............................................................................................30
SECTION 10. Further Assurances...................................................................................30
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Page 15 of 53
SECTION 11. Successors and Assigns...............................................................................30
SECTION 12. Entire Agreement.....................................................................................31
SECTION 13. Notices..............................................................................................31
SECTION 14. Amendments...........................................................................................32
SECTION 15. Counterparts.........................................................................................32
SECTION 16. Headings.............................................................................................32
SECTION 17. Nouns and Pronouns...................................................................................32
SECTION 18. Governing Law........................................................................................32
SECTION 19. Publicity............................................................................................33
SECTION 20. Severability.........................................................................................33
</TABLE>
Exhibits Section Reference
-------- -------------------------------------------------------
Exhibit A Schedule of Purchasers Preamble
Exhibit B Terms of Escrow Agreement 1.1(a)
Exhibit C Stock Purchase Agreement for IndeNet, Inc. 1.3(b)
Exhibit D Form of Registration Rights Agreement 1.3(b)
Exhibit E Certificates of Designation 1.3(b)
Exhibit F Form of Opinion of Counsel to the Company 1.3(b)
Schedules
Schedule 2.1 Foreign Qualification
Schedule 2.3 Common Stock Equivalents
Schedule 2.6 Financial Statements
Schedule 2.7 Undisclosed Liabilities
Schedule 2.8 Absence of Changes
Schedule 2.10 Contracts
Schedule 2.11(b) Payments for Intellectual Property
Schedule 2.11(c) Third Party Intellectual Property Rights
Schedule 2.12 Equity Investments
Schedule 2.13(b) Insurance
Schedule 2.14 Employee Benefit Plans and Employment Agreements
Schedule 2.15 Employees
Schedule 2.16 Litigation
Schedule 2.17 Permits
Schedule 2.21 Environmental Laws
Schedule 2.22 Consents and Approvals
Schedule 2.23 Brokers
Index of Defined Terms
Term Section
- --------------------------- -------
Accredited Investor 3(e)
Acquisition Recitals
Acquisition Consideration 1.3(b)
Additional Purchasers 1.1(c)
Additional Shares 1.3(b)
Ancillary Documents 1.3(b)
Articles of Incorporation 1.3(b)
Balance Sheet 2.6
Benefit Plan 2.14(a)
Capital Stock 2.3
Certificate of Designation 1.3(b)
<PAGE>
Page 16 of 53
Claim Notice 8.3
Closing 1.2(a)
Closing Date 1.2(a)
Code 2.14(a)
Common Stock 2.3
Company Preamble
Contract 2.10(a)
Conversion Shares 2.4
Deductible 8.1
DSCM 1.3(b)
Employee 2.14(a)
Employee Agreement 2.14(a)
Encumbrances 2.13(a)
Environmental Laws 2.21(f)
Environmental Liability 2.21(f)
ERISA 2.14(a)
Escrow Account 1.1(a)
Escrow Agent 1.1(a)
Escrow Agreement 1.1(a)
Escrow Amount 1.1(a)
Exchange Act 2.5
Hazardous Material 2.21(f)
IndeNet Purchase Agreement 1.3(b)
Initial Purchasers 7(b)
Intellectual Property 2.11(e)
Litigation 2.16
Losses 8.2
Maintenance Amount 4.8
Material Adverse Change 2.6
Material Adverse Effect 2.1
Non-Competition Agreements 1.3(b)
Non-voting Observer 4.7(a)
Notice 4.8
Pequot Entities 1.3(b)
Permits 2.17
Permitted Encumbrances 2.8
Proposed Securities 4.8
Public Authority 2.21(f)
Purchase 1.1(a)
Purchase Price 1.1(a)
Purchaser Entity 8.1
Purchasers Preamble
Purchasers' Designee 4.7(a)
Registration Rights Agreement 1.3(b)
SEC Reports 2.5
Section 16(b) 4.7(a)
Securities Act 2.18
Series A Preferred Stock Recitals
Software 2.11(f)
Subsidiary 2.1
<PAGE>
Page 17 of 53
PREFERRED STOCK PURCHASE AGREEMENT
AGREEMENT, dated as of July 14, 1997, by and among DIGITAL GENERATION
SYSTEMS, INC. (the "Company"), and the parties listed on the Schedule of
Purchasers attached to this Agreement as Exhibit A (each hereinafter referred to
as a "Purchaser" and collectively referred to as the "Purchasers").
W I T N E S S E T H :
WHEREAS, the Company wishes to sell to the Purchasers and the Purchasers
wish to purchase from the Company shares of Series A Convertible Preferred Stock
(the "Series A Preferred Stock"), each such share convertible into one share of
the Common Stock (as defined herein).
WHEREAS, the business currently conducted by the Company is the operation of
a nationwide multi-media network designed to provide electronic delivery and
related services to the broadcast industry by linking providers to broadcast
stations.
WHEREAS, the Company shall use the proceeds arising from the transaction
contemplated hereby solely to finance a portion of the purchase price of the
acquisition of Mediatech, Inc., a Delaware corporation and a wholly-owned
subsidiary of IndeNet, Inc. (the "Acquisition").
ACCORDINGLY, the parties hereto hereby agree as follows:
SECTION 1. Issuance and Sale of Series A Preferred Stock
1.1. The Purchase. (a) At the Closing (as defined in Section 1.2(a)), each
Purchaser shall, severally and not jointly, purchase from the Company and the
Company shall sell to each Purchaser, the number of shares of Series A Preferred
Stock set forth opposite such Purchaser's name on Exhibit A (collectively, the
"Purchase") at the purchase price set forth opposite such name on Exhibit A.
Subject to Section 1.1(b), the aggregate purchase price to be paid by the
Purchasers for the Series A Preferred Stock purchased by them hereunder is as
set forth on Exhibit A as Total Purchase Price (the "Purchase Price"), of which
(i) the Purchase Price less 14% shall be paid to an account or accounts
designated by the Company not less than three business days prior to the Closing
and (ii) 14% of the Purchase Price (the "Escrow Amount") shall be paid to an
escrow agent (the "Escrow Agent") mutually acceptable to the Company and the
Pequot Entities (as defined below) to be held in a Escrow Account (the "Escrow
Account") and disbursed by the Escrow Agent pursuant to Section 1.4 hereto and
the terms of an escrow agreement in a form mutually satisfactory to the Company,
the Pequot Entities and the Escrow Agent (the "Escrow Agreement") and including
the terms set forth in Exhibit B.
(b) In the event that the Company shall sell Additional Shares (as
defined in 1.3(b)(xiv)), the Pequot Entities shall have the right to purchase
that portion of the Additional Shares that maintains the Pequot Entities'
combined percentage ownership of the Series A Preferred Stock at an ownership
level of 51% or more. Upon
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determination that such sales of Additional Shares will be made (but in no event
later than three business days prior to the Closing), the Company shall provide
the Pequot Entities with a written notice describing the amount of total
Additional Shares to be sold and the amount to be offered to the Pequot Entities
in order to maintain the Pequot Entities' 51% ownership level. The Pequot
Entities shall, within 24 hours of receipt of such notice, confirm its intention
to purchase such shares. The purchase of such Additional Shares shall be on the
same terms and conditions as the shares purchased under the Purchase and shall
be treated, in all respects, as shares purchased under the Purchase, including,
without limitation, the contribution of 14% of the Purchase Price to the Escrow
Agent.
(c) Subject to Section 1.1(b) above, the Company and the purchasers of
the Additional Shares ("Additional Purchasers") described above may, at any time
before the Closing (as defined below), execute counterpart signature pages to
this Agreement, and such Additional Purchasers will, upon delivery to the
Company of such signature pages, become parties to, and bound by, this
Agreement, each to the same extent as if they had executed the original
agreement. Exhibit A to this Agreement will be amended by the Company to list
the Additional Purchasers purchasing shares of Series A Preferred Stock under
this Agreement. Upon execution of the above mentioned signature pages, each
Additional Purchaser shall be deemed to be a "Purchaser" for all purposes of
this Agreement and the Escrow Agreement, and a Holder for purposes of the
Registration Rights Agreement.
1.2. The Closing. (a) The closing of the Purchase (the "Closing") shall take
place at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York
Plaza, New York, NY 10004 at 9:00 a.m. on July 21, 1997 or on such other date as
shall be mutually agreed by the Company and the Purchasers (the "Closing Date");
provided, however, that the closing of the Purchase shall be held simultaneously
with the closing of the Acquisition.
(b) At the Closing, the Company shall deliver to each Purchaser a
certificate or certificates representing the shares of Series A Preferred Stock
purchased by such Purchaser, registered in the name of such Purchaser or its
nominee. Delivery of such certificates to a Purchaser shall be made against
receipt at the Closing by the Company from such Purchaser of the purchase price
therefor, which shall be paid by wire transfer to an account designated at least
one business day prior to the Closing by the Company.
1.3. Conditions to Closing. (a) The obligations of the Company and the
Purchasers to consummate the transactions contemplated hereby at the Closing are
subject to the satisfaction of the following conditions: no temporary
restraining order, preliminary or permanent injunction or other order or decree
which prevents the consummation of the transactions contemplated hereby shall
have been issued and remain in effect, and no statutes, rule or regulation shall
have been enacted by any
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governmental authority (of the United States or otherwise) which prevents the
consummation of the transactions contemplated hereby; provided, however, that
the parties shall use their reasonable best efforts to cause any such decree,
ruling, injunction or other order to be vacated or lifted.
(b) The obligations of the Purchasers to consummate the transactions
contemplated hereby at the Closing is subject to the satisfaction or waiver of
the following conditions:
(i) the representations and warranties of the Company set forth
in Section 2 of this Agreement shall be true and correct in all material
respects as of the date when made and (unless made as of a specified date)
as of the Closing Date; and the Company shall have performed in all material
respects its covenants set forth in this Agreement to be performed prior to
the Closing Date and shall not have taken any action which (if any shares of
Series A Preferred Stock were outstanding) would violate any provision of
the Articles of Incorporation (including the Certificate of Designation) or
this Agreement, as the case may be (and at the Closing the Company shall
deliver to the Purchasers an officer's certificate certifying as to the
Company's compliance with the conditions set forth in this clause (i));
(ii) The Company shall contemporaneously close the transactions
contemplated by the Acquisition in a form not materially different from the
draft Stock Purchase Agreement ("IndeNet Purchase Agreement"), attached
hereto as Exhibit C (such materiality to be determined by the Purchasers in
their sole discretion), at a total purchase price of less than $29,000,000
and shall not have waived any conditions in the IndeNet Stock Purchase
Agreement without the prior written consent of the Purchasers.
(iii) The Company and the Purchasers shall have entered into the
Registration Rights Agreement in the form of Exhibit D hereto (the
"Registration Rights Agreement" and all other contracts, agreements,
schedules, certificates and other documents (including, but not limited to,
the Certificate of Designation (as defined below) and the Escrow Agreement)
being delivered pursuant to or in connection with this Agreement by any
party hereto at or prior to the Closing, the "Ancillary Documents").
(iv) The Company shall have delivered to the Purchasers
certificates of good standing from California with respect to the Company
and New York with respect to the Subsidiary (as defined below) dated as of a
date no earlier than ten days prior to the Closing.
(v) The Amended and Restated Articles of Incorporation of the
Company, as amended, shall have been amended and supplemented by a
Certificate of Designation substantially in the form of Exhibit E hereto
setting forth the rights and preferences of the Series A Preferred Stock
(the "Certificate
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of Designation"), and the Certificate of Designation shall have been filed
with the Secretary of the State of California (the Amended and Restated
Articles of Incorporation, as amended, including such Certificate of
Designation, the "Articles of Incorporation");
(vi) The Common Stock to be issued upon conversion of the Series
A Preferred Stock shall have been approved for quotation on The NASDAQ Stock
Market, subject to official notice of issuance;
(vii) The Company shall have delivered to the Purchasers a
certificate executed by its Secretary certifying (x) a copy of its
organizational documents including the Articles of Incorporation and the
By-Laws, (y) resolutions authorizing the transaction and (z) incumbency
matters.
(viii) The Purchasers shall receive from Wilson, Sonsini,
Goodrich & Rosati P.C., counsel for the Company, an opinion addressed to the
Purchasers, dated as of the Closing, satisfactory in form and substance to
the Purchasers, which shall be in the form of the opinions set forth in
Exhibit F attached hereto.
(ix) In the event that the Purchasers shall designate a person to
serve on the board of directors (who, if such person is not an employee of
Dawson Samberg Capital Management, Inc. ("DSCM"), the investment manager for
each of the Pequot entities listed on Exhibit A (DSCM and such entities
referred to as the "Pequot Entities"), shall be reasonably acceptable to the
Company) such designee shall have been elected to the board of directors of
the Company effective, without any further action, as of the Closing Date.
(x) The Company shall have entered into non-competition
agreements (the "Non-Competition Agreements"), in a form mutually acceptable
to the Company and the Purchasers, with Henry W. Donaldson.
(xi) The Company shall have obtained, with financially sound and
reputable insurers, directors' and officers' liability insurance in an
amount not less than $5,000,000 or a binder with respect to such insurance
in form satisfactory to the Purchasers.
(xii) The Company shall have performed and satisfied all
covenants and agreements required by this Agreement to be performed or
satisfied by it at or prior to the Closing.
(xiii) Without limiting the generality of Section 1.3(b)(i), no
Material Adverse Effect shall have occurred, nor shall any event or events
have occurred which would reasonably likely to have a Material Adverse
Effect.
(xiv) The Company shall not have sold additional shares
("Additional Shares") of Series A Preferred Stock to any persons other than
the Purchasers unless (x) the terms and conditions are the same as those set
forth herein and (y)(A) if the cash portion of the consideration in the
Acquisition
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("Acquisition Consideration") is less than $13 million the total purchase
price of such Additional Shares shall not exceed $4 million or (B) if the
Acquisition Consideration is more than $13 million, the total purchase price
of such Additional Shares shall not exceed the sum of (1) $4 million plus
(2) the amount by which the cash portion of the Acquisition Consideration
exceeds $13 million (up to a maximum of $2 million). Pursuant to the
procedures set forth in Section 1.1(b), the Pequot Entities shall, at their
option, in the aggregate, after considering the sales of the Additional
Shares and the sale to GE Capital Information Technology Solutions, own 51%
or more of the outstanding shares of Series A Preferred Stock.
(xv) The Company shall have entered into the Escrow Agreement.
1.4.Purchase Price Adjustment. In the event the Company (a) shall have less
than $17.8 million in total revenue for fiscal third and fourth quarter, 1997
combined (based on the audited financial statements for the year ended December
31, 1997) or (b) insofar as it is possible to support a tape interface with an
MPEG disk-based system, the Sony RS 422 Standard Video Transmission Interface
shall not be completed and available for customer use by December 31, 1997 (as
determined by the Purchasers in their sole reasonable discretion), then the
Purchasers shall be entitled to instruct the Escrow Agent to pay one-eighth
(1/8) of the Deposit Amount to the Purchasers, payable beginning March 31, 1998
and continuing on a quarterly basis until the earlier of such time as the (x)
Deposit Amount has been fully distributed or (y) anytime after the public
announcement by the Company of the fourth quarter, 1997, earnings results, the
Market Price (as defined in the Certificate of Designation) per share of the
Common Stock shall exceed the Conversion Price (as defined in the Certificate of
Designation) multiplied by 2 for at least 25 days out of 40 consecutive Trading
Days (as defined in the Certificate of Designation).
SECTION 2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchasers follows:
2.1. Organization and Good Standing; Power and Authority; Qualifications.
Each of the Company and its subsidiary, PDR Productions, Inc., a New York
corporation (the "Subsidiary") (a) are duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization and (b) has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as presently conducted and as proposed to be conducted.
The Company has all requisite power and authority to enter into and carry out
the transactions contemplated by this Agreement and the Ancillary Documents to
which it is a party. Each of the Company and its Subsidiary is qualified to
transact business as a foreign
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corporation in, and is in good standing under the laws of, those jurisdictions
listed on Schedule 2.1 under its name, which jurisdictions constitute all of the
jurisdictions wherein the character of the property owned or leased or the
nature of the activities conducted by it makes such qualification necessary and
where failure to so qualify would individually or in the aggregate have a
material adverse effect on properties, business, prospects, operations,
earnings, assets, liabilities or the condition (financial or otherwise) of the
Company and its Subsidiary taken as a whole, whether or not in the ordinary
course of business (a "Material Adverse Effect").
2.2. Authorization of the Documents. The execution, delivery and performance
by the Company of this Agreement and each of the Ancillary Documents to which it
is a party has been duly authorized by all requisite corporate action on the
part of the Company (and do not or will not require the approval or consent of
the shareholders of the Company), and this Agreement and each of the Ancillary
Documents constitutes a legal, valid and binding obligation of the Company which
is a party thereto, enforceable against the Company in accordance with its terms
except to the extent that enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights generally and
except to the extent that the remedy of specific performance and injunction and
other forms of equitable relief may be subject to equitable defenses.
2.3. Capitalization. The authorized capitalization of the Company
immediately prior to the date of the Closing consists of: (a) 5,000,000 shares
of Preferred Stock, of which (i) the shares to be sold pursuant to the Purchase
and the Additional Shares to be issued as permitted herein have been designated
Series A Preferred Stock and (ii) no shares of Series A Preferred Stock are
issued and outstanding and all such outstanding shares are validly issued, fully
paid and nonassessable and free and clear of all Encumbrances; and (b)
30,000,000 shares of Common Stock, no par value per share ("Common Stock"), of
which 11,739,617 shares are issued and outstanding and all such outstanding
shares are validly issued, fully paid and nonassessable and free and clear of
all Encumbrances (as defined below). No class of capital stock ("Capital Stock")
of the Company is entitled to preemptive rights. Except as listed on Schedule
2.3 hereto, there are no outstanding options, warrants, subscription rights,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into, shares of any class of Capital Stock of the Company, or
Contracts, by which the Company or its subsidiary is or may become bound to
issue additional shares of its Capital Stock or options, warrants or other
rights to purchase or acquire any shares of its Capital Stock. Between the date
hereof and the Closing Date, the Company will not have changed the amount of its
authorized Capital Stock, or have subdivided or otherwise changed any shares of
any class of its Capital Stock, whether by way of reclassification, stock split
or otherwise, or have issued any additional shares of Capital
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Stock other than pursuant to the exercise of securities outstanding on the date
hereof and set forth in Schedule 2.3 hereto and will not have granted any
options, warrants or other rights to purchase or acquire shares of the Company's
Capital Stock. Except as set forth in Schedule 2.3 hereto, the Company has not
declared or paid any dividend or made any other distribution of cash, stock or
other property to its shareholders.
2.4. Authorization and Issuance of Capital Stock. The authorization,
issuance, sale and delivery of the Series A Preferred Stock pursuant to this
Agreement and the authorization, reservation, issuance, sale and delivery of the
shares of Series A Preferred Stock and the Conversion Shares (as defined below)
have been duly authorized by all requisite corporate action on the part of the
Company, and when issued, sold and delivered in accordance with this Agreement,
the Series A Preferred Stock and the Conversion Shares will be validly issued
and outstanding, fully paid and nonassessable with no personal liability
attaching to the ownership thereof, free and clear of any Encumbrances, other
than Encumbrances, if any, arising as a result of actions taken by the
Purchasers, and not subject to preemptive or similar rights of the shareholders
of the Company or others. The terms, designations, powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions, of any series of Preferred Stock
of the Company are as stated in the Company's Articles of Incorporation. No
shareholder approval is required to consummate the transaction contemplated
hereunder. The Company has reserved a sufficient number of shares of Series A
Preferred Stock for issuance to the Purchasers on the date hereof in accordance
with this Agreement and (ii) Common Stock for issuance upon conversion or
exercise of all other common stock equivalents outstanding on the date hereof.
The shares of Common Stock issuable upon the conversion of the Series A
Preferred Stock issued or issuable to the Purchasers hereunder shall be referred
to collectively as the "Conversion Shares."
2.5. SEC Reports. The Company has filed all proxy statements, reports and
other documents required to be filed by it under the Securities Exchange Act of
1934, as amended (the "Exchange Act") from and after February 6, 1996; and the
Company has furnished the Purchasers true and complete copies of all annual
reports, quarterly reports, proxy statements and other reports under the
Exchange Act filed by the Company from and after such date, each as filed with
the Securities and Exchange Commission (collectively, the "SEC Reports"). Each
SEC Report was in compliance in all material respects with the requirements of
its respective report form and did not on the date of filing contain any 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, and as of the date
hereof there is no fact or facts not disclosed in the SEC
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Reports which relate specifically to the Company and which individually or in
the aggregate may have a Material Adverse Effect.
2.6. Financial Statements. The financial statements (including any related
schedules and/or notes) included in the SEC Reports have been prepared in
accordance with generally accepted accounting principles consistently followed
(except as indicated in the notes thereto) throughout the periods involved and
fairly present in all material respects the consolidated financial condition,
results of operations and changes in shareholders' equity of the Company as of
the respective dates thereof and for the respective periods then ended (in each
case subject, as to interim statements, to changes resulting from year-end
adjustments, none of which were material in amount or effect). Except as set
forth in Schedule 2.6, the Company has no liabilities or obligations, contingent
or otherwise, except (i) liabilities and obligations in the respective amounts
reflected or reserved against in the Company's balance sheet (the "Balance
Sheet") as of March 31, 1997 included in the SEC Reports or (ii) liabilities and
obligations incurred in the ordinary course of business since March 31, 1997
which individually or in the aggregate do not have a Material Adverse Effect.
Since March 31, 1997, the Company has operated its business only in the ordinary
course and there has not been individually or in the aggregate any change that
would have a Material Adverse Effect (a "Material Adverse Change") other than
changes disclosed in the SEC Reports or otherwise set forth in Schedule 2.6
hereto. The financial forecasts furnished by the Company to the Purchasers have
been reasonably prepared and reflect the best currently available estimates and
judgment of the Company's management as to the expected future financial
performance of the Company and its Subsidiary.
2.7. Absence of Undisclosed Liabilities. Except as set forth on Schedule
2.7, the Company has no liabilities or obligations (whether accrued, absolute,
contingent, unliquidated or otherwise, whether or not known, whether due or to
become due and regardless of when asserted) other than (i) liabilities or
obligations reserved against or otherwise disclosed in the Balance Sheet or the
footnotes thereto, (ii) liabilities or obligations incurred after March 31, 1997
in the ordinary course of business consistent (in amount and kind) with past
practice (none of which is a liability resulting from breach of contract, breach
of warranty, tort, infringement, claim or lawsuit) and that do not exceed
$75,000 in a single transaction.
2.8. Absence of Material Changes. Except as set forth on Schedule 2.8 and
except as otherwise expressly contemplated by this Agreement, since March 31,
1997, the business of the Company and its Subsidiary has been conducted in the
ordinary course, consistent with past practice and there has not been (a) any
Material Adverse Change, nor has any event or change occurred which could
reasonably result in a Material Adverse Change, in the condition (financial or
otherwise), results of
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operations, business, assets, liabilities or prospects of the Company or its
Subsidiary or any event or condition which could reasonably be expected to have
such a Material Adverse Change, (b) any waiver or cancellation of any valuable
right of the Company or its Subsidiary, or the cancellation of any material debt
or claim held by the Company or its Subsidiary, (c) any payment, discharge or
satisfaction of any claim, liability or obligation of the Company or its
Subsidiary other than in the ordinary course of business except where such
payment, discharge or satisfaction would not, individually or in the aggregate,
have a Material Adverse Effect, (d) any Encumbrance upon the assets of the
Company or its Subsidiary other than any Permitted Encumbrance, (e) any
declaration or payment of dividends on, or other distribution with respect to,
or any direct or indirect redemption or acquisition of, any securities of the
Company, (f) any issuance of any stock, bonds or other securities of the Company
or its Subsidiary, (g) any sale, assignment or transfer of any tangible or
intangible assets of the Company or its Subsidiary except in the ordinary course
of business, (h) any loan by the Company or its Subsidiary to any officer,
director, employee, consultant or shareholder of the Company or its Subsidiary
(other than advances to such persons in the ordinary course of business in
connection with travel and travel related expenses), (i) any damage, destruction
or loss (whether or not covered by insurance) materially and adversely affecting
the assets, property, condition (financial or otherwise), results of operations
or prospects of the Company or its Subsidiary, (j) any increase, direct or
indirect, in the compensation paid or payable to any officer or director of the
Company or its Subsidiary, other than in the ordinary course of business, to any
other employee, consultant or agent of the Company or its Subsidiary, (k) any
change in the accounting methods, practices or policies of the Company or its
Subsidiary, (l) any indebtedness incurred for borrowed money by the Company or
its Subsidiary other than in the ordinary course of business, (m) any amendment
to or termination of any material agreement to which the Company or its
Subsidiary is a party other than the expiration of any such agreement in
accordance with its terms, (n) any change in the laws or regulations governing
the Company or its Subsidiary, (o) any Material Adverse Change in the manner of
business or operations of the Company or its Subsidiary (including, without
limitation, any accelerations or deferral of the payment of accounts payable or
other current liabilities or deferral of the collection of accounts or notes
receivable), (p) any capital expenditures or commitments therefor by the Company
or its Subsidiary other than in the ordinary course of business and pursuant to
an annual budget as approved by the Board of Directors that aggregate in excess
of $50,000, (q) any amendment of the articles of incorporation, Bylaws or other
organizational documents of the Company or its Subsidiary, (r) any transaction
entered into by the Company or its Subsidiary whether or not in the
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ordinary course of business or any other material transactions entered into by
the Company or its Subsidiary whether or not in the ordinary course of business,
or (s) any agreement or commitment (contingent or otherwise) by the Company or
its Subsidiary to do any of the foregoing. For purposes of this Agreement,
"Permitted Encumbrances" shall mean (i) those consisting of zoning or planning
restrictions, easements, permits and other restrictions or limitations on the
use of such property or irregularities in title thereto which, individually and
in the aggregate, do not materially impair the use of such property, (ii)
warehousemen's, mechanics', carriers', landlords', repairmen's or other similar
Encumbrances arising in the ordinary course of business and securing obligations
not yet due and payable, and (iii) other Encumbrances which arise in the
ordinary course of business and which individually and in the aggregate do not
materially impair its use of such property or its ability to obtain financing by
using such asset as collateral.
2.9. No Conflict. The execution and delivery by the Company of the Agreement
and the Ancillary Documents to which it is a party and the consummation by the
Company of the transactions contemplated hereby and thereby and its compliance
with the provisions hereof and thereof (including, without limitation, the
issuance, sale and delivery by the Company of the Series A Preferred Stock and
the Conversion Shares) will not (a) violate any provision of any domestic
(federal, state or local) or foreign law, statute, rule or regulation, or any
ruling, writ, injunction, order, judgment or decree of any court, administrative
agency or other governmental body applicable to it, or any of its properties or
assets except where such violation would not, individually or in the aggregate,
have a Material Adverse Effect, (b) conflict with, or result in any violation or
breach of, or constitute (with due notice or lapse of time, or both) a default
or loss of a benefit under, or cause or permit the acceleration under, the
terms, conditions or provisions of any Contract to which it is a party or its
properties or assets is subject, except for defaults which would not,
individually or in the aggregate, have a Material Adverse Effect (c) result in
the creation or imposition of any Encumbrance upon any of its properties or
assets, except for Encumbrances which would not individually or in the aggregate
have a Material Adverse Effect or (d) violate its organizational documents.
2.10. Agreements. (a) Except as set forth on Schedule 2.10, the Company or
its Subsidiary are not a party to, and are not bound or subject to, any
indenture, mortgage, guaranty, lease, license or other contract, agreement or
understanding, written or oral (a "Contract"), other than any Contract which (i)
pursuant to its terms, has expired, been terminated or fully performed by the
parties, and in each case, under which the Company and its Subsidiary have no
liability, contingent or otherwise, or (ii) involves monthly payments to or from
the Company and/or its Subsidiary (as opposed to an indemnity agreement or
similar contract under which a party is not required to make fixed monthly
payments) which monthly payments do not aggregate on an annual basis to $50,000
or more, and in each case, is
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not material to the business, condition (financial or otherwise), operations or
prospects of the Company or its Subsidiary.
(b) Each of such Contracts is, as of the date hereof, and will continue
after the Closing to be, legal, valid, binding and in full force and effect and
enforceable in accordance with its terms. There is no breach, violation or
default by the Company (or, to the best knowledge of the Company, any other
party) under any such Contract except where such breach, violation or default
would not, individually or in the aggregate, have a Material Adverse Effect, and
no event (including, without limitation, the consummation of the transactions
contemplated by this agreement) which, with notice or lapse of time or both,
would (A) constitute a breach, violation or default by the Company (or, to the
best knowledge of the Company, any other party) under any such Contract except
where such breach, violation or default would not, individually or in the
aggregate, have a Material Adverse Effect, or (B) give rise to any lien or right
of termination, modification, cancellation, prepayment, suspension, limitation,
revocation or acceleration against the Company under any such Contract. Except
as set forth on Schedule 2.10, the Company is not or, to the knowledge of the
Company, no other party to any of such Contracts (i) is in arrears in respect of
the performance or satisfaction of the terms and conditions on its part to be
performed or satisfied under any of such Contracts or (ii) has granted or has
been granted any waiver or indulgence under any of such Contracts or has
repudiated any provision thereof.
2.11. Intellectual Property Rights. (a) Except as disclosed on Schedule 2.11
hereto, (i) the Company owns or has the right to use pursuant to license,
sub-license, agreement or permission all of its Intellectual Property (as
defined below), except where the absence of any thereof would not individually
or in the aggregate have a Material Adverse Effect; (ii) the Company has not
interfered with, infringed upon or misappropriated any Intellectual Property
rights of third parties, except for interferences, infringements and
misappropriations which would not individually or in the aggregate have a
Material Adverse Effect, and the Company has not received any claim, demand or
notice alleging any such interference, infringement or misappropriation
(including any claim that it must license or refrain from using any Intellectual
Property rights of any third party). To the Company's knowledge no third party
has interfered with, infringed upon or misappropriated any Intellectual Property
rights of the Company, except for interferences, infringements and
misappropriations which would not individually or in the aggregate have a
Material Adverse Effect.
(b) Except as set forth on Schedule 2.11(b), neither the Company nor
the Subsidiary is obligated to pay any amount, whether as royalty, license fee
or other payment, to any person in order to make, use, or sell any Intellectual
Property.
(c) Except as set forth on Schedule 2.11(c), the operation of the
Company and its Subsidiary as presently operated does not need to
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use or rely upon any Intellectual Property rights of third parties.
(d) All royalties due under said licenses have been paid and there
exists no default by the Company and its Subsidiary or by any other party under
the terms of said licenses, and no event has occurred which, upon the passage of
time or the giving of notice, or both, would result in any default by the
Company and its Subsidiary, or by any other party to the license or prevent the
Company from exercising and obtaining the benefits of any options contained
therein except where such default would not, individually or in the aggregate,
have a Material Adverse Effect.
(e) As used in this Agreement, "Intellectual Property" means all
intellectual property owned, leased, licensed, and used by the Company or its
Subsidiary, including without limitation, (i) all world wide inventions and
discoveries (whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereto, and all patents, patent applications and
patent disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions and reexaminations thereof, (ii)
all trademarks, service marks, trade dress, logos, trade names and corporate
names, together with all translations, adaptations, derivations and combinations
thereof and including all goodwill associated therewith, and all applications,
registrations, renewals and derivatives in connection therewith, (ii) all
copyrightable works, all copyrights and all applications, registrations and
renewals in connection therewith, (iv) all mask works and all applications,
registrations and renewals in connection therewith, (v) all know-how, trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice (including ideas, research
and development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, addresses, phone numbers, pricing and cost
information, and business and marketing plans and proposals), (vi) all Software,
(vii) all other proprietary rights of any type of description (regardless of
whether the same have been formally registered), (viii) all copies and tangible
embodiments thereof (in whatever form or medium) and (ix) all licenses and
agreements in connection with the foregoing.
(f) As used in this Agreement, "Software" means any and all versions,
releases, and predecessors of the software and computer programs of the Company
or its Subsidiary, including all such software and computer programs in machine
readable source code forms and in machine executable object code forms and all
related specifications (including, without limitation, all logic architectures,
algorithms and logic flows and all physical, functional, operating and design
parameters), any data used by or related to Software, work in progress relating
to corrections, modifications or enhancements, operating systems and procedures
(including development methodology), designs, design revisions, related
applications, work benches, software in any language, concepts, ideas,
processes, techniques, software designs and test tools, third party software
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interfaces written by them and all methods of implementation and packaging,
together with all associated know-how and show-how.
(g) As used in this Agreement, "Third Party Software" means software or
computer programs used in the operation of the Company and its Subsidiary
(specifically, in connection with servicing clients) as presently conducted or
currently anticipated to be conducted and that are not owned by the Company.
2.12. Equity Investments; Subsidiaries. Except as set forth on Schedule
2.12, the Company has never had, nor does it presently have, any subsidiaries,
nor has it owned, nor does it presently own, whether directly or indirectly
owned, any capital stock or other proprietary interest, directly or indirectly,
in any corporation, association, trust, partnership, joint venture or other
entity.
2.13. Title to Assets and Properties; Insurance. (a) The Company has good
and marketable title, or a valid leasehold interest in or contractual right to
use, all of its assets (including Third Party Software) and properties, free and
clear of any mortgages, judgments, claims, liens, security interests, pledges,
escrows, charges or other encumbrances of any kind or character whatsoever
("Encumbrances") except in each case for such defects in title and such other
liens and Encumbrances which do not individually or in the aggregate materially
detract from the value to the Company of the properties and assets of the
Company and its Subsidiary taken as a whole.
(b) The Company and its Subsidiary maintain insurance in such amounts
(to the extent available in the public market), including self-insurance,
retainage and deductible arrangements, and of such a character as is reasonable
for companies engaged in the same or similar business and for companies located
in San Francisco. Schedule 2.13(b) sets forth a list of all insurance coverage
carried by the business and/or the Company, the carrier and terms and amount of
coverage.
2.14. Employee Benefit Plans. (a) Schedule 2.14 hereto contains a true and
complete list of (i) each written plan, program, policy, payroll practice,
contract, agreement or other arrangement, or commitment therefore, providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits of any kind,
funded or unfunded, which is now or previously has been sponsored, maintained,
contributed to or required to be contributed to by the Company or pursuant to
which the Company has any liability, contingent or otherwise, including, but not
limited to, any "employee benefit plan" within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (each,
a "Benefit Plan"); and (ii) each management, employment, bonus, option, equity
(or equity related), severance, consulting, non compete, confidentiality or
similar agreement or contract (each, an "Employee Agreement"), pursuant to which
the Company has any liability, contingent or otherwise,
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between the Company and any current, former or retired employee, officer,
consultant, independent contractor, agent or director of the Company (an
"Employee"). Except as identified on Schedule 2.14, the Company does not
currently sponsor, maintain, contribute to, nor is it required to contribute to,
nor has the Company ever sponsored, maintained, contributed to or been required
to contribute to, or incurred any liability to, (i) any "defined benefit plan"
(as defined in ERISA Section 3(35)); (ii) any "multiemployer plan" (as defined
in ERISA Section 3(37)) or (iii) any Benefit Plan which provides, or has any
liability to provide, life insurance, medical, severance or other employee
welfare benefits to any Employee upon his or her retirement or termination of
employment, except as required by Section 4980B of the Internal Revenue Code
(the "Code").
(b) Except with respect to its wholly-owned Subsidiary as disclosed
herein, the Company is not nor has ever been (i) a member of a "controlled group
of corporations," under "common control" or an "affiliated service group" within
the meaning of Sections 414(b), (c) or (m) of the Code, (ii) required to be
aggregated under Section 414(o) of the Code, or (iii) under "common control,"
within the meaning of Section 4001(a)(14) of ERISA, or any regulations
promulgated or proposed under any of the foregoing Sections, in each case with
any other entity.
(c) The Company has previously provided to the Purchasers current,
accurate and complete copies of all documents embodying or relating to each
Benefit Plan and each Employee Agreement, including all amendments thereto,
trust or funding agreements relating thereto (if any), the two most recent
annual reports (Series 5500 and related schedules) required under ERISA (if
any), the most recent determination letter (if any) received from the Internal
Revenue Service, the most recent summary plan description (with all material
modifications) (if any), and all material communications to any Employee or
Employees relating to any Benefit Plan or Employee Agreement.
(d) Each Benefit Plan has been established and maintained in accordance
with its terms and in compliance with all applicable, laws, statutes, orders,
rules and regulations, including but not limited to ERISA and the Code; and each
Benefit Plan intended to qualify under Section 401 of the Code is, and since its
inception has been, so qualified.
(e) The execution of, and performance of the transactions contemplated
in, this Agreement will not (either alone or upon the occurrence of any
additional or subsequent events) constitute an event under any Benefit Plan or
Employee Agreement that will or may result in any payment (whether of severance
pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligations to fund benefits with respect
to any Employee.
2.15. Labor Relations; Employees. Schedule 2.15 hereto lists all employees
of the Company with an annual salary in excess of $100,000. Except as set forth
on Schedule
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2.15 hereto, (i) the Company is not delinquent in payments to any of its
employees, for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed by the date hereof or amounts required
to be reimbursed by them to the date hereof, (ii) the Company is in compliance
with all applicable federal, state and local laws, rules and regulations
respecting employment, employment practices, labor, terms and conditions of
employment and wages and hours except where failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect, (iii) the
Company is not bound by or subject to (and none of its assets or properties is
bound by or subject to) any written or oral, express or implied, commitment or
arrangement with any labor union, and no labor union has requested or, to the
best knowledge of the Company, has sought to represent any of the employees,
representatives or agents of the Company, (iv) there is no labor strike,
dispute, slowdown or stoppage actually pending, or, to the best knowledge of the
Company, threatened against or involving the Company, (v) to the best knowledge
of the Company, no salaried key employee has any plans to terminate his or her
employment with the Company. Each of the officers of the Company, each key
employee and each other employee of the Company who has or had access to
confidential information of the Company and its Subsidiary has executed a
confidentiality agreement, and such agreements are in full force and effect.
2.16. Litigation; Orders. Except as set forth on Schedule 2.16, there is no
civil, criminal or administrative action, suit, claim, notice, hearing, inquiry,
proceeding or investigation at law or in equity by or before any court,
arbitrator or similar panel, governmental instrumentality or other agency now
pending or, to the best knowledge of the Company, threatened against the Company
or its Subsidiary or the assets (including the Intellectual Property) or the
Company or its Subsidiary (a "Litigation"). Except as set forth in Schedule
2.16, neither the Company nor its Subsidiary is subject to any order, writ,
injunction or decree of any court of any federal, state, municipal or other
domestic or foreign governmental department, commission, board, bureau, agency
or instrumentality.
2.17. Compliance with Laws; Permits. Except as provided in Schedule 2.17,
the Company and its Subsidiary are in compliance, and have been conducted in
compliance with, all federal, state, local and foreign laws, rules, ordinances,
codes, consents, authorizations, registrations, regulations, decrees,
directives, judgments and orders applicable to it except where the failure to
comply would not individually or in the aggregate have a Material Adverse
Effect. The Company has all federal, state, local and foreign governmental
licenses, permits, qualifications and authorizations ("Permits") necessary in
the conduct of its business as currently conducted. All such Permits are in full
force and effect, and no violations have been recorded in respect of any such
Permits; no proceeding is pending or, to the best
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knowledge of the Company, threatened to revoke or limit any such Permit; and no
such Permit will be suspended, cancelled or adversely modified as a result of
the execution and delivery of this Agreement or the Ancillary Documents and the
consummation of the transactions contemplated hereby or thereby, except where
failure to have such Permit would not individually or in the aggregate have a
Material Adverse Effect.
2.18. Offering Exemption. Assuming the accuracy of the representations and
warranties contained in Section 3 hereof, the offer and sale of the Series A
Preferred Stock as contemplated hereby and the issuance and delivery of the
Conversion Shares to the Purchasers upon the conversion of the Series A
Preferred Stock are each exempt from registration under the Securities Act of
1933, as amended (the "Securities Act") and under applicable state securities
and "blue sky" laws, as currently in effect.
2.19. Disclosure. Neither this Agreement nor any certificate, instrument or
written statement furnished or made to the Purchasers by or on behalf of the
Company in connection with this Agreement or the Ancillary Documents contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein and therein not
misleading. There is no fact which the Company has not disclosed to the
Purchasers or their counsel in writing and of which the Company is aware which
materially and adversely affects or which could reasonably be expected to
materially and adversely affect the Company or its Subsidiary or the business,
financial condition, operations, property, affairs or prospects of the Company
or its Subsidiary or the ability of the Company or its Subsidiary to perform its
obligations under the Agreement or any of the Ancillary Documents.
2.20. Taxes. The Company and its Subsidiary have filed or caused to be filed
all income tax returns which are required to be filed and have paid or caused to
be paid all Taxes that have become due, except Taxes the validity or amount of
which is being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been set aside. "Taxes," for purposes of
this Agreement, means any taxes, assessments, duties, fees, levies, imposts,
deductions, withholdings, including, without limitation, income, gross receipts,
ad valorem, value added, excise, real or personal property, asset, sales, use,
license, payroll, transaction, capital, net worth and franchise taxes, estimated
taxes, withholding, employment, social security, workers compensation, utility,
severance, production, unemployment compensation, occupation, premium, windfall
profits, transfer and gains taxes, or other governmental charges of any nature
whatsoever imposed by any government or taxing authority of any country or
political subdivision of any country and any liabilities with respect thereto,
including any penalties, additions to tax, fines or interest thereon, and
includes any liability of the Company and its
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Subsidiary arising under any tax sharing agreement to which it is or has been a
party.
2.21. Environmental Matters. Except as listed in Schedule 2.21:
(a) There are, with respect to the Company and its Subsidiary, or any
predecessor of the foregoing, no past or present violations of Environmental Law
(as defined below), nor any actions, activities, circumstances, conditions,
events, incidents, or contractual obligations which may give rise to any
liability pursuant to any Environmental Law and neither the Company nor its
Subsidiary has received any notice with respect to any of the foregoing nor is
any Litigation pending or threatened in connection with any of the foregoing.
(b) To the knowledge of the Company, no Hazardous Materials are present
on or about any real property currently owned, leased or used by the Company or
its Subsidiary and no Hazardous Materials were present on or about any real
property previously owned, leased or used by the Company or its subsidiary
during the period the property was owned, leased or used by the Company or its
Subsidiary, except in the normal course of the Company's or such Subsidiary's
business.
(c) To the knowledge of the Company, no Hazardous Materials have been
released on or about, or where they may pose a threat of migration to, any real
property currently owned, leased or used by the Company or its Subsidiary and no
Hazardous Materials were released on or about any real property previously
owned, leased or used by the Company or its Subsidiary during the period the
property was owned, leased or used by the Company or its Subsidiary, except as
may be required in the normal course of business and in material compliance with
applicable Environmental Law.
(d) To the knowledge of the Company, no asbestos-containing materials
or PCBs are present on or about any property currently owned, leased or used by
the Company or its Subsidiary.
(e) To the knowledge of the Company, there are not now, nor have there
ever been, any underground storage tanks or similar facilities of any kind on or
under any real property currently or previously owned, leased or used by the
Company or its Subsidiary.
(f) For purposes of this Section 2.21, capitalized terms used herein
shall have the following meanings:
"Environmental Laws" shall mean, at any date, all provisions of
federal, state, local or foreign law (including applicable principles of common
and civil law), statutes, ordinances, rules, regulations, published standards
and directives that have the force and effect of Laws, permits, licenses,
judgments, writs, injunctions, decrees and orders enacted, promulgated or issued
by any Public Authority, and all indemnity agreements and other contractual
obligations, as in effect at such date, relating to (i) the protection of the
environment, including the air, surface and subsurface soils, surface waters,
groundwaters and natural resources, and (ii) occupational health and safety and
exposure of persons to Hazardous Materials.
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Environmental Laws shall include the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. ss.ss.9601 et seq., and any other laws
imposing or creating liability with respect to Hazardous Materials.
"Environmental Liability" shall mean any liabilities, obligations,
costs, losses, payments or damages, including compensatory and punitive damages,
incurred (i) to contain, remove, clean up, assess, abate or otherwise remedy any
actual or alleged release or threatened release of Hazardous Materials, any
actual or alleged contamination (by Hazardous Materials) of air, surface or
subsurface soil, groundwater or surface water, or any personal injury or damage
to natural resources or property resulting from any such release or
contamination, pursuant to the requirements of any Environmental Law or in
response to any claim by any Public Authority or other third party under any
Environmental Law; (ii) to modify facilities or processes or take any other
remedial action in response to any claim by any Public Authority of
non-compliance with any Environmental Law; (iii) as a result of the imposition
of any civil or criminal fine or penalty by any Public Authority for the
violation or alleged violation of any Environmental Law; or (iv) as a result of
any action, suit, proceeding or claim by any third party under any Environmental
Law. The term "Environmental Liability" shall include: (i) reasonable fees of
counsel and consultants (but not any corporate allocation for management time or
for the use of similar in-house services or facilities) and (ii) the costs and
expenses of any investigation undertaken to ascertain the existence or extent of
any potential or actual Environmental Liability.
"Hazardous Material" shall mean any substance regulated by any
Environmental Law or which may now or in the future form the basis for any
Environmental Liability.
"Public Authority" shall mean any supranational, national, regional,
state or local government court, governmental agency, authority, board, bureau,
instrumentality or regulatory body.
2.22. Consents. Except as set forth on Schedule 2.22, no permit,
authorization, consent or approval of or by, or any notification of or filing
with, any person (governmental or private) is required by the Company in
connection with the execution, delivery and performance of the Agreement and the
Ancillary Documents to which it is a party, the consummation by the Company of
the transactions contemplated hereby or thereby, or the issuance, sale or
delivery of the Series A Preferred Stock or the Conversion Shares (other than
such notifications or filings required under applicable federal or state
securities laws, if any, which shall be made on a timely basis).
2.23. Brokers. Except as listed on Schedule 2.23. neither the Company nor
any of its officers, directors, employees or shareholders has employed any
broker or finder in connection with the transactions contemplated by this
Agreement or the Ancillary Documents.
2.24. Suppliers and Customers. The Company does not have any knowledge of
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any termination, cancellation or threatened termination or cancellation or
limitation of, or any material modification or change in, or expressed material
dissatisfaction with the business relationship between the Company or its
Subsidiary and any supplier or vendor or customer or client of the Company or
its Subsidiary, in each case, of materials or services in an amount in excess of
$50,000 per year.
2.25. Use of Proceeds. The Company shall use the proceeds arising from the
transactions contemplated hereby to finance a portion of the Acquisition.
2.26. Holding Company Act and Investment Company Act. Neither the Company
nor its Subsidiary is: (i) a "public utility company" or a "holding company," or
an "affiliate" or a "subsidiary company" of a "holding company," or an
"affiliate" of such a "subsidiary company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended, or (ii) a "public
utility," as defined in the Federal Power Act, as amended, or (iii) an
"investment company" or an "affiliated person" thereof or an "affiliated person"
of any such "affiliated person," as such terms are defined in the Investment
Company Act of 1940, as amended.
SECTION 3. Representations and Warranties of the Purchasers. Each of the
Purchasers represents and warrants to the Company as of the date hereof as
follows:
(a) Such Purchaser is acquiring the Series A Preferred Stock for its
own account, for investment and not with a view to the distribution thereof
within the meaning of the Securities Act.
(b) Such Purchaser understands that (i) the Series A Preferred Stock
has not been, and that the Conversion Shares will not be, registered under the
Securities Act or any state securities laws, by reason of their issuance by the
Company in a transaction exempt from the registration requirements thereof and
(ii) the Series A Preferred Stock and the Conversion Shares may not be sold
unless such disposition is registered under the Securities Act and applicable
state securities laws or is exempt from registration thereunder.
(c) Such Purchaser further understands that the exemption from
registration afforded by Rule 144 (the provisions of which are known to such
Purchaser) promulgated under the Securities Act depends on the satisfaction of
various conditions, and that, if applicable, Rule 144 may afford the basis for
sales only in limited amounts.
(d) Such Purchaser has not employed any broker or finder in connection
with the transactions contemplated by this Agreement.
(e) Such Purchaser is an "Accredited Investor" (as defined in Rule
501(a) under the Securities Act).
(f) Such Purchaser is duly organized and validly existing under the
laws of the state of its organization and has all power and authority to enter
into and consummate the transactions contemplated by the Agreement and the
Ancillary Documents. Each of this Agreement and the Ancillary Documents to
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which it is a party consitutes a valid and binding agreement of such Purchaser
enforceable against such Purchaser in accordance with its terms except to the
extent that enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights generally.
(g) The execution, delivery and performance by such Purchaser of this
Agreement and each of the Ancillary Documents to which it is a party and the
consummation by such Purchaser of the transactions contemplated hereby and
thereby will not (a) violate any provision of law, statute, rule or regulation,
or any ruling, writ, injunction, order, judgment or decree of any court,
administrative agency or other governmental body applicable to it, or any of its
properties or assets or (b) violate its organizational documents (if any).
(h) No permit, authorization, consent or approval of or by, or any
notification of or filing (including any filing under the Hart-Scott Rodino
Antitrust Improvements Act of 1976, as amended) with, any person (governmental
or private) is required in connection with the execution, delivery and
performance by such Purchaser of the Agreement and the Ancillary Documents to
which it is a party, or the consummation by such Purchaser of the transactions
contemplated thereby.
(i) Such Purchasers, in making this investment, have not relied upon
any information or representations and warranties of Hambrecht & Quist LLC,
including, without limitation, representations and warranties regarding the
Company, its officers, financial condition, business and prospects, or the terms
of the purchase of the Series A Preferred Stock.
SECTION 4. Certain Covenants.
4.1. Access to Records. Subject to appropriate agreements of confidentiality
and limitations of interference, the Company shall afford the Purchasers and
their employees, counsel and other authorized representatives full access,
during normal business hours, upon reasonable advance notice, with due regard to
its ongoing operations, to the assets, properties, offices and other facilities,
Contracts and books and records of the Company and of its Subsidiary, and to the
outside auditors of the Company and their work papers relating thereto, in each
case, as the Purchasers may from time to time reasonably request. The parties
hereto agree that no investigation by the Purchasers or their representatives
shall affect or limit the scope of the representations and warranties of the
Company contained herein or in any Ancillary Document delivered pursuant hereto
or limit liability for breach of any such representation or warranty.
4.2. Affirmative Covenants.
(a) System of Accounting. The books of account and other financial and
corporate records of the Company and its subsidiary shall be maintained in
accordance with good business and
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accounting practices and the financial condition of the Company and its
Subsidiary shall be accurately reflected in the SEC Reports.
(b) Maintenance of Corporate Existence, etc. The Company shall, and
shall cause its Subsidiary to, maintain in full force and effect its corporate
existence, rights, governmental approvals and franchises and all licenses and
other rights to use patents, processes, trademarks, trade names or copyrights
owned or possessed by it and deemed by it to be material to the conduct of its
business. The Company shall, and shall cause its Subsidiary to, use its
commercially reasonable efforts to preserve its favorable business relationships
with the clients, lenders, suppliers, customers, licensors and licensees and
others having business dealings with the Company and its Subsidiary and to
preserve the goodwill and ongoing operations of the Company and its Subsidiary.
(c) Compliance with Laws. The Company shall, and shall cause its
Subsidiary to, comply with all applicable laws, rules regulations and orders
except where failure to comply would not, individually or in the aggregate, have
a Material Adverse Effect.
(d) Maintenance of Properties and Leases. The Company shall, and shall
cause its subsidiary to, keep their properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
reasonably needful and proper, or legally required, repairs, renewals,
replacements, additions and improvements thereto. So long as it is in the best
interest of the Company, the Company shall, and shall cause its Subsidiary to,
comply at all times with each provision of all leases to which any of them is a
party or under which any of them occupies, or has possession, of, property.
(e) Insurance. The Company shall, and shall cause its subsidiary to,
keep its assets which are of an insurable character, if any, insured by
financially sound and reputable insurers against loss or damage by fire,
extended coverage and other hazards and risks and liability to persons and
property to the extent and in the manner customary for companies in similar
businesses similarly situated and located in San Francisco, California.
(f) Licenses and Permits. The Company shall, and shall cause its
subsidiary to, use its best efforts to obtain all federal, state, local and
foreign governmental licenses, permits and qualifications material to and
necessary in the conduct of its business as proposed to be conducted.
(g) Intellectual Property. The Company shall, and shall cause its
subsidiary to, use its reasonable best efforts to cause all Intellectual
Property, including, but not limited to, technological developments, inventions,
discoveries or improvements made by its employees to be fully documented in
accordance with the prevailing industrial professional standards, and, where
possible and appropriate, file and prosecute United States and foreign patent
applications relating to and protecting such developments. In addition, the
Company shall, and shall cause its subsidiary to, use its commercially
reasonable efforts to cause all Intellectual Property, including, but not
limited to,
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all technological developments, inventions, discoveries or improvements made by
any of its employees or any employees of its subsidiaries to be owned by it and,
where possible and appropriate, obtain reasonable legal protections for the its
benefit with respect to such property.
(h) Compliance with Contracts. So long as it is in the best interest of
the Company, the Company shall, and shall cause its subsidiary to, comply with
all material obligations which it incurs pursuant to any contract or agreement,
whether oral or written, express or implied, as such obligations become due,
unless and to the extent that the same are being contested in good faith and by
appropriate proceedings and adequate reserves (as determined in accordance with
generally accepted accounting principles, consistently applied) have been
established on its books with respect thereto.
4.3. Insurance. The Company shall maintain after the Closing the directors'
and officers' liability insurance. The Company and the Board of Directors will
evaluate the appropriateness of obtaining "key man" life insurance to be owned
by the Company and with the Company named as the payee of all benefits
thereunder.
4.4. Merger, etc. The Company will not merge with or into or consolidate
with, or sell all or substantially all of its assets to, any other person unless
(a) either (i) in the case of merger or consolidation, the Company will be the
surviving entity or (ii) in the case of a merger or consolidation where the
Company is not the surviving entity and in the case of a sale of all or
substantially all of its assets, the entity formed by such consolidation or into
which the Company is merged or the entity which acquires all of substantially
all of the assets of the Company shall have assumed in writing all of the
obligations of the Company under each of this Agreement and the Ancillary
Documents, and (b) immediately after the consummation of such merger or
consolidation the surviving entity would not be in violation of any of the
provisions applicable to the Company contained in this Agreement and the
Ancillary Documents.
4.5. Transactions with Affiliates. The Company will not, and will not permit
its subsidiary to, engage in any transaction or group of related transactions
(including, without limitation, the purchase, lease, sale or exchange of
properties of any kind or the rendering of any service) with any affiliate
(other than the Company), except in the ordinary course and pursuant to the
reasonable requirements of the Company's or such subsidiary's business and upon
fair and reasonable terms no less favorable to the Company or such subsidiary
than would be obtainable in a comparable arm's-length transaction with a person
not an Affiliate (as defined in the Securities Act).
4.6. Notice of Breach. As promptly as practicable, and in any event not
later than five Business Days after senior management of the Company becomes
aware thereof, the Company shall provide the Purchasers with
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written notice of any breach by the Company of any provision of this Agreement,
including, without limitation, this Article 4, specifying the nature of such
breach and any actions proposed to be taken by the Company to cure such breach.
4.7. Matters Related to Directors. (a) Subject to Article 3(b) of the
Certificate of Designation, in the event that the Purchasers shall designate a
person to serve on the Board of Directors prior to the Closing, the Company will
have taken all necessary action for such designee (the "Purchasers' Designee")
to be elected to the Board of Directors of the Company. Thereafter, so long as
the Purchasers own 10% of the total outstanding stock of the Company (as such
calculation is made pursuant to Section 16(b) of the Securities Exchange Act of
1934, as amended ("Section 16(b)") in connection with any annual meeting of
shareholders at which the term of a Purchasers' Designee is to expire, the
Company will take all necessary action to cause a Purchasers' Designee, which
Purchasers' Designee, if not an employee of a Entity affiliate, shall be
reasonably acceptable to the Company, to be nominated and use its best efforts
to cause such Purchasers' Designee to be elected to the Board of Directors of
the Company. In the event of any vacancy arising by reason of the resignation,
death, removal or inability to serve of any of the Purchasers' Designees, the
Company shall use reasonable best efforts to cause a replacement designee of the
Purchasers to be elected successor to fill such vacancy. Notwithstanding
anything to the contrary, in the event the Purchasers choose to propose a
director who is not an employee of a Pequot Entity, then the Purchasers shall
also be entitled to designate a non-voting observer (which observer, if not an
employee of a Pequot Entity, shall be reasonably acceptable to the Company)
other than a voting member of the Board to attend and participate in (but not to
vote at) all meetings of the Board of Directors of the Company and any committee
of the Board (the "Non-voting Observer"); provided, however, that the Purchasers
shall only have the right to designate a Non-voting Observer so long as the
Purchasers hold in the aggregate more than 10% of the total Common Stock
outstanding on an as converted basis (as such calculation is made pursuant to
Section 16(b)). Subject to the execution of appropriate confidentiality
agreements, the Non-voting Observer shall have the same access and limitations
to information concerning the business and operations of the Company as
directors of the Company, and shall be entitled to participate in discussions
and consult with the Board of Directors of the Company without voting; provided,
further, that, in the event the Board of Directors, upon a written determination
of counsel to the Company, concludes that the presence of the Non-voting
Observer would violate the Company's attorney-client privilege in a manner that
would be materially detrimental to the Company's legal position, such Non-voting
Observer shall be excluded from the portion of the meeting to which such
privilege relates. Such Non-voting Observer (and his or her affiliates) shall be
subject to the same securities trading restrictions as the outside directors of
the Company and have
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liability of an insider for any violations of federal and state securities laws.
(b) In addition to any requirements specified in the By-Laws of the
Company, the Company shall notify the Purchasers, the Purchasers' Designee or
the Non-voting Observer, as the case may be, by telecopy, of (a) every meeting
(or action by written consent) of the Board of Directors of the Company and (b)
every meeting (or action by written consent) of the board of directors of its
subsidiary and of any committee of the Board of Directors of the Company or its
subsidiary, to the extent, in the case of clause (b), that a Purchasers'
Designee is on the board of directors of such subsidiary or is on such committee
of the Board of Directors of the Company or its subsidiary, at least three days
in advance of such meeting (or distribution of written consents), or, if such
notice under the circumstances is not practicable, as soon before the meeting
(or distribution) as is practicable.
(c) The Company shall, upon request therefor, promptly reimburse the
Purchasers' Designee and the Non-voting Observer, as the case may be, for all
reasonable expenses incurred by them in connection with their attendance at
meetings of the Board of Directors or of committees of the Board of Directors
and any other activities undertaken by them in their capacity as directors of
the Company or its subsidiary or observer, as applicable. The foregoing shall be
in addition to, and not in lieu of (or in duplication of), any indemnification
or reimbursement obligations of the Company under the Articles of Incorporation
or Bylaws of the Company or by law. The Non-voting Observer shall be entitled to
indemnification from the Company to the maximum extent permitted by law as
though he or she were a director of the Company.
(d) Without the approval of the Board of Directors of the Company that
includes the affirmative vote of the Purchasers' Designee, the Company shall not
amend, supplement, modify or repeal any provision of the Articles of
Incorporation or Bylaws of the Company or take any other action, including,
without limitation, the adoption of a shareholders' rights plan or similar plan,
which would materially and adversely affect the rights or benefits of the
Purchasers under any of this Agreement or the Ancillary Documents, including,
without limitation, the conversion rights of the holders of the Series A
Preferred Stock hereunder.
4.8. Rights of First Offer. Prior to seeking financing from any third party
consisting of a privately offered issuance of equity securities (the "Proposed
Securities") by the Company on or after the date of the Closing (other than with
respect to the securities being sold contemporaneously herewith), the Company
shall notify the Purchasers of a description in reasonable detail of the
Proposed Securities, the amount proposed to be issued and the consideration the
Company desires to receive therefor (the "Notice"), which Notice shall
constitute an offer to the Purchasers to purchase a portion (a "Maintenance
Amount") of such Proposed Securities on a pari passu
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basis in order to maintain the Purchasers' percentage level of ownership (i) of
the total Common Stock outstanding (on a fully diluted basis) and (ii) of the
total outstanding Series A Preferred Stock. The Purchasers shall have not less
than 20 days after receipt of the Notice (unless the Purchasers earlier indicate
that they have no interest in purchasing the Proposed Securities) to purchase
the above-mentioned Maintenance Amount on the terms set forth in the Notice or
such other terms as are mutually acceptable to the Company and the Purchasers).
In the event that the Purchasers do not purchase their Maintenance Amount, the
Company shall be permitted to sell the entire amount of the Proposed Securities;
provided, that the closing of such sale occurs within 90 days from the date of
the Notice and provided that the sale of the Proposed Securities is on terms no
more favorable than those terms set forth in the Notice. No privately offered
equity securities shall be issued by the Company to any Person unless the
Company has first offered such portion of the equity securities to the
Purchasers in accordance with this Section 4.8.
4.9. Completion of Certain Matters. (a) The Company shall, prior to
September 1, 1997, demonstrate to the Purchasers in a manner satisfactory to the
Purchasers the viability of its current radio transmission technology to support
bi-directional transmission capabilities.
4.10. Subsidiary Stock. (a) The Company shall not, without the prior written
consent of the holders of a majority of the shares of Series A Preferred Stock,
(a) create, designate, or authorize the issuance of, any series of stock of its
Subsidiary or Mediatech, Inc. or (b) spin off the assets or the shares of the
Common Stock of its Subsidiary or Mediatech, Inc.
SECTION 5. Transfer Taxes. The Company agrees that it will pay, and will
hold each Purchaser harmless from any and all liability with respect to any
stamp or similar Taxes which may be determined to be payable in connection with
the execution and delivery and performance of this Agreement, and that it will
similarly pay and hold each Purchaser harmless from all Taxes in respect of the
issuance of the Series A Preferred Stock and the Conversion Shares to such
Purchaser.
SECTION 6. Survival of Representations, Warranties, Agreements and
Covenants, etc. All representations and warranties in this Agreement and in the
Ancillary Documents shall survive the Closing until the second anniversary of
the date hereof (except to the extent a Claim Notice (as defined in Section 8.3)
shall have been given prior to such date with respect to a breach of a
representation and warranty, in which case such representation and warranty
shall survive until such claim is resolved) and shall in no way be affected by
any investigation or knowledge of the subject matter thereof made by or on
behalf of any Purchaser provided, however, the representations and warranties
set forth in Sections 2.2, 2.3, 2.4 and 2.6 (to the extent related to Taxes)
shall survive the Closing indefinitely; provided, further, however,
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that the representations and warranties set forth in Section 2.20 shall survive
until the end of the applicable statute of limitations. All agreements contained
herein shall survive the Closing until, by their respective terms, they are no
longer operative.
SECTION 7. Expenses. (a) Except as set forth in Section 7(b), the Company
and each Purchaser shall pay all the costs and expenses incurred by it or on its
behalf in connection with this Agreement and the consummation of the
transactions contemplated hereby.
(b) Within 10 days from the receipt of a billing statement from the
Pequot Entities (the Pequot Entities, together with GE Capital Information
Technology Solutions, the "Initial Purchasers"), the Company shall pay and shall
reimburse the Initial Purchasers for all of their reasonable documented
out-of-pocket costs and expenses incurred in connection with this transaction
(but excluding travel expenses of the Initial Purchasers) (including, without
limitation, the reasonably documented reasonable fees and expenses of counsel
retained by Pequot Private Equity Fund, L.P. in connection with the negotiation
and preparation of this Agreement and the Ancillary Documents and the
consummation of the transactions contemplated hereby and thereby; provided,
however, in no event shall the liability of the Company under this Section 7(b)
in the aggregate exceed $50,000. In addition, the Company shall pay, and hold
the Initial Purchasers harmless against liability for the payment of stamp and
other Taxes which may be payable in respect of the execution and delivery of
this Agreement or the issuance, delivery or acquisition of any shares of Series
A Preferred Stock or Conversion Shares.
SECTION 8. Indemnification.
8.1. General Indemnification. The Company shall indemnify, defend and hold
each Purchaser, its affiliates, their respective officers, directors, partners,
employees, agents, representatives, successors and assigns (each a "Purchaser
Entity") harmless from and against all Losses (as defined below) incurred or
suffered by a Purchaser Entity (whether incurred or suffered directly or
indirectly through ownership of capital stock of the Company) arising from the
breach of any of the representations, warranties, covenants or agreements made
by the Company in this Agreement or in any Ancillary Document. Each Purchaser,
severally and not jointly, shall indemnify, defend and hold the Company, its
affiliates, their respective officers, directors, employees, agents,
representatives, successors and assigns harmless against all Losses arising from
the breach of any of its representations, warranties, covenants or agreements in
this Agreement or in any Ancillary Documents. Notwithstanding anything to the
contrary in this Agreement, no indemnification payment by the Company pursuant
to this Section 8 with respect to any Losses otherwise payable hereunder as a
result of a breach of the representations and warranties of the Company (other
than any Losses resulting from breaches of the representation and warranty in
Section 2.3 which
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shall not be subject to the Deductible (as defined below)) shall be payable
until the time as such Losses shall aggregate for all Purchaser Entities to more
than $50,000 (the "Deductible"), and then only to the extent that such Losses,
in the aggregate for all Purchaser Entities, exceed the Deductible.
8.2. Indemnification Principles. For purposes of this Section 8, (i)
"Losses" shall mean each and all of the following items: claims, losses,
(including, without limitation, losses of earnings) liabilities, obligations,
payments, damages (actual, punitive or consequential), charges, judgments,
fines, penalties, amounts paid in settlement, costs and expenses (including,
without limitation, interest which may be imposed in connection therewith, costs
and expenses of investigation, actions, suits, proceedings, demands, assessments
and fees, expenses and disbursements of counsel, consultants and other experts);
and (ii) solely with respect to Claims by third parties against a Purchaser
Entity, each of the representations and warranties made by any party in this
Agreement and in the Ancillary Documents (other than the representation and
warranty made in subclause (a) of Section 2.8 and in Section 2.19 and 2.24 of
this Agreement) shall be deemed to have been made without the inclusion of
limitations or qualifications as to materiality, such as the words "Material
Adverse Effect," "immaterial," "material" and "in all material respects" or
words of similar import. Any payment (or deemed payment) by the Company to a
Purchaser pursuant to this Section 8, shall be treated for federal income tax
purposes as an adjustment to the price paid by such Purchaser for the Series A
Preferred Stock pursuant to this Agreement.
8.3. Claim Notice. A party seeking indemnification under this Section 8
shall, promptly upon becoming aware of the facts indicating that a claim for
indemnification may be warranted, give to the party from whom indemnification is
being sought a claim notice relating to such Loss (a "Claim Notice"). Each Claim
Notice shall specify the nature of the claim, the applicable provision(s) of
this Agreement or other instrument under which the claim for indemnity arises,
and, if possible, the amount or the estimated amount thereof. No failure or
delay in giving a Claim Notice (so long as the same is given prior to expiration
of the representation or warranty upon which the claim is based) and no failure
to include any specific information relating to the claim (such as the amount or
estimated amount thereof) or any reference to any provision of this Agreement or
other instrument under which the claim arises shall affect the obligation of the
party from whom indemnity is sought.
SECTION 9. Remedies. In case any one or more of the covenants and/or
agreements set forth in this Agreement shall have been breached by any party
hereto, each Purchaser, with respect to a breach by the Company, with respect to
a breach by a Purchaser, may proceed to protect and enforce its rights either by
suit in equity and/or by action at law,
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including, but not limited to, an action for damages as a result of any such
breach and/or an action for specific performance of any such covenant or
agreement contained in this Agreement.
SECTION 10. Further Assurances. At any time or from time to time after the
Closing, the Company, on the one hand, and the Purchasers, on the other hand,
agree to cooperate with each other, and at the request of the other party, to
execute and deliver any further instruments or documents and to take all such
further action as the other party may reasonably request in order to evidence or
effectuate the consummation of the transactions contemplated hereby relating to
the Purchase and to otherwise carry out the intent of the parties hereunder.
SECTION 11. Successors and Assigns. This Agreement shall bind and inure to
the benefit of the Company and the Purchasers and the respective successors,
permitted assigns, heirs and personal representatives of the Company and the
Purchasers except that the Company may not assign its rights and obligations
under this Agreement to any person without the prior written consent of the
Purchasers. In addition, and whether or not any express assignment has been
made, the provisions of this Agreement which are for each of the Purchaser's
benefit as a purchaser or holder of Series A Preferred Stock are also for the
benefit of, and enforceable by, any subsequent holder of such Series A Preferred
Stock and/or Conversion Shares.
SECTION 12. Entire Agreement. This Agreement and the other writings referred
to herein or delivered pursuant hereto which form a part hereof contain the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior and contemporaneous arrangements or understandings with
respect thereto.
SECTION 13. Notices. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or sent by telecopy,
nationally recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:
(i) if to the Company, to:
Digital Generation Systems, Inc.
875 Battery Street
San Francisco, CA 94111
Telecopy: (415) 276-6601
Attention: Henry Donaldson
with a copy to:
Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
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Telecopy: (415) 496-6811
Attention: John B. Goodrich, Esq.
(ii) if to the Purchasers, to the address listed on Exhibit A.
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Telecopy: (212) 859-8587
Attention: Robert C. Schwenkel, Esq.
All such notices, requests, consents and other communications shall be deemed to
have been given when received.
SECTION 14. Amendments. The terms and provisions of this Agreement may be
modified or amended, or any of the provisions hereof waived, temporarily or
permanently, pursuant to the written consent of the Company and the Purchasers
holding a majority of the shares purchased pursuant to the Purchase. No waiver
of any of the provisions of this Agreement shall be deemed to or shall
constitute a waiver of any other provision hereof (whether or not similar). No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof.
SECTION 15. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
SECTION 16. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed to be a
part of this Agreement.
SECTION 17. Nouns and Pronouns. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice versa.
SECTION 18. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York without giving effect to
the principles of conflicts of law. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of the State of New York and of the United States of America, in
each case located in the County of New York, for any Litigation arising out of
or relating to this Agreement and the Ancillary Documents and the transactions
contemplated hereby and thereby (and agrees not to commence any Litigation
relating thereto except in such courts), and further agrees that service of any
process, summons, notice or document by U.S. registered mail to its respective
address set forth in this Agreement shall be effective service of process for
any Litigation brought against it in any such court. Each of the parties hereto
hereby irrevocably and
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unconditionally waives any objection to the laying of venue of any Litigation
arising out of this Agreement or the transactions contemplated hereby in the
courts of the State of New York or the United States of America, in each case
located in the County of New York, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such Litigation brought in any such court has been brought in an
inconvenient forum.
SECTION 19. Publicity. Each of the parties hereto agrees that it will make
no public statement regarding the transactions contemplated hereby unless the
language and timing of such statement has been approved by the Company and the
Pequot Entities. Notwithstanding the foregoing, each of the parties hereto may,
in documents required to be filed by it with the Commission or other regulatory
bodies, make such statements with respect to the transactions contemplated
hereby as each may be advised is legally necessary upon advice of its counsel;
provided, however, that the party making such determination shall immediately
notify the other party that it intends to make a public announcement and the
parties hereto shall, in good faith, attempt to agree on any public
announcements or publicity statements with respect thereto.
SECTION 20. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid, but
if any provision of this Agreement is held to be invalid or unenforceable in any
respect, such invalidity or unenforceability shall not render invalid or
unenforceable any other provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Series A
Preferred Stock Purchase Agreement as of the date first above written.
THE COMPANY:
DIGITAL GENERATION SYSTEMS, INC.
By:________________________________
Name:
Title:
PURCHASERS:
PEQUOT PRIVATE EQUITY FUND, L.P.
By:________________________________
Name:
Title:
PEQUOT PARTNERS FUND, L.P.
By:________________________________
Name:
Title:
PEQUOT OFFSHORE PRIVATE EQUITY FUND, INC.
By:________________________________
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Name:
Title:
PEQUOT INTERNATIONAL FUND, INC.
By:________________________________
Name:
Title:
GE CAPITAL INFORMATION TECHNOLOGY SOLUTIONS
By:________________________________
Name:
Title:
TECHNOLOGY CROSSOVER
VENTURES, L.P.
By:________________________________
Name:
Title:
TECHNOLOGY CROSSOVER
VENTURES, C.V.
By:________________________________
Name:
Title:
TCV II, V.O.F.
By:________________________________
Name:
Title:
TECHNOLOGY CROSSOVER
VENTURES II, L.P.
By:________________________________
Name:
Title:
TCV II (Q), L.P.
By:________________________________
Name:
Title:
TCV II STRATEGIC PARTNERS, L.P.
By:________________________________
Name:
Title:
TECHNOLOGY CROSSOVER
VENTURES II, C.V.
By:________________________________
Name:
Title:
INTEGRAL CAPITAL PARTNERS III,
L.P.
By:________________________________
Name:
Title:
INTEGRAL CAPITAL PARTNERS
INTERNATIONAL III, L.P.
By:________________________________
Name:
Title:
<PAGE>
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EXHIBIT D
AMENDMENT
TO
PREFERRED STOCK PURCHASE AGREEMENT
THIS AMENDMENT, dated July 23, 1997 (the "Amendment") to the Preferred Stock
Purchase Agreement, dated July 14, 1997 (the "Agreement"), by and among Digital
Generation Systems, Inc. (the "Company") and the purchasers listed on Exhibit A
thereto (the "Purchasers"), is entered into by and among the Company and the
Purchasers (capitalized terms used herein and not otherwise defined shall have
the meanings assigned to them in the Agreement).
W I T N E S S E T H :
WHEREAS, in order to comply with rules of the NASDAQ Stock Market in
connection with the issuance of more than 20% of the outstanding shares of the
Company, the Company may need to obtain shareholder approval at a meeting of the
shareholders of the Company ("Shareholders' Approval") in order to issue 100% of
the shares of Common Stock and Series A Preferred Stock necessary to consummate
the Acquisition and the transactions contemplated by the Agreement; and
WHEREAS, the Company and the Purchasers desire to amend the Agreement to
allow for a two-step closing of the Purchase: first, the sale of that number of
shares permitted under the NASDAQ Stock Market rules; second, the sale of the
remaining shares after the Shareholders' Approval, if such Shareholders'
Approval is necessary.
NOW, THEREFORE, in consideration of the good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Purchaser hereby agree as follow:
1. Amendment to the Agreement. Acting in accordance with Section 14 of the
Agreement, the undersigned hereby consent to the following amendments to the
Agreement.
(a) Clause (a) of Section 1.1 is deleted in its entirety and the
following is inserted in lieu thereof:
"1.1. The Purchase. (a) At the Initial Closing and the Subsequent Closing
(as both terms are defined in Section 1.2(a)), each Purchaser shall, severally
and not jointly, purchase from the Company and the Company shall sell to each
Purchaser, the number of shares of Series A Preferred Stock set forth opposite
such Purchaser's name on Exhibit A-1 and Exhibit A-2, respectively
(collectively, the "Purchases") at the purchase price set forth opposite such
name on each exhibit. Subject to Section 1.1(b), the aggregate purchase price to
be paid by the Purchasers for the Series A Preferred Stock purchased by them
hereunder is as set forth on Exhibit A-1 and A-2, as the case may be, as Total
Purchase Price (the "Purchase Price"), of which (i) the Purchase Price less 14%
shall be paid to an account or accounts designated by the Company not less than
three business days prior to the Initial Closing or the Subsequent Closing, as
the case may be, and (ii) 14% of the Purchase Price (the "Escrow Amount") shall
be paid to an escrow agent (the "Escrow Agent") mutually acceptable to
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the Company and the Pequot Entities (as defined below) to be held in a Escrow
Account (the "Escrow Account") and disbursed by the Escrow Agent pursuant to
Section 1.4 hereto and the terms of an escrow agreement in a form mutually
satisfactory to the Company, the Pequot Entities and the Escrow Agent (the
"Escrow Agreement") and including the terms set forth in Exhibit B."
(b) The parenthetical in the second sentence of Section 1.1(b) is
deleted and the third sentence of Section 1.1(b) is deleted.
(c) References to "the Closing" in clause (b) of Section 1.1 is deleted
and "the Initial Closing or the Subsequent Closing, as the case may be," is
inserted in lieu thereof.
(d) References to "Exhibit A" in clause (c) of Section 1.1 is deleted
and "Exhibit A-1 or Exhibit A-2, as the case may be," inserted in lieu thereof.
(e) Section 1.2 is deleted in its entirety and the following is
inserted in lieu thereof:
"1.2. The Closing. (a) (i) The closing of the purchase of the shares of
Series A Preferred Stock identified on Exhibit A-1 (the "Initial Closing") shall
take place at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New
York Plaza, New York, NY 10004 at 9:00 a.m. on July 21, 1997 or on such other
date as shall be mutually agreed by the Company and the Purchasers (the "Initial
Closing Date"); provided, however, that the Initial closing shall be held
simultaneously with or subsequent to the closing of the Acquisition and
simultaneously with the repayment of the bridge loans provided by Pequot
Partners Fund, L.P. and Kleiner, Perkins, Caufield & Byers (the "Lenders") in
the amounts of $3,000,000 and $3,000,000, respectively, (the "Notes") (by wire
transfer to an account designated by each of the Lenders) and (ii) the closing
of the purchase of the shares of Series A Preferred Stock identified on Exhibit
A-2 (the "Subsequent Closing") shall take place at the location referred to in
(i) above one day after the Shareholders' Approval or until such time as the
parties hereto mutually agree such Shareholders' Approval is not necessary (the
"Subsequent Closing Date").
(b) At each of the Initial Closing and the Subsequent Closing, the
Company shall deliver to each Purchaser a certificate or certificates
representing the shares of Series A Preferred Stock purchased by such Purchaser,
registered in the name of such Purchaser or its nominee. Delivery of such
certificates to a Purchaser shall be made against receipt at the Initial Closing
or the Subsequent Closing, as the case may be, by the Company from such
Purchaser of the purchase price therefor, which shall be paid by wire transfer
to an account designated at least one business day prior to the Initial Closing
or the Subsequent Closing, as the case may be, by the Company."
(f) Reference to "the Closing" in clause (a) to Section 1.3 is deleted
and "the Initial Closing or the Subsequent Closing,
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as the case may be," is inserted in lieu thereof.
(g) References to "Closing" or "Closing Date" in clauses (b)(i), (iv),
(viii),(ix) and (xii) of Section 1.3 shall be immediately preceded by the word
"Initial."
(h) Reference to "contemporaneously close" in clause (b) (ii) of
Section 1.3 is deleted and "have closed" is inserted in lieu thereof.
(i) Clause (b) (iii) is deleted in its entirety and the following
is inserted in lieu thereof:
(iii) The Company and the Purchasers shall have entered into the
Registration Rights Agreement in the form of Exhibit D hereto (the
"Registration Rights Agreement" and all other contracts, agreements,
schedules, certificates and other documents (including, but not limited to,
the Certificate of Designation (as defined below), the Escrow Agreement, the
Voting Agreement and the Amendment) being delivered pursuant to or in
connection with this Agreement by any party hereto at or prior to the
Initial Closing, the "Ancillary Documents").
(j) The following shall be inserted immediately after Section 1.3(b):
"(c) The obligations of the Purchasers to consummate the transactions
contemplated hereby at the Subsequent Closing is subject to the satisfaction or
waiver of the following conditions:
(i) The Initial Closing shall have occurred.
(ii) The Shareholders' Approval, if necessary, shall have taken
place.
(iii) The Common Stock to be issued upon conversion of the Series
A Preferred Stock sold in the Subsequent Closing shall have been approved
for quotation in the NASDAQ Stock Market, subject to official notice of
issuance.
(k) References in Sections 2, 4.3, 4.7 and 4.8 to "Closing or Closing
Date" shall be immediately preceded by the word "Initial."
(l) The following is inserted immediately after Section 4.10:
"4.11 Proxy Statement. (a) If the NASDAQ Stock Market so requires, as
promptly as practicable after the execution of this Amendment, the Company shall
prepare and file with the Securities and Exchange Commission (the "SEC") a proxy
statement relating to the meeting of the Company's stockholders to be held in
connection with the Shareholders' Approval, if necessary (together with any
amendments thereof or supplements thereto, the "Proxy Statement") and shall mail
the Proxy Statement to its stockholders as promptly as practicable. The Proxy
Statement shall include the recommendation of the Board of Directors and the
Company in favor of the
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Transactions; provided, however that if an alternative method of shareholder
approval is approved by the NASDAQ Stock Market, the Company shall use the same
diligence referred to above in fulfilling its reporting obligations.
The Company shall promptly prepare and submit to the NASDAQ Stock Market a
listing application covering the shares of Common Stock issuable in the
Transaction, and shall use its reasonable best efforts to obtain approval for
the listing of such Common Stock before the closing.
(b) The information in the Proxy Statement shall not, at (i) the time
the Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to the stockholders of the Company, and at (ii) the time of each of the
Stockholders' Meeting (as hereinafter defined), contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. If at any
time prior to the Stockholders' Meeting any event or circumstance relating to
Company or its Subsidiary, or their respective officers or directors, should be
discovered by Company which should be set forth in an amendment or a supplement
of the Proxy Statement, the Company shall promptly transmit such amendment or
supplement to the stockholders. All documents that the Company is responsible
for filing with the SEC in connection with the Transactions contemplated herein
will comply as to form and substance in all material respects with the
applicable requirements of the Securities Act and the rules and regulations
thereunder and the Exchange Act and the rules and regulations thereunder.
4.12 Stockholders' Meeting. If the NASDAQ Stock Market so requires, the
Company shall call and hold a meeting of its stockholders (the "Stockholders'
Meeting") as promptly as practicable for the purpose of voting upon the approval
of the issuance of the shares underlying the Transactions and the Company shall
use its best efforts to hold the Stockholders' Meeting as soon as practicable;
provided, however, that if such meeting is not required by the NASDAQ Stock
Market in order to list the shares on the NASDAQ Stock Market, such
Stockholders' Meeting need not be held. The Company shall use its reasonable
best efforts to solicit from its stockholders proxies in favor of the approval
of the Transactions, and shall take all other action necessary or advisable to
secure the vote or consent of stockholders required by California law, to obtain
such approvals, unless otherwise necessary under the applicable fiduciary duties
of the respective directors of the Company, as determined by such directors in
good faith after consultation with independent legal counsel (who may be such
party's regularly engaged independent legal counsel)."
(m) Reference to "Closing" in Sections 6 and 10 is immediately preceded
by "Initial."
(n) The dollar amount of $50,000 in the proviso in clause (b) of
Section 7 is deleted and $75,000 is inserted in lieu thereof.
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(o) Exhibit A is deleted in its entirety and Exhibits A-1 and A-2
(attached hereto) are inserted in lieu thereof.
(p) The representations and warranties set forth in Section 2 shall be
considered without reference to the effect of the closing of the Acquisition.
2. Entire Agreement. The Agreement, as amended by this Amendment, sets forth
the entire understanding of the parties with respect to the transactions
contemplated hereby.
3. Effect of Amendment. Upon effectiveness of this Amendment, on or after
the date hereof, each reference in the Agreement to "this Agreement,"
"hereunder," "hereof," "herein," or words of like import, and each reference in
any other documents entered into in connection with the Agreement, shall mean
and be a reference to the Agreement, as amended hereby. Except as specifically
amended above, the Agreement shall remain in full force and effect and is hereby
ratified and confirmed.
4. Governing Law. This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State of New York.
5. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto
have caused this Agreement to be duly executed as of the day and year first
above written.
THE COMPANY:
DIGITAL GENERATION SYSTEMS,
INC.
By:________________________________
Name:
Title:
PURCHASERS:
PEQUOT PRIVATE EQUITY FUND,
L.P.
By:________________________________
Name:
Title:
PEQUOT PARTNERS FUND, L.P.
By:________________________________
Name:
Title:
PEQUOT OFFSHORE PRIVATE
EQUITY FUND, INC.
By:________________________________
Name:
Title:
PEQUOT INTERNATIONAL FUND,
INC.
By:________________________________
Name:
<PAGE>
Page 53 of 53
Title:
GE CAPITAL INFORMATION
TECHNOLOGY SOLUTIONS
By:________________________________
Name:
Title:
TECHNOLOGY CROSSOVER
VENTURES, L.P.
By:________________________________
Name:
Title:
TECHNOLOGY CROSSOVER
VENTURES, C.V.
By:________________________________
Name:
Title:
TCV II, V.O.F.
By:________________________________
Name:
Title:
TECHNOLOGY CROSSOVER
VENTURES II, L.P.
By:________________________________
Name:
Title:
TCV II (Q), L.P.
By:________________________________
Name:
Title:
TCV II STRATEGIC PARTNERS, L.P.
By:________________________________
Name:
Title:
TECHNOLOGY CROSSOVER
VENTURES II, C.V.
By:________________________________
Name:
Title:
INTEGRAL CAPITAL PARTNERS III,
L.P.
By:________________________________
Name:
Title:
INTEGRAL CAPITAL PARTNERS
INTERNATIONAL III, L.P.
By:________________________________
Name:
Title:
