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1940 Act File No. 811-9052
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2/A
(Check appropriate box or boxes)
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] AMENDMENT NO. 1
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
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Exact Name of Registrant as Specified in Charter
2200 WEST MAIN STREET, SUITE 900, DURHAM, NORTH CAROLINA 27705
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Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(919) 286-7000
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Registrant's Telephone Number, including Area Code
DAVID CHARLES BLIVIN, 2200 WEST MAIN STREET, SUITE 900, DURHAM, NORTH CAROLINA
27705
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Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
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SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
CROSS REFERENCE SHEET
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Caption in Registration
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Items in Parts A and B of Form N-2 Statement
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Item 1. Outside Front Cover Not Applicable
Item 2. Inside Front Cover and Outside Back Cover Page Not Applicable
Item 3. Fee Table and Synopsis Management Expenses;
Not Applicable
Item 4. Financial Highlights Not Applicable
Item 5. Plan of Distribution Not Applicable
Item 6 Selling Shareholders Not Applicable
Item 7. Use of Proceeds Not Applicable
Item 8. General Description of Registrant General; The Fund; Risk Factors;
Investment Policy and Strategy;
Industry Overview; Management of
the Fund; Federal Securities Acts;
Use of Proceeds
Item 9. Management Board of Directors; Investment
Advisor; Technical and Business
Consultants to the Advisor;
Management of the Fund; Custodian;
Management Expenses; Summary of the
Operating Agreement
Item 10. Capital Stock, Long-Term Debt, and Other Securities Distributions and Allocations;
Term; Determination of Net
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Asset Value; Federal Income Tax
Aspects; Investment by Employee
Benefit Plans and Individual
Retirement Accounts; Summary of the
Operating Agreement
Item 11. Default and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Not Applicable
Item 13. Table of Contents of the Statement of Additional Table of Contents
Information
Item 14. Cover Page General
Item 15. Table of Contents Table of Contents
Item 16. General Information and History General
Item 17. Investment Objective and Policies Investment Policy and Strategy;
Industry Overview; Management of
the Fund
Item 18. Management Board of Directors; Investment
Advisor; Technical and Business
Consultants to the Advisor;
Management Expenses; Management of
the Fund; Custodian; Summary of the
Operating Agreement
Item 19. Control Persons and Principal Holders of Securities Not Applicable
Item 20. Investment Advisory and Other Practices Board of Directors; Investment
Advisor; Custodian; Independent
Accountants; Management Expenses;
Conflicts of Interest; Related
Parties and
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Transactions with Affiliates
Item 21. Brokerage Allocation and Other Practices Not Applicable
Item 22. Tax Status Income Tax Aspects; Investment by
Employee Benefit Plans and
Individual Retirement Accounts
Item 23. Financial Statements To be filed by amendment
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TABLE OF CONTENTS
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Page
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PARTS A AND B - REQUIRED INFORMATION
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
INDUSTRY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INVESTMENT POLICY AND STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INVESTMENT ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
TECHNICAL AND BUSINESS CONSULTANTS TO THE ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DISTRIBUTIONS AND ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
MANAGEMENT EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PRIVATE PLACEMENT STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CONFLICTS OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
RELATED PARTIES AND TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FIDUCIARY RESPONSIBILITY OF THE ADVISOR AND THE DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FEDERAL INCOME TAX ASPECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INVESTMENT BY EMPLOYEE BENEFIT PLANS AND
INDIVIDUAL RETIREMENT ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SUMMARY OF THE OPERATING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FEDERAL SECURITIES ACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
PART C - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
GENERAL
The Southeast Interactive Technology Fund I, LLC (the "Fund") is a
newly organized North Carolina limited liability company which is operated as a
closed-end, non-diversified management investment company. The Fund privately
offered 1,000 shares of membership interest in the Fund (the "Shares") on the
terms and conditions herein described (the "Offering") in accordance with
Regulation D under the Securities Act of 1933, as amended (the "1933 Act"), and
applicable state securities laws. Accordingly, the Fund has not and presently
does not intend to register the Shares under the 1933 Act. This Registration
Statement on Form N-2 (this "Registration Statement") is being filed only under
the Investment Company Act of 1940, as amended (the "1940 Act" or "Investment
Company Act"). The Fund has been formed to invest principally in equity and
equity-related securities of technology companies located in the Southeast and
involved in the fields of interactive information and visual technologies.
The Offering resulted in the sale of 244 Shares at a price of $25,000
per Share to 168 investors who met the suitability standards set forth herein
("Investors"). Interstate/Johnson Lane Corporation (the "Selling Agent")
offered and sold the Shares on a "best efforts" basis as agent for the Fund.
The minimum investment was $25,000. Other registered broker-dealers may have
participated in the Offering. Subscriptions for Shares were effective upon
acceptance by Montrose Venture Partners, LLC, a North Carolina limited
liability company which has been engaged as the investment advisor to the Fund
and which is responsible for day-to-day management of the Fund's affairs (the
"Advisor"). The Offering of Shares was terminated on August 31, 1995.
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OFFERING SELLING PROCEEDS
PRICE COMMISSIONS (1) TO FUND (2)
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Per Share . . . . . . . . . . . . . . . $ 25,000 $ 1,250 $ 23,750
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Total . . . . . . . . . . . . . . . . . $6,100,000 $ 305,000 $5,795,000
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(1) The Fund paid the Selling Agent a sales commission equal to 5% of the
proceeds of the Offering. The Selling Agent also was reimbursed for
certain expenses as discussed below.
(2) Before deduction for certain organizational and offering expenses in the
amount of $250,000 (including printing costs, professional fees, filing
fees and other selling expenses) payable by the Fund in connection with
the organization of the Fund and the Offering and before deduction of an
organizational fee payable to the Advisor in the amount of one percent
of the proceeds of the Offering.
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THE SHARES ARE A SPECULATIVE INVESTMENT AND THE OFFERING INVOLVED
SUBSTANTIAL RISKS TO INVESTORS, INCLUDING THE RISK THAT INVESTORS MIGHT LOSE
THEIR ENTIRE INVESTMENT IN THE FUND. THERE ARE SEVERE RESTRICTIONS ON
TRANSFERS OF SHARES AND THERE IS NO LIQUIDITY IN THE INVESTMENT. (See "Risk
Factors" and "Conflicts of Interest.")
THE SHARES HAVE BEEN NEITHER REGISTERED WITH NOR APPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR BY THE
SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS ANY COMMISSION OR
AUTHORITY PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING OR THE ACCURACY OR
ADEQUACY OF THIS REGISTRATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The Offering was made only to persons qualifying as "Accredited
Investors" pursuant to Regulation D promulgated under the 1933 Act. Even
though an individual was an Accredited Investor, additional suitability
requirements may have applied depending on the investor's state of residence.
An Accredited Investor is any investor who falls into one of the following
categories:
(1) Any bank as defined in section 3(a)(2) of the 1933 Act, or any
savings and loan association or other institution as defined in section
3(a)(5)(A) of the 1933 Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934, as amended (the "1934 Act"); any insurance
company as defined in section 2(13) of the 1933 Act; any investment company
registered under the Investment Company Act or any business development company
as defined in section 2(a)(48) of the 1940 Act; any Small Business Investment
Company licensed by the U.S. Small Business Administration under section 301(c)
or (d) of the Small Business Investment Act of 1958; any employee benefit plan
within the meaning of Title I of the Employee Retirement Income Security Act of
1974 ("ERISA"), if the investment decision is made by a plan fiduciary, as
defined in section 3(21) of ERISA, which is either a bank savings and loan
association, insurance company or registered investment adviser, or if the
employee benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that are
accredited investors;
(2) Any private business development company as defined in
202(a)(22) of the Investment Advisers Act of 1940, as amended (the "Investment
Advisers Act");
(3) Any organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;
(4) Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his or her purchase exceeds
$1,000,000;
(5) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year;
(6) Any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person; or
(7) Any entity in which all of the equity owners fall within one
of the foregoing categories.
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RISK FACTORS
AN INVESTMENT IN THE FUND IS SUBJECT TO ALL OF THE RISKS CUSTOMARILY
ASSOCIATED WITH AN INVESTMENT IN SECURITIES. ACCORDINGLY, SHARES SHOULD BE
PURCHASED ONLY BY PERSONS WHO HAVE THE RESOURCES TO ASSUME THE RISKS
CHARACTERISTIC OF THIS TYPE OF INVESTMENT AND WHO CAN AFFORD TO INVEST ON A
LONG-TERM BASIS. THERE CAN BE NO ASSURANCE THAT THE FUND'S PORTFOLIO
INVESTMENTS WILL BE PROFITABLE OR THAT ANY DISTRIBUTIONS WILL BE MADE TO THE
INVESTORS. ANY RETURNS TO THE INVESTORS WILL BE DEPENDENT UPON THE FUND'S
MAKING SUCCESSFUL INVESTMENTS, OF WHICH THERE CAN BE NO ASSURANCE. THE
ADVISOR, WHICH IS AFFILIATED WITH CERTAIN OF THE DIRECTORS, WILL RECEIVE
SUBSTANTIAL COMPENSATION FROM THE FUND. IN ADDITION TO THE FACTORS SET FORTH
ELSEWHERE HEREIN, PROSPECTIVE INVESTORS WERE ADVISED TO CAREFULLY CONSIDER THE
FOLLOWING MATTERS:
NO MARKET FOR SHARES
No Investor may sell or transfer his or her Shares without the consent
of the Board of Directors. There are also additional restrictions on transfers
of Shares and one cannot predict, even if a Share could be sold, what price
could be obtained. Therefore, it is highly unlikely that an Investor would be
able to liquidate his or her investment prior to the termination of the Fund.
Also, any capital appreciation or distributions of the Fund's investments may
not begin to be realized or received until many years after this Offering. The
Investors under the Operating Agreement further agree not to transfer their
Shares in violation of federal or state securities laws and make additional
representations to that effect in their Subscription Agreements. Investors
have no right to require the Fund to redeem their Shares. Investors should
also note that under the Operating Agreement, the Directors are not obligated
to make a "Section 754 election." (See "Federal Income Tax Aspects.") Failure
to make this election prevents a proposed transferee from taking a "stepped-up"
basis in the Shares, and this might have an effect on the marketability of the
Shares. AN INVESTMENT IN THE FUND IS A LONG-TERM INVESTMENT. THERE IS NOT
EXPECTED TO BE ANY MARKET FOR THE SHARES.
LACK OF DIVERSIFICATION
The Fund intends to invest a majority of its assets, and may invest
substantially all of its assets, in equity and equity-related securities of
interactive information and visual technology companies in the Southeast
("Portfolio Companies"). As a result, an investment in the Fund will be
subject to greater risk and market fluctuation than an investment in a Fund
that diversifies its investments more broadly both by industry and geographic
region. Because the investments of the Fund will be concentrated in a highly
specialized market segment and further limited generally to one geographic
region, the investment offered hereby lacks diversification of risk with
respect to industry downturns, acts of God, local economic or environmental
problems and other similar matters, the impact of which might be better
absorbed or compensated for in a more diversified offering.
IMMEDIATE DEVALUATION
The Fund is a newly organized, closed-end investment company with no
previous operating history. The net asset value per Share immediately
following the completion of the Offering will be $25,000, less the per Share
commissions, fees and expenses of the Offering. Payment of the management fees
to the Advisor and other operating expenses will also reduce the net asset
value per Share.
RISKS OF INVESTMENT IN EMERGING TECHNOLOGY COMPANIES
Certain interactive technology companies may be dependent on the
development of new technologies and/or the application of existing or new
technologies. New technologies and applications may not necessarily be
generally accepted, or may be rendered obsolete by subsequent technological
developments. The success of any one company may depend, in part, on its
ability to develop, introduce
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and market products or services that meet changing user needs and that
successfully anticipate or respond to technological changes on a cost effective
and timely basis. There can be no assurance that the technologies of Portfolio
Companies will be successfully developed into profitable products or services.
A lack of compatibility with existing technology, the lack of standardization
among competing technologies attempting to serve the same market, a failure to
conform to accepted industry standards or obsolescence can also be significant
obstacles for interactive technology companies. In particular, emerging
companies may be subject to the following risks, among others:
Consumer and Business Acceptance - In order to achieve success,
interactive technology companies are dependent upon the acceptance of
their new technologies by consumers and businesses. In the event that
acceptance is slower than expected, interactive information and visual
technology companies may be delayed in their development. Moreover,
unless the products and services offered by these companies are priced
appropriately, they may fail to gain acceptance by consumers and
businesses.
Limited Operating History - Many of the Fund's investments will be in
smaller, dedicated technology companies which will have limited
operating histories. As a result, these companies may have
inexperienced management, face undeveloped or limited markets, have
limited products, have no proven profit-making history, may operate at
a loss or with substantial variations in operating results from period
to period, have limited access to capital and/or be in the
developmental stages of their businesses. There can be no assurance
that any interactive technology company will be profitable or
successful in implementing its business plans, or will provide any
return on an investment by the Fund. Nor can there be any assurance
that the Fund will not lose its entire investment in any company in
which it invests.
Proprietary Rights - Many technology companies rely on a combination
of patent, copyright, trademark and trade secret protection and
non-disclosure agreements to establish and protect their proprietary
rights, which are frequently essential to the growth and profitability
of a technology company. There can be no assurance that a particular
company will be able to protect these rights or will have the
financial resources to do so, or that competitors will not develop or
patent technologies that are substantially equivalent or superior to a
Portfolio Company's technologies. Conversely, other companies may
make infringement claims against a company in which the Fund invests,
which could have a material adverse effect on such company.
Competition - The markets in which many interactive technology
companies operate are extremely competitive. New technologies and
improved products and services are continually being developed,
rendering older technologies, products and services obsolete.
Moreover, competition can result in significant downward pressure on
pricing. There can be no assurance that companies in which the Fund
invests will successfully penetrate their markets or establish or
maintain competitive advantages.
Leveraged Capital Structure - The companies in which the Fund proposes
to invest will generally have highly leveraged capital structures,
especially after the Fund's investment is made, if it is in the form
of an interest bearing instrument. Should such companies suffer
reduced cash flows resulting from economic downturns or other factors,
the return on, or the recovery of, the Fund's investments in them may
be at greater risk than would investments in less highly leveraged
companies.
COMPETITION FOR INVESTMENT OPPORTUNITIES
A large number of investors may compete for the limited number of
investment opportunities which are consistent with the Fund's investment
objectives. This is expected to be mitigated somewhat by the regional focus
and location of the Fund. However, there is no assurance that competition for
these investments will not increase over time.
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LIMITED OPERATING HISTORY OF ADVISOR/DEPENDENCE ON MANAGEMENT
While the principals of the Advisor have experience in investing and
managing corporate assets and technologies, the Advisor has not previously
managed a venture fund. The Advisor anticipates that the same qualities that
have enabled its principals to invest and manage individual investment
opportunities will allow the Advisor to invest the assets of the Fund.
However, there is no assurance that this will be the case. The success of the
Fund will depend largely on the capabilities of the Advisor, Montrose Venture
Partners, LLC. The principals of the Advisor are W. Clay Hamner, David C.
Blivin and E. Lee Bryan. (See "Strategic Focus - Management and Advisory
Team.")
CONFLICTS OF INTEREST
The Advisor and its principals will be subject to certain conflicts of
interest in connection with their management of the Fund's investment
activities, including without limitation the valuation of Fund investments in
connection with the determination of the Advisor's management fee. (See
"Conflicts of Interest.") As a result, the disinterested Directors must
approve the valuation of the Fund's investments for this purpose.
UNSPECIFIED USE OF PROCEEDS
Because the Advisor has not identified the particular investments for
the net proceeds of the Offering, an Investor must rely on the ability of the
Advisor, with the assistance of its business and technical consultants, to
select and make investments consistent with the Fund's objectives. The
Investors will not have the opportunity to evaluate individually the
information used by the Advisor in making investment decisions.
RISKS FOR INDIVIDUAL RETIREMENT ACCOUNTS AND INVESTORS SUBJECT TO ERISA
Fiduciaries of individual retirement accounts ("IRAs") or other
pension, profit-sharing or employee benefit plans subject to ERISA, should
consider whether an investment in the Shares satisfies the investment
requirements of ERISA. In addition, tax-exempt entities should consider the
unrelated business income tax implications of investing in the Fund. (See
"Federal Income Tax Aspects.")
LIMITATIONS ON ACCOUNTABILITY OF THE DIRECTORS AND THE ADVISOR
To the fullest extent permitted by law, the Operating Agreement
provides that the Directors and the Advisor will not be liable, responsible or
accountable to the Fund or any of the Investors for any acts or omissions
within the scope of their authority as conferred upon them by the Operating
Agreement or the Advisory and Management Agreement, except for acts or
omissions of willful malfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office ("disabling
conduct"). In a published interpretive release, the staff of the SEC announced
its position that such indemnification provisions do not violate the 1940 Act
if they provide a reasonable and fair means for determining whether
indemnification shall be made. As a result of the indemnification provisions
in the Operating Agreement, Investors may have a more limited right of action
than they would have in the absence of such provisions. (See "Fiduciary
Responsibility of the Directors and the Advisor.")
TAXABLE INCOME IN EXCESS OF DISTRIBUTIONS
No distributions can be assured. Fund investments or sales of Fund
assets may generate income that is taxable to the Investors, regardless of
whether actual distributions are made. However, the Advisor believes that such
an event is highly unlikely, and that the Fund will endeavor to make
distributions to Investors sufficient to allow Investors to pay income taxes
attributable to their ownership of Shares in the Fund.
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LACK OF SEPARATE COUNSEL
The Fund and the Advisor have engaged common counsel, and have not
relied upon separate counsel in connection with the organization of the Fund
and offering of Shares. There is, therefore, risk of a lack of independent
review of the terms of the Offering.
LIABILITY OF INVESTORS
Investors who are members of a limited liability company such as the
Fund, as such, are generally not liable for the obligations of the limited
liability company beyond the extent of their capital contributions and their
share of undistributed profits of the Fund. However, there are certain
statutory rules applicable to all limited liability companies dealing with
wrongful distributions which impair the solvency of the company. For example,
if an Investor has knowingly received a wrongful distribution in violation of
the Operating Agreement, or the North Carolina Limited Liability Company Act,
that Investor can be liable up to the amount of the wrongful distribution.
TAX CONSIDERATIONS
Tax Law Changes - The tax effects of ownership of Shares may be
altered by legislation, regulation or court decision, all of which could
adversely affect the tax status of the Fund or the individual Investors.
Fund Status - The anticipated results of an investment in the Fund
are based upon the assumption that the Fund will be treated as a partnership
and not as an association taxable as a corporation. The Fund has not applied
and does not anticipate applying for a ruling from the Internal Revenue Service
with respect to any aspects of the treatment to be accorded Investors for
federal income tax purposes. If the Fund should be treated as an association
taxable as a corporation for federal income tax purposes, income and losses of
the Fund would be reflected and taxed on the Fund's tax return rather than
being passed through to the members and all or a portion of any distributions
made to the Investors would be taxed as dividends or capital gains income which
would not be deductible by the Fund. See "Federal Income Tax Aspects" for a
description of possible bases of challenge to the status of the Fund as a
partnership.
Allocations - The Fund's income, gains and losses will, for federal
income tax purposes, be allocated among the Investors in accordance with the
Operating Agreement. The Internal Revenue code of 1986, as amended (the
"Code") requires that a special allocation by a partnership of income, gains or
losses have "substantial economic effect." Treasury Department regulations
govern the circumstances in which the allocation of the Fund's income, gains
and losses will be recognized.
Character of Investor Income or Loss - Counsel for the Fund is of the
opinion that under present law an Investor's allocable share of the Fund's
income or loss will more likely than not be treated as portfolio income or
loss.
Risks of Audits - The costs incurred in connection with a tax audit of
the Fund and any ensuing administrative or legal proceedings may adversely
affect any profitability of the Fund.
Deductibility of Fees - The Advisor and its affiliates will receive
substantial payments, fees and other compensation from the Fund. The Internal
Revenue Service may scrutinize closely all of these fees and may take the
position that the fees represent unreasonable expenses, capital expenditures or
nondeductible distributions rather than payments for services.
See "Federal Income Tax Aspects" with respect to the tax aspects of the
Offering.
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THE FUND
Southeast Interactive Technology Fund I, LLC is a newly organized
closed-end, non-diversified management investment company that intends to
invest in equity and equity-related securities of companies located in the
Southeast and involved in the developing fields of interactive information and
visual technologies. The Advisor believes the Fund offers investors a
significant opportunity to invest in the role that Southeast technology
companies will play in the information and visual technology industries. The
Fund is organized and headquartered in North Carolina and has no operating
history. The Fund's principal office is located at 2200 West Main Street,
Suite 900, Durham, North Carolina 27705 and the telephone number is
919-286-7000.
USE OF PROCEEDS
The net proceeds of the Offering after deducting selling commissions
and organizational and offering expenses payable by the Fund were $5,795,000.
Such proceeds will be invested or allocated for follow-on investments in
Portfolio Companies in accordance with the Fund's investment objective and
policies over a period estimated to be approximately 24 months from the Initial
Closing Date. The Advisor believes this time period is appropriate because
many potential Portfolio Companies will be closely-held entities in or emerging
from the development stage with less than $4 million in assets and less than $2
million in capital. Consequently, extensive financial analysis and other due
diligence will be required to adequately evaluate investment opportunities in
these companies. Pending such an investment, the proceeds will be invested in
high grade money market instruments under the management supervision of
Sovereign Advisers, Inc.
Set forth below is a table showing application of funds available upon
completion of the Offering. For a description of all fees and other
compensation to be paid to the Advisor, affiliates thereof, the Advisor's
technical and business consultants and the Selling Agent, see "Summary of the
Offering - Fees and Estimated Expenses."
<TABLE>
<CAPTION>
Subscriptions
(244 Shares)
------------
<S> <C> <C>
Gross Offering Proceeds (1) $6,100,000 100.00%
Sales Commissions (2) 305,000 5.00%
---------- -------
5,795,000 95.00%
Organizational Fee (3) 61,000 1.00%
Organizational and Offering
Expenses (4) 250,000 4.10%
---------- -------
Net Proceeds Available for Investment $5,484,000 89.90%
</TABLE>
(1) 244 Shares were offered at a price of $25,000 per Share.
(2) The Fund paid the Selling Agent a sales commission of five percent
(5%) of the gross proceeds of the Offering.
(3) The Fund paid the Advisor a fee equal to one percent (1%) of the gross
proceeds of the Offering in return for the Advisor's services in
structuring and organizing the Fund.
(4) These expenses include out-of-pocket expenses incurred in connection
with the organization of the Fund and offering and selling expenses,
including legal, accounting and printing costs; filing and
qualification fees; disbursements of the Advisor and the Selling
Agent; and reimbursements to the Advisor for expenses incurred while
engaged in organizing the Fund.
7
<PAGE> 13
INDUSTRY OVERVIEW
The Advisor believes that the shift taking place from analog to
digital technologies is creating a convergence of industries involving
computers, telecommunications, publishing, television, entertainment, catalog
shopping, consumer electronics and information services. These industries are
coming together in what is being called the Interactive Age by many
commentators and will create an industry where the eventual winners will
deliver many or all of these products through their fully integrated delivery
systems. The start of this can be seen by the number of alliances being formed
between previously separate industry leaders. Examples of this include the
alliances between phone and cable companies, cable and home shopping, on-line
services and television, computer software and catalog shopping, computers and
publishing, etc. The convergence of technologies enabling this new environment
includes:
The Information Highway - Visual information (i.e., television,
graphics, animation) requires large volumes of data for storage, processing and
transmission. Ten years ago, 9,600 bits per second was the standard dial phone
speed, acceptable for fax transmission but far too slow for video. The
information highway allows bandwidths of up to 155,000,000 bits per second.
Fiber-optic bundles and digital satellites create a worldwide network for the
transmission of voluminous data in any format.
CD-ROM/CD-I - CD-ROM laser/disc technology and industry standards now
permit a complete encyclopedia including video clips to be stored on a disc
smaller than a 45-RPM record. CD-I enables this basic technology to be used on
a television set with an adapter called a "set-top," bringing the power of the
computer into the television set.
Computers - The most rapid growth in computers today is in the area of
systems offering interactive multimedia. These new systems and their
retrofitted cousins enable the user to create and retrieve information in text,
video and audio formats.
Television - Television sets have accommodated electronic video game
playing devices for almost a decade. New television and set-top technologies
permit television to closely parallel computers in the utilization of
interactive multimedia. This enables noncomputer users to avail themselves of
the powerful learning techniques heretofore limited to computer users.
These converging technologies are also facilitating the expansion of
technologies to worldwide markets. Lesser developed countries, through the
existence of satellite technology, are able to leap-frog much of the
infrastructure investment previously required. As a result, the previous
barriers to the worldwide market for these technologies are quickly
diminishing. Linkage technologies that previously may have addressed one or
two of the above industries can now be leveraged across the entire converged
industry and across a worldwide market place. This development is expected to
present attractive investment opportunities for long-term capital appreciation.
The Advisor anticipates that the evolution of these technologies will create an
opportunity for development of interactive communication networks. Interactive
communication networks have been compared to an information highway which will
transport entertainment, information and interactive services among homes and
businesses. The Advisor expects that these interactive communication networks
will change the way we communicate, train our workers, educate our children and
access our entertainment.
The anticipated successful evolution of several digital based
technologies will be the key to the development of the full potential of the
Interactive Age. Such technologies will provide a means of converting letters,
numbers, images, and sounds into pieces of data that can be manipulated,
compressed, transported and stored with efficiency. In the Advisor's view, as
these key technologies converge, the creation of interactive networks will
foster new services and generate new revenue opportunities for many industries,
including entertainment, education, publishing, broadcasting, advertising, home
shopping, travel, recreation, health care and financial services. Interactive
information and visual technology companies are defined by the Fund as those
involved in any aspect of developing communication links for the interactive
transfer of digital information and the creation and/or presentation of that
information. Such companies include:
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<PAGE> 14
Enablers - Technology and equipment companies whose products and
services are used by content, software and transmission companies.
Both the hardware and content providers will require new software and
associated systems to make the Interactive Age a reality. Although
great strides are being made in the hardware components required for
interactive communication and visual display, these components cannot
interact without software programmed to make them operate efficiently.
This is evident from many of the announced test markets which have
been proposed for interactive services which have been delayed due to
the absence of software needed to run the available hardware.
Enabling software will remove significant barriers to the ability to
create content and establish user interfaces which appeal to the mass
markets.
The software and component part suppliers should provide the basic
building blocks for the new interactive communication networks. The
development of value-added interactive information and visual
technology networks will require the melding of key technologies,
including information processing servers, low cost consumer
electronics, data compression systems, software, data storage,
semiconductors, computers and communication technologies. Increases
in information processing power will be required at both ends of the
application spectrum, from the top of the television set to the data
centers of the transmission companies.
Content Providers - Content or software companies that create and own
entertainment programs and information databases as well as
interactive services provided to home and business users.
Interactive communication will require the creation or re-engineering
of content to fill the pipelines being created by the major
communications companies. There have already been announcements by
these major companies of over $36 billion of planned capital
investment. Generally, the Fund does not plan to invest in companies
that will compete head-on with these major companies for their markets
and products. However, it is expected that these major companies will
be ideal strategic partners for the targeted investment companies.
The Advisor believes that their capital investments are being made
with the contemplation that there will be content and services to be
provided over this "pipeline." Accordingly, the Advisor believes that
companies with unique creative talent will wield significant leverage
in the Interactive Age.
These companies will create and own entertainment programs and
information databases as well as interactive services provided to
homes and offices. Examples include multimedia production houses,
gaming companies, education and training software developers, and
other production companies. With the tools that will be created for
the Interactive Age and the pipelines put in place to serve the mass
markets, the creative firms will be able to directly create and
distribute their content. This is similar to the way desktop
publishing has allowed the proliferation of newsletters and internally
created marketing packages, or the way CAD/CAM allowed architects to
both engineer and design buildings and other structures.
The content providers are expected to be the major beneficiaries of
the technological changes taking place because providing content that
adds value will be a key factor in realizing the full potential of the
interactive pipelines. Interactive industries will blend the skills
of entertainment and information with those of computer programmers to
create interactive products that represent creative responses to meet
consumer needs. Interactive communication has the potential to
revitalize existing revenue streams and create new opportunities for
content providers. Fully depreciated media libraries will be easily
accessible and could generate significant incremental revenues at
little additional cost. Companies that own copyrights to voice, data,
images, music, games, sports, characters and text may reap significant
benefits from the evolving communications networks.
The Fund recognizes that technologies and applications for interactive
information will evolve in the future. Accordingly, there is no assurance that
the Fund will invest in any of the specific types of companies described above.
In addition to the types of companies described above, the Fund may invest
9
<PAGE> 15
in other companies which may develop in the future and whose activities are
determined by the Advisor to fall within the scope of interactive information
and visual technology.
INVESTMENT POLICY AND STRATEGY
INVESTMENT POLICY
The Operating Agreement provides that the purpose of the Fund is to
invest in equity-oriented investment instruments such as convertible preferred
and common stock, hybrid investment instruments such as convertible notes, and
lending money or guaranteeing loans in private transactions in and to, and for
the benefit of, new and developing companies in the interactive information and
visual technology industries with an emphasis on proprietary technologies,
related industries and/or marketable products which work on existing hardware.
Amendment of the Operating Agreement, including modification of its purpose,
requires the affirmative vote of two-thirds of the outstanding Shares.
INVESTMENT STRATEGY
The Fund's investment strategy is based upon the belief that a
disciplined and focused investment strategy, in a region offering attractive
opportunities coupled with a lack of sufficient capital to leverage these
opportunities, offers the potential for capital appreciation for Investors.
The Fund's investment strategy and policies as set forth below, are not
fundamental policies and may be changed by the Fund's Board of Directors
without the approval of the Investors. There is no assurance that any
investment strategy will be successful. The Advisor expects to utilize the
following strategies:
Regional Focus. The Fund will have its headquarters in Durham, North
Carolina, near the Research Triangle Park ("RTP"), the approximate geographic
center of the Southeast region, which the Advisor defines as extending from
Washington, D.C. to the Gulf Coast.
By focusing on the Southeast region and especially the RTP area, the
Advisor will be able to take advantage of more than 50 major technology and
research companies located in this region and which specialize in
microelectronics, telecommunications and other industries supporting
interactive technologies. In the RTP area alone, Duke University, the
University of North Carolina at Chapel Hill ("UNC-CH") and North Carolina State
University ("NCSU") sponsor approximately one-half billion dollars in research
annually. In addition, technology companies in the RTP area and the Southeast
spend billions annually in research. They have contracts with major
corporations and government agencies including NASA, the US Army, the
Department of Defense and other companies where technologies currently being
developed can be funded partially by grants for specific products designed for
special projects.
According to the Council for Entrepreneurial Development, the RTP has
the highest annual percentage growth rate for high technology start-ups,
exceeding even California's famed Silicon Valley. In addition to the MCNC,
the RTP is the home of the virtual reality center at UNC-CH. This facility is
one of only two academic centers for virtual reality research in the country.
In addition, the North Carolina Visual Technology Center has been founded and
is expected to receive funding in 1995. This will be similar to the existing
North Carolina Biotechnology Center and will provide technological development
funds to statewide visual technology start-ups which can eventually be
investment targets of the Fund. Also, located in the Southeast region are the
Institute for Academic Technology in the RTP, the Georgia Institute of
Technology, the Huntsville/NASA complex in Alabama and other leading research
universities and government and private agencies. The Advisor believes the
Fund is positioned to identify, support and provide strategic guidance and work
with strategic partners to help its Portfolio Companies achieve their potential
profitability.
In spite of these opportunities, the Advisor believes the Southeast
region is significantly underfunded. For example, according to the North
Carolina Technological Development Authority, Inc. ("NCTDA"), in 1993, North
Carolina venture firms received no funding commitments of new venture
10
<PAGE> 16
capital dollars out of $2.9 billion committed nationally. Also according to
NCTDA, in 1992, $31.1 billion capital was under management nationwide by
venture capital funds, of which only $138 million was invested in North
Carolina--less than one-half of one percent. This compares with $8.3 billion
invested in California and $4.3 billion invested in Massachusetts, two other
major technology centers in the country. The Advisor believes that venture
capital managers tend to invest in companies geographically close to
themselves, and accordingly the lack of adequate investment capital
headquartered in the Southeast has posed difficulties for technology companies
in the Southeast in securing necessary funds. With the high level of research
being funded, facilities in place, and high per capita Ph.D.s residing in the
area, the Advisor feels there is substantial pent-up supply of venture
opportunities at attractive valuations.
The Advisor anticipates that at least 65% of the Fund's assets will be
invested in companies that are headquartered in the Southeast or have a
significant presence in the Southeast.
Strategic Focus. The Fund will seek investment opportunities
concentrated in the areas of interactive information and visual technology.
While many of the base technologies have been under development for the last
twenty-five years, the Advisor believes that the technologies and linkages are
only now reaching the level of sophistication and affordability which makes
them appealing to the mass markets. Factors which the Advisor considers
important in its investment focus include:
(1) Diversification Within Industry - While investors would like to
participate in these emerging technology industries and companies
which are being developed in the Southeast, investment in technology
companies is generally considered difficult for investors due to the
complexity of the emerging industries and the almost daily
announcements of new products. The Fund will invest in a number of
entities within the industry, thereby increasing its chances to
identify profitable investments.
(2) Management and Advisory Team - W. Clay Hamner and David C. Blivin have
managed a number of financial transactions and companies. In
addition, E. Lee Bryan, one of the principals of the Advisor and a
Director of the Fund, has substantial experience and exposure in
technology, which the Advisor believes will add value to the Fund by
enabling the Advisor to conceive of and propose additional
applications for new technologies across industries. While many new
technologies are developed by scientists to solve specific problems,
the ability to see applications for these technologies across
industries is key to helping these companies develop the strategic
relationships and growth potential that their technologies represent.
As a result of its principals' previous activities, the Advisor has
relationships with many of the leaders of the region's money center
banks, as well as Fortune 500 companies which can become strategic
partners for Portfolio Companies. The Advisor also has relationships
with partners in many of the major regional and New York investment
banking firms. These relationships will be utilized whenever possible
to assist Portfolio Companies.
(3) Business and Technical Consultants - The Advisor has selected a group
of business leaders and technical consultants who are recognized
experts in the target industries and who are well connected and aware
of the opportunities and competing technologies being developed. The
Advisor intends to utilize the services of these consultants on an
as-needed basis. The Advisor believes this group will help the Fund
identify entities with truly promising technologies and will also
allow the Fund to quickly perform its due diligence, thereby allowing
the Portfolio Companies to maintain any technological leads they may
have over their competition. This is especially true where the Fund
has relationships with leaders of public institutional research
centers. As a result of their public status and roles as non-direct
competitors, these institutions have been able to forge alliances with
most of the major technology companies and in many cases are working
on collaborative efforts for their next generation products. Although
the business and technical consultants to the Advisor will not be able
to discuss the specifics of their work, their knowledge of where the
industries' leaders are heading can be utilized as a baseline for
evaluating investment opportunities for the Fund. Additionally, their
relationships with these
11
<PAGE> 17
major companies will allow them to present new technologies to the
right parties where these technologies could add to the utility of
products under development.
(4) Need for Capital - Due to the perceived risk of investing in emerging
technologies, many venture funds have been slow to invest in companies
in the interactive technology industry. This is especially true in
the Southeast where there has been a lack of capital for these
companies. The Advisor believes that the lack of significant
competition for these investments in the Southeast should allow the
Fund to select the best opportunities available in the region.
However, there can be no assurance that any such opportunities will
result in successful investments. The Advisor believes that a
synergistic phenomenon is taking place in the entrepreneurial
community that couples university technology centers, research and
development facilities, collaborative enterprises and local available
lead investors. The Southeast, in the opinion of the Advisor, has
developed all of the necessary ingredients for the interactive
multimedia evolution except indigenous venture capital funding. The
Advisor believes that the Fund will fill that void.
(5) Exit Flexibility - Interactive information and visual technologies are
generating interest from the media and investment community.
Additionally, industry leaders are pursuing strategic relationships to
protect against missing out on the future of these technologies. This
has created an atmosphere where companies with unique or proprietary
technologies and products may have near-term exit opportunities either
through the public market or from a strategic partner. The Advisor
believes this creates the potential for favorable investment returns
over a period shorter than is typical of many venture capital
investments. It is anticipated that many of the companies in which
the Fund will invest, when coupled with strategic partners, can then
be positioned to raise additional capital either publicly or
privately, and to grow and expand their respective businesses.
(6) Technology Intercept - In many cases, synergistic development of new
technologies may be undertaken by companies in close proximity to each
other without the knowledge of either company. The Advisor and its
business and technical consultants expect to be catalysts in bringing
complementary developers together and in creating value. By employing
a strategy of technology intercept (projecting future trends in
technology and the impact they may have on target markets), the
Advisor and its business and technical consultants will survey a
universe of technology development, identify linkage opportunities and
work within their respective networks to identify promising investment
entities. The Advisor expects that this proactive investment strategy
will create substantial value for the Fund although there can be no
assurance that this will be the case.
The Advisor anticipates that at least 65% of the Fund's assets will
be invested in interactive information and visual technology companies. Such
investments primarily will be in the form of convertible preferred stock and
convertible subordinated debt instruments. Warrants to purchase common stock
may, in some instances, be attached to the primary investment instrument.
Strategic Partners. The Advisor believes that many major technology
companies are supplementing their in-house research and development with
strategic joint venture relationships. These relationships are not only with
other technology leaders but also with the younger emerging companies which are
developing next generation linkage technologies that will give the major
companies a market edge. The Advisor expects to invest in situations where
strategic partners are already in place or where the Advisor believes it can
bring a strategic partner in as a co- investor, major customer or in another
capacity. The existence of those strategic partners creates two key elements:
(1) substantiation of the market application of a particular technology and (2)
a user, a revenue source, or in many cases, a distribution network for the
product. In many cases, Investors in the Fund may be investing alongside major
technology partners, which the Advisor believes will reduce certain risks to
the Investors. However, there can be no assurance that the presence of a
strategic partner will result in a successful investment by the Fund.
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<PAGE> 18
As a general rule, the Fund intends to be the lead investor, but will
also consider co-investments in companies, later-stage financings in companies,
and investments in companies located outside the geographical area of the Fund
where the opportunities are unique and where there may be proprietary access to
technology that may assist a Portfolio Company. The Fund will probably not
lead investments located outside the Southeast. The Fund will also attempt to
develop relationships with larger venture capital funds as co-investment
partners where appropriate. Because the Fund expects a strategic partner may
co-invest alongside the Fund or will have already invested equity in the
company, the Fund will probably be more likely to co-invest with strategic
partners than with financial partners in the early stages. The Advisor expects
to develop an expert reputation for technology due diligence, in part due to
the strengths of its consultants, such that co-investment partners can be
attracted without lengthening the investment process. Where other venture
capital funds wish to co-invest with the Fund and are willing to accept the
terms initiated by the Fund without delaying the investment process,
co-investment will be encouraged. This will allow the Fund to make its
investments in a timely fashion to help ensure the maintenance of any
technology leads that the Portfolio Companies may have on their competition.
Equally important as having a strategic partner is having the right
strategic partner. Through its business and technical consultants, the Advisor
believes that it will have insight into promising technologies which may help
Portfolio Companies in the form of advantageous alliances with the strategic
partners relevant to their technologies. For example, for a video technology
company to have aligned itself with Sony/Beta technology rather than VHS
technology would not have been beneficial. The Advisor believes that in many
cases its consultants will have advance knowledge of the future technologies
under development and the likelihood of their acceptance by the technical
community. The Advisor hopes to be able to add substantial value to the Fund's
Portfolio Companies by the knowledgeable coaching it anticipates providing to
these companies.
It is expected that a majority of the Fund's investments will follow
this model.
THE INFORMATION CONCERNING THE INTERACTIVE TECHNOLOGY INDUSTRY AND ITS
EVOLUTION, THE RESEARCH TRIANGLE PARK AND SOUTHEAST REGION, THE LEVELS OF
RESEARCH EXPENDITURES MADE IN SUCH AREAS AND THE AVAILABILITY OF VENTURE
CAPITAL FOR INTERACTIVE TECHNOLOGY INVESTMENTS IN THE SOUTHEAST, WHICH ARE
DISCUSSED IN THIS SECTION AND THE PRECEDING SECTION ENTITLED "INVESTMENT
OPPORTUNITIES" HAVE BEEN COMPILED BY THE ADVISOR FROM INDUSTRY NEWSLETTERS,
PERIODICALS, PRIVATE CONSULTANT REPORTS, UNIVERSITY AND GOVERNMENT
PUBLICATIONS, AND OTHER SOURCES. THE ADVISOR BELIEVES SUCH INFORMATION TO BE
ACCURATE BUT HAS NOT INDEPENDENTLY VERIFIED SUCH INFORMATION.
BOARD OF DIRECTORS
The overall management of the business and affairs of the Fund are
vested solely in the Fund's managers, who will function in a manner similar to
a corporate board of directors and are referred to herein as the "Directors,"
provided that the investment activities and day-to-day operations of the Fund
will be delegated to the Advisor. The Directors will determine all agreements
between the Fund and persons or companies furnishing the services to it,
including the Fund's agreements with its money manager, escrow agent and
Portfolio Companies, and the Advisory and Management Agreement with the
Advisor. The Advisory and Management Agreement is terminable upon sixty days'
notice by the Directors or by the holders of a majority of the Shares. The
Directors will be elected on an annual basis at an annual meeting of the
Investors. The initial Directors which will serve until the first meeting of
the Investors will consist of the following: W. Clay Hamner, David C. Blivin,
E. Lee Bryan, Terry Sanford and Wayne M. Rogers. Mr. Hamner, Mr. Blivin and
Mr. Bryan are principal members of the Advisor to the Fund. Senator Sanford
and Mr. Rogers are not affiliated with the Advisor or the Selling Agent and are
not "interested persons" with respect to the Fund, as such term is defined in
the Investment Company Act. At least 40% of the Directors must be persons who
are not "interested persons." Such persons may receive reasonable compensation
from the Fund for acting as Directors.
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The education and experience of Mr. Hamner, Mr. Bryan and Mr. Blivin
are discussed in the section entitled "Investment Advisor." Below is a summary
of the experience of Senator Sanford and Mr. Rogers:
Terry Sanford - Senator Sanford (77) has distinguished himself and the
State of North Carolina through his terms as a Governor of North
Carolina, President of Duke University, and United States Senator and
has gained a reputation as a lifelong educational leader and public
servant. Under his innovative leadership, Duke University gained
additional national recognition. A graduate of UNC-CH and its School
of Law, Senator Sanford holds honorary degrees from approximately 30
American colleges and universities. His years as Governor were marked
by innovation in the establishment of the community college system,
the Governor's School, the North Carolina School of the Arts, and
considerable new support for the public schools. As a member of the
United States Senate, he promoted legislation to require an honest and
balanced national budget, to reform political campaign practices, and
to broaden the opportunities for disadvantaged children in the Head
Start program, among numerous other issues. Senator Sanford continues
to exemplify a deep devotion to Duke University, serving as President
Emeritus and as a Professor of Public Policy. He practices law as a
senior partner in the McNair & Sanford, P.A. law firm in North and
South Carolina. He is Chairman of a 3-year North Carolina Bar
Association study of the causes of crime and corrective actions, the
Chairman of the Board of the North Carolina Museum of Art, the Board
of North Carolina Electronics Industry Trade Association and is
involved in many charitable, legal and educational activities. He has
also served on the Board of Directors of ITT Financial Corp., Fuqua
Industries, Inc., Golden Corral Corporation and Unocal, Inc.
Wayne M. Rogers - Mr. Rogers (61) is a well-known professional actor
who, in addition to his acting career, has been involved in investment
activities for over fifteen years. These include business management
of a number of motion picture personalities as well as co-ventures
with other prominent individuals and institutions. Mr. Rogers has
been a director of The Pantry, Inc. since 1990. He has also been a
director of P.H.C., Inc., Electronic Data Controls, Inc., Extek
Micro-Systems and Wadell Equipment Company. In addition, he is active
in several charitable and philanthropic affairs. He is also a member
of the Board of Trustees for the Kenan Institute of Private Enterprise
at UNC-CH. Mr. Rogers received a Bachelor of Arts degree from
Princeton University. In 1993 and 1994, Mr. Rogers was also a
director at Dabney/Resnick, Inc., an investment banking firm.
INVESTMENT ADVISOR
The investment activities of the Fund and the day-to-day operations of
the Fund will be managed by Montrose Venture Partners, LLC (the "Advisor").
The principals of the Advisor are W. Clay Hamner, David C. Blivin and E. Lee
Bryan.
Below is a summary of the experience of each of the principals of the
Advisor:
W. Clay Hamner - Mr. Hamner (49) is the Managing Director and Chief
Executive Officer of Montrose Capital Corporation. He received his
Undergraduate and Masters degrees from the University of Georgia and
Doctorate in Business Administration from Indiana University. Mr.
Hamner is on the Board of Directors of Vista Resources, Inc. (NYSE);
Wendy's International, Inc. (NYSE); The Pantry, Inc. (a privately held
company which owns 415 convenience stores where he is also Chairman
and Chief Executive Officer), and Interstate/Johnson Lane, Inc.
(NYSE), the parent company of Interstate/Johnson Lane Corporation, the
Selling Agent. He was also a Special Limited Partner in Intersouth I.
Formerly, Mr. Hamner served on the Board of Directors of Highland
Energy Corporation; Clinton Gas Systems (OTC); Fuqua Industries, Inc.
(NYSE); Triton Group, Ltd. (NYSE); and Capital Technology, Inc. Prior
to entering private business, Mr. Hamner taught in the Graduate
Schools of Business at Northwestern University and Duke University.
Mr. Hamner is a Director of the Institute of Private Enterprise at
UNC-CH
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and serves on the Kenan-Flagler School of Business Board of Visitors
(UNC-CH), the Fuqua School of Business Board of Visitors (Duke), and
the Duke University Medical Center Board of Advisors. He also
analyzed and evaluated Duke's nontraditional investments portfolio
while on the faculty at Duke. Mr. Hamner will take an active role in
the identification of and negotiation with the selected Portfolio
Companies, as well as reviewing and helping direct the strategic
operations and planning of Portfolio Companies.
David C. Blivin - Mr. Blivin (37) is the Chief Financial Officer for
Montrose Capital Corporation. He is a 1985 graduate of the Duke
University Fuqua School of Business and a Certified Public Accountant.
Prior to joining Montrose Capital Corporation, Mr. Blivin worked as a
Senior Auditor with Arthur Andersen LLP and in this capacity audited
several companies in technology fields. As Chief Financial Officer
for Montrose Capital Corporation, Mr. Blivin has negotiated financings
and reviewed business plans for a number of entities in which Montrose
Capital Corporation has invested. Mr. Blivin serves on the Board of
Directors of The Pantry, Inc. and has served on the Triangle
Investment Club, a club sponsored by the Durham and Raleigh Chambers
of Commerce and the Council for Entrepreneurial Development, to review
plans of start-up businesses for investment potential.
E. Lee Bryan - Mr. Bryan (57) is the founder of One Room Systems,
Inc., a multimedia educational products creation and distribution
company. Prior to founding the company, he was a principal in a
number of successful business ventures. In 1984 Mr. Bryan founded
Vortech, Inc. ("Vortech"), a company which became a worldwide leader
in digital teleradiology. Vortech was subsequently sold to Eastman
Kodak Company. In 1988 Mr. Bryan joined CACI International ("CACI"),
a major U.S. government systems integrator. As Executive Vice
President of CACI, Mr. Bryan spearheaded a major technical and
business restructuring for the company. Prior to his involvement in
the entities listed, Mr. Bryan developed an extensive background in
government and private sector high technology endeavors. Mr. Bryan is
a graduate of the United States Naval Academy at Annapolis and a
retired officer from the nuclear submarine program. Mr. Bryan has
been a high level advisor to the government of the United States for
defense and intelligence information systems. He is a trustee of the
Center for Excellence in Education and the Profound Paralysis Group.
He is a member of the Heart Center board at Duke University Medical
Center and the Durham "Smart Start" program board.
TECHNICAL AND BUSINESS CONSULTANTS TO THE ADVISOR
The Advisor has established strong relationships with business and
technical consultants from a variety of disciplines who will be called upon by
the Advisor to provide in-depth perspective on Portfolio Company investments.
These individuals are business leaders and highly regarded scientists and
technical consultants in their fields. The consultants have been strategically
selected for their broad industry knowledge and relationships both in business
and in the interactive information and visual technology fields. To the extent
permitted by the 1940 Act, one or more of the consultants may serve on the
boards of Portfolio Companies and may receive compensation for their services
from the Portfolio Companies in the form of stock options or directors' fees.
They will also be compensated by the Advisor with up to 20% of the accrual
portion of the management fee the Advisor receives from the Fund, which will be
payable at such time as the Fund makes distributions of profits to Investors.
Subject to possible review or approval by the SEC pursuant to the 1940 Act,
they may also be given the right to co-invest alongside the Fund at the Fund
price in certain cases. Although the Advisor reserves the right to add
additional consultants that it believes will add value to the Fund and to
terminate consultants at any time, the current advisors are listed below.
Glenn Boschetto - Mr. Boschetto is the Director and Senior Vice
President of Corporate Finance for Dabney/Resnick, Inc., a high yield
financing boutique founded by former senior professionals of Drexel
Burnham Lambert, Salmon Brothers and Donaldson Lufkin & Jenrette. At
Dabney/Resnick, he directs the firm's middle market leveraged buyout
financing for clients which include America's major leveraged equity
fund managers. Prior to joining Dabney/Resnick, Mr.
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<PAGE> 21
Boschetto worked with Drexel Burnham Lambert and Goldman, Sachs & Co.
in corporate finance and strategic planning, respectively. He is an
Economics graduate of Brigham Young University.
James N. Brown, Jr., Ph.D. - Dr. Brown is currently Chief Scientist in
the Electronics & Systems Unit of the Research Triangle Institute. In
this role since October 1988, he has been responsible for initiating
and participating in interdisciplinary research and development
projects. He has also served in the role of Acting Director of the
Institute's Center for Digital Systems Engineering and was responsible
for developing and implementing marketing plans for that program area.
Since October 1989, Dr. Brown has been the Institute's Representative
on the North Carolina Board of Science & Technology. As a member of
that Board, he serves as Chair of the Computer Graphics Committee and
Long-Range Planning Committee. He was also appointed a member of the
Technical Advisory Council of the North Carolina Supercomputing
Division of MCNC and is currently Chairman of a committee seeking
state sponsorship of the newly formed Interactive Visual Technology
Center.
Paul J. Coleman, Jr., Ph.D. - Dr. Coleman is professor of space
physics at the University of California at Los Angeles. He holds
B.S.E. degrees in mathematics and physics, an M.S. degree in physics,
and a Ph.D. in space physics. His professional experience includes
positions at the Ramo-Wooldridge Corporation (now TRW Systems),
initially as a research scientist and subsequently as manager of a
research group, and as manager of NASA's interplanetary sciences
program at its headquarters in Washington, D.C. Since 1981, Dr.
Coleman has also served as President and Chief Executive Officer of
the Universities Space Research Association (USRA), a non- profit
corporation owned by more than seventy universities and chartered to
facilitate research, development and education in space science and
technology. Also, Dr. Coleman is a Trustee of American Technology
Initiative, Inc., and has served as a founding member and Chairman of
the Oversight Committee for the San Diego Supercomputer Center, a
director of the National Institute for Space Commercialization, a
member of the Scientific Advisory Committee for the Los Alamos
National laboratory and the Lawrence Livermore National Laboratory,
and a founding member of the Steering Committee for the California
Space Institute. In addition, he is a consultant to the U.S.
government on research and development. In the private sector, Dr.
Coleman is a director of CACI International, Fairchild Space and
Defense Corporation, Applied Electron Corporation, and Lasertechnics,
Inc. and is a co-founder and a former director of University
Technology Transfer, Inc. In addition, he is a consultant to industry
on research and development and to the financial community on high-
technology enterprises.
James N. "Nick" England, III - Mr. England is currently a research
professor in the Computer Science Department at UNC-CH. He is part of
the PixelFlow high-performance computer graphics system development
team which is part of the UNC Virtual Reality Center. This center has
received worldwide recognition for its work and is a leading center in
the area of virtual reality development. Mr. England has been
involved in the development of computer graphics and image processing
software and hardware since he was a Ph.D. student at NCSU in the
1970s. In 1978, he co-founded Ikonas Graphic Systems, Inc. ("Ikonas")
to produce a high-performance programmable graphics processor based on
the work he did at N.C. State University. As President and Chief
Engineer, he was responsible for product design and corporate
development, helping make Ikonas a leading provider of graphics and
image processing systems to industrial, government and university
research labs. Ikonas had grown to 15 employees at the time of its
acquisition by Adage, Inc. ("Adage") in 1982. Mr. England served as
Vice President of Graphics Technology at Adage for four years and was
responsible for corporate strategy and development, product planning
and major customer programs. He also created a new application
software group and managed a team of 25 hardware and software
engineers. In 1986, he co-founded Transcepts Systems, Inc
("Transcepts"). Mr. England was President and managed the prototype
development and introduction of Transcepts' TAAC-1 graphics and
imaging processor. In 1987, he negotiated the sale of Transcepts to
Sun Microsystems, Inc. Mr. England served as director of Sun
Microsystems, Inc.'s North Carolina Research and Development Group
until 1993. In addition to his current position at UNC-CH, Mr.
England serves on the boards of the North Carolina Interactive Vision
Technology Center and the National Computer Graphic
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<PAGE> 22
Association, and the IEEE Computer Graphics Application Magazine's
editorial board, and has served on a number of SIGGRAPH Conference
Technical Programs committees. Also, he has published several
technology articles on graphics and imaging hardware.
L.J. "Bud" Evans, Jr. - Mr. Evans is President and CEO of CSAT, Inc.
("CSAT"), a private corporation founded to foster the market
introduction of advanced technologies. Prior to founding CSAT, Mr.
Evans held a number of positions in and out of government. These
included senior executive positions at The White House, the Nuclear
Regulatory Commission and NASA. At NASA, Mr. Evans was responsible
for the creation of the Commercial Programs Office. Mr. Evans also
chaired The White House Cabinet Council on Commerce and Trade and was
responsible for the National Commercial Space Policy. Mr. Evans has
founded and held executive positions with a number of private firms in
the aerospace, health services and teletraining fields. In addition
to being Chairman of the Board of CSAT, Inc., ESSI, Inc., SaraTech
Finance, Inc. and SpaceTech, Inc., Mr. Evans sits on the Board of
Trustees of the Environmental Research Institute of Michigan, the
National Advisory Committee of the University of Michigan, the
Applications Committee of the National Research Council and the Boards
of Advisors of ORSI, Inc. and the American Astronautical Society. Mr.
Evans holds a B.A. in Economics from Colby College and a J.D. from
Cornell University.
William H. Graves, Ph.D. - Dr. Graves earned a Ph.D. in mathematics
from Indiana University in 1966. In 1967, he joined the faculty at
UNC-CH, where he now is Associate Provost for Information Technology,
Professor of Mathematics, and Professor of Information Science. He
has served the University in other capacities, as well, including two
terms as Associate Dean for General Education and an interim term as
Vice Chancellor for Academic Affairs. As Associate Provost, Professor
Graves has institutional responsibility for a range of computer and
video technologies, networks, classrooms, and services. He is also
responsible for the University's Institute for Academic Technology,
which has been funded by IBM since 1989 when he proposed this
collaborative effort to advance national educational goals. The
Institute emerged from his earlier work with IBM, first within the
University to create software development opportunities in the general
education program, and then nationally to help create the IBM
Consulting Scholar Program. Professor Graves has given over 200
invited presentations on the role of information technology in
education and has written and edited extensively on the subject. He
currently chairs the planning committee for EDUCOM's National Learning
Infrastructure Initiative. EDUCOM's 600 member colleges and
universities and 100 corporate associates are helping to shape the
national information infrastructure. The goal of the initiative is to
apply this collective knowledge of the new infrastructure to foster
new instructional delivery models that are learner-centered, broadly
affordable, and scalable.
Jane Smith Patterson - Ms. Patterson is currently serving as the Chief
Policy Advisor for Budget and Technology for the State of North
Carolina under Governor Jim Hunt. Ms. Patterson was educated at
UNC-CH, N.C. State and Harvard Universities and worked both in the
private sector and the university community until the late 1970s when
she was hired by Governor Hunt to serve in his cabinet as Deputy
Secretary. Her tenure there was marked by an emphasis on advancing
North Carolina Information Transmission Systems to the forefront of
the Governor's technology initiatives and directing a focus on
innovative management practices and government. She has since worked
as a Vice President of ITT-Network Systems Group and as Vice
Chancellor for University Advancement at UNC-Wilmington. In her
current role as an advisor to Governor Hunt, she is responsible for
management of policy issues, policy oversight for budget issues and
state planning, development of technology policy and employment
strategies and other areas of responsibilities as assigned by the
Governor. A special focus of her office is the information highway
project which is the leader among all 50 states in the development and
employment of a fiber-optic information transmissions system that will
be the first of its kind and scope in the world. She is currently
serving on the board of MCNC, UNC School of Medicine, North Carolina
Equity, Inc. and North Carolina Rural Economic Development Center,
among others. She has also served on the boards of the Research
Triangle World Trade Center, BB&T and North Carolina School of Science
and Mathematics. Recently she was named to the National
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<PAGE> 23
Infrastructure Advisory Council by Vice President Al Gore. She will
serve on this council along with the Presidents and CEOs of
corporations such as MCI Communications Corporation, AT&T Company,
Microsoft Corporation, Silicon Graphics, Inc. and Corning, Inc.
Robert M. Price - Mr. Price is retired Chairman of the Board and Chief
Executive Officer of Control Data Corporation. Mr. Price worked at
Control Data from 1961 to 1990 serving in a variety of positions. He
was instrumental in leading Control Data's early strategic and
international expansion, in both operations and marketing. He led
Control Data's strategic move from hardware into information and
systems integration services, principally through the start-up and
growth of small subsidiary companies. Mr. Price received his
Bachelors Degree from Duke University and his Masters Degree in
Applied Mathematics from Georgia Institute of Technology. He has
worked at Lawrence Livermore Radiation Laboratory, Convair
Corporation, the Georgia Institute of Technology and Standard Oil of
California, Inc. prior to joining Control Data Corporation.
Currently, Mr. Price is President and CEO of PSV, Inc. ("PSV"), a
consortium of consultants specializing in management of technology.
PSV offers services in technology commercialization, corporate
strategy, human resource management and general management practice.
Additionally, Mr. Price teaches management of technology at the Fuqua
School of Business at Duke University. He is also Chairman of the
Alpha Center which provides training and business strategy systems to
entrepreneurs in the field of human services. Mr. Price serves on
the Boards of Directors of International Multifoods, Inc., Premark
International Inc., Rohr, Inc., Public Service Company of New Mexico
Inc., and Forth Shift Corporation. He also serves on the Board of
Visitors of Duke University's Fuqua School of Business and is on the
board of the United Way of Minneapolis.
David A. Smith - Mr. Smith is Chairman of the Board and Chief
Executive Officer of Virtus Corporation ("Virtus"). He is author of
the award-winning computer adventure game The Colony. During the
early 1980s, he worked in systems development and robotics with major
corporations and start-ups. In 1986, Mr. Smith joined Lord
Corporation in Cary, N.C. where he performed research in
human-computer interfaces for robotics. In January, 1990, Mr. Smith
co-founded Virtus, a pioneer in virtual reality-based modeling and
visualization for the desktop. The company's flagship product, Virtus
Walkthrough, began shipping in November 1990 and won MacUser
magazine's "Breakthrough Product of the Year" Award. His follow-on
products, Walkthrough Pro, Voyager and VR, have all won similar
industry recognition. He has worked on joint development projects
with Apple Computer and Taligent. Virtus also recently received an
equity investment from Motorola and they are working on several joint
projects.
Peter Julian Sprague - Mr. Sprague is Chairman and Chief Executive
Officer of Wave Systems Corp. ("Wave Systems") and has been Chairman
of National Semiconductor Corporation since 1965. Wave Systems was
started in 1988 to develop the technology for an electronic
information metering system that will revolutionize the distribution
and retrieval of electronic information. Mr. Sprague received his
Bachelor of Arts degree in Political Science from Yale in 1961,
studied Political Science at M.I.T. and participated in the doctoral
program in Economics at Columbia University. He holds a patent in the
area of projection cathode ray tubes and has applied for a patent in
the field of information distribution. In 1985, Mr. Sprague was
inducted into the Academy of Distinguished Entrepreneurs at Babson
College as well as received an Honorary Doctorate of Law from Babson
College. Mr. Sprague also serves as a trustee of Stevens Institute of
Technology.
Carl B. Wootten - Mr. Wootten was the Director of the Office of
Technology Transfer for the University of California system from 1989
to 1994. As director of this office, he was responsible for the
University system's licensing program operations, the licensing of
technology from nine campuses and the overseeing of similar operations
at the three federal labs operated by the University. Under his
tenure, the income from such operations increased from $9 million to
$50 million. Prior to joining the University of California, Mr.
Wootten was President of the University Technology Corporation, the
Director of Patent Administration at Duke University, and the
Executive Director of the University of Virginia Patents Foundation.
Prior to 1965, Mr.
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<PAGE> 24
Wootten spent over eleven years working with the technology industry
and held positions as an officer and board member of several
profitable U.S. corporations whose interests primarily focused within
the nuclear field and irradiation processing. He has served on the
Board of Trustees of the Licensing Executive Society and the Society
of University Patent Administrators. Mr. Wootten is a graduate of the
U.S. Naval Academy and spent eight years in the U.S. Navy, finishing
his career as chief engineer of a nuclear powered Polaris missile
submarine.
MCNC - North Carolina's microelectronics, supercomputing and
communications center has been in the forefront of advanced electronic
and information technologies since its establishment in 1980. The
MCNC has recognized experts and leading research in the areas of
microelectronics, communications and advanced visualization. The Fund
has established a relationship with the MCNC which will provide the
Fund access to the MCNC's experts for field specific technology
reviews of targeted investment companies. They will also be available
to provide further due diligence, consulting and other support
services on a negotiated basis. Additionally, the MCNC has an annual
research budget exceeding $45 million. As technologies are developed
to the point of commercial viability, the Advisor expects that the
Fund will have access to investing in these spin-out opportunities.
MANAGEMENT OF THE FUND
The day-to-day operations of the Fund are delegated to the Advisor
subject to the Fund's investment objectives and policies. As previously
stated, the Fund will target investments in interactive information and visual
technology companies that the Advisor believes provide superior and long-term
return potential. The Fund intends to invest principally in early-stage
companies; however, its industry focus will support an investment in any stage
of leading edge technology companies seeking private equity, including
privately placed equity-related securities by public companies.
In early-stage companies, initial investments will typically be small.
Upon the companies' achievement of established milestones, additional funding
will be made available. This staged investing approach is designed to give the
Fund substantial positions in the better investments. The size of the
investment in any one company will vary, but in general will not be less than a
total commitment of $1 million and not more than 10% of the Fund's capital.
The Advisor expects to consider, among others, some or all of the following
factors in reviewing and analyzing a potential investment:
(1) Management Team - Management is the single most important criteria for
any investment. In some cases, the Advisor may provide financial
expertise and strategic guidance in the early stages. In many cases
the Advisor will work with executive search firms or its consultants
to identify appropriate personnel to complete the management team.
(2) Proprietary Technology or Product - Generally the Fund will invest in
companies which have products which can be protected and have
protective properties, which are key to product market applications
and which the Advisor believes will address a significant potential
market.
(3) Availability of Strategic Partner - In cases where a strategic partner
is not in place, the Fund may help identify a partner and may provide
some equity-related bridge financing while the relationship with the
strategic partner is being formalized.
(4) Acceptable Projected Cash Flow - Unless there are other favorable
investment attributes, the Fund will generally expect a potential
Portfolio Company to project having a positive cash flow by at least
the end of the third year after the Fund's investment. Additionally,
sources of financing to carry the Portfolio Company through a point of
breakeven cash flow will be anticipated to prevent the Fund from being
"forced" into unplanned fundings. The Fund will monitor its
investments in Portfolio Companies and will provide financial
expertise where needed to help ensure that additional funding and
financing will be available as needed to support the growth of
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<PAGE> 25
the companies after the completion of Fund's investment. However,
there can be no assurance that a Portfolio Company will meet any cash
flow projections.
(5) Acceptable Investment Structure - The Fund will in many cases attempt
to invest in its Portfolio Companies through securities which the
Advisor believes will provide a senior or preferential return, such as
convertible preferred stock, convertible debt or anti-dilutive common
stock where available, as opposed to common stock.
(6) Exit Strategy - Attention to the process of trying to achieve
liquidity for the Fund's investments will be an important
consideration in every investment. Typical exit strategies will
include (i) the sale of the Portfolio Company to a third party for
cash, promissory notes, securities (which may be restricted
securities), or a combination thereof, (ii) a public offering or
private placement of the Portfolio Company's stock, and (iii) the sale
of the Fund's interest in the Portfolio Company to the company itself
or its management. There can be no assurance that any of these exit
strategies will be successful.
The Advisor has retained business and technical consultants who can
aid the Advisor in reviewing and analyzing the above factors and in assisting
the management of Portfolio Companies. Such business and technical consultants
will be solely acting as consultants to the Advisor and will not vote in, or
have any control over, the actions of the Advisor or the Fund.
The Fund will have an arrangement with Sovereign Capital Management,
Inc., d/b/a Sovereign Advisers, Inc. ("Sovereign"), a registered investment
advisor founded in 1979, whereby Sovereign will manage the idle cash of the
Fund. Sovereign is a wholly-owned subsidiary of Interstate/Johnson Lane, Inc.,
the parent company of the Selling Agent. Sovereign will charge a quarterly
management fee at the rate of one-half of one percent (0.5%) per annum of the
average daily balance of the Fund's cash under management.
CUSTODIAN
First Union National Bank of North Carolina serves as the Custodian
for the firm's securities and investments. The Custodian does not participate
in the Fund's investment decisions.
DISTRIBUTIONS AND ALLOCATIONS
DISTRIBUTIONS
The Fund intends to distribute in the first quarter of each year the
proceeds of all dispositions of securities which occurred within the preceding
year, except to the extent that the Directors determine that such amounts
should be retained to pay reasonable and anticipated expenses of the Fund or
reserved for investment in existing Portfolio Companies requiring additional
capital. The Fund expects to make cash distributions in each year sufficient
to allow Investors to pay the income taxes incurred by them which result from
their investment in the Fund. Distributions will be made in cash or marketable
securities. Net proceeds of dispositions of portfolio securities and current
net income will be distributed on a cumulative basis to the Investors in
proportion to their ownership of Shares.
Discretionary In-Kind Distributions - Distributions of Fund assets
during the term of the Fund will generally consist of cash or securities listed
on a national securities exchange or quoted through NASDAQ. In the case of a
distribution in kind, the distributed property will be distributed to all
Investors in proportion to their respective ownership of Shares. Any such
distribution will likely consist of securities whose resale may be subject to
restrictions imposed by federal and state securities laws.
In general, the Directors intend to distribute capital gains as
realized and not to reinvest such capital gains. However, the Directors may
cause the Fund to hold securities, especially restricted securities, until a
distribution of those securities is deemed consistent with the company's
progress and
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<PAGE> 26
market conditions. The Directors also have the authority to reinvest capital
gains in existing Portfolio Companies if they believe such an investment is in
the interest of the Investors. The Directors expect that operating income from
such sources as interest and dividends will generally be reinvested or used to
cover operating expenses.
At the termination of the Fund, there will be a period of orderly
liquidation during which the Fund assets will be distributed to any creditors
and to the Investors in accordance with the allocation process described above.
Such distributions will be made in accordance with the Investors' positive
capital account balances, in cash or in kind (including, in certain instances,
private equity holdings) as the Directors may determine.
ALLOCATIONS OF TAXABLE INCOME AND LOSS
For tax purposes, gains and losses will generally be allocated to the
Investors in accordance with their ownership of Shares.
TERM
The Fund's term will be seven years, but may be extended for up to two
additional two-year periods by the Directors, with further extensions subject
to the approval of the holders of a majority of the Shares. The Directors also
have the sole authority to terminate the Fund at any time.
MANAGEMENT EXPENSES
The Fund will pay the Advisor an annual management fee of five percent
(5%) of the net asset value of the Fund for its administrative and investment
management services. Beginning with the first full year of operations of the
Fund, the management fee will be based on the net asset value of the Fund (see
"Determination of Net Asset Value") as follows:
(1) two and one-half percent (2.5%) of the net asset value of the Fund as
of the Valuation Date will be payable in twelve equal monthly
installments, each of which will be due on or before the last day of
each month of such fiscal year; and
(2) two and one-half percent (2.5%) of the net asset value of the Fund as
of the Valuation Date will be accrued and paid, from time to time, as
the Fund liquidates portfolio investments; provided, however, that
until such time as Investors have received cumulative distributions
from the Fund equal to the gross proceeds of the Offering, only 20% of
the profit realized upon liquidation of a portfolio investment will
be available for payment of accrued management fees.
The management fee for the first year or part thereof of the Fund will
be in the amount of two and one-half percent (2.5%) of the gross Offering
proceeds, prorated for the portion of the first year after the Initial Closing
Date.
The Advisor will pay out of its management fees certain expenses
associated with managing and administering the Fund, including, but not limited
to, general overhead expenses, including salaries and fringe benefits of the
Advisor's personnel, office rental and office equipment, fire and theft
insurance, cleaning and utilities of office space, bookkeeping and general
travel and entertainment expenses. One hundred percent (100%) of any
directors' fees and fifty percent (50%) of any consulting fees paid by
Portfolio Companies to the Advisor or its members, as permitted by the
Investment Company Act, shall be paid to the Fund to reduce its expenses.
The Fund will pay or reimburse the Advisor or its affiliates for all
direct operating expenses which are related to the Fund's investment
activities, including stationery, postage, telephone and copying charges, dues
and charges for national and/or regional industry associations, fees and
expenses of
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<PAGE> 27
consultants, and other expenses including fees and expenses for outside
consulting services, legal, accounting, and auditing expenses, litigation
expenses, and organizational and marketing expenses of the Fund. The Fund will
also pay costs incurred in the investigation of investment opportunities and in
the oversight of portfolio investments, including travel and entertainment
expenses directly related thereto. In many cases the Fund will recoup all or a
portion of such expenses from the Portfolio Company upon the successful closing
of an investment by the Fund in a Portfolio Company.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund's assets will be determined as soon as
practical after and as of the end of each calendar year in good faith by the
Directors. In calculating the value of the Fund's total assets, the Directors
will value securities which are traded in the over-the-counter market or on a
national or regional stock exchange at the prevailing bid price on the
Valuation Date, unless the investment is subject to certain restrictions which
require a discount to such price, in which case such discount will be approved
by the Directors who are not "interested persons."
However, the Advisor anticipates that a substantial portion of the
Fund's assets will consist of securities which have no readily determinable
market values. Generally, securities which are not marketable will be valued
(i) at the cost to the Fund or (ii) on a basis consistent with any subsequent
equity-related transactions with third parties which give independent
substantiation to any change in values.
PRIVATE PLACEMENT STATUS
As a purchaser of an interest in a private placement not registered
under the 1933 Act, each Investor will be required to represent that it is
acquiring the Shares for investment and not with a view on resale or
distribution. Further, each Investor must be prepared to bear the economic
risk of the investment for an indefinite period, since the Shares cannot be
sold unless they are subsequently registered under the 1933 Act or an exemption
from such registration is available. It is extremely unlikely that the Shares
will ever be registered under the 1933 Act.
During the course of the transaction and prior to sale, each Investor
and his or her purchaser representative(s), if any, are invited to ask
questions of the Advisor concerning the terms and conditions of the Offering
and to obtain any additional information.
INDEPENDENT ACCOUNTANTS
The annual financial statements to be provided to Investors will be
reviewed by, and certain other matters will be passed upon by, independent
public accountants Price Waterhouse LLP, Raleigh, North Carolina.
CONFLICTS OF INTEREST
TIME DEVOTED TO FUND BUSINESS
Although the Advisor is required to devote such time as may be
necessary for the proper performance of its duties as manager of the Fund, the
Advisor and its affiliates and principals are entitled to and currently do
engage in a number of other activities. Accordingly, conflicts may arise with
respect to the time and attention that the Advisor may devote to the Fund.
(See "Fiduciary Responsibility of the Advisor.") However, the Advisor does not
currently manage any other technology-focused venture capital funds, and will
not begin to invest funds from any subsequent venture capital fund until the
Fund's available capital is fully invested or committed for investment.
Therefore, the Advisor does not believe it will have conflicts arising from the
allocation of proposed investments among competing funds under its management.
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<PAGE> 28
INTERESTS IN PORTFOLIO COMPANIES
Due to the narrow focus of the Fund and the Fund's desire to have
industry leaders involved in the consulting group, it is anticipated that,
where permitted by the 1940 Act, investments may be made in companies in which
a principal of the Advisor or one or more of its consultants has a financial
interest. In some cases they may have a controlling interest. Subject to the
1940 Act, such individuals may also receive stock options and fees for their
board positions, receive consulting fees directly from Portfolio Companies, and
may be allowed to invest alongside the Fund in certain investments. The
Advisor will be sensitive to these potential conflicts in its decision making
and will communicate with its consultants as appropriate. To the extent
practicable, the Advisor will cause investment decisions to be made by parties
without such conflicts, although the Advisor may continue to receive input and
analysis from such parties.
DETERMINATION OF NET ASSET VALUE
The Advisor's management fee is based upon the net asset value of the
Fund from time to time. Because the Fund's investments are likely to be in
private companies with no established market quotations, the valuation of their
securities in the portfolio of the Fund is subject to the good faith
determination of the Directors, of which up to 60% of the members may be
principals or affiliates of the Advisor. Because a majority of the Board of
Directors is likely to consist of principals or affiliates of the Advisor, such
persons will have a conflict of interest in determining the net asset value of
the Fund. The valuation of any Fund asset for such purposes, therefore, must
be approved by the disinterested Directors.
COMMON COUNSEL
The Fund has engaged the firm of Moore & Van Allen, PLLC, Charlotte,
North Carolina, as counsel to the Fund to render the tax opinion referenced in
this Registration Statement and an opinion relating to certain organizational
matters with respect to the Fund under North Carolina law and to advise the
Fund on matters affecting the Fund. Such counsel also serves as special
counsel to the Advisor (and affiliates thereof) and also represents the Selling
Agent in matters unrelated to the Fund. Such counsel may further receive
compensation from the Advisor (and affiliates thereof) or the Fund from time to
time in connection with other matters.
SUCH COUNSEL DOES NOT PURPORT TO HAVE MADE ANY INVESTIGATION OR TO
HAVE ACTED INDEPENDENTLY ON BEHALF OF THE INVESTORS. EACH INVESTOR MUST LOOK
TO HIS OR HER OWN COUNSEL IN CONNECTION WITH AN INVESTMENT IN THE FUND.
RELATED PARTIES AND TRANSACTIONS WITH AFFILIATES
Investors should be aware of the following relationships and
transactions among certain parties to this Offering and their affiliates:
W. Clay Hamner, one of the principals of Montrose Venture Partners,
serves on the Board of Directors of Interstate/Johnson Lane, Inc., the parent
company of the Selling Agent.
The Selling Agent and Sovereign, the investment advisor engaged by the
Fund to manage its idle cash, are both wholly-owned subsidiaries of
Interstate/Johnson Lane, Inc.
Investment decisions will be made by the Advisor in reliance in part
upon advice from its business and technical consultants, some of whom may be in
control of, receive fees or other compensation from, or have investments or
other financial interests in potential Portfolio Companies of the Fund or the
competitors of such companies.
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The Fund anticipates that it may purchase technical services related
to its due diligence functions or other services from One Room Systems, Inc.,
an affiliate of E. Lee Bryan, a Director and a principal of the Advisor. Any
such purchases will be on One Room Systems, Inc.'s standard commercial terms.
FIDUCIARY RESPONSIBILITY OF THE ADVISOR AND THE DIRECTORS
The Directors are accountable to the Fund as fiduciaries and are
required to exercise good faith and integrity in all dealings with the Fund.
This is a rapidly changing area of law and prospective investors should consult
their own counsel concerning the Directors' duties. The Advisor will have
similar obligations arising out of the Advisory and Management Agreement.
The Operating Agreement provides that the Directors and the Advisor
will have no liability to the Fund for any losses arising out of any act or
omission except for acts or omissions of willful malfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office ("disabling conduct"). In a published interpretive release, the staff
of the SEC has announced its position that such indemnification provisions do
not violate the 1940 Act if they provide a reasonable and fair means for
determining whether indemnification shall be made. The permissible means by
which such a determination could be made include (i) a final a decision on the
merits by a court or other body that the person to be indemnified was not
liable by reason of disabling conduct; (ii) the vote of a majority of
disinterested, nonparty directors; or (iii) a written opinion by independent
legal counsel. In the event a claim for indemnification is made, the
determination to indemnify the claimant will be made by one of the permissible
means. Investors may have a more limited right of action than they would have
in the absence of such provisions. The Operating Agreement also provides in
certain situations for indemnification of the Directors and the Advisor by the
Fund for liabilities they may incur in dealings with third parties on behalf of
the Fund.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO THE DIRECTORS, THE ADVISOR AND
AFFILIATES OR PERSONS CONTROLLING THE FUND PURSUANT TO THE FOREGOING
PROVISIONS, THE FUND HAS BEEN INFORMED THAT IN THE OPINION OF THE SEC, SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS
THEREFORE UNENFORCEABLE.
FEDERAL INCOME TAX ASPECTS
INTRODUCTION
EACH PURCHASER OF SHARES (an "Investor") SHOULD CONSULT HIS PERSONAL
TAX ADVISOR CONCERNING THE FEDERAL, STATE AND LOCAL TAX LAWS WHICH MAY APPLY TO
HIS PARTICIPATION IN THE FUND.
The following discussion is a summary of the material federal tax
considerations which may be relevant to an investment in the Fund and is not
intended as a substitute for personal tax planning and professional tax advice
with regard to an investment in the Fund. The tax consequences of an
investment in the Fund will vary substantially for each Investor based upon
such factors as the Investor's sources and levels of income, the nature of his
investment portfolio and the nature and amount of his tax deductions unrelated
to the Fund, and therefore, the advisability from a tax standpoint of any
investment in the Fund depends primarily upon the income tax situation of a
particular Investor. NO RULINGS HAVE BEEN OR WILL BE REQUESTED FROM THE
INTERNAL REVENUE SERVICE (THE "IRS" OR THE
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"SERVICE") WITH RESPECT TO ANY OF THE MATTERS DESCRIBED HEREIN. IN READING THE
DISCUSSION WHICH FOLLOWS, IT SHOULD BE NOTED THAT COUNSEL HAS GIVEN ADVICE ONLY
AS TO SUCH MATTERS AS ARE SPECIFICALLY STATED HEREIN TO BE THE OPINION OF
COUNSEL.
The opinion of Moore & Van Allen, PLLC, Charlotte, North Carolina
("Counsel" to the Fund), has been rendered only in connection with the material
federal income tax issues arising from an investment in the Fund. The
discussion of the federal income tax considerations relating to an investment
in the Fund and Counsel's opinion, where specifically rendered, are based upon
representations of the Advisor and a review of other documents and information,
which Counsel believes to be pertinent to the Offering. Counsel has made
inquiry into relevant facts, and is satisfied that the material facts are
accurately and completely described in the offering materials. An independent
verification by Counsel of the asserted facts was not required under existing
Treasury Regulations, however, because Counsel has no reason to believe that
any relevant facts asserted to Counsel or representations, documents or other
information relied on by Counsel are untrue. ANY MODIFICATION OR ALTERATION OF
ANY FACTS, REPRESENTATIONS OR OTHER INFORMATION RELIED ON BY COUNSEL IN ITS
INQUIRY COULD ADVERSELY AFFECT THE FOLLOWING DISCUSSION AND COUNSEL'S OPINIONS
DESCRIBED HEREIN.
The discussion contained herein and Counsel's opinions, where
specifically rendered, are based on existing statutory law contained in the
Internal Revenue Code of 1986 (the "Code" and, with respect to a particular
section, "Code Section") treasury regulations, court decisions, published
revenue rulings and revenue procedures of the IRS through the date of this
Registration Statement. No assurances can be given that existing tax laws,
regulations and rulings, and judicial decisions will not be amended, modified,
altered, or reversed at any time and applied either retrospectively or
prospectively. Any such changes may adversely affect the following discussion
and the opinions of Counsel described herein and the anticipated tax
consequences of an investment in the Fund.
There have been a number of pieces of major tax legislation passed by
Congress in recent years, many provisions of which have not been interpreted by
regulations or other authority. Investors should be aware that they may be
adversely affected, perhaps, retroactively, by the resolution of current
uncertainties in the tax laws or by future legislature, judicial or
administrative changes.
In the opinion of Counsel, subject to certain conditions, limitations
and restrictions expressed herein it is more likely than not that: (1) the
Fund will be treated as a partnership for federal income tax purposes; and (2)
items of Fund income, gain, loss, deduction and credit allocated to the
Investors in accordance with the Agreement will be respected pursuant to Code
Section 704. No opinion is expressed with regard to the deductibility of any
fees paid to the Advisor and affiliates, because of the inherently factual
nature of the reasonableness and character of such fees and the absence of
clear authority regarding these issues.
The factual basis for the opinions of Counsel on the material tax
issues is set out hereinafter, along with other information pertaining to the
federal tax consequences of an investment in the Fund. A copy of the opinion
of Counsel may be obtained from the Advisor.
The discussion below is directed primarily to individual Investors who
are United States citizens. A potential Investor which is a corporation,
trust, estate, tax-exempt organization or nonresident alien should consult his
or its own tax counsel regarding the specific rules applicable to an investment
in the Fund.
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CLASSIFICATION AS A PARTNERSHIP FOR TAX PURPOSES
The Fund has not and will not apply for a ruling from the IRS that the
Fund will be classified as a partnership and not as an association taxable as a
corporation for federal income tax purposes. Rather, the Fund will rely upon
the opinion of Counsel as to the tax status of the Fund. In the opinion of
Counsel, the Fund as constituted under the Operating Agreement should be
classified as a partnership and not as an association taxable as a corporation
for federal income tax purposes. Counsel's opinion is subject to the
conditions that the organization and operation of the Fund is in accordance
with the North Carolina Limited Liability Company Act and the Operating
Agreement.
Counsel's opinion is based upon Regulations Section 301.7701-2 and -3
which indicate that an organization will be classified as a partnership for
federal tax purposes where the organization possesses no more than two of the
following four specified corporate characteristics" (1) continuity of life,
(2) centralization of management, (3) limited liability, and (4) free
transferability of interests. The Regulations further indicate that, in some
cases, other factors may be significant in determining the proper
classification of an organization. Treas. Reg. Section 301.7701-2(a). See
Phillip G. Larson, 66 T.C. 159 (1976) (other factors not of critical
significance independent of their bearing on the four major characteristics);
Acq., Rev. Rul. 79-106, 1979-1 C.B. 448.
Counsel's opinion that the Fund will not have more corporate
characteristics than noncorporate characteristics results from the following
analysis.
a. Continuity of Life. Under the Regulations, the corporate
characteristic of continuity of life exists if the death, insanity, bankruptcy,
retirement, resignation, or expulsion of any member of the organization will
not cause a dissolution. Pursuant to the Operating Agreement, any of such
events with respect to certain of the Directors will result in the dissolution
of the Fund unless a majority in interest of the Investors vote to continue the
Fund and, if necessary, appoint a new Director. While the Directors subject to
such dissolution events may or may not be members of the Fund, Counsel believes
that the applicability of such dissolution events with respect to such
Directors results in a meaningful possibility of the dissolution of the Fund,
in contrast to a corporation which would not be dissolved upon the happening of
such events to its directors.
Thus, based on the foregoing, the Fund should not be deemed to possess
the corporate characteristic of continuity of life.
b. Centralized Management. An organization is considered to have
centralized management if any person (or group of persons that does not include
all members) has continuing exclusive authority to make the management
decisions necessary to the conduct of the business for which the organization
was formed. Accordingly, the corporate characteristic of centralized
management would likely be found to exist because all of the interests in the
Fund will be owned by the Investors and the Directors have management
authority.
c. Limited Liability. The corporate characteristic of limited
liability exists if under local law there is no member of the organization who
is personally liable for the debts of, or claims against, the organization.
Because of the statutory limitation of liability of Members pursuant to the
North Carolina Limited Liability Company Act, the corporate characteristic of
limited liability will exist with respect to the Fund.
d. Free Transferability of Interests. Finally, an organization
is considered under the Regulations to have free transferability of interests
if each of its members or those members owning
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<PAGE> 32
substantially all of the interests in the organization have the power, without
the consent of the other members, to substitute for themselves in the same
organization a person who is not a member of the organization. Such
substitution of interests must confer on the transferee all the attributes of
the transferor's interest in the organization. Treas. Reg. Section
301.7701-2(e)(1).
The court in Larson concluded that a requirement in a partnership
agreement permitting the assignment of limited partners' interests in the Fund
with the consent of the general partner, which consent could not be
unreasonably withheld, was not a restriction on transfer. Hence, the partners'
interests were held to be freely transferable. To the contrary, however, free
transferability would appear not to exist in the case where an assignee could
become a substitute limited partner only with the consent of the general
partner when there is no additional mandate in the partnership agreement that
such consent may not be unreasonably withheld. See Treas. Reg. Section
301.7701-3(b)(2) Example 1.
Because the Operating Agreement requires the unrestricted consent of
the Directors before an assignee may become a substitute Investor, Counsel is
of the opinion that the corporate characteristic of free transferability of
interest should not be found to exist.
In analyzing whether an unincorporated organization has more corporate
characteristics than noncorporate characteristics, Larson and the Regulations
suggest that the four major characteristics are to be accorded equal weight
except that the characteristic of free transferability will be accorded less
significance when it exists in "modified" form such that each member is first
required to offer his interest to the other members. Thus, based on the above
analysis, the Fund should have only two corporate characteristics --
centralized management and limited liability -- and such corporate
characteristics should not cause the Fund to be treated as an association
taxable as a corporation.
This conclusion has been reached despite the presence of other
factors, such as the promotion of the Fund by means of a Private Placement
Memorandum, that might constitute corporate characteristics. See Zuckman v.
United States, 524 F.2d 721 (Ct. Cl. 1975); Reg. Section 301.7701-2(a)(3); Rev.
Rul. 79-106, supra. The IRS has recently issued Rev. Proc. 95-10 setting
forth conditions under which the IRS will issue an advance ruling on the tax
classification of a limited liability company. The Fund will not meet all of
the conditions of Rev. Proc. 95-10, and accordingly would likely be unable to
obtain a ruling from the IRS as to its tax classification. No ruling will be
requested from the Service with respect to this or any other issue discussed in
this Registration Statement. Although the Rev. Proc. 95-10 conditions relate
only to the issuance of an advance ruling and do not necessarily represent the
litigation position of the Service, it is possible that the Service will seek
to classify the Fund as a corporation.
Classification by the Service of the Fund as an association taxable as
a corporation for income tax purposes would result in dramatic changes in the
tax treatment of the Fund's transactions, most notably (i) income, gain, loss,
deductions and credits would not flow through to the Investors for reporting on
their own individual income tax returns, (ii) distributions to the Investors
would be treated as corporate distributions, subject to tax as ordinary income
in certain circumstances, and (iii) the taxable income of the Fund would be
subject to the corporate federal income tax. The Fund intends to contest any
contention by the IRS that the Fund constitutes an association taxable as a
corporation unless such contention is based upon a clearly applicable
substantive change of law. Such a contest might result in the Fund incurring a
liability for substantial legal fees.
PUBLICLY TRADED PARTNERSHIPS.
Code Section 7704 provides that certain publicly traded partnerships
will be treated as corporations for tax purposes. A publicly traded
partnership is defined as a partnership whose shares are
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traded on an established securities market or are readily tradable on a
secondary market or the substantial equivalent thereof.
The Advisor has represented to the Fund and its Counsel that Shares
will not be traded on a established securities market nor will any other trades
be permitted if after such trade the Fund will not be classified as a
partnership for federal income tax purposes or will the same be offered with
the expectation that there will be a secondary market for such interest. Under
the Operating Agreement, the Fund may require, as a condition precedent to
transfer of a Fund interest, delivery to the Fund of an opinion of counsel that
the transfer will not violate such restriction. While the Fund and the Selling
Agent may, in their discretion, assist Investors in disposing of or purchasing
Shares, the same will be limited to isolated transactions. The Advisor has
represented to Counsel that under no circumstances will the Fund, the Advisors
or the Selling Agent undertake a course of conduct which would cause the Fund
to be treated as a publicly traded partnership.
Based upon the placement of the Shares as proposed by the Advisor, it
is likely that the Fund will not be classified as a publicly traded partnership
under Code Section 7704.
FEDERAL TAXATION OF INVESTORS
Subchapter K of the Internal Revenue Code provides that an entity
classified as a partnership shall not be subject to federal income tax.
Instead, a partnership must file an annual information return setting forth all
items of income, gain, loss, deduction, credit and tax preference of the Fund.
The Fund must furnish to each Investor information containing the partner's
distributive share of the income, gain, loss, deduction, credit and tax
preference, together with such other information as may be required by the
Regulations. A partner's ability to deduct a share of partnership losses or
deductions is subject to many restrictions: (a) partnership level items can be
deducted by a partner only if such items are property allocated to him, (b) a
partner may not deduct partnership losses in excess of his basis in his
partnership interest, (c) a partner's ability to deduct losses from a
partnership activity are restricted by his amount "at risk" in such partnership
activity and (d) a partner's ability to deduct net losses from a limited
partnership will generally be limited by the passive activity loss
restrictions. All Investors will be taxed on their allocable shares of the
Fund's taxable income whether or not that income is actually distributed.
Investors should note that the preparation and filing of any individual return
of an Investor and the payment of any taxes, penalties or interest due on
account of such return will be the sole responsibility of each Investor.
PASSIVE ACTIVITY RULES
Certain taxpayers (including individuals, certain closely-held
C-corporations and certain personal service corporations) generally may deduct
their losses from so-called "passive activities" only to the extent of their
income from passive activities. Similarly, tax credits from passive activities
generally may be used only to offset tax liabilities attributable to passive
activities. The following discussions address the passive and portfolio
activity restrictions only as they affect individual Investors.
Passive activities generally include any activity involving the
conduct of a trade or business in which the taxpayer does not materially
participate (such as an investment in a limited partnership) and any activity
involving the receipt of payments principally for the use of tangible property
(such as rental real estate or equipment leasing). Passive activities do not
include a taxpayer's employment or day-to-day business, nor portfolio
investments (e.g., dividends, royalties, and interest), and thus, income from
those sources cannot be sheltered by passive activity losses. An investment in
the Fund is not expected to constitute an investment in a passive activity, as
the Fund's investment activities are not expected to rise
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to the level of a trade or business for this purpose. Rather, the Investors'
allocable shares of Fund income will likely be portfolio income, which cannot
be offset by passive losses from other sources.
CASH DISTRIBUTIONS TO INVESTORS
The tax treatment of cash distributions to the Investors should be
distinguished from the tax treatment of the Investors' shares of income and
loss, which is discussed above. Cash distributed to an Investor from the Fund
will not be taxable unless it exceeds the basis of the Investor's Shares.
However, cash distributions will reduce the tax basis of the Investor's Shares,
although not below zero. If a distribution exceeds the partner tax basis, the
excess is taxed as gain from the sale of the Shares.
INVESTOR'S TAX BASIS IN THE FUND
Code Section 704(d) permits a partner to deduct his or her
distributive share of partnership loss, if any, only to the extent of the
adjusted basis of such partner interest in the partnership at the end of the
partnership year in which such loss occurred. Any excess of loss over basis,
however, may be carried over indefinitely and deducted if, and to the extent
that, at the end of any succeeding taxable year the tax basis of the partner
interest in the partnership exceeds zero.
An Investor's adjusted tax basis in his or her Shares will initially
be determined by the amount of his or her contributions to the Fund represented
by the purchase price of the Shares. The Investor's basis will be increased by
his or her distributive share of the Fund's taxable income and tax-exempt
income, if any.
Conversely, the Investor's adjusted tax basis in the Shares will be
decreased, but not below zero, by the Investor's proportionate share of: (1)
cash (and property) distributions and (2) Fund losses and nondeductible
expenditures.
In addition to the above increases and decreases, an Investor's
adjusted tax basis in the Shares can also be affected by Fund liabilities and
liabilities to which Fund assets are subject. Code Section 752(a) provides for
an increase in a partner's tax basis to the extent of his share of partnership
liabilities. However, the Fund does not anticipate incurring significant
amounts of liabilities.
LIMITATION ON DEDUCTION OF LOSSES - AT RISK PROVISIONS
Section 465 generally limits an individual's deductions for losses
from an activity to the aggregate amount such individual has economically
placed at risk and, thus, could actually lose from the activity. Amounts
considered to be at risk generally include the amount of money and the adjusted
basis of property contributed to the activity and amounts borrowed on which the
individual is personally liable or has pledged property, other than property
used in the activity. An individual is not considered to be at risk with
respect to amounts protected against loss through nonrecourse financing or
similar arrangements.
ALLOCATIONS OF FUND INCOME AND LOSS
The Fund will rely on the opinion of Counsel as to the validity of
allocations of Fund income, gain, loss, deduction or credit. Based upon
Counsel's conclusion that allocations made pursuant to the Agreement will be in
accordance with the current provisions of the Code and the accompanying
Regulations, including Regulations issued in December, 1985, Counsel is of the
opinion that such allocations should be respected.
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The conclusion that allocations made in accordance with the Agreement
will be sustained is based upon the following discussion. Code Section 704(a)
provides generally that a partner's distributive share of income, gain, loss,
deduction or credit will be determined by the partnership agreement unless
otherwise provided in the Income Tax Chapter of the Internal Revenue Code. Code
Section 704(b) indicates, however, that where the agreement does not have
"substantial economic effect," each partner's distributive share must be
determined in accordance with the partner's interest in the partnership,
determined by taking into account all facts and circumstances. The question of
whether a partnership allocation has substantial economic effect requires an
inherently factual determination.
Regulations under Code section 704(b) set forth specific criteria for
determining whether an allocation has substantial economic effect. Such
Regulations set forth a two part test which initially requires that the
allocation have economic effect and, thereafter, requires that the economic
effect be substantial.
a. Economic Effect. An allocation will be considered to have
economic effect under the "Primary Economic Effect Test" of the Final
Regulations if throughout the full term of the partnership, the partnership
agreement provides: (i) for the determination and maintenance of capital
accounts in accordance with the Final Regulations; (ii) liquidation proceeds
upon dissolution of the partnership are to be distributed in accordance with
the partners' positive capital account balances determined after taking into
account all capital account adjustments for the partnership taxable year during
which such liquidation occurs; and (iii) any partner with a deficit capital
account following the liquidation of his or her interest in the partnership is
required to restore the amount of such deficit to the partnership, to be paid
to creditors or distributed to partners with positive capital account balances.
The Operating Agreement does not require the Investors to fund deficit
capital account balances. Therefore, the Primary Economic Effect Test will not
be satisfied by the Fund. However, the allocations of net income and net loss
to the Investors will be respected if the Alternate Economic Effect Test is
satisfied (see discussion below) or if the allocations to the Investors
otherwise are in accordance with the Investors' interests in the Fund (also
discussed below).
If the Primary Economic Effect Test is not satisfied, the Section 704
Regulations provide an alternate test for economic effect (the "Alternate
Economic Effect Test") under which allocations of Fund tax items which do not
reduce an Investor's capital account below zero (or increase a deficit balance
in such person's capital account) will nevertheless have economic effect if
requirements (i) and (ii) of the Primary Economic Effect Test are satisfied and
if the partnership agreement contains a "qualified income offset"; i.e., the
partnership agreement provides that a partner who unexpectedly receives an
adjustment, allocation or distribution of certain prescribed items which cause
his capital account to fall below zero will be allocated income and gain in an
amount and manner sufficient to eliminate such deficit balance as quickly as
possible. The Operating Agreement contains such a provision.
The Section 704 Regulations provide a special set of tests where
losses are attributable to nonrecourse debt. In order for allocations of such
losses to be deemed to be in accordance with the "partners' interests in the
partnership," the following requirements must be met: (i) the capital account
maintenance and capital account liquidation rules set forth in the Section 704
Regulations, as described above, must be satisfied throughout the term of the
partnership; (ii) nonrecourse deductions must be allocated in a manner
"reasonably consistent" with allocations, which have substantial economic
effect, of some other significant item (other than minimum gain) attributable
to the property securing the nonrecourse liabilities; (iii) the partnership
agreement must contain a "minimum gain chargeback" provision; and (iv) all
other material allocations and capital account adjustments must be valid under
the Section 704 Regulations. For purposes of requirement (v), minimum gain
generally is the gain a
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<PAGE> 36
partnership would have to recognize if the property securing the partnership's
nonrecourse debt were foreclosed upon, which typically would be the excess of
the amount of the debt over the tax basis of the property. A "minimum gain
chargeback" provision provides that if there is a decrease in the partnership's
minimum gain during the year, all partners with deficit capital account
balances at the end of the year will be allocated items of income and gain for
that year so as to eliminate the deficits as quickly as possible. The
Operating Agreement contains such a provision.
b. Substantiality. The economic effect of a partnership
allocation must further be substantial under the Final Regulations. An effect
is substantial when there is a reasonable possibility that the allocations will
substantially affect the dollar amounts to be received from the partnership,
independent of tax consequences. One general rule and two specific rules must
be satisfied. The general rule renders an allocation's economic effect
insubstantial if, at the time the allocation becomes a part of the partnership
agreement:
(1) the after-tax economic consequences of at least one partner may, in
present value terms, be enhanced compared to such consequences if the
allocation (or allocations) were not contained in the partnership
agreement, and
(2) there is a strong likelihood that the after-tax economic consequences
of no partner will, in present value terms, be substantially
diminished compared to such consequences if the allocations were not
contained in the partnership agreement. Treas. Reg. Section
1.704-1(b)(2)(iii)(a).
The two specific rules for substantiality relate to the shifting of
tax consequences and to transitory allocations. Under the shifting of tax
consequences rule, an allocation's economic effect is deemed insubstantial if,
at the time the allocation became a part of the partnership agreement, there is
a strong likelihood that (1) the net adjustments to the partners' capital
accounts for the taxable year would not differ from the net adjustments if the
allocations were not in the partnership agreement, and (2) the total tax
liabilities for the partners would be less than if the allocations were not in
the partnership agreement, taking into account the partners' respective
nonpartnership tax attributes. Treas. Reg. Section 1.704-1(b)(2)(ii)(b).
The transitory allocations rule looks to whether the partnership
agreement provides for the possibility that one or more original allocations
will be largely offset by one or more other allocations, or "offsetting
allocations." Provided an offset will not likely occur within 5 years, the
transitory allocation rule will not render the economic effect of the
allocations insubstantial. Treas. Reg. Section 1.704-1(b)(2)(iii)(c).
The Operating Agreement provides that if an allocation of net loss to
an Investor would reduce his or her capital account below zero (or increase a
deficit balance in the capital account), such allocation will instead be made
to Investors having positive capital account balances. The Operating Agreement
also contains a "qualified income offset" provision and a "minimum gain
chargeback" provision requiring that in certain situations where an Investor's
capital account balance falls below zero at the end of any year, the Investor
will be allocated items of income and gain as quickly as possible to the extent
necessary to eliminate the deficit capital account balance. In addition, the
Operating Agreement provides (i) for the determination and maintenance of the
Investors' capital accounts in accordance with the Section 704 Regulations; and
(ii) that liquidating distributions will in all cases be made in accordance
with the positive capital account balances of the Investors. Counsel is of the
opinion that, based on these factors, and the Section 704 Regulations, it is
more likely than not that the Funds's allocations of net income and net loss to
the Investors will not be substantially modified if challenged by the IRS.
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The Operating Agreement gives the Directors the right to amend the tax
allocation provisions of the Operating Agreement to take account of any
amendments to Code Section 704 or the Regulations thereunder or any
administrative or judicial interpretations thereof.
If the allocations are determined not to have the requisite
substantial economic effect, then each partner's distributive share would be
determined in accordance with the partner's interest in the Fund by taking into
account all facts and circumstances. The allocations that might result from a
successful challenge by the Service could be less favorable than those set
forth in the Operating Agreement.
RETROACTIVE ALLOCATIONS
Items of partnership income, gain, loss, deduction or credit are
allocable to a partner only if realized, paid or incurred by the partnership
during the portion of the year in which the partners are admitted to the
partnership and not retroactively to periods prior to entry.
In 1984, the IRS issued a news release (IR-84-129) announcing that
partnerships using the "interim-closing-of-the-books" method to take into
account the varying interests of partners during a taxable year will be
permitted to use a "semi-monthly convention" pursuant to which the varying
interests of partners used to determine their distributive shares of
partnership items is determined by treating partners entering during the first
15 days of the month as entering on the first day of the month and partners
entering after the 15th day of the month as entering on the 16th day of the
month. It is likely that the Internal Revenue Service will permit partnerships
to use other conventions not described in this news release. For example, the
release states that the IRS is preparing regulations that will address this and
other issues, "including the possible use of other conventions..." Further,
the Conference Committee Report accompanying the enactment of the relevant
Internal Revenue Code provision provides that "the conferees understand that
the Secretary will provide for a monthly convention by regulation... Under
this convention, partners entering after the 15th day of a month will be
treated as entering on the first day of the following month and partners
entering during the first 15 days of a month will be treated as entering on the
first day of the month. The Fund intends to use such a monthly convention.
Thus, any Investors who are admitted to the Fund on an early date will be
allocated a larger share of Fund income, losses, credits and deductions than
Investors entering the Fund at a later date.
DEDUCTIBILITY OF MISCELLANEOUS EXPENSES
Under Section 67 of the Internal Revenue Code, non-corporate taxpayers
may deduct certain miscellaneous expenses (e.g., investment advisory fees, tax
preparation fees, unreimbursed employee expenses, subscriptions to professional
journals, etc.) only to the extent such deductions exceed in the aggregate 2%
of the taxpayer's adjusted gross income. Each Investor's share of the
management fee paid by the Fund to the Advisor will be included among the
miscellaneous expenses potentially subject to the 2% floor. However,
corporations and tax exempt organizations are not affected by the 2% floor.
For individual taxpayers, such expenses are also potentially subject to the
overall limitation of itemized deductions to the excess of such deductions over
the lesser of (i) 3% of the difference between the Investor's adjusted gross
income and the "applicable amount" ($111,800 for individuals and married
couples filing jointly, and $55,900 for married individuals filing separately)
or (ii) 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
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DEDUCTIBILITY OF FEES AND OPERATING EXPENSES GENERALLY
The Fund may incur and deduct certain items that may be subject to
close scrutiny by the IRS to determine whether they represent expenses of the
Fund that are currently deductible, rather than capital expenditures or
expenditures that cannot provide any present or future tax benefit.
a. Reasonableness. In determining whether an expenditure is
properly deductible, the Service, upon audit, would make a facts and
circumstances inquiry as to the "reasonableness" of the expenditure. Generally
an expenditure is determined to be reasonable where it is paid or incurred as
the result of arm's-length negotiations between unrelated parties. Under the
Operating Agreement and the Advisory and Management Agreement, certain
expenditures incurred on behalf of the Fund will be paid by the Fund to the
Advisor or affiliates for services rendered by the Advisors or affiliates on
behalf of the Fund. The Service, upon examination, may challenge any of such
fees or reimbursements as being excessive and not reasonable. Accordingly, to
the extent the Fund could not establish the reasonableness of such expenses,
they would be disallowed. On the other hand, expenses arising from
arm's-length negotiations between unrelated parties should be respected as
reasonable. The Advisor anticipates that any such fees or reimbursements will
be reasonable in amount and properly deductible.
b. Capitalization or Amortization Requirement. In addition to
the above requirement, an expenditure that has a useful life extending
substantially beyond the tax year in which it was made will not be currently
deductible. Instead, such expenditure must be capitalized or amortized.
Treas. Reg. Section 1.461-1(a), 1.263-2(a). Case authority and revenue
rulings indicate that an expenditure must be capitalized or amortized when it
has a useful life in excess of one year.
DEDUCTIBILITY OF ORGANIZATION AND SYNDICATION EXPENDITURES
The Fund is expected to incur significant expenses for the offer and
sale of the Shares and for other syndication expenses. These amounts and any
other organization and syndication expenses, although financed by the deferral
of part of the purchase price of the Property, will be paid by the Fund. The
treatment of such expenditures should be as follows:
Under Code Section 709, a partnership is not permitted a current
deduction for organization expenses, but may elect to amortize such expenses
over a period of not less than sixty months. Organization expenses include
those expenses which are incident to the creation of the partnership,
chargeable to a capital account, and are of a character which, if expended
incident to the creation of a partnership having an ascertainable life, would
be amortized over such life. Illustrative of organization expenses, the
Regulations list legal fees for services incurred in negotiating and preparing
the partnership agreement, accounting fees for the establishment of a
partnership accounting system and certain other filing fees. The Regulations
indicate that the organization expenses to which the election to amortize
applies include only those expenditures incurred before the end of the taxable
year in which the partnership begins business. No amortization of any
organization expenditures incurred after the first year of Fund operations is
permitted.
Syndication expenses, to the contrary, are specifically excluded from
classification as organization expenses. Accordingly, such expenses must be
capitalized and are non-deductible and non-amortizable. The Regulations define
syndication expenses as expenses connected with the issuing and marketing of
interests in the partnership. Examples include brokerage fees, registration
fees, and legal fees of the issuer for securities advice and advice pertaining
to the adequacy of tax disclosures in the placement memorandum. Hence, selling
commissions paid to the Selling Agent for offering and selling the Shares will
not be deductible in any event.
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<PAGE> 39
SALE OR OTHER DISPOSITION OF AN INVESTOR'S INTEREST
The Operating Agreement places certain restrictions on an Investor's
ability to assign, sell or otherwise dispose of his or her Shares. The
following discussion assumes that the Investor complies in all respects with
the requirements of the Operating Agreement.
Investors should be aware that they may be unable to sell their
interests because no market for such interests may exist. In the event an
Investor does dispose of his or her interest, however, such Investor's gain or
loss will be determined by the difference in the amount realized and the
adjusted basis of his interest.
Any gain or loss realized by a limited partner on a sale of a
partnership interest is generally taxable as long-term capital gain or loss if
the selling Investor has held his interest for longer than one year.
Investors should also note that under Code Section 708(b)(1)(B) a
partnership is terminated for federal tax purposes if, within a 12-month
period, there is a sale or disposition (other than by gift or inheritance) of
50 percent or more of the total interest in partnership capital and profits.
Notwithstanding that a partnership may continue under state law, the
Regulations indicate that where a partnership is technically terminated
pursuant to Code Section 708(b)(1)(B), the partnership will be deemed to
distribute all its property to the purchaser(s) and remaining partners in
accordance with their pro rata interests in liquidation of the "old"
partnership, and the purchaser(s) and remaining partners will be deemed to
contribute all the property to a "new" partnership. In addition, a termination
under Code Section 708 will result in the closing of the Fund's taxable year
pursuant to Code Section 706(c). Such termination of the Fund and closing of
Fund tax year could have an adverse impact on the Investors.
However, the admission of new partners (such as the Investors) to a
partnership does not generally give rise to a Section 708 termination, even
though the interests of existing partners are reduced by 50% or more. See Rev.
Rul. 75-423, 1975-2 CB 260.
In order to prevent a termination of the Fund under Code Section 708
as a result of sales or exchanges of 50 percent or more of the partnership
profits and capital interests, Section 7.1 of the Operating Agreement has a
prohibition against any sales, assignments, or exchanges, which in the opinion
of Counsel, would cause a Code Section 708 termination. Thus, as long as the
Investors adhere to the Agreement, problems inherent in a Code Section 708
technical termination should not arise with respect to the Fund.
SALE OR OTHER DISPOSITION OF FUND ASSETS
In the event the Fund disposes of any securities of its Portfolio
Companies, gain or loss will be realized and recognized under Code Section
1001, which provides that gain or loss is generally equal to the difference
between the amount realized and the adjusted basis.
Fund investments or sales of Fund assets may generate income that is
taxable to the Investors, regardless of whether actual distributions are made.
However, the Advisor believes that such an event is highly unlikely, and that
the Fund will be able to make distributions to Investors sufficient to allow
Investors to pay income taxes attributable to their ownership of Shares in the
Fund.
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<PAGE> 40
TARGETED CAPITAL GAINS EXCLUSION
The Revenue Reconciliation Act of 1993 added to the Code Section 1202,
which permits the exclusion, for federal income tax purposes, of 50% of any
gain (subject to certain limitations) realized upon the sale or exchange of
"qualified small business stock" held more than five years. Generally,
qualified small business stock is stock of a small business corporation
acquired directly from the issuing corporation, which must at the time of
issuance and immediately thereafter have assets of not more than $50,000,000
and be actively engaged in the conduct of a trade or business not excluded by
law. Per investor and per investment, any gain, 50% of which may be excluded,
may not exceed the greater of ten times the cost of the investment or
$10,000,000. For the purpose of this limitation, an investment company is
treated as a single investor. It is possible that in some cases investments
made by the Fund will be in qualified small business stock, that the Fund will
hold such stock for more than five years and that the Fund will ultimately
dispose of such stock at a profit. If that were to occur, each Investor who
held his or her Shares at the time the Fund purchased the qualified small
business stock and at all times thereafter until the disposition of such stock
by the Fund would be entitled to exclude from his or her taxable income 50% of
such Investor's share of such gain, whether distributed or deemed distributed.
One half of any amount so excluded would be treated as a preference item for
alternative minimum tax purposes.
NORTH CAROLINA CREDITS FOR INVESTMENT IN QUALIFIED BUSINESSES
Individual Investors in the Fund may under certain circumstances be
entitled to credits against their North Carolina income taxes. To the extend
the Fund invests in certain "qualified businesses," the Fund will be eligible
for up to a 25% credit in the year following the investment, which will be
allocated to all Investors in accordance with their interests in the Fund.
However, qualifying for these tax credits will not be an overriding concern as
to the making or liquidation of portfolio investments.
REGISTRATION AS QUALIFIED GRANTEE BUSINESS
The Fund has been registered with the State of North Carolina as a
"qualified grantee business" for purposes of the credit against North Carolina
income taxes for investments in qualified business ventures and qualified
grantee businesses. Subject to the following discussion and the other
qualifications discussed in this Registration Statement, individual Investors
in the Fund who have North Carolina taxable income may claim as a credit
against North Carolina income taxes an amount equal to 25% of their investment
in the Fund up to a maximum credit of $50,000.
The credit is available for the year following the year of investment
in the Fund, so for investors admitted to the Fund in 1995 the credit would be
available against North Carolina income taxes for the year 1996 and available
for carryforward for up to five years. An Investor must file a claim for the
credit with the North Carolina Department of Revenue by April 15 of the year
following the year in which the investment is made (i.e., by April 15, 1996 for
Investors admitted to the Fund in 1995).
The maximum amount of credits available to all taxpayers in any year
is $12,000,000. If the total amount of credits claimed is greater than the
amount available, the state will allocate the available credits among claimants
on a pro rata basis. Investors will be notified of any reduction in claimed
credits as a result of such allocation on or before December 31 of the year
following the year in which the investment is made.
The credit for investment in the Fund would be independent of any
credits which might be claimed by the Fund and allocated to the Investors in
respect of the Fund's own investment in qualified
35
<PAGE> 41
North Carolina business ventures, although each Investor would be subject to an
additional limitation in an aggregate amount of $50,000 per year for both types
of credit. Any aggregate unused credits from these two sources may be carried
forward for up to five years. An Investor's basis in Shares of the Fund is
generally required to be reduced for North Carolina purposes for credits
allowed.
THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE
NORTH CAROLINA CREDIT FOR INVESTMENTS IN QUALIFIED BUSINESSES. EACH INVESTOR
SHOULD CONSULT HIS OR HER OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE AND
LOCAL TAX LAWS WHICH APPLY TO THE INVESTOR'S PARTICIPATION IN THE FUND.
UNRELATED BUSINESS TAXABLE INCOME
Certain entities, such as charitable and other organizations described
in Section 501(c) of the Code and trusts formed as part of profit sharing or
pension plans that qualify under Section 401(a) of the Code, are generally
exempt from tax. In addition, participants in pension plans normally do not
recognize gains or losses incurred by or passed through to such plans. The
Fund is permitted to sell interests to such tax-exempt entities. However,
investment by such entities involves complex tax, regulatory, and business
issues. THEREFORE, TAX-EXEMPT ENTITIES SHOULD CONSULT THEIR TAX AND BUSINESS
ADVISORS BEFORE INVESTING IN THE FUND.
Although tax-exempt entities do not generally pay taxes, such entities
are subject to tax on their unrelated business taxable income ("UBTI"), defined
below. An entity that generates UBTI is taxed on that income at regular
corporate or trust rates, as applicable. If the Fund generates income that
would be UBTI if generated by the tax-exempt Investor, such Investor will
realize UBTI whether or not such UBTI is actually distributed from the Fund.
Even though an Investor is allocated UBTI, this allocation will generally not
affect the tax-exempt status of the entity.
UBTI is the gross income derived by a tax-exempt entity from an
unrelated trade or business less the deductions mentioned above. Items that
are generally excludable from UBTI include dividends, gains from the sale or
exchange of property held for investment, rents from real property, interest,
and rents from personal property being leased as an incident to real property.
Therefore, it is anticipated that the operations of the Fund will not generate
UBTI to tax-exempt Investors.
Under the Fund Operating Agreement the Fund will use its best efforts
so as not to make any investment, incur any liability, or otherwise take any
action which would result in the realization by a tax-exempt member of
"unrelated business taxable income" within the meaning of Section 512 of the
Internal Revenue Code.
CODE SECTION 754 ELECTION
The Operating Agreement gives the Directors the power to cause the
Fund to make a Code Section 754 election. Such an election would permit the
Fund to make adjustments to the basis of the Fund Property: (1) under Code
Section 734(b) in the case of certain distributions of cash and Fund property,
and (2) under Code Section 743(b) in the case of certain transfers of an
interest in the Fund by a sale or exchange or upon the death of an Investor.
In the first instance, the adjustment is permitted to prevent double
taxation of the gain from appreciation in the value of the Property. For
example, where a withdrawing Investor receives a cash distribution in exchange
for his Fund interest, such distribution would include any increase in the
value
36
<PAGE> 42
of his interest resulting from appreciation in the Property. The Investor
would likely recognize gain on the distribution from the appreciation, but
since he received cash rather than property, the property which had appreciated
in value would get no corresponding increase in basis in the "hands" of the
Fund as a result of the gain recognized by such Investor. Should the Fund
thereafter sell the appreciated property, the remaining Investors would be
forced to recognize gain from the appreciation in value of the property,
including the distributee-Investor's proportionate share of the gain which he
had previously realized and recognized. The adjustment, therefore, allows the
Fund to obtain an increase in the basis of certain assets to the extent of the
gain recognized by the distributee-Investor from the appreciation in the value
of the Property.
With regard to a transferee, Code Section 743(b) permits the Fund to
adjust the basis of Fund property (with respect to the transferee-Investor
only) so that the transferee-Investor's proportionate share of the adjusted
basis of such property is equal to the initial cost basis of his Fund interest.
If such partner's cost basis includes amounts attributable to appreciation in
the value of the Property, the election will generally result in the
transferee-Investor recognizing less taxable income upon the disposition of the
property.
Certain disadvantages may result from making the Code Section 754
election. One problem is that once the election is made, it will apply with
respect to all subsequent distributions of property by the Fund and to all
subsequent transfers of interests in the Fund. Thus, in the event the Property
is declining in value, rather than appreciating, the election will be
unfavorable to the remaining partners in the case of a distribution to which
734(b) would apply, and unfavorable to the transferee in the case of a sale or
exchange to which 743(b) would apply. Secondly, a Code Section 754 election
could require a costly appraisal upon a distribution to an Investor or a
transfer of an Investor's interest. Investors should note, however, that if
the election is not made, an Investor's interest is likely to be less
marketable.
STATE AND LOCAL TAXES
Investors should consider the potential state and local income tax
consequences of an investment in the Fund. Each Investor is advised to consult
his own tax advisor to determine if the state or locality in which he is a
resident imposes a tax upon his share of the income or loss of the Fund.
The Fund's operations will be based in North Carolina, and thus an
Investor may be required to report his distributive share of income or loss in
North Carolina, whether or not the Investor is a resident. However, the
Advisor believes that the activities of the Fund in investing for long-term
capital appreciation will not be a "trade or business" and thus nonresidents of
North Carolina will not be required to include income from the Fund as North
Carolina income.
Investors should also be aware that the amount of deductions available
to the Fund for state income tax purposes may be different from those available
for federal income tax purposes in those states which do not fully coordinate
with federal income tax principles.
INVESTMENT BY EMPLOYEE BENEFIT PLANS AND
INDIVIDUAL RETIREMENT ACCOUNTS
A fiduciary of a pension, profit-sharing, or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider fiduciary standards under ERISA in the context of
the plan's particular circumstances before authorizing an investment of all or
any portion of such plan's assets in the Fund. Among other factors, such
fiduciary should consider
37
<PAGE> 43
(i) whether the investment satisfies the prudence requirements of Section
404(a)(1)(B) of ERISA, (ii) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA, (iii) whether
the investment is in accordance with the documents and instruments governing
the plan as required by Section 404(a)(1)(D) of ERISA, (iv) whether the value
of the investment can be determined annually as required by Section 301(d)(5)
of ERISA and Revenue Ruling 80-155, 1980-1 C.B. 84, (v) how the definition of
the term "plan assets" under ERISA and the Department of Labor regulations
regarding the definition of "plan assets" affects the proposed investment, and
(vi) whether a prohibited transaction in violation of Section 406 of ERISA or
Section 408(e)(2) of the Internal Revenue Code of 1986 ("Code") will occur. In
addition, persons who control the investments of individual retirement accounts
("IRAs") should consider the applicable items listed above.
The definition of the term "plan assets" under ERISA and recently
finalized Department of Labor regulations must be considered to determine
whether the assets held by the Fund will be treated as "plan assets." The
treatment of the Fund's assets as "plan assets" is important because it
determines whether (a) those who have discretion with respect to the management
of the Fund and its assets are considered fiduciaries of an investing plan and
thus subject to ERISA's fiduciary duties and liabilities, (b) the other
fiduciaries of an investing plan may have improperly delegated asset management
responsibility to the management of the Fund, (c) the Fund's assets must be
reported to the Department of Labor under ERISA's reporting and disclosure
rules, and (d) the prohibited transactions rules under ERISA and the Internal
Revenue Code apply to the Fund's activities.
The "plan asset" regulations will not apply to the Fund if less than
25% of the Shares are held by employee benefit plans. In addition, the
regulations will not apply the Fund so long as it qualifies as a Venture
Capital Operating Company ("VCOC"). Generally, the regulations define a VCOC
as a company which invests at least one-half of its assets in entities in which
the company has management rights, which rights are actually exercised to some
degree. In determining whether the company has management rights, factors such
as the right to elect a director, the right to inspect books and records of a
non-public issuer, and ownership of a significant portion of the equity of a
non-public issuer will be considered. It is the intention of the Advisor to
conduct the operations of Fund so that it falls within the definition of a
VCOC.
In addition to the fiduciary standards under ERISA, fiduciaries of
ERISA plans IRAs should consider the unrelated business income tax implications
of investing in the Fund. See "Federal Tax Aspects."
SUMMARY OF THE OPERATING AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN PROVISIONS OF THE
OPERATING AGREEMENT WHICH HAVE NOT BEEN DISCUSSED ELSEWHERE IN THIS
REGISTRATION STATEMENT. THIS SUMMARY DOES NOT PURPORT TO BE A COMPLETE SUMMARY
OF ALL MATTERS SET FORTH IN THAT DOCUMENT. THIS SECTION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE COMPLETE DOCUMENT FILED AS AN EXHIBIT HERETO.
(Section references cited below refer to sections in the Operating Agreement,
and capitalized terms which are not defined herein are defined in the Operating
Agreement.)
CAPITAL CONTRIBUTIONS
Directors. The Directors are not obligated to make capital
contributions to the Fund.
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Investors. Assuming all 1,000 Shares are sold, the Investors will
contribute an aggregate of $25,000,000 to the capital of the Fund payable in
full upon subscription.
No Investor may withdraw his or her capital from the Fund without the
approval of the Directors, nor will any Investor receive interest on his or her
capital. The Directors are not responsible for the return of capital of any
Investor.
CASH DISTRIBUTIONS
The Fund intends to make distribute in the first quarter of each year
the net proceeds from dispositions of portfolio investments which occurred
during the preceding year, after making provision for expenses, including the
payment of management fees, reserves and possible investment in other existing
Portfolio Companies. The Fund anticipates that distributions to Investors will
in any event be sufficient to defray the Federal and state taxes attributable
to the Investors' receipt of taxable income as a result of investment in the
Fund. (See "Risk Factors -- Taxable Income.")
ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS
Net profits and net losses of the Fund shall be allocated to the
Investors generally in accordance with their ownership of Shares, provided
however that under applicable tax law and the Operating Agreement losses will
not be allocated to any Investor that would result in the Investor's having a
negative capital account. All distributions and, in general, all allocations
to the Investors shall be in proportion to the number of Shares owned by each
Investor as compared to the aggregate number of Shares owned by all Investors.
LIMITATION ON TRANSFER OF FUND INTERESTS
An Investor will be required to covenant that he or she is acquiring
the Shares for investment purposes only and not with a view to the resale or
transfer thereof. Transfers by Investors of their Shares are prohibited
without the written consent of the Directors. If an Investor desires to
transfer Shares with the consent of the Directors, the Investor must first give
notice to the Directors of the terms of such transfer. In no event shall an
assignee of an Investor be substituted as an Investor in the place of his
assignor without the prior written consent of the Directors. An assignee who
does not become a substituted Investor has no rights in the Fund except to
receive his or her share of profits, losses, distributions and benefits to
which the assignor would otherwise be entitled. In addition to the consent of
the Directors, the following conditions must be met before an assignee of an
Investor can become a substituted Investor: (i) a duly executed and
acknowledged instrument of assignment has been filed with the Fund setting
forth that the assignee becomes a substituted Investor in the place of the
assignor, (ii) the Fund interest being acquired by the assignee consists of the
entire interest of the assigning Investor, and (iii) the assignor and the
assignee execute and acknowledge such other instruments as the Directors may
deem necessary or desirable to effect such admission.
THERE ARE SEVERE RESTRICTIONS ON TRANSFERS OF SHARES AND THERE IS NO
LIQUIDITY IN THE INVESTMENT IN THE SHARES.
In addition, the Directors may in their discretion require as a
condition precedent to the transfer of a Fund interest, delivery to the Fund of
an opinion of counsel satisfactory to the Directors to the effect that such
transfer does not constitute a violation of the Securities Act of 1933, as
amended, or any applicable state securities or real estate syndication laws and
the transfer will not cause the partnership to cease to be classified as a
partnership for federal income tax purposes. Section 708 of the Code
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<PAGE> 45
provides that a partnership will terminate for federal income tax purposes then
50% or more of the total interests in partnership capital and profits are sold
or exchanged within any period of 12 consecutive months. Therefore, the
Directors will not permit any assignment which might terminate the Fund for
federal income tax purposes. Any assignment of Fund interests to which the
Directors do not consent shall be deemed void ab initio.
REPORTS TO INVESTORS
The Directors will cause the Fund to deliver to the Investors a number
of reports including quarterly reports from the Directors and audited annual
financial statements, annual balance sheets and annual profit and loss
statements; and all information necessary for the preparation of each
Investor's federal income tax return including a Form K-l (which shall be
delivered on or before March 31 of each year).
TERM OF FUND
The Fund shall continue for a seven-year term, subject to the
Directors' right to extend for up to two additional two-year periods, with
additional extensions requiring the consent of the holders of a majority of the
Shares, unless sooner terminated upon the happening of any one or more of the
following events:
(a) upon the removal, dissolution, voluntary or involuntary
adjudication of bankruptcy, or liquidation or receivership or
assignment for the benefit of creditors or other withdrawal of
any of the following Directors: W. Clay Hamner, David C.
Blivin or E. Lee Bryan, unless a majority in interest of the
Investors elect to continue the business of the Fund and, if
there is no remaining Director, appoint a new Director; or
(b) upon the sale (or other disposition) of all or substantially
all of the assets of the Fund; or
(c) upon the Directors' election to terminate the Fund; or
(d) upon the occurrence of any event which, under North Carolina
law, causes the dissolution or termination of the Fund.
Upon any termination or dissolution of the Fund, the winding up of the
Fund's affairs will be conducted by the Directors or by another person selected
by the holders of a majority of the Shares if no Director remains to act as
Director. In winding up the Fund, the Directors may arrange for the collection
and disbursement to the Investors of future receipts from the Fund's assets,
either by themselves or others, or may sell the Fund's assets for such
consideration and on such terms as shall be consistent with obtaining the fair
market value thereof.
REIMBURSEMENT OF EXPENSES OF THE ADVISOR
The Operating Agreement and the Advisory and Management Agreement
require the Fund to reimburse the Advisor for the amount of direct expenses
incurred by it in connection with the investment activities of the Fund,
including the cost of attorneys and accountants retained by the Fund. The
Advisor will pay out of its management fees certain general overhead and office
expenses incurred in the management and administration of the Fund, including
personnel costs, utilities, insurance and general travel and entertainment
expenses.
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<PAGE> 46
MISCELLANEOUS FUND PROVISIONS
The Directors have the sole right to manage the business of the Fund
and no Investor may participate in or control the Fund's business. The
Investors have voting rights only in certain limited situations, including the
election of the Directors, the approval or termination of investment advisory
contracts, the selection of the Fund's accountants, the extension of the term
of the Fund after the Director's two discretionary two-year extensions, the
amendment of the Operating Agreement, the authorization of certain
extraordinary transactions, and certain other items.
The books and records of the Fund will be available at the Fund's
office for inspection by the Investors upon reasonable notice, at reasonable
hours, during the business day.
AMENDMENT OF OPERATING AGREEMENT
The Operating Agreement may generally be amended by the consent of the
Directors and the holders of more than 66 2/3 of the Shares. Certain
amendments require the unanimous consent of the Investors.
FEDERAL SECURITIES ACTS
The Shares offered hereby were not registered under the 1933 Act. The
Shares were offered in compliance with applicable state securities laws and
pursuant to an exemption from federal registration under the 1933 Act pursuant
to Regulation D as promulgated under the 1933 Act to a limited number of
purchasers able to bear the economic risks thereof, with each of such
purchasers (or his purchaser-representative) possessing a level of expertise,
knowledge and sophistication in matters such as those described herein so as to
make intelligently and knowingly a proper economic decision relative to the
acquisition of Fund interests. All Investors were required to represent that
the Share or Shares being purchased were being acquired for their own account
for investment and not with a view to distribution. The Shares may not be
sold, transferred or otherwise disposed of by the Investor and must, therefore,
be held indefinitely unless they are hereafter registered under the 1933 Act,
or, in the opinion of counsel satisfactory to the Fund and its counsel, an
exemption from registration under the 1933 Act is available.
There is no right to require registration of these Shares under the
1933 Act, and, in view of the nature of this transaction, the Fund does not
intend to make available the current public information necessary to exempt the
Shares from registration under the 1933 Act pursuant to Rule 144 of the 1933
Act. The assignability of the Shares is further limited under the Operating
Agreement as above described.
The Fund is registering as an investment company under the 1940 Act
and the Advisor has registered as an investment adviser under the Investment
Advisers Act.
GLOSSARY OF TERMS
"Advisor" refers to Montrose Venture Partners, LLC, a North Carolina limited
liability company whose principal members are W. Clay Hamner, David C. Blivin
and E. Lee Bryan.
"Custodian" refers to First Union National Bank of North Carolina
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<PAGE> 47
"Director" refers to a person appointed or elected as a member of the Fund's
Board of Directors, initially consisting of W. Clay Hamner, David C. Blivin, E.
Lee Bryan, Terry Sanford and Wayne M. Rogers.
"Escrow Agent" refers to First Union National Bank, N.A.
"Fund" refers to Southeast Interactive Technology Fund I, LLC, a limited
liability company organized under the laws of North Carolina.
"Investors," unless the context requires otherwise, refers to the purchasers of
the Shares who will be admitted to the Fund.
"Offering" refers to the offering of Shares to prospective investors under the
conditions set forth in this Registration Statement.
"Operating Agreement" refers to that certain Operating Agreement to be entered
into by W. Clay Hamner, David C. Blivin and E. Lee Bryan as initial members and
filed herewith as an Exhibit.
"Portfolio Company" refers to a company in which the Fund invests.
"Selling Agent" refers to Interstate/Johnson Lane Corporation, Charlotte, North
Carolina, which has been retained to offer and sell the Shares to Investors.
"Share" refers to the interest of an Investor representing an initial capital
contribution of $25,000.
"Sovereign" means Sovereign Capital Management, Inc., d/b/a Sovereign Advisers.
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PART C - OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item 24. Financial Statement and Exhibits
1. Financial Statements of the Fund To be filed by amendment.
2. Exhibits The exhibits to this Registration Statement are
listed in the Exhibit Index.
Item 25. Marketing Agreements Not Applicable.
Item 26. Other Expenses of Issuance and Distribution The following are estimates of the fees and expenses
to be incurred by the Fund in connection with the
Offering:
SEC Registration Fee $ 1,000
Legal Fees 120,000
Blue Sky Fees 9,000
Accounting Fees 40,000
Printing Expenses 10,000
Miscellaneous Costs 70,000
--------
Total $250,000
========
Item 27. Persons Controlled by or Under Common The Fund will not be controlled by or
Control under common control with any person other than the
Investors whose subscriptions are accepted.
Item 28. Indemnification See "Fiduciary Responsibility of the Advisor and the
Directors."
Item 30. Business and Other Connections of the See "Management of the Fund; Conflicts
Investment Advisor of Interest; Related Parties and Transactions with
Affiliates."
Item 31. Location of Accounts and Records Accounts, books and other records required by
Section 31(a) of the 1940 Act will be maintained and
kept at the offices of Montrose Venture Partners,
LLC at 2200 West Main Street, Suite 900, Durham,
North Carolina 27705.
Item 32. Management Services Except as described in Parts A and B of this
Registration Statement, the fund is not a party to
any material management-related service contract.
Item 33. Undertakings Not Applicable
</TABLE>
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SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, hereunto duly authorized, in the City of Durham, and
State of North Carolina, on the 15th day of March, 1996.
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
By: /s/ DAVID C. BLIVIN
-----------------------------------------
David C. Blivin, Manager
44
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
2(a) Articles of Organization of Southeast Interactive
Technology Fund I, LLC*
2(b) Not Applicable
2(c) Not Applicable
2(d) Operating Agreement, dated January 16, 1995, of Southeast
Interactive Technology Fund I, LLC*
2(e) Not Applicable
2(f) Not Applicable
2(g)(i) Advisory and Management Agreement, dated June 14, 1995,
by and between Southeast Interactive Technology Fund I, LLC
and Montrose Venture Partners, LLC *
2(g)(ii) Investment Advisory Agreement, dated June 13, 1995,
by and between Southeast Interactive Technology Fund I, LLC
and Sovereign Advisors, Inc.*
2(h) Not Applicable
2(i) Not Applicable
2(j) Custodian Agreement, dated June 14, 1995, by and between
Southeast Interactive Technology Fund I, LLC and
First Union National Bank of North Carolina *
2(k)(i) Escrow Agreement, dated as of January 16, 1995,
by and between Interstate/Johnson Lane Corporation,
Southeast Interactive Technology Fund I, LLC
and First Union National Bank of North Carolina
(the "Escrow Agreement") *
2(k)(ii) Amendment to the Escrow Agreement, dated April 24, 1995*
2(k)(iii) Stock Purchase Agreement, dated June 15, 1995, by and
between Southeast Interactive Technology Fund I, LLC
and Virtus Corporation *
2(k)(iv) Registration Rights Agreement, dated June 15, 1995, by
and between Southeast Interactive Technology Fund I, LLC and
Virtus Corporation *
2(k)(v) Investment Agreement By and Among Southeast
Interactive Technology Fund I, LLC and One Room
Systems, Inc.
2(k)(vi) Series A Convertible Preferred Stock Purchase
Agreement, dated August 30, 1995, by and among
NETTECH, INC. and multiple purchasers including
Southeast Interactive Technology Fund I, LLC
2(k)(vii) Registration Rights Agreement, dated August 30, 1995,
by and between NETTECH, INC. and Southeast
Interactive Technology Fund I, LLC
2(k)(viii) Put and Call Agreement, dated August 30, 1995, by and
between NETTECH, INC. and Southeast Interactive
Technology Fund I, LLC
2(k)(ix) Voting Agreement, dated August 30, 1995, by and
between NETTECH, INC. and Southeast Interactive
Technology Fund I, LLC
2(k)(x) Conditional Stock Purchase Warrant of NETTECH, INC.
Issue to Southeast Interactive Technology
Fund, LLC on August 30, 1995
2(k)(xi) Fixed Rate Convertible Note Due December 15, 1996
issued by Wave Interactive Network, Inc. to
Southeast Interactive Technology Fund I, LLC
2(k)(xii) Warrant to Purchase Common Stock dated December 15,
1995, issued by Wave Interactive Network, Inc. to
Southeast Interactive Technology Fund I, LLC
2(l) Not Applicable
2(m) Not Applicable
2(n) Not Applicable
2(o) Not Applicable
2(p) Form of Subscription Agreement and Power of Attorney *
2(q) Not Applicable
</TABLE>
_________________
* Previously filed.
45
<PAGE> 1
EXHIBIT 2(a)
STATE OF NORTH CAROLINA
DEPARTMENT OF THE SECRETARY OF STATE
LIMITED LIABILITY COMPANY
ARTICLES OF ORGANIZATION
Pursuant to Section 57C-2-20 of the General Statutes of North Carolina, the
undersigned does hereby submit these Articles of Organization for the purpose
of forming a limited liability company.
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1. The name of the limited liability company is: SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
-----------------------------------------------
2. The latest date on which the limited liability company is to dissolve is: December 31, 2014
-----------------------------
3. The name and address of each organizer executing these articles of organization is as follows (at least two
persons must execute this document; attach additional pages if necessary);
David C. Blivin E. Lee Bryan
2200 W. Main St., Suite 900 2525 Meridian Parkway, Suite 400
Durham, NC 27705 Durham, NC 27713
4. The street address and county of the initial registered office of the limited liability company is:
Number and Street 2200 West Main Street, Suite 900
-------------------------------------------------------------------
City, State, Zip Code Durham, North Carolina 27705 County Durham
---------------------------------------------- ---------------
5. The mailing address if different from the street address of the initial registered office is:
----------------------------------------------------------------------
6. The name of the initial agent is: David C. Blivin
-------------------------------------
7. Check one of the following:
(i) Member-managed LLC: all of the members by virtue of their status as members shall be managers of this
- ---------
limited liability company.
X (ii) Manager-managed LLC: except as provided by N.C.G.S. Section 57C-3-20(a), the members of this limited
- ---------
liability company shall not be managers by virtue of their status as members.
8. Any other provisions which the limited liability company elects to include are attached.
9. These articles will be effective upon filing, unless a date and/or time is specified:
--------------------------------------------------------------------------------------------------------------
This the 16th day of January 1995
---------- -----------------------------------------, ----
- --------------------------------------------------- ------------------------------------------
Signature Signature
David C. Blivin, Organizer E. Lee Bryan, Organizer
- ------------------------------------------------- ----------------------------------
Type or Print Name and Title Type or Print Name and Title
NOTES:
1. Filing fee is $100. This document and one exact or conformed copy of these articles must be filed with the
Secretary of State.
CORPORATIONS DIVISION 300 N. SALISBURY STREET RALEIGH, NC 27603-5909
</TABLE>
<PAGE> 1
EXHIBIT 2(d)
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 "Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 "Additional Investor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3 "Adjusted Capital Account Deficit" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.4 "Advisor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.5 "Advisory Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.6 "Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.7 "Affiliated Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.8 "Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.9 "Articles" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.10 "Assignee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.11 "Capital Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.12 "Capital Contribution" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.13 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.14 "Consultants" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.15 "Distributions" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.17 "Estimated Value Capital Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.18 "Extended Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.19 "Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.20 "Fund Minimum Gain" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.21 "Income" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.22 "Independent Manager" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.23 "Interested Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.24 "Investment Company Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.25 "Investor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.26 "Losses" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.27 "Majority" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.28 "Manager" or "Director" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.29 "Member" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.30 "Members" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.31 "Member Minimum Gain" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.32 "Member Nonrecourse Debt" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.33 "Member Nonrecourse Deductions" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.34 "Memorandum" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.35 "Nonrecourse Deductions" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1.36 "Nonrecourse Liability" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1.37 "Portfolio Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1.38 "Portfolio Investment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1.39 "Share" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1.40 "Substituted Investor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1.41 "Super Majority in Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1.42 "Transfer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1.43 "Valuation Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1.44 "Withdrawal" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>
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ARTICLE 2
FORMATION, NAME AND PRINCIPAL PLACE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.1 Fund Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.2 Name of Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.3 Registered Office, Registered Agent and Principal Place of Business . . . . . . . . . . . . 6
ARTICLE 3
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.1 Commencement and Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 4
PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4.1 Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 5
CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.1 Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.2 Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.3 Minimum Capitalization and Term of Offering . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 6
ALLOCATION OF DISTRIBUTIONS, NET INCOME, NET LOSSES
AND OTHER ITEMS AMONG THE MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6.1 Distributions other than in Liquidation of the Fund . . . . . . . . . . . . . . . . . . . . 8
Section 6.2 Distributions in Termination, Dissolution and Liquidation . . . . . . . . . . . . . . . . . 9
Section 6.3 Allocations of Income and Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.4 Special Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.5 Curative Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 6.6 Tax Allocations: Section 704(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 6.7 Varying Interest in Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.8 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 7
FUND CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 7.1 Fund Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 8
RIGHTS AND DUTIES OF THE MANAGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 8.1 Exclusive Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 8.2 Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 8.3 Powers and Authority of the Managers . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 8.4 Compensation from Portfolio Companies . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.5 Managers to Act in Best Interests of Fund . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.6 Limitations on Powers of the Managers . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 8.7 Removal of a Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 8.8 Advisory and Management Agreement, Management Fees and Expenses . . . . . . . . . . . . . 18
Section 8.9 No Management by Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.10 Policy with Respect to Investment Opportunities and Conflicts of Interest . . . . . . . . 20
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Section 8.11 Coinvestment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 9
ADDITIONAL INVESTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.1 Additional Capital Contributions and Admission of Additional Investors . . . . . . . . . 21
Section 9.2 Restrictions on Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE 10
CONSULTANTS TO THE ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 10.1 Consultants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 10.2 Length of Service and Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 10.3 Meetings, Permitted Activities and Duties . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE 11
WITHDRAWAL OF AN INVESTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 11.1 Withdrawal of an Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 11.2 Time for Payment for Fund Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 11.3 Valuation of Withdrawing Member's Interest . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE 12
DISSOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 12.1 No Return of Capital Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 12.2 Managers Not Liable for Return of Capital . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 12.3 Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE 13
WITHDRAWAL OF MANAGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 13.1 Assignability of Interest or Withdrawal of a Manager . . . . . . . . . . . . . . . . . . 27
ARTICLE 14
RECORDS, ACCOUNTING AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 14.1 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 14.2 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 14.3 Tax Accounting Methods; Periods; Elections . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE 15
VALUATION OF FUND ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 15.1 Dates of Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 15.2 Method of Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE 16
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 16.1 Representations and Warranties of Investors . . . . . . . . . . . . . . . . . . . . . . . 29
Section 16.2 Indemnification of the Members, Managers and Affiliates . . . . . . . . . . . . . . . . . 30
Section 16.3 Amendment of Operating Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 16.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 16.5 Agreement Binding Upon Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . 31
Section 16.6 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 16.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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Section 16.8 Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 16.9 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 16.10 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE 17
MEETINGS OF INVESTORS AND ELECTION OF MANAGERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 17.1 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 17.2 Election of Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 17.3 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 17.4 Initial Board of Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 17.5 Action by Written Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
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OPERATING AGREEMENT
OF
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
a North Carolina Limited Liability Company
THIS OPERATING AGREEMENT is made and entered into as of the 16th day of
January, 1995, by and among the following persons and entities (the
"Members"):
W. CLAY HAMNER, DAVID C. BLIVIN and E. LEE BRYAN (the "Initial
Members"); and
THE PERSONS AND ENTITIES listed in Exhibit A attached hereto (the
"Investors").
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 "Act" shall mean the North Carolina Limited Liability
Company Act, as in effect in North Carolina, as amended from time to time.
Section 1.2 "Additional Investor" means any individual, corporation,
partnership, trust or other entity who shall be admitted as an Investor
pursuant to Section 9.1.
Section 1.3 "Adjusted Capital Account Deficit" shall mean with
respect to any holder of Shares, the deficit balance, if any, in such holder's
Capital Account as of the end of the relevant fiscal year, after giving effect
to the following adjustments:
(a) Credit to such Capital Account any amounts which such
holder is obligated to restore or is deemed to be obligated to restore
pursuant to the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and
(b) Debit to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and
1.704-1(b)(2)(ii)(d)(6) of the Regulations.
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.7041(b)(2) (ii)(d) of the Regulations
and shall be interpreted consistently therewith.
Section 1.4 "Advisor" means Montrose Venture Partners, LLC, or any
successor to Montrose Venture Partners, LLC as administrator and principal
investment advisor to the Fund.
Section 1.5 "Advisory Agreement" means the Advisory and Management
Agreement to be entered into between the Fund and Montrose Venture Partners,
LLC.
Section 1.6 "Affiliate" shall have the meaning set forth in Rule 405,
promulgated pursuant to the Securities Act of 1933, as amended.
Section 1.7 "Affiliated Person" with respect to the Fund shall mean:
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<PAGE> 7
(a) Any person directly or indirectly owning, controlling
or holding with power to vote, five percent (5%) or more of the
Shares;
(b) Any person five percent (5%) or more of whose
outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by the Fund;
(c) Any person directly or indirectly controlling,
controlled by, or under common control with, the Fund;
(d) Any officer, director, partner, or employee of the
Fund; or
(e) Any investment adviser to the Fund or any member of
any advisory board (within the meaning of the Investment Company Act)
of the Fund.
Section 1.8 "Agreement" shall mean this Operating Agreement, as
amended from time to time.
Section 1.9 "Articles" shall mean the Articles of Organization of the
Fund filed with the office of the Secretary of State of North Carolina.
Section 1.10 "Assignee" means a person who has acquired all or a
portion of an Investor's beneficial interest in the Fund but has not become a
Substituted Investor.
Section 1.11 "Capital Account" shall mean with respect to each Member
a financial and tax accounting account maintained and adjusted in accordance
with the Treasury Regulations promulgated under Section 704 of the Code.
Capital Accounts shall be revalued by the Manager in connection with a
revaluation of the Fund's assets in accordance with Regulations Section
1.704-1(b)(2)(iv)(f).
Section 1.12 "Capital Contribution" of a Member as of any date means
the total capital contribution to the Fund which such Member is required to
make for his Fund Interest in the Fund.
Section 1.13 "Code" means the Internal Revenue Code of 1986, as
amended from time to time, or any successor federal revenue law and any final
treasury regulations, revenue rulings, and revenue procedures thereunder.
Section 1.14 "Consultants" means those individuals as described in
Section 10.1.
Section 1.15 "Distributions" shall mean distributions of cash or
other property (and if other property, valued at the fair market value of such
property) made by the Fund to the Members from any source.
Section 1.16 "Estimated Value" means the value of Fund assets as
value is assigned to such assets pursuant to Article 15.
Section 1.17 "Estimated Value Capital Account" means the amount of
any actual cash contribution to the capital of the Fund by a Member, as the
same may be (i) increased from time to time by such Member's allocable share of
the Fund's realized and unrealized income and gains and (ii) decreased by a
Member's distributions (whether in cash or in kind, but if in kind equal to the
Member's share of the Estimated Value of such distributed asset, as that term
is defined in this Agreement), by such Member's share of realized and
unrealized Fund losses and by such Member's share of expenditures of the Fund
which are not deductible or properly chargeable to a capital account of the
Fund. For these
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purposes, realized and unrealized income, gains and losses shall be computed
based on the Estimated Value of the Fund assets and such realized and
unrealized income, gains and losses shall be accounted for so as to prevent
duplication of increases or decreases from allocations of income, gains and
losses previously affecting Estimated Value Capital Accounts.
Section 1.18 "Extended Closing Date" means August 31, 1995.
Section 1.19 "Fund" shall refer to the limited liability company
created under this Agreement and the Articles.
Section 1.20 "Fund Minimum Gain" has the meaning set forth in
Regulations Sections 1.704-2(b)(2) and 1.704-2(d).
Section 1.21 "Income" shall mean the net income (including tax exempt
income) of the Fund or any separately allocable item thereof.
Section 1.22 "Independent Manager" means a Manager or Director of the
Fund who is not an Interested Person with respect to the Fund.
Section 1.23 "Interested Person" with respect to the Fund means any
of the following:
(a) Any Affiliated Person of the Fund;
(b) Any member of the immediate family of any natural
person who is an Affiliated Person of the Fund;
(c) Any Interested Person (as otherwise defined herein)
of any investment advisor to or principal underwriter of the Fund;
(d) Any person or partner or employee of any person who
at any time since the beginning of the last two completed fiscal years
of the Fund has acted as legal counsel to the Fund;
(e) Any broker or dealer registered under the Securities
Exchange Act of 1934 or any Affiliated Person of such a broker or
dealer; and
(f) Any other person whom the Managers determine is an
Interested Person;
provided, however, that no person shall be deemed an Interested Person
of the Fund solely by reason of (A) such person's being a member of
the Fund's Board of Managers or any advisory board (within the meaning
of the Investment Company Act) or an owner of Shares, or (B) such
person's membership in the immediate family of any person specified in
the preceding clause (A).
Section 1.24 "Investment Company Act" means the federal Investment
Company Act of 1940, as amended.
Section 1.25 "Investor" means any person or entity named on
Exhibit A attached hereto and any other individual, corporation, partnership,
trust or other entity who shall be admitted to the Fund as an Additional
Investor or as a Substituted Investor, until any such person shall withdraw
as an Investor
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pursuant to Article 11 or until a Substituted Investor or Investors are
admitted with respect to his entire limited partnership interest.
Section 1.26 "Losses" shall mean the net loss of the Fund or any
separately allocable deduction, including expenditures of the Fund not
deductible in computing its taxable income and not properly chargeable to a
capital account.
Section 1.27 "Majority" when used with respect to a vote or approval
of any action by the Investors means (i) Investors holding more than fifty
percent (50%) of the outstanding Shares or (ii) if less, Investors holding
sixty-seven percent (67%) or more of the outstanding Shares which are present
or represented by proxy at a meeting of Investors, if the holders of more than
fifty percent (50%) of the outstanding Shares are present at such meeting or
represented by proxy.
Section 1.28 "Manager" or "Director" shall refer to any person or
entity which may be admitted to the Fund as a Manager in accordance with this
Agreement until the withdrawal, or cessation of such person or entity as a
Manager hereunder.
Section 1.29 "Member" means any of the Investors, except as expressly
otherwise provided.
Section 1.30 "Members" includes all of the Investors.
Section 1.31 "Member Minimum Gain" means an amount, with respect to
each Member Nonrecourse Debt, equal to the Fund Minimum Gain that would result
if such Member Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Section 1.704-2(i) of the Regulations.
Section 1.32 "Member Nonrecourse Debt" has the meaning set forth in
Section 1.704-2(b)(4) of the Regulations.
Section 1.33 "Member Nonrecourse Deductions" has the meaning set
forth in Section 1.704-2(i)(2) of the Regulations. The amount of Member
Nonrecourse Deductions with respect to a Member Nonrecourse Debt for a Fund
fiscal year equals the excess, if any, of the net increase, if any, in the
amount of Member Minimum Gain attributable to such Member Nonrecourse Debt
during that fiscal year over the aggregate amount of any distributions during
that fiscal year to the Member that bears the economic risk of loss for such
Member Nonrecourse Debt to the extent such distributions are from the proceeds
of such Member Nonrecourse Debt and are allocable to an increase in Member
Minimum Gain attributable to such Member Nonrecourse Debt, determined in
accordance with Section 1.704-2(i)(2) of the Regulations.
Section 1.34 "Memorandum" means the Confidential Private Placement
Memorandum of the Fund dated January 16, 1995.
Section 1.35 "Nonrecourse Deductions" has the meaning set forth in
Section 1.704-2(b) and 2(c) of the Regulations. The amount of Nonrecourse
Deductions for a Fund fiscal year equals the excess, if any, of the net
increase, if any, in the amount of Fund Minimum Gain during that fiscal year
over the aggregate amount of any distributions during that fiscal year of
proceeds of a Nonrecourse Liability that are allocable to an increase in Fund
Minimum Gain, determined according to the provisions of Section 1.704-2(c) of
the Regulations.
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Section 1.36 "Nonrecourse Liability" has the meaning set forth in
Section 1.704-2(b)(3) of the Regulations.
Section 1.37 "Portfolio Company" means that term as defined in
Section 4.1.
Section 1.38 "Portfolio Investment" means that term as defined in
Section 4.1.
Section 1.39 "Share" means an Investor's interest in the Fund
representing an agreement to contribute to the capital of the Fund Twenty-Five
Thousand Dollars ($25,000.00). The Agreement additionally provides that Shares
may be sold in certain events pro rata to existing Investors.
Section 1.40 "Substituted Investor" means a person admitted pursuant
to Section 9.2 as the successor to all of the rights of an Investor with
respect to all or any part of his interest in the Fund.
Section 1.41 "Super Majority in Interest" means Investors owning 66
2/3% or more of the Shares owned by all the Investors.
Section 1.42 "Transfer" means any sale, exchange, transfer, gift,
encumbrance, assignment, pledge, mortgage or other hypothecation or other
disposition, whether voluntary or involuntary.
Section 1.43 "Valuation Date" means that term as defined in Section
15.1.
Section 1.44 "Withdrawal" means as to any of W. Clay Hamner, David C.
Blivin or E. Lee Bryan, or any person or entity succeeding any of them as
Manager, any of the following events:
(a) In the case of an individual, his or her death or
adjudication of incompetency;
(b) In the case of an entity, its dissolution and
commencement of winding up or liquidation; or
(c) The attachment by creditors of the affected person or
entity's interest in the Fund, the assignment by such person or entity
for the benefit of or arrangement with creditors, or the filing of a
bankruptcy petition against such person or entity if such petition is
not set aside within 120 days of filing.
Certain other capitalized terms not defined above shall have the
meanings given such terms in this Agreement.
ARTICLE 2
FORMATION, NAME AND PRINCIPAL PLACE OF BUSINESS
Section 2.1 Fund Formation. The Initial Members hereby agree to
form a limited liability company pursuant to the Act. Promptly upon the
execution hereof, the Managers shall do or cause to be done all such filing,
recording, or other acts as may be necessary or appropriate from time to time
to comply with the requirements of law for the formation and/or operation of a
limited liability company in the State of North Carolina. Each of the
Investors by execution of this Agreement irrevocably constitutes and appoints
the Managers, or any of them, as the true and lawful attorney for such Investor
to make, execute, sign, acknowledge and file any and all of the foregoing
documents in the name, place and stead of said Investor. In the event the
Agreement is to be amended in connection with the
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substitution or addition of an Investor, such an amendment need be signed only
by the Managers, by the Investor to be added or substituted and, in the case of
a substitution, by the assigning Investor; provided, however, nothing shall
permit any assignment by an Investor in violation of this Agreement. Any
amendment to the Articles or any certificate required to be filed pursuant to
the Act shall be filed by the Manager promptly following the event requiring
said amendment. All amendments may be signed either personally or by an
attorney-in-fact.
Section 2.2 Name of Fund. The name of the Fund shall be
Southeast Interactive Technology Fund I, LLC.
Section 2.3 Registered Office, Registered Agent and Principal
Place of Business. The registered office and principal place of business of
the Fund shall be maintained at 2200 West Main Street, Suite 900, Durham, North
Carolina 27705, or such other place as the Managers shall designate. The
registered agent at such address shall be David C. Blivin.
ARTICLE 3
TERM
Section 3.1 Commencement and Term. The Fund shall have a term
commencing as of the filing of the Articles with the North Carolina Secretary
of State's office (the "Commencement Date") and continuing until the earlier of
the following dates:
(a) Seven years from the date of the filing of the
Articles, but the Managers, in their sole discretion, shall have the
right to extend the initial term of the Fund for up to two additional
two-year periods; and the Managers may further extend the term of the
Fund with the consent of the holders of a majority of the Shares, but
in any event not past December 31, 2014;
(b) The election to terminate by the Managers;
(c) the Withdrawal of W. Clay Hamner, David C. Blivin or
E. Lee Bryan, or any successor to any of them as Manager, unless the
remaining Managers, if any, and the holders of a majority of the
Shares agree in writing to continue the Fund within ninety (90) days
after the event of Withdrawal; or
(d) The occurrence of any event which under the Act or
any other law, causes the dissolution or termination of a limited
liability company, other than as modified in this Agreement.
ARTICLE 4
PURPOSE
Section 4.1 Purposes. The purposes of the Fund are:
(a) Investing in equity-oriented investment instruments,
such as convertible preferred stock and common stock; investing in
hybrid investment instruments, such as convertible notes; and lending
money or guaranteeing loans for the purposes as herein expressed
(together such investments, loans and guarantees shall be referred to
hereinafter as "Portfolio Investments", and the company in which a
Portfolio Investment is made shall be referred to hereinafter as a
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<PAGE> 12
"Portfolio Company"). Such Portfolio Investments will be in private
transactions in and to, and for the benefit of, new and developing
companies in the interactive information and visual technology
industries with an emphasis on proprietary technologies, related
industries and/or marketable products which work on existing hardware.
To achieve greater profitability, the Fund may also invest, in
accordance with this Agreement, in any growth company (also referred
to hereinafter as a "Portfolio Company" or a "Portfolio Investment")
in which the Managers perceive the opportunity to achieve a high
return on investment through active participation, including leveraged
buyouts of existing companies. The Managers anticipate that such
Portfolio Investments will be made primarily in companies located in a
target region which extends from Washington, D.C. to the Gulf Coast.
In order to maintain a diversified investment strategy, the Fund will
generally follow some or all of the following investment guidelines:
(i) The minimum Portfolio Investment
will be One Million Dollars ($1,000,000) although it is
anticipated that the Fund's investment will be made in phases
based on performance;
(ii) Not more than ten percent (10%) of
the Fund's Portfolio Investment will be invested in any one
company; and
(iii) The Fund will generally seek as
Portfolio Investments companies which have forged business
alliances with strategic Fortune 500 partners or equivalent
leaders in similar industries, although in cases where a
strategic partner is not in place and the company represents
an otherwise valuable investment opportunity, the Fund may
help identify such a partner while providing equity-related
short-term bridge financing in the interim.
The above-stated parameters are guidelines only and shall not
constitute or restrict the Fund from making investments from time to
time that do not adhere strictly to the guidelines so long as the
Managers have determined in good faith that the opportunities and
risks associated with an investment are such that not adhering to the
guidelines would be in the best interests of the Fund. The Fund may
acquire Portfolio Investments in Portfolio Companies and hold such
Portfolio Investments, distribute the Portfolio Investments to the
Investors or sell the Portfolio Investments and reinvest the proceeds,
to the extent permitted hereunder, in the same or other Portfolio
Companies;
(b) To do all things reasonably incidental to the
purposes described above, including executing any and all documents,
agreements, filings and instruments as may in the opinion of the
Managers be necessary or advisable in connection with the affairs and
operations of the Fund and the conduct of the business of the Fund;
(c) To execute, deliver and perform all contracts and
other undertakings and engage in all activities and transactions as
may in the opinion of the Managers be necessary or advisable to carry
out the foregoing objects and purposes;
(d) All such other lawful purposes as the Managers and a
Super Majority in Interest of Investors may agree; and
(e) To have and exercise all the powers available to it
as a limited liability company under the laws of the State of North
Carolina.
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ARTICLE 5
CAPITAL CONTRIBUTIONS
Section 5.1 Manager. Neither the Initial Members nor any Manager
shall be required to contribute any capital to the Fund. Certain of the
Initial Members, the Managers or their Affiliates may advance certain funds to
the Fund for expenses of the Fund incurred prior to the admission of Investors
and will be reimbursed for such expenses at the initial closing of the Fund and
admission of Investors.
Section 5.2 Investor. Each Investor shall contribute at closing,
the aggregate amount opposite its name set forth in Exhibit A attached hereto.
No Investor shall be entitled to interest on his or her Capital Contributions.
Section 5.3 Minimum Capitalization and Term of Offering. The
Managers may hold a closing of the Fund upon the acceptance of subscriptions
for Shares representing aggregate Capital Contributions of at least Ten Million
Dollars ($10,000,000). If less than Twenty-Five Million Dollars ($25,000,000)
in Capital Contributions is received at the initial closing, the Manager may
admit, at an additional closing or closings held not later than the Extended
Closing Date, Additional Investors whose aggregate Capital Contributions shall
not exceed the difference between Twenty-Five Million Dollars ($25,000,000) and
the aggregate Capital Contributions received at all prior closings. Such
Additional Investors shall be admitted to the Fund on the same terms as the
Investors admitted at the initial closing. No Investor may be admitted
subsequent to the Extended Closing Date as provided in Section 9.1 below.
At the initial closing and upon the admission of Investors, each of the Initial
Members will withdraw from the Fund and will receive no distributions or other
consideration therefor, such Initial Members having been admitted only for the
purpose of organizing the Fund. Such withdrawal of the Initial Members shall
not be grounds for dissolution of the Fund.
ARTICLE 6
ALLOCATION OF DISTRIBUTIONS, NET INCOME, NET LOSSES
AND OTHER ITEMS AMONG THE MEMBERS
Section 6.1 Distributions other than in Liquidation of the Fund.
(a) Annual Distributions. Prior to dissolution of the
Fund and provided that no distribution shall be made which would
render the Fund insolvent, impair (within the meaning of Section
6.8(b) hereof) the Estimated Value Capital Account of any Member, or
reduce the Estimated Value Capital Account of any Member below zero
while any other Member's Estimated Capital Value Account is above
zero, the Managers shall distribute (subject to approval by the
Independent Managers) Available Funds no later than ninety (90) days
after the close of each fiscal year. For purposes of this Agreement,
"Available Funds" shall mean the net proceeds from dispositions of
Portfolio Investments during the fiscal year ended immediately
preceding the distribution, and other operating profits of the Fund
accumulated during such fiscal year, after provision for anticipated
operating expenses, management and advisory fees and expenses, working
capital reserves, reserves for other Portfolio Investments which may
require additional capital, and such other costs and expenses as the
Managers deem prudent to make provisions for.
Distributions pursuant to this Section 6.1(a) shall
be made to the Investors pro rata in the proportions in which Income
and gains for such fiscal year have been allocated to them, and in the
absence of any Income, in accordance with their ownership of Shares.
All cash
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or other liquid assets of the Fund not distributed pursuant to this
Section 6.1(a) may be retained in the Fund and if retained shall be
available for reinvestment in accordance with the purposes of the
Fund.
(b) Other Distributions. Subject to the distribution
provisions set forth in Section 6.1(a), the Managers in their sole and
absolute discretion prior to dissolution of the Fund may, but shall
not be obligated to, distribute such assets of the Fund, whether in
cash or in kind, as it may from time to time deem advisable; provided
that no distribution shall be made which would render the Fund
insolvent, impair (within the meaning of Section 6.8(b) hereof) the
Estimated Value Capital Account of any Member or reduce the Estimated
Value Capital Account below zero while any other Member's Estimated
Capital Value Account is above zero.
Section 6.2 Distributions in Termination, Dissolution and
Liquidation. Upon the Fund's termination and dissolution, all property of the
Fund, after payment of liabilities and expenses incurred (or reasonably
estimated to be incurred) in the winding up of the Fund's affairs shall be
distributed in liquidation of the Fund to the Members as follows:
(a) First, to the Investors to the extent necessary,
taking into account all prior distributions, for the return of their
Capital Contributions; and
(b) Thereafter, to all Investors in accordance with their
positive Capital Account balances. For purposes hereof, all in kind
distributions shall be valued at the Estimated Value. Any amounts
withheld for expenses in dissolution of the Fund and thereafter not
needed for such purposes shall be distributed as set forth above.
Section 6.3 Allocations of Income and Losses.
Income and Losses for each calendar year, or fraction thereof, as the
case may be, shall be allocated to the Members (and for purposes of this
Article 6, the term "Member" shall include Investors and any holder of Shares
whether or not such holder has been admitted to membership in the Fund) as
follows:
(a) Income. After giving effect to the special
allocations set forth in Sections 6.4 and 6.5 hereof, Income for each
calendar year, or fraction thereof, shall be allocated to the Members
in accordance with their ownership of Shares.
(b) Losses. After giving effect to the special
allocations set forth in Sections 6.4 and 6.5 hereof, Losses for each
calendar year, or fraction thereof, shall be allocated in the
following order and priority:
(i) Except as provided in Section
6.3(b)(ii) hereof, Losses shall be allocated to the Members in
accordance with their ownership of Shares.
(ii) The Losses allocated pursuant to
Section 6.3(b)(i) hereof shall not exceed the maximum amount
of Losses that can be so allocated without causing any Member
to have an Adjusted Capital Account Deficit at the end of any
fiscal year. In the event some but not all of the Members
would have Adjusted Capital Account Deficits as a consequence
of an allocation of Losses pursuant to Section 6.3(b)(i), the
limitation set forth in this Section 6.3(b)(ii) shall be
applied on a Member by Member basis so as to allocate the
maximum permissible Loss to each Member under Section
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<PAGE> 15
1.704-1(b)(2)(ii)(d) of the Regulations. Any Losses in excess
of the limitations set forth in this Section 6.3(b)(ii) shall
be allocated in accordance with Section 6.3(b)(i).
Section 6.4 Special Allocations. The following special
allocations shall be made in the following order:
(a) Minimum Gain Chargeback. Notwithstanding any other
provision of this Article 6, if there is a net decrease in Fund
Minimum Gain during any Fund fiscal year, each Member shall be
specially allocated items of Fund income and gain for such year (and,
if necessary, subsequent years) in an amount equal to the greater of
(i) the portion of such Member's share of the net decrease in Fund
Minimum Gain, determined in accordance with Regulations Section
1.704-2(g), that is allocable to the disposition of Fund property
subject to Nonrecourse Liabilities, determined in accordance with
Regulations Section 1.704-2(f), or (ii) if such Member would otherwise
have an Adjusted Capital Account Deficit at the end of such year, an
amount sufficient to eliminate such Adjusted Capital Account Deficit.
Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each
Member pursuant thereto. The items to be so allocated shall be
determined in accordance with Section 1.704-2(f) of the Regulations.
This Section 6.4(a) is intended to comply with the minimum gain
chargeback requirement in such Section of the Regulations and shall be
interpreted consistently therewith. To the extent permitted by such
Section of the Regulations and for purposes of this Section 6.4(a)
only, each Member's Adjusted Capital Account Deficit shall be
determined prior to any other allocations pursuant to this Article 6
with respect to such fiscal year and without regard to any net
decrease in Member Minimum Gain during such fiscal year.
(b) Member Minimum Gain Chargeback. Notwithstanding any
other provision of this Article 6 except Section 6.4(a), if there is a
net decrease in Member Minimum Gain attributable to a Member
Nonrecourse Debt during any Fund fiscal year, each Member who has a
share of the Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5),
shall be specially allocated items of Fund income and gain for such
year (and, if necessary, subsequent years) in an amount equal to the
greater of (i) the portion of such Member's share of the net decrease
in Fund Minimum Gain attributable to such Member Nonrecourse Debt,
determined in accordance with Regulations Section 1.704-2(i)(4), or
(ii) if such Member would otherwise have an Adjusted Capital Account
Deficit at the end of such year, an amount sufficient to eliminate
such Adjusted Capital Account Deficit. Allocations pursuant to the
previous sentence shall be made in proportion to the respective
amounts required to be allocated to each Member pursuant thereto. The
items to be so allocated shall be determined in accordance with
Section 1.704-2(i)(4) of the Regulations. This Section 6.4(b) is
intended to comply with the minimum gain chargeback requirement in
such Section of the Regulations and shall be interpreted consistently
therewith. Solely for purposes of this Section 6.4(b), each Member's
Adjusted Capital Account Deficit shall be determined prior to any
other allocations pursuant to this Article 6 with respect to such
fiscal year, other than allocations pursuant to Section 6.4(a) hereof.
(c) Qualified Income Offset. In the event any Member
unexpectedly receives any adjustments, allocations, or distributions
described in Regulations Section 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Fund
income and gain shall be specially allocated to each such Member in an
amount and manner sufficient to eliminate, to the extent required by
the Regulations, the Adjusted Capital Account Deficit of such Member
as quickly as possible, provided that an allocation pursuant to this
Section 6.4(c) shall be made if and only to the extent that such
Member would have an Adjusted Capital Account Deficit after
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all other allocations provided for in this Article 6 have been
tentatively made as if this Section 6.4(c) were not in the Agreement.
(d) Gross Income Allocation. In the event any Member has
a deficit Capital Account at the end of any Fund fiscal year that is
in excess of the sum of (i) the amount such Member is obligated to
restore, and (ii) the amount such Member is deemed to be obligated to
restore pursuant to the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be specially
allocated items of Fund income and gain in the amount of such excess
as quickly as possible, provided that an allocation pursuant to this
Section 6.4(d) shall be made if and only to the extent that such
Member would have a deficit Capital Account in excess of such sum
after all other allocations provided for in this Article 6 have been
tentatively made as if Section 6.4(c) hereof and this Section 6.4(d)
were not in the Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for
any fiscal year or other period shall be allocated to the Members in
the same proportion as Losses are allocated pursuant to Section
6.3(b)(i).
(f) Member Nonrecourse Deductions. Any Member
Nonrecourse Deductions for any fiscal year or other period shall be
specially allocated to the Member who bears the economic risk of loss
with respect to the Member Nonrecourse Debt to which such Member
Nonrecourse Deductions are attributable in accordance with Regulations
Section 1.704-2(i).
(g) Section 754 Adjustment. To the extent an adjustment
to the adjusted tax basis of any Fund asset pursuant to Code Section
734(b) or Code Section 743(b) is required, pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining
Capital Accounts, the amount of such adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases
such basis) and such gain or loss shall be specially allocated to the
Members in a manner consistent with the manner in which their Capital
Accounts are required to be adjusted pursuant to such Section of the
Regulations.
Section 6.5 Curative Allocations.
(a) The "Regulatory Allocations" consist of the "Basic
Regulatory Allocations," as defined in Section 6.5(b) hereof, the
"Nonrecourse Regulatory Allocations," as defined in Section 6.5(c)
hereof, and the "Member Nonrecourse Regulatory Allocations," as
defined in Section 6.5(d) hereof.
(b) The "Basic Regulatory Allocations" consist of (i)
allocations pursuant to the last sentence of Section 6.3(b) (ii)
hereof, and (ii) allocations pursuant to Sections 6.4(c), 6.4(d), and
6.4(g) hereof. Notwithstanding any other provision of this Agreement,
other than the Regulatory Allocations, the Basic Regulatory
Allocations shall be taken into account in allocating items of income,
gain, loss and deduction among the Members so that, to the extent
possible, the net amount of such allocations of other items and the
Basic Regulatory Allocations to each Member shall be equal to the net
amount that would have been allocated to each such Member if the Basic
Regulatory Allocations had not occurred. For purposes of applying the
foregoing sentence, allocations pursuant to this Section 6.5(b) shall
only be made with respect to allocations pursuant to Section 6.4(g)
hereof to the extent the Managers reasonably determine that such
allocations will otherwise be inconsistent with the economic agreement
among the parties to this Agreement.
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(c) The "Nonrecourse Regulatory Allocations" consist of
all allocations pursuant to Sections 6.4(a) and 6.4(e) hereof.
Notwithstanding any other provision of this Agreement, other than the
Regulatory Allocations, the Nonrecourse Regulatory Allocations shall
be taken into account in allocating items of income, gain, loss, and
deduction among the Members so that, to the extent possible, the net
amount of such allocations of other items and the Nonrecourse
Regulatory Allocations to each Member shall be equal to the net amount
that would have been allocated to each such Member if the Nonrecourse
Regulatory Allocations had not occurred. For purposes of applying the
foregoing sentence (i) no allocations pursuant to this Section 6.5(c)
shall be made prior to the Fund fiscal year during which there is a
net decrease in Fund Minimum Gain, and then only to the extent
necessary to avoid any potential economic distortions caused by such
net decrease in Fund Minimum Gain, and (ii) allocations pursuant to
this Section 6.5(c) shall be deferred with respect to allocations
pursuant to Section 6.4(e) hereof to the extent the Managers
reasonably determine that such allocations are likely to be offset by
subsequent allocations pursuant to Section 6.4(a) hereof.
(d) The "Member Nonrecourse Regulatory Allocations"
consist of all allocations pursuant to Sections 6.4(b) and 6.4(f)
hereof. Notwithstanding any other provision of this Agreement, other
than the Regulatory Allocations, the Member Nonrecourse Regulatory
Allocations shall be taken into account in allocating items of income,
gain, loss, and deduction among the Members so that, to the extent
possible, the net amount of such allocations of other items and the
Member Nonrecourse Regulatory Allocations to each Member shall be
equal to the net amount that would have been allocated to each such
Member if the Member Nonrecourse Regulatory Allocations had not
occurred. For purposes of applying the foregoing sentence (i) no
allocations pursuant to this Section 6.5(d) shall be made with respect
to allocations pursuant to Section 6.5(f) relating to a particular
Member Nonrecourse Debt prior to the Fund fiscal year during which
there is a net decrease in Fund Minimum Gain attributable to such
Member Nonrecourse Debt, and then only to the extent necessary to
avoid any potential economic distortions caused by such net decrease
in Member Minimum Gain, and (ii) allocations pursuant to this Section
6.5(d) shall be deferred with respect to allocations pursuant to
Section 6.4(f) hereof relating to a particular Member Nonrecourse Debt
to the extent the Managers reasonably determine that such allocations
are likely to be offset by subsequent allocations pursuant to Section
6.4(b) hereof.
(e) The Managers shall have reasonable discretion, with
respect to each Fund fiscal year, to (i) apply the provisions of
Sections 6.5(b), 6.5(c), and 6.5(d) hereof in whatever order is likely
to minimize the economic distortions that might otherwise result from
the Regulatory Allocations, and (ii) divide all allocations pursuant
to Sections 6.5(b), 6.5(c), and 6.5(d) hereof among the Members in a
manner that is likely to minimize such economic distortions.
(f) Any income, gain, loss, or deduction realized as a
direct or indirect result of the issuance of a Fund interest by the
Fund to a Member (the "Issuance Items") shall be allocated among the
Members so that, to the extent possible, the net amount of such
Issuance Items, together with all other allocations under this
agreement to each Member, shall be equal to the net amount that would
have been allocated to each such Member if the Issuance Items had not
been realized.
Section 6.6 Tax Allocations: Section 704(c). In the event of a
contribution of property other than cash to the Fund, income, gain, loss and
deduction with respect to such contributed property shall be shared among the
Members for tax purposes so as to take account of the variation between the
basis of the property to the Fund and its fair market value at the time of
contribution in accordance with section
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704(c) of the Code. In the event the value of Fund assets is adjusted in
accordance with Section 1.6 hereof and Regulations Section 1.704-1(b)(iv)(f),
subsequent allocations of income, gain, loss and deductions with respect to
such assets shall take account of any variation between the adjusted basis of
such asset for federal income tax purposes and its book value in the same
manner as under Code Section 704(c) and the Regulations thereunder.
Section 6.7 Varying Interest in Fund. Allocations to any Member
whose Interest changes during a Fund fiscal year or to any Member who is a
Member for less than a full Fund fiscal year shall be made in accordance with
Section 706(d) and the Treasury Regulations promulgated thereunder to take into
account the Member's varying Interest in the Fund during the Fund fiscal year.
Section 6.8 Miscellaneous.
(a) Income and Losses of the Fund shall be allocated (but
for tax purposes, only realized net income, gains and losses shall be
allocated to Capital Accounts), as of each Valuation Date, as of the
date of the admission of any Additional Investor pursuant to Section
9.1, upon the withdrawal of any Investor pursuant to Section 11.1 and
as of each other time otherwise required by this Agreement.
(b) The Managers shall not be personally obligated to
contribute cash or other assets to the Fund to restore Capital
Accounts, Adjusted Capital Account Deficits, or impaired Estimated
Value Capital Accounts of Investors either during the term of the Fund
or upon liquidation. The Estimated Value Capital Account of a Member
shall be deemed to be impaired when it is less than (after taking into
account any distribution) the amount of Capital Contributions made by
such Member, minus the value of all distributions (valued as of the
date of distribution in accordance with this Agreement) whether in
cash or in kind, made to such Member pursuant to this Agreement.
(c) Each Member shall share in the Income and Losses of
the Fund allocated to all Members in the ratio that the number of
Shares owned by such Member bears to the number of issued and
outstanding Shares. The profit and loss sharing ratios among Members
shall be appropriately readjusted as of the date of the admission of
any Additional Investor pursuant to this Agreement, upon the
withdrawal of any Investor pursuant to Section 11.1 and as of each
other time otherwise required by this Agreement.
ARTICLE 7
FUND CONTRACTS
Section 7.1 Fund Contracts. Except as otherwise provided herein,
all contracts undertaken by the Fund shall be approved by the Managers and
executed by any Manager. The Members shall promptly execute (with
acknowledgement, if required) at the request of the Manager, any and all
instruments necessary or appropriate to ratify or confirm the authority of the
Managers hereunder. So long as the Fund is required to be registered under the
Investment Company Act, any contract or renewal thereof pursuant to which any
person undertakes regularly to serve as an investment advisor of or principal
underwriter for the Fund must be approved by the vote of a majority of Managers
who are not parties to such contract or Interested Persons of any party to the
contract, cast in person at a meeting called for the purpose of voting on such
approval.
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ARTICLE 8
RIGHTS AND DUTIES OF THE MANAGERS
Section 8.1 Exclusive Control. Subject to the terms and
provisions of this Agreement, the Managers shall have exclusive management and
control of the affairs of the Fund and shall have the power and authority to do
all things necessary or appropriate to carry out the purposes of the Fund. In
the Memorandum and other communications with Investors and others, the Managers
may be referred to as "Directors." For their services to the Fund, Managers
who are not Interested Persons may receive reasonable compensation therefor as
determined by the Board of Managers, and any Manager shall be entitled to be
reimbursed for any expenses enumerated in Section 8.8(c) which such Manager may
have paid on behalf of the Fund, to the extent provided herein. Except as
otherwise set forth in this Agreement, as to any action of the Fund, the vote
of a majority of the Managers shall control.
Section 8.2 Duties. The Managers will diligently and faithfully
devote such time and effort as may be reasonably required in the management,
supervision, and administration of the business of the Fund and operations of
the Fund in accordance with applicable law and Section 4.1 of this Agreement.
Without limiting the generality of the Managers' duties and obligations
hereunder, the Managers, either themselves or through contracts with other
parties, including without limitation the Advisor, including (to the extent
permitted by applicable law and regulations) Affiliates or other related
parties or entities, will cause the Fund to (i) provide office space for the
Fund, (ii) provide personnel for the analysis of, investment in and liquidation
from investment opportunities, (iii) maintain the books and records of the Fund
and make semi-annual progress and portfolio reports to the Members, (iv)
generally provide all overhead and required support for the Fund not identified
in this Agreement as the obligation and expense of the Fund, and (v) have a
fiduciary responsibility for the safekeeping and use of all funds and assets of
the Fund, whether or not in its immediate possession or control, and the
Managers shall not employ nor permit another to employ such funds or assets in
any manner except for the benefit of the Fund.
So long as the Fund is required to be registered under the Investment
Company Act, the Managers will use their best efforts to operate the Fund in
compliance with the provisions of such Act and the rules and regulations
promulgated thereunder.
The Managers will use their best efforts to cause the Fund not to make
any investment, incur any liability, or take any action which would result in
the realization of "unrelated business taxable income" by a tax-exempt Investor
within the meaning of section 512 of the Code.
Section 8.3 Powers and Authority of the Managers. The Managers
shall have full power, authority and duty (except as otherwise provided
herein):
(a) To do such acts and incur such expenses on behalf of
the Fund as may be necessary or advisable in connection with the
conduct of the Fund affairs, specifically including doing acts and
incurring expenses necessary to (i) evaluate the management of a
proposed Portfolio Company, (ii) assess the technology of the proposed
Portfolio Company and the market for its product, (iii) monitor
Portfolio Investments, (iv) sponsor forums or seminars to market
interactive information and visual technologies and other related
technologies to targeted industries and (v) assist in the management
and development of Portfolio Companies by serving on or designating
employees, advisors, or partners of the Managers to serve on Boards of
Directors of such Portfolio Companies or otherwise;
(b) To engage such agents, attorneys, accountants,
custodians, and any other financial advisors and consultants as may be
necessary or advisable for the affairs of the Fund;
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(c) To receive, buy, sell, exchange, trade and otherwise deal
in and with securities and other property of the Fund;
(d) To open, conduct and close cash accounts with brokers
on behalf of the Fund and to pay the customary fees and charges
applicable to transactions in all such accounts;
(e) To open, maintain and close bank accounts and
custodial accounts for the Fund and to draw checks and other orders
for the payment of money;
(f) To file, on behalf of the Fund, all required local,
state and federal tax returns and other documents relating to the
Fund, and if in the best interests of the Fund, cause the Fund to make
or revoke if permissible, any of the elections referred to in Section
108, 709, 754 and 1017 of the Code or any similar provisions enacted
in lieu thereof;
(g) To cause the Fund to purchase or bear the cost of any
insurance covering the potential liabilities of any person indemnified
under Section 16.2;
(h) To commence or defend litigation that pertains to the
Fund or any Fund assets, provided that the Fund shall not bear the
expenses of any litigation which arose as a result of bad faith, gross
negligence or willful misconduct of an party indemnified under this
Agreement except in accordance with Section 16.2 hereof;
(i) To amend this Agreement by revising Exhibit A to reflect
the name and Capital Contributions of each Investor upon the addition
or withdrawal of an Investor pursuant to this Agreement;
(j) Subject to the other provisions of this Agreement, to
enter into, make and perform such contracts, agreements and other
undertakings, and to do such other acts, as it may deem necessary or
advisable for, or as may be incidental to, the conduct of the business
contemplated by the Article 4, including, without in any manner
limiting the generality of the foregoing, contracts, agreements,
undertakings and transactions with any Member or with any other
person, firm or corporation having any business, financial or other
relationship with any Member or Members; provided however, such
transactions with such persons and entities shall be on terms no less
favorable to the Fund than are generally afforded to unrelated third
parties in comparable transactions;
(k) To sign or endorse in its own capacity on behalf of
the Fund any contracts, deeds, mortgages, deeds of trust, notes, stock
or other security certificates or other documents or instruments;
(l) To respond or cause a response to be made as soon as
practicable to all inquiries received from Investors concerning the
operations and affairs of the Fund and supervise and coordinate all
communications between the Fund and the Investors;
(m) Subject to the provisions of this Agreement and
applicable law, including without limitation the Investment Company
Act and rules promulgated thereunder, to receive, along with
affiliates of the Managers, the Advisor and its consultants,
investment advisory fees, directors' fees or other compensation from
Portfolio Companies;
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(n) To cause the Fund to pay to the Advisor a fee in the
amount of one percent (1%) of Capital Contributions in return for its
services in assisting the Initial Members in structuring and
organizing the Fund;
(o) To cause the Fund to enter into an Advisory and
Management Agreement with the Advisor providing for the delegation to
the Advisor of (i) responsibility for day-to-day management of the
Fund; and (ii) responsibility for the investment activities of the
Fund, in return for the management fees and compensation described in
the Memorandum and set forth in such Advisory and Management
Agreement; to be reduced as provided in such agreement and in Section
8.8;
(p) To engage Interstate/Johnson Lane Corporation or its
affiliates to market the Shares, and to pay a commission of five
percent (5%) upon the sales of Shares to Investors;
(q) To engage Sovereign Advisers, Inc. to manage the idle
cash of the Fund, and to pay a quarterly fee of at the rate of
one-half of one percent per annum of the funds under management to
Sovereign Advisors, Inc.;
(r) To engage First Union National Bank, N.A., or other
national banking association to serve as escrow agent for the offering
of Shares and as custodian of the Fund's securities and investment
assets;
(s) To determine or approve distributions to Investors;
and
(t) To determine the value of Fund assets or approve the
valuations proposed by the Advisor.
Section 8.4 Compensation from Portfolio Companies. Subject to
applicable law, the Managers and their consultants and affiliates may receive
consulting and investment advisory or investment banking fees, fees for serving
on the boards of directors, and other compensation for services rendered to
companies in which the Fund has invested, provided that all or a portion of
such fees shall be remitted or credited to the Fund as provided in Section
8.10(d).
Section 8.5 Managers to Act in Best Interests of Fund. In
carrying out their duties and exercising their powers hereunder, the Managers
shall exercise reasonable skill and care and use their best judgment and shall
act at all times in what they deem to be the best interests of the Investors
and, in the case of any conflict between the best interests of the Managers and
the best interests of the Investors, the Managers shall not, any other
provisions hereof to the contrary notwithstanding, act in a manner inconsistent
with the best interests of the Investors or inconsistent with this Agreement.
Further, subject to the preceding sentence, the Managers shall not be liable,
responsible or accountable in damages or otherwise to any Investor or holder of
Shares for any acts performed or omitted by it in good faith and within the
scope of this Agreement. More specifically, but without limiting the
generality of the preceding sentence, the Managers shall not be liable for good
faith mistakes of judgment or losses due to such mistakes of any employee,
broker or other agent of the Fund. Each Manager shall, however, be liable for
his or her actions to the extent they are attributable to gross negligence, bad
faith, willful misconduct and/or fraud.
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Section 8.6 Limitations on Powers of the Managers.
(a) The Managers, without the prior written consent or
ratification of all of the Members, shall have no authority to:
(i) Do any act in contravention of this
Agreement or the Act;
(ii) Do any act which would make it
impossible to carry on the ordinary business of the Fund; or
(iii) Possess Fund property for other than
a Fund purpose or the benefit of the Fund, or commingle the
funds of the Fund with the funds of any other person.
(b) Without the consent of a Super Majority in Interest,
the Managers may not:
(i) Admit a person as a Member of the
Fund except as provided in this Agreement;
(ii) Permit the Fund to redeem or
repurchase Shares except as may otherwise be provided in this
Agreement;
(iii) Cause the Fund to transact business
with the Managers or any Affiliate of the Managers for goods
and services required in the conduct of the Fund's business
(except otherwise authorized in this Agreement) unless the
following conditions have been compiled with:
(A) The transaction is on terms
competitive with those that may be obtained from
persons who are not Affiliates;
(B) Any and all such transactions are
disclosed to all Members;
(C) Any goods or services provided by
the Managers or their Affiliates to the Fund are
pursuant to a written contract which sets forth the
goods and services to be provided and the
compensation to be paid, and is terminable without
cause or penalty upon sixty (60) days notice; and
(D) The transaction shall comply with
all applicable law, including without limitation the
Investment Company Act and rules promulgated
thereunder;
(iv) Invest in real estate (although the
Fund may invest in Portfolio Companies that own real estate as
an incident to the conduct of their ordinary business), oil
and gas, other natural resources, financial institutions or
stage, movie or television shows; or
(v) Take any action which would cause
the Fund to be treated as other than a partnership for federal
income tax purposes.
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(c) In addition, without the consent of a Super Majority
in Interest, neither the Managers nor any principal or partner of the
Managers shall organize and commence placement of investment funds of
another limited liability company, partnership or other entity with a
purpose similar in substance to the purpose of the Fund or be a
manager or general partner in any such entity until such time as the
total contributions to the capital of the Fund have been invested in
Portfolio Investments or committed for investment in Portfolio
Investments. Provided, however, that the prohibitions of this
subsection (c) shall not apply to Independent Managers.
(d) Without the consent of a Majority of Investors, the
Managers may not:
(i) Cause the Fund to change its
classification as a closed-end company under the Investment
Company Act;
(ii) Cause the Fund to borrow money,
issue senior securities, underwrite securities issued by other
persons, purchase or sell real estate or commodities or make
loans to other persons, except in each case in accordance with
the recitals of policy contained in the Memorandum or in its
registration statement filed under the Investment Company Act;
(iii) Cause the Fund to deviate from its
policy in respect of concentration of its investments in the
interactive media industry, deviate from any investment policy
which is stated in the Memorandum or the Fund's registration
statement under the Investment Company Act to be a fundamental
policy changeable only by vote of Investors, or deviate from
any other policy stated in the Memorandum or such registration
statement to be a fundamental policy; or
(iv) Cause the Fund to change the nature
of its business so as to cease to be an investment company
(provided, however, that this clause shall not prevent the
Fund from terminating or abandoning its registration as an
investment company under the Investment Company Act if in the
opinion of the Managers such registration is no longer
required by the Investment Company Act).
Section 8.7 Removal of a Manager. At any time other than at an
annual meeting of Investors, a Super Majority of Investors shall have the right
to remove any Manager from its role as manager, but only for breach of
fiduciary duty, gross negligence, willful misconduct and/or fraud. At the
annual meeting of Investors, all Managers shall be subject to election by
majority vote of Investors as provided herein.
Section 8.8 Advisory and Management Agreement, Management Fees
and Expenses.
(a) The Fund will enter into an Advisory and Management
Agreement (the "Advisory Agreement") with the Advisor providing for
the delegation to the Advisor of the day-to-day administration of the
Fund and the responsibility, subject to the authority of the Managers,
for the investment activities of the Fund, including without
limitation investigation and due diligence with respect to potential
investments, decisions regarding investments in securities of
Portfolio Companies, the exercise of any management rights the Fund
may have with respect to Portfolio Companies, and the sale or other
disposition of investments in Portfolio Companies. The Advisory
Agreement will provide for the payment to the Advisor, as full payment
for management and advisory services rendered as Advisor, for
facilities supplied hereunder and as
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full reimbursement for all expenses set forth in Section 8.8(b),
beginning with the first full year of operations of the Fund,
compensation at an annual rate of up to five percent (5%) of the net
asset value of the Fund as follows: (i) two and one-half percent
(2.5%) of the net asset value of the Fund as of the immediately
preceding Valuation Date, payable on a monthly basis, and (ii) two and
one-half percent (2.5%) of the net asset value of the Fund as of the
immediately preceding Valuation Date, deferred and payable out of
twenty percent (20%) of profits otherwise distributable to Investors
as provided in the Advisory Agreement. The management fee for the
first year or part thereof of the Fund will be in the amount of two
and one-half percent (2.5%) of Capital Contributions, prorated for the
portion of the year following the initial closing of the offering of
interests in the Fund. Such management fee will be prorated for any
later Fund year which is not a full year based on the ratio of the
number of days for which the Fund was in existence during the year to
the total number of days in the year. The portion of the management
fee described in clause (i) above will be reduced to two percent
(2.0%) of the net asset value of the Fund upon the formation of a new
venture capital fund by W. Clay Hamner, David C. Blivin or E. Lee
Bryan. One Hundred percent (100%) of any director's fees, and fifty
percent (50%) of consulting fees paid to W. Clay Hamner, David C.
Blivin, or E. Lee Bryan by Portfolio Companies will be remitted to the
Fund to offset Fund expenses.
(b) The Advisory Agreement will provide that the Advisor
shall pay out of the management fee described in Section 8.8(a), and
the Fund shall not be obligated to pay, the normal general overhead
and administrative operating expenses related to the Fund's investment
activities, including: salaries and fringe benefits of professional,
administrative, clerical, bookkeeping and secretarial personnel of the
Advisor; office rental; general travel and entertainment expenses;
office equipment, fire and theft insurance, heat, light, cleaning,
power, water and utilities of any office space maintained by the
Advisor on its own behalf or on behalf of the Fund.
(c) The Fund shall pay for the following items:
organization and offering expenses of the Fund, including the five
percent (5%) commission on the sale of Shares payable to the Selling
Agent and a fee equal to one percent (1%) of Capital Contributions
payable to the Advisor as an organizational fee; an ongoing cash
management fee payable to Sovereign Advisers, Inc. in the amount of
one-half of one percent per annum of funds managed; normal operating
expenses which are directly related to the Fund's investment
activities, including: stationery, postage, long distance telephone
calls, telexes, facsimile and copying expenses; direct expenses
incurred in investigating investment opportunities; travel and
entertainment expenses; dues and charges to join or participate in
national or regional associations related to the targeted industries;
costs of periodicals relating to the targeted industries; fees and
expenses of consultants; marketing expenses (including the costs of
sponsoring forums or seminars to market interactive multimedia,
virtual reality and other related technologies to targeted industries;
fees of attorneys, accountants, custodians, financial advisors and
certain fees of consultants (as contemplated in the Memorandum),
including Affiliates of the Fund or of the Managers (but fees to such
related parties shall be governed by Section 8.6(b)(iii)) and expenses
of the Fund's advisors and consultants; commissions, banking,
brokerage, registration and private placement fees; transfer, capital
and other taxes, duties and costs incurred in selling Portfolio
Investments; and insurance premiums, indemnifications, costs of
litigation and other extraordinary expenses. In many cases it is
anticipated that expenses of making or selling Portfolio Investments
may be paid or reimbursed to the Fund by the Portfolio Companies or
the purchasers of such Portfolio Investments.
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Section 8.9 No Management by Investors. The Investors shall not
take part in the management or control of the Fund business or have any right
or authority to act for the Fund or to vote on matters other than the matters
set forth in this Agreement.
Section 8.10 Policy with Respect to Investment Opportunities and
Conflicts of Interest. Each Member agrees, subject to the limitations of
Sections 8.1, 8.2, 8.5, 8.6 and 8.10(b) and (c), that any other Member, the
Managers and their Affiliates, and the Advisor may engage in or possess an
interest in other business ventures of every kind or description, independently
or with others, including, but not limited to management of other venture
capital funds, investment in, financing, acquisition and disposition of
securities, investment and management counseling, brokerage services, or
serving as officers of any corporation, partners of any partnership, or
trustees of any trust, whether or not any such activities may conflict with any
interest of the Fund or any of the other Members. In addition, subject to
applicable law, the Managers and their Affiliates may perform various services
for the Fund's Portfolio Companies, including, but not limited to, investment
banking, merger and acquisition assistance, real estate and equipment leasing,
and serving as officers, directors and agents of Portfolio Companies and
receive compensation therefor; subject, however, to the provision that one
hundred percent (100%) of all directors' fees and fifty percent (50%) of
compensation for professional services will be remitted to the Fund. The
parties hereto expressly agree that neither the Fund nor the Members shall have
any rights in or to such activities, or any profits derived therefrom. Without
in any way limiting the foregoing:
(a) Except as provided in Section 8.10(b) and 8.10(e),
the Members, the Managers, and their respective partners, officers,
directors and Affiliates shall not have any obligation or
responsibility to disclose or refer any of the investment
opportunities obtained through activities contemplated by this Section
8.10 to the Fund or the Members.
(b) Subject to applicable law, including without
limitation the Investment Company Act and rules promulgated
thereunder, the Managers and the Advisor may cause the Fund to invest
funds in any business or entity in which the Managers or the Advisor
or any Affiliate of the Managers or the Advisor or any consultant
holds beneficially any equity ownership; provided however, that:
(i) In the case of an investment in any
business or entity which immediately prior to such investment
is controlled by all of the Managers, as control ("Control")
is determined under Rule 405 promulgated under the Securities
Act of 1933, the Managers must obtain prior written consent
from a Super Majority of the Investors prior to making the
investment;
(ii) In the case of an investment in any
business or entity which immediately prior to such investment
is controlled by some, but not all, of the Managers or
Affiliates of the Managers, as control ("Control") is
determined under Rule 405 promulgated under the Securities Act
of 1933, the investment must be approved by all of the
Managers that do not have any beneficial interest in such
business or entity.
(c) Subject to applicable law, including without
limitation the Investment Company Act and rules promulgated
thereunder, the Managers or their Affiliates may invest personally in
any business or entity in which the Fund holds beneficially any equity
ownership provided that such investment does not result in control of
such business or entity by such person or any combination of such
persons.
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(d) One hundred percent (100%) of directors' fees and
fifty percent (50%) of all consulting fees otherwise payable to the
Advisor or its members from any Portfolio Company, which fees were
generated subsequent to the time of commencement of the Fund's
investment in such Portfolio Company, must be remitted to the Fund.
This provision shall not apply to any salary or similar compensation
paid to any individual for service to a Portfolio Company as an
employee or contractor if the employment or contract relationship was
established prior to the Fund's investment in the Portfolio Company.
(e) Before the time of any investment in securities
within the scope of the Fund's purpose by any Manager or Affiliate of
a Manager, whose investment is on the personal behalf of such person,
such person shall bring to the attention of the Managers his intention
to make such investment and shall provide information necessary to
enable the Managers to consider causing the Fund to invest in such
investment. Such person may make such investment only (i) as a
co-investment with the Fund subject to this Agreement and applicable
law or (ii) after the Fund has given such person notice that it does
not intend to invest in such securities.
(f) The parties hereto hereby waive, and covenant not to
sue on the basis of, any law (statutory, common law or otherwise)
respecting the rights and obligations of the Members inter se which is
or may be inconsistent with this Section 8.10.
Section 8.11 Coinvestment. Subject to applicable law, the
Managers and their Affiliates, and any Consultant to the Advisor may coinvest
with the Fund, provided the Fund has obtained its desired investment position.
ARTICLE 9
ADDITIONAL INVESTORS
Section 9.1 Additional Capital Contributions and Admission of
Additional Investors.
(a) Except as provided in this Section 9.1, no additional
Shares shall be sold by the Fund following the filing of the Articles
in the office of the North Carolina Secretary of State.
(b) The parties hereto authorize the Managers, without
further approval of the Members, to offer and sell additional Shares
through the Extended Closing Date (and as limited by Section 5.3) and
to admit as Investors persons purchasing such interests ("Additional
Investors") subject to the following terms:
(i) The Members' Capital Contributions
(including those of Additional Investors) do not exceed
$25,000,000 in the aggregate;
(ii) The Managers may refuse to admit any
person or persons as Additional Investors for any reason
whatsoever;
(iii) The offerings and sales of Shares
shall terminate on the Extended Closing Date, if not earlier
terminated;
(iv) The additional requirements set
forth in Section 9.1(c) shall be satisfied; and
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(v) Each Additional Investor investing
pursuant to this Section 9.1(b) shall make a contribution to
the capital of the Fund for his Share(s) in the manner
provided in Section 5.2.
If during any taxable year of the Fund there is a change in any
Member's interest in the Fund, each Member's distributive share of any
item of income, gain, loss, deduction or credit of the Fund of such
taxable year, notwithstanding anything in this Agreement to the
contrary, shall be determined as provided in Section 706(d) of the
Code to take into account the varying interests of the Members in the
Fund during such taxable year.
(c) The sale of Shares and the admission of persons as
Investors pursuant to Section 9.1(b) must comply with the following
conditions:
(i) Each purchaser of one or more Shares
or fractional Shares shall have executed and filed with the
Fund a subscription agreement substantially similar to the
form executed by other Investors, together with such other
documents and instruments as the Managers may deem necessary
or desirable to effect the investment, including, but not
limited to, execution of a signature page or other document
making such person a party to and bound by the provisions of
this Agreement;
(ii) Offers and sales made pursuant to
Section 9.1(b) hereof shall not (i) require registration under
Section 5 of the Securities Act of 1933, as amended, (ii)
cause the Fund to be terminated under Section 708 of the
Code; or (iii) violate this Agreement; and
(d) Upon the admission of any Additional Investor
pursuant to this Section the Managers shall amend this Agreement by
revising Exhibit A to reflect the name and capital contributions of
each Additional Investor.
(e) The admission of Investors pursuant to this Section
9.1 shall not be cause for dissolution of the Fund.
(f) An Additional Investor shall be treated as any other
Investor of the Fund for all purposes of this Agreement, including the
allocations of cash distributions and profits and losses to be made
under Article 6 of this Agreement. Allocations to any Member whose
interest changes during a Fund fiscal year or to any Member who is a
Member for less than a full Fund fiscal year shall be made in
accordance with Section 706(d) and the Treasury Regulations
promulgated thereunder to take into account the Member's varying
interest in the Fund during the Fund fiscal year.
Section 9.2 Restrictions on Assignments.
(a) No Investor may transfer all or any portion of such
Investor's Shares without the prior written consent of the Managers,
which may be withheld in the Managers' absolute discretion.
(b) In addition to the restriction in Section 9.2(a), no
transfer of any Investor's Shares shall be valid or effective unless
such transfer will not:
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(i) Constitute a violation of the
registration provisions of the Securities Act of 1933, as
amended, or the registration provisions of any applicable
state securities provisions, or violate the Agreement;
(ii) Violate any federal or state laws or
the rules and regulations of any federal or state governmental
agency applicable to such transfer;
(iii) After such transfer, cause the Fund
to be classified other than as a partnership for federal
income tax purposes; or
(iv) When taken together with other prior
transfers, result in a "termination" of the Fund for federal
income tax purposes.
The transferring Investor must give the Managers written notice of his
or her desire to transfer his or her Shares or part thereof and either
(A) an opinion of counsel to such transferring Investor satisfactory
in form and in substance to counsel for the Fund with respect to the
matters referred to in clauses (i)-(iv) above, or (B) sufficient
information to allow counsel to the Fund to make the determination
that the proposed transfer will not result in the consequences
referred to in clauses (i)-(iv) above (any expenses from such
determination to be paid by the transferring Investor).
(c) Each of the Investors agrees with all other Members that
he or she will not make any transfer of his or her Shares which will
violate this Section 9.2, and any such purported transfer shall be
invalid and of no effect. In the event of any transfer permitted by
this Section which shall result in multiple ownership of any Shares,
the Managers may require one or more trustees or nominees to be
redesignated to represent a portion of or the entire interest
transferred for the purpose of receiving all notices which may be
given and all payments which may be made under this Agreement, and for
the purpose of exercising the rights which the transferor as an
Investor had pursuant to the provisions of this Agreement.
(d) Notwithstanding any other provision hereof, any
successor shall be bound by the provisions hereof. Prior to
recognizing any transfer in accordance with this Section, the Managers
may require the transferring Investor to execute and acknowledge an
instrument of assignment in form and substance satisfactory to the
Managers and may require the Assignee to exercise or waive his right
to make any payments of the transferring Investor's Capital
Contribution (where applicable) and to assume all obligations of the
assigning Investor. An Assignee shall be entitled to the allocations
and distributions attributable to the interest assigned to him or her
and to transfer and assign such interest in accordance with the terms
of this Agreement; however, an Assignee who is not a Member at the
time of transfer shall not be entitled to the other rights of an
Investor until he or she becomes a Substituted Investor.
Notwithstanding the above, the Fund and the Managers shall incur no
liability for allocations and distributions made in good faith to the
transferring Member until the written instrument of assignment has
been received by the Fund and recorded on its books and the effective
date of the assignment has passed.
(e) No Assignee of an Investor shall become a Substituted
Investor without the prior written consent of the Managers, which may
be withheld in the Managers' absolute discretion. The transferring
Investor and the Assignee shall also execute and acknowledge any
instrument or instruments as the Manager may deem necessary or
desirable to effect such admission and the Assignee shall accept,
adopt and approve in writing all of the terms and provisions of this
Agreement.
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(f) In the event of any Transfer or attempted Transfer of
any Investor's Shares in violation of the provisions of this Section
9.2, without limiting any other rights of the Fund, the Managers shall
have the right to require the withdrawal of such Investor (or his or
her successors in interest) from the Fund. In the event of such
withdrawal, the withdrawing Investor shall be paid for his or her
Shares in accordance with the provision for payment of withdrawing
Investors as set forth in Sections 11.1(b) and 11.2.
(g) In the event that any regulation adopted under the
Employee Retirement Income Security Act of 1974 ("ERISA") or any
similar legislation shall require any Investor to divest itself of its
interest in the Fund prior to dissolution of the Fund, or in the event
that a regulatory agency or a court shall determine that, pursuant to
such regulations, an Investor's continued investment in the Fund is
contrary to law, then the Managers, on a best efforts basis, will seek
a buyer or buyers for the interest held by such Investor.
(h) The transfer of an Investor's interest or any part
thereof and the admission of a Substituted Investor shall not be cause
for dissolution of the Fund.
ARTICLE 10
CONSULTANTS TO THE ADVISOR
Section 10.1 Consultants. The Managers shall be solely
responsible for the management, policies and operations of the Fund, provided
that the administration of the Fund and the management of the investment
activities of the Fund will be delegated to the Advisor pursuant to the
Advisory Agreement. It is anticipated that the Advisor will establish
relationships with persons who are leaders in their technical and business
fields ("Consultants") who will provide the Advisor with guidance and insight
into the technologies and strategic positioning of targeted investment
companies. Persons may be added or removed as Consultants from time to time by
the Advisor as it deems appropriate in its sole discretion. The Advisor will
be solely responsible for the administration of investment opportunities, all
investment and sale decisions, and the monitoring of and rendering of
assistance to Portfolio Companies, as well as all financial, reporting,
administrative, overhead support and other activities for the Fund and the
Advisor.
Section 10.2 Length of Service and Removal. Each Consultant shall
serve at the pleasure of the Advisor and any Consultant may be removed with or
without cause at any time by the Advisor.
Section 10.3 Meetings, Permitted Activities and Duties.
(a) It is anticipated that the Advisor will consult, discuss
and analyze general investment trends, the Portfolio Investments and
proposed Portfolio Investments with its Consultants as it deems
appropriate in order to utilize each Consultant's particular
expertise.
(b) Subject to applicable law, the Consultants are
permitted to serve as consultants or directors to any business or
entity in which the Fund holds beneficially any equity ownership.
(c) Neither the Advisor nor the Managers shall be
obligated to accept or take action with respect to any recommendation
of the Consultants, and no such recommendation shall affect the
rights, obligations or liabilities of any Member under this Agreement.
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(d) In his or her capacity as a Consultant, no such
member shall take part in the management or control of the Fund
business, and shall have no authority to act for the Fund.
(e) The Advisor may consult from time to time with individual
Consultants with respect to Portfolio Investments and prospective
Portfolio Investments.
(f) It is anticipated that the Advisor will pay certain
compensation to its Consultants, expected to be in the amount of
twenty percent (20%) of the accrued portion of its management fee, out
of the management fees received by the Manager under the Advisory
Agreement. The eligibility requirements for Consultants shall be left
to the discretion of the Advisor and its agreements or other
arrangements with Consultants.
(g) The Consultants serve as consultants to the Advisor
and not to the Fund or any of its Members. No Consultant shall be
entitled to direct compensation from the Fund for acting in such
capacity. The Advisor shall retain sole discretion, subject to the
ultimate authority of the Managers with respect to the investment of
the funds of the Fund, as to whether to accept or reject the advice of
its Consultants, and to add or terminate Consultants. No Investor
should consider any Consultant as his or her investment advisor.
ARTICLE 11
WITHDRAWAL OF AN INVESTOR
Section 11.1 Withdrawal of an Investor.
(a) An Investor may not withdraw from the Fund in whole
or in part prior to dissolution of the Fund, except with the written
consent of the Managers.
(b) In the event an Investor withdraws with the written
consent of the Managers, and subject to applicable law, the interest
of such Investor shall be withdrawn in its entirety and such
Investor's Shares shall be deemed cancelled, and the withdrawing
Investor will receive an amount equal to his or her Estimated Value
Capital Account as of the most recent Valuation Date as determined in
Section 15.2, (less the value of distributions made to him or her by
the Fund since such Valuation Date), payable as provided in Section
11.2. The Managers shall have absolute discretion to make the
distribution in respect of the interest of any withdrawing Investor in
cash or, at the option of the Managers, in kind, subject to Section
6.1(b). Any portion of distributions made to a withdrawing Investor
in kind or pursuant to this, Section 11.1(b), shall be made ratably in
proportion to the value that each security then held by the Fund,
determined pursuant to Section 15.2, bears to the value of the Fund's
assets as of the Section 15.1 Valuation Date; provided however, that
the Managers may make a fair nonratable distribution in kind to any
withdrawing Investor with the written consent of the withdrawing
Investor and the consent of two-thirds (2/3) in interest of the
nonwithdrawing Investors, and provided further that the Managers may
withhold from distribution any securities the distribution of which
would, in the Managers' judgment, cause hardship to the issuer or its
parent.
(c) Except as provided in Section 11.2, the withdrawing
Investor shall not share in the profits and losses of the Fund after
withdrawal from the Fund, and Exhibit A to this Agreement shall be
revised by the Managers to reflect such withdrawal. As of the date of
such Member's withdrawal, the withdrawing Investor's Capital
Contribution for all purposes of this agreement shall be reduced to
zero. Each remaining Investor shall thereafter share in the income,
gains, and losses of the Fund attributable to the Investors as a group
in the proportion that the
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number of Shares owned by such Investor bears to the total number of
remaining issued and outstanding Shares.
(d) Withdrawal of an Investor shall not be cause for
dissolution of the Fund.
Section 11.2 Time for Payment for Fund Interests. Any Member or
representative thereof who shall become entitled or required to withdraw from
the Fund or be paid the value of his or her Fund Interest pursuant to this
Agreement shall be paid without interest as expeditiously as possible without
causing hardship to the Fund. Except as provided below, distributions shall be
completed to the extent possible within six (6) months from the accrual of the
right to be paid, and in any event one-half (1/2) of such distribution shall be
completed no later than six (6) months after accrual of the right to be paid,
and the remainder shall be distributed no later than two (2) years from said
date. Notwithstanding the above, no distribution will be made which would
render the Fund insolvent, impair (within the meaning of Section 6.8(c) hereof)
the Estimated Value Capital Account of any Member, or reduce the Estimated
Value Capital Account of any Member below zero while any Member's Estimated
Value Capital Account is above zero.
Section 11.3 Valuation of Withdrawing Member's Interest. The
valuation of the total amount of Fund assets attributable to an Investor
withdrawing pursuant to Section 11.1 hereof shall be as of the most recent
Valuation Date prior to (A) the date the Managers receive said Investor's
request to withdraw, or (B) in the case of an Investor required to withdraw
pursuant to Section 9.2(vi), as of the date of Transfer. The Managers shall
notify the withdrawing Investor in writing of such valuation at the later of
(A) the date the Managers consent to such withdrawal pursuant to Section 11.1,
or (B) the date the Managers furnish the statement of value for such valuation
date to all Investors provided for by Section 15.2.
ARTICLE 12
DISSOLUTION
Section 12.1 No Return of Capital Contribution. No Investor shall
have the right to the return of his or her capital in the Fund except as
provided in Sections 6.1 and 6.2 or upon withdrawal of an Investor in
accordance with Section 11.1.
Section 12.2 Managers Not Liable for Return of Capital. No
Manager shall be personally liable for the return of Capital Contributions of
Investors.
Section 12.3 Dissolution.
(a) The Fund shall be dissolved upon the occurrence of an
event described in Section 3.1, unless the Fund is continued in
accordance with the terms set forth in Section 3.1.
(b) Upon dissolution of the Fund, its business and affairs
shall be liquidated in an orderly manner. The Members acknowledge
that it may not be possible to wind down the affairs of the Fund
immediately after dissolution of the Fund since immediate liquidation
of the assets of the Fund may be neither possible nor in the best
interests of the Members. Accordingly, the Members agree that upon
dissolution the Fund may remain in existence for up to two (2) years
to permit an orderly winding down of the Fund's affairs and to
maximize the proceeds of liquidation.
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(c) Anything to the contrary herein notwithstanding, the
Managers may, subject to Section 6.2, distribute ratably in kind, upon
dissolution, any assets of the Fund, but such distribution shall not
occur until all liabilities of the Fund, including liabilities owing
to any Members, have been satisfied.
ARTICLE 13
WITHDRAWAL OF MANAGERS
Section 13.1 Assignability of Interest or Withdrawal of a Manager.
No Manager shall voluntarily withdraw as Manager (except that Independent
Managers may withdraw at any time) or admit a new Manager to the Fund without
the written consent of the holders of a majority of the Shares.
ARTICLE 14
RECORDS, ACCOUNTING AND REPORTS
Section 14.1 Books and Records. The Managers shall keep or cause
to be kept books and records pertaining to the Fund's business showing all of
its assets and liabilities, receipts and disbursements, realized profits and
losses, Capital Accounts, and Estimated Value Capital Accounts and all
transactions entered into by the Fund. Such books and records of the Fund
shall be kept at its principal office, and all Members and their
representatives shall at all reasonable times have free access thereto for the
purpose of inspecting or copying the same.
Section 14.2 Reports.
(a) As promptly as possible after the close of each
quarter, the Managers shall cause a progress and portfolio report of
the Fund (in such detail as the Manager may determine, but at a
minimum summarizing new Portfolio Investments and, so long as the Fund
is registered under the Investment Company Act, the information
required to be furnished to Investors by such Act) to be furnished to
each Member.
(b) As promptly as possible after the close of each
fiscal year of the Fund, the Managers shall cause audited financial
statements to be prepared for the Fund as of the end of each such
year. Such financial statements shall be prepared by a firm of
certified public accountants of national standing that the Managers
shall in their sole judgment employ at the Fund's expense. Within
ninety (90) days after the close of the fiscal year of the Fund, a
copy of a set of the financial statements, including the report of
such certified public accountants, shall be furnished to each Member
and shall include, as of the end of such fiscal year:
(i) A statement of the assets and
liabilities of the Fund;
(ii) A statement of operations setting
forth the net loss or net profit of the Fund; and
(iii) A statement of changes in the
financial position of the Fund.
The audited financial statements shall be accompanied by an overview
prepared, or caused to be prepared, by the Managers of all investments
held by the Fund.
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(c) In addition, the Managers shall cause such certified
public accountants to supply within ninety (90) days of the close of
the fiscal year of the Fund all other information necessary to enable
each Member to prepare his or her income tax returns, and the Managers
shall in a timely manner supply such other information as each Member
may reasonably request for the purpose of enabling such Member to
comply with any reporting requirements imposed by any governmental
agency or authority.
(d) As promptly as possible after the close of each
fiscal year of the Fund, the Managers will prepare or cause to be
prepared and furnished to each Member a statement of the net asset
value of the Fund as of the most recent Valuation date, in accordance
with Article 15 hereof.
Section 14.3 Tax Accounting Methods; Periods; Elections. The Fund
shall keep its financial accounting records (and the audited financial
statements shall be prepared) utilizing the same methods used to report its
income for income tax purposes. Unless otherwise provided in this Agreement,
the determination of whether to utilize the cash or accrual method of
accounting, whether to utilize accelerated cost recovery or another method of
depreciation, and the selection among any other allowable, alternative tax
accounting methods or principles shall be made by the Managers and shall be
those methods and principles which are determined by it to be in the best
interests of the Fund. The Fund's annual financial accounting and tax
accounting period shall be the calendar year, unless another accounting period
is required by the Code. The Managers may cause the Fund to make any election
allowable to the Fund under the Code, including elections under Section 754 of
the Code with respect to Fund distributions described in Section 734 of the
Code and with respect to transfers of Fund Interests described in Section 743
of the Code.
ARTICLE 15
VALUATION OF FUND ASSETS
Section 15.1 Dates of Valuation. The Managers shall value the
Fund assets (the "Estimated Value") as of December 31 of each year (the
"Valuation Date"), until such time as all of the assets of the Fund shall have
been distributed or liquidated, and shall also value any asset which is
distributed in kind as of the date of distribution of such asset. The Managers
shall also value the Fund assets as of the dissolution date of the Fund. In
determining the value of the Fund assets, no value shall be placed on the
goodwill or name of the Fund, or the office records, files, statistical data or
any similar intangible assets of the Fund not normally reflected in the Fund's
accounting records, but there shall be taken in consideration any amounts to be
received, including items of income earned but not received, expenses incurred
but not yet paid, liabilities fixed or contingent, prepaid expenses to the
extent not otherwise reflected in the books of account, and the value of
options or commitments to purchase securities pursuant to agreements entered
into on or prior to such valuation date.
Section 15.2 Method of Valuation. Determination of value of
securities made for any purpose under this Agreement shall be based on all
relevant factors including without limitation, type of security, marketability,
restrictions on disposition, subsequent purchases of the same or similar
securities by other investors, pending mergers or acquisitions, and current
financial position and operating results. Any determination of the value of
securities made pursuant to this Section 15.2 shall be generally made as
follows:
(a) Marketable securities listed on a national securities
exchange will be valued at the last sales price on the date of
valuation, or in the absence of a sale on such date, at the last bid
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price on the date of valuation, unless the investment is subject to
restrictions which warrant a discount.
(b) Marketable securities traded in the over-the-counter
market and reported on the National Association of Securities Dealers'
Automated Quotations ("NASDAQ") System will be valued at the closing
bid price as reported by such system, unless the investment is subject
to restrictions which warrant a discount.
(c) Marketable securities other than those reported on the
NASDAQ System will be valued at the most recent sale price for such
security, unless the investment is subject to restrictions which
warrant a discount.
(d) All other securities will be valued at cost or on a
basis consistent with any subsequent equity-related transactions with
third parties which give independent substantiation to any change in
values.
(e) The Managers' valuation of Fund assets shall be
conclusive and binding on all Members; provided however, that (i) any
valuations which pursuant to the Advisory Agreement are used to
calculate the net asset value of the Fund for purposes of determining
the Advisor's compensation, must be approved by all Independent
Managers; and (ii) if a Super Majority in Interest objects to any
valuation, the Managers shall attempt to determine an alternative
value. If the Managers and a Super Majority in Interest cannot agree
on an alternative value, the valuation shall be submitted to
arbitration by an appraiser selected by the senior ranking officer of
the National Association of Venture Capitalists. If the National
Association of Venture Capitalists shall cease to exist or shall fail
to select an appraiser, such contested valuation shall be submitted to
arbitration in Durham County, North Carolina in accordance with the
Commercial Arbitration Rules of the American Arbitration Association
then in effect, except that to be qualified, an arbitrator must have
substantial experience with investing in and making evaluations of
early stage companies. The determination of the arbitrators with
respect to such contested valuation shall be binding on all Members.
ARTICLE 16
MISCELLANEOUS
Section 16.1 Representations and Warranties of Investors. Each
Investor, by execution of this Agreement, represents and warrants to every
other Member and to the Fund:
(a) That he, she or it is acquiring the Shares for
purposes of investment only, for his or her own account and not with
the view to resell or to distribute the same or any part thereof, and
that no other person has any interest in such Investor's interest or
in the rights of such Investor hereunder other than as a stockholder
in or partner of such Investor;
(b) That he, she or it is an "accredited investor" as
defined in Rule 501 of Regulation D of the Securities Act of 1933, as
amended; and
(c) That he, she or it has had the opportunity to ask
questions of and receive answers from the Managers and persons
authorized to act on behalf for the Fund concerning the terms of this
investment.
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Section 16.2 Indemnification of the Members, Managers and
Affiliates. All Members, each Manager and the Affiliates of each such Manager,
and each Consultant to the Advisor, shall be the persons and entities
("Persons") entitled to indemnification as hereinafter provided in this
Section. Any Person entitled to indemnification shall be indemnified to the
fullest extent permitted by law by the Fund against any cost, expense
(including attorneys' fees), judgment and/or liability reasonably incurred by
or imposed upon such Person in connection with any action, suit or proceeding
(including any proceeding before any administrative or legislative body or
agency) to which such Person may be made a party or otherwise involved or with
which such Person shall be threatened by reason of being or having been
associated with the Fund; provided however, that no Person shall be so
indemnified with respect to any matter as to which such Person shall have been
adjudicated to have acted in gross negligence, bad faith, engaged in reckless
actions which evidenced a conscious disregard for the consequences of those
actions, or committed willful misconduct or fraud. Any indemnification
hereunder shall be made by the Fund only as authorized in the specific case
upon a determination that indemnification of the Person is proper in the
circumstances because such Person has met the applicable standard of conduct
set forth above. The right of indemnification granted by this Section 16.2
shall be in addition to any rights to which the Person seeking indemnification
may otherwise be entitled and shall inure to the benefit of the successors,
assigns, executors or administrators of the Members. Each Person indemnified
hereunder shall each have the right to select his, her or its own attorney upon
a reasonable showing by such Person that counsel for the Fund cannot adequately
represent such Person's interests; provided however, if indemnification of two
or more Persons results or may result from a common matter, then such Persons
shall be required to use the same counsel, except in the event of a conflict of
interest of such counsel. Subject to Section 8.5, no Person entitled to
indemnity hereunder shall satisfy any right of indemnity or reimbursement
granted in this Section 16.2, or to which they may be otherwise entitled,
except out of the assets of the Fund, and no Member shall be personally liable
with respect to any such claim for indemnity or reimbursement. Any obligation
to an indemnified Person under this Section shall be deemed, until paid, a debt
of the Fund to such Person, and shall be repaid in full before any
distributions (or further distributions) are made to Members pursuant to any of
the provisions of this Agreement. The indemnification hereunder shall not
extend to the tax consequences resulting to any Person from his investment in
or association with the Fund.
Section 16.3 Amendment of Operating Agreement. This Agreement may
be amended, in whole or in part, by the Managers with the written consent of a
Super Majority in Interest, provided that (i) the Managers must give prior
written notice of any proposed amendment to all Members, which notice sets
forth the text of the proposed amendment; (ii) no amendment shall be adopted
without the consent of all such Members which would (A) cause the Fund to cease
to be a limited liability company under the Act, (B) extend the term of the
Fund (except as otherwise permitted herein), (C) substantially limit or expand
the Managers' power hereunder or otherwise materially increase Investors'
obligations or diminish their rights hereunder or (D) provide for amendment to
this Section 16.3; and (iii) no approval of the Investors shall be required to
amend the Agreement upon admission of Additional or Substituted Investors.
Section 16.4 Notices. Notices which may or are required to be
given hereunder by any party to another shall be in writing and deposited in
the United States mail, certified or registered, return receipt requested,
postage prepaid, or given by telex or telegram, addressed to the respective
parties at their addresses set forth on Exhibit A hereto in the case of the
Investors and set forth as the address of the principal office of the Fund in
the case of the Managers or to such other addresses as may be designated by any
party hereto by notice addressed to the Fund in the case of the Investors and
to the individual Investors in the case of the Managers. Notices to and from
Investors with foreign addresses shall be given by telex and confirmed in
writing. Notices shall be deemed to have been given when
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deposited in the United States mail within the Continental United States or
transferred by telex or telegram.
Section 16.5 Agreement Binding Upon Successors and Assigns.
Except as herein otherwise specifically provided, this Agreement shall inure to
the benefit of and shall be binding upon the heirs, executors, administrators
or other representatives, successors and assigns of the respective parties
hereto.
Section 16.6 Fiscal Year. The fiscal year of the Fund shall be
the calendar year, unless the Managers in their sole discretion and with the
prior approval of the Internal Revenue Service consents to another fiscal
year-end, or unless the Managers, after consultation with their advisors,
determine that a different fiscal year-end is required by the Code.
Section 16.7 Governing Law. This Agreement and the rights of the
Members hereunder, shall be governed by and construed in accordance with the
laws of the State of North Carolina. In the event any Investor decides to
institute legal action arising our of a dispute under the terms of this
Agreement, such action shall be instituted only in a court of competent
jurisdiction in the State of North Carolina. If the Fund is the party
instituting such action, the Investor against whom such action is instituted
agrees to submit to the personal jurisdiction of such Court.
Section 16.8 Attorney's Fees. In the event any Member brings
legal action to enforce any provisions of this Agreement, the Member or Members
(or Fund) who do not prevail in such legal action shall pay the prevailing
Member or Members the reasonable attorneys' fees or costs of the prevailing
Member or Members which have been incurred in such action.
Section 16.9 Consents. Any and all consents, agreements or
approvals provided for or permitted by this Agreement shall be in writing and a
signed copy thereof shall be filed and kept with the books of the Fund.
Section 16.10 Other.
(a) All references to the masculine herein shall include
the neuter and the feminine.
(b) The captions and titles preceding the text of each
Section hereof shall be disregarded in the construction of the
Agreement.
(c) This Agreement may be executed in counterparts, each
of which shall be deemed to be an original hereof.
ARTICLE 17
MEETINGS OF INVESTORS AND ELECTION OF MANAGERS
Section 17.1 Meetings.
(a) An annual meeting of Investors shall be held on the
second Wednesday in May of each year, beginning with May 8, 1996, or
at such other time as shall be determined by the Managers, for the
following purposes:
(i) The election of the Board of Managers;
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(ii) The approval of certain advisory agreements;
(iii) The selection of the Fund's certified public
accountants; and
(iv) The transaction of such other business as may
come before the meeting.
(b) Special meetings of the Investors for any purpose may
be called by the Managers and shall be called by the Managers upon
receipt of a request in writing signed by the holders of fifty percent
(50%) or more of the Shares. Such request shall state the purpose of
the proposed meeting and the matters proposed to be acted upon at the
meeting. Such meeting shall be held in Durham, North Carolina at such
place as may be designated by the Managers, or, if called upon the
request of other Investors, a place within North Carolina as
designated by such other Investors.
(c) A notice of any such meeting shall be given either
personally or by mail, not less than (5) days nor more than fifty
(50) days before the date of the meeting, to each Investor at such
Investor's address as set forth on Exhibit A. Such notice shall
state the purpose or purposes of the meeting. If the meeting is
adjourned to another time or place, and if any announcement of the
adjournment of time or place is made at the meeting, it shall not
be necessary to give notice of the ajourned meeting except to those
Investors not in attendance at the meeting. The presence in person
or by proxy of Investors holding more than fifty percent (50%) of
the outstanding Shares shall constitute a quorum at all meetings of
the Investors which shall be the number of Investors required for
any meeting; provided, however, that if there be no such quorum,
Investors holding a majority of the Shares so present or so
represented may adjourn the meeting from time to time, until a quorum
shall have been obtained. No notice of the time, place, or purpose of
any meeting of Investors need be given to any Investor who attends
in person or is represented by proxy (except when the Investor
attends a meeting for the express purpose of objecting at the
beginning of the meeting is not transaction of any business on the
ground that the meeting is not lawfully called or convened), or to
any Investor entitled to such notice who, in writing (executed and
filed with the records of the meeting, either before or after the
time thereof) waives such notice.
(d) For the purpose of determining the Investors entitled
to vote on, or to vote at, any meeting of the Company or any
adjournment thereof, the Managers may fix, in advance, a date as the
record date for any such determination of Investors. Such date shall
not be less than five (5) days nor more than fifty (50) days before
any such meeting.
(e) Each Investor may authorize any person or persons to
act for him by proxy in all matters in which an Investor is entitled
to participate, whether by waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the
Investor or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven (11) months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at
the pleasure of the Investor executing it.
(f) Unless otherwise provided herein with respect to a
particular matter, the affirmative vote of a Majority of Investors
shall be required to carry any motion properly before the Investors.
F-32
<PAGE> 38
Section 17.2 Election of Managers. At the annual meeting of
Investors, the Investors shall elect the members of the Board of Managers. The
persons receiving the highest number of votes shall be deemed to have been
elected, provided, however, that at least forty percent (40%) of the members of
the Board of Managers must be Independent Managers. The term of each Manager
shall expire at the next annual meeting of Investors following the Manager's
election or upon such Manager's death, resignation or removal as provided
herein.
Section 17.3 Vacancies. Except as otherwise provided by law, any
vacancy occurring in the Board of Managers may be filled by the affirmative
vote of a majority of the remaining Managers. If a vacancy must be filled by
an Independent Manager to meet the requirement herein that at least 40% of the
Managers be Independent Managers, such vacancy may be filled only by a person
who has been selected and proposed for election by a majority of the remaining
Independent Managers, and except in the case of a vacancy occurring as a result
of the death, disqualification or bona fide resignation of an Independent
Manager, must be elected by the Investors as provided herein.
Section 17.4 Initial Board of Managers. Until the first annual
meeting of Investors, the Board of Managers shall consist of the following
individuals:
W. Clay Hamner
David C. Blivin
E. Lee Bryan
Terry Sanford (Independent Manager)
Wayne M. Rogers (Independent Manager)
Section 17.5 Action by Written Consent. Any action of the
Investors may be taken without a meeting upon the written consent of the
Investors holding a number of Shares sufficient to approve such action at a
duly called meeting of Investors; provided, however, that notwithstanding
anything herein to the contrary an amendment to this Agreement shall be made
only upon the unanimous written consent of the Investors, or approval by a
Super Majority of Investors at a duly called meeting of Investors.
F-33
<PAGE> 39
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the date first above written.
Initial Members:
______________________________
W. Clay Hamner
_______________________________
David C. Blivin
_______________________________
E. Lee Bryan
[Adoption by Investors made by separate Subscription Agreements]
F-34
<PAGE> 40
EXHIBIT A
Names and Addresses of Investors
F-35
<PAGE> 1
EXHIBIT 2(g)(i)
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
ADVISORY AND MANAGEMENT AGREEMENT
This ADVISORY AND MANAGEMENT AGREEMENT, as of the 14th day of
June, 1995, is between SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC, a North
Carolina limited liability company (the "Fund"), and MONTROSE VENTURE PARTNERS,
LLC, a North Carolina limited liability company (the "Advisor"). The parties
hereto agree as follows:
1. APPOINTMENT. The Fund hereby retains the Advisor as its
administrative manager and investment adviser, subject to the direction of the
Board of Directors of the Fund, to manage the day-to-day operations of the Fund
and to perform investment advisory services for the Fund as more fully
described herein. The Fund's appointment of the Advisor and this Agreement
shall be submitted for approval of the Fund's security holders at the first
meeting thereof, and shall terminate automatically if not approved by majority
vote of such security holders in accordance with the Investment Company Act, as
defined below.
2. ADMINISTRATIVE DUTIES. The Advisor shall have the
responsibility for all day-to-day management of the Fund's operations and
affairs. In furtherance of the performance of its administrative
responsibilities, the Advisor will cause appropriate books and records to be
kept of the Fund's investment and other activities, in accordance with the
Investment Company Act of 1940 (the "Investment Company Act") and regulations
thereunder and in accordance with any other applicable federal, state or local
laws or regulations. The Advisor will cause to be prepared and filed on behalf
of the Fund all required federal, state or local tax returns. The Advisor will
prepare and file or deliver all reports to the Securities and Exchange
Commission and state securities agencies, and reports to the Fund's security
holders, as may be required by the Investment Company Act or any other federal,
state or local law or regulation. The Advisor will keep and maintain all such
books and records in accordance with the Investment Company Act and regulations
thereunder. All such books, records, returns and reports shall be the property
of the Fund and the Advisor shall make such records available to the Fund upon
request.
3. ADVISOR'S PAYMENT OF GENERAL ADMINISTRATIVE EXPENSES. The
Advisor shall bear the following costs associated with managing and
administering the Fund: general overhead expenses, including salaries and
fringe benefits of the Advisor's personnel, office rental and office equipment,
fire and theft insurance, cleaning and utilities of office space, bookkeeping
and general (not related to investment activities) travel and entertainment
expenses.
4. INVESTMENT MANAGEMENT DUTIES AND RESPONSIBILITIES. The
Advisor shall be primarily responsible for (i) identification of potential
investment opportunities for the Fund in accordance with the objectives and
policies of the Fund as set forth in the Memorandum, the investigation of such
potential opportunities and due diligence associated therewith; (ii)
negotiation and finalization of letters of intent and definitive purchase
agreements and related documents, and consummating the Fund's investment in
Portfolio Companies; (iii) monitoring, oversight and management of the Fund's
investment in Portfolio Companies, including without limitation review of sales
and operational reports, financial statements, Portfolio Company polices and
strategic objectives, Portfolio Company alliances with other companies, and
other matters necessary to the Fund's proper management of its investments, and
the exercise of any management or voting rights the Fund may have with respect
to Portfolio Companies; (iv) identification of exit opportunities and
strategies with respect to the Fund's portfolio investments; and (v) selling or
otherwise disposing of the Fund's portfolio investments.
In the performance of its investment advisory functions hereunder, the
Advisor shall be authorized to make investments on behalf of the Fund without
specific approval of the Fund or its Directors; however, the Advisor shall keep
the Directors informed of investment opportunities which are under serious
consideration and shall be subject to the directives, if any, of the Directors
with respect to any particular investment. The Advisor shall use its best
efforts to ensure that all Fund investments are made in accordance with the
investment objectives and policies set forth in the Fund's Confidential
Offering Memorandum dated January 16, 1995.
The Advisor will comply, and will cause its employees and agents to
comply, with all applicable federal, state and local laws, rules and
regulations, and will comply with any code of ethics which may be adopted by
the Fund.
The Advisor will cause all of its employees, contractors or agents who
are "access persons" as defined in the Investment Company Act to be bonded in
accordance with the provisions of the Investment Company Act.
5. REIMBURSEMENT OF EXPENSES RELATED TO INVESTMENT ACTIVITIES.
The Advisor may cause the Fund to pay directly or to reimburse the Advisor for
all direct operating expenses which are related to the Fund's investment
activities, including stationery, postage, telephone and copying charges, dues
and charges for national and/or regional industry associations, fees and
expenses of consultants, and other expenses including fees and expenses for
outside consulting services, legal, accounting and auditing expenses,
litigation expenses, and organizational and marketing expenses of the Fund.
The Fund will also pay or reimburse costs incurred in the investigation of
investment opportunities and in the oversight of portfolio investments,
including travel and
<PAGE> 2
entertainment expenses directly related thereto. To the extent reasonably
practicable, the Advisor will attempt to recoup all or a portion of such
expenses from a Portfolio Company upon the successful closing of an investment
by the Fund in a Portfolio Company or the sale of the Fund's interest in a
Portfolio Company.
6. COMPENSATION. For the services to be rendered hereunder by
the Advisor the Fund will pay the Advisor an annual management fee of five
percent (5%) of the Net Asset Value of the Fund. Beginning with the first full
fiscal year of operations of the Fund, the annual fee will be computed and paid
as follows:
(a) a portion of such fee, in the amount of two and one-half
percent (2 1/2%) of the Net Asset Value of the Fund as of the
immediately preceding Valuation Date, will be payable in
twelve equal monthly installments, each of which will be due
and payable on the last day of each month of such fiscal year;
and
(b) a portion of such fee, in the amount of two and one-half
percent (2 1/2%) of the Net Asset Value of the Fund as of the
immediately preceding Valuation Date, will be accrued.
Accrued and unpaid management fees will become due and payable
as follows: first, upon the distribution to the investors in
the Fund of the net proceeds from the sale or disposition of a
portfolio investment of the Fund, but only to the extent of
twenty percent (20%) of the profits from such sale or
disposition otherwise available for distribution; and second,
after the investors in the Fund have received cumulative
distributions from all sources equal to the proceeds of the
Fund's Offering, upon the Fund's having funds available for
distribution, without limitation.
The management fee for the first year or part thereof of the Fund will
be in the amount of two and one-half percent (2 1/2%) of the gross Offering
proceeds, prorated for the portion of such first year after the Initial Closing
Date.
7. REMISSION OF CERTAIN FEES. Subject to applicable law, the
Advisor and its affiliates may perform services for Portfolio Companies,
including without limitation investment banking, merger and acquisition
assistance, real estate and equipment leasing, and serving as officers,
directors and agents of Portfolio Companies and receive compensation therefor;
provided, however, that the Advisor will remit to the Fund, and cause its
affiliates and agents to remit to the Fund, one hundred percent (100%) of all
directors' fees and fifty percent (50%) of compensation for professional
services. This provision shall not apply to any salary or similar compensation
paid to any individual for service to a Portfolio Company as an employee or
contractor if the employment or contract relationship was established prior to
the Fund's investment in the Portfolio Company.
8. TECHNICAL AND BUSINESS ADVISORY PANEL. It is contemplated
that the Advisor will engage a panel of business leaders and technical experts
to assist it in evaluating potential Fund investments, as described in the
Memorandum. Such consultants shall be compensated by the Advisor and shall
report to the Advisor. No such consultant shall be entitled to compensation
from the Fund for acting in such capacity. The Fund and its investors shall
have no right to place any person on or remove any person from such panel, and
the Fund and its investors shall not consider any member of such panel to be an
investment advisor or other consultant to the Fund, such consultants being
consultants solely to the Advisor. All correspondence, reports and
recommendations made by such consultants shall be solely the property of the
Advisor.
9. EFFECTIVE DATE AND TERM. This Agreement shall commence upon
the Initial Closing Date and shall continue for a period of two years
thereafter unless sooner terminated pursuant to the provisions hereof. After
the initial two-year period, this Agreement shall renew for successive one-year
periods, provided such renewal is approved by the Directors of the Fund,
including the independent Directors, or by a vote of the holders of a majority
of the Fund's outstanding securities.
10. TERMINATION. This Agreement may be terminated on sixty days'
notice by either of the parties, provided that termination by the Fund must be
upon action by its Directors or upon the vote of the holders of a majority of
the Fund's outstanding securities. This Agreement will terminate automatically
upon any attempted assignment thereof by the Advisor.
11. RECEIPT OF FORM ADV. The Fund acknowledges that it has
received and read a copy of the Advisor's Form ADV, Part II as required by Rule
204-3 of the Investment Advisers Act of 1940 and the Fund understands that the
effective date of this Agreement may not be earlier than 48 hours after the
Fund's receipt of such brochure.
12. LIABILITY OF ADVISOR. The Fund expressly acknowledges that
the Advisor does not in any way guarantee that a specific result will be
achieved through the management of the assets of the Fund. The Advisor shall
not be liable to the Fund for
- 2 -
<PAGE> 3
any loss incurred in connection with recommendations made or actions taken or
not taken on the Fund's behalf, or in connection with errors of judgment in
managing the Fund, with the exception of losses resulting from the Advisor's
gross negligence, willful malfeasance or violation of applicable law. The
Advisor shall not be liable for any loss resulting from any act or omission of
the Fund, any custodian, or any brokerage firm. Nothing in this Agreement
shall constitute a waiver of any rights which the Fund may have under
applicable state or federal law.
13. OTHER CLIENTS. The Fund acknowledges that the Advisor may
perform advisory services for various other funds or clients and that the
Advisor may give them advice or take action for their accounts which may differ
from that regarding the Fund.
14. REPRESENTATIONS AND WARRANTIES OF THE FUND. The Fund hereby
represents and warrants that it is authorized to enter into this Agreement, the
terms hereof do not violate any obligation by which it is bound, whether
arising by contract, operation of law or otherwise, there are not conditions,
restrictions or limitations on the investment of its assets by the Advisor or
on any other activity contemplated by this Agreement which are inconsistent
with the terms of this Agreement and all information about the Fund contained
in all documents delivered to the Advisor in connection with this Agreement is
accurate and complete in all material respects. The Fund agrees that it will
promptly notify the Advisor in writing of any material change in its
circumstances that might affect the manner in which the Fund is managed. The
Fund agrees to indemnify the Advisor and its members, officers, employees,
agents and affiliates and hold them harmless against any and all losses, costs,
claims, and liabilities which any of them may suffer or incur arising out of a
breach by the Fund of its representations and warranties contained in this
Agreement.
15. ARBITRATION. The parties hereby agree that all disputes and
controversies, which may arise between the Fund and the Advisor concerning any
transaction or the construction, performance or breach of this or any agreement
between the Fund and the Advisor, whether entered into prior to, on, or
subsequent to the date hereof, shall be determined by arbitration in Charlotte,
North Carolina, in accordance with the rules of the American Arbitration
Association. The parties agree that a decision in any such proceeding shall be
final and binding upon both parties, that Client is waiving its rights to seek
other remedies in court including any rights to a jury trial, that the panel of
arbitrators will typically include persons who were or are affiliated with the
securities industry, that the arbitration process, including discovery, is
generally more limited than a court proceeding and that the arbitrators are not
required in their decision to include factual findings or legal reasoning and
any right to appeal or seek modification of the arbitrators' rulings is
strictly limited.
16. GOVERNING LAW AND SEVERABILITY. This Agreement is governed by
North Carolina Law. Client understands that none of the foregoing shall waive
any rights it may have under applicable federal and state securities laws. It
is understood by the parties hereto that if any term, provision, duty,
obligation or undertaking herein contained is held by the courts to be
unenforceable or illegal or in conflict with applicable state law, the validity
of the remaining portions shall not be affected, and the rights and obligations
of the parties shall be construed and enforced as if such invalid or
enforceable provision was not contained herein.
17. DEFINITIONS. The capitalized terms used in this Agreement, if
not otherwise defined herein, shall have the following meanings:
"Directors" means those persons holding the office of Manager of the
Fund from time to time and referred to as the "Directors" in the Memorandum.
"Initial Closing Date" means the date of the first admission of
investors to the Fund pursuant to the Offering.
"Memorandum" means the Confidential Offering Memorandum of the Fund
dated January 16, 1995, as amended or supplemented.
"Net Asset Value" means the net value of the Fund's assets as
determined by the Directors pursuant to the procedures set forth in Article 15
of the Operating Agreement.
"Operating Agreement" means the Operating Agreement of the Fund, as
set forth as Exhibit A to the Memorandum, as it may be amended or supplemented
from time to time.
"Offering" means the private offering of the Fund's Shares to
accredited investors pursuant to the Memorandum.
- 3 -
<PAGE> 4
"Portfolio Company" means a company in which the Fund has purchased
equity or convertible debt or other securities, but shall not include
short-term money management investments.
"Valuation Date" means December 31 of each year.
18. ASSIGNMENT. This Agreement may not be assigned by either
party.
19. WAIVER. No failure of any party hereto to enforce any
provisions hereof or to resort to any remedy or to exercise any one or more
alternate remedies and no delay in enforcing, resorting to or exercising any
remedy shall constitute a waiver by that party of its right subsequently to
enforce the same or any other provision hereof or to resort to any one or more
of such rights or remedies on account of any such ground then existing or which
may subsequently occur.
20. CAPTIONS. Titles or captions of paragraphs contained in this
Agreement have been inserted only as a matter of convenience and in no way
define, limit, extend, describe or otherwise affect the scope or meaning of
this Agreement or the intent of any provisions hereof.
21. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto on separate counterparts, but all of
such counterparts shall together constitute a single instrument. Any party may
execute and deliver this Agreement by telefax or other facsimile transmission.
22. ENTIRE AGREEMENT. This Agreement shall constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and shall not be supplemented, amended or modified except by a written
instrument executed on behalf of the parties hereto by such parties or their
duly authorized representatives and executed of even date herewith or
subsequent hereto.
IN WITNESS WHEREOF, the parties have executed this Advisory and
Management Agreement as of the date and year first written above.
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
By:
---------------------------------------
Manager
MONTROSE VENTURE PARTNERS, LLC
By:
---------------------------------------
Manager
- 4 -
<PAGE> 1
EXHIBIT 2 (g)(ii)
SOVEREIGN ADVISERS, INC. LETTERHEAD
INVESTMENT ADVISORY AGREEMENT
This Agreement is made by and between SOUTHEAST INTERACTIVE TECHNOLOGY
FUND I, LLC ("Client") and Sovereign Advisors, Inc., a North Carolina
Corporation ("Advisor").
1. APPOINTMENT OF ADVISOR. By execution of this Agreement and
effective as of the effective date set forth in the attached Schedule of Fees,
the Advisor accepts appointment as investment advisor for the Account and will
supervise and direct investments of the Account subject to such limitations as
the Client may communicate in writing to the Advisor from time to time. The
Advisor, as agent and attorney in fact with respect to the Account, when it
deems appropriate, without prior consultation with Client, may, (i) buy, sell,
exchange, convert and otherwise trade in any stocks, bonds and other securities
of every kind and description, and (ii) place orders for the execution of such
securities transactions with or through such brokers, dealers, or issuers as
the Advisor may select. THE ADVISOR SHALL NOT ACT AS CUSTODIAN FOR THE
ACCOUNT.
2. ESTABLISHING ACCOUNT AND EFFECTING TRANSACTIONS. The Advisor shall
have full and complete discretion to establish accounts and to execute
transactions through one or more broker/dealers as The Advisor selects, unless
the Client specifically directs otherwise by written notice. The Client
understands and acknowledges that, as described in Advisor's Form ADV, Part II,
the Advisor may take into consideration a number of factors in selecting
broker/dealers to execute transactions in addition to execution and commission
price, including research information and other services, consistent with all
applicable Federal, State, NASD and exchange regulations and that Portfolio may
be charged commissions on transactions which may be in excess of the amount of
commissions another broker or dealer would have charged. The Client further
understands and agrees that the Advisor may receive certain reimbursements and
services (commonly referred to as "Soft Dollar Compensation") from brokers
executing transactions for the Portfolio based upon, in whole or in part, the
volume of commissions generated by transactions for the Portfolio. In
addition, the Advisor is authorized and empowered to execute any and all
agreements with broker/dealers on the Client's behalf. This authorization is a
continuing one and shall remain in full force and effect until receipt from the
Client of a written notice of its revocation thereof. Unless the Client
designates otherwise and subject to the limitations set forth herein, the
Advisor may execute transactions through or with its affiliate company,
Interstate/Johnson Lane ("IJL"). The Client grants to IJL the authority to
effect agency cross transactions (whereby IJL acts as a broker) or principal
transactions (whereby the Advisor directs IJL to sell securities to the
Account from IJL's inventory or purchase securities from the Account for IJL's
inventory), to the extent permitted by law. The Client's consent to
"principal" transactions contained herein, can be revoked at any time by
written notice to Sovereign Advisers.
3. STANDARD OF CARE. It is agreed that the sole standard of care
imposed upon the Advisor by this Agreement is to act with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like aims. While the
Advisor will make a good faith effort to require brokers and dealers selected
to effect Account transactions to perform their obligations, the Advisor shall
not be responsible for any loss incurred by reason of any act or omission of
any broker, dealer or custodian for the Account. In maintaining its records,
The Advisor does not assume responsibility for the accuracy of information
furnished by Client or any other party.
<PAGE> 2
4. INVESTMENT OBJECTIVES AND RESTRICTIONS. Client has specified in
Schedule A the investment objectives and any specific investment restrictions
which govern the Account. It will be the Client's responsibility to advise the
Advisor of any changes or modifications in the investment objectives of the
Account as well as any additional investment restrictions applicable thereto and
to give the Advisor prompt written notice if Client deems any investments
recommended or made for the Account to be in violation of such objectives or
restrictions. Unless the Client notifies the Advisor in writing of specific
restrictions, the investments recommended for, or made on behalf of the
Account, shall be deemed not to be restricted under the current or future laws
of any state or by virtue of the terms of any other contract or instrument
purporting to bind the Client and the Advisor.
5. PROCEDURES. The operational procedures which shall apply to the
conduct of the Account are set forth in Schedule B and may be modified from
time to time by the Advisor upon prior written notice to the Client.
6. SERVICE TO OTHER CLIENTS. It is understood that the Advisor
performs investment advisory services for various clients and that the Advisor
may give advice and take action with respect to other clients which may differ
from advice given to Client or the timing or nature of action taken with
respect to the Account. The Advisor agrees, to the extent practicable, to
allocate investment opportunities to the Account over a period of time on a fair
and equitable basis relative to other clients.
7. FEES. The Advisor's compensation shall be calculated on the basis
of the market value of all assets under management and shall be paid in
accordance with the attached Schedule of Fees which may be amended by Advisor
from time to time upon thirty (30) days written notice to the Client.
8. TERMINATION. This Agreement may be terminated at any time upon
thirty business days prior to written notice by either party. Fees will be
prorated to date of termination and any unearned portion of prepaid fees will
be refunded to the Client without penalty. The Client shall have the option to
terminate this Agreement without penalty within five business days after the
date of execution; provided, however, that any investment action taken by
Advisor with respect to the Portfolio prior to the effective date of such
termination shall be at the Client's risk.
9. NOTICES. Unless otherwise specified herein, all notices and
instructions with respect to security transactions or any other matters
contemplated by this Agreement shall be deemed duly given when received in
writing by the Advisor at the address first above written or when
hand-delivered or deposited by first-class mail addressed to the Client at the
address appearing below and to the Custodian at such address as it may specify
to the Advisor in writing, or at such other address or addresses as shall be
specified. The Advisor may rely upon any notice (written or oral) from any
person reasonably believed by it to be genuine and authorized.
10. REPRESENTATIONS BY CLIENTS. The Client represents and confirms
that the employment of the Advisor is authorized by the governing documents
relating to the Account and that the terms hereof do not violate any obligation
by which the Client is bound, whether arising by contract, operation of law or
otherwise, and, if the Client is a corporation or trust, that (a) this
Agreement has been duly authorized by appropriate action and when executed and
delivered will be binding upon the Client in accordance with its terms, and (b)
the Client will deliver to the Advisor such evidence of such authority as the
Advisor may reasonably require, whether by way of a certified resolution or
otherwise. The Client agrees to indemnify the Advisor and its affiliates and
hold them harmless against any and all losses costs claims, and liabilities
which any of them may suffer or incur arising out of a breach by the Client of
its representations and warranties contained in this Agreement. The Client
will deliver to the Advisor such evidence of the
<PAGE> 3
Client's authority to act as the Advisor may reasonably require, whether by way
of certified resolution, trust agreement or otherwise.
11. ARBITRATION. The Client hereby agrees that all disputes and
controversies, which may arise between the Client and the Advisor, concerning
any transaction or the construction, performance or breach of this or any
agreement between the Client and the Advisor, whether entered into prior to,
on, or subsequent to the date thereof, shall be determined by arbitration in
Charlotte, North Carolina, in accordance with the securities rules of the
American Arbitration Association. The Client acknowledges that a decision in
any such proceeding shall be final and binding upon both parties, that the
Client is waiving its rights to seek other remedies in court including any
rights to a jury trial, that the panel of arbitrators will typically include
persons who were or are affiliated with the securities industry, that the
arbitration process, including discovery, is generally more limited than a
court proceeding and that the arbitrators are not required in their decision to
include factual findings or legal reasoning and any right to appeal or seek
modification of the arbitrators' rulings is strictly limited.
12. REPRESENTATIONS BY ADVISOR. By execution of this Agreement, the
Advisor represents and confirms that it is registered as an investment advisor
under the Investment Advisors Act of 1940 and that with respect to the
performance of its duties hereunder with respect to the Account (if it is a
qualified employee benefit plan) the Advisor is a "fiduciary" as that term is
defined under the Employee Retirement Income Security Act of 1974.
13. ACKNOWLEDGMENT-OF RECEIPT OF FORM ADV PART II. The Client hereby
acknowledges that the Client has received and read a copy of Advisors Form ADV,
Part II required by Rule 204-3 of the Investment Advisers Act of 1940 and the
Client understands that the effective date of this Agreement may not be earlier
that 48 hours after the Client's receipt of the brochure.
14. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of North Carolina.
Agreed and Accepted this 13th Southeast Interactive
--------- --------------------------------
day of June 19 95 (Client) Technology Fund I, LLC
------------ ------------
By: /s/ David C. Blivin
--------------------------------
in Charlotte, NC
-------------------------------- --------------------------------
(City and State)
(City and State)
SOVEREIGN ADVISERS, INC. 121 W. Trade Street, Suite 2350
Charlotte, NC 28202
By /s/ Jeffry R. Hines Date June 13, 1995
-------------------------------- -----------------------------
Authorized Officer
<PAGE> 4
SCHEDULE A
INVESTMENT OBJECTIVES AND RESTRICTIONS
1. The investment objectives governing the Account are:
to maximize current return with limited fluctuation in principle value in
liquid fixed income securities.
2. Transactions for the Account shall be subject to the following specific
restrictions and limitations (if none, state "none"):
the account shall be invested primarily in securities backed by the U.S.
Government and its agencies. No derivative securities will be permitted.
3. The foregoing investment objectives, restrictions and limitations shall
govern the Account unless and until the Advisor receives written notice from
the Client of any changes to or modifications of the foregoing.
<PAGE> 5
Schedule B
Operational Procedures
1. All transactions will be consummated by payment to, or delivery by, the
Client, or such other party as the Client may designate in writing (the
"Custodian"), of all cash and/or securities due to or from the Account.
THE ADVISOR SHALL NOT ACT AS CUSTODIAN FOR THE ACCOUNT, BUT MAY ISSUE
SUCH INSTRUCTIONS TO THE CUSTODIAN AS MAY BE APPROPRIATE IN CONNECTION
WITH THE SETTLEMENT OF TRANSACTIONS INITIATED BY THE ADVISOR PURSUANT TO
SECTION 1 OF THE AGREEMENT. Instructions of the Advisor to the Client
and/or the Custodian shall be made in writing sent by first-class mail
or, at the option of the Advisor, orally and confirmed in writing as
soon as practical thereafter, and the Advisor shall instruct all brokers
and dealers executing orders on behalf of the account to forward to the
Client and/or the Custodian copies of all confirmations promptly after
execution of transactions.
2. The Advisor shall not have any obligation to purchase or sell, or to
recommend for purchase or sale, for the Account any security which the
Advisor, its principals, affiliates or employees may purchase or sell
for its or their own accounts for the account of any other client, if
in the opinion of the Advisor, such transaction or investment appears
unsuitable, impractical or undesirable for the Account.
3. ALLOCATION OF BROKERAGE. When the Advisor places orders for the
execution of portfolio transactions for the Account, the Advisor may
allocate such transactions to such brokers and dealers for execution on
such markets, at such prices and at such commission rates as in good
faith judgment of the Advisor will be in the best interest of the
Account, taking into consideration in the selection of such brokers and
dealers not only the available prices and rates of brokerage
commissions, but also other relevant factors (such as, without
limitation, execution capabilities, reliability and quality, research
and other brokerage services provided by such brokers or dealers and the
value to clients of an ongoing relationship of the Advisor with such
brokers and dealers) which are expected to enhance the general portfolio
management capabilities of the Advisor, without having to demonstrate
that such factors are of direct benefit to the Account. Consistent with
the foregoing, the Advisor is not obligated to obtain the lowest
possible commission rate so long as the difference in costs is
reasonably justified by the quality of the services offered.
4. REPORTS TO ADVISOR. The Client will provide, or instruct the Custodian
to provide, the Advisor with such periodic reports of the status of the
Account as the Advisor may reasonably request, including written
inventories of the Account investments at least monthly.
5. CONFIDENTIAL RELATIONSHIP. All information and advice furnished by
either party to the other hereunder, including their respective agents
and employees, shall be treated as confidential and shall not be
disclosed to third parties except as required by law.
6. PROXIES. The Advisor will not be required to take any action or
render any advice with respect to the voting of proxies solicited by
or with respect to the issuers of securities in which assets of the
Account may be invested from time to time.
<PAGE> 6
SCHEDULE C
-----------
FEES
-----
<TABLE>
The amount of fees will be billed as follows:
<S> <C> <C>
Time-weighted Assets Under Management 50 Basis Points Per Annum
The fee will be billed quarterly in arrears based upon the average-daily
balance of the preceeding quarter. Any contributions or withdrawals during
the quarter will be time weighted for billing purposes.
</TABLE>
<PAGE> 1
EXHIBIT 2(j)
CUSTODIAN AGREEMENT
THIS CUSTODIAN AGREEMENT, dated as of June 14, 1995 ("Custodian
Agreement"), is by and between SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC, a
North Carolina limited liability company ("Depositor"); and FIRST UNION
NATIONAL BANK OF NORTH CAROLINA, a national banking association, as Custodian
hereunder ("Custodian").
BACKGROUND
A. Depositor, a closed-end private venture capital fund, desires
to engage Custodian to serve as the custodian of its securities and other
investment assets in accordance with the Investment Company Act of 1940 (the
"Investment Company Act").
B. Custodian has agreed to accept, hold, and disburse the
securities and funds deposited with it and the earnings thereon in accordance
with the terms of this Custodian Agreement.
C. In order to establish the custodianship of securities and
investment assets in accordance with the Investment Company Act, the parties
hereto have entered into this Custodian Agreement.
STATEMENT OF AGREEMENT
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
for themselves, their successors and assigns, hereby agree as follows:
1. Definitions. The following terms shall have the
following meanings when used herein:
"Cash Manager" shall mean Sovereign Capital Management, Inc.
d/b/a Sovereign Advisers, Inc., or other financial advisor designated as such
by the Depositor.
"Custody Period" shall mean the period commencing on the date
hereof and ending on the Termination Date as defined herein.
"Depositor Representative" shall mean David C. Blivin or W.
Clay Hamner or any other person designated in a writing signed by Depositor and
delivered to Custodian and the Recipient Representative in accordance with the
notice provisions of this Custodian Agreement, to act as its representative
under this Custodian Agreement.
"Direction" shall mean a joint written direction executed by
the Depositor Representative and one of the Disinterested Directors directing
Custodian to disburse all or a
<PAGE> 2
portion of the Securities or the Funds or to take or refrain from taking an
action pursuant to this Custodian Agreement.
"Directors" or "Board of Directors" means the persons serving
as the managers of the Depositor.
"Disinterested Director" means one of the managers of the
Depositor who is not an "interested person" of Depositor as defined by the
Investment Company Act. Upon execution of this Agreement the Depositor
Representative shall deliver to Custodian a list of the Disinterested
Directors, and the Depositor shall immediately notify the Custodian in writing
upon any changes or additions to, or deletions from, the list of Disinterested
Directors. Custodian may rely conclusively upon the list of Disinterested
Directors as provided from time to time by Depositor and shall not be obligated
to undertake any independent investigation as to the status of a Director.
"Funds" shall mean cash and cash equivalents of the Depositor
held, invested and reinvested by the Custodian in accordance with this
Agreement, together with any interest and other income thereon.
"Securities" shall mean the securities and other investment
assets (other than Funds) deposited with Custodian pursuant to this Agreement,
together with any dividends, interest and other income thereon.
"Termination Date" shall have the meaning ascribed to such
term in Section 23 hereof.
2. Appointment of and Acceptance by Custodian.
Depositor hereby appoints Custodian to serve as custodian hereunder. Custodian
hereby accepts such appointment and, upon receipt of Funds and/or Securities in
accordance with Section 3 below, agrees to hold and disburse the Funds and
Securities in accordance with this Custodian Agreement.
3. Creation of Custodian Accounts. Upon the initial
closing of Depositor's private offering of its securities, Depositor will
transfer the net offering proceeds remaining after the payment of expenses of
the offering, funding of the Depositor's operating account(s), and other
deductions as directed by Depositor, into a cash management account. After the
initial closing, Depositor will deposit subsequent net proceeds received in the
offering (which are not held by Depositor as operating funds in accordance with
the Investment Company Act) into the cash management account.
a. Cash Management Account. The cash management account
created above shall be held by Custodian and the Funds therein shall
be invested in accordance with the instructions of the Cash Manager.
Funds deposited in this account shall be disbursed to purchase
Securities, to make distributions to the equity owners of Depositor,
or for
- 2 -
<PAGE> 3
other purposes as specified by, and upon receipt by Custodian of, a Direction.
b. Securities Custodianship. The Custodian will accept
and maintain physical possession of the stock certificates or other
evidences of ownership of Securities acquired by the Depositor.
Securities held by the Custodian hereunder may be (i) withdrawn only
upon receipt by the Custodian of a Direction in connection with the
sale, exchange, redemption, making of a conversion, the exercise of
warrants or rights, assents to changes in the terms of the Securities,
or other transactions necessary or appropriate in the ordinary course
of business relating to the management of securities; or (ii)
distributed to the equity owners of the Depositor as specified by, and
upon receipt by the Custodian of, a Direction.
Interest, dividends and other current earnings from the investment of
the Cash Management Account and the holding of Securities shall be deposited
into the Cash Management Account unless otherwise directed in writing by the
Depositor Representative. Proceeds from the sale or other disposition of
Securities shall be deposited into the Cash Management Account.
5. Access to Securities. All Securities shall be
physically segregated at all times from those of any other person and shall be
withdrawn only in accordance with this Agreement. Except as otherwise provided
by law, no person shall be authorized or permitted to have access to the
Securities except pursuant to a resolution of the Board of Directors of
Depositor. Each such resolution shall designate not more than five persons who
shall be either Directors or responsible employees of Depositor and shall
provide that access to such Securities shall be had only by two or more such
persons jointly, at least one of whom shall be a Director. Notwithstanding the
foregoing, access shall be permitted (i) to properly authorized officers and
employees of the Custodian and (ii) for purposes of Section 7 hereof, to the
independent public accountant jointly with any two persons so designated by
resolution or such authorized officers or employees of Custodian. Such
Securities shall at all times be subject to inspection by the United States
Securities Exchange Commission through its authorized employees or agents
accompanied, unless otherwise directed by order of such Commission, by one or
more of the persons designated pursuant to this Section 5.
4. Disbursement of Funds.
a. Written Direction. Custodian shall disburse Funds
and transfer Securities, at any time and from time to time, only in
accordance with a Direction consistent with the terms of this
Agreement.
b. Confirmation. Upon the disbursement of Funds from
the cash management account described herein or the transfer
- 3 -
<PAGE> 4
of any Securities, Custodian will promptly confirm such disbursement
and transfer in writing to the Depositor with a copy to the
Disinterested Directors of Depositor.
The investment and reinvestment of Funds pursuant to the
instructions of the Cash Manager shall not be "disbursements" requiring
Direction and confirmation to Disinterested Directors as provided in this
Section 4.
6. Deposit/Withdrawal Notations. Each person depositing
or withdrawing Securities shall sign and deliver to the Custodian a notation in
the form attached hereto as Exhibit A. The Custodian will promptly transmit a
copy of such notation to a Director or other person authorized to receive such
notation by the Board of Directors of Depositor, who shall not be a person
designated for the purposes of Section 5 hereof. The Custodian shall preserve
a copy of each such notation for at least one year thereafter.
7. Verification of Securities. The Securities shall be
verified by actual examination by an independent public accountant retained by
the Depositor at least three times during each calendar year, at least two of
which shall be chosen by the accountant without prior notice to the Depositor.
8. Disbursement Into Court. If, at any time, there
shall exist any dispute between Depositor and Custodian with respect to the
holding or disposition of any portion of the Securities, the Funds or any other
obligations of Custodian hereunder, or if at any time Custodian is unable to
determine, to Custodian's reasonable satisfaction, the proper disposition of
any portion of the Securities or the Funds or Custodian's proper actions with
respect to its obligations hereunder, or if the Depositor has not within 30
days of the furnishing by Custodian of a notice of resignation pursuant to
Section 10 hereof, appointed a successor Custodian to act hereunder, then
Custodian may, in its sole discretion, take either or both of the following
actions:
a. suspend the performance of any of its obligations
under this Custodian Agreement until such dispute or uncertainty shall
be resolved to the reasonable satisfaction of Custodian or until a
successor Custodian shall have been appointed (as the case may be);
provided, however, that Custodian shall continue to invest the Funds
and hold the Securities in accordance with Section 9 hereof; and/or
b. petition (by means of an interpleader action or any
other appropriate method) any court of competent jurisdiction in
Charlotte, North Carolina, for instructions with respect to such
dispute or uncertainty, and pay into such court all Funds and
Securities held by it for holding and disposition in accordance with
the instructions of such court.
- 4 -
<PAGE> 5
Custodian shall have no liability to Depositor, its members or any other person
with respect to any such suspension of performance or disbursement into court,
specifically including any liability or claimed liability that may arise, or be
alleged to have arisen, out of or as a result of any delay in the disbursement
of Funds or Securities or any delay in or with respect to any other action
required or requested of Custodian, except for Custodian's negligence or
intentional misconduct.
9. Investment of Funds. Custodian shall invest and
reinvest the Funds as the Cash Manager shall direct (subject to applicable
minimum investment requirements), provided, however, that no investment or
reinvestment may be made except in the following:
a. direct obligations of the United States of America or
obligations the principal of and the interest on which are
unconditionally guaranteed by the United States of America; or
b. certificates of deposit issued by any bank, bank and
trust company, or national banking association (including Custodian
and its affiliates) with at least $500 million in tangible net worth,
which certificates of deposit are insured by the Federal Deposit
Insurance Corporation or a similar governmental agency.
If Custodian has not received a direction at any time that an
investment decision must be made, Custodian shall invest the Funds, or such
portion thereof as to which no direction has been received, in investments
described in clause (b) above. Each of the foregoing investments shall be made
in the name of Custodian. No investment shall be made in any instrument or
security that has a maturity of greater than six (6) months. Notwithstanding
anything to the contrary contained herein, Custodian may, upon notice to the
Depositor, sell or liquidate any of the foregoing investments at any time if
the proceeds thereof are required for any release of funds permitted or
required hereunder, and Custodian shall not be liable or responsible for any
loss, cost or penalty resulting from any such sale or liquidation. With
respect to any Funds received by Custodian for deposit or any Direction
received by Custodian with respect to investment of any Funds after ten
o'clock, a.m., Charlotte, North Carolina, time, Custodian shall not be required
to invest such Funds or to effect such investment instruction until the next
day upon which banks in Charlotte, North Carolina are open for business.
10. Resignation and Removal of Custodian. Custodian may
resign from the performance of its duties hereunder at any time by giving ten
(10) days' prior written notice to the Depositor or may be removed, with or
without cause, by the Depositor at any time by the giving of ten (10) days'
prior written notice to Custodian. Such resignation or removal shall take
effect upon the appointment of a successor Custodian as provided hereinbelow.
Upon any such notice of resignation or
- 5 -
<PAGE> 6
removal, the Depositor shall appoint a successor Custodian hereunder, which
shall be a commercial bank, trust company or other financial institution with a
combined capital and surplus in excess of $10,000,000. Upon the acceptance in
writing of any appointment as Custodian hereunder by a successor Custodian,
such successor Custodian shall thereupon succeed to and become vested with all
the rights, powers, privileges and duties of the retiring Custodian, and the
retiring Custodian shall be discharged from its duties and obligations under
this Custodian Agreement, but shall not be discharged from any liability for
actions taken as Custodian hereunder prior to such succession. After any
retiring Custodian's resignation or removal, the provisions of this Custodian
Agreement (shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Custodian under this Custodian Agreement.
11. Liability of Custodian. Custodian shall have no
liability or obligations with respect to the Funds or the Securities except for
Custodian's willful misconduct or gross negligence. Custodian's sole
responsibility shall be for the safekeeping, investment, and disbursement of
the Funds and the Securities in accordance with the terms of this Custodian
Agreement. Custodian shall have no implied duties or obligations and shall not
be charged with knowledge or notice of any fact or circumstance not
specifically set forth herein. Custodian may rely upon any instrument, not
only as to its due execution, validity and effectiveness, but also as to the
truth and accuracy of any information contained therein, which Custodian shall
in good faith believe to be genuine, to have been signed or presented by the
person or parties purporting to sign the same and to conform to the provisions
of this Custodian Agreement. In no event shall Custodian be liable for
incidental, indirect, special, consequential or punitive damages. Custodian
shall not be obligated to take any legal action or commence any proceeding in
connection with the Funds or the Securities, any account in which Funds are
deposited, this Custodian Agreement, or to appear in, prosecute or defend any
such legal action or proceeding. Custodian may consult legal counsel selected
by it in the event of any dispute or question as to the construction of any of
the provisions hereof or of any other agreement or of its duties hereunder, and
shall incur no liability and shall be fully protected from any liability
whatsoever in acting in accordance with the opinion or instruction of such
counsel. Depositor shall promptly pay, upon demand, the reasonable fees and
expenses of any such counsel.
12. Indemnification of Custodian. From and at all times
after the date of this Custodian Agreement, Depositor shall, to the fullest
extent permitted by law and to the extent provided herein, indemnify and hold
harmless Custodian and each director, officer, employee, attorney, agent and
affiliate of Custodian (collectively, the "Indemnified Parties") against any
and all actions, claims (whether or not valid), losses, damages, liabilities,
costs and expenses of any kind or nature whatsoever (including without
limitations reasonable attorneys' fees, costs
- 6 -
<PAGE> 7
and expenses) incurred by or asserted against any of the Indemnified
Parties from and after the date hereof, whether direct, indirect or
consequential as a result of or arising from or in any way relating to any
claim, demand, suit action or proceeding (including any inquiry or
investigation) by any person, whether threatened or initiated, asserting a
claim for any legal or equitable remedy against any person under any statute or
regulation, including, but not limited to, any federal or state securities
laws, or under any common law or equitable cause or otherwise, arising from or
in connection with the negotiation, preparation, execution, performance or
failure of performance of this Custodian Agreement or any transactions
contemplated herein, whether or not any such Indemnified Party is a party to
any such action, proceeding, suit or the target of any such inquiry or
investigation; provided, however, that no Indemnified Party shall have the
right to be indemnified hereunder for any liability finally determined by a
court of competent jurisdiction, subject to no further appeal, to have resulted
solely from the gross negligence or willful misconduct of such Indemnified
Party. If any such action or claim shall be brought or asserted against any
Indemnified Party. If any such action or claim shall be brought or asserted
against any Indemnified Party, such Indemnified Party shall promptly notify
Depositor in writing, and Depositor shall assume the defense thereof, including
the employment of counsel and the payment of all expenses. Such Indemnified
Party shall, in its sole discretion, have the right to employ separate counsel
in any such action and to participate in the defense thereof, and the fees and
expenses of such counsel shall be paid by such Indemnified Party unless (a)
Depositor agrees to pay such fees and expenses, or (b) Depositor shall fail to
assume the defense of such action or proceeding or shall fail, in the
reasonable discretion of such Indemnified Party, to employ counsel satisfactory
to the Indemnified Party in any such action or proceeding, or (c) that named
parties to any such action or proceeding (including any impleaded parties)
include both Indemnified Party and Depositor, and Indemnified Party shall have
been advised by counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to Depositor.
All such fees and expenses payable by Depositor pursuant to the foregoing
sentence shall be paid from time to time as incurred, both in advance of and
after the final disposition of such action or claim. All of the foregoing
losses, damages, costs and expenses of the Indemnified Parties shall be payable
by Depositor and Recipient, jointly and severally, upon demand by such
Indemnified Party. The obligations of Depositor under this Section 12 shall
survive any termination of this Custodian Agreement and the resignation or
removal of Custodian.
13. Fees and Expenses of Custodian. Depositor shall
compensate Custodian for its services hereunder in accordance with Schedule 1
attached hereto and, in addition, shall reimburse Custodian for all of its
reasonable out-of-pocket expenses, including attorneys' fees, travel expenses,
telephone and facsimile transmission costs, postage (including express mail and
- 7 -
<PAGE> 8
overnight delivery charges), copying charges and the like. All of the
compensation and reimbursement obligations set forth in this Section 13 shall
be payable by Depositor upon demand by Custodian. The obligations of Depositor
under this Section 13 shall survive any termination of this Custodian Agreement
and the resignation or removal of Custodian.
Custodian is authorized to, and may, disburse to itself from
the Escrow Funds, from time to time, the amount of any compensation and
reimbursement of out-of-pocket expenses due and payable hereunder (including
any amount to which Custodian or any Indemnified Party is entitled to seek
indemnification pursuant to Section 12 hereof.) Custodian shall notify the
Depositor Representative of any disbursement from the Escrow Funds to itself or
any Indemnified Party in respect of any compensation or reimbursement hereunder
and shall furnish to the Depositor Representative copies of all related
invoices and other statements. Depositor hereby grants to Custodian and the
Indemnified Parties a security interest in and lien upon the Funds and all
funds therein to secure all obligations hereunder to Custodian and the
Indemnified Parties, and Custodian and Indemnified Parties shall have the right
to offset the amount of any compensation or reimbursement due any of them
hereunder (including any claim for indemnification pursuant to Section 12
hereof) against the Escrow Funds. If for any reason funds in the Escrow Funds
are insufficient to cover such compensation and reimbursement, Depositor shall
promptly pay such amounts to Custodian or any Indemnified Party upon receipt of
an itemized invoice.
14. Representations and Warranties. Depositor makes the
following representations and warranties to Custodian:
(a) Depositor is a limited liability company, duly
organized, validly existing and in good standing under the
laws of the State of North Carolina, and has full power and
authority to execute and deliver this Custodian Agreement and
to perform its obligations hereunder;
(b) This Custodian Agreement has been duly approved
by all necessary action of Depositor, has been executed by
duly authorized managers of Depositor, and constitutes a valid
and binding agreement of Depositor, enforceable in accordance
with its terms.
(c) The execution, delivery and performance by
Depositor of this Custodian Agreement will not violate,
conflict with, or cause a default under the articles of
organization or operating agreement of Depositor, any
applicable law or regulation, any court order or
administrative ruling or decree to which Depositor is a party
or any of its property is subject, or any agreement, contract,
indenture, or other binding
- 8 -
<PAGE> 9
arrangement, to which Depositor is a party or any of its
property is subject.
(d) David C. Blivin or W. Clay Hamner, or either of
them, is hereby duly appointed to act as the representative of
Depositor hereunder and has full power and authority to
execute, deliver, and cause the Depositor to perform this
Custody Agreement, to execute and deliver any Direction on
behalf of the Depositor and to take any and all other actions
as the Depositor Representative under this Agreement, all
without further consent or direction from, or notice to,
Depositor or any other party.
(e) No party other that the parties hereto have, or
shall have, any lien, claim or security interest in the Funds
or the Securities or any part thereof. No financing statement
under the Uniform Commercial Code is on file in any
jurisdiction claiming a security interest in or describing
(whether specifically or generally) the Funds or the
Securities or any part thereof.
(f) All of the representations and warranties of
Depositor contained herein are true and complete as of the
date hereof and will be true and complete at the time of any
disbursement from the Funds.
15. Consent to Jurisdiction and Venue. In the event that
any party hereto commences a lawsuit or other proceeding relating to or arising
from this Agreement, the parties hereto agree that the United States District
Court for the Western District of North Carolina shall have the sole and
exclusive jurisdiction over any such proceeding. If all such courts lack
federal subject matter jurisdiction, the parties agree that the Superior Court
Division of the General Court of Justice of Mecklenburg County, North Carolina
shall have sole and exclusive jurisdiction. Any of these courts shall be
proper venue for any such lawsuit or judicial proceeding and the parties hereto
waive any objection to such venue. The parties hereto consent to and agree to
submit to the jurisdiction of any of the courts specified herein and agree to
accept service or process to vest personal jurisdiction over them in any of
these courts.
16. Notice. All notices and other communications
hereunder shall be in writing and shall be deemed to have been validly served,
given or delivered five (5) days after deposit in the United States mails, by
certified mail with return receipt requested and postage prepaid, when
delivered personally, one (1) day after delivery to any overnight courier, or
when transmitted by facsimile transmission facilities, and addressed to the
party to be notified as follows:
- 9 -
<PAGE> 10
If to Depositor at: Southeast Interactive Technology Fund I, LLC
2200 West Main Street, Suite 900
Durham, North Carolina 27705
ATTENTION: David C. Blivin
Facsimile Number: (704) 286-4031
If to the
Custodian at: First Union National Bank of
North Carolina, as Custodian
Corporate Trust Department
230 South Tryon Street, 8th Floor
Charlotte, NC 28288-1179
ATTENTION: Karen Atkinson
Facsimile Number: (704) 383-7316
or to such other address as each party may designate for itself by like notice.
17. Amendment or Waiver. This Custodian Agreement may be
changed, waived, discharged or terminated only by a writing signed by the
Representatives and Custodian. No delay or omission by any party in exercising
any right with respect hereto shall operate as a waiver. A waiver on any one
occasion shall not be construed as a bar to, or waiver of, any right or remedy
on any future occasion.
18. Severability. To the extent any provision of this
escrow Agreement is prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining
provisions of this Custodian Agreement.
19. Governing Law. This Custodian Agreement shall be
construed and interpreted in accordance with the internal laws of the State of
North Carolina without giving effect to the conflict of laws principles
thereof.
20. Entire Agreement. This Custodian Agreement
constitutes the entire agreement between the parties relating to the holding,
investment and disbursement of the Escrow Funds and sets forth in their
entirety the obligations and duties of Custodian with respect to the Securities
and the Funds.
21. Binding Effect. All of the terms of this Custodian
Agreement, as amended from time to time, shall be binding upon, inure to the
benefit of and be enforceable by the respective heirs, successors and assigns
of Depositor and the Custodian.
22. Execution in Counterparts. This Custodian Agreement
may be executed in two or more counterparts, which when so executed shall
constitute one and the same agreement or direction.
- 10 -
<PAGE> 11
23. Termination. Upon the first to occur of (i) the
disbursement of all amounts in the Funds and all of the Securities pursuant to
Directions; (ii) the appointment of a successor Custodian pursuant to this
Agreement, the execution of a custodian agreement with such successor and the
transfer of all Funds and Securities to such successor; or (iii) the
disbursement of all amounts in the Funds and the deposit of the Securities into
court pursuant to Section 8 hereof (the "Termination Date"), this Custodian
Agreement shall terminate and Custodian shall have no further obligation or
liability whatsoever with respect to this Custodian Agreement, the Securities
or the Funds.
24. Subject to the provisions of applicable law, the
Custodian and any stockholder, director, officer or employee of the Custodian
may buy, sell, and deal in any of the securities of Depositor and become
pecuniarily interested in any transaction in which the Depositor may be
interested, and contract and lend money to Depositor and otherwise act as fully
and freely as though it were not Custodian under this Agreement. Nothing
herein shall preclude the Custodian from acting in any other capacity for
Depositor or for any other entity.
- 11 -
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have caused this Custodian
Agreement to be executed under seal as of the date first above written.
DEPOSITOR
SOUTHEAST INTERACTIVE TECHNOLOGY
FUND I, LLC
By: ______________________________
Manager
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, AS CUSTODIAN
By:________________________________
Title:_____________________________
- 12 -
<PAGE> 13
SCHEDULE 1
Fees Payable to Custodian
<PAGE> 14
No. ________
EXHIBIT A
TO
CUSTODIAN AGREEMENT
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
NOTATION
FOR
DEPOSIT/WITHDRAWAL OF SECURITIES OR FUNDS
_______ Deposit _____ Withdrawal
1. Date and time of deposit/withdrawal: ____________________________
2. Title and amount of
Securities or Funds
deposited or withdrawn: ___________________________________
___________________________________
___________________________________
3. Manner of acquisition or purpose
for withdrawal: ___________________________________
___________________________________
___________________________________
___________________________________
___________________________________
4. If withdrawal, name of person to
whom delivered: ___________________________________
Custodian:
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, N.A.
By: _________________________
[Transmit promptly to appropriate representative of Southeast Interactive
Technology Fund I, LLC (the "Fund") as provided in Section 6 of the
Custodian Agreement between the Fund and the Custodian.]
<PAGE> 1
EXHIBIT 2(k)(i)
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of January 16, 1995, ("Escrow
Agreement"), is by and between INTERSTATE/JOHNSON LANE CORPORATION, a North
Carolina corporation ("Underwriter"); SOUTHEAST INTERACTIVE TECHNOLOGY FUND I,
LLC, a North Carolina limited liability company, ("Issuer"); and FIRST UNION
NATIONAL BANK OF NORTH CAROLINA, a national banking association, as Escrow
Agent hereunder ("Escrow Agent").
BACKGROUND
A. Issuer has engaged Underwriter as its agent to sell up to One
Thousand (1000) shares of limited liability company membership interest (the
"Shares") at Twenty-Five Thousand Dollars ($25,000) per Share on a "best
efforts" basis, pursuant to the Confidential Private Placement Memorandum of
the Issuer dated January 16, 1995 and attached hereto as Exhibit A (the
"Offering Document").
B. In accordance with the Offering Document, subscribers to the
Shares (the "Subscribers" and individually, a "Subscriber") will be required to
submit full payment for their respective investments at the time they enter
into subscription agreements.
C. In accordance with the Offering Documents, all payments
received by Underwriter in connection with subscriptions for Shares shall be
promptly forwarded to Escrow Agent, and Escrow Agent has agreed to accept, hold
and disburse such funds deposited with it and the earnings thereon in
accordance with the terms of this Escrow Agreement.
D. In order to establish the escrow of funds and to effect the
provisions of the Offering Document, the parties hereto have entered into this
Escrow Agreement.
STATEMENT OF AGREEMENT
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
for themselves, their successors and assigns, hereby agree as follows:
1. Definitions. The following terms shall have the following
meanings when used herein:
"Cash Investment" shall mean the number of Shares to be
purchased by any Subscriber multiplied by the offering price per Share of
$25,000 as set forth in the Offering Document.
<PAGE> 2
"Cash Investment Instrument" shall mean a check, money order
or similar instrument, made payable to "First Union National Bank as Escrow
Agent for Southeast Interactive Technology Fund," in full payment for the
Shares to be purchased by any Subscriber.
"Escrow Funds" shall mean the funds deposited with Escrow
Agent pursuant to this Agreement, together with any interest and other income
thereon.
"Minimum Offering" shall mean Four Hundred (400) Shares.
"Minimum Offering Notice" shall mean a written notification,
signed by Underwriter, which shall specify that subscriptions for the Minimum
Offering have been received; that, to the best of Underwriter's knowledge after
due inquiry and review of its records, Cash Investment Instruments in full
payment for that number of Shares equal to or greater than the Minimum Offering
have been received, deposited with and collected by Escrow Agent; and that such
subscriptions have not been withdrawn, rejected or otherwise terminated.
"Pro Rata Basis," with respect to the allocation among
Subscribers of interest and other earnings held in the Escrow Funds, shall
mean, for each Subscriber, the Subscriber's Cash Investment multiplied by the
number of days the Cash Investment of such Subscriber was held in
interest-bearing investments pursuant to Section 6 hereof, multiplied by the
average yield earned on the Escrow Funds during such period of days.
"Shares" shall have the meaning set forth in the section of
this Escrow Agreement titled "Background".
"Subscriber" or "Subscribers" shall have the meaning set forth
in the section of this Escrow Agreement titled "Background".
"Subscription Accounting" shall mean an accounting of all
subscriptions for Shares received and accepted by Underwriter as of the date of
such accounting, indicating for each subscription the Subscriber's name, social
security number and address, the number and total purchase price of subscribed
Shares, the date of receipt by Underwriter of the Cash Investment Instrument,
and notations of any nonpayment of the Cash Investment Instrument submitted
with such subscription, any withdrawal of such subscription by the Subscriber,
any rejection of such subscription by Underwriter, or other termination, for
whatever reason, of such subscription.
2. Appointment of and Acceptance by Escrow Agent. Issuer and
Underwriter hereby appoint Escrow Agent to serve as escrow agent hereunder, and
Escrow Agent hereby accepts such appointment in accordance with the terms of
this Escrow Agreement.
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<PAGE> 3
3. Deposits into Escrow.
a. Upon receipt by Underwriter of any Cash Investment
Instrument for the purchase of Shares, Underwriter shall forward to
Escrow Agent, by 12:00 noon of the next business day, the Cash
Investment Instrument for deposit into the following escrow account:
First Union National Bank of North Carolina
Charlotte, North Carolina
ABA # 053000219
ATTN: Corporate Trust Department
for: Southeast Interactive Technology Fund I, LLC
Escrow Account
Notify Karen Atkinson (704) 374-2670
Each such deposit shall be accompanied by the following documents:
(1) a completed W-9 Form for each of the Subscribers to
which such deposit relates, containing such
Subscriber's name, social security number or taxpayer
identification number, address and other information
required for withholding purposes;
(2) a Subscription Accounting; and
(3) instructions regarding the investment of such
deposited funds in accordance with Section 6 hereof.
ALL FUNDS SO DEPOSITED SHALL REMAIN THE PROPERTY OF THE SUBSCRIBERS
ACCORDING TO THEIR RESPECTIVE INTERESTS AND SHALL NOT BE SUBJECT TO ANY LIEN OR
CHARGE BY ESCROW AGENT OR BY JUDGMENT OR CREDITORS' CLAIMS AGAINST ISSUER UNTIL
RELEASED TO ISSUER IN ACCORDANCE WITH SECTION 4(A) HEREOF.
b. Underwriter and Issuer understand and agree that all
checks and similar instruments received by Escrow Agent hereunder are
subject to collection requirements of presentment and final payment,
and that the funds represented thereby cannot be drawn upon or
disbursed until such time as final payment has been made and is not
longer subject to dishonor. Upon receipt, Escrow Agent shall process
each Cash Investment Instrument for collection, and the proceeds
thereof shall be held as part of the Escrow Funds until disbursed in
accordance with
Section 4 hereof. If, upon presentment for payment,
any Cash Investment Instrument is dishonored, Escrow Agent's sole
obligation shall be to notify Underwriter of such dishonor and to
return such Cash Investment Instrument to Underwriter to take whatever
action it deems necessary. Notwithstanding the foregoing, if for any
reason any Cash Investment Instrument is uncollectible after payment
of the funds represented thereby has been made by Escrow Agent, Issuer
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<PAGE> 4
shall immediately reimburse Escrow Agent upon receipt from Escrow
Agent of written notice thereof.
4. Disbursement of Escrow Funds.
a. Completion of Minimum Offering. Subject to the
provisions of Section 10 hereof, Escrow Agent shall pay to Issuer the
liquidated value of the Escrow Funds, by certified or bank check or by
wire transfer, no later than five (5) business days following receipt
of the following documents:
(1) A Minimum Offering Notice;
(2) Subscription Accounting, substantiating the
sale of the Minimum Offering; and
(3) Such other certificates, notices or other
documents as Escrow Agent shall reasonably
require.
Notwithstanding the foregoing, Escrow Agent shall not be obligated to
disburse the Escrow Funds to Issuer if Escrow Agent has grounds to believe that
(a) Cash Investment Instruments in full payment for that number of Shares equal
to or greater than the Minimum Offering have not been received, deposited with
and collected by the Escrow Agent, or (b) any of the certifications set forth
herein or in the documents described above are incorrect or incomplete.
After the disbursement of Escrow Funds to Issuer pursuant to this
Section 4(a), this Agreement shall terminate. In the event Escrow Agent
receives any additional funds with respect to Shares after such termination,
Escrow Agent shall pay such additional funds to Issuer by certified or bank
check or wire transfer, no later than five (5) business days after receipt.
b. Rejection of Any Subscription or Termination of the
Offering. No later than five (5) business days after receipt by
Escrow Agent of written notice (i) from Issuer or Underwriter than
Underwriter intends to reject a Subscriber's subscription, (ii) from
Issuer or Underwriter that there will be no closing of the sale of
Shares to Subscribers, or (iii) from the United States Securities
Exchange Commission ("SEC") or any other federal or state regulatory
authority that a stop order has been issued with respect to the
Offering Document and has remained in effect for at least twenty (20)
days, Escrow Agent shall pay to the applicable Subscriber(s), by
certified or bank check and by first class mail, the amount of the
Cash Investment paid by each Subscriber, and shall pay as soon as
practicable to the applicable Subscriber(s), by certified or bank
check and by first class mail, each Subscriber's share of income
earned on the Escrow Funds (net of such Subscriber's share of
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<PAGE> 5
expenses), each such share to be calculated on a Pro Rata Basis.
c. Expiration of Offering Period. Notwithstanding
anything to the contrary contained herein, if Escrow Agent shall not
have received a Minimum Offering Notice on or before May 31, 1995 (or
August 31, 1995 if on or before May 31, 1995 Issuer notifies Escrow
Agent in writing that Issuer has elected to extend the offering
period), Escrow Agent shall, within five (5) business days after such
date and without further instruction or direction from Underwriter or
Issuer, return to each Subscriber, by certified or bank check and by
first class mail, the Cash Investment made by such Subscriber, and
shall pay as soon as practicable to the applicable Subscriber(s), by
certified or bank check and by first class mail, each Subscriber's
share of income earned on the Escrow Funds (net of such Subscriber's
share of expenses), each such share to be calculated on a Pro Rata
Basis.
5. Suspension of Performance or Disbursement Into Court. If, at
any time, there shall exist any dispute between Underwriter, Issuer, Escrow
Agent, any Subscriber or any other person with respect to the holding or
disposition of any portion of the Escrow Funds or any other obligations of
Escrow Agent hereunder, or if at any time Escrow Agent is unable to determine,
to Escrow Agent's sole satisfaction, the proper disposition of any portion of
the Escrow Funds or Escrow Agent's proper actions with respect to its
obligations hereunder, or if Underwriter and Issuer have not within 30 days of
the furnishing by Escrow Agent of a notice of resignation pursuant to Section 7
hereof, appointed a successor Escrow Agent to act hereunder, then Escrow Agent
may, in its sole discretion, take either or both or the following actions:
a. suspend the performance of any of its obligations
under this Escrow Agreement until such dispute or uncertainty shall be
resolved to the sole satisfaction of Escrow Agent or until a successor
Escrow Agent shall have been appointed (as the case may be); provided,
however, that Escrow Agent shall continue to invest the Escrow Funds
in accordance with Section 6 hereof; and/or
b. petition (by means of an interpleader action or any
other appropriate method) any court of competent jurisdiction in
Charlotte, North Carolina, for instructions with respect to such
dispute or uncertainty, and pay into such court all funds held by it
in the Escrow Funds for holding and disposition in accordance with the
instructions of such court.
Escrow Agent shall have no liability to Underwriter, Issuer, any Subscriber or
any other person with respect to any such suspension of performance or
disbursement into court, specifically including any liability or claimed
liability that
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<PAGE> 6
may arise, or be alleged to have arisen, out of or as a result of any delay in
the disbursement of funds held in the Escrow Funds or any delay in or with
respect to any other action required or requested of Escrow Agent.
6. Investment of Funds. Escrow Agent shall invest and reinvest
the Escrow Funds as Underwriter shall direct (subject to applicable minimum
investment requirements) in writing; provided, however, that no investment or
reinvestment may be made except in the following:
a. First Union Funds Treasury Market Portfolio; or
b. Fidelity Institutional Cash U.S. Treasury Portfolio.
If Escrow Agent has not received written instructions from Underwriter
at any time that an investment decision must be made, Escrow Agent shall invest
the Escrow Funds, or such portion thereof as to which no written instructions
have been received, in investments described in clause (b) above. Each of the
foregoing investments shall be made in the name of Escrow Agent in its stated
capacity as escrow agent. No investment shall be made in any instrument or
security that has a maturity of greater than twenty-four (24) hours unless such
instrument or security is specifically approved by the Issuer and may be
liquidated without penalty or loss of interest upon twenty-four (24) hours
notice. Notwithstanding anything to the contrary contained herein, Escrow
Agent may, without notice to Underwriter or Issuer, sell or liquidate any of
the foregoing investments at any time if the proceeds thereof are required for
any release of funds permitted or required hereunder, and Escrow Agent shall
not be liable or responsible for any loss, cost or penalty resulting from any
such sale or liquidation. With respect to any funds received by Escrow Agent
for deposit into the Escrow Funds or any written investment instruction of
Underwriter received by Escrow Agent after ten o'clock, a.m., Charlotte, North
Carolina, time, Escrow Agent shall not be required to invest such funds or to
effect such investment instruction until the next day upon which banks in
Charlotte, North Carolina are open for business.
7. Resignation and Removal of Escrow Agent. Escrow Agent may
resign from the performance of its duties hereunder at any time by giving ten
(10) days' prior written notice to Underwriter and Issuer or may be removed,
with or without cause, by Underwriter or Issuer, acting jointly in writing, at
any time by the giving of ten (10) days' prior written notice to Escrow Agent.
Such resignation or removal shall take effect upon the appointment of a
successor Escrow Agent as provided hereinbelow. Upon any such notice of
resignation or removal, Underwriter and Issuer jointly shall appoint a
successor Escrow Agent hereunder, which shall be a commercial bank, trust
company or other financial institution with a combined capital and surplus in
excess of $10,000,000. Upon the acceptance in writing of any appointment as
Escrow Agent hereunder by a successor Escrow
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<PAGE> 7
Agent, such successor Escrow Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of the retiring Escrow
Agent, and the retiring Escrow Agent shall be discharged from its duties and
obligations under this Escrow Agreement, but shall not be discharged from any
liability for actions taken as Escrow Agent hereunder prior to such succession.
After any retiring Escrow Agent's resignation or removal, the provisions of
this Escrow Agreement (shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was Escrow Agent under this Escrow
Agreement.
8. Liability of Escrow Agent. Escrow Agent shall have no
liability or obligation with respect to the Escrow Funds except for Escrow
Agent's willful misconduct or gross negligence. Escrow Agent's sole
responsibility shall be for the safekeeping, investment, and disbursement of
the Escrow Funds in accordance with the terms of this Escrow Agreement. Escrow
Agent shall have no implied duties or obligations and shall not be charged with
knowledge or notice of any fact or circumstance not specifically set forth
herein. Escrow Agent may rely upon any instrument, not only as to its due
execution, validity and effectiveness, but also as to the truth and accuracy of
any information contained therein which Escrow Agent shall in good faith
believe to be genuine, to have been signed or presented by the person or
parties purporting to sign the same and to conform to the provisions of this
Escrow Agreement. In no event shall Escrow Agent be liable for incidental,
indirect, special, consequential or punitive damages. Escrow Agent shall not
be obligated to take any legal action or commence any proceeding in connection
with the Escrow Funds or any account in which Escrow Funds are deposited or
this Escrow Agreement, or to appear in, prosecute or defend any such legal
action or proceeding. Without limiting the generality of the foregoing, Escrow
Agent shall not be responsible for or required to enforce any of the terms or
conditions of any subscription agreement with any Subscriber or any other
agreement between Issuer, Underwriter and/or any Subscriber. Escrow Agent
shall not be responsible or liable in any manner for the performance by Issuer
or any Subscriber of their respective obligations under any subscription
agreement nor shall Escrow Agent be responsible or liable in any manner for the
failure of Issuer, Underwriter or any third party (including any Subscriber) to
honor any of the provisions of this Escrow Agreement. Escrow Agent may consult
legal counsel selected by it in the event of any dispute or question as to the
construction of any of the provisions hereof or of any other agreement or of
its duties hereunder, and shall incur no liability and shall be fully protected
from any liability whatsoever in acting in accordance with the opinion or
instruction of such counsel. Issuer shall promptly pay, upon demand, the
reasonable fees and expenses of any such counsel.
9. Indemnification of Escrow Agent. From and at all times after
the date of this Escrow Agreement, Issuer shall, to the fullest extent
permitted by law and to the extent provided herein, indemnify and hold harmless
Escrow Agent and each
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<PAGE> 8
director, officer, employee, attorney, agent and affiliate of Escrow Agent
(collectively, the "Indemnified Parties") against any and all actions, claims
(whether or not valid), losses, damages, liabilities, costs and expenses of any
kind or nature whatsoever (including without limitations reasonable attorneys'
fees, costs and expenses) incurred by or asserted against any of the
Indemnified Parties from and after the date hereof, whether direct, indirect or
consequential as a result of or arising from or in any way relating to any
claim, demand, suit action or proceeding (including any inquiry or
investigation) by any person, whether threatened or initiated, asserting a
claim for any legal or equitable remedy against any person under any statute or
regulation, including, but not limited to, any federal or state securities
laws, or under any common law or equitable cause or otherwise, arising from or
in connection with the negotiation, preparation, execution, performance or
failure of performance of this Escrow Agreement or any transactions
contemplated herein, whether or not any such Indemnified Party is a party to
any such action, proceeding, suit or the target of any such inquiry or
investigation; provided, however, that no Indemnified Party shall have the
right to be indemnified hereunder for any liability finally determined by a
court of competent jurisdiction, subject to no further appeal, to have resulted
solely from the gross negligence or willful misconduct of such Indemnified
Party. If any such action or claim shall be brought or asserted against any
Indemnified Party, such Indemnified Party shall promptly notify Issuer in
writing, and Issuer shall assume the defense thereof, including the employment
of counsel and the payment of all expenses. Such Indemnified Party shall, in
its sole discretion, have the right to employ separate counsel in any such
action and to participate in the defense thereof, and the fees and expenses of
such counsel shall be paid by such Indemnified Party unless (a) Issuer agrees
to pay such fees and expenses, or (b) Issuer shall fail to assume the defense
of such action or proceeding or shall fail, in the reasonable discretion of
such Indemnified Party, to employ counsel satisfactory to the Indemnified Party
in any such action or proceeding, or (c) that named parties to any such action
or proceeding (including any impleaded parties) include both Indemnified Party
and Issuer, and Indemnified Party shall have been advised by counsel that there
may be one or more legal defenses available to it which are different from or
additional to those available to Issuer. All such fees and expenses payable by
Issuer pursuant to the foregoing sentence shall be paid from time to time as
incurred, both in advance of and after the final disposition of such action or
claim. The obligations of Issuer and Underwriter under this Section 9 shall
survive any termination of this Escrow Agreement and the resignation or removal
of Escrow Agent.
10. Compensation to Escrow Agent.
a. Fees and Expenses. Issuer shall compensate Escrow
Agent for its services hereunder in accordance with Exhibit B attached
hereto and, in addition, shall reimburse
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<PAGE> 9
Escrow Agent for all of its reasonable out-of-pocket expenses,
including attorneys' fees, travel expenses, telephone and facsimile
transmission costs, postage (including express mail and overnight
delivery charges), copying charges and the like. All of the
compensation and reimbursement obligations shall be payable by Issuer
upon demand by Escrow Agent, provided that Escrow Agent's fees shall
be paid first out of earnings on the Escrow Funds. The obligations of
Issuer and Underwriter under this Section 10 shall survive any
termination of this Escrow Agreement and the resignation or removal of
Escrow Agent.
b. Disbursements from Escrow Funds to Pay Escrow Agent.
The Escrow Agent is authorized to and may disburse from time to time,
to itself or to any Indemnified Party from the Escrow Funds (to the
extent of Issuer's rights thereto), the amount of any compensation and
reimbursement of out-of-pocket expenses due and payable hereunder
(including any amount to which Escrow Agent or any Indemnified Party
is entitled to seek indemnification pursuant to Section 9 hereof.)
Escrow Agent shall notify Issuer of any disbursement from the Escrow
Funds to itself or to any Indemnified Party in respect of any
compensation or reimbursement hereunder and shall furnish to Issuer
copies of all related invoices and other statements.
c. Security and Offset. Issuer hereby grants to Escrow
Agent and the Indemnified Parties a security interest in and lien upon
the Escrow Funds (to the extent of Issuer's rights thereto) to secure
all obligations hereunder, and Escrow Agent and the Indemnified
Parties shall have the right to offset the amount of any compensation
or reimbursement due any of them hereunder (including any claim for
indemnification pursuant to Section 9 hereof) against the Escrow Funds
(to the extent of Issuer's rights thereto). If for any reason the
Escrow Funds available to Escrow Agent and the Indemnified Parties
pursuant to such security interest or right or offset are insufficient
to cover such compensation and reimbursement, Issuer shall promptly
pay such amounts to Escrow Agent and the Indemnified Parties upon
receipt of an itemized invoice.
11. Representations and Warranties; Legal Opinions.
a. Issuer makes the following representations and
warranties to Escrow Agent:
(1) Issuer is a limited liability company duly
organized, validly existing, and in good standing under the
laws of the State of North Carolina, and has full power and
authority to execute and deliver this Escrow Agreement and to
perform its obligations hereunder;
(2) This Escrow Agreement has been duly approved
by all necessary action of Issuer, has been executed by
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<PAGE> 10
duly authorized managers of Issuer, and constitutes a valid and
binding agreement of Issuer, enforceable in accordance with
its terms.
(3) The execution, delivery and performance by
Issuer of this Escrow Agreement will not violate, conflict
with, or cause a default under the articles of incorporation
or bylaws of Issuer, any applicable law or regulation, any
court order or administrative ruling or decree to which Issuer
is a party or any of its property is subject, or any
agreement, contract, indenture, or other binding arrangement
to which Issuer is a party or any of its property is subject.
The execution, delivery and performance of this Agreement is
consistent with and accurately described in the Offering
Document, and the allocation of interest and other earnings to
Subscribers, as set forth in Sections 4(b) and 4(c) hereof,
has been properly described therein.
(4) No party other that the parties hereto have
and the prospective Subscribers have, or shall have, any lien,
claim or security interest in the Escrow Funds or any part
thereof. No financing statement under the Uniform Commercial
Code is on file in any jurisdiction claiming a security
interest in or describing (whether specifically or generally)
the Escrow Funds or any part thereof.
(5) Issuer hereby acknowledges and agrees that
the status of Escrow Agent is that of agent only for the
limited purposes set forth herein, and hereby represents and
covenants that no representation or implication shall be made
that the Escrow Agent has investigated the desirability or
advisability of investment in the Shares or has approved,
endorsed or passed upon the merits of the investment therein
and that the name of the Escrow Agent has not and shall not be
used in any manner in connection with the offer or sale of the
Shares other than to state that the Escrow Agent has agreed to
serve as escrow agent for the limited purposes set forth
herein.
(6) All of the representations and warranties of
Issuer contained herein are true and complete as of the date
hereof and will be true and complete at the time of any
disbursement from the Escrow Funds.
b. Underwriter makes the following representations and
warranties to Escrow Agent:
(1) Underwriter is a corporation duly organized,
validly existing, and in good standing under the laws of the
State of North Carolina, and has full power and
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<PAGE> 11
authority to execute and deliver this Escrow Agreement and to
perform its obligations hereunder;
(2) This Escrow Agreement has been duly approved
by all necessary corporate action of Underwriter, has been
executed by duly authorized officers of Underwriter, and
constitutes a valid and binding agreement of Underwriter,
enforceable in accordance with its terms.
(3) The execution, delivery, and performance by
Underwriter of this Escrow Agreement will not violate,
conflict with, or cause a default under the articles of
incorporation or bylaws of Underwriter, any applicable law or
regulation, any court order or administrative ruling or decree
to which Underwriter is a party or any of its property is
subject, or any agreement, contract, indenture, or other
binding arrangement to which Underwriter is a party or any of
its property is subject. The execution, delivery and
performance of this Agreement is consistent with and
accurately described in the Offering Document, and the
allocation of interest and other earnings to Subscribers, as
set forth in Sections 4(b) and 4(c) hereof, has been properly
described therein.
(4) The deposit with Escrow Agent by Underwriter
of Cash Investment Instruments pursuant to Section 3 hereof
shall be deemed a representation and warranty by Underwriter
that such Cash Investment Instrument represents a bona fide
sale to the Subscriber described therein of the amount of
Shares set forth therein, subject to and in accordance with
the terms of the Offering Document.
(5) Underwriter hereby acknowledges that the
status of Escrow Agent is that of agent only for the limited
purposes set forth herein, and hereby represents and covenants
that no representation or implication shall be made that the
Escrow Agent has investigated the desirability or advisability
of investment in the Shares or has approved, endorsed or
passed upon the merits of the investment therein and that the
name of the Escrow Agent has not and shall not be used in any
manner in connection with the offer or sale of the Shares
other than to state that the Escrow Agent has agreed to serve
as escrow agent for the limited purposes set forth herein.
(6) All of the representations and warranties of
Underwriter contained herein are true and complete as of the
date hereof and will be true and complete at the time of any
disbursement from the Escrow Funds.
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<PAGE> 12
12. Consent to Jurisdiction and Venue. In the event that any
party hereto commences a lawsuit or other proceeding relating to or arising
from this Agreement, the parties hereto agree that the United States District
Court for the Western District of North Carolina shall have the sole and
exclusive jurisdiction over any such proceeding. If all such courts lack
federal subject matter jurisdiction, the parties agree that the Superior Court
Division of the General Court of Justice of Mecklenburg County, North Carolina
shall have sole and exclusive jurisdiction. Any of these courts shall be
proper venue for any such lawsuit or judicial proceeding and the parties hereto
waive any objection to such venue. The parties hereto consent to and agree to
submit to the jurisdiction of any of the courts specified herein and agree to
accept service or process to vest personal jurisdiction over them in any of
these courts.
13. Notice. All notices and other communications hereunder shall
be in writing and shall be deemed to have been validly served, given or
delivered five (5) days after deposit in the United States mails, by certified
mail with return receipt requested and postage prepaid, when delivered
personally, one (1) day after delivery to any overnight courier, or when
transmitted by facsimile transmission facilities, and addressed to the party to
be notified as follows:
If to Issuer at: Southeast Interactive Technology Fund I, LLC
2200 West Main Street, Suite 900
Durham, North Carolina 27705
ATTENTION: David C. Blivin
Facsimile Number: (919) 286-4031
If to Underwriter at:
Interstate/Johnson Lane Corporation
121 West Trade Street, Suite 1500
Charlotte, North Carolina 28202
ATTENTION: W. Allen Rogers, II
Facsimile Number: (704) 379-9025
If to the Escrow
Agent at: First Union National Bank of
North Carolina, as Escrow Agent
Corporate Trust Department
230 South Tryon Street, 8th Floor
Charlotte, NC 28288-1179
ATTENTION: Karen Atkinson
Facsimile Number: (704) 383-7316
or to such other address as each party may designate for itself by like notice.
14. Amendment or Waiver. This Escrow Agreement may be changed,
waived, discharged or terminated only by a writing signed by Underwriter,
Issuer and Escrow Agent. No delay or omission by any party in exercising any
right with respect hereto
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<PAGE> 13
shall operate as a waiver. A waiver on any one occasion shall not be construed
as a bar to, or waiver of, any right or remedy on any future occasion.
15. Severability. To the extent any provision of this Escrow
Agreement is prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Escrow Agreement.
16. Governing Law. This Escrow Agreement shall be construed and
interpreted in accordance with the internal laws of the State of North Carolina
without giving effect to the conflict of laws principles thereof.
17. Entire Agreement. This Escrow Agreement constitutes the
entire agreement between the parties relating to the acceptance, collection,
holding, investment and disbursement of the Escrow Funds and sets forth in
their entirety the obligations and duties of Escrow Agent with respect to the
Escrow Funds.
18. Binding Effect. All of the terms of this Escrow Agreement, as
amended from time to time, shall be binding upon, inure to the benefit of and
be enforceable by the respective heirs, successors and assigns of Underwriter,
Issuer and Escrow Agent.
19. Execution in Counterparts. This Escrow Agreement may be
executed in two or more counterparts, which when so executed shall constitute
one and the same agreement.
20. Termination. Upon the first to occur of the disbursement of
all amounts in the Escrow Funds or deposit of all amounts in the Escrow Funds
into court pursuant to Section 5 hereof, this Escrow Agreement shall terminate
and Escrow Agent shall have no further obligation or liability whatsoever with
respect to this Escrow Agreement or the Escrow Funds.
21. The Escrow Agent and any stockholder, director, officer or
employee of the Escrow Agent may buy, sell, and deal in any of the securities
of Issuer and become pecuniarily interested in any transaction in which the
Issuer may be interested, and contract and lend money to Issuer and otherwise
act as fully and freely as though it were not Escrow Agent under this
Agreement. Nothing herein shall preclude the Escrow Agent from acting in any
other capacity for the Issuer or for any other entity.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be executed under seal as of the date first above written.
SOUTHEAST INTERACTIVE TECHNOLOGY
FUND I, LLC, Issuer
By: ______________________________
Manager
By: ______________________________
Manager
INTERSTATE/JOHNSON LANE
CORPORATION, Underwriter
[CORPORATE SEAL] By:________________________________
Title:_____________________________
ATTEST:
__________________________
Secretary
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, AS ESCROW AGENT
By:________________________________
Title:_____________________________
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<PAGE> 15
Exhibit A
Offering Document
<PAGE> 16
Exhibit B
Fees Payable to Escrow Agent
<PAGE> 1
EXHIBIT 2(k)(ii)
AMENDMENT TO ESCROW AGREEMENT
THIS AMENDMENT, made as of April 24, 1995, by and among MONTROSE
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC, a North Carolina limited
liability company (the "Issuer"); INTERSTATE/JOHNSON LANE CORPORATION, a North
Carolina corporation (the "Underwriter"); and FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, a national banking association (the "Escrow Agent").
WHEREAS, the parties hereto entered into an Escrow Agreement dated as
of January 16, 1995 (the "Escrow Agreement") in connection with a private
offering of interests in the Issuer ("Shares") pursuant to the Confidential
Private Placement Memorandum of the Issuer dated January 16, 1995 (the
"Memorandum"); and
WHEREAS, the Issuer has amended the Private Placement Memorandum
pursuant to the addendum attached hereto as Exhibit A to provide for an initial
closing at a minimum offering of 200 Shares;
NOW, THEREFORE, the parties agree as follows:
1. In accordance with Exhibit A attached hereto, the Escrow
Agreement is hereby amended as follows:
a. Section 1 of the Memorandum is amended by replacing
the clause: "'Minimum Offering' shall mean Four Hundred (400)
Shares." with the clause "'Minimum Offering' shall mean Two Hundred
(200) Shares."
b. All other pertinent sections of the Escrow Agreement
shall be interpreted consistently with the foregoing amendment.
2. In all other respects the Escrow Agreement remains in effect.
3. The Fund and the Underwriter have delivered, or will deliver,
the attached Addendum to the Memorandum to all Investors, including all
Investors who have already deposited funds with the Escrow Agent. If any such
Investor desires to rescind such Investor's investment in the Fund, the Fund
will promptly communicate such desire to the Escrow Agent, and the Escrow Agent
will remit such Investor's escrowed funds, plus the Investor's share of
interest earned on the Escrow Fund, to such Investor.
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IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first written above.
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC,
Issuer
By: ______________________________
Manager
INTERSTATE/JOHNSON LANE CORPORATION,
Underwriter
By:________________________________
Title:_____________________________
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, as Escrow Agent
By:________________________________
Title:_____________________________
<PAGE> 1
EXHIBIT 2(k)(iii)
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into as of the 15th day of June,
1995, by and among Virtus Corporation, a North Carolina corporation (the
"Company"), and Southeast Interactive Technology Fund I, LLC, a North Carolina
limited liability company ("Investor").
WHEREAS, the Company and Investor have reached certain agreements with
regard to the purchase of certain securities of the Company by Investor.
NOW, THEREFORE, in consideration of the promises, covenants and
matters hereinafter set forth, the parties mutually covenant, contract and
agree, each with the other, as follows:
1. PURCHASE AND SALE.
(a) Sale of Stock. Subject to the terms and conditions hereof,
and in reliance on the representations and warranties contained herein, the
Company hereby agrees to issue and sell to Investor, and Investor hereby agrees
to purchase from the Company, Twenty Four Thousand Three Hundred Ninety
(24,390) shares (the "Shares") of Class E Convertible Preferred Stock, par
value $.01 per share (the "Preferred Stock"), each of which shares of Preferred
Stock is convertible into one (1) share of Common Stock, par value $.01 per
share (the "Common Stock"), of the Company, for the purchase price of Twenty
Dollars and Fifty Cents ($20.50) per share, for a total purchase price of Four
Hundred Ninety Nine Thousand Nine Hundred Ninety Five ($499,995) Dollars.
(b) Closing. The Closing shall be held on a mutually agreeable
date not later than June 15, 1995 at the offices of Petree Stockton, 4101 Lake
Boone Trail, Suite 400, Raleigh, North Carolina 27607, at 9:00 a.m. or on such
other date and at such other time and place as the parties may mutually agree.
At the Closing, Investor shall pay the Company the full purchase price of the
Shares in cash, by certified or bank cashier's check or by wire transfer to an
account designated in writing by the Company. At the Closing, the Company
shall deliver to Investor a stock certificate or certificates registered in
Investor's name representing the number of Shares purchased in form and
substance acceptable to Investor, and shall also deliver the documents
described in Section 2 hereof.
(c) Additional Investment. Investor has expressed an interest in
purchasing additional shares of capital stock of the Company, and the Company
has expressed an interest in discussing with Investor in the future the sale of
additional shares of capital stock of the Company to Investor. In light of the
foregoing, the Company has included in its authorized capital
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additional shares of Preferred Stock of the same class sold to Investor
pursuant to this Agreement. Neither the Company nor Investor is making any
commitment to such any future sale or purchase of capital stock of the Company
and any such sale or purchase shall be on terms, including price, to be
negotiated at the time of sale of the additional shares of capital stock.
Investor expressly conditions any such purchase by it on continuing progress by
the Company in hiring a Chief Executive Officer.
2. CONDITIONS OF CLOSING.
The obligation of Investor to purchase and pay for the Shares as set
forth under Section 1 hereunder at the Closing is subject to the fulfillment to
Investor's reasonable satisfaction or waiver in writing by Investor, on or
before the dates specified herein, of the following conditions:
(a) Representations and Warranties Correct; Performance of
Obligations. The representations and warranties made by the Company in Section
3 hereof and in any statement, certificate, schedule, exhibit or other document
delivered pursuant to this Agreement or in connection with the transaction
contemplated hereby shall be true and correct when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of said date; the Company's business and assets shall not have
been adversely affected prior to the Closing Date; and the Company shall have
performed all agreements, obligations and conditions herein required to be
performed or observed by it on or prior to the Closing Date.
(b) Reservation and Issuance of Shares. The Company shall have:
(i) duly amended its Articles of Incorporation to authorize for issuance the
Shares having the rights and preferences provided in the Articles of Amendment
of Articles of Incorporation in the form of Exhibit A hereto, which shall have
been filed with the office of the Secretary of State of the State of North
Carolina prior to closing; and (ii) reserved for issuance upon conversion of
the Shares, one (1) share of its Common Stock for each Share issued, which
number shall automatically be adjusted as required to equal the number of
shares of Common Stock issuable upon conversion of the Shares from time to
time.
(c) Due Diligence Review. Investor shall have completed its due
diligence review of the books, records, operations and business of the Company
and based on such review Investor shall have determined to purchase the Shares
as contemplated by this Agreement.
(d) Registration Rights Agreement. Investor shall have become a
party to the Registration Rights Agreement attached hereto as Exhibit B.
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(e) Opinion of Counsel. Investor shall have received from Petree
Stockton, L.L.P. legal counsel for the Company, an opinion as of the Closing
Date in the form of Exhibit C hereto.
(f) Delivery of Closing Documents. Investor shall have received
the following closing documents, in form and substance satisfactory to Investor
and its counsel:
1. This Agreement, duly executed by the Company.
2. An executed copy of the Registration Rights Agreement.
3. Certificates representing the Shares being purchased
by Investor at the Closing.
4. The opinion of counsel in the form described in
subsection 2(e) hereof.
5. Certificate of the Secretary of State of North
Carolina as to the good standing of the Company as of
a date recent to the Closing Date.
6. Copies of the Articles of Incorporation and Bylaws of
the Company, as amended to date, certified by the
Secretary of the Company to be true and correct.
7. Copies of resolutions of the Board of Directors of
the Company authorizing the transactions contemplated
by this Agreement, which resolutions shall have been
certified by the Secretary of the Company to be true,
correct and complete and in full force and effect.
8. Any and all other documents, certificates, and
assurances which may be reasonably requested by
Investor.
(g) At least a majority (on an as-converted basis) of the holders
of each of the following classes of securities of the Company shall have
separately shall have waived in writing any and all preemptive rights and
rights of first refusal with respect to the shares to be sold to Investor:
Class A Convertible Preferred Stock, Class B Convertible Preferred Stock, Class
C Convertible Preferred Stock and Class D Convertible Preferred Stock.
(h) The Board of the Company shall have appointed David Blivin as
director, subject to the closing of the transactions contemplated by this
Agreement.
(i) Motorola, Inc. shall have executed and delivered to the
Company prior to the Closing a document converting all principal and accrued
interest outstanding on the March 14, 1995 $200,000
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demand note into shares of Class E Convertible Preferred Stock of the Company,
at a price of $20.50 per share provided that any such conversion may be
contingent upon receipt by the Company of at least $499,995 of gross proceeds
from the sale of its capital stock. Such document shall be in form and
substance reasonably satisfactory to Investor.
(j) The Company shall have obtained any and all consents, permits
and waivers necessary for consummation of the transactions contemplated by this
Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to Investor that, as of the
date hereof:
(a) Organization and Good Standing; Corporate Power. The Company
is a corporation duly organized and validly existing under the laws of the
State of North Carolina, and is in good standing under such laws, and is
qualified and authorized to do business in, and in good standing as a foreign
corporation in, all other states in which such qualification or authorization
is necessary for the conduct of the business in which the Company is now
engaged, and in which the failure to so qualify would have a material adverse
effect on the Company, and has all necessary licenses and permits required by
all governmental authorities to carry on such business and which the failure to
obtain would have a material adverse effect on the Company. The Company has
all requisite legal and corporate power to own, lease and operate its property
and assets, to carry on its business as presently conducted, to enter into this
Agreement, to sell and issue the Shares and to carry out and perform its
obligations under the terms of this Agreement.
(b) Authorization. The execution and delivery of this Agreement,
and the Registration Rights Agreement and the sale and issuance to Investor of
the Shares as herein provided, have been duly authorized by all necessary
corporate action of the Company so that when issued and delivered (i) the
Shares will from and after the time of issuance be duly and validly authorized
and issued, fully-paid and nonassessable, and the Common Stock to be issued
upon conversion of the Shares will from and after the time of issuance be duly
and validly authorized and issued, fully paid and non-assessable, and (ii)
neither the execution and delivery of this Agreement nor the issuance of the
Shares, or shares of Common Stock to be issued pursuant to conversion of the
Shares, will be in contravention of law, or of any judgment, decree, statute,
order, rule or regulation applicable to the Company or of its Articles of
Incorporation, Bylaws or any other contract, agreement or instrument to which
the Company may be a party or to which its property is or may be subject. Each
of this Agreement and the Registration Rights Agreement constitute legal, valid
and binding obligations of the Company and the other parties thereto (other
than Investor) enforceable in accordance with each of their respective terms.
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<PAGE> 5
(c) Litigation. There is no investigation or litigation or any
proceeding before any court, commission or other administrative authority
pending, or, to the knowledge of the Company, any basis therefor or threat
thereof, against the Company, or its officers or directors which involves the
possibility of any judgment or liability, not fully covered by insurance,
which, in any case or in the aggregate, would materially and adversely affect
(i) any of the business, prospects, operations, property and assets of the
Company, (ii) the right of the Company to conduct its business as now engaged,
or (iii) the ability of the Company to perform its obligations under this
Agreement.
(d) Consents and Approvals. No consent or approval of,
authorization of, or qualification or filing with, any governmental agency or
authority or any other person or entity is required in connection with the
execution, delivery or performance of this Agreement (or any agreement or
obligation contemplated hereby) by the Company, except for filing a Form D with
the Securities and Exchange Commission after sale of the Shares, and filing the
Amendment of the Articles of Incorporation with the Secretary of State of the
State of North Carolina prior to sale of the Shares.
(e) Untrue Statements. Neither this Agreement nor any other
agreement, schedule, report, certificate, or any other document furnished to
Investor by the Company or on its behalf in connection herewith 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 material fact known to the Company relating to its business,
finances, or operations that has not been disclosed to Investor by the Company.
The representations contained herein shall not apply to any projections or pro
forma financial statements furnished to Investor, provided, however, that the
Company represents and warrants such projections or pro forma financial
statements are made in good faith and with belief in the reasonableness of all
assumptions made in connection therewith.
(f) Compliance with Law and Other Instruments. The Company is not
in violation of any instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to it, the violation of which might have a
material adverse effect on the business, prospects, affairs, operations or
condition of the Company. The execution, delivery and performance of this
Agreement and the taking of the actions contemplated hereby will not result in
any violation of, be in conflict with, or constitute a default under any of the
foregoing or result in the creation of any mortgage, lien, charge or
encumbrance upon any of the properties or assets of the Company pursuant to any
of the foregoing. None of the foregoing materially adversely affects or in the
future may (insofar as the Company can now foresee based on facts known to it
on the date hereof) materially adversely
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affect the business, prospects, operations, affairs or condition of the Company
or any of its properties or assets.
(g) Brokerage Fees. There are no claims or potential claims
against the Company or any of its officers, directors or shareholders, for
brokerage commissions, finders' fees, or other similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of the Company or such officer,
director or shareholder.
(h) Related Parties. David Smith, the President and Chief
Executive Officer of the Company, is a consultant to the advisor of Investor.
The Company conducts ongoing business with One Room Systems, Inc., a company
affiliated with Lee Bryan, a member of the advisors to Investor. To the
knowledge of the Company, the Company has had no other dealings with the
Investor or any persons or entities associated with the Investor.
(i) Tax Credit Status. The Company is qualified as a "qualified
business venture" pursuant to Section 105-163.013 (b) of the General Statutes
of North Carolina.
(j) Affiliations. The Company has no subsidiaries and does not
own or control any shares of stock or any other investments in any partnership,
corporation, limited liability company or other organization.
(k) Good Title to Properties and Assets. The Company has good
title to all the properties and assets used in its business or described in its
internal financial records, and to all patents, trademarks, trademark rights,
trade names, copyrights, licenses and other intellectual property either
developed by or assigned to the Company for its use, subject to no lien,
mortgage, pledge, reservation of rights, restrictions, security interest,
encumbrance or change of any kind except as disclosed to Investor.
(l) Tax Matters. The Company has completed and duly filed in
correct form with the appropriate United States, state and local governmental
agencies and with the appropriate foreign countries and political subdivisions
thereof, all tax returns and reports required to be filed, and such returns and
reports are accurate and complete in all material respects.
(m) ERISA. The Company has no employee benefit plans subject to
the Employee Retirement Income Security Act of 1974 ("ERISA").
(n) Financial Statements. The unaudited financial statements
of the Company dated December 31, 1994 are true, complete and correct and were
prepared in accordance with generally accepted accounting principles
consistently applied. Since December 31, 1994, there has not been any material
adverse change in the financial condition, results of operations,
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properties, assets, liabilities or business of the Company, except those
reflected in the unaudited financial statements of the Company dated April 30,
1995 or those disclosed to Investor. The unaudited balance sheet of the
Company dated April 30, 1995 reflects all issued capital stock of the Company
as of April 30, 1995.
4. REPRESENTATIONS AND WARRANTIES OF INVESTOR.
Investor hereby represents and warrants to the Company that, as of the
date hereof:
(a) Organization and Good Standing. Investor is a limited
liability company duly organized and validly existing under the laws of the
State of North Carolina and is in good standing under such laws.
(b) Power. Investor has all requisite power to enter into this
Agreement and to carry out and perform its obligations under the terms of this
Agreement.
(c) Authorization. All action on the part of Investor necessary
for the performance of Investor's obligations hereunder has been taken or will
be taken prior to the Closing. This Agreement is a valid and binding
obligation of Investor, enforceable in accordance with its terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief
of debtors and the availability or lack of availability of specific performance
and other equitable remedies;.
(d) Securities Laws. Investor is purchasing the Securities for
its own account for investment purposes only and not with a view to, or for
resale in connection with, any "distribution" thereof for purposes of the
Securities Act of 1933, as amended and understands the following.
(i) No federal or state agency has made any finding or
determination as to the fairness of this offering for investment, nor
any recommendation or endorsement of the Shares.
(ii) There is no public market for the Shares or any of
the company's securities and there is no certainty that such a market
will ever develop. There can be no assurance that Investor will be
able to sell or dispose of the Shares. Moreover, no assignment, sale,
transfer, exchange or other disposition of the Shares can be made
other than in accordance with all applicable securities laws. It is
understood that in order not to jeopardize the offering's exempt
status under Section 4(2) and Regulation D of the Securities Act of
1933, as amended (the "Securities Act") and the state securities law,
any transferee may be required to fulfill certain investor suitability
requirements.
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(iii) Investor has such knowledge and experience in
financial and business matters that it is capable of evaluating
the merits and risks of investment in the Company and of making
an informed investment decision.
(iv) Investor has the capacity to protect its own interest
in connection with this transaction by reason of its prior personal or
business relationships with the Company or its officers or directors
or its business or financial experience.
(v) Investor understands that because the Shares have not
been registered under the Securities Act or applicable state
securities laws, Investor cannot dispose of any or all of the Shares
unless such Shares are subsequently registered under the Securities
Act, and/or applicable state securities laws, or exemptions from such
registration are available. Investor acknowledges and understands it
has no right to require the Company to register the Shares, except as
provided in the Registration Rights Agreement in the form of Exhibit B.
Investor is aware that the Company may not accomplish a public
offering of its stock. Investor further understands that the Company,
as a condition to the transfer of any of the Shares, may require that
the request for transfer be accompanied by opinion of counsel
reasonably satisfactory to the Company, inform and substance
reasonably satisfactory to the Company and preceded by prior written
notice, to the effect that the proposed transfer does not result in
violation of the Securities Act or applicable state securities laws,
unless such transfer is covered by an effective registration
statement under the Securities Act and compliance with all applicable
state securities laws or an exemption or exemptions from registration
is or are available. Investor understands that each certificate
representing the Shares and any securities issued upon conversion of
the shares or on account of ownership thereof will bear the following
legend or one substantially similar thereto:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state. These
securities have been acquired for investment and not with a view to
distribution or resale, and may not be sold, mortgaged, pledged,
hypothecated or otherwise transferred without an effective
registration statement for such shares under the Securities Act and
applicable state securities laws, or an opinion of counsel reasonably
satisfactory to the corporation that registration is not required
under the Securities Act and applicable state securities laws. The
securities are also subject to certain rights of first refusal of the
corporation and other contractual restrictions on transfer.
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(vi) Investor is organized under the laws of the State of
North Carolina, its principal offices are located in the State of
North Carolina and all decisions relating to purchase of the Shares
have occurred solely in North Carolina.
5. COVENANTS OF THE COMPANY
The Company may use the proceeds of the sale of the Shares
contemplated hereby for any corporate purpose consistent with budgets approved
by the Board of Directors of the Company, but may not use such proceeds (i) to
repay any outstanding indebtedness of the Company to Motorola, Inc. or (ii) to
pay more than 50% of the deferred compensation of certain management employees
of the Company reflected on the balance sheet of the Company dated April 30,
1995. The Company shall use the proceeds of the sale of the Shares
contemplated hereby for the following purposes (i) the reasonable and
documented expenses of Investor incurred to negotiate and close the sale of the
Shares contemplated hereby, including the fees and expenses of its legal
counsel, (ii) up to $5,000 to a vendor, mutually acceptable to the Company and
Investor, for a summary video to be produced by Investor covering Virtus'
markets, products, management and potential and (iii) the reasonable fees and
expenses of legal counsel to the Company incurred in connection with sale of
the Shares contemplated hereby.
Until closing of the Sale of the Company (as defined in Section 8
hereof) or an Initial Public Offering (as defined in Section 6(a) hereof) by
the Company, the Company covenants and agrees that for so long as Investor
owns, beneficially or of record, the Shares, or the Common Stock issuable upon
conversion of the Shares:
(a) Reports and Information. The Company shall furnish to
Investor the following reports:
(i) Annual Reports. Commencing the fiscal year ending
December 31, 1995, as soon as available and in any event within 90 days after
the end of each fiscal year, consolidated and consolidating financial
statements of the Company including a balance sheet as of the end of such
fiscal year and statements of income and retained earnings and of sources and
applications of funds for such fiscal year, prepared in reasonable detail and
in accordance with generally accepted accounting principles consistently
applied. The Company shall have such financial statements audited and upon
completion of the audit shall furnish to the Investor the opinion thereon of a
recognized firm of independent certified public accountants as may be selected
by the Board of Directors of the Company.
(ii) Interim Reports. As soon as available, and in any
event within 45 days after the end of the first three quarter of each of the
Company's fiscal years beginning with the quarter ended March 31, 1995,
consolidated and consolidating financial
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statements of the Company including a cash flow statement, a balance sheet as
of the end of such accounting period and statements of income and retained
earnings and of sources and applications of funds for such accounting period
and for the period from the beginning of such fiscal year to the end of such
accounting period, and setting for in comparative form the figures for the
corresponding periods of the preceding fiscal year, prepared in reasonable
detail and in accordance with generally accepted accounting principles
consistently applied and certified as correct by the president and chief
financial officer of the Company.
(iii) Monthly Reports. As soon as available, and in any
event within 30 days after the end of each month beginning after March 31,
1995, consolidated and consolidating financial statements of the Company
including cash flow statement and a balance sheet as of the end of the month
will be prepared in reasonable detail in accordance with generally acceptable
accounting principles consistently applied and certified as correct by the
president and chief financial officer of the Company. The management of the
Company will include with each monthly report comments on progress and problems
facing the Company.
(iv) Other. Promptly upon request, such other financial
information and data as Investor may from time to time reasonably request.
(v) SEC Filings, Etc. Upon completion of an Initial
Public Offering (as defined in Section 6(a) hereof) by the Company, the
obligation to provide Investor with the reports set forth in subsections (i),
(ii), (iii) and (iv) of this Section 5(a) shall terminate. Promptly upon their
becoming available (and in no event later than the ten days after release to
the public) copies (without duplication) of all financial statements, reports,
press releases, notices and proxy statements sent by the Company to its
security holders and all annual, periodic or special reports or registration
statements filed by the Company with the Commission, and all other material
communication sent by the Company to its security holders or filed by the
Company with the Commission.
(b) Other Information. The Company shall furnish promptly to
Investor any information related to this Agreement or any other agreements with
Investor or any other documents executed in connection with this Agreement as
Investor may reasonably request regarding the Company's operations, business
affairs, financial condition, or any of the Company's covenants, agreements
and/or undertakings under this Agreement or any of the other agreements or
documents, provided the Company is not restricted from doing so by law, rule,
regulation or contractual provisions.
(c) Board Observer Status and Board Information. If at any time
the Articles of Incorporation do not permit the holders of the class of
Preferred Stock purchased by Investor pursuant to
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this Agreement to vote as a separate class to elect at least one member of the
Board of Directors of the Company, a person designated by Investor, and
reasonably acceptable to the Company, shall have the right to attend all
meetings of the Board of Directors of the Company and to receive at
approximately the same time as nonofficer members of the Board of Directors (i)
all information provided to such nonofficer members of the Board of Directors
of the Company and (ii) all written consents of the Board of Directors of the
Company. The Company may require such observer to execute a reasonable
confidentiality agreement.
(d) Issuance of Additional Class E Shares. The Company will not
issue more than 48,779 shares of Class E Convertible Preferred Stock without
the prior consent of a majority of the holders of Class E Convertible Preferred
Stock if, after the issuance of such shares in excess of 48,779, Investor would
hold less than a majority of the issued and outstanding shares of Class E
Convertible Preferred Stock.
6. RIGHTS OF FIRST REFUSAL AND TRANSFER RESTRICTIONS.
(a) Rights of Shareholders. If, at any time prior to the first
registration under the Securities Act of 1933 and sale of the Company's Common
Stock having proceeds to the Company (net of underwriting discounts, fees and
all offering expenses) of at least Five Million ($5,000,000.00) Dollars, (the
"Initial Public Offering") the Company proposes to issue (except in a
transaction described in subsection 6(b)) any capital stock or any security
convertible into or having rights to purchase its capital stock, the Company
shall first comply with the following:
(i) The Company shall first offer in writing to sell to
the holders of Common Stock issued upon conversion of Convertible Preferred
Stock of any class and holders of Convertible Preferred Stock of any class
(collectively the "Shareholders") pro rata in proportion to their ownership of
Common Stock issued upon conversion of, and shares of Common Stock then
issuable upon conversion of, the shares of Convertible Preferred Stock
purchased by the Shareholders ("Ownership Interest"). Such offer shall
describe such securities and specify the quantity, the price and the payment
terms. If within ten (10) days after receipt of such offer one or more of the
Shareholders, accept the same in writing as to the portion referred to above or
any lesser amount as such Shareholders may specify to the Company, upon the
terms specified.
(ii) After expiration of the 10-day period specified in
clause (i) above, the Company shall then offer in writing to sell as securities
not purchased pursuant to such clause to the Shareholders, who have indicated
their desire to purchase all the shares allocable to them pursuant to
subsection (i) above, at the price and on the payment terms specified in such
subsection. If such Shareholders desire to purchase more than the total of such
securities being offered, such Shareholders may be limited to the
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purchase of a portion of such securities proportionate to its Ownership
Interest compared to the Ownership Interest of other Shareholders desiring to
purchase the securities being offered by the Company. If within ten (10) days
after receipt of such offer the Shareholders accept the same in writing as to
the portion referred to above or any lesser amount, then the Company shall sell
such portion of such securities, or such lesser amount as the Shareholders
shall specify to the Shareholders.
(iii) If the offers to sell are rejected, or all are not
accepted within the time periods specified in clauses (i) and (ii) above, the
Company shall be free to sell up to the quantity of such securities not agreed
by the Shareholders to be purchased by them (or up to all such securities in
the event such offer is rejected or is not accepted within applicable time
periods after it has been made by the Company), at a price not less favorable
to the Company than that specified in such offer and on payments terms no less
favorable to the Company than those specified in such offer. However, if such
sale is not consummated within ninety (90) days after the date an offer
pursuant to this subsection 6(a) was made, the Company shall not sell such
securities without again complying with this Section.
(b) Excluded Transactions. The following transactions shall be
excluded from the restrictions of subsection 7(a):
(i) Any issuance to an employee of the Company of Common
Stock of the Company or options or other rights to purchase Common Stock as
part of a bona fide compensation plan approved by the Board of Directors prior
to the date of this Agreement or subsequent thereto by the affirmative vote
required by this Agreement.
(ii) Any issuance of Common Stock upon the conversion of
any shares of the Convertible Preferred Stock; and
(iii) Any issuance of shares of capital stock or rights to
acquire shares of capital stock of the Company to any corporate partner for a
cash investment by that corporate partner if the issuance is also accompanied
by a transaction between the Company and the corporate partner involving the
technology and/or products of the Company and/or the corporate partner,
provided the Board of Directors determines such transaction is in the best
interest of the Company.
(c) Rights of the Company. In the event Investor desires to sell
or otherwise transfer any shares of Stock, at any time prior to an Initial
Public Offering by the Company, Investor shall first notify the Company in
writing of the identity of the purchaser or other transferee and the material
terms and conditions of sale, including the number of securities to be sold,
price and payment terms.
If within thirty (30) days after the notice of sale or other transfer
is received by the Company, the Company determines the
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<PAGE> 13
purchaser or other transferee is a competitor of the Company, which
determination shall be made by the Board of Directors of the Company, the
Company may prohibit the proposed sale or transfer to such purchaser or other
transferee. Any determination made by the Board of Directors in good faith
shall be final and biding.
If within thirty (30) days after the notice of sale or transfer is
received by the Company, the Company notifies Investor in writing it desires to
purchase all the securities to be sold or transferred by Investor, Investor
shall sell such shares to the Company on the same terms and conditions as
specified in the notice sent to the Company by Investor. The Company may
assign its right to purchase such securities to one or more persons or entities
in its sole discretion. The Company shall complete such purchase within sixty
(60) days after receipt of notice of sale or transfer by the Company.
In the event within thirty (30) days after receipt, by the Company, of
the notice of sale or transfer, the Company neither (i) notifies Investor in
writing the purchaser or transferee has been deemed to be a competitor of the
Company, nor (ii) notifies Investor in writing the Company and/or its
assignee(s) desire to purchase all the securities to be sold or transferred,
Investor shall be free to sell or transfer the securities on the terms and
conditions specified in its notice to the Company to the Person specified in
such notice subject to compliance with applicable securities laws and
regulations or pursuant to an exemption therefrom and Section 4 of this
Agreement. If such sale or transfer is not consummated within ninety (90) days
after the Company received notice of the proposed sale or transfer from
Investor, Investor may not sell or transfer such securities without again
complying with this Section.
The Company shall have no right to purchase Stock to be sold or
transferred to any Person that, directly or indirectly, owns or controls, or is
owned or controlled by, or is under common control with, Investor or to any
Subsidiary of Investor (a "Investor Affiliate").
Any purchaser or transferee of Stock shall agree as a condition to
consummation of such sale or transfer that any subsequent sale or transfer of
the Stock shall be subject to the rights of the Company set forth in this
Section 6.
The restrictions on transfer of securities contained herein are in
addition to, and not in lieu of, restrictions pursuant to applicable law.
7. GENERAL
The parties hereto further warrant, covenant, contract and agree each
with the other as follows:
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<PAGE> 14
(a) Entire Agreement. This Agreement, the Exhibits and Schedules
hereto and other documents referred to herein constitute the entire
understanding among the parties with respect to the subject matter hereof and
they supersede all prior negotiations, understandings, correspondence,
undertakings, promises, representations and agreements, whether oral or
written, in connection with the subject matter hereof.
(b) Survival of Agreements and Representatives and Warranties.
All agreements, representations and warranties contained herein or made in
writing by the Company in connection herewith, to the extent applicable, shall
survive the execution and delivery of this Agreement and shall continue until
all Stock ceases to be outstanding unless specifically limited to a shorter
time by the terms of this Agreement.
(c) Binding Effect. All covenants, representations, warranties
and other stipulations in this Agreement, the Proprietary Information and
Inventions Agreements, or the Noncompetition Agreements, given by or on behalf
of any of the parties hereto, shall bind and inure to the benefit of the
respective successors, heirs, personal representatives and permitted assigns of
the parties hereto.
(d) Notices. Except in cases where oral or other notice is
permitted by this Agreement, all notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
given (a) when hand delivered, including delivery by messenger or courier
service (or if delivery is refused, at the time of refusal), to the address set
forth below, (b) when received or refused as evidenced by the postal receipt if
sent by United States mail as Certified Mail, Return Receipt Requested, with
proper postage prepaid, addressed as set forth below or (c) when received as
evidenced by the transmission report of the telefax machine of the transmitting
party acknowledging a good transmission if sent by telefax to the number set
forth below:
(i) If to the Company:
Virtus Corporation
118 Mackenan Drive, Suite 250
Cary, North Carolina 27511
Attn: David A. Smith
Telefax Number: 919-460-4530
(ii) If to the Investor:
Southeast Interactive Technology Fund
2200 West Main Street, Suite 900
Durham, North Carolina 27705
Telefax Number: 919-286-4031
Any of the parties may change its mailing address or telecopy number,
by giving notice to the other party pursuant to
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<PAGE> 15
this Section 9(f) as long as the mailing address and telecopy number is within
the United States of America.
(e) Governing Law. This Agreement shall be governed in all
respects by the laws of the State of North Carolina.
(f) Headings. The descriptive section headings herein have been
inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provisions hereof.
(g) Multiple Originals. The Agreement may be executed
simultaneously in one or more counterparts, each of which shall be deemed an
original, and it shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
(h) Assignment. Neither this agreement, nor any interest herein
or any rights hereunder, shall be signed by either party without the prior
written consent of the other party.
(i) Waiver. Failure or delay on the part of either party to
exercise any right, remedy, power, privilege or option hereunder which is not
subject to an express time limitation with respect to exercise shall not
operate or be construed to operate as a waiver thereof. A waiver, to be
effective, must be in writing and be signed by the party making the waiver. No
written waiver of any term or condition of this Agreement shall operate or be
construed to operate as a waiver of any other term or condition, nor shall any
written waiver of any breach or default operate or be construed to operate as a
waiver of any other breach or default or of the same type of breach or default
on a subsequent occasion or operate or be construed to operate as a continuing
waiver.
(j) Amendment. This Agreement may not be modified, altered nor
amended in any manner whatsoever, except by another written agreement executed
by the parties.
(k) Severability. If any of the articles, paragraphs, sections
and/or clauses of this Agreement is declared by judicial interpretation or
construction or otherwise to be null, void and/or unenforceable in any respect,
such article, paragraph, section and/or clause shall be deemed to be eliminated
from this Agreement, but the other parts of this Agreement shall remain in full
force and effect; provided, however, if the elimination of any part of this
Agreement materially affects any right, benefit, option or privilege of either
party, the parties agree to negotiate in good faith to replace such part with a
substitute valid and enforceable part that achieves the intent and purpose of
the eliminated part.
(l) Except as provided by law, each party shall secure advance
written approval from the other of the decision to issue and the content of any
statement regarding or mentioning the
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<PAGE> 16
other party to the public or press, whether in writing or otherwise. This
provision shall not be deemed to have been breached if the disclosing party
acting on the advice of its securities or other regulatory counsel makes
disclosures to investors or to any governmental or other regulatory agency or
organization.
8. DEFINITIONS.
For the purpose of this Agreement, the following terms shall have the
following meanings:
(a) "Person" shall include both the singular and the plural and
shall mean any individual, partnership, corporation, trust, unincorporated
organization, or government or department or agency thereof.
(b) "Sale of the Company" shall mean transfer of more than fifty
percent (50%) of the voting capital stock of the Company to a person or persons
who are not currently holders of capital stock of the Company or the transfer
of all or substantially all of the assets of the Company, whether by means of
sale, merger or otherwise.
(c) "Stock" shall mean the shares of Preferred Stock sold pursuant
to this Agreement and shares of Common Stock issued or issuable upon conversion
of such Shares and all other securities of the Company issued on account of
ownership thereof.
(d) "Subsidiary" shall mean any corporation with respect to which
Investor or the Company, as the case may be, owns, directly or indirectly, a
majority of the voting shares, or shares or other interest entitling Investor
or the Company, as the case may be, to elect a majority of the Board of
Directors.
(e) to the extent not specifically defined herein, any accounting
term used herein shall have the meaning ordinarily accorded to it under
generally accepted accounting principles consistently applied.
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<PAGE> 17
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
SOUTHEAST INTERACTIVE VIRTUS CORPORATION
TECHNOLOGY FUND I, L.L.C.
By: By:
----------------------- -----------------------
Title: Title:
-------------------- --------------------
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<PAGE> 1
EXHIBIT 2(k)(iv)
REGISTRATION RIGHTS AGREEMENT
AGREEMENT dated as of June 15, 1995, by and among Virtus Corporation,
a North Carolina corporation ("the Company"), and the Holder of Registrable
Securities of the Company (as defined below).
W I T N E S S E T H:
WHEREAS, the Company and the holders of the securities of the Company
desire to provide for the circumstances under which the Company will register
securities of the Company on behalf of the holders of such securities; and
WHEREAS, the Company is entering, has entered, and/or will enter, into
counterparts of this Agreement with certain other holders of its securities,
all of which counterparts, whenever and with whomever executed, shall
constitute one Agreement.
NOW THEREFORE, in consideration of the premises and the mutual terms
and provisions hereof, the parties hereto hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following
terms shall have the following respective meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute enacted hereafter, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect from time to
time.
(b) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Act.
(c) The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Act and the declaration or ordering of effectiveness of
such registration statement by the Commission.
(d) "Registrable Securities" shall mean (i) shares of Common Stock
which are owned by the undersigned on the date of executing this Agreement or
which are owned by another party to this Agreement at the time of execution of
a counterpart of this Agreement, or (ii) shares of Common Stock issued or
issuable upon conversion or exercise of Convertible Securities owned by the
undersigned on the date of executing this Agreement or owned by another party
to this Agreement at the time of execution of a counterpart of this Agreement,
and (iii) shares of Common Stock issued as a dividend or other distribution
with respect to, or in exchange or in replacement of, any such Common Stock or
Convertible
<PAGE> 2
Securities (securities shall be deemed to be owned for this purpose if an
agreement for their purchase has been executed).
(e) "Holder" shall mean any person who is a party to this
Agreement or a counterpart to this Agreement and who holds Registrable
Securities and any other person holding Registrable Securities to whom these
registration rights have been transferred pursuant to Section 10 of this
Agreement; provided, however, that any person who acquires any Registrable
Securities in a distribution pursuant to a registration statement filed by the
Company under the Act or pursuant to a sale under Rule 144 under the Act shall
not be considered a Holder.
(f) "Convertible Securities" means any securities of the Company
which entitle the holder of such securities to receive upon conversion or
exercise shares of Common Stock or Convertible Securities of the Company.
2. Piggyback Registration. Subject to Section 8 of this
Agreement, if at any time the Company proposes to register any of its
securities under the Act, either for its own account or for the account of
others, in connection with the public offering of such securities solely for
cash, on a registration form that would also allow the registration of
Registrable Securities, the Company shall, each such time, promptly give each
Holder written notice of such proposal. This provision shall not apply to a
registration solely of securities issued or issuable in connection with any
stock option plan or other employee benefit plan. Upon receipt by the Company
of the written request of any Holder given within ten (10) days after mailing
of any such notice by the Company, the Company shall use its best efforts to
cause to be included in such registration under the Act all the Registrable
Securities that each such Holder has requested be registered.
3. Obligations of the Company. Whenever required under this
Agreement to use its best efforts to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the Commission a registration statement
covering such Registrable Securities and use its best efforts to cause such
registration statement to be declared effective by the Commission as
expeditiously as possible and to keep such registration effective until the
earlier of (i) the date when all Registrable Securities covered by the
registration statement have been sold or (ii) 180 days from the effective date
of the registration statement.
(b) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be necessary to
keep such registration statement effective during the period referred to in
Section 3(a) and to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement, and cause
the
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<PAGE> 3
prospectus to be supplemented by any required prospectus supplement, and as so
supplemented to be filed with the Commission pursuant to Rule 424 under the
Act.
(c) Furnish to the selling Holders such numbers of copies of such
registration statement, each amendment thereto, the prospectus included in such
registration statement (including each preliminary prospectus), each supplement
thereto as they may reasonably request in order to facilitate the disposition
of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the Registrable
Securities under the securities laws of such jurisdictions in which the Company
shall register securities to be sold by the Company pursuant to the same
registration under the Act.
(e) Promptly notify each selling Holder of such Registrable
Securities at any time when a prospectus relating thereto is required to be
delivered under the Act of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading and, at the request of any such Holder, the Company will prepare
promptly a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
will not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading.
(f) Provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement.
(g) Enter into underwriting agreements and related agreements in
customary form for a primary offering.
(h) Make available for inspection by any selling Holder of
Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or other
agent retained by any such selling Holder or underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the officers, directors, employees and independent accountants of the
Company to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
(i) Promptly notify the selling Holders of Registrable Securities
and the underwriters, if any, of the following events and (if requested by any
such person) confirm such notification in writing: (1) the filing of the
prospectus or any prospectus supplement and the registration statement and any
amendment or post-effective amendment thereto and, with respect to the
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<PAGE> 4
registration statement or any post-effective amendment thereto, the declaration
of the effectiveness of such documents, (2) any requests by the Commission for
amendments or supplements to the registration statement or the prospectus or
for additional information, (3) the issuance of any stop order suspending the
effectiveness of the registration statement, and (4) the receipt by the Company
of any notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction.
(j) Whenever any provision of this Agreement requires the Company to
furnish any information to Holder or the agents or representatives of Holder,
the Company may require any such person or entity to execute and deliver a
reasonable confidentiality agreement, agreement to refrain from trading or any
other agreement necessary or prudent to protect the Company or its officers,
directors and employees against insider trading liabilities and may restrict
access to confidential trade secret information.
4. Furnish Information. In the event of any registration by the
Company (whether or not the Registrable Securities of any Holder are included
therein), the Holders shall furnish to the Company such information regarding
them, the Registrable Securities and other securities of the Company held by
them, and the intended method of disposition of such Registrable Securities as
the Company shall reasonably request and as shall be required in connection
with the action to be taken by the Company. It shall be a condition precedent
to the obligation of the Company to cause any registration pursuant to this
Agreement to have become effective for the Holders to have exercised their
rights of conversion with respect to any Registrable Securities proposed to be
registered.
5. Suspension of Disposition of Registrable Securities. Each
selling Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(e) or 3(i) (2), (3)
or (4) hereof, such Holder will forthwith discontinue disposition of
Registrable Securities until such Holder's receipt of copies of a supplemented
or amended prospectus contemplated by Section 3(e) hereof, or until it is
advised in writing by the Company that the use of the prospectus may be
resumed, and has received copies of any additional or supplemental filings
which are incorporated by reference in the prospectus, or in the case of
Section 3(i) (2), (3) or (4), until the Company notifies the Holder in writing
that sales of Registrable Securities may continue. If so directed by the
Company, such Holder will deliver to the Company (at the expense of the
Company) all copies, other than permanent file copies then in such Holder's
possession, of the prospectus covering such Registrable Securities current at
the time of receipt of such notice.
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<PAGE> 5
6. Expenses of Registration.
The Holders shall bear the fees and disbursements of their own
counsel and shall bear any additional registration and qualification fees and
expenses (including underwriters' discounts and commissions), and any additional
costs and disbursements of counsel for the Company that result solely from the
inclusion of Registrable Securities held by the Holders in such registration,
with such additional expenses of the registration being borne by all selling
Holders pro rata on the basis of the total number of Registrable Securities so
registered; provided, however, that if any such cost or expense is attributable
solely to one selling Holder and does not constitute a normal cost or expense
of a registration, such cost or expense shall be allocated solely to that
selling Holder.
7. Underwriting Requirements; Priorities.
(a) The Company will have the right to select the investment
banker(s) and manager(s) to administer any offering to which this Agreement is
applicable. If a registration is an underwritten primary registration on
behalf of the Company (without regard to registration rights arising hereunder
or under any other agreement), and the managing underwriters advise the Company
in writing that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold at the
desired price in such offering, the Company will include in such registration
(i) first, the securities the Company proposes to sell, (ii) second, the
Registrable Securities requested to be included in such registration, pro rata
among the Holders thereof on the basis of the number of Registrable Securities
owned by them and (iii) third, other securities requested to be included in
such registration, pro rata among the holders thereof on the basis of the
number of shares requested to be registered. If a registration is an
underwritten secondary registration on behalf of holders of securities of the
Company, or a combined primary and secondary offering, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold at the desired price in such offering, the Company will
include in such registration (i) first, securities the Company proposes to
sell, (ii) second, the securities requested to be included therein by holders
with contractual registration rights other than the Holders, pro rata among the
holders of such securities on the basis of the number of shares requested to be
included therein, (iii) third, the securities requested to be included therein
by Holders of Registrable Securities, pro rata among the holders of such
Registrable Securities on the basis of the number of shares requested to be
included therein, and (iv) fourth, other securities requested to be included in
such registration, including securities to be sold by holders without
contractual registration rights.
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<PAGE> 6
(b) No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's securities on the
basis provided in any underwriting arrangements approved by the persons
entitled hereunder to approve such arrangements and (ii) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements
and other documents required under the terms of such underwriting arrangements.
8. Limitation of the Company's Obligations.
(a) The Company may, in its sole discretion, (i) not comply with
this Agreement in the case of its initial public offering registered under the
Act, and (ii) terminate this Agreement after sale or other transfer, whether by
registration, under Rule 144 or otherwise, by the Holders of at least Fifty
(50%) Percent of the aggregate number of Registrable Securities held by Holders
at the time of the Company's initial public offering.
(b) The Company shall not be obligated under this Agreement to
register or include in any registration Registrable Securities that any Holder
has requested to be registered if the Company shall furnish such Holder with a
written opinion of counsel reasonably satisfactory to such Holder, that all
Registrable Securities that such Holder holds may be publicly offered, sold and
distributed without registration under the Act pursuant to Rule 144 promulgated
by the Commission under the Act without restriction as to the amount of
securities that can be sold.
9. Lockup Agreement.
(a) For so long as the Holder has the right to have Registrable
Securities included in any registration pursuant to this Agreement, the Holder
agrees in connection with any registration of the Company's securities upon the
request of the underwriters managing any underwritten offering of the Company's
securities, not to sell, make any short sale of, pledge, grant any option for
the purchase of or otherwise dispose of any Registrable Securities (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, during the seven days prior
to and during the 90-day period beginning on the effective date of such
registration as the Company or the underwriters may specify. This provision
shall apply whether or not any Registrable Securities of the Holder are
included in the offering.
10. Transfer of Registration Rights. Provided that the Company
is given written notice by the Holder at the time of such transfer stating the
name and address of the transferee and identifying the securities with respect
to which the rights under this Agreement are being assigned, the registration
rights under this Agreement may be transferred in whole or in part at any time
to any transferee of Registrable Securities.
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<PAGE> 7
11. Indemnification and Contribution. In the event any Registrable
Securities are included in a registration statement under this Agreement:
(a) To the full extent permitted by law, the Company will, and
hereby does, indemnify and hold harmless each Holder whose Registrable
Securities are included in a registration, each director, officer, partner,
employee, or agent for such Holder, any underwriter (as defined in the Act) for
such Holder, and each person, if any, who controls such Holder or underwriter
within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several, to which they may become subject under the Act
and applicable state securities laws insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based on any
untrue or alleged untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein in light of the circumstances under
which they were made or necessary to make the statements therein not misleading
or arise out of any violation by the Company of any rule or regulation
promulgated under the Act applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration; and
will reimburse each such person or entity for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld) nor
shall the Company be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in connection with such registration statement, preliminary prospectus,
final prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by or on behalf of any such Holder, underwriter or
controlling person.
(b) To the full extent permitted by law, each Holder whose
Registrable Securities are included in a registration under this Agreement,
severally and not jointly, will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed the registration
statement, each person, if any, who controls the Company within the meaning of
the Act, and any underwriter for the Company (within the meaning of the Act),
each other selling Holder and each person, if any, who controls such other
selling Holder within the meaning of the Act against any losses, claims,
damages or liabilities, joint or several, to which the Company or any such
director, officer, controlling person, selling Holder or underwriter may become
subject, under the Act and
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<PAGE> 8
applicable state securities laws, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in such registration
statement, preliminary or final prospectus, or amendments or supplements
thereto, in reliance upon and in conformity with written information furnished
by such Holder expressly for use in connection with such registration; and each
such Holder will reimburse any legal or other expenses reasonably incurred by
the Company or any such director, officer, controlling person, selling Holder
or underwriter in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld).
In no event shall the liability by reason of this contractual
indemnity of any selling Holder of Registrable Securities hereunder be greater
than the dollar amount of the proceeds received by such Holder upon the sale of
the Registrable Securities giving rise to such indemnification obligation. Any
Holder required to indemnify the Company as provided above shall cease to have
the right to participate in any other registration pursuant to this Agreement.
12. Remedies. In addition to being entitled to exercise all
rights provided in this Agreement as well as all rights granted by law,
including recovery of damages, the Company and each Holder of Registrable
Securities will be entitled to specific performance of its rights under this
Agreement. The Company and each Holder agrees that monetary damages would not
be adequate compensation for any loss incurred by reason of a breach by it of
the provisions of this Agreement and hereby agrees not to raise the defense in
any action for specific performance that a remedy at law would be adequate.
13. Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may be given, by written consent of the Company and the Holders of at least a
majority of the outstanding Registrable Securities.
14. Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by
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<PAGE> 9
hand-delivery, registered first-class mail, telex, telecopier, or air courier
guaranteeing overnight delivery:
(a) if to a Holder of Registrable Securities, at the most current
address given by such Holder to the Company in accordance with the provisions
of this Section 14, which address initially shall be the address given to the
Company upon acquisition of the Registrable Securities, unless the Holder has
notified the Company of a change of address; and
(b) if to the Company, initially at its address set forth below
and thereafter at such other address, notice of which is given in accordance
with the provisions of this Section 14:
Virtus Corporation
118 Mackenan Drive, Suite 250
Cary, NC 27511
Attn: President
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; two business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
15. Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
16. Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina.
18. Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
19. Entire Agreement. This Agreement is intended by the parties
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred
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<PAGE> 10
to herein with respect to the registration rights granted by the Company with
respect to the Registrable Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter. Nothing in this Agreement shall preclude the Company from entering
into any other agreement having the same or different terms with any Holder or
any third party with respect to registration rights or related matters.
20. Parties Benefitted. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any rights, remedies,
obligations or liabilities.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date set forth below.
VIRTUS CORPORATION
By:
--------------------------------
Title:
--------------------------
Date:
------------------
SOUTHEAST INTERACTIVE TECHNOLOGY
FUND I, LLC
By:
--------------------------------
Date: Title:
------------------- --------------------------
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<PAGE> 1
EXHIBIT 2(k)(v)
INVESTMENT AGREEMENT BY AND
AMONG
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
AND
ONE ROOM SYSTEMS, INC.
November 2, 1995
<PAGE> 2
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT (the "Agreement") is made and entered into
as of this 2nd day of November, 1995 by and among ONE ROOM SYSTEMS, INC., a
North Carolina corporation (the "Company"); and SOUTHEAST INTERACTIVE
TECHNOLOGY FUND, LLC, a North Carolina limited liability company (the
"Investor").
WITNESSETH:
WHEREAS, the Company develops multimedia educational and entertainment
products; and
WHEREAS, the Company and the Investor have reached certain agreements
with regard to the loan of funds to the Company and purchase of certain
securities of the Company by the Investor, all upon the terms and conditions
more particularly described herein.
NOW THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the receipt and sufficiency of which are
acknowledged by all parties, the parties hereto agree as follows:
I. SECURED CONVERTIBLE LOAN AND WARRANTS
A. Loan Against Receivables and Approved Contracts. The Investor
will make a loan to the Company of up to $250,000 at any one time outstanding
(the "Loan") which will be secured by all of the receivables of the Company and
an assignment of contract rights for certain contracts. The amount outstanding
from time to time shall not be greater than the "Borrowing Base."
For purposes hereof, the Borrowing Base shall be equal to (i)
the amount calculated by multiplying the appropriate percentage set forth below
by the amount of Qualified Receivables plus (ii) the amount that will be
generated under Approved Contracts.
For purposes hereof, "Qualified Receivables" shall be the net
amount of bona fide receivables (net of any credits or discounts, including
discounts for early payment, or similar offsets) due from non-affiliates of the
Company for the provision of goods and services. The appropriate percentages
shall be as follows:
100% for Qualified Receivables of 0-60 days;
75% for Qualified Receivables of 60-90 days;
0% for Qualified Receivables of more than 90 days.
For purposes hereof, "Approved Contracts" shall be bona fide
written contracts with non-affiliates of the Company for the provision of goods
and services which have been approved by Investor. The amount that will be
generated under an Approved contract will be any amounts that will become due
and owing to the
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<PAGE> 3
Company for performance under the Approved Contract (other than amounts that
are indeterminate or contingent such as royalties that depend on sales) but
which have not yet been earned. Once an amount is earned and becomes due and
payable, it may qualify as a Qualified Receivable, but no amount shall be
double counted as an amount due under an Approved Contract and as a Qualified
Receivable in determining the Borrowing Base.
The Company agrees to provide to Investor a Qualified
Receivables list and aging report in a format approved by Investor at or prior
to Closing and on a monthly basis thereafter by the fifth day of each month
(for the previous calendar month), such report to be certified by the Company.
Attached to such report shall be copies of the contracts that the Company
wishes to include on the Approved Contracts list and such other reasonable
documentation as Investor may request. The Company's certification shall
include the following representations and warranties with respect to both
Qualified Receivables or Approved Contracts:
(a) Each of the accounts assigned as collateral security
is genuine, valid, and represents an existing claim arising out of
products sold or services rendered by the Company to the stated
account debtor;
(b) The amounts of the accounts assigned as collateral
security are true amounts now due and owing, the Company has performed
all of its duties and has met all of its obligations pertaining to the
accounts, and the accounts are not subject to any defense, setoff,
counterclaim, or claim of any substance or nature;
(c) The Company is the true and sole owner of the
accounts, the accounts are not subject to any prior security interest
and are free and clear of all liens and encumbrances of any nature;
(d) The Company will not, until such time as the Loan is
paid in full and no longer outstanding, subject the accounts to any
security interest or other lien or encumbrance.
The Company grants Investor a security interest in all
existing or future Qualified Receivables and Approved Contracts (the
"Collateral"), and the proceeds of the Collateral, including, without
limitation, all proceeds of fire, credit or insurance. The security interest
is to secure payment and performance of all of the Company's debts, liabilities
and obligations to the Investor pursuant to the Loan, now existing or hereafter
arising. The Company shall execute and file appropriate UCC financing
statements (the "Financing Statements") to perfect the security interest of
Investor in the Collateral.
The Loan will bear interest at the rate of 10% per annum, with
interest payable monthly. Repayments of principal that are required because of
a change in the Borrowing Base shall be made monthly. Advances on the Loan
will be made no more often than
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<PAGE> 4
monthly. Loan documents evidencing and securing the Loan shall permit Investor
at its option after an Event of Default (as defined herein or in any Loan
documents), to notify the obligors on receivables and Approved Contracts to pay
such funds either directly to Investor or to a lock box or intermediary or
escrow agent selected by Investor.
All obligations of the Company shall, notwithstanding any time
allowed by any instrument evidencing a liability, become immediately due and
payable, without notice and demand, if any of the following Events of Default
("Events of Default") occurs:
(a) Default in the payments or performance of any
obligation or liability contained or referenced in this Agreement or
any note or loan document evidencing the same;
(b) Any warranty, representation or statement made or
furnished to Investor by Company proves to have been false in any
material respect when made or furnished;
(c) Any event which results in the acceleration of the
maturity of the Company's indebtedness to others under any indenture,
agreement, undertaking or otherwise;
(d) The placing of an encumbrance on any of the
Collateral, or the making of any levy, seizure or attachment against
the Collateral; or
(e) The Company's dissolution, insolvency or business
failure, or the appointment of a receiver of any part of the Company's
property, or the Company's assignment for the benefit of creditors,
the recording or existence of any lien for unpaid taxes against the
Company, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against the Company.
In the event any Event of Default listed above occurs, the
Investor shall immediately have all rights and remedies as a secured party
under the Uniform Commercial Code in force in the State of North Carolina, in
addition to the rights and remedies provided herein or in any other agreement
executed by the Company. In the Event of Default, the outstanding balance of
the Loan will bear interest at the rate of 16.5% per annum, until paid. In the
event the Investor has to exercise any rights or remedies or enforce any
collection proceedings against the Company, the Company shall be obligated to
pay the reasonable costs therefore, including reasonable attorneys' fees.
The Loan shall be payable in full on the date one year from
the date the first advance is made on the Loan or such earlier date as the Loan
may become due because Investor elects to accelerate the Loan because of an
event of default under the Loan documents. After thirty (30) day written
notice to Investor, the Loan may be prepaid in whole; provided, however, at
such time that
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<PAGE> 5
the Company wishes to prepay the Loan, Investor shall have the option to
convert the Loan pursuant to I.B. below.
The Loan shall be personally guaranteed by E. Lee Bryan
pursuant to a Guaranty delivered at Closing in the form attached to as Exhibit
E.
B. Conversion Feature. Investor shall have the option at any
time to convert the outstanding principal balance of the Loan to common stock
of the Company ("Common Stock") at the Conversion Price described below. Any
conversion must be of the entire outstanding principal balance at the time of
conversion and, after conversion, Investor will have no obligation to advance
additional funds to the Company. In the event the Investor desires to convert
at a time when the outstanding principal balance of the Loan is less than
$250,000, the Investor shall have the option to convert the entire $250,000,
upon payment to the Company of the difference between $250,000 and the then
outstanding balance of the Loan.
The conversion price (the "Conversion Price") shall initially
be $1.00 per share. This Conversion Price is based upon the Company currently
having 5,552,302 shares of Common Stock issued and outstanding. So long as the
Loan is outstanding, the Company agrees not to issue any stock with dividends
or liquidation preferences superior to the rights of the Common Stock into
which the Loan may be converted without the prior written consent of Investor,
except as provided below in the Section D. titled "Equity Infusion." The
Conversion Price will adjust proportionately upon any stock splits, stock
combinations, stock dividend or similar changes to the capital structure. In
addition, in the event that any Common Stock is issued at a price per share
less than the Conversion Price then in effect, the Conversion Price shall
immediately adjust to be equal to such lower price; provided, this provision
shall not apply to existing employee stock options disclosed by the Company to
Investor.
C. Warrants. Investor shall be issued a warrant (the "Warrant")
to purchase additional shares of Common Stock of the Company. The purchase
price per share for Common Stock under the Warrant shall be equal to the
Conversion Price ($1.00 per share, adjusted for changes to capital structure as
set forth above). The number of shares of Common Stock which may be purchased
pursuant to the Warrant shall be equal to $50,000 divided by the Conversion
Price in effect at the time of exercise of the Warrant. The Warrant will be
exercisable at any time from the date of its issuance through the date seven
(7)years after its issuance. The Warrant may be exercised only once, i.e., if
the Warrant is exercised while the Loan is outstanding, the number of shares
that may be purchased shall not be affected by any subsequent increases in the
principal balance of the Loan.
D. Equity Infusion. In the event the Company plans to sell stock
or otherwise obtain a capital infusion of at least $2,000,000 either by private
placement or public offering at a price per share of common stock of at least
twice the Conversion Price (the "Equity
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<PAGE> 6
Infusion"), the Company will be obligated to notify Investor at least
forty-five (45) days prior to the anticipated closing and to provide Investor
with copies of any information provided to the potential investors in
connection with the Equity Infusion or such other information as may be
reasonably requested by Investor in order to allow it to evaluate the merits of
converting to Common Stock. On or before the closing of the Equity Infusion,
Investor may elect to convert its Loan to Common Stock. If Investor does not
so elect, the Company will repay the Loan out of the proceeds of the Equity
Infusion. However, in either event, Investor shall retain its rights to
purchase Common Stock pursuant to the Warrant in accordance with the terms of
the Warrant.
E. Public Offerings. In the event that the Company registers
securities under the Securities Act of 1933, as amended, Southeast shall have
"piggyback" registration rights (at the expense of the Company) in accordance
with the Registration Rights Agreement attached hereto as Exhibit A to enable
it to sell its shares of Common Stock (whether acquired by conversion of the
Loan or exercise of the Warrant) pro rata with the shares of any other selling
shareholders, with the number of shares of all selling shareholders subject to
the approval of the Company's underwriter.
II. THE CLOSING
The closing ("Closing") of the Loan under this Agreement shall take
place at the offices of Moore & Van Allen, at 2200 West Main Street, Suite 800,
Durham, North Carolina 27705, on or before February 28, 1996, or at such other
time, date and place as are mutually agreeable to the Company and the Investor.
At the Closing, the Company will deliver to the Investor the Registration
Rights Agreement (Exhibit A), the Convertible Debenture (Exhibit B), the
Warrant (Exhibit C), the Financing Statements (Exhibit D) in the forms attached
hereto, a Qualified Receivables list and aging report and such other
certificates and documents as specified herein. In addition, E. Lee Bryan will
deliver the Personal Guaranty (Exhibit E) and the Company's counsel will
deliver an opinion in the form attached hereto as Exhibit F. The date of the
Closing is hereinafter referred to as the "Closing Date." If at the Closing any
of the conditions specified in this Agreement have not been fulfilled, Investor
shall, at its election, be relieved of all of its obligations under this
Agreement without thereby waiving any other rights it may have by reason of
such failure or such nonfulfillment.
III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Any disclosures contained in any schedule of this Agreement shall be
deemed to be included in all schedules to this Agreement whether or not any
other schedules are specifically referenced therein and such disclosures
contained in any such schedule shall qualify the representations and warranties
made by the Company whether any such representation or warranty contains any
express
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<PAGE> 7
qualification. (All schedules hereto are collectively referred to herein as the
"Disclosure Schedule"). Subject to the foregoing, the Company represents and
warrants to the Investor that:
A. Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
State of North Carolina and has full corporate power and authority to
conduct its business as presently conducted and as proposed to be
conducted by it. In addition, the Company has full corporate power
and authority to enter into and perform this Agreement and to carry
out the transactions contemplated by this Agreement. The Company is
duly qualified to do business as a foreign corporation and is in good
standing in every jurisdiction where the nature of its properties or
its business requires such qualification, other than jurisdictions
where the failure to so qualify would not have a material adverse
effect on the operations or financial condition of the Company taken
as a whole.
B. Capitalization. The authorized capital stock of the Company
(immediately prior to the Closing) will consist of 20,000,000 shares
of common stock, 1c. par value per share (the "Common Stock"), of
which 5,552,302 shares are issued and outstanding. All of the issued
and outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable. Except as set
forth in the Disclosure Schedule hereto or provided in this Agreement,
(i) no subscription, warrant, option, convertible security or other
right (contingent or otherwise) to purchase or acquire any shares of
capital stock of the Company is authorized or outstanding, (ii) there
is not any commitment of the Company to issue any subscription,
warrant, option, convertible security or other such right to acquire
any material amount of shares of capital stock of the Company or to
issue or distribute to holders of any shares of its capital stock any
evidences of indebtedness in a material amount or assets of a material
nature of the Company, and (iii) the Company has no obligation
(contingent or otherwise) to purchase, redeem or otherwise acquire any
shares of its capital stock or any interest therein or to pay any
dividend or make any other distribution in respect thereof. Except as
provided in this Agreement, no person or entity is entitled to (i) any
preemptive or similar right with respect to the issuance of any
capital stock of the Company, or (ii) any rights with respect to the
registration of any capital stock of the Company under the Securities
Act. To the best of the Company's knowledge, all of the issued and
outstanding shares of Common Stock have been offered, issued and sold
by the Company in compliance with the applicable Federal and state
securities laws.
C. Affiliations. The Company has no Subsidiaries, and does not
own or control any shares of stock or any other investments in any
other person or entity.
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<PAGE> 8
D. Consent of Third Parties, etc. (i) All consents and waivers
required in connection with the consummation of the transactions
contemplated hereby have been obtained, (ii) the transactions
contemplated hereby do not violate, or constitute or trigger the
occurrence of an event of default with respect to, any lease,
promissory note, loan agreement or any other material agreement or
understanding with respect to which the company is a party, and (iii)
the Company is not in default under or with respect to any lease,
promissory note, loan agreement or any other material agreement or
understanding with respect to which it is a party.
E. Issuance of Common Stock. The issuance and delivery of the
shares of Common Stock issuable upon conversion of the Loan, and the
issuance and delivery of the shares of Common Stock issuable pursuant
to the Warrant, have been, or will be on or prior to the Closing, duly
authorized and reserved for issuance, as the case may be, by all
necessary corporate action on the part of the Company, and the Common
Stock issuable upon conversion of the Loan and upon exercise of the
Warrant, when issued will be duly and validly issued, fully paid and
nonassessable.
F. Financial Statements. The Company has furnished to the
Investor a complete and correct copy of a balance sheet of the Company
(the "Balance Sheet") as of December 31, 1994 (the "Balance Sheet
Date"), and the related statements of income and retained earnings and
changes in financial position for the fiscal year then ended, which
have been reviewed and are audited (the "Annual Financial
Statements"). The Company has also furnished to the Investor the
unaudited monthly financial statements of the Company prepared by the
Company for each of the monthly periods from December 31, 1994 through
September 30, 1995, consisting of balance sheets and related
statements of income and retained earnings and changes in financial
position for the respective months then ended (the "Monthly Financial
Statements"; the Annual Financial Statements and the Monthly Financial
Statements are sometimes collectively referred to as the "Financial
Statements"). The Financial Statements are complete and correct, are
in accordance with the books and records of the Company and present
fairly the financial conditions and results of operations of the
Company, as of the dates and for the periods indicated, and have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis except that, with respect to the Monthly
Financial Statements, which have not been prepared in accordance with
generally accepted accounting principles due to the absence of
relevant notes and applicable periodic adjustments and accruals, there
may be audit adjustments which will not, in the aggregate, be
material. None of the Financial Statements contain any untrue or
misleading statement of material fact or omit to state a fact material
to the business of the Company, or necessary to make the statements
contained therein not misleading. The Company had no material
liabilities of any nature (matured or
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<PAGE> 9
unmatured, fixed or contingent) which were not provided for in the
Financial Statements; and all reserves established by the Company and
set forth in the Financial Statements were adequate for the purposes
indicated herein.
G. Absence of Changes. Except as provided in this Agreement or
as disclosed herein, since the Balance Sheet Date, there has been no
material adverse change in the condition, financial or otherwise, net
worth or results of operations of the Company, other than changes in
the ordinary course of business which changes have not individually or
in the aggregate, had a materially adverse effect on the business,
prospects, properties or condition, financial or otherwise, of the
Company.
H. Property and Assets. The Company has good title to all of its
material properties and assets, including all properties and assets
reflected in the Balance Sheet, except those disposed of since the
date thereof in the ordinary course of business, and none of such
properties or assets is subject to any mortgage, pledge, lien,
security interest, lease, charge or encumbrance other than those the
material terms of which are described in the Balance Sheet or in the
Disclosure Schedule, except for (i) liens for current taxes not yet
due, (ii) mechanic's, materialman's and similar liens which may have
arisen in the ordinary course of business and which, in the aggregate,
are not material, (iii) security interests securing indebtedness not
in default for the purchase price of property purchased or leased in
the ordinary course of business and which, in the aggregate, are not
material, and (iv) minor imperfections of title, if any, not material
in amount and not materially detracting from the value or impairing
the use of the property subject thereto or impairing the current or
proposed operations of the Company; and except as otherwise disclosed
to the Investor in writing, prior to the Closing Date.
I. Insurance. The Company maintains valid policies of workers'
compensation insurance and of insurance with respect to its properties
and business of the kinds and in the amounts not less than is
customarily obtained by corporations of established reputation engaged
in the same or similar business and similarly situated, including,
without limitation, insurance against loss, damage, fire, theft,
product liability and other risks. Schedule III-I contains a list of
all insurance policies maintained by the Company and indicates the
coverage provided under each policy.
J. Taxes. The Company has filed all federal, state and other tax
returns that were required to be filed, and has paid all taxes,
assessments and other such governmental charges as shown on such
returns, and all such assessments and charges received by the Company,
to the extent due, have been paid, except those being contested in
good faith and with respect to which adequate reserves have been
established. The Company
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<PAGE> 10
has, to the best of its knowledge, established on its books reserves
adequate for the payment of all federal, state and other tax
liabilities.
K. Litigation. There is no litigation, proceeding or
governmental investigation, administrative or judicial, pending or, to
the Company's knowledge, threatened against the Company which, if
decided adversely to the Company might have a materially adverse
effect on the business, properties or condition (whether financial or
otherwise) of the Company, or on the ability of the Company to perform
its obligations hereunder or under any other agreement or document
contemplated hereby.
L. Shareholder List. Schedule III-L contains a complete and
correct list of the stockholders of the company, showing the number of
shares of stock held by each such stockholder as of the date of
Closing. Except as otherwise contemplated by this Agreement, there
are no agreements, oral or written, between the Company and any holder
of its stock, or, to the best knowledge of the Company after due
inquiry, among any holders of its stock, relating to the acquisition,
disposition or voting of the stock of the Company.
M. Employment Contracts; Certain Transactions. Except as set
forth in the Schedule III-M, (i) the Company does not have any
employment contracts, deferred compensation agreements or bonus,
incentive or profit-sharing plans currently in force and effect, and
(ii) there are no existing arrangements or proposed arrangements
between the Company and any officer or director or holder of more than
10% of the stock of the Company.
N. Authorization. The execution and delivery of this Agreement,
the Registration Rights Agreement, the Convertible Debenture, the
Warrant and the Financing Statements have been duly authorized by all
necessary corporate action of the Company so that this Agreement, the
Registration Rights Agreement, the Convertible Debenture, the Warrant
and the Financing Statements will constitute the legal, valid and
binding agreements of the Company, enforceable in accordance with
their respective terms, and that neither the execution and delivery of
this Agreement, the Registration Rights Agreement, the Convertible
Debenture, the Warrant and the Financing Statements nor the issuance
of the shares of Common Stock to be issued upon exercise of the
conversion rights or exercise of the Warrant, will be in contravention
of law or of any order, rule or regulation applicable to the Company
or of its Articles of Incorporation, Bylaws or any other contract,
agreement or instrument to which the Company may be a party.
0. Governmental Approvals. No consent or approval of any
governmental agency or authority is required in the making or
performance of this Agreement by the Company which has not
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<PAGE> 11
been or will not be obtained prior to Closing. All such consents and
approvals are listed in Schedule III-0.
P. Other Contracts. The Company has furnished to Investor copies
(or descriptions, in the case of oral arrangements) and set forth on
Schedule III-P is a list of all its material leases, franchise and
managerial contracts and agreements, and any and all other material
contracts and agreements, used or to be used in connection with the
conduct of its business.
The Company is not a party to any other contract or agreement which in
the judgment and opinion of the Company may materially or adversely
affect the business, properties, assets or condition of the Company.
The Company is not in material default of any such material contracts
and agreements.
Q. Articles of Incorporation and Bylaws. The Company's Articles
of Incorporation and Bylaws, copies of which have been furnished to
the Investor, are in full force and effect, without further changes,
amendments or modifications.
R. Untrue Statements. Neither this Agreement nor any other
agreements, reports, certificates, or any other documents furnished to
the Investor by the Company on its behalf in connection herewith
contain any untrue statement of a material fact, or omit to state a
fact which would be material in light of the circumstances pertaining
thereto.
S. Patents, Licenses, Trademarks, etc. Except as set forth on
the Schedule III:
1. The Company owns or licenses all patents, licenses,
trademarks, trade names, trademark rights or copyrights which
are necessary to conduct the Company's business, as now
conducted or as contemplated to be conducted, without conflict
with any patent, license, trademark, trade name or copyright
of any other person or entity, and all such patents, licenses,
trademarks, trade names, trademark rights or copyrights are
listed in the Disclosure Schedule, along with information on
ownership or licensing of such patents, licenses, trademarks,
trade names, trademark rights or copyrights;
2. No royalties, honorariums or fees are payable by the
Company to other persons by reason of the ownership or use of
the Intellectual Property Rights (as defined below) of the
Company; and
3. No product manufactured, marketed or sold by the
Company will, to the best knowledge of the Company, violate
any license or infringe any Intellectual Property Rights or
assumed name of another. There is no pending or threatened
claim or litigation against the Company
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<PAGE> 12
(nor, to the best knowledge of the Company, does there exist
any basis therefor) contesting the validity or right to use of
any of the foregoing. The Company has not received any notice
that any of the Intellectual Property Rights of the Company or
the operation or proposed operation of the Company conflicts,
or will conflict, with the asserted rights of others, nor, to
the best knowledge of the Company, does there exist any basis
for any such conflict, it being understood however, that the
Company had not conducted patent or similar searches.
"Intellectual Property Rights" shall mean all industrial,
commercial and intellectual property rights, including,
without limitation, patents, patent applications, patent
rights, trademarks, trade names, service marks, copyrights,
computer programs, certificates of public convenience and
necessity, franchises, licenses, trade secrets, proprietary
processes and formulae.
T. Compliance with Law. The company is not in material violation
of any law, regulation, authorization or order of any public authority
relevant to the ownership of its properties or the carrying on of its
present or contemplated businesses. Without limiting the generality
of the foregoing, and except as set forth above, the Company is not,
and has not heretofore been, in material violation of any laws,
statutes, regulations, rules and other governmental requirements
relating to the protection of the environment, disposal of waste
materials and similar matters. The Company has all governmental
permits and licenses necessary to operate its business in the manner
currently operated and contemplated to be operated. With respect to
all inspections by the Occupational Safety and Health Administration,
no violations have been cited or indicated.
U. Brokerage Fees. There are no claims against the Company or
any of its officers, directors or shareholders, for brokerage
commissions, finders' fees or other similar compensation in connection
with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of the Company or such
officer, director or shareholder. 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.
V. Leased Real Property. Schedule III-V attached hereto and by
reference made a part hereof sets forth a list of all leases or
subleases of all real property or interests therein currently leased
by the Company (the "Real Property Leases"). Complete and correct
copies of all such Real Property Leases have been delivered to the
Investor. Each Real Property Lease is legal, valid and binding as
between the Company which is the lessee thereunder and, to the best
knowledge of the Company, the other party or parties thereto, and the
Company which is the lessee thereunder is a tenant or possessor in
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<PAGE> 13
good standing, free of any default or breach whatsoever and quietly
enjoys the premises provided for therein. To the best knowledge of
the Company, all real property covered by the Real Property Leases is
zoned for the purposes for which each of such properties is currently
being used. None of the real property covered by the Real Property
Leases has been condemned or otherwise taken by any public authority,
and, to the best knowledge of the Company, no condemnation or taking
is threatened or contemplated. None of the real property is subject
to any claim, contract or law which might affect its use or value for
the purposes now made of it during the terms of the respective Real
Property Leases.
Company shall be deemed to have reaffirmed the representations and warranties
contained in this Article III on the Closing; provided however, that the
Company will update any schedules, financial statements and other information
necessary to reflect any material changes that have occurred since the date of
this Agreement.
IV. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
The Investor represents and warrants to the Company as follows:
A. Investment Purposes. In making the loans and investments
contemplated herein, it is specifically understood and agreed that the
Investor is acquiring the Loan,(and, in the event the conversion
rights or Warrant are exercised, its shares of Common Stock) for its
own account, for the purpose of investment and not with a view towards
the sale or distribution thereof within the meaning of the Securities
Act; provided, however, that the disposition of each of the Investor's
property shall at all times be and remain within its control.
B. No Registration. The Investor is aware that (i) the shares of
Common Stock to be issued upon exercise of conversion rights and upon
exercise of the Warrant will not be registered under the Securities
Act by reason of their issuance by the Company in a transaction exempt
from the registration requirements of the Securities Act; (ii) that
the Investor must hold the Common Stock indefinitely unless a
subsequent disposition thereof is registered under the Securities Act
and applicable state securities laws or is exempt from registration
(pursuant to Rule 144 or otherwise); and (iii) the Common Stock shall
bear a legend to that effect and the Company will make a notation on
its transfer books to such effect.
C. No Broker. The Investor has not employed any broker or finder
in connection with the transactions contemplated by this Agreement.
The Investor shall be deemed to have reaffirmed the representations and
warranties contained in this Article IV on the Closing.
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<PAGE> 14
V. CONDITIONS TO CLOSING OF THE INVESTOR.
A. In addition to any requirements set forth elsewhere in this
Agreement, the Investor's obligation to fund the Loan shall be subject
to the fulfillment on or prior to the Closing Date of the following
conditions:
1. Representation and Warranties Correct. The
representations and warranties made by the Company in Section
III hereof shall be true and correct when made, and shall be
true and correct on the Closing Date, with the same force and
effect as if they had been made on and as of such date, and
there shall have been no default or breach of the terms of
this Agreement by the Company.
2. Agreements. The following agreements, documents or
certificates, in form and substance satisfactory to the
Investor and their counsel, shall have been entered into
and/or delivered by the appropriate parties and shall be in
full force and effect:
a. Registration Rights Agreement among the
Company and the Investors in the form of Exhibit A
hereto (the "Registration Rights Agreement");
b. Convertible Debenture in the form attached
hereto as Exhibit B (the "Convertible Debenture");
and
c. Warrant in the form attached hereto as
Exhibit C (the "Warrant"); and
d. Financing Statements in the form attached
hereto as Exhibit D (the "Financing Statements") and
e. Personal Guarantee of E. Lee Bryan in the
form attached hereto as Exhibit E (the "Personal
Guarantee"); and
f. A certificate, as of the most recent
practicable date, as to the corporate good standing
of the Company issued by the Secretary of State of
North Carolina.
g. Bylaws of the Company, certified by the
Company's Secretary or Assistant Secretary as of the
Closing Date.
h. Resolutions of the Board of Directors of the
Company and, if necessary, of the shareholders of the
Company, authorizing and approving all matters in
connection with this Agreement and the transactions
contemplated hereby, certified by the
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<PAGE> 15
Secretary or Assistant Secretary of the Company as of
the Closing Date.
i. Evidence that the insurance provided for in
Section VIII. I. is in full force and effect.
j. Opinion of the company's counsel in the form
attached hereto as Exhibit F.
k. A budget for one year and use of proceeds.
l. A Qualified Receivables list and aging
report.
m. A compliance certificate executed by the
President of the Company and certifying that all
conditions to this Agreement have been fulfilled.
3. SEC Approval. The SEC shall have issued an order
exempting the transactions contemplated by this Agreement and
the related documents from the provisions of Section 17 of the
Investment Company Act.
4. Blue Sky Law. The Company shall have obtained all
necessary Blue Sky law permits and qualifications, or secured
an exemption therefrom, required by any state for the offer
and sale of the Common Stock issuable upon exercise of the
conversion Rights or exercise of the Warrant.
VI. CONDITIONS TO CLOSING OF THE COMPANY.
The Company's obligation to close the Loan, issue the Convertible
Debenture and Warrant is, at the option of the Company, subject to the
representations made by the Investor in Section IV hereof being true and
correct when made and shall be true and correct on the Closing Date.
VII. RELEASE FROM OBLIGATION TO CLOSE ON THE LOAN.
Because of the SEC approval required in V.A.3 above, it is anticipated
that it may take up to one hundred twenty (120) days to close on the Loan. If,
for whatever reason, the Company decides prior to the Closing that it does not
wish to procure the Loan from the Investor, the Company shall give the Investor
written notice that it does not wish to close on the Loan. The Company shall
not be obligated to close on the Loan provided the following two (2) conditions
are met:
1. The Company immediately executes the Warrant in the
form attached hereto as Exhibit C; and
2. The Company agrees to reimburse the Investor for all
reasonable attorney's fees and expenses incurred in
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<PAGE> 16
connection with the preparation, execution, and delivery of
this Agreement, and other related documentation, including the
documentation necessary to gain approval of the SEC; provided,
however, such obligation to reimburse the Investor shall, in
no event, exceed the sum of Sixteen Thousand Dollars
($16,000). All payments to be made by the Company shall be
made no later than thirty (30) days following presentation to
the Company of a statement for such expenses, reimbursable
hereunder and substantiated to the satisfaction of the
Company.
VIII. AFFIRMATIVE COVENANTS.
The Company covenants and agrees that so long as the Loan is
outstanding, or the Investor owns Common Stock pursuant to the Loan conversion
or exercise of the Warrant, the Company will do the following:
A. Taxes and Liens. The Company will pay and promptly discharge
when due, all lawful claims, including taxes, assessments,
governmental charges and claims for labor, materials and supplies
incurred in the ordinary course of business, except in those instances
where the validity or amount thereof is being contested in good faith
and by appropriate legal or administrative proceedings, and an
adequate reserve therefor has been established on its books.
B. Insurance. The Company will maintain adequate public
liability insurance, casualty insurance on its personal property, and,
in the event the Company presently owns or in the future acquires real
property, fire, wind, water, flood (in the event any of its business
facilities are located in a designated federal flood area) and
earthquake insurance, and business interruption insurance, fidelity
bonds, director's and officer's liability insurance, and product
liability insurance to protect adequately the interests of the Company
against loss from the hazards ordinarily covered by such insurance and
in such amounts as similar businesses ordinarily obtain, and shall
maintain such other insurance, including worker's compensation
coverage, as is customarily maintained by businesses similarly
situated and engaged in operations similar to those of the Company.
The Company shall provide the Investors with copies of all such
policies upon request, which policies shall be issued by financially
sound and reputable insurers acceptable to the Investors in their
reasonable discretion.
C. Financial Statements. While the Loan is outstanding, the
Company will deliver to the Investor the following information:
1. Within ninety (90) days of the Company's year end,
the annual Financial Statements, which will have been
certified by and contain an unqualified report thereon,
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<PAGE> 17
satisfactory to the Investor, of a firm of independent
certified public accountants which financial statements shall
have been prepared in accordance with generally accepted
accounting principles, consistently applied.
2. Within fifteen (15) days after the end of each month,
a balance sheet of the Company as of the end of such month,
and statements of income and cash flows of the Company for the
current month just ended and for the period from the beginning
of the current fiscal year to the end of such month, all in
reasonable detail and reasonably satisfactory in form and
scope to the Investor, and prepared in accordance with
generally accepted accounting principles, consistently
applied;
3. Within thirty (30) days after the end of each
quarter, quarterly narrative reports describing important
operation activities during the prior quarter, indicating
whether the Company is in compliance with this Agreement and
other major agreements and discussing any material variances
from the Budget (as defined herein), accompanied with an
updated Budget as provided herein;
4. As soon as available and to the extent requested by the
Investor, copies of all statements, reports and other
documents relating to the financial condition of the Company
and its business operations as required to be furnished to any
other lender of the company pursuant to the terms of any loan
documentation, as the same may be amended, supplemented or
modified from time to time;
5. Promptly upon transmission thereof, and in any event
no later than ten (10) days after the date of such
transmission, copies of all financial statements, reports and
returns as the Company shall send to its stockholders and any
governmental department, bureau, commission or agency having
regulatory authority over the Company and including, but not
limited to, all communications to and from applicable
regulatory authorities regarding notice of enforcement
proceedings, complaints, inspections and related matters;
5. Promptly upon the effectiveness thereof, certified
copies of all amendments to the Articles of Incorporation and
Bylaws of the Company;
6. Promptly, communications with any persons or
companies interested in acquiring the Company or forming
potential strategic relationships;
7. Promptly, notice of any material events affecting the
Company or its prospects; and
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<PAGE> 18
8. With reasonable promptness, such additional financial
or other data as the Investors may reasonably request.
D. Other Information; Examination. The Company will furnish to
such Investor from time to time and with reasonable promptness: (i)
detailed information with respect to proposed material events relating
to the operations of the Company (including, without limitation,
matters relating to any public offering of securities, financing
arrangements, material litigation, either filed against or on behalf
of the Company, and contracts for substantial amounts of the Company's
products and contracts for any related services) and (ii) copies of
all material documents filed with any court with respect to any
material litigation in which the Company is a party. The Company will
further permit representatives of the Investor to visit and inspect
the premises of the Company and to examine its insurance certificates
and records, books of account and other records at such reasonable
times and as often as the Investor may reasonably request, but only
under circumstances as would not unreasonably interfere with the
conduct of the Company's business. The Company will also permit
representatives of the Investor to visit with the Company's certified
public accountants, and this Agreement shall constitute the Company's
authorization to said accountants to discuss with such representatives
the Company's affairs, finances and accounts. The Investor shall treat
as confidential all information obtained by it hereunder or in
connection herewith not otherwise known to it or in the public domain.
Notwithstanding the foregoing, the Company shall have no
obligation to deliver or disclose to any Investor any document or
information which (i) the Company is prohibited by contract from
delivering or disclosing or (ii) is subject to governmental security
classifications restricting such disclosure (unless a representative
of such Investor holds the appropriate security clearance).
E. Corporate Existence. The Company will do all things necessary
to preserve and to keep in full force and effect its corporate
existence, rights and franchises granted by law or otherwise.
F. Comply with Laws. The Company will comply in all material
respects with all laws of the United States and each state and
subdivision thereof which may be applicable to it, and all other
applicable laws of any country in which the Company is engaged in
business, and with all rules and regulations promulgated by agencies,
commissions and other instrumentalities of the United States and such
other countries, and any state or subdivision thereof having
rule-making or regulatory authority over the Company.
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<PAGE> 19
G. Maintain Property. The Company will take all reasonable steps
to maintain its property in good order and repair.
H. Notice of Default. The Company will, within five (5) days of
its discovery of any breach under this Agreement, or any default under
any agreement executed in connection herewith, or under any other loan
or material lease pursuant to which the Company is obligated to any
third party, furnish with a copy of any notification of breach or
default, as the case may be (in the case such notification is received
with respect to obligations owing to third parties) and an officer I
Certification providing a written explanation of the circumstances
involved.
I. Key Man Life Insurance. The Company will keep in force and
maintain in the name of the Company key man life insurance on the life
of Mr. E. Lee Bryan in the amount of Two Hundred Fifty Thousand
Dollars ($250,000), payable to Investor to the extent of the
outstanding balance of the Loan on terms reasonably satisfactory to
the Investor.
IX. NEGATIVE COVENANTS OF THE COMPANY.
The Company covenants and agrees that so long as any portion of the
Loan is outstanding, the Company shall not, without the written consent of
Investor:
A. Dividends and Redemption of Stock. Authorize, declare or pay
any dividend, whether in cash, properties or securities, or make any
distribution upon any class of its capital stock, or redeem, purchase
or otherwise acquire for value any shares of its stock.
B. Change in Capital Structure. Change the capital structure of
the Company in any manner so as to not keep reserved sufficient Common
Stock for issuance to Investor upon exercise of the Warrant and
conversion of the Loan.
C. Loans to, Investments in, and Liabilities of Others. Make or
permit to remain outstanding any loan or advance to, or pledge or
encumber its assets for the benefit of, or assume or guarantee the
payment or performance of any liability or obligations of, or own,
purchase or acquire any stock or securities of, or guarantee, endorse
or otherwise be or become contingently or absolutely liable in
connection with the obligations, stock or dividends of, any other
person.
D. Merger or Substantial Disposition. Merge or consolidate with
or into any other corporation or effect or enter into any agreement to
effect a reorganization or similar transaction with any other person,
or acquire in any manner any other person, or sell, lease or transfer
or otherwise dispose of all or a substantial part of its assets in a
single or series of related transactions or any of its licenses,
trademarks, trade
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<PAGE> 20
names and copyrights, or change the control of ownership of the
Company, except in connection with an Initial Public Offering.
E. Disposal of Assets. Sell, exchange, convey, assign, transfer,
lease or otherwise dispose of all or any portion of its assets other
than for adequate value and in the normal course of their respective
business operations.
F. Subsidiary Corporation. Create or acquire in any manner a
subsidiary corporation, or acquire any equity interest in any other
person.
G. Character of Business. Change the general character of the
business of the Company as conducted at the date hereof, or engage in
any type of business not reasonably related to the business of the
Company as presently conducted or contemplated to be conducted.
H. Sale and Leaseback. Enter into any arrangement, directly or
indirectly, whereby the Company shall sell or transfer any real or
personal property, whether now or hereafter acquired, used or useful
in the business of the Company and thereafter rent or lease such
property, or other property which the Company shall intend to use for
substantially the same purpose as the property sold or transferred.
I. Transactions With Related Persons. Enter into any transaction
with a Related Person (as defined below) of the Company, or modify any
current transaction or arrangement with a Related Person in any manner
that would be materially adverse to the Company. For purposes of this
Agreement, a "Related Person" shall consist of an employee, a
shareholder, director or officer of the Company, or a relative of any
such individual.
J. No Amendments to Articles of Incorporation or Bylaws. Make
any amendments to its Articles of Incorporation or Bylaws. With
respect to this covenant, the Investor agrees not to withhold their
consent unreasonably.
K. Budget Expenditures. Make or incur an expenditure more than
10% in excess of the amounts provided for in the Budget.
L. Incur Secured Indebtedness. Except for the indebtedness
described on Schedule VIII-L hereto and except as provided in Section
H of Article III relating to permissible liens on property and assets,
incur, create, assume or permit to exist any liability for borrowed
money, or any other liability evidenced by notes, bonds, debentures or
similar obligations secured by Qualified Receivables or Approved
Contracts of the Company, or which would be superior in payment rights
to the Loan.
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<PAGE> 21
M. Salary Limitations. Pay a salary to E. Lee Bryan, except out
of net earnings the Company, and in any event not in excess of Ten
Thousand Dollars ($10,000) per month.
X. INDEMNIFICATION
In addition to the indemnities included elsewhere in this
Agreement, the parties hereto agree to indemnify and hold each other
harmless as follows:
A. Indemnification by the Company. The Company agrees to
indemnify and hold the Investor harmless at all times after the date
of this Agreement from and against any and all loss, liability, damage
or deficiency resulting from any misrepresentation, breach of warranty
or nonfulfillment of any covenants or agreements on the part of the
Company contained herein or in any certificate or document furnished
by the Company pursuant hereto and any loss or damage resulting from
any claims, litigation, actions, suits, proceedings, judgments,
counsel fees, costs and expenses incident to such misrepresentation,
breach or nonfulfillment.
B. Indemnification by the Investor. The Investor agrees to
indemnify and hold the Company harmless at all times after the date of
this Agreement from and against any and all loss, liability, damage or
deficiency resulting from any misrepresentation, breach of warranty or
nonfulfillment of any covenants or agreements on the part of Investor
contained herein or in any certificate or document furnished by such
Investor pursuant hereto and any loss or damage resulting from any
claims, litigations actions, suit proceedings, judgments, counsel
fees, costs and expenses incident to such misrepresentation, breach or
nonfulfillment.
C. Third Party Claims. Should any claim be made by a person not a
party to this Agreement with respect to any matter to which the
foregoing indemnity relates, the party against whom such claim is
asserted (the "Indemnified Party"), within a reasonable period of
time, shall give written notice to the other party (the "Indemnifying
Party") of any such claim, and the Indemnifying Party shall thereafter
defend or settle any such claim, at its sole expense, on its own
behalf and with counsel of its selection. In such defense or
settlement of any claims, the Indemnified Party shall cooperate with
the Indemnifying Party to the maximum extent reasonably possible. Any
payment resulting from such defense or settlement, together with the
total expense thereof, shall be binding on the Company and the
Investor for the purpose of this Article.
D. Settlement. Notwithstanding the foregoing, should any claim
be made by a person not a party to this Agreement with respect to any
matter to which the foregoing indemnity relates, the Indemnified
Party, on not less than thirty (30) days' notice to the Indemnifying
Party, may make settlement of such claim, and such settlement shall be
binding on the
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<PAGE> 22
Indemnifying Party and the Indemnified Party for the purposes of this
Article IX; provided, however, that if within said thirty (30) day
period the Indemnifying Party shall have requested the Indemnified
Party not to settle such claim and to deny such claim at the expense
of the Indemnifying Party, the Indemnified Party will promptly comply
and the Indemnifying Party shall have the right to defend on its own
behalf with counsel of its selection. Any payment or settlement
resulting from such contest, together with the total expense thereof,
shall be binding on the Company and the Investor for the purposes of
this Article.
E. Restrictions on Liability. Notwithstanding the indemnities
contained in this Agreement, the Company and the Investor agree that
neither shall have any obligation to indemnify the other for amounts
for which indemnity is sought under this Article until such amounts
exceed individually or in the aggregate the sum of Ten Thousand
Dollars ($10,000.00).
XI. BUDGET; USE OF PROCEEDS.
The Company covenants and agrees that so long as the Loan is
outstanding it will do the following:
1. At the time this Agreement is executed, the Company will submit a
budget which shall be approved by Investor (the "Budget") setting forth a pro
forma balance sheet of the Company, a pro forma statement of income and
retained earnings, and a cash flow statement of the Company for each month of
the upcoming fiscal year, all in reasonable detail, which projections will be
revised and revisions provided to the Investor on a quarterly basis. The
initial Budget shall indicate the company's use of the Loan proceeds and the
Loan proceeds shall be used only for payment of expenses and costs in
accordance with the Budget. Should the Company receive additional equity from
outside sources, it may immediately submit a revised Budget to Investor showing
the intended use of such capital and Investor shall, in its discretion, approve
such revised Budget, such approval not to be unreasonably withheld.
XII. GENERAL.
As further and special provisions set forth under this Agreement, the
parties hereto further warrant, covenant, contract and agree each with the
other as follows:
A. Entire Agreement. This Agreement, the Exhibits and Schedules
hereto and other documents referred to herein constitute the entire
understanding among the parties. The Exhibits, Schedules and all
certificates delivered at Closing are specifically incorporated into
this Agreement.
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<PAGE> 23
B. Reimbursement of Expenses. The Company agrees to reimburse
the Investor for all reasonable attorneys' fees and expenses incurred
in connection with the preparation, execution and delivery of this
Agreement, and other related documentation, including the
documentation necessary to gain approval of the SEC, or any subsequent
amendments, modifications or supplements thereto; provided, however,
such obligation to reimburse the Investor shall, in no event, exceed
the sum of Sixteen Thousand Dollars ($16,000), and all reasonable
expenses (including reasonable attorneys' fees and expenses) incurred
by the Investor following a breach in enforcing their rights hereunder
or at law or in equity. All payments to be made by the Company shall
be made no later than thirty (30) days following presentation to the
Company of a statement for such expenses, reimbursable hereunder and
substantiated to the satisfaction of the Company.
C. Survival of Agreements and Representations and Warranties.
All agreements and all representations and warranties contained herein
or made in writing by the Company in connection herewith, to the
extent applicable, shall survive the execution and delivery of this
Agreement and other documents referred to herein and shall continue
for so long as any portion of the Loan is outstanding, Investor owns
the Warrant or any shares of Common Stock to be issued upon exercise
of the Loan conversion rights or the Warrant.
D. No Waiver. No delay by or on behalf of the Investor or of the
Company in exercising any of their respective rights conferred
hereunder, and no course of dealing between the Investor and the
Company shall operate as a waiver of any right granted hereunder,
unless expressly waived in writing by the party whose waiver is
alleged.
E. Binding Effect. All covenants, representations, warranties
and other stipulations in this Agreement and other documents referred
to herein, given by or on behalf of any of the parties hereto, shall
bind and inure to the benefit of the respective successors, heirs,
personal representatives and assigns of the parties hereto.
F. Cumulative Powers. No remedy herein conferred upon a party is
intended to be exclusive of any other remedy, and each such remedy
shall be cumulative and in addition to every other remedy given
hereunder or now or hereafter existing at law, or in equity or by
statute or otherwise.
G. Loss of Securities. In the event of the loss, theft, or
destruction of a stock certificate, upon delivery of indemnity in such
form and amount as shall be reasonably satisfactory to the Company, or
in the event of mutilation of a stock certificate, upon surrender and
cancellation of such certificate of stock, the Company will make and
deliver a new certificate of stock, of like tenor, to replace such
lost, stolen, mutilated or destroyed stock certificate. In
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<PAGE> 24
addition, upon request of any holder of stock of the Company now or
hereafter issued by the Company to the Investor, and upon surrender of
such stock to the Company and compliance with any restrictive legends
and the terms of this Agreement, the Company will reissue stock, in
lesser denominations, to parties designated by such holder of stock
certificates.
H. Communications. All communications and notices provided for
hereunder shall be in writing and shall be made by hand delivery,
telecopier, or commercial courier guaranteeing next day service, to:
(i) If to the Company, to:
One Room Systems, Inc.
ATTN: E. Lee Bryan - CEO
2525 Meridan Parkway, Suite 220
Durham, North Carolina 27713
If to the Investor, to:
Southeast Interactive Technology Fund I, LLC
2200 West Main Street, Suite 900
Durham, North Carolina 27705
Attention: W. Clay Hamner
or to such other address with respect to any party as such party shall
notify the other parties hereto in writing. Any notice required to
be given hereunder by one party to another shall be deemed to have
been given when so delivered personally, or if telecopied, when
receipt is acknowledged, or if delivered by commercial courier, the
next business day after timely delivery to the courier. Except as
otherwise provided for herein, to the extent possible, all requests
for disclosure or other provision of information to be made or
otherwise given by the Company shall be completed no later than ten
(10) days following the giving of a written request therefor in the
manner described in this Section.
I. Governing Law. This Agreement shall be governed in all
respects by the laws of the State of North Carolina.
J. Headings. The descriptive section headings herein have been
inserted for convenience only and shall not be deemed to limit or
otherwise affect the construction of any provisions hereof.
K. Multiple Originals. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be
deemed an original, and it shall not be necessary in making proof of
this Agreement to produce or account for more than one such
counterpart.
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<PAGE> 25
L. Changes. The terms and provisions of this Agreement may not
be modified or amended, except with the written consent of the Company
and the Investor.
M. Conditions Precedent. In the event all of the conditions
precedent to Closing are not met, the Company shall be obligated to
pay expenses as provided in XII B. above, and the Company and Investor
shall have no further obligations to each other.
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<PAGE> 26
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their respective duly authorized officers, or
manager, their respective seals to be hereunto affixed, all by authority of
their respective Board of Directors or limited liability company, as of the day
and year first above written.
ONE ROOM SYSTEMS, INC.
By: ________________________________
E. Lee Bryan -- President & CEO
ATTEST:
By:_______________________________
Secretary
[CORPORATE SEAL)
SOUTHEAST INTERACTIVE TECHNOLOGY
FUND I, LLC
BY: ________________________________
Manager
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<PAGE> 27
SCHEDULE III-I INSURANCE POLICIES
1. See attached for copies of all policies.
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<PAGE> 28
SCHEDULE III-L SHAREHOLDER LIST
1. See attached for list of shareholders of the Company.
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<PAGE> 29
SCHEDULE III-M EMPLOYMENT AGREEMENTS
1. E. Lee Bryan--See attached
2. Judy Curtis--See attached
3. Sharron Lucky--See attached
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<PAGE> 30
SCHEDULE III-O GOVERNMENTAL APPROVALS
1. SEC approval required as a condition of Closing.
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<PAGE> 31
SCHEDULE III-P MATERIAL CONTRACTS
1. Contract with Institute for Academic Technology--see attached
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<PAGE> 32
SCHEDULE III-S PATENTS, LICENSES, TRADEMARKS, ETC.
1. See pages 16 and 17 of the Company's Confidential Private Placement
Memorandum
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<PAGE> 33
SCHEDULE VIII-L PERMITTED INDEBTEDNESS
1. Loan from E. Lee Bryan to the Company -- See attached documents for
details
2. Loan from First Union National Bank of North Carolina to the Company
- -- See attached documents for details
3. Loan from First Union National Bank of North Carolina to the Company -
anticipated Closing - November 2, 1995; it is anticipated this loan will be
repaid upon funding under this Investment Agreement.
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<PAGE> 34
SCHEDULE III-V REAL PROPERTY LEASES
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<PAGE> 1
EXHIBIT 2(k)(vi)
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
This Agreement dated as of August 30, 1995 is entered into by and
among NETTECH, INC., a North Carolina corporation (the "Company"), and the
persons and entities listed as Purchasers on Schedule A attached hereto and
incorporated herein by reference (collectively, the "Purchasers").
In consideration of the mutual promises and covenants contained in
this Agreement, the parties hereto agree as follows:
1. Authorization and Sale of Shares.
1.1 Authorization. At the Closing (as hereinafter
defined), the Company will have duly authorized the sale and issuance, pursuant
to the terms of this Agreement, of 487,500 shares of its Series A Convertible
Preferred Stock, no par value per share (the "Series A Preferred"), having the
rights, restrictions, privileges and preferences set forth in the Articles of
Amendment of Articles of Incorporation attached hereto as Exhibit A (the
"Articles of Amendment"). At the Closing, the Company shall have adopted and
filed with the Secretary of State of North Carolina the Articles of Amendment
creating undesignated Preferred Stock and designating Series A Preferred.
1.2 Sale of Shares. Subject to the terms and conditions
of this Agreement, at the Closing the Company will (i) sell and issue to each
of the Purchasers, and each of the Purchasers will purchase, the number of
shares of Series A Preferred specified on Schedule A for the purchase price of
$2.00 per share. The shares of Series A Preferred being sold under this
Agreement are referred to as the "Shares."
1.3 Cancellation of Notes. The purchase price for the Shares
to be sold to certain of the Purchasers shall be paid by such Purchasers by the
cancellation of the outstanding principal of and accrued but unpaid interest on
certain promissory notes executed by the Company and payable to or for the
benefit of such Purchasers (the "Notes") and additional funds by certified
check or wire transfer (the "Additional Funds") as set forth on Schedule A
attached hereto, with accrued interest to be calculated at the closing as
necessary. With respect to each of the Notes, each of the Purchasers paying
for his shares by the cancellation of the Notes payable to him or for his
benefit hereby waives: (i) any provision or condition in the Notes upon which
the cancellation of the Notes is contingent, (ii) any provision in the Notes
that is contrary to the terms of this Agreement, and (iii) any default under
the Note occurring on or before the Closing Date.
<PAGE> 2
1.4 Use of Proceeds. The Company will use the proceeds
from the sale of the Shares as specified on Exhibit B attached hereto.
2. The Closing. The closing ("Closing") of the sale and purchase
of the Shares under this Agreement shall take place at the offices of Petree
Stockton, L.L.P., Suite 400, 4101 Lake Boone Trail, Raleigh, North Carolina
27607, as soon as practicable after each of the conditions to Closing specified
in Section 5 below has been satisfied, but in no event later than August 31,
1995. At the Closing, the Company shall deliver to each of the Purchasers (i)
a certificate for the number of Shares being purchased by such Purchaser,
registered in the name of such Purchaser, against payment to the Company of the
purchase price therefor, by certified check or wire transfer and/or the
cancellation of the indebtedness under the Notes owed to certain of the
Purchasers by the Company. The date of the Closing is hereinafter referred to
as the "Closing Date." If Closing shall not have been held by August 31, 1995
because any of the conditions specified in Section 5 shall not have been
fulfilled, the Purchasers shall, at their election, be relieved of all of their
obligations under this Agreement as their sole remedy.
3. Representations of the Company. Subject to and except as
disclosed by the Company in Exhibit C hereto, the Company hereby represents and
warrants to the Purchasers as follows:
3.1 Organization and Standing. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of North Carolina and has full corporate power and authority
to conduct its business as presently conducted and as proposed to be conducted
by it and to enter into and perform this Agreement and to carry out the
transactions contemplated by this Agreement. The Company is duly qualified to
do business as a foreign corporation and is in good standing in every
jurisdiction in which the failure to so qualify would have a material adverse
effect on the operations or financial condition of the Company. The Company
has made available to the Purchasers true and complete copies of its Articles
of Incorporation and By-Laws, each as amended to date and presently in effect.
The Company has all requisite legal and corporate power to own, lease and
operate its property and assets, to carry on its business as presently
conducted, to enter into this Agreement, to sell and issue the Shares and to
carry out and perform its obligations under the terms of this Agreement.
3.2 Capitalization. The authorized capital stock of the
Company (immediately prior to the Closing) shall consist of 8,000,000 shares of
common stock, no par value per share (the "Common Stock"), of which 1,525,000
shares are issued and outstanding, and 2,000,000 shares of Preferred Stock, no
par
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value per share, of which 487,500 shares shall have been designated as Series A
Preferred, none of which shares will be issued and outstanding. All of the
issued or outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable. Except as set forth in
Exhibit C hereto or provided in this Agreement, (i) no subscription, warrant,
option, convertible security or other right (contingent or otherwise) to
purchase or acquire any shares of capital stock of the Company is authorized or
outstanding, (ii) the Company has no obligation (contingent or otherwise) to
issue any subscription, warrant, option, convertible security or other such
right or to issue or distribute to holders of any shares of its capital stock
any evidences of indebtedness or assets of the Company, and (iii) the Company
has no obligation (contingent or otherwise) to purchase, redeem or otherwise
acquire any shares of its capital stock or any interest therein or to pay any
dividend or make any other distribution in respect thereof. All of the issued
and outstanding shares of capital stock of the Company and all options and
warrants listed on Exhibit C have been offered, issued and sold by the Company
in compliance with applicable Federal and state securities laws.
3.3 Subsidiaries, Etc. The Company has no subsidiaries
and does not own or control, directly or indirectly, any shares of capital
stock of any other corporation or any interest in any partnership, joint
venture or other noncorporate business enterprise.
3.4 Stockholder List and Agreements. Attached as Exhibit
D is a true and complete list of the stockholders of the Company, showing the
number of shares of Common Stock or other securities of the Company held by
each stockholder as of the date of this Agreement. Except as disclosed in
Exhibit D and as provided in this Agreement, there are no agreements, written
or oral, between the Company and any holder of its capital stock, or, to the
best of the Company's knowledge, among any holders of its capital stock,
relating to the acquisition (including without limitation rights of first
refusal or preemptive rights), disposition, registration under the Securities
Act of 1933, as amended (the "Securities Act"), or voting of the capital stock
of the Company.
3.5 Issuance of Shares. The issuance, sale and delivery
of the Shares in accordance with this Agreement, and the issuance and delivery
of the shares of Common Stock issuable upon conversion of the Shares (the
"Converted Shares"), have been, or will be on or prior to the Closing, duly
authorized by all necessary corporate action on the part of the Company, and
all such shares have been duly reserved for issuance. The Shares when so
issued, sold and delivered against payment therefor in accordance with the
provisions of this Agreement, and the
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Converted Shares, when issued upon such conversion, will be duly and validly
issued, fully paid and nonassessable.
3.6 Authority for Agreement. The execution, delivery and
performance by the Company of this Agreement and all other agreements and
instruments required to be executed by the Company on or prior to the Closing
pursuant to Section 5.4 (the "Ancillary Agreements"), and the consummation by
the Company of the transactions contemplated hereby and thereby, have been or
will be duly authorized by all necessary corporate action. This Agreement and
the Ancillary Agreements have been duly executed and delivered by the Company
and constitute valid and binding obligations of the Company enforceable in
accordance with their respective terms. The execution of and performance of
the transactions contemplated by this Agreement and the Ancillary Agreements
and compliance with their provisions by the Company will not violate any
provision of law and will not conflict with or result in any breach of any of
the terms, conditions or provisions of, or constitute a default under, or
require a consent or waiver under, its Articles of Incorporation or By-Laws
(each as amended to date) or any indenture, lease, agreement or other
instrument to which the Company is a party or by which it or any of its
properties is bound, or any decree, judgment, order, statute, rule or
regulation applicable to the Company.
3.7 Governmental Consents. No consent, approval, order
or authorization of, or registration, qualification, designation, declaration
or filing with, any governmental authority is required on the part of the
Company in connection with the execution and delivery of this Agreement, the
offer, issuance, sale and delivery of the Shares, the other transactions to be
consummated at the Closing, or the issuance of the Converted Shares when issued
upon conversion, all as contemplated by this Agreement, except such filings as
shall have been made prior to and shall be effective on and as of the Closing.
Based on the representations made by the Purchaser in Section 4 of this
Agreement, the offer and sale of the Shares to the Purchaser will be in
compliance with applicable Federal and state securities laws.
3.8 Litigation. There is no action, suit or proceeding,
or governmental inquiry or investigation, pending, or, to the best of the
Company's knowledge, any basis therefor or threat thereof, against the Company,
which questions the validity of this Agreement or the right of the Company to
enter into it, or which might result, either individually or in the aggregate,
in any material adverse change in the business, prospects, assets or condition,
financial or otherwise, of the Company, nor is there any litigation pending,
or, to the best of the Company's knowledge, any basis therefor or threat
thereof, against the Company by reason of the proposed activities of the
Company, or
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negotiations by the Company with possible investors in the Company.
3.9 Financial Statements. The Company has furnished to
the Purchaser complete and correct copies of (i) the unaudited balance sheet of
the Company (the "1995 Balance Sheet") as at March 31, 1995, (the "Balance
Sheet Date"), (ii) the related income statement for the fiscal year ending as
of the Balance Sheet Date, (iii) the unadjusted balance sheet of the Company as
of July 31, 1995, and (iv) the income statements for the period from the
Balance Sheet Date through July 31, 1995, all compiled by the Company
(collectively, the "Financial Statements"). The Financial Statements are
complete and correct, are in accordance with the books and records of the
Company and present fairly the financial condition and results of operations of
the Company, as at the dates and for the periods indicated, and have been
prepared in accordance with generally accepted accounting principles
consistently applied, except that the Financial Statements have been prepared
for the internal use of management and may not be in accordance with generally
accepted accounting principles because of the absence of footnotes normally
contained therein and are subject to normal year-end audit adjustments which in
the aggregate will not be material.
3.10 Absence of Liabilities. Except as disclosed in
Exhibit C, the Company did not have, at July 31, 1995, any liabilities of any
type which in the aggregate exceeded $5,000, whether absolute or contingent,
which were not fully reflected on the July 31, 1995 balance sheet, and, since
the Balance Sheet Date, the Company has not incurred or otherwise become
subject to any such liabilities or obligations except in the ordinary course of
business.
3.11 Taxes. The amount shown on the Balance Sheet as
provision for taxes is sufficient in all material respects for payment of all
accrued and unpaid Federal, state, county, local and foreign taxes for the
period then ended and all prior periods. The Company has filed or has obtained
presently effective extensions with respect to all Federal, state, county,
local and foreign tax returns which are required to be filed by it, such
returns are true and correct and all taxes shown thereon to be due have been
timely paid with exceptions not material to the Company. Federal income tax
returns of the Company have not been audited by the Internal Revenue Service,
and no controversy with respect to taxes of any type is pending or, to the best
of the Company's knowledge, threatened. Neither the Company nor any of its
stockholders has ever filed (a) an election pursuant to Section 1362 of the
Internal Revenue Code of 1986, as amended (the "Code"), that the Company be
taxed as an S Corporation or (b) consent pursuant to Section 341(f) of the Code
relating to collapsible corporations.
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3.12 Property and Assets. The Company has good title to
all of its material properties and assets, including all properties and assets
reflected in the July 31, 1995 balance sheet, except those disposed of since
the date thereof in the ordinary course of business, and none of such
properties or assets is subject to any mortgage, pledge, lien, security
interest, lease, charge or encumbrance other than those the material terms of
which are described in the July 31, 1995 balance sheet or in Exhibit C.
3.13 Intellectual Property. Set forth on Exhibit C is a
true and complete list of all patents, patent applications, trademarks, service
marks, trademark and service mark applications, trade names, copyright
registrations and licenses presently used by the Company or necessary for the
conduct of the Company's business as conducted and as proposed to be conducted,
as well as any agreement under which the Company has access to any confidential
information used by the Company in its business (the "Intellectual Property
Rights"). The Company owns, or has the right to use under the agreements or
upon the terms described in Exhibit C, all of the Intellectual Property Rights,
and has taken all actions reasonably necessary to protect the Intellectual
Property Rights. The business conducted or proposed by the Company does not
and will not cause the Company to infringe or violate any of the patents,
trademarks, service marks, trade names, copyrights, licenses, trade secrets or
other intellectual property rights of any other person or entity. The Company
is not aware that any employee is obligated under any contract (including any
license, covenant or commitment of any nature), or subject to any judgment,
decree or order of any court or administrative agency, that would materially
conflict or interfere with (i) the performance of the employee's duties as an
officer, employee or director of the Company, (ii) the use of the employee's
best efforts to promote the interests of the Company or (iii) the Company's
business as conducted or proposed to be conducted. Except as described in
Exhibit C, no other person or entity (including without limitation any prior
employer of any employee or of any other employee of the Company) has any right
to or interest in any inventions, improvements, discoveries or other
confidential information utilized by the Company in its business.
3.14 Insurance. The Company maintains valid policies of
workers' compensation insurance and of insurance with respect to its properties
and business of the kinds and in the amounts not less than is customarily
obtained by corporations of established reputation engaged in the same or
similar business and similarly situated, including, without limitation,
insurance against loss, damage, fire, theft, public liability and other risks.
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3.15 Material Contracts and Obligations. Exhibit C sets
forth a list of all material agreements or commitments of any nature to which
the Company is a party or by which it is bound, including without limitation
(a) each agreement which requires future expenditures by the Company in excess
of $10,000 or which might result in payments to the Company in excess of
$10,000, (b) all employment and consulting agreements, employee benefit, bonus,
pension, profit-sharing, stock option, stock purchase and similar plans and
arrangements, and distributor and sales representative agreements, (c) any
agreement with any stockholder, officer or director of the Company, or any
"affiliate" or "associate" of such persons (as such terms are defined in the
rules and regulations promulgated under the Securities Act), including without
limitation any agreement or other arrangement providing for the furnishing of
services by, rental of real or personal property from, or otherwise requiring
payments to, any such person or entity and (d) any agreement relating to the
Intellectual Property Rights. The Company has delivered to the Purchasers
copies of such of the foregoing agreements as such Purchasers have requested.
All of such agreements and contracts are valid, binding and in full force and
effect.
3.16 Compliance. The Company, in all material respects,
has complied with all laws, regulations and orders applicable to its present
and proposed business and has all material permits and licenses required
thereby. There is no term or provision of any mortgage, indenture, contract,
agreement or instrument to which the Company is a party or by which it is
bound, or, to the best of the Company's knowledge, of any provision of any
state or Federal judgment, decree, order, statute, rule or regulation
applicable to or binding upon the Company, which materially adversely affects
or, so far as the Company may now foresee, in the future is reasonably likely
to materially adversely affect, the business, prospects, assets or condition,
financial or otherwise, of the Company. To the best of the Company's
knowledge, none of the employees of the Company is in violation of any term of
any contract or covenant (either with the Company or with another entity)
relating to employment, patents, proprietary information disclosure,
noncompetition or nonsolicitation.
3.17 Absence of Changes. Since the Balance Sheet Date,
there has been no material adverse change in the condition, financial or
otherwise, net worth or results of operations of the Company, other than
changes occurring in the ordinary course of business which changes have not,
individually or in the aggregate, had a materially adverse effect on the
business, prospects, properties or condition, financial or otherwise, of the
Company.
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3.18 Employees. All employees of the Company whose
employment responsibility requires access to confidential or proprietary
information of the Company have executed and delivered Invention and
Non-Disclosure Agreements in the form of Exhibit E, and all of such agreements
are in full force and effect. None of the employees of the Company is
represented by any labor union, and there is no labor strike or other labor
trouble pending with respect to the Company (including, without limitation, any
organizational drive) or, to the best of the Company's knowledge, threatened.
3.19 ERISA. The Company does not have or otherwise
contribute to or participate in any employee benefit plan subject to the
Employee Retirement Income Security Act of 1974.
3.20 Books and Records. The minute books of the Company
contain complete and accurate records of all meetings and other corporate
actions of its stockholders and its Board of Directors and committees thereof.
The stock ledger of the Company is complete and reflects all issuances,
transfers, repurchases and cancellations of shares of capital stock of the
Company.
3.21 Disclosures. Neither this Agreement nor any Exhibit
hereto, nor any report, certificate or instrument furnished to any of the
Purchasers or their respective special counsel in connection with the
transactions contemplated by this Agreement, including without limitation the
Business Plan of the Company dated July, 1995 (the "Plan"), when read together,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which they
were made, not misleading. The Company knows of no information or fact which
has or would have a material adverse effect on the business, prospects, assets
or condition, financial or otherwise, of the Company which has not been
disclosed in Exhibit C. Each projection furnished in the Plan was prepared in
good faith based on reasonable assumptions and represents the Company's best
estimate of future results based on information available as of the date of the
Plan.
3.22 Tax Credit Status. The Company is qualified as a "qualified
business venture" pursuant to Section 105-163.013(b) of the General Statutes
of North Carolina.
3.23 Related Party Transactions. Except as reflected in the
Financial Statements or as set forth on Exhibit C, the Company is not a party
to any contracts or agreements, written or oral, with any officer, director,
shareholder or employee (or family member of same or entity owned or controlled
by same) (each a "Related Person") pursuant to which the Company buys or sells
goods or
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services to or from any Related Party except for (i) employment arrangements in
the ordinary course of business and (ii) the lease of the Company headquarters
from Ellis Gregory pursuant to an oral month-to-month lease at a current rental
rate of $2,000 per month.
3.24 Stock Options. All stock options issued under the NetTech,
Inc. Stock Option Plan adopted by the Company (the "Stock Option Plan") prior
to closing have been issued to the parties designated on Exhibit C and have a
minimum exercise price of $0.80 per share of common stock.
4. Representations of the Purchasers. Each of the Purchasers
severally represents and warrants to the Company as follows:
4.1 Investment. Such Purchaser is acquiring the Shares,
and the shares of Common Stock into which the Shares may be converted, for his
or its own account for investment and not with a view to, or for sale in
connection with, any distribution thereof, nor with any present intention of
distributing or selling the same; and, except as contemplated by this Agreement
and the Exhibits hereto, such Purchaser has no present or contemplated
agreement, undertaking, arrangement, obligation, indebtedness or commitment
providing for the disposition thereof.
4.2 Authority. Such Purchaser has full power and
authority to enter into and to perform this Agreement in accordance with its
terms. Such Purchaser represents that it has not been organized, reorganized
or recapitalized specifically for the purpose of investing in the Company.
4.3 Experience. Such Purchaser has carefully reviewed
the representations concerning the Company contained in this Agreement, has
read the Plan and has made detailed inquiry concerning the Company, its
business and its personnel; the officers of the Company have made available to
such Purchaser any and all written information which he or it has requested and
have answered to such Purchaser's satisfaction all inquiries made by such
Purchaser; and such Purchaser has sufficient knowledge and experience in
investing in companies similar to the Company so as to be able to evaluate the
risks and merits of his or its investment in the Company and is able
financially to bear the risks thereof.
4.4 Accredited Investor. Unless otherwise indicated in
writing by such Purchaser to the Company, such Purchaser is an Accredited
Investor within the definition set forth in Securities Act Rule 501(a).
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4.5 Authority for Agreement. The execution, delivery and
performance by such Purchaser of this Agreement and each Ancillary Agreement to
which such Purchaser is a party, and the consummation by such Purchaser of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary action. This Agreement and each Ancillary Agreement to which such
Purchaser is a party have been duly executed and delivered by such Purchaser
and constitute valid and binding obligations of such Purchaser enforceable in
accordance with their respective terms. The execution of and performance of
the transactions contemplated by this Agreement and each Ancillary Agreement to
which such Purchaser is a party and compliance with their provisions by such
Purchaser will not violate any provision of law and will not conflict with or
result in any breach of any of the terms, conditions or provisions of, or
constitute a default under, or require a consent or waiver under its Articles
of Incorporation or By-Laws, each as amended to date (in the case of a
corporation) or its partnership agreement, as amended to date (in the case of a
partnership), or any indenture, lease, agreement or other instrument to which
such Purchaser is a party or by which he or it or any of his or its properties
is bound, or any decree, judgment, order, statute, rule or regulation
applicable to such Purchaser.
4.6 Waiver. Such Purchaser hereby waives any defaults
under the Note payable to or for his or its benefit.
5. Conditions to the Obligations of the Purchasers. The
obligation of the Purchasers to purchase Shares at the Closing is subject to
the fulfillment, or the waiver by the Purchasers, of each of the following
conditions on or before the Closing:
5.1 Accuracy of Representations and Warranties. Each
representation and warranty contained in Section 3 shall be true on and as of
the Closing Date with the same effect as though such representation and
warranty had been made on and as of that date.
5.2 Performance. The Company shall have performed and
complied with all agreements and conditions contained in this Agreement
required to be performed or complied with by the Company prior to or at the
Closing.
5.3 Opinion of Counsel. The Purchaser shall have
received an opinion from Petree Stockton, L.L.P., counsel for the Company,
dated the Closing Date, addressed to the Purchasers, and satisfactory in form
and substance to the Purchasers, to the effect that:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of North
Carolina and has full corporate power and authority to conduct its business as
presently conducted, to enter into and
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perform this Agreement and to carry out the transactions contemplated by this
Agreement.
(b) Except for changes contemplated by this
Agreement, the authorized capital stock of the Company is as described in
Section 3.2 of this Agreement and, to the best of such counsel's knowledge, the
other representations and warranties contained in Section 3.2 are true and
correct (other than the last sentence thereof, as to which counsel has no
specific knowledge that such representation is not correct). The rights,
preferences and privileges of, and restrictions on, the Series A Preferred are
as stated in the Articles of Incorporation, as amended.
(c) The Shares and the Converted Shares have been
duly authorized and reserved for issuance by all necessary corporate action on
the part of the Company; and the Shares, when issued, sold and delivered
against payment therefor in accordance with the provisions of this Agreement,
and the Converted Shares, when issued upon such conversion, will be duly and
validly issued, fully paid and nonassessable.
(d) The execution, delivery and performance by
the Company of this Agreement and the Ancillary Agreements have been duly
authorized by all necessary corporate action and this Agreement and the
Ancillary Agreements have been duly executed and delivered by the Company.
This Agreement and the Ancillary Agreements (other than Section 1.11 of the
Registration Rights Agreement referred to in Section 5.4, as to which no
opinion need be expressed) constitute the valid and binding obligations of the
Company, enforceable in accordance with their respective terms, subject as to
enforcement of remedies to applicable bankruptcy, insolvency, reorganization or
similar laws affecting generally the enforcement of creditors' rights and
subject to a court's discretionary authority with respect to the granting of a
decree ordering specific performance or other equitable remedies. The
execution and delivery of this Agreement and the Ancillary Agreements, and the
offer, issue and sale of the Shares hereunder will not conflict with, or result
in any breach of any of the terms, conditions, or provisions of, or constitute
a default under, the Articles of Incorporation or By-Laws of the Company, or
any indenture, lease, agreement, or other instrument known to such counsel to
which the Company is a party or by which it or any of its properties are bound,
or any decree, judgment or order specifically naming the Company and known to
such counsel.
(e) Except as obtained and in effect at the
Closing, no consent, approval, order or authorization of, or registration,
qualification, designation, declaration, or filing with, any governmental
authority (other than filings required to be made after the Closing under
applicable federal and state securities laws, which filings shall be specified
in such
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opinion) is required on the part of the Company in connection with the
execution and delivery of this Agreement, or the offer, issue, sale and
delivery of the Shares, or the other transactions to be consummated at the
Closing pursuant to this Agreement.
(f) Based on the representations of the Purchaser
in Section 4, the offer, issuance and sale of the Shares pursuant to this
Agreement are exempt from registration under the Securities Act.
(g) To the best of such counsel's knowledge,
except as set forth in Exhibit C to this Agreement, there is no action, suit or
proceeding, or governmental inquiry or investigation, pending or threatened
against the Company.
5.4 Other Agreements and Instruments.
(a) The Registration Rights Agreement (the
"Registration Rights Agreement") attached hereto as Exhibit F shall have been
executed and delivered by the Company and the Purchasers.
(b) The Put and Call Agreement attached hereto as
Exhibit G shall have been executed and delivered by the Company and Southeast
Interactive Technology Fund I, LLC.
(c) The Warrants in the form attached hereto as
Exhibit H shall have been executed and delivered by the Company to each of the
Purchasers.
5.5 Consents and Approvals. The Company shall have
received the requisite approvals of the securities commissioners of such states
as may require such approvals in connection with the offering and issuance of
the Shares hereunder and such approvals shall be in full force and effect on
the Closing Date.
5.6 Certificates and Documents. The Company shall have
delivered to the Purchasers:
(a) The Articles of Incorporation of the Company,
as amended and in effect as of the Closing Date (including the Articles of
Amendment), certified by the Secretary of State of the State of North Carolina;
(b) Certificates, as of the most recent
practicable dates, as to the corporate good standing of the Company issued by
the Secretary of State of the State of North Carolina;
(c) By-laws of the Company, certified by its
Secretary or Assistant Secretary as of the Closing Date; and
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(d) Resolutions of the Board of Directors of the
Company, authorizing and approving all matters in connection with this
Agreement and the transactions contemplated hereby, certified by the Secretary
or Assistant Secretary of the Company as of the Closing Date.
5.7 Compliance Certificate. The Company
shall have delivered to the Purchaser a certificate, executed by the President
of the Company, dated the Closing Date, certifying to the fulfillment of the
conditions specified in Sections 5.1 and 5.2 of this Agreement.
5.8 Amendment to Wayfarer Agreement.
The agreement with Wayfarer Technology Group, LLC dated January 13, 1995 shall
have been amended in a form satisfactory to Southeast Interactive Technology
Fund I, LLC ("Southeast").
5.9 Cancellation of IFM Loan. The Loan
and Security Agreement dated January 13, 1995 with IFM Venture Group shall be
cancelled as of the closing and all security interests securing such loan
released (in connection with this transaction, the outstanding balance
[currently $170,000 of principal is outstanding] of the loan shall be paid in
full by the conversion of at least $73,000 of such loan into Shares at closing
with the balance to be paid with the proceeds of the transaction).
5.10 Election of Director. The Company
shall have entered into a Voting Agreement in the form attached hereto as
Exhibit I.
5.11 Other Matters. All corporate and
other proceedings in connection with the transactions contemplated by this
Agreement and all documents and instruments incident to such transactions shall
be reasonably satisfactory in substance and form to the Purchasers, and the
Purchasers shall have received all such counterpart originals or certified or
other copies of such documents as they may reasonably request.
6. Conditions to the Obligations of the Company. The obligations
of the Company under Section 1.2 of this Agreement are subject to fulfillment,
or the waiver, of each of the following conditions on or before the Closing:
6.1 Accuracy of Representations and Warranties. The
representations and warranties of each of the Purchasers contained in Section 4
shall be true on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of that date.
6.2 Blue Sky Approvals. The Company shall have received
the requisite approvals of the securities commissioners
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of such states as may require such approvals in connection with the offering
and issuance of the Shares hereunder and such approvals shall be in full force
and effect on the Closing Date.
6.3 Compliance Certificate. Each of the Purchasers shall
have delivered to the Company a certificate, executed by a general partner (if
the Purchaser is a partnership), by an authorized officer (if the Purchaser is
a corporation), by an authorized manager (if the Purchaser is a limited
liability company) or by the Purchaser (if the purchaser is a natural person),
dated the Closing Date, certifying to the fulfillment of the conditions
specified in Section 6.1 of this Agreement.
6.4 Other Matters. All corporate and other proceedings
in connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Company, and the Company shall have
received all such counterpart originals or certified or other copies of such
documents as it may reasonably request.
7. Covenants of the Company.
7.1 Inspection. The Company shall permit the Purchasers,
or any authorized representatives thereof, to visit and inspect the properties
of the Company, including its corporate and financial records, and to discuss
its business and finances with officers of the Company, during normal business
hours following reasonable notice and as often as may be reasonably requested.
7.2 Financial Statements and Other Information.
(a) The Company shall deliver to the Purchaser:
(i) within 30 days after the end of each
fiscal quarter of the Company, the President of the Company will provide the
Purchasers with a report stating in brief the major operational activities of
the Company for the month and stating further that he has reviewed every
obligation of the Company under this Agreement, under any material agreement
and under any related instrument, and to his best knowledge and belief no
breach by the Company of this Agreement or of such related instrument, has
occurred, or through lapse of time will have occurred, and disclosing any such
breach of which he has obtained knowledge and setting forth what action, if
any, has been initiated or taken by the Company towards the curing of any such
breach. Such report shall discuss any material variances from budget for the
fiscal quarter and shall be accompanied by a reforecast or updated forecast of
financial performance covering the next twelve months from the end of such
fiscal quarter.
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<PAGE> 15
(ii) within 15 days after the end of each
month, an unaudited balance sheet of the Company as at the end of such month
and unaudited statements of income of the Company for such month and for the
current fiscal year to the end of such month, setting forth in comparative form
the Company's projected financial statements for the corresponding periods for
the current fiscal year;
(iii) as soon as available, but in any
event at least 30 days prior to the end of each fiscal year, a budget and for
the next three fiscal years of the Company, projected financial statements on a
semi- annual basis for the first fiscal year of the Company following the date
of this Agreement and on an annual basis for the next two fiscal years, setting
forth balance sheets, income statements and statements of cash flow. The
Company will also deliver to the Purchasers any revisions to such budgets
within 10 days of their acceptance by the Board of Directors of the Company
with any explanation with respect to such deviation;
(iv) annually, at the option of the
Purchasers, within 90 days after the end of each fiscal year of the Company,
consolidated and consolidating financial statements of the Company including a
balance sheet as of the end of such fiscal year and statements of income and
retained earnings and of sources and applications of funds for such fiscal
year, prepared in reasonable detail and in accordance with generally accepted
accounting principles consistently applied and accompanied by the opinion
thereon of a nationally recognized firm of independent certified public
accountants as may be selected by the Board of Directors of the Company. The
Company's chief financial officer shall supply (or upon request of the
Purchasers, the Company shall request its auditor to supply) a report for the
Purchasers analyzing the compliance of the Company with this Agreement and any
other material agreements in light of the annual audited report;
(v) Promptly upon their becoming
available (and in no event later than the ten days after preparation) copies
(without duplication) of all financial statements, reports, press releases,
notices and proxy statements sent by the Company to its security holders and
the financial community and all annual, periodic or special reports or
registration statements filed by the Company with the Securities and Exchange
Commission (the "Commission"), and all other material communications sent by
the Company to its security holders or filed by the Company with the
Commission;
(vi) Within ten days of preparation or
occurrence, the Company will furnish the Purchasers with copies or notification
of any report made by an outside consultant for the Company, any reports filed
with state or federal regulatory
15
<PAGE> 16
agencies or securities exchanges by the Company, any report presented to the
Board of Directors, and communications with any person or persons interested in
acquiring the Company or forming a potential strategic relationship with the
Company; or
(vii) with reasonable promptness, such
other notices, information and data with respect to the Company as the Company
delivers to the holders of its Common Stock, and such other information and
data as the Purchasers may from time to time reasonably request.
(b) The foregoing financial statements shall be
prepared on a consolidated basis if the Company then has any subsidiaries. The
financial statements delivered pursuant to clauses (ii) and (iv) of paragraph
(a) shall be accompanied by a certificate of the President or the chief
financial officer of the Company stating that such statements have been
prepared in accordance with generally accepted accounting principles
consistently applied (except as noted) and fairly present the financial
condition and results of operations of the Company at the date thereof and for
the periods covered thereby.
7.3 Material Changes and Litigation. The Company shall
promptly notify the Purchasers of any material adverse change in the business,
prospects, assets or condition, financial or otherwise, of the Company and of
any litigation or governmental proceeding or investigation brought or, to the
best of the Company's knowledge, threatened against the Company, or any
officer, director, key employee or principal stockholder of the Company
materially adversely affecting or which, if adversely determined, would
materially adversely affect its business, prospects, assets or condition,
financial or otherwise.
7.4 Reservation of Common Stock. The Company shall
reserve and maintain a sufficient number of shares of Common Stock for issuance
upon conversion of all of the outstanding Shares.
7.5 Certain Actions Prohibited. Subject to the
termination of this Section 7.5 as provided below, without the unanimous
consent of the Board of Directors of the Company, the Company will not:
a. Enter into any lines of business that are not
substantially related to the current business of the Company;
b. Issue any stock that would have dividend or
liquidation preferences or registration rights that would be prior to the
rights of the holders of the Shares, except (1) in connection with any round of
financing in which the Company shall receive in excess of two million dollars
($2,000,000) or (2) with the unanimous consent of the Board of Directors of the
Company;
16
<PAGE> 17
c. Make any amendment to the Articles of Incorporation
or Bylaws of the Company that would change the number of directors or the
manner in which directors are elected.
d. Hire any employees with access to confidential or
proprietary information or for development of products unless such employees
execute an Invention and Non-Disclosure Agreement substantially in the form of
Exhibit E;
e. Incur additional indebtedness in an aggregate amount
at any one time outstanding in excess of $150,000 more than the amount
reflected in the July 31, 1995 balance sheet.
f. Increase the number of shares of common stock of the
Company (or securities convertible into common stock) that may be issued under
stock option plans or incentive compensation plans or similar arrangements
beyond the number currently authorized (except proportional adjustments in
connection with stock splits or similar recapitalizations that do not increase
the total percentage of stock of the Company that is subject to such plans);
g. Issue any shares of common stock or securities
convertible into common stock to officers, directors, consultants, suppliers or
customers as a form of compensation except under stock option plans limited as
provided in the preceding subsection.
h. Enter into a transaction with a Related Person or
modify any current transaction or arrangement with a Related Person in any
manner that would be materially adverse to the Company.
i. Enter into any employment agreements for a definite
term with any Related Person who is a holder of more than 10% of the capital
stock of the Company.
The restrictions contained in this Section 7.5 shall terminate with
respect to (and cease to be enforceable by) the holders of Series A Preferred
Stock (except for Southeast Interactive Technology Fund I, LLC) at such time as
the holders of Series A Preferred Stock (including Southeast Interactive
Technology Fund I, LLC) cease to own shares of Series A Preferred Stock
representing at least fifteen percent (15%) of the outstanding capital stock of
the Company on an as-converted basis. The restrictions contained in this
Section 7.5 shall terminate with respect to (and cease to be enforceable by)
Southeast Interactive Technology Fund I, LLC at such time as Southeast
Interactive Technology Fund I, LLC ceases to own shares of Series A Preferred
Stock representing at least five percent (5%) of the outstanding capital stock
of the Company on an as-converted basis.
17
<PAGE> 18
7.6 Termination of Covenants. The covenants of the
Company contained in this Section 7 shall terminate, and be of no further force
or effect, upon the effective date of a registration statement filed by the
Company under the Securities Act covering the Company's first public offering
of Common Stock (an "IPO") and with a selling price (before deducting
commissions and expenses) of at least $3.00 per share, or a merger of the
Company after which the shareholders of the Company immediately prior to the
merger hold less than fifty percent (50%) of the outstanding capital stock of
the surviving corporation and in which the consideration received by the
holders of the Shares is at least $3.00 per share.
8. Transfer of Shares.
8.1 Restricted Shares. "Restricted Shares" means (i) the
Shares, (ii) the shares of Common Stock issued or issuable upon conversion of
the Shares, or (iii) any shares of capital stock of the Company acquired by the
Purchasers pursuant to the right of first refusal set forth in the Bylaws of
the Company, and any other shares of capital stock of the Company issued in
respect of such shares (as a result of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events); provided, however,
that shares of Common Stock which are Restricted Shares shall cease to be
Restricted Shares (i) upon any sale pursuant to the Registration Rights
Agreement, Section 4(1) of the Securities Act or Rule 144 under the Securities
Act or (ii) at such time as they become eligible for sale under Rule 144(k)
under the Securities Act.
8.2 Requirements for Transfer.
(a) Restricted Shares shall not be sold or
transferred unless either (i) they first shall have been registered under the
Securities Act, or (ii) the Company first shall have been furnished with an
opinion of legal counsel, reasonably satisfactory to the Company, to the effect
that such sale or transfer is exempt from the registration requirements of the
Securities Act.
(b) Notwithstanding the foregoing, no
registration or opinion of counsel shall be required for (i) a transfer by a
Purchaser which is a partnership to a partner of such partnership or a retired
partner of such partnership who retires after the date hereof, or to the estate
of any such partner or retired partner, if the transferee agrees in writing to
be subject to the terms of this Section 8 to the same extent as if he were an
original Purchaser hereunder, or (ii) a transfer made in accordance with Rule
144 under the Securities Act.
18
<PAGE> 19
8.3 Legend. Each certificate representing Restricted
Shares shall bear a legend substantially in the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be offered, sold or otherwise transferred, pledged or
hypothecated unless and until such shares are registered under
such Act or an opinion of counsel satisfactory to the Company
is obtained to the effect that such registration is not
required."
The foregoing legend shall be removed from the certificates
representing any Restricted Shares, at the request of the holder thereof, at
such time as they become eligible for resale pursuant to Rule 144(k) under the
Securities Act.
8.4 Rule 144A Information. The Company agrees, upon the
request of any Purchaser, to make available to the Purchasers and to any
prospective transferee of any Restricted Shares of the Purchasers the
information concerning the Company described in Rule 144A(d)(4) under the
Securities Act.
9. Miscellaneous.
9.1 Successors and Assigns. This Agreement, and the
rights and obligations of each Purchasers hereunder, may be assigned by such
Purchaser to any person or entity to which Shares are transferred by such
Purchaser, and such transferee shall be deemed a "Purchaser" for purposes of
this Agreement; provided that the transferee provides written notice of such
assignment to the Company.
9.2 Confidentiality. Each of the Purchasers agrees
that he or it will keep confidential and will not disclose or divulge any
confidential, proprietary or secret information which such Purchaser may obtain
from the Company pursuant to financial statements, reports and other materials
submitted by the Company to the Purchasers or pursuant to visitation or
inspection rights granted hereunder, unless such information is known, or until
such information becomes known, to the public; provided, however, that each of
the Purchasers may disclose such information (i) to his or its attorneys,
accountants, consultants, and other professionals to the extent necessary to
obtain their services in connection with his or its investment in the Company,
(ii) to any prospective purchaser of any Shares from such Purchaser as long as
such prospective purchaser agrees in writing to be bound by the provisions of
this Section or (iii) to any affiliate of such Purchaser or to a partner,
shareholder or subsidiary of such Purchaser.
19
<PAGE> 20
9.3 Survival of Representations and Warranties. All
agreements, representations and warranties contained herein shall survive the
execution and delivery of this Agreement and the closing of the transactions
contemplated hereby for a period of two (2) years.
9.4 Expenses. Each party shall pay its respective
legal fees and expenses incurred in connection with the preparation of this
Agreement and the other agreement contemplated hereby and the closing of the
transactions contemplated hereby permitted, however, that the Company will pay
the reasonable legal fees of counsel for Southeast Interactive Technology Fund
I, LLC.
9.5 Notices. All notices, requests, consents, and
other communications under this Agreement shall be in writing and shall be
delivered by hand or mailed by first class certified or registered mail, return
receipt requested, postage prepaid:
If to the Company, at 4040 Barrett Drive, Raleigh, North Carolina
27609, Attention: Michael R. Carney, President, or at such other address or
addresses as may have been furnished in writing by the Company to the
Purchasers, with a copy to Fred D. Hutchison, Esquire, Petree Stockton, L.L.P.,
4101 Lake Boone Trail, Suite 400, Raleigh, North Carolina 27607;
If to the Purchasers, at the addresses set forth in Schedule A hereto
or at such other address or addresses as may have been furnished to the Company
in writing by any of the Purchasers.
Notices provided in accordance with this Section 9.5 shall be deemed
delivered upon personal delivery or two business days after deposit in the
mail.
9.6 Brokers. The Company and each of the Purchasers
(i) represents and warrants to the other parties hereto that he or it has
retained no finder or broker in connection with the transactions contemplated
by this Agreement, and (ii) will indemnify and save the other parties harmless
from and against any and all claims, liabilities or obligations with respect to
brokerage or finders' fees or commissions, or consulting fees in connection
with the transactions contemplated by this Agreement asserted by any person on
the basis of any statement or representation alleged to have been made by such
indemnifying party.
9.7 Entire Agreement. This Agreement and the
Ancillary Agreements embody the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings relating to such subject matter.
20
<PAGE> 21
9.8 Amendments and Waivers. Except as otherwise
expressly set forth in this Agreement, any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company (acting through its
Board of Directors with the board representatives of any of the Purchasers
abstaining from voting), and the Purchasers owning Seventy Percent (70%) or
more of the Shares. Any amendment or waiver effected in accordance with this
Section 9.8 shall be binding upon each holder of any Shares (including the
Converted Shares), each future holder of all such securities and the Company.
No waivers of or exceptions to any term, condition or provision of this
Agreement, in any one or more instances, shall be deemed to be, or construed
as, a further or continuing waiver of any such term, condition or provision.
9.9 Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original, but
all of which shall be one and the same document.
9.10 Section Headings. The section headings are for
the convenience of the parties and in no way alter, modify, amend, limit, or
restrict the contractual obligations of the parties.
9.11 Severability. The invalidity or unenforceability
of any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
9.12 Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of North Carolina.
21
<PAGE> 22
NETTECH, INC.
By:
-----------------------------------
Michael R. Carney, President
PURCHASERS:
SOUTHEAST INTERACTIVE TECHNOLOGY
FUND I, LLC
By:
-----------------------------------
David C. Blivin
-----------------------------------
John P. Huyett
-----------------------------------
James P. Poitras
-----------------------------------
Mort S. Neblett
-----------------------------------
John B. Abernethy
-----------------------------------
Lee N. Palles
-----------------------------------
Christopher T. Speh
-----------------------------------
Joan R. Reese
-----------------------------------
Fred D. Hutchison
22
<PAGE> 23
----------------------------------
Kevin B. Hayes
----------------------------------
Thomas O. Price
----------------------------------
Edward W. Whitehorne
----------------------------------
Christopher C. Kupec
----------------------------------
J. Booth Kalmbach
----------------------------------
Chris Evans
----------------------------------
William J. Cunningham
----------------------------------
Kathleen B. Cunningham
----------------------------------
E.L. Clark
----------------------------------
James H. Millis, Sr.
23
<PAGE> 24
SCHEDULES AND EXHIBIT
<TABLE>
<S> <C>
SCHEDULE A - PURCHASERS
EXHIBIT A - ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
EXHIBIT B - USE OF FUNDS
EXHIBIT C - EXCEPTIONS
EXHIBIT D - LIST OF STOCKHOLDERS
EXHIBIT E - FORM OF INVENTION AND NON-DISCLOSURE AGREEMENT
EXHIBIT F - REGISTRATION RIGHTS AGREEMENT
EXHIBIT G - PUT AND CALL AGREEMENT
EXHIBIT H - FORM OF WARRANT
EXHIBIT I - VOTING AGREEMENT
</TABLE>
24
<PAGE> 1
EXHIBIT 2(k)(vii)
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made and entered into as of this
30th day of August, 1995 and between NETTECH, INC., a North Carolina
corporation maintaining its principal office in Wake County, North Carolina
(the "Company"), and the undersigned investors in Series A Preferred Stock of
the Company (individually, an "Investor" and collectively, the "Investors").
WHEREAS, the Investors have purchased shares of the Company's Series
A Preferred Stock, no par value per share (the "Series A Preferred Stock"); and
WHEREAS, the Company and the Investors have agreed to provide the
Investors with certain rights relating to the registration and sale of the
capital stock of the Company, together with rights to certain reports of the
Company; and
NOW, THEREFORE, in consideration of the investments being made by the
Investors and of the covenants and promises contained herein, the parties agree
as follows:
ARTICLE 1 - REGISTRATION RIGHTS
1.1 Definitions. For purposes of this Article 1, the following
terms shall have the following respective meanings:
(a) "Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute enacted hereafter, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect from time to
time.
(b) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Act.
(c) The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Act and the declaration or ordering of effectiveness of
such registration statement by the Commission.
(d) "Registrable Securities" shall mean (i) shares of Series A
Preferred Stock which are owned by the undersigned Investors on the date of
executing this Agreement, and (ii) shares of Series A Preferred Stock issued as
a dividend or other distribution with respect to, or in exchange or in
replacement of, any such Series A Preferred Stock (securities shall be deemed
<PAGE> 2
to be owned for this purpose if an agreement for their purchase has been
executed). The term Registrable Securities shall also refer to any common
stock into which the Series A Preferred Stock of an undersigned Investor has
been converted.
1.2 Piggyback Registration. Subject to Section 1.8 of this
Agreement, if at any time the Company proposes to register any of its
securities under the Act, either for its own account or for the account of
others, in connection with the public offering of such securities solely for
cash, on a registration form that would also allow the registration of
Registrable Securities, the Company shall, each such time, promptly give each
Investor written notice of such proposal. This provision shall not apply to a
registration solely of securities issued or issuable in connection with any
stock option plan or other employee benefit plan or in connection with a merger
or acquisition. Upon receipt by the Company of the written request of any
Investor given within ten (10) days after mailing of any such notice by the
Company, the Company shall use its best efforts to cause to be included in such
registration under the Act all the Registrable Securities that each such
Investor has requested be registered.
1.3 Obligations of the Company. Whenever required under this
Agreement to use its best efforts to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the Commission a registration statement
covering such Registrable Securities and use its best efforts to cause such
registration statement to be declared effective by the Commission as
expeditiously as possible and to keep such registration effective until the
earlier of (i) the date when all Registrable Securities covered by the
registration statement have been sold or (ii) 180 days from the effective date
of the registration statement.
(b) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be necessary to
keep such registration statement effective during the period referred to in
Section 1.3(a) and to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement, and cause
the prospectus to be supplemented by any required prospectus supplement, and as
so supplemented to be filed with the Commission pursuant to Rule 424 under the
Act.
(c) Furnish to the selling Investors such numbers of copies of
such registration statement, each amendment thereto, the prospectus included in
such registration statement (including each preliminary prospectus), and each
supplement thereto as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them.
2
<PAGE> 3
(d) Use its best efforts to register and qualify the Registrable
Securities under the securities laws of such jurisdictions in which the Company
shall register securities to be sold by the Company pursuant to the same
registration under the Act.
(e) Promptly notify each selling Investor of such Registrable
Securities at any time when a prospectus relating thereto is required to be
delivered under the Act of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading and, at the request of any such Investor, the Company will
prepare promptly a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not misleading.
(f) Provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement.
(g) Enter into underwriting agreements and related agreements in
customary form for a primary offering.
(h) Make available for inspection by any selling Investor of
Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or other
agent retained by any such selling Investor or underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the officers, directors, employees and independent accountants of the
Company to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
(i) Promptly notify the selling Investors of Registrable
Securities and the underwriters, if any, of the following events and (if
requested by any such person) confirm such notification in writing: (1) the
filing of the prospectus or any prospectus supplement and the registration
statement and any amendment or post-effective amendment thereto and, with
respect to the registration statement or any post-effective amendment thereto,
the declaration of the effectiveness of such documents, (2) any requests by the
Commission for amendments or supplements to the registration statement or the
prospectus or for additional information, (3) the issuance of any stop order
suspending the effectiveness of the registration statement, and (4) the receipt
by the Company of any notification with respect to the suspension
3
<PAGE> 4
of the qualification of the Registrable Securities for sale in any
jurisdiction.
(j) Whenever any provision of this Agreement requires the
Company to furnish any information to the Investors or the agents or
representatives of the Investors, the Company may require any such person or
entity to execute and deliver a reasonable confidentiality agreement, agreement
to refrain from trading or any other agreement necessary or prudent to protect
the Company or its officers, directors and employees against insider trading
liabilities and may restrict access to confidential trade secret information.
1.4 Furnish Information. In the event of any registration by the
Company (whether or not the Registrable Securities of any Investor are included
therein), the Investors shall furnish to the Company such information regarding
them, the Registrable Securities and other securities of the Company held by
them, and the intended method of disposition of such Registrable Securities as
the Company shall reasonably request and as shall be required in connection
with the action to be taken by the Company. It shall be a condition precedent
to the obligation of the Company to cause any registration pursuant to this
Agreement to have become effective for the Investors to have exercised their
rights of conversion with respect to any Registrable Securities proposed to be
registered.
1.5 Suspension of Disposition of Registrable Securities. Each
selling Investor of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 1.3(e) or 1.3(i) (2),
(3) or (4) hereof, such Investor will forthwith discontinue disposition of
Registrable Securities until such Investor's receipt of copies of a
supplemented or amended prospectus contemplated by Section 1.3(e) hereof, or
until it is advised in writing by the Company that the use of the prospectus
may be resumed, and has received copies of any additional or supplemental
filings which are incorporated by reference in the prospectus, or in the case
of Section 1.3(i) (2), (3) or (4), until the Company notifies the Investor in
writing that sales of Registrable Securities may continue. If so directed by
the Company, such Investor will deliver to the Company (at the expense of the
Company) all copies, other than permanent file copies then in such Investor's
possession, of the prospectus covering such Registrable Securities current at
the time of receipt of such notice.
1.6 Expenses of Registration.
The Investors shall bear the fees and disbursements of their own counsel
and shall bear any additional registration and qualification fees and expenses
(including underwriters'
4
<PAGE> 5
discounts and commissions), and any additional costs and disbursements of
counsel for the Company that result solely from the inclusion of Registrable
Securities held by the Investors in such registration, with such additional
expenses of the registration being borne by all selling Investors pro rata on
the basis of the total number of Registrable Securities so registered;
provided, however, that if any such cost or expense is attributable solely to
one selling Investor and does not constitute a normal cost or expense of a
registration, such cost or expense shall be allocated solely to that selling
Investor.
1.7 Underwriting Requirements; Priorities.
(a) The Company will have the right to select the investment
banker(s) and manager(s) to administer any offering to which this Agreement is
applicable. If a registration is an underwritten primary registration on
behalf of the Company (without regard to registration rights arising hereunder
or under any other agreement), and the managing underwriters advise the Company
in writing that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold at the
desired price in such offering, the Company will include in such registration
(i) first, the securities the Company proposes to sell, (ii) second, the
Registrable Securities requested to be included in such registration, pro rata
among the Investors thereof on the basis of the number of Registrable
Securities owned by them and (iii) third, other securities requested to be
included in such registration, pro rata among the holders thereof on the basis
of the number of shares requested to be registered. If a registration is an
underwritten secondary registration on behalf of holders of securities of the
Company, or a combined primary and secondary offering, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold at the desired price in such offering, the Company will
include in such registration (i) first, securities the Company proposes to
sell, (ii) second, the securities requested to be included therein by holders
with contractual registration rights other than the Investors, pro rata among
the holders of such securities on the basis of the number of shares requested
to be included therein, (iii) third, the securities requested to be included
therein by Investors of Registrable Securities, pro rata among the holders of
such Registrable Securities on the basis of the number of shares requested to
be included therein, and (iv) fourth, other securities requested to be included
in such registration, including securities to be sold by holders without
contractual registration rights.
(b) No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's securities on the
basis provided in any underwriting
5
<PAGE> 6
arrangements approved by the persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
1.8 Limitation of the Company's Obligations.
(a) The Company may, in its sole discretion, (i) not comply with
this Agreement in the case of its initial public offering registered under the
Act, and (ii) terminate this Agreement after sale or other transfer, whether by
registration, under Rule 144 or otherwise, by the Investors of at least Fifty
(50%) Percent of the aggregate number of Registrable Securities held by
Investors at the time of the Company's initial public offering.
(b) The Company shall not be obligated under this Agreement to
register or include in any registration Registrable Securities that any
Investor has requested to be registered if the Company shall furnish such
Investor with a written opinion of counsel reasonably satisfactory to such
Investor, that all Registrable Securities that such Investor holds may be
publicly offered, sold and distributed without registration under the Act
pursuant to Rule 144 promulgated by the Commission under the Act without
restriction as to the amount of securities that can be sold.
1.9 Lockup Agreement. For so long as the Investor has the right
to have Registrable Securities included in any registration pursuant to this
Agreement, the Investor agrees in connection with any registration of the
Company's securities upon the request of the underwriters managing any
underwritten offering of the Company's securities, not to sell, make any short
sale of, pledge, grant any option for the purchase of or otherwise dispose of
any Registrable Securities (other than those included in the registration)
without the prior written consent of the Company or such underwriters, as the
case may be, during the seven days prior to and during the 180-day period
beginning on the effective date of such registration as the Company or the
underwriters may specify. This provision shall apply whether or not any
Registrable Securities of the Investor are included in the offering.
1.10 Transfer of Registration Rights. Provided that the Company
is given written notice by the Investor at the time of such transfer stating
the name and address of the transferee and identifying the securities with
respect to which the rights under this Agreement are being assigned, the
registration rights under this Agreement may be transferred in whole or in part
at any time to any transferee of Registrable Securities.
6
<PAGE> 7
1.11 Indemnification and Contribution. In the event any Registrable
Securities are included in a registration statement under this Agreement:
(a) To the full extent permitted by law, the Company will, and
hereby does, indemnify and hold harmless each Investor whose Registrable
Securities are included in a registration, each director, officer, partner,
employee, or agent for such Investor, any underwriter (as defined in the Act)
for such Investor, and each person, if any, who controls such Investor or
underwriter within the meaning of the Act, against any losses, claims, damages
or liabilities, joint or several, to which they may become subject under the
Act and applicable state securities laws insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based on any untrue or alleged untrue statement of any material fact contained
in such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein in light of the circumstances under
which they were made or necessary to make the statements therein not misleading
or arise out of any violation by the Company of any rule or regulation
promulgated under the Act applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration; and
will reimburse each such person or entity for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld) nor
shall the Company be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in connection with such registration statement, preliminary prospectus,
final prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by or on behalf of any such Investor, underwriter or
controlling person.
(b) To the full extent permitted by law, each Investor whose
Registrable Securities are included in a registration under this Agreement,
severally and not jointly, will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed the registration
statement, each person, if any, who controls the Company within the meaning of
the Act, and any underwriter for the Company (within the meaning of the Act),
each other selling Investor and each person, if any, who
7
<PAGE> 8
controls such other selling Investor or underwriter within the meaning of the
Act against any losses, claims, damages or liabilities, joint or several, to
which the Company or any such director, officer, controlling person, selling
Investor or underwriter may become subject, under the Act and applicable state
securities laws, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in such registration statement, preliminary or final
prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished by such Investor expressly for
use in connection with such registration; and each such Investor will reimburse
any legal or other expenses reasonably incurred by the Company or any such
director, officer, controlling person, selling Investor or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of such Investor (which
consent shall not be unreasonably withheld).
In no event shall the liability by reason of this contractual
indemnity of any selling Investor of Registrable Securities hereunder be
greater than the dollar amount of the proceeds received by such Investor upon
the sale of the Registrable Securities giving rise to such indemnification
obligation. Any Investor required to indemnify the Company as provided above
shall cease to have the right to participate in any other registration pursuant
to this Agreement.
1.12 Remedies. In addition to being entitled to exercise all
rights provided in this Article as well as all rights granted by law, including
recovery of damages, the Company and each Investor of Registrable Securities
will be entitled to specific performance of its rights under this Agreement.
The Company and each Investor agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agrees not to raise the defense in any
action for specific performance that a remedy at law would be adequate.
8
<PAGE> 9
ARTICLE 2 -- MISCELLANEOUS
2.1 Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may be given, by written consent of the Company and the Investors of at least
seventy percent (70%) of the outstanding Registrable Securities.
2.2 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
2.3 Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
2.4 Notices. All notices required or permitted to be sent shall
be sent to the addresses of the parties set forth on their respective signature
pages, or to such other address as any party shall provide to the other parties
in a notice sent in accordance with this Agreement. Any notice sent by
registered or certified mail, return receipt requested, or by Federal Express,
shall be deemed to have been received by the party to whom it was sent one day
following the date it was sent. Any notice sent by any other means shall be
deemed to have been received when it is actually received at the address
provided above.
2.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina.
2.6 Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
2.7 Entire Agreement. This Agreement is intended by the parties
as a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Registrable Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
9
<PAGE> 10
matter. Nothing in this Agreement shall preclude the Company from entering
into any other agreement having the same or different terms with any Investor
or any third party with respect to registration rights or related matters.
2.8 Parties Benefitted. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any rights, remedies,
obligations or liabilities.
[COUNTERPART SIGNATURE PAGES ATTACHED]
10
<PAGE> 11
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
IN WITNESS WHEREOF, the undersigned, through its duly authorized
representative, has executed this Agreement under seal as of the date provided
below:
NETTECH, INC.
By:_________________________________
Title:___________________
Date:_______________________________
Address: 4040 Barrett Drive
Raleigh, N.C. 27609
11
<PAGE> 12
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
IN WITNESS WHEREOF, the undersigned Investors have executed this
Agreement under seal as of the date provided below:
SOUTHEAST INTERACTIVE TECHNOLOGY
FUND I, LLC
By:_________________________________(SEAL)
David C. Blivin
2200 W. Main Street
Suite 900
Durham, NC 27705
____________________________________(SEAL)
John P. Huyett
116 Redfern Drive
Cary, NC 27511
____________________________________(SEAL)
James P. Poitras
228 Huntington Drive
Chapel Hill, NC 27514
____________________________________(SEAL)
Mort S. Neblett
7617 Masonboro SD Rd.
Wilmington, NC 28409
____________________________________(SEAL)
John B. Abernethy
1009 W. Lady Diana Court
Apex, NC 27502
____________________________________(SEAL)
Lee N. Palles
8704 Cold Springs Road
Raleigh, NC 27615
____________________________________(SEAL)
Christopher T. Speh
1205 Kintail Drive
Raleigh, NC 27613
12
<PAGE> 13
____________________________________(SEAL)
Joan R. Reese
117 Galax Lane
Durham, NC 27703
____________________________________(SEAL)
Fred D. Hutchison
3317 Old Saybrook Court
Raleigh, NC 27612
____________________________________(SEAL)
Kevin B. Hayes
522 Marshall Way
Durham, NC 27705-1831
____________________________________(SEAL)
Thomas O. Price
10809 Bexhill Drive
Raleigh, NC 27606
____________________________________(SEAL)
Edward W. Whitehorne
4216 Green Level Rd., W
Apex, NC 27502-9446
____________________________________(SEAL)
Christopher C. Kupec
c/o Moore & Van Allen
100 N. Tryon Street
Floor 47
Charlotte, NC 28202
____________________________________(SEAL)
J. Booth Kalmbach
2119 Woodland Avenue
Raleigh, NC 27608
____________________________________(SEAL)
Chris Evans
4319 Lambeth Drive
Raleigh, NC 27609
13
<PAGE> 14
____________________________________(SEAL)
William J. Cunningham
Kathleen B. Cunningham
as Joint Tenants with Right of Survivorship
1031 Harvey Street
Raleigh, NC 27608
____________________________________(SEAL)
William J. Cunningham
Kathleen B. Cunningham
as Joint Tenants with Right of Survivorship
1031 Harvey Street
Raleigh, NC 27608
____________________________________(SEAL)
E.L. Clark
Post Office Box 809
Chapel Hill, NC 27514-0809
____________________________________(SEAL)
James H. Millis, Sr.
Wachovia Capital Management
Post Office Box 3099 (MC32121)
Winston-Salem, NC 2150-2121
14
<PAGE> 1
EXHIBIT 2(k)(viii)
PUT AND CALL AGREEMENT
THIS PUT AND CALL AGREEMENT is made this 30th day of August, 1995,
between NETTECH, INC., a North Carolina corporation (the "Company"); and
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC, a North Carolina limited
liability company (the "Investor").
WHEREAS, pursuant to the terms of a Series A Preferred Stock Purchase
Agreement of even date herewith the Investor has purchased 250,000 shares of
the Company's Series A Preferred Stock, no par value per share (the "Stock");
and
WHEREAS, in the absence of a public market for the Company's capital
stock in which the Investor could sell the shares of the Stock or the Common
Stock to be issued upon conversion of the Stock, and due to the potential lack
of an offer to purchase such shares by means of an acquisition from or through
a third party not a party to the aforesaid Stock Purchase Agreement, the
Investor would be unable to dispose of its shares; and
WHEREAS, the Investor has purchased the Stock for investment purposes
and not for resale and is a passive investor not actively involved in the
Company's day-to-day management as are its principals, and is not receiving
compensation for such day-to-day management services as are its principals; and
WHEREAS, it may be in the best interest of the Investor to dispose of
the Stock to the Company, and it may be in the best interest of the Company,
under favorable conditions, to purchase the Stock from the Investor;
NOW, THEREFORE, in consideration of the investments being made by the
Investor and of the covenants and promises contained herein, the parties agree
as follows:
1. Option to Put or Call.
(a) At any time after the fifth (5th) anniversary of the date
hereof (such period following the fifth anniversary of the date hereof referred
to as the "Exercise Period"), the Investor may require the Company to purchase
(the "Put"), or the Company may require the Investor to sell (the "Call"), in
the manner described in section 2 below, any or all of the Stock held by the
Investor.
(b) The Put or Call shall be exercised by notice in writing given
by the party exercising the Put or Call to the other party during the Exercise
Period as set forth above. Closing shall take place at the time specified in
the notice, which shall be no more than 120 and no less than 90 days following
the date of
<PAGE> 2
notice; provided that in the event of a Call, Investor may elect, at any time
within 30 days following the date of notice of the Call, to convert the Stock
to common stock of the Company, and if Investor elects to convert to common
stock within such 30 day period, the Call shall be null and void with respect
to such converted Stock.
2. Price. The price at which each share of the Stock shall be
purchased by the Owners upon the exercise of the Put or Call shall initially be
$3.00 per share, with such price to increase by ten percent (10%) annually each
year on the anniversary date of this Agreement over the price for the previous
year beginning on the sixth (6th) anniversary date of this Agreement, subject
to adjustment for stock splits, stock dividends and recapitalizations. The
price shall be determined as of the closing date specified in the notice of Put
or Call, not the date of the notice of exercise.
3. Payment Following Exercise of Put or Call
(a) Upon exercise of the Put, the purchase price for Stock subject
to the Put will be payable as follows: Either (i) in cash at closing or, (ii)
upon election of the Company, a minimum of ten percent (10%) of the purchase
price shall be paid in cash at closing, with the balance represented by a
promissory note in the amount of the balance of the purchase price, such
promissory note to bear interest at ten percent (10%) per annum, with principal
payable in twelve equal quarterly payments due on the first day of each
calendar quarter, beginning with the first such date to occur after the
closing, together with all accrued but unpaid interest as of such payment dates
until the promissory note is paid in full (the promissory note may be prepaid
at any time). In the event the Company elects to pay over time, the Investor
shall retain a security interest in the Shares to secure payment of the
promissory note and the Company shall execute a security or pledge agreement
and such other documents or instruments as are reasonably required in order to
grant and perfect such security interest.
(b) Upon exercise of the Call, the purchase price for Stock
subject to the Call will be payable in cash, and payment shall be made against
delivery by the Investor to the Company of the share certificates representing
the Stock being purchased at the time of the payment of the purchase price.
4. Capital Changes; Sale of Common Stock. The Put and Call shall
apply to any securities into or for which the Stock is converted or exchanged,
or which are issued with respect thereto, as a result of any stock dividend,
stock split, recapitalization, reorganization, combination of shares, merger,
consolidation or
2
<PAGE> 3
otherwise, with appropriate adjustments to the price at which such securities
shall be repurchased to eliminate the effect of such capital change; provided
that this Agreement shall terminate with respect to any Stock (other than Stock
for which a notice of Call has been given and no notice of conversion has been
given within the applicable thirty day period) which has been converted into
common stock of the Company, either automatically or upon election of the
Investor as provided in the Articles of Incorporation of the Company.
5. Termination. This Agreement shall terminate and be of no
further force or effect upon the effective date of a registration statement
filed by the Company under the Securities Act covering the Company's first
public offering of Common Stock (an "IPO") in which the selling price (before
deducting commissions and expenses) is at least $3.00 per share or a merger of
the Company after which the shareholders of the Company immediately prior to
the merger hold less than fifty percent (50%) of the outstanding capital stock
of the surviving corporation and in which the consideration received by the
holders of the Stock is at least $3.00 per share.
6. General. The respective rights and obligations of the parties
hereto apply to the parties so named herein and to their respective heirs,
personal representatives, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NETTECH, INC.
By: _________________________________
Michael R. Carney, President
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
By:__________________________________
, Manager
3
<PAGE> 1
EXHIBIT 2(k)(ix)
VOTING AGREEMENT
THIS VOTING AGREEMENT made as of August 30, 1995, among NETTECH, INC.,
a North Carolina corporation (the "Company"), Southeast Interactive Technology
Fund I, LLC, a North Carolina limited liability company (the "Investor"), and
the stockholders of the Company listed on Schedule A hereto (collectively the
"Stockholders").
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Company and the Investor have entered into a Series A
Convertible Stock Purchase Agreement dated the date hereof (the "Stock Purchase
Agreement") in connection with the sale and purchase of securities of the
Company;
WHEREAS, as a condition precedent to its execution and delivery of the
Stock Purchase Agreement, the Investor has required that the Company and the
Stockholders enter into this Agreement, and the Company and the Stockholders
are willing to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants hereinafter contained, the parties hereto agree as follows:
1. Board of Directors. Provided that the Investor owns at least
five percent (5%) of the issued and outstanding capital stock of the Company on
an as-converted basis, the Stockholders and the Investor agree to vote a
sufficient number of shares of the Company's voting capital stock ("Stock")
owned by them or hereafter acquired by them at any time, and otherwise use
their respective best efforts, as stockholders of the Company, to fix and
maintain the number of members of the Company's board of directors ("Board of
Directors") at no more than five (5) and to elect in any subsequent election of
the Board of Directors one member of the Board of Directors designated by the
Investor. The Investor shall furnish written notice to the Stockholders, no
later than five (5) days following receipt of notice of any meeting at which or
action pursuant to which Directors are to be elected, of the name of the person
designated by him to serve as a Director. In the absence of such notice, the
Director then serving and previously designated by the Investor shall be
re-elected. At any time following the date on which the Investor owns at least
five percent (5%) of the issued and outstanding capital stock of the Company on
an as-converted basis, the Stockholders shall use their best efforts at the
request of the Investor to call a special meeting of the shareholders of the
<PAGE> 2
Company for the purpose of electing the representative of the Investor in the
event he has not been so elected or to remove a director or directors in the
event the number of members of the Board exceeds five (5). The obligation of
the Stockholders to use their respective best efforts to elect a representative
of the Investor is subject to the Investor's first having voted a sufficient
number of his shares of the Company's voting capital stock to elect his
representative.
2. Compensation Committee. The Board of Directors of the Company
shall appoint a compensation committee of the Board (the "Compensation
Committee"). The Compensation Committee (i) shall include the director elected
pursuant to Section 1 hereof and (ii) shall have at least 50% of its members
consist of "outside directors," which term shall mean directors who are not
officers or employees of the Company. The Compensation Committee shall be
delegated full responsibility for administering the Stock Option Plan of the
Company as provided in Section 2 of the Stock Option Plan. In addition, the
Company will not, without approval of the Compensation Committee, (i) pay
bonuses to or institute a bonus compensation plan that covers any employees who
are also shareholders holding more than 10% of the Company's capital stock or
(ii) increase the salary of any employees who are also shareholders holding
more than 10% of the Company's capital stock.
3. Term of Agreement. This Agreement shall terminate and be of
no further force and effect upon the occurrence of any of the following events:
(a) the expiration of ten (10) years from the date of the
execution of this Agreement, or
(b) at such time as the Investor owns less than five (5%) of
the issued and outstanding voting capital stock of the Company on an
as-converted basis, or
(c) upon an initial public offering of stock of the
Company in which the selling price (before deducting commissions and expenses)
is at least $3.00 per share, or
(d) upon a merger of the Company after which the shareholders
of the Company immediately prior to the merger hold less than fifty percent
(50%) of the outstanding capital stock of the surviving corporation and in
which the consideration received by the Investor is at least $3.00 per share.
Termination of this Agreement shall not affect any rights or
obligations accruing prior thereto.
4. Notices. All notices hereunder shall be in writing and shall
be given by personal delivery or by registered or certified
2
<PAGE> 3
mail (postage prepaid and return receipt requested) addressed, in the case of
the Shareholders as set forth on Schedule A hereto, in the case of the
Investor, as set forth in Schedule B hereto, or, in the case of the Company, to
its then principal address, or such other address as any party may designate to
the other parties hereto in accordance with the aforesaid procedure. All
notices shall be deemed to have been given as of the date of personal delivery
or as of the date of deposit in the United States mail, as the case may be.
5. Assignment; Binding Effect. This Agreement shall be binding
on the parties hereto and their respective heirs, executors, legal
representatives, successors and assigns; provided that the shares of Stock
owned by a party to this Agreement shall not be transferred (except to the
Company or another party to this Agreement) unless the transferee enters into a
written agreement containing substantially the same provisions as are set forth
herein with respect to the shares so transferred, upon which event such
transferee shall become a party to this Agreement.
6. Legends. All certificates for shares of capital stock held by
the Stockholders, the Investor and any successors or assigns shall bear a
legend specifically referring to this Agreement (or similar agreement of a
subsequent transferee).
7. Amendment. This Agreement may not be changed or amended,
except by written instrument executed by the Company, the Stockholders, and the
Investor, nor may any provision of this Agreement be waived except by written
instrument signed by the party making such waiver, acting as aforesaid in the
case of the Stockholders or the Investor.
8. Entire Agreement. This Agreement contains the sole and entire
understanding of the parties with respect to its subject matter and all prior
negotiations, discussions, commitments and understanding heretofore had between
them with respect thereto are merged herein.
9. Counterparts. This Agreement may be executed in more than one
counterpart, each of which shall be deemed to be an original and which,
together, shall constitute one and the same instrument.
10. Applicable Law. This Agreement shall be construed in
accordance with the law of the State of North Carolina.
11. Invalid Provision. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and the Agreement shall be construed in all respects as if such valid
or unenforceable provisions were omitted.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first written above.
NETTECH, INC.
By:
---------------------------
Michael R. Carney
President
ATTEST:
________________
_____ Secretary
[CORPORATE SEAL]
SOUTHEAST INTERACTIVE TECHNOLOGY FUND, I
By: (SEAL)
---------------------------
, Manager
STOCKHOLDERS:
_________________________________ (SEAL)
Ellis Gregory
_________________________________ (SEAL)
Sharon Gregory
_________________________________ (SEAL)
Michael R. Carney
_________________________________ (SEAL)
Ronald Vincent
4
<PAGE> 5
Schedule A
Shareholders and Addresses for Notice
Ellis Gregory
11316 Centaur Road
Wake Forest, NC 27587
Sharon Gregory
11316 Centaur Road
Wake Forest, NC 27587
Michael R. Carney
7116 North Ridge Drive
Raleigh, NC 27615
Ronald Vincent
7312 Fox Road
Raleigh, NC 27604
5
<PAGE> 6
Schedule B
Address for Notice for the Investor
Southeast Interactive Technology Fund I, LLC
2200 W. Main Street
Suite 900
Durham, NC 27705
6
<PAGE> 1
EXHIBIT 2(k)(x)
- -------------------------------------------------------------------------------
THE SECURITIES REPRESENTED BY THIS WARRANT CERTIFICATE AND THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT
BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT
WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR (ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
SUCH SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES
LAWS.
- -------------------------------------------------------------------------------
No. W-1
CONDITIONAL STOCK PURCHASE WARRANTS
(Void after August 31, 1997)
NETTECH, INC.
a North Carolina Corporation
CERTIFICATE EVIDENCING WARRANTS
(One Warrant is required for the purchase
of one share of stock subject to
adjustment as herein provided)
- -------------------------------------------------------------------------------
THIS IS TO CERTIFY THAT, in the event that NETTECH, INC., a North Carolina
corporation (the "Company") fails to meet projected gross revenues of
$6,250,000 (exclusive of any extraordinary gain recognized upon modification of
the Company's agreements with Cabletron Systems, Inc.) for the Company's two
fiscal years ending March 31, 1997, then SOUTHEAST INTERACTIVE TECHNOLOGY FUND
I, LLC ("Warrant Holder") shall be entitled to purchase 50,000 shares of the
Series A Convertible Preferred Stock, no par value per share (the "Series A
Preferred Stock") of the Company at a price of $0.01 per share (the "Warrant
Price"), at any time after June 30, 1997 and before 5:00 p.m., Eastern time on
August 31, 1997; provided, however, that this Warrant shall expire upon either
(1) the effective date of a registration statement filed by the Company under
the Securities Act covering the Company's first public offering of Common Stock
(an "IPO") in which the selling price (before deducting commissions and
expenses) is at least $3.00 per share; or (2) a merger of the Company after
which the shareholders of the Company immediately prior to the merger hold less
than fifty percent (50%) of the outstanding capital stock of the surviving
corporation and in which the consideration received by the Warrant Holder is at
least $3.00 per share.
<PAGE> 2
1. Adjustments. The Warrant Price and the number and kind of
securities purchasable upon the exercise of the Warrants shall be subject to
adjustment from time to time upon the occurrence of certain events, as follows:
(a) In the case of any reclassification of the Series A
Preferred Stock or in the case of any consolidation or merger of the Company
with or into another corporation (other than a merger with another corporation
in which the Company is a continuing corporation and which does not result in
any reclassification of the Series A Preferred Stock), or in the case of any
sale of all or substantially all of the assets of the Company, the Company, or
such successor or purchasing corporation, as the case may be, shall execute a
new Warrant certificate, providing that the holder of these Warrants shall have
the right to exercise such new warrants to receive, in lieu of each share of
Series A Preferred Stock theretofore issuable upon exercise of these Warrants,
the number and kind of shares of stock, other securities, money or property
receivable upon such reclassification, consolidation, merger or sale by a
holder of shares of the Series A Preferred Stock. Such new Warrant certificate
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for herein. The provisions of this
subsection (b) shall similarly apply to successive reclassifications,
consolidations mergers and sales.
(b) If the Company at any time while these Warrants
remain outstanding and unexpired shall split, subdivide or combine the Series A
Preferred Stock, the Warrant Price shall be proportionately decreased in the
case of a split or subdivision or increased in the case of a combination.
(c) If the Company at any time while these Warrants are
outstanding and unexpired shall pay a dividend with respect to the Series A
Preferred Stock payable in shares of Series A Preferred Stock, then the Warrant
Price shall be adjusted, from and after the date of determination of the
shareholders entitled to receive such dividend, to that price determined by
multiplying the Warrant Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total
number of shares of the Series A Preferred Stock outstanding immediately prior
to such dividend, and (ii) the denominator of which shall be the total number
of shares of Series A Preferred Stock outstanding immediately after such
dividend.
(d) Upon each adjustment in the Warrant Price pursuant to
subsections (a), (b) or (c) above, the number of shares of Series A Preferred
Stock purchasable hereunder shall be adjusted, to the nearest whole share, to
the product obtained by multiplying the number of shares of Series A Preferred
Stock
<PAGE> 3
purchasable immediately prior to such adjustment in the Warrant Price by a
fraction (i) the numerator of which shall be the Warrant Price immediately
prior to such adjustment, and (ii) the denominator of which shall be the
Warrant Price immediately after such adjustment.
2. Liquidation and Dissolution. In case any voluntary or
involuntary dissolution, liquidation, or winding up of the Company shall at any
time be proposed, the Company shall give at least 20 days prior written notice
thereof to the registered holder hereof stating the date on which such event is
to take place and the date (which shall be at least 20 days after the giving of
such notice) as of which the holders of shares of Series A Preferred Stock of
record shall be entitled to exchange their Series A Preferred Stock for
securities or other property deliverable upon such dissolution, liquidation, or
winding-up (on which date, in the event such dissolution, liquidation or
winding-up shall actually take place, the Warrants and all rights with respect
hereto shall terminate).
3. Exercise. Exercise may be made of all or part of the Warrants
evidenced hereby to the extent permitted hereunder by surrendering this
Certificate together with a duly executed Election to Exercise in the form
attached hereto, to the Company at its principal office, or at such other place
as the Company shall designate in writing, accompanied by payment in full of
the aggregate Warrant Price payable in respect of the Warrants being exercised.
If less than all the Warrants evidenced by this Certificate are exercised, the
Company will, upon such exercise, execute and deliver to the registered holder
hereof a new Certificate (dated the date hereof) evidencing the Warrants not so
exercised. As promptly as practicable after surrender of this Certificate and
the receipt of payment as aforesaid, and in any event within 10 business days
thereafter, the Company shall issue and deliver to the registered holder
hereof, on its written order, a certificate or certificates for the number of
shares of Series A Preferred Stock issuable upon the exercise of such Warrants
in accordance with the provisions hereof.
4. No Fractional Shares. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of the
Warrants. If the full exercise of the Warrants requires the issuance of any
fraction of a share, the Company shall pay the holder thereof an amount in cash
equal to such fraction multiplied by the current market value of a whole share.
The current market value shall equal, if the Series A Preferred Stock is listed
on a national securities exchange, the last reported sale price on such
exchange prior to the date of the exercise of the Warrants or, if the Series A
Preferred Stock is quoted in the National Association of Securities Dealers
Automated Quotation System, the last reported sales price or the mean of the
last reported bid and asked prices (as the case may be) reported by
3
<PAGE> 4
NASDAQ or, if the Series A Preferred Stock is not so listed or quoted, the
current market value determined in good faith by the Company.
5. Transfer. This Certificate and the Warrants evidenced hereby
may be transferred only by surrendering this Certificate for cancellation at
the principal office of the Company, or at such other place as the Company
shall designate in writing, accompanied by duly executed transfer instruments
in form reasonably satisfactory to the Company. Warrants may be divided or
combined into a Certificate or Certificates evidencing the same aggregate
number of Warrants.
6. Registered Owner. The person in whose name this Certificate
is registered shall be deemed the owner hereof and of the Warrants evidenced
hereby for all purposes. The registered owner of this Certificate shall not be
entitled, by virtue of being such registered owner, to any rights whatsoever as
a shareholder of the Company.
7. Securities Law Matters. At the time of exercise, the holder
shall execute an Investment Letter in the form attached hereto stating (among
other things) that the shares issued pursuant to the Warrants have not been
registered under federal or state securities laws, and that such shares may not
be transferred unless the shares are so registered or unless the Company has
received an opinion of counsel acceptable to the Company that such transfers
are exempt from registration.
8. Notice. All notices and other communications required or
permitted hereunder shall be in writing and shall be given in person or by
registered or certified mail, addressed, if to the Company, to
NetTech, Inc.
4040 Barrett Drive
Raleigh, N.C. 27609
Attn: President
and if to the holder, to the address of the holder noted on the Company's
warrant registration records.
9. Expiration. The Warrants evidenced by this Certificate shall
be wholly void for all purposes after 5:00 p.m., Eastern time, on August 31,
1997.
4
<PAGE> 5
Date: August___, 1995.
NETTECH, INC.
[CORPORATE SEAL]
By:
-----------------------------
------------------, President
ATTEST:
- ------------------------------
- -------------------, Secretary
<PAGE> 6
FORM OF
ELECTION TO EXERCISE
The undersigned registered holder hereby elects to purchase
_____________ shares of no par value Series A Preferred Stock of NetTech, Inc.
(the "Company") under and pursuant to the provisions of the foregoing
Certificate evidencing __________ Stock Purchase Warrants. The Company is
hereby requested to issue Certificate(s) representing said shares in the name
of the undersigned at the address set forth following its signature in
denominations as indicated. Delivered herewith is an Investment Letter to the
Company in the form attached to the Warrants.
DATED this _____ day of ____________, 19___.
Name of Registered Holder _________________________________
Signature _________________________________________________
Title _____________________________________________________
Address ___________________________________________________
___________________________________________________
Issue Certificate(s) as Follows:
_______________ Certificates for _____________ shares each.
_______________ Certificates for _____________ shares each.
_______________ Certificates for _____________ shares each.
<PAGE> 7
FORM OF
INVESTMENT LETTER
__________, 19___
[Issuer Name/Address]
Gentlemen:
The undersigned, ________________________ ("Purchaser") intends to
acquire up to _________ shares (the "Shares") of the no par value Series A
Preferred Stock (the "Series A Preferred Stock") of NetTech, Inc. (the
"Company") from the Company pursuant to the exercise of certain Stock Purchase
Warrants held by Purchaser. The Shares will be issued to Purchaser in a
transaction not involving a public offering and pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the "1933 Act"). In
connection with such purchase and in order to comply with the exemption from
registration relied upon by the Company, Purchaser represents, warrants and
agrees as follows:
1. Purchaser is acquiring the Shares for Purchaser's own account,
to hold for investment, and Purchaser shall not make any sale, transfer or
other disposition of the Shares in violation of the 1933 Act or the rules and
regulations promulgated thereunder by the Securities and Exchange Commission or
in violation of any applicable state securities law.
2. Purchaser has been advised that the issuance of the Shares is
not being registered under the 1933 Act on the ground that this transaction is
exempt from registration under Section 3(b) or 4(2) of the 1933 Act, as not
involving any public offering, and that reliance by the Company on such
exemptions is predicated in part on Purchaser's representations set forth in
this letter. Purchaser also has been advised that neither the Shares nor the
issuance thereof are being registered under the securities laws of any state.
3. Purchaser has been informed that the Shares must be held
indefinitely unless subsequently registered under the 1933 Act and applicable
state securities laws, or unless exemptions from such registration are
available with respect to any proposed transfer or disposition by Purchaser of
the Shares. Purchaser understands and agrees that the Company, as a condition
to the transfer of any of the Shares, may require that the request for transfer
be accompanied by an opinion of counsel satisfactory to the Company, in form
and substance satisfactory to the Company, to the effect that the proposed
transfer is exempt from registration under the 1933 Act and applicable state
securities laws, unless such transfer is covered by an effective registration
statement under the 1933 Act and all applicable state securities laws.
<PAGE> 8
4. Purchaser understands and agrees that there will be placed on
the certificates for the Shares, or any substitutions therefor, a legend
stating in substance:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), nor under any state securities law and may not be
pledged, sold, assigned or transferred unless (i) a
registration statement with respect thereto is effective under
the Act and any applicable state securities laws or (ii) in
the opinion of counsel acceptable to the Company such
securities may be pledged, sold, assigned or transferred
without an effective registration statement under the Act or
applicable state securities laws.
5. Purchaser has been furnished with or has had access to the
information it has requested from the Company in connection with the investment
represented by the Shares and has had an opportunity to discuss with the
officers and management of the Company the Company's business and financial
affairs. Purchaser has such knowledge and experience in business and financial
matters and with respect to investments in securities or in privately held
companies so as to enable it to understand and evaluate the risks of such
investment and form an investment decision with respect thereto.
Very truly yours,
-----------------------------------
[Purchaser]
Accepted as of the _____ day of ____________, 19____.
NETTECH, INC.
By: ------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 2(k)(xi)
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO THE SALE OR
DISTRIBUTION THEREOF AND HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT
OF 1933 OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR THE SHARES OF
COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY BE SOLD OR TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE UNDER SAID ACT.
WAVE INTERACTIVE NETWORK, INC.
FIXED RATE CONVERTIBLE NOTE
DUE DECEMBER 15, 1996
$250,000.00 New York, New York
December 15, 1995
FOR VALUE RECEIVED, the undersigned, Wave Interactive Network, Inc., a
Delaware corporation (the "Company"), hereby promises to pay to the order of
Southeast Interactive Technology Fund, I, LLC (the "Holder") the principal
amount of Two Hundred Fifty Thousand Dollars ($250,000.00) on December 15, 1996
(the "Maturity Date") and accrue interest (computed on the basis of a 365-day
year, using the number of days actually elapsed) at a rate equal to ten percent
(10%) per annum, with all interest due and payable when the principal amount
becomes due and payable.
This Convertible Note ("Note") is convertible into Common Stock of the
Company (the "Common Stock") as provided by the terms of Article 3 set forth
below. This Note is being delivered to the Holder together with a Warrant
(attached hereto as "Exhibit A"), a Guaranty (attached hereto as "Exhibit B")
and an Escrow Agreement (attached hereto as "Exhibit C") (the Note, Warranty,
Guaranty and Escrow Agreement are collectively referred to herein as the
"Documents").
<PAGE> 2
ARTICLE 1
Representations, Warranties and Covenants of the Company
(a) Representations and Warranties of the Company. The Company
hereby represents and warrants to and covenants and agrees with the Holder as
follows:
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is qualified and in good standing as a foreign corporation in each
jurisdiction in which the nature of the business conducted by the Company
requires such qualification.
(ii) The Company has the full right, power and
authority to enter into and to perform the transactions contemplated by the
Documents. The Documents will be duly executed by the Company, and the
transactions contemplated thereby have been duly authorized by all necessary
corporate action and constitute the legal, valid and binding obligations of the
Company, enforceable in accordance with their respective terms.
(iii) The shares of the Company's common stock when
issued pursuant to the terms of this Note or upon exercise of the Warrant, as
the case may be, will be duly and validly authorized and issued, fully paid and
nonassessable.
(iv) The Company has delivered to the Holder a
copy of the Company's balance sheet for the period ending November 30, 1995.
This balance sheet accurately describes the financial condition of the Company
and does not contain any material misstatement of fact or omit to state any
material fact necessary to make the information contained in the balance sheet
not misleading.
(v) Neither the execution or delivery of the
Documents by the Company nor the performance by the Company of the transactions
contemplated by the Documents requires the consent, waiver, approval, license
or authorization of or filing with any person or public authority or violate
any provision of law applicable to the Company or conflict with or result in a
breach or termination of any provision of, or constitute a default under, or
will result in the creation of any lien, charge or encumbrance upon any of the
property or assets of the Company pursuant to any corporate charter, by-laws,
mortgage, deed of trust, indenture or other agreement or instrument, or any
order, judgement, decree, statute, regulation or any other registration of any
kind or character to which the Company is a party or by which any of the assets
of the Company may be bound, with or without the giving of notice, the passage
of time or both.
(vi) The Company is in compliance in all material
respects with all laws and regulations of all Federal, state and local
government agencies having jurisdiction over it or
- 2 -
<PAGE> 3
affecting its business, and possesses all required licenses, permits and
approvals for its services and facilities which are required to be issued by
any and all applicable Federal, state or local authorities.
(b) Covenants of the Company
(i) Payment of Principal and Interest. The
Company will duly and punctually pay or cause to be paid the principal amount
of this Note and the interest thereon at the times and place and in the manner
specified in this Note. This Note may not be prepaid, in whole or in part, by
the Company without the prior written consent of the Holder, except as provided
herein.
(ii) Notice of Certain Events. The Company shall
provide the Holder with notice within three (3) years of such time as the
Company signs a letter of intent or commences preparation of offering documents
or agreements relating to the public offering of common stock of the Company
("Common Stock") pursuant to the Securities Act of 1933, as amended (the
"Securities Act").
(iii) Financial Statements, Certificates and
Information. During the period beginning on the date hereof and ending on the
last to occur of (i) the Maturity Date or (ii) upon conversion of the Note, the
last date on which the Holder owns the Common Stock issued pursuant to such
conversion, the Company will deliver to the Holder (i) within fifteen (15) days
after the end of each of month, a report comparing monthly cash flow against
the Budget (as defined herein), which shall be accompanied by a certificate of
the chief financial officer of the Company; (ii) within thirty (30) days after
the end of each quarter, quarterly narrative reports describing material
operation activities during the prior quarter, indicating whether the Company
is in compliance with this Note and other material agreements and discussing
any material variances from the Budget, which shall be accompanied by a
reforecast or updated forecast of financial performance for the next twelve
months; (iii) within ninety (90) days after the end of each fiscal year, the
Company's audited consolidated financial statements (including the report of
the independent accountants, a balance sheet, statements of operations, cash
flows and stockholders equity and notes to financial statements) for such
fiscal year, (iv) copies of all communications and materials made generally
available to stockholders and all press releases at such time as such material
is provided to stockholders or at such time as the press release is delivered
to the media; (v) copies of all filings made with the Securities and Exchange
Commission (the "Commission") or any other federal or state regulatory agencies
or securities exchanges, within five (5) days after such filings are made; and
(vi) any communications with any entities interested in acquiring the Company
or forming potential strategic relationships, within seven (7) days of any such
communication; and (vii) notice of any material events affecting the Company or
its prospects, within
- 3 -
<PAGE> 4
seven (7) days of any such event. Notwithstanding the foregoing, the
obligations imposed on the Company in this Paragraph 1(c) shall terminate (if
not sooner terminated in accordance with terms of this Note) upon an initial
public offering of Common Stock.
(iv) Business and Corporate Existence. The
Company will keep in full force and effect its corporate existence and all
rights, licenses, leases and franchises reasonably necessary to the conduct of
its business and will not take any steps leading to the liquidation or
dissolution of the Company.
(v) Inconsistent Agreements. The Company will
not enter into any agreement which is inconsistent or conflicts with or limits
or abrogates in any way any of the provisions of this Note.
(vi) Notice of Default Under Note. If an Event of
Default, as defined in Paragraph 2(a) of this Note, shall occur or if an event
which, with the passage of time or the giving of notice would result in an
Event of Default, then in either case the Company will immediately notify the
Holder in writing of such Event of Default or such event describing it in
reasonable detail and such written notification shall be signed by an executive
officer of the Company.
(vii) No Extension, Modification of Warrants. The
Company will not extend or otherwise modify the terms of any outstanding
warrants or options.
(viii) No Right of Prepayment. The Company shall
not have the right to prepay this Note without the written consent of the
Holder, except as provided in Article 7.
(ix) Payment into Escrow under Certain
Circumstances. In the event that this Note becomes prepayable as a result of
an Event of Default pursuant to Article 2 of this Note, then the Company shall,
as the Holder requests, either (A) pay such principal amount and accrued
interest to the Holder or (B) pay to Esanu Katsky Korins & Siger, as escrow
agent, the principal amount of this Note which would, but for this Paragraph
1(k), be paid to the Holder, plus accrued interest to such date, with
instructions to invest such amount in United States Government obligations and
hold such amount until the Maturity Date or until this Note shall be converted.
(x) Management; Board Membership. During the
period in which the Note is outstanding, the Company shall not, without the
prior written consent of the Holder, do any of the following: (a) enter into
new lines of business; (b) incur any indebtedness secured by receivables or
contracts of the Company; (c) incur any indebtedness that is superior in
payment rights to the Note; or (d) change the Company's capital structure in
such a manner as to not keep reserved sufficient Common Stock for
- 4 -
<PAGE> 5
issuance to the Holder upon conversion of the Note. Furthermore, during such
period and for a period of two years thereafter, Southeast shall have the right
to elect one member to the Board of Directors of the Company.
(xi) No Dividends. During the period in which the
Note is outstanding, the Company shall not pay any dividend or make any
distribution with respect to any class of its capital stock.
(xii) No Merger, Consolidation or Sale of Assets.
Neither the Company nor any Subsidiary will merge or consolidate with or into
any other corporate entity or sell or lease all or a substantial portion of its
business or assets without the approval of the Holder of this Note, except that
the Company may merge a subsidiary into itself or another subsidiary.
ARTICLE 2
Events of Default and Acceleration
(a) Events of Default Defined. The entire unpaid principal amount
of this Note together with interest thereon shall, at the option of the Holder,
upon written notice to the Company, forthwith become and be due and payable if
any one or more Events of Default shall have occurred (for any reason
whatsoever and whether such happening shall be voluntary or involuntary or be
affected or come about by operation of law pursuant to or in compliance with
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body) and be continuing. An Event of
Default shall occur:
(i) the Company fails to make due and punctual
payment of the principal of or any interest on the Note when and as the same
shall become due and payable whether at maturity or otherwise; or
(ii) the Company shall be in default with respect
to any of its obligations under any note, bond or other debt instrument or
agreement (other than the Note) or there shall have occurred any event which,
with the passage of time or the giving of notice or both, will result in a
default thereunder; or
(iii) the Company fails to perform or observe any
of the covenants, agreements or conditions contained in this Note (other than a
default described in Paragraph 2(a)(i) of this Note), or the other Documents
and such default shall have continued for a period of ten (10) days after
written notice thereof to the Company by the Holder, or any representation or
warranty contained in the Documents shall be false or misleading in a material
respect; or
(iv) the Company consents to the appointment of a
receiver, trustee or liquidator of itself or of a substantial part of its
property, or shall admit in writing its inability to
- 5 -
<PAGE> 6
pay its debts generally as they become due, or shall make a general assignment
for the benefit of creditors, or shall file a voluntary petition in bankruptcy,
or an answer seeking reorganization in a proceeding under any bankruptcy law
(as now or hereafter in effect) or an answer admitting the material allegations
of a petition filed against the Company, in any such proceeding, or shall by
voluntary petition, answer or consent, seek relief under the provisions of any
other now existing or future bankruptcy or other similar law providing for the
reorganization or winding up of corporations, or an arrangement, composition,
extension or adjustment with its or their creditors, or shall, in a petition in
bankruptcy filed against it or them be adjudicated a bankrupt, or the Company
or its directors or a majority of its stockholders shall vote to dissolve or
liquidate the Company; or
(v) a court of competent jurisdiction enters an
order, judgment or decree appointing, without consent of the Company, a
receiver, trustee or liquidator of the Company or any Subsidiary, or of all or
any substantial part of the property of the Company, or approving a petition
filed against the Company seeking a reorganization or arrangement of the
Company under the federal bankruptcy laws or any other applicable law or
statute of the United States of America or any State thereof, or any
substantial part of the property of the Company shall be sequestered; and such
order, judgment or decree shall not be vacated or set aside within sixty (60)
days from the date of the entry thereof; or
(vi) under the provisions of any law for the
relief or aid of debtors, any court of competent jurisdiction shall assume
custody or control of the Company or of all or any substantial part of the
property of the Company and such custody or control shall not be terminated
within sixty (60) days from the date of assumption of such custody or control.
(b) Rights of Holder. Nothing in this Note shall be construed to
modify, amend or limit in any way the right of the Holder to bring an action
against the Company in the event that the Company fails to pay principal of and
interest on this Note when due, and if the Holder shall be required to commence
a legal proceeding to enforce payment of this Note, the Company shall pay the
Holder's reasonable legal fees and expenses.
ARTICLE 3
Conversion
(a) Right of Conversion. The Holder of the Note shall have the
right, prior to 5:00 P.M., New York City time on the Maturity Date, or, if this
Note shall be prepayable pursuant to its terms, 5:00 P.M. New York City time on
the business day prior to the date of such prepayment, to convert all of the
principal and interest amount of this Note outstanding at such time into such
shares of Common Stock at the conversion price hereinafter
- 6 -
<PAGE> 7
defined (the "Conversion Price"). No partial conversion shall be permitted to
be made by the Holder.
(b) Exercise of Conversion Right. In order to exercise the
conversion right, the Holder of this Note shall surrender the Note at the
office of the Company together with written instructions specifying the
principal amount and accrued interest of this Note which the Holder elects to
convert and the registration and delivery of certificates for shares of Common
Stock issuable upon such conversion. The number of shares of Common Stock
issuable upon conversion (the "Conversion Shares") shall be determined by
dividing the amount of principal and interest being converted by the Conversion
Price in effect at such time. The Holder shall thereupon be deemed the holder
of the Conversion Shares so issued and the principal amount of and interest on
the Note shall be deemed to have been paid in full.
(c) Conversion Price and Adjustments. The initial Conversion
Price shall be equal to One Thousand Dollars ($1,000) per share. During the
time period that the Note is outstanding, the Company shall not issue any stock
with dividends or liquidation preferences superior to the rights of the Common
Stock into which the Notes may be converted without the prior written consent
of the Holder, except as provided in Paragraph 4(a). The Conversion Price is
based on the Company's having 10,000 shares of Common Stock issued and
outstanding, and the Conversion Price will adjust proportionately upon any
stock splits, stock combinations, stock dividends or distributions,
reclassifications or similar changes in the Company's capital structure
affecting the number of shares of common stock issued and outstanding (except
in the case of an initial public offering of securities, which shall be
governed by the terms of Paragraph 5(a)) in accordance with the terms set forth
below in this Paragraph 3(c). Without limiting the foregoing, in the event
that any Common Stock is issued at a price per share less than the Conversion
Price then in effect, then the Conversion Price shall adjust immediately so as
to become equal to such lower price.
(1) In case the Company shall (i) pay a dividend
or make a distribution on its shares of Common Stock in shares of Common Stock,
(ii) subdivide or reclassify its outstanding Common Stock into a greater number
of shares, or (iii) combine or reclassify its outstanding Common Stock into a
smaller number of shares, the Conversion Price in effect at the time of the
record date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be proportionately adjusted
so that upon conversion of this Note after such date the Holder shall be
entitled to receive the aggregate number and kind of shares which, if this Note
had been converted immediately prior to such time, the Holder would have owned
upon such conversation and been entitled to receive upon such dividend,
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed in this Paragraph 3(c)(1) shall occur.
- 7 -
<PAGE> 8
(2) In case the Company shall issue rights or
warrants to all holders of its Common Stock entitled them to subscribe for or
purchase shares of Common Stock (or securities convertible into Common Stock)
at a price (or having a conversion price per share) less than the Computation
Price, which shall be defined for purposes of this Paragraph 3(c) to be the
greater of the Conversation Price then in effect or the Fair Market Value of
the Common Stock (as defined in Paragraph 3(c)(3) of this Note) on the record
date mentioned below, the Conversion Price shall be adjusted so that the time
same shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the date of such issuance by a fraction, of which
the numerator shall be the number of shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at the Computation Price per share of the Common Stock, and of which
the denominator shall be the number of shares of Common Stock outstanding on
such record date plus the number of additional shares of Common Stock offered
shall be made successively whenever such rights or warrants are issued and
shall become effective immediately extent that shares of Common Stock are not
delivered (or securities convertible into Common Stock are not delivered) after
the expiration of such rights or warrants, the Conversation Price shall
thereafter be readjusted to the Conversion Price which would then be in effect
had the adjustments made upon the issuance of such rights or warrants been made
upon the basis of delivery of only the number of shares of Common Stock (or
securities convertible into Common Stock) actually delivered.
(3) For the purpose of any computation under
Paragraph 3(c)(2) of this Note, the Fair Market Value per share of Common Stock
at any date shall be deemed to be (i) if the Common stock is being publicly
traded, the average of the daily closing prices for 30 consecutive business
days commencing 45 business days before such date; provided, that the closing
price for each day shall be the reported last sale price regular way or, in
case no such reported sale takes place on such day, the average of the reported
last bid and asked prices regular way, in either case on the principal national
securities exchange on which the Common Stock is admitted to trading or listed,
or if not listed or admitted to trading on such exchange, the average of the
reported highest bid and reported lowest asked prices as reported by NASDAQ, or
other similar organization if NASDAQ is no longer reporting such information or
(ii) if the Common Stock is not publicly traded, the fair market value as
determined in good faith by the Board of Directors.
(4) Notwithstanding anything in this Paragraph
3(c) to the contrary, the Company shall be entitled, but shall not be required,
to make such decrease in the Conversion Price, in addition to those required by
this Paragraph 3(c), as it in its discretion shall determine to be advisable in
order that nay dividend or distribution in shares of Common Stock, subdivision,
- 8 -
<PAGE> 9
reclassification or combination of Common Stock issuance of warrants to
purchase Common Stock or other distribution referred to hereinabove in this
Paragraph 3(c) hereafter made by the Company to the holders of its Common Stock
shall not result in any tax to the holders of its Common Stock or securities
convertible into Common Stock.
(5) The Company may retain a firm of independent
public accountants of recognized standing selected by the Board of Directors
(who may be the regular accountants employed by the Company) to make any
computation required by this Paragraph 3(c), and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
(6) In the event that at any time, as a result of
an adjustment made pursuant this Paragraph 3(c), the Holder thereafter shall be
entitled to receive any shares of the Company, other than Common Stock
thereafter the number of such other shares so receivable upon conversation of
this Note shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Paragraph 3(c).
(d) Officer's Certificate. Whenever the Conversation Price
shall be adjusted as required by the provisions of Paragraph 3(c), the Company
shall forthwith file in the custody of its Secretary or an Assistant Secretary
at its principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Conversion Price, setting forth in reasonable
detail the facts requiring such adjustment, including a statement of the number
of additional shares of Common Stock, if any, and such other facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Each such officer's certificate shall be made available at all reasonable times
for inspection by the Holder, and the Company shall, forthwith after each such
adjustment, mail a copy by certified mail, return receipt requested, of such
certificate to the Holder at the Holder's address set forth in the Company's
books and records.
(e) Notices to Note Holders. So long as this Note shall be
outstanding, (1) if the Company shall pay any dividend or make any distribution
upon Common Stock (other than a regular cash dividend payable out of retained
earnings) or (2) if the Company shall offer to the holders of the Common Stock
for subscription or purchase by them any share of any class or any other rights
or (3) if any capital reorganization of the Company, reclassification of the
capital stock of the Company, consolidation or merger of the Company with or
into another corporation sale, lease or transfer of all or substantially all of
the property and assets of the Company to another corporation, or voluntary or
involuntary dissolution, liquidation or winding up of the Company shall be
effected, then in any such case, the Company shall cause to be mailed by
certified mail to the Holder, at least fifteen (15) days prior to the date
specified in (i) and
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<PAGE> 10
(ii) below, as the case may be, a notice containing a brief description of the
proposed action and stating the date on which (i) a record is to be taken for
the purpose of such dividend distribution or rights, or (ii) such
reclassification, reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and the date, if any is
to be fixed, as of which the holders of Common Stock or other securities shall
receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(f) Reclassification, Reorganization or Merger. In case of any
reclassification, capital reorganization or other change of outstanding shares
of the capital stock of the Company, or in case of any consolidation or merger
of the Company with or into another corporation (other than a merger with a
subsidiary in which merger the Company is the continuing corporation and which
does not result in any reclassification, capital reorganization or other change
of outstanding shares of capital stock of the Company) or in case of any sale,
lease or conveyance to another corporation of the property of the Company as an
entirety, the Company shall, as a condition precedent to such transaction, cause
effective provisions to be made so that the Holder shall have the right
thereafter by converting this Note, to purchase the kind and amount of shares of
stock and other securities and property receivable upon such reclassification,
capital reorganization and other change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock which might have
been purchased upon conversation of this Note immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Any such
provision shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Note.
The foregoing provisions of this paragraph 3(f) shall similarly apply to
successive consolidations, mergers, sales or conveyances. In the event that in
connection with any such capital reorganization or reclassification,
consolidation, merger, sale or conveyance, additional shares of Common Stock
shall be issued in exchange, conversation, substitution or payment, in whole in
part, for a security of the Company other than Common Stock, any such issue
shall be treated as an issue of Common Stock covered by the provisions of
Paragraph 3(c)(1) of this Note.
(g) Voting Rights. This Note, absent conversation as provided
herein, shall not confer upon the Holder any voting or other rights of a
stockholder of the Company.
(h) Fractional Shares. No fractional shares or script representing
fractional shares be issued upon the conversation of the Note. If, upon
conversation of any Note, the Holder would except for the provisions of this
Paragraph 3(h), be entitled to receive a fractional share of Common Stock, then
an amount equal to such fractional share multiplied by the then fair market
value
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<PAGE> 11
of shares of the Company's Common Stock, as determined in good faith by the
Company's Board of Directors, shall be paid by the Company in cash to the
Holder.
(i) No Modification of Article 1. Nothing in this Article 3 shall
be construed in any manner as a modification or amendment of any of the
Company's covenants set forth in Article 1 of this Note or as a consent to any
transaction prohibited by said Article 1.
ARTICLE 4
Additional Funding; Equity Investments
(a) Additional Funding. In the event the Company achieves certain
milestones during the term of this Note, the Holder agrees to extend to the
Company additional funding of $250,000 and to amend the terms and conditions of
this Note accordingly, with the amended Note to continue to be secured by the
Guaranty and the common stock held pursuant to the Escrow Agreement to continue
to secure the Guaranty (the "Additional Funding"). The Additional Funding shall
be made in the event the Company enters into a definitive agreement with Wave
Systems Corp. and achieves any two of the following events; (i) the Company
enters into a definitive agreement with Simon & Schuster to distribute their
content, the terms of which shall include royalty relationships; (ii) the
Company enters into a definitive agreement with a PC hardware manufacturer for
the bundling of the Company's product, (iii) the Company enters into a
definitive agreement with Motorola to include the Company's technology in a
public test of the Company's products through inclusion with the Motorola cable
modem; (iv) the Company announces its successful participation with an industry
leader at Demo '96 or a similar show in February 1996; and (v) the Company
raises a total of $500,000 in equity capital. Notwithstanding the foregoing,
the determination of the foregoing determination of the successful achievement
of the objectives set forth above shall be at the sole and absolute discretion
of Southeast. In the event of the Additional Funding, the Company shall also
issue to the Holder warrants for an additional 100 shares of Common Stock, at an
exercise price and on the same terms and conditions as the Warrant.
(b) Equity Investments. In the event the Company plans to sell
stock or otherwise obtain a capital infusion by a strategic partner(s) (a
partner who will use or purchase the technology or products of the Company) or
other qualified investor(s) (exclusive of any funds provided by Southeast or
Wave Systems Corp.) equal to an aggregate capital amount of at least Two Million
Dollars ($2,000,000) (the foregoing, an "Equity Infusion"), the Company shall
provide the Holder with copies of any information provided to the potential
investors in connection with the Equity Infusion. Notwithstanding anything to
the contrary contained in this Note and subject only to the mutual consent of
the parties to amend the terms hereof, on or before the closing of an Equity
Infusion transaction at purchase price
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<PAGE> 12
per share of common stock (or conversion price per share) greater than or equal
to the Conversation Price.
ARTICLE 5
Registration Rights
(a) Registration Rights.
(i) During the term of this Note, the Company shall
advise the Holder by written notice at least two weeks prior to the filing of
any registration statement under the Securities Act (other than a registration
statement relating solely to an acquisition or a registration statement on Form
S-8 or any subsequent similar form) covering securities of the Company, whether
such sevcurites are being sold for the account of the Company and/or selling
stockholders, and upon such notice to the Holder, the Holder shall have the
option of (i) converting the Note into Common Stock and selling such Common
Stock pursuant to such registration statement or (ii) being paid in cash in the
amount equal to the principal left on the Note, plus all accrued interest
thereon. The Company shall include in the registration statement such
information as may be required to permit a public offering of the Holder's
Common Stock (issued either upon conversion of the Note or upon exercise of the
Warrant) provided, however, that if the registration statement relates to a
public offering by the Company of its securities, if requested by the managing
underwriter, the Company will first exclude the shares of Common Stock held by
shareholders of record prior to the date of this Note, then, if requested, to
exclude the Holder's Common Stock held by shareholders of record prior to the
date of this Note, then, if requested, to exclude the Holder's Common Stock
from such registration statement, and provided, further, that if such managing
underwriter agrees to include the Holder's Common Stock in the registration
statement only upon the agreement of the Holder to refrain from selling any
Common Stock without the prior to the date of this Note, then, if requested, to
exclude the Holder's Common Stock from such registration statement, and
provided, further, that if such managing underwriter agrees to include the
Holder's Common Stock in the registration statement only upon the agreement of
the Holder to refrain from selling any Common Stock without the prior consent
of the managing underwriter during such period (the "holdoff period")
subsequent to the effective date of the registration statement as the managing
underwriter may request, the inclusion of Holder's Common Stock in such
registration statement shall be conditioned upon the Holder's agreeing not to
sell any of such Common Stock without the consent of such managing underwriter
during the holdoff period, and the Holder shall agree to such hold off.
Notwithstanding the foregoing, in no event shall the Holder be required to
agree to a holdoff period longer than any other selling stockholders whose
shares are included in such registration statement pursuant to piggy-back
registration rights granted by the Company. The Company shall use its best
efforts
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<PAGE> 13
to keep such registration statement current for a period of six (6) months from
the effective date of such registration statement or, if the underwriter or
managing underwriting agrees to the inclusions of the Common Stock in the
registration statement for the holdoff period, three (3) months from the
conclusion of the holdoff period. The Company's obligations pursuant to this
Paragraph 5(a) shall be subject to and conditioned upon the Holder providing
the Company in a timely manner with such information which the Company may
request in connection with the registration statement, including, but not
limited to, information concerning the Holder, nay underwriter engaged by the
Holder and the proposed manner of distribution of the Common Stock and any
specific information requested by the Commission. All costs incurred by the
Company relating to the inclusion of the Holder's Common Stock in the
registration statement shall be paid by the Company.
(b) The Company's obligations pursuant to this
Article 5 shall be applicable to the Holder and not to any transferees of the
Common Stock; provided that, in this event of the death of an individual
Holder, the rights granted in this Article 5 may be exercised by his legal
representative.
(c) The Company shall not be required to include
any Common Stock in a registration statement if the number of shares proposed
to be sold may be sold by the selling stockholder pursuant to Rule 144 during
the seven (7) months commencing on the date such holder advised the Company of
his desire to have such shares included in such registration statement.
ARTICLE 6
Budget; Use of Proceeds
(a) Budget; Use of Proceeds. The Company and the Holder shall
agree upon an approved budget (the "Budget") for the Company for the one year
period immediately following the closing of the Note and the Company and the
Holder hereby acknowledge and agree that the proceeds of the Note shall be used
only for payment of expenses and costs in accordance with the Budget and shall
not exceed the Budget by more than 10% without the written consent of the
Holder. The Budget shall be modified or altered only with the prior consent of
the Holder. Upon the expiration of the period covered by the Budget, the
Company will prepare and adopt new Budgets, all of which shall be subject to
the approval of the Holder (which approval shall not unreasonably withheld or
delayed), for so long as the Company is required to furnish reports pursuant to
Paragraph 1(c), provided, that upon conversion, the Company's obligation with
respect to the preparation of Budgets shall cease.
- 13 -
<PAGE> 14
ARTICLE 7
Miscellaneous
(a) Transferability. This Note shall be transferable and
negotiable at any time by the holder of this Note.
(b) Waiver of Trial by Jury. In any legal proceeding to enforce
payment of this Note, the Company waives trial by jury, claims for offset and
counterclaims, if any.
(c) Legal Fees. In the event that it is necessary for any holder
to commence legal proceedings in order to enforce payment of this Note, the
Company shall pay all legal fees and expenses incurred by such holder.
(d) Governing Law. This Note shall be governed by the internal
laws of the State of New York, without regard to any otherwise applicable
principles of conflict of laws.
(e) Court Jurisdiction. The Company hereby irrevocably consents
to the jurisdiction of the federal and state courts sitting in New York County;
New York for any action on or relating to this Note, and agrees that service
may be made upon the Company by registered mail, return receipt requested, at
the address provided in Paragraph 8(f) of this Note and they each agree to
accept such service. Nothing in this Paragraph 8(e) shall be construed to
prohibit the holder of this Note from effecting service upon the Company by any
other manner permitted by law.
(f) Notices. Any notice, request or documentation required or
permitted to be given hereunder shall be sufficient if in writing and delivered
personally or sent by overnight courier or first class, certified or registered
mail, return receipt requested, or delivered by telecopy (with prompt written
confirmation by mail or courier) to the address set forth below or any address
designated by any party by notice similarly given. Such notice shall be deemed
to have been given upon the actual receipt of such notice.
To Company: Wave Interactive Network, Inc.
480 Pleasant Street
Lee, Massachusetts
Attention: Steven Sprague, President
with a copy (not constituting notice) to:
Eric Kamisher, Esq.
c/o Esanu Katsky Korins & Siger
605 Third Avenue
New York, New York 10158
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<PAGE> 15
To Holder:
Southeast Interactive Technology Fund I, LLC
220 West Main Street
Suite 900
Durham, North Carolina 27705
Attention: David Blivin, Managing Director
with a copy (not constituting notice) to:
James H. Clarke
Moore & Van Allen, PLLC
2200 West Main Street
Suite 800
Durham, North Carolina 27705
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first aforesaid.
WAVE INTERACTIVE NETWORK, INC.
By:_______________________________
Name:
Title:
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
By:_______________________________
Name:
Title:
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<PAGE> 16
NOTICE OF CONVERSION
[To be Signed Only Upon Conversion
of the Note]
WAVE INTERACTIVE NETWORK, INC.
The undersigned, the holder of the foregoing Note, hereby surrenders such Note
for conversion into shares of Common Stock of WAVE INTERACTIVE NETWORK, INC. to
the extent of $____________ unpaid principal amount of and interest due on such
Note, and requests that the certificates for such shares be issued in the name
of SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC and delivered to
_______________________________, whose address is _____________________________.
DATED:
__________________________ ______________________________________________
(Signature)
(Signature must conform in all respects to name
of holder as specified on the face of the Note.)
______________________________________________
Insert here the unpaid principal amount of the
Note.
- 16 -
<PAGE> 1
Exhibit 2(k)(xii)
Warrant to Purchase
*** 100 ***
Shares of Common Stock
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND NEITHER
THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE
APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
VOID AFTER 5:00 P.M. NEW YORK TIME
ON FIVE YEARS AFTER THE CLOSING DATE (AS DEFINED IN THIS WARRANT)
COMMON STOCK PURCHASE WARRANT
OF
WAVE INTERACTIVE NETWORK, INC.
This is to certify that, FOR VALUE RECEIVED, Southeast Interactive Technology
Fund I, LLC or registered assigns (the "Holder"), is entitled to purchase,
subject to the provisions of this Warrant, from Wave Interactive Network, Inc.,
a Delaware corporation (the "Company"), at an exercise price per share of One
Thousand Dollars ($1,000.00), subject to an adjustment as provided in this
Warrant, One Hundred (100) shares of common stock ("Common Stock") of the
Company at any time during the Exercise Period, as hereinafter defined. The
Exercise Period shall mean the period commencing on the earlier date of (i) the
conversion of the Convertible Note (as defined herein) and (ii) repayment of
the Loan (as defined herein) and ending at 5:00 P.M. New York time, five (5)
years from the date of issuance of this Warrant. This Warrant is being issued
by the Company in connection with the Company's delivery of the certain
Convertible Note ("Convertible Note") to the Holder with respect to a loan from
the Holder to the Company in the principal amount of Two Hundred Fifty Thousand
Dollars ($250,000) (the "Loan"). The number of shares of Common Stock to be
received upon the exercise of this Warrant and the price to be paid for a share
of Common Stock may also be adjusted from time to time as hereinafter set
forth. The exercise price for the purchase of a share of Common Stock pursuant
to this Warrant in effect at any time and as adjusted from time to time is
hereinafter sometimes referred to as the "Exercise Price." The shares of
Common Stock or other securities issuable upon exercise of the Warrants are
referred to as the "Warrant Shares."
(A) EXERCISE OF WARRANT. This Warrant may be exercised in whole
at any time or in part from time to time during the Exercise Period by
presentation and surrender of this Warrant to the Company
<PAGE> 2
at its principal office, or at the office of its stock transfer agent, if any,
with the Purchase Form annexed to this Warrant duly executed and accompanied by
payment of the Exercise Price for the number of shares of Common Stock
specified in such form. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder hereof to purchase
the balance of the shares of Common Stock purchasable hereunder. Upon receipt
by the Company of this Warrant at its office, or by the stock transfer agent of
the Company at its office, in proper form for exercise, accompanied by payment
of the Exercise Price of the Warrant Shares with respect to which the Warrant
is being exercised, the Holder shall be deemed to be the holder of record of
the shares of Common Stock issuable upon exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. In the event that payment of the Exercise Price is made other
than by wire transfer of funds or by a certified or official bank check
acceptable to the Company, at the election of the Company, the Holder shall not
be deemed to be the holder of the Warrant Shares until the proceeds of the
payment shall be collected by the Company.
(B) RESERVATION OF SHARES. The Company hereby agrees that at all
times there shall be reserved for issuance and/or delivery upon exercise of
this Warrant such number of shares of Common Stock as shall be required for
issuance and delivery upon exercise of this Warrant.
(C) FRACTIONAL SHARES. No fractional shares or script
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon any exercise
of this Warrant, the Company shall pay to the Holder an amount in cash equal to
such fraction multiplied by the current market value of such fractional share,
determined as follows:
(1) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on The Nasdaq Stock Market or other automated quotation
system which provides information as to the last sale price, the current value
shall be the reported last sale price of one share of Common Stock on such
exchange or market on the last business day prior to the date of exercise of
this Warrant, or if no such sale is made on such day, the current value shall
be the average of the closing bid and asked prices for such day on such
exchange or system; or
(2) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current value shall be the mean of the
reported last bid and asked prices of one share of Common Stock as reported by
Nasdaq or the National Quotation Bureau, Inc. or other similar reporting
services selected by the Company's board of directors, on the last business day
prior to the date of the exercise of this Warrant; or
- 2 -
<PAGE> 3
(3) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current value of one share of Common Stock shall be an amount, not less than
book value, determined in such reasonable manner as may be prescribed in good
faith by the Board of Directors of the Company.
(D) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Company or at the office of its stock
transfer agent, if any, for other Warrants of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. Subject to the provisions of Paragraph (j)
of this Warrant, upon surrender of this Warrant to the Company or at the office
of its stock transfer agent, if any, with the Assignment Form annexed hereto
duly executed and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the office of the Company or
at the office of its stock transfer agent, if any, together with a written
notice specifying the names and denominations in which new Warrants are to be
issued and signed by the Holder hereof. The term "Warrant" as used herein
includes any Warrants into which this Warrant may be divided or exchanged.
Upon receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and
deliver a new Warrant of like tenor. Any such new Warrant executed and
delivered shall constitute an additional contractual obligation on the part of
the Company, whether or not this Warrant so lost, stolen, destroyed, or
mutilated shall be at any time enforceable by anyone. Notwithstanding the
foregoing, prior to the date a registration statement in which the Warrant
Shares are registered pursuant to the Securities Act is declared effective by
the Commission, the Warrants are not transferable except to an affiliate of the
holder, to a family member or trusts for the benefit of the holder or of a
family member pursuant to the will or laws of intestate succession of an
individual Investor, to the partners of the holder which is a partnership, to
the members of an Investor which is a limited liability company, to the
stockholders of an Investor which is a privately held corporation, and to the
beneficiaries of an Investor which is a trust or estate.
(E) RIGHTS OF THE HOLDER. The Holder shall not, by virtue of this
Warrant, be entitled to any rights of a stockholder in the Company, either at
law or in equity, and the rights of the Holder are limited to those expressed
in the Warrant and are not enforceable against the Company except to the extent
set forth in this Warrant.
- 3 -
<PAGE> 4
(F) ANTI-DILUTION PROVISIONS.
(1) The Exercise Price in effect at any time and the
number and kind of securities purchasable upon exercise of each Warrant shall
be subject to adjustment in each case the Company shall, subsequent to the
Closing Date, (A) pay a dividend or make a distribution on its shares of Common
Stock in shares of Common Stock, (B) subdivide or reclassify its outstanding
Common Stock into a greater number of shares, or (C) combine or reclassify its
outstanding Common Stock into a smaller number of shares or otherwise effect a
reverse split, or (D) effect a recapitalization whereby the holders of the
Common Stock receive in respect of or in exchange for such shares other
securities of the Company. The Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date of such
subdivision, combination, reclassification or recapitalization shall be
proportionately adjusted so that the Holder of this Warrant exercised after
such date shall be entitled to receive the aggregate number and kind of shares
and/or other securities which, if this Warrant had been exercised immediately
prior to such time, he would have owned upon such exercise and been entitled to
receive upon such dividend, subdivision, combination or reclassification. Such
adjustment shall be made successively whenever any event listed in this
Paragraph (f)(1) shall occur; provided, however, that with respect to a
recapitalization referred to in clause (D) of this Paragraph (f)(1), the
Exercise Price shall not be adjusted, and the Holder shall be entitled to
receive, upon payment of the Exercise Price per share, such securities as would
have been represented by one share of Common Stock had the Warrant been
exercised immediately prior to the record date relating to such transaction.
(2) Whenever the Exercise Price payable upon exercise of
each Warrant is adjusted pursuant to Paragraph (f)(1) of this Warrant, the
number of shares of Common Stock purchasable upon exercise of each Warrant
shall simultaneously be adjusted by multiplying the number of shares of Common
Stock issuable upon exercise of each Warrant in effect on the date thereof by
the Exercise Price in effect on the date thereof and dividing the product so
obtained by the Exercise Price, as adjusted. In no event shall the Exercise
Price per share be less than the par value per share, and, if any adjustment
made pursuant to said Paragraph (f)(1) would result in an exercise price of
less than the par value per share, then, in such event, the Exercise Price
shall be the par value per share.
(3) All calculations under this Paragraph (f) shall be
made to the nearest cent or to the nearest one-hundredth of a share, as the
case may be. Anything in this Paragraph (f) to the contrary notwithstanding,
the Company shall be entitled, but shall not be required, to make such
decreases in the Exercise Price, in addition to those required by this
Paragraph (f), as it in its discretion shall determined to be advisable in
order that any dividend or distribution in shares of Common Stock, subdivision,
reclassification or combination of Common Stock, issuance of
- 4 -
<PAGE> 5
warrants to purchase Common Stock or distribution of evidences of indebtedness
or other assets (excluding cash dividends) referred to hereinabove in this
Paragraph (f) hereafter made by the Company to the holders of its Common Stock
shall not result in any tax to the holders of its Common Stock or securities
convertible into Common Stock.
(4) The Company may retain a firm of independent public
accountants of recognized standing selected by the Board of Directors (who may
be the regular accountants employed by the Company) to make any computation
required by this Paragraph (f), and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(5) In the event that at any time, as a result of an
adjustment made pursuant to Paragraph (f)(1) of this Warrant, the Holder of any
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Common Stock contained in Paragraph (f)(1)
of this Warrant.
(6) Irrespective of any adjustments in the Exercise Price
or the number or kind of shares purchasable upon exercise of Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in this and similar Warrants initially
issued by the Company.
(G) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of Paragraph (f) of this Warrant, the
Company shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted Exercise Price and the adjusted
number of shares of Common Stock issuable upon exercise of each Warrant,
determined as herein provided, setting forth in reasonable detail the facts
requiring such adjustment, including a statement of the number of additional
shares of Common Stock, if any, and such other facts as shall be necessary to
show the reason for and the manner of computing such adjustment. Each such
officer's certificate shall be made available at all reasonable times for
inspection by the Holder or any holder of a Warrant executed and delivered
pursuant to Paragraph (a) and the Company shall, forthwith after each such
adjustment, mail, by certified mail, a copy of such certificate to the Holder
or any such holder at such holder's address set forth in the Company's Warrant
Register.
(H) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (1) if the Company shall pay any dividend or make any distribution
upon Common Stock (other than a regular cash dividend payable out of retained
earnings) or (2) if the Company shall offer to all of the holders of Common
Stock for subscription or purchase by them any share of any class or any other
rights or
- 5 -
<PAGE> 6
(3) if any capital reorganization of the Company, reclassification of the
capital stock of the Company, consolidation or merger of the Company with or
into another corporation, sale, lease or transfer of all or substantially all
of the property an assets of the Company to another corporation, or voluntary
or involuntary dissolution, liquidation or winding up of the Company shall be
effected, then in any such case, the Company shall cause to be mailed by
certified mail to the Holder, at least fifteen days prior to the date specified
in clauses (i) and (ii), as the case may be, of this Paragraph (h) a notice
containing a brief description of the proposed action and stating the date on
which (i) a record is to be taken for the purpose of such dividend,
distribution or rights, or (ii) such reclassification, reorganization,
consolidation, merger, conveyance, lease, dissolution, liquidation or winding
up is to take place and the date, if any is to be fixed, as of which the
holders of Common Stock or other securities shall receive cash or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up.
(I) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of
the Company with or into another corporation (other than a merger with a
subsidiary in which the merger the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the class issuable upon
exercise of this Warrant) or in case of any sale, lease or conveyance to
another corporation of the property of the Company as an entirety, the Company
shall, as a condition precedent to such transaction, cause effective provisions
to be made so that the Holder shall have the right thereafter by exercising
this Warrant, to purchase the kind and amount of shares of stock and other
securities and property receivable upon such reclassification, capital
reorganization and other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock which might have been purchased
upon exercise of this Warrant immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Warrant. The foregoing
provisions of this Paragraph (i) shall similarly apply to successive
reclassifications, reorganizations and changes of shares of Common Stock and to
successive consolidations, mergers, sales or conveyances. In the event that in
connection with any such capital reorganization or reclassification,
consolidation, merger, sale or conveyance, additional shares of Common Stock
shall be issued in exchange, conversion, substitution or payment, in whole or
in part, for a security of the Company other than Common Stock, any such issue
shall be treated as an issue of Common Stock covered by the provisions of
Paragraph (f) of this Warrant.
- 6 -
<PAGE> 7
(J) TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. This
Warrant or the Warrant Shares or any other security issued or issuable upon
exercise of this Warranty may not be sold or otherwise disposed of except as
set forth in Paragraph (d) of this Warrant and as follows:
(1) To a person who, In the opinion of counsel for the
Company, is a person to whom this Warrant or Warrant Shares may legally be
transferred without registration and without the delivery of a current
prospectus under the Securities Act of 1933, as amended, with respect thereto
and then only against receipt of an agreement of such person to comply with the
provisions of this Paragraph (j) with respect to any resale or other
disposition of such securities which agreement shall be satisfactory in form
and substance to the Company and its counsel; or
(2) to any upon delivery of a prospectus then meeting the
requirements of the Act relating to such securities and the offering thereof
for such sale or disposition.
(K) REGISTRATION RIGHTS.
(i) During the Exercise Period, the Company shall
advise the Holder by written notice at least two weeks prior to the filing of
any registration statement under the Securities Act (other than a registration
statement relating solely to an acquisition or a registration statement on Form
S-8 or any subsequent similar form) covering securities of the Company, whether
such securities are being sold for the account of the Company and/or selling
stockholders, and will upon the request of the Holder, include in any such
registration statement such information as may be required to permit a public
offering of the Holder's Common Stock provided, however, that if the
registration statement relates to a public offering by the Company of its
securities, if requested by the managing underwriter, the Company will first
exclude the shares of Common Stock held by shareholders of record prior to the
date of the Convertible Note, and then, if requested, to exclude the Holder's
Common Stock from such registration statement, and provided, further, that is
such managing underwriter agrees to include the Holder's Common Stock in such
registration statement shall be conditioned upon the Holder agreeing not to
sell any of such Common Stock with the consent of such managing underwriter
during the holdoff period, and the Company shall not be required to include the
Holder's Common Stock in such registration statement unless the Holder shall
agree to such hold off. Notwithstanding the foregoing, in no event shall the
Holder be required to agree to a holdoff period longer than any other selling
stockholders whose shares are included in such registration statement or any
other registration statement being filed at or about the same time a such
registration statement pursuant to piggy-back registration rights granted by
the Company. The Company's obligations pursuant to this Paragraph 5(a) shall
be subject to and conditioned upon the Holder providing the Company in a timely
manner with such information with the Company may request in connection with
the registration statement, including, without
- 7 -
<PAGE> 8
limitation, information concerning the Holder any underwriter engaged by the
older and the proposed manner of distribution of the Common Stock and any
specific information requested by the Commission.
(ii) The Company's obligations pursuant to this
Paragraph 5 shall be applicable to the Holder and not to any transferees of the
Common Stock; provided that, in the event of the death of an individual Holder,
the rights granted in this Paragraph 5 may be exercised by his legal
representative.
(iii) The Company shall not be required to include
any Common Stock in a registration statement if the number of shares proposed
to be sold may be sold by the selling stockholder pursuant to Rule 144 during
the seven (7) months commencing on the date such holder advised the Company of
his desire to have such shares included in such registration statement.
Dated as of December 15, 1995
WAVE INTERACTIVE NETWORK, INC.
By:
------------------------------------
Name:
Title:
- 8 -
<PAGE> 9
PURCHASE FORM
Dated: 19_____
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing ___________ shares of Common Stock and
hereby makes payment of $______________ in payment of the actual exercise
price thereof.
---------------------------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name _______________________________________________________________
(Please typewrite or print in block letters)
Signature __________________________________________________________
Social Security or Employer Identification No. _____________________
- 9 -
<PAGE> 10
ASSIGNMENT FORM
FOR VALUE RECEIVED,
hereby sells, assigns and transfer unto
Name _______________________________________________________________
Address ____________________________________________________________
Social Security or Employer Identification No. ____________________
The right to purchase Common Stock represented by this Warrant to the extent of
____________________shares as to which such rights is exercisable and does
hereby irrevocably constitute and appoint______________________________________
attorney to transfer the same on the books of the Company with full power of
substitution.
Dated:____________________, 19_________.
Signature _____________________________________
Signature Medallion Guaranteed:
________________________________________________
- 10 -
<PAGE> 1
EXHIBIT 2(p)
SUBSCRIBER NAME(S) _____________________________
I/JL ACCOUNT NO. _______________________________
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY
THE SHARES OF LIMITED LIABILITY COMPANY INTERESTS IN SOUTHEAST
INTERACTIVE TECHNOLOGY FUND I, LLC HAVE NOT BEEN REGISTERED, QUALIFIED,
APPROVED OR DISAPPROVED UNDER ANY FEDERAL OR STATE SECURITIES LAWS, NOR HAS THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR OTHER FEDERAL OR STATE
REGULATORY AUTHORITY PASSED ON OR ENDORSED THE MERITS OF THE OFFERING OF THE
SHARES OR THE ACCURACY OR ADEQUACY OF THE MEMORANDUM (AS DEFINED BELOW). ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SHARES MAY NOT BE SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF BY AN INVESTOR UNLESS THE SHARES HAVE
BEEN REGISTERED UNDER FEDERAL SECURITIES LAWS AND, WHERE REQUIRED, UNDER THE
LAWS OF OTHER JURISDICTIONS, OR UNLESS THE PROPOSED SALE, TRANSFER OR
DISPOSITION IS EXEMPT FROM REGISTRATION. THERE IS NO OBLIGATION OF THE ISSUER
TO REGISTER THE SHARES. ACCORDINGLY, A PURCHASER OF SHARES MUST BE PREPARED TO
BEAR THE ECONOMIC RISK OF THE INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
Southeast Interactive Technology Fund I, LLC
220 West Main Street, Suite 900
Durham, North Carolina 27705
Ladies and Gentlemen:
The undersigned is executing and delivering this Agreement in
connection with the subscription by the undersigned for shares of limited
liability company interests ("Shares") in Southeast Interactive Technology Fund
I, LLC (the "Fund"), a North Carolina limited liability company. The
undersigned understands that the Fund, its managers (the "Directors") and
Montrose Venture Partners, LLC, the Fund's investment advisor and manager of
its day-to-day activities (the "Advisor"), are relying upon the accuracy and
completeness of the information contained herein in complying with their
obligations under federal and state securities laws and in considering whether
or not to accept the subscription of the undersigned. Terms used but not
defined herein have the same meanings as in the Confidential Private Placement
Memorandum of the Fund dated January 16, 1995 (the "Memorandum").
The undersigned hereby irrevocably agrees, represents and warrants
with, to and for the benefit of the Fund, the Directors, the Advisor and the
owners of Shares in the Fund (the "Investors") as follows:
1. SUBSCRIPTION.
(a) Subject to the terms and conditions of this Agreement, the
undersigned hereby subscribes for Shares and agrees to become a member of the
Fund and to contribute to the capital of the Fund the amount set forth herein
immediately above the signature of the undersigned.
<PAGE> 2
(b) The undersigned tenders herewith a check payable to "Escrow
Agent for Southeast Interactive Technology Fund" (the "Escrow Agent") in the
full amount of the capital contribution of the undersigned pursuant to Section
1(a).
(c) The undersigned is delivering herewith (i) two signed copies
of this Agreement and (ii) a signed and completed Investor Suitability
Questionnaire, in the form accompanying this Agreement. Pursuant to the power
of attorney contained in Section 4 hereof, the Directors will execute the
Operating Agreement of the Fund, among other things, on behalf of the
undersigned if the undersigned is accepted as an Investor.
2. ACCEPTANCE. The undersigned understands and agrees that the
Directors have full right to accept or reject this subscription, in whole or in
part. Upon acceptance of a subscription by the Fund, one copy of this
Agreement, signed by the undersigned and, to indicate acceptance by the Fund,
shall be returned to the undersigned by the Fund.
3. REPRESENTATIONS AND WARRANTIES.
(a) Set forth below is the true and correct address of the
undersigned's residence or principal place of business. The only jurisdiction
in which an offer to sell Shares was made to the undersigned is the
jurisdiction in which such residence or principal place of business is
situated. The undersigned has no present intention of becoming a resident of
(or moving its principal place of business to) any other state or jurisdiction.
(b) The undersigned understands that the Shares have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"), or
under the laws of any other jurisdiction, and that the Fund does not
contemplate and is under no obligation to so register the Shares. The
undersigned understands and agrees that the Shares must be held indefinitely
unless they are subsequently registered under the 1933 Act and, where required,
under the laws of other jurisdictions, unless an exemption from registration is
available. Even if such exemption is available, the undersigned agrees that
the assignment and transferability of Shares will be governed by the Operating
Agreement. The Operating Agreement imposes substantial restrictions on
transfer. The undersigned recognizes that no trading market for Shares
currently exists and it is extremely unlikely that any public market for Shares
will develop. The undersigned understands that the representations and
warranties of the undersigned contained herein and the information provided by
the undersigned in the Investor Suitability Questionnaire may be relied upon by
the Fund, the Directors, the Advisor, and any other appropriate parties in
determining whether the offering of Shares is exempt from registration under
the 1933 Act and applicable state securities laws.
(c) The Shares for which the undersigned hereby subscribes are
being acquired solely for the undersigned's own account for investment and are
not being purchased with a view to or for resale, distribution or other
disposition, and the undersigned has no present plans to enter into any
contract, undertaking, agreement or arrangement for any such resale,
distribution or other disposition.
(d) The undersigned has been furnished and has carefully read the
Memorandum and the Operating Agreement, including all exhibits, schedules and
appendices thereto. Without limiting the scope of the information and risk
factors disclosed in the Memorandum which the undersigned has considered in
making this subscription, the undersigned understands, acknowledges, agrees and
is aware that:
(1) the Advisor, which is affiliated with certain of the
Directors, will receive substantial compensation from the Fund as
set forth in the Memorandum;
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<PAGE> 3
(2) no federal or state agency has passed upon the Shares
or made any finding or determination as to the fairness of this
investment;
(3) the Shares are speculative investments which involve
a high degree of risk, including the risk that the undersigned
might lose its entire investment in the Fund;
(4) any federal income tax benefits which may be
available to the undersigned may be lost through adoption of new
laws, amendments to existing laws or regulations, or changes in
the interpretation of existing laws and regulations; and
(5) certain of the Directors and their affiliates may
engage in activities which result in conflicts of interests with
the Fund, as described in more detail in the Memorandum under
"CONFLICTS OF INTEREST" and "TRANSACTIONS WITH RELATED PARTIES."
(e) The undersigned has carefully reviewed and understands the
risks of a purchase of Shares, including the risks set forth under "RISK
FACTORS" and the considerations described under "CONFLICTS OF INTEREST" and
"SUITABILITY STANDARDS" in the Memorandum.
(f) In connection with the undersigned's investment in the Fund,
the undersigned, to the extent the undersigned has deemed necessary, has
obtained the advice of the undersigned's own investment advisors, counsel and
accountants ("Investment Advisors").
(g) The undersigned and the undersigned's investment advisors, if
any, have been furnished all materials relating to the Fund, the offering of
Shares (the "Offering") or anything set forth in the Memorandum which the
undersigned and the undersigned's investment advisors have requested of the
Advisor. The undersigned and the undersigned's investment advisors have been
afforded the opportunity to ask questions of the Advisor or the Directors
concerning the terms and conditions of the Offering and to obtain any
additional information necessary to verify the accuracy of any representations
or information set forth in the Memorandum.
(h) The Advisor has answered all inquiries that the undersigned
and the undersigned's investment advisors have made concerning the Fund, the
Advisor or any other matters relating to the creation and operations of the
Fund and the terms and conditions of the Offering.
(i) Neither the undersigned nor the undersigned's investment
advisors have been furnished any Offering literature on which they have relied
other than the Memorandum and the undersigned and the undersigned's investment
advisors have relied only on the Memorandum and the information furnished or
made available to them by the Fund or the Advisor, as described in
subparagraphs 3(g) and 3(h) above.
(j) The undersigned has the financial ability to bear the
economic risk of the undersigned's investment in the Fund for an indefinite
period of time and has adequate net worth and means of providing for the
undersigned's current needs and contingencies to sustain a complete loss of the
undersigned's investment and has no need for liquidity in the undersigned's
investment in the Fund.
(k) The undersigned has such knowledge and experience in
financial and business matters that the undersigned is capable of evaluating,
and has evaluated, the merits and risks of the proposed investment.
(l) The undersigned has carefully reviewed the section of the
Memorandum entitled "SUITABILITY STANDARDS" and in particular, the description
of "accredited investor" as set forth
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<PAGE> 4
therein, and represents and warrants that he, she or it meets the suitability
requirements set forth in such section, including, without limitation, that he,
she or it is an "Accredited Investor," as that term is defined in Rule 501 of
Regulation D under the 1933 Act. Please read and complete Item #8 within
Section C.
(m) The undersigned, if other than an individual, has substantial
business or other investment activities in addition to its investment in the
Shares.
(n) If the undersigned is a company as defined in the Investment
Company Act of 1940 (the "1940 Act"), which term includes corporations,
partnerships, trusts and other entities, then the amount of capital contributed
by it to the Fund, together with its investments in any entities which are or
would, but for the exception set forth in subparagraph (A) of Section 3(c)(1)
of the 1940 Act, be excluded from the definition of investment company solely
by paragraph 3(c)(1) of the 1940 Act, does not exceed 10% of its total assets.
(o) The information provided by the undersigned in the Investor
Suitability Questionnaire and the other subscription materials delivered by the
undersigned to the Fund herewith is incorporated herein by reference and made a
part hereof, and the undersigned represents and warrants that such information
is true and complete and fairly reflects the current financial condition and
affairs of the undersigned.
(p) If the undersigned is a corporation, partnership, trust or
other entity, (i) it is authorized and qualified and has full right and power
to become an Investor in, and is authorized to make its capital contribution
to, the Fund and to perform its obligations pursuant to the provisions hereof
and of the Operating Agreement, (ii) the person signing this Subscription
Agreement, the other subscription documents, and any other instrument executed
and delivered herewith on behalf of such entity has been duly authorized by
such entity and has full power and authority to do so, and (iii) such entity
has not been formed for the specific purpose of acquiring an interest in the
Fund, unless each owner of such entity is an accredited investor as defined in
Rule 501 of Regulation D under the 1933 Act and has submitted information
substantiating such qualification.
(q) The undersigned hereby represents and warrants to the
Directors, the Fund and the Advisor that, by reason of the undersigned's
business or financial experience, the undersigned has the capacity to protect
the undersigned's interests in connection with an investment in the Fund.
4. POWER OF ATTORNEY. The undersigned hereby irrevocably constitutes
and appoints David C. Blivin, W. Clay Hamner, and E. Lee Bryan, or any of them,
with full power of substitution, as the undersigned's true and lawful
attorney-in-fact with full power and authority for the undersigned, and in the
undersigned's name, place and stead and either personally or by
attorney-in-fact, to execute, deliver, acknowledge, publish, file and record
and swear to the execution, delivery, acknowledgment, filing and/or recording
of:
(a) the Operating Agreement, and all amendments to the Operating
Agreement required or permitted by law or the provisions of the Operating
Agreement and all instruments that the attorney-in-fact deems appropriate to
reflect any change or modification of the Operating Agreement in accordance
with the Operating Agreement;
(b) all such other agreements, applications, instruments,
documents, certificates, and reports which may from time to time be required by
the laws of the United States of America, the State of North Carolina or any
other jurisdiction in which the Fund shall determine to do business, or any
political
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<PAGE> 5
subdivision or agency thereof, to effectuate, implement and continue the valid
and subsisting existence of the Fund;
(c) all conveyances and other instruments which the Directors
deem appropriate to reflect the dissolution and termination of the Fund; and
(d) all certificates and other instruments deemed necessary or
advisable by the Directors to carry out the provisions of the Operating
Agreement.
The Power of Attorney granted hereby is coupled with an interest, is
irrevocable and shall (i) continue in full force and effect notwithstanding the
subsequent death, incapacity, dissolution, termination or bankruptcy of the
undersigned or the transfer of all or any portion of the undersigned's Shares
and (ii) extend to the undersigned's successors, assigns and legal
representatives. The undersigned agrees to be bound by any representation made
by the attorney-in-fact acting in good faith pursuant to this Power of
Attorney, and hereby waives any and all defenses which may be available to
contest, negate or disaffirm the action of the attorney-in-fact taken in good
faith under this Power of Attorney.
In the event of any conflict between the provisions of the Operating
Agreement and any document executed or filed by the attorney-in-fact pursuant
to this Power of Attorney, the Operating Agreement shall govern.
5. COVENANT TO UPDATE INFORMATION. The undersigned covenants to
advise the Fund by telephone and in writing if any representation and warranty
contained in paragraph 3 hereof becomes untrue prior to the date the
undersigned receives from the Advisor a copy of this Agreement signed by the
undersigned and, to indicate acceptance, by the Fund.
6. OPERATING AGREEMENT. The undersigned acknowledges that it has
received and reviewed to its satisfaction the Operating Agreement. The
undersigned specifically accepts, adopts and agrees to each and every provision
of the Operating Agreement.
7. AGREEMENT WITH RESPECT TO RESALE. The undersigned agrees that no
Shares will be resold without registration under the 1933 Act, and, where
required, under the laws of other jurisdictions, or pursuant to an exemption
therefrom.
8. INDEMNIFICATION. The undersigned acknowledges that the
undersigned understands the meaning and legal consequences of the
representations and warranties contained in this Agreement and agrees to
indemnify and hold harmless the Fund, the Directors, the Advisor, its
principals and their affiliates, and each other Investor from and against any
and all loss, damage, liability or expense, including, without limitation,
legal fees, due to or arising out of a breach of any representation or warranty
of the undersigned contained in any document furnished by the undersigned in
connection with the offering and sale of the Shares, including, without
limitation, this Agreement and the Investor Suitability Questionnaire, or
failure by the undersigned to comply with any covenant or agreement by the
undersigned herein or in any other document furnished by the undersigned to any
of the foregoing in connection with this transaction.
9. NOTICES. All notices and other communications required or
permitted under this Agreement shall be in writing, and shall be deemed to have
been given if delivered personally or mailed, postage prepaid, by first class
mail, to the parties at the addresses set forth in this Agreement or such other
address as a party may specify to the other by notice as provided in this
Section.
B-5
<PAGE> 6
10. ASSIGNMENT. This Agreement may not be assigned or transferred by
either party without the consent of the other party.
11. AMENDMENT AND WAIVER. This Agreement may be amended or modified
only by an instrument signed by the undersigned and the Fund. A waiver of any
provision of this Agreement must be in writing, designated as such, and signed
by the party against whom enforcement of that waiver is sought. The waiver by
a party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent or other breach thereof.
12. BINDING EFFECT. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the undersigned and
the Fund and their respective heirs, executors, administrators, successors,
legal representatives and assigns. If the undersigned shall be joint
subscribers, the representations and warranties herein contained shall be
deemed to be made jointly and severally by and be binding upon each such person
and such person's heirs, executors, administrators, legatees, devisees,
assigns, legal representatives and successors.
13. JOINT OWNERSHIP. If the Shares are purchased in joint ownership,
each joint owner must execute this Agreement and satisfy the suitability
standards described herein and in the Memorandum, and each joint owner who is a
resident of North Carolina must contribute at least $5,000 toward the purchase
of the Shares purchased hereunder.
B-6
<PAGE> 7
SUBSCRIBER NAME(S):_____________________________
I/JL ACCOUNT NO.________________________________
SOUTHEAST INTERACTIVE TECHNOLOGY FUND I, LLC
INVESTOR SUITABILITY QUESTIONNAIRE
INSTRUCTIONS
This Questionnaire is being delivered to each person or entity (a
"Person") who has indicated an interest in investing in Southeast Interactive
Technology Fund I, LLC, a North Carolina limited liability company (the
"Fund"). The purpose of this Questionnaire is to assist the Fund and
Interstate/Johnson Lane Corporation (the "Selling Agent") in evaluating (1) the
investor's knowledge and experience in financial and business matters, and the
investor's ability to evaluate the merits and risks of an investment in the
Fund, and (2) whether the investor meets the criteria established under state
securities laws and under the Securities Act of 1933, as amended (the "1933
Act"), and the rules and regulations thereunder, for Persons investing in the
Fund's Shares. Accordingly, the Questionnaire will be reviewed and relied upon
by the Fund, the Selling Agent, Montrose Venture Partners, LLC, the Fund's
investment advisor (the "Advisor") and the Fund's counsel, to determine whether
the prospective investor meets the Fund's investor suitability standards.
This Questionnaire must be completed and signed by each Person who
proposes to invest in the Fund. Signature pages for individuals, corporations,
partnerships and trusts are included with this Questionnaire. This
Questionnaire does not include signature pages for entities other than
corporations, partnerships or trusts. An entity other than an individual,
corporation, partnership or trust should appropriately modify and complete the
signature page for corporations. (See Sections D and E.)
Corporations, partnerships, trusts and other entities must attach to
their signature page a copy of the corporate resolution, partnership agreement,
trust agreement or other document, as the case may be, indicating that the
person(s) signing the subscription documentation is authorized to do so. Each
Person who proposes to invest in the Fund may be required at the request of the
Fund or the Selling Agent to supply additional documentation, including,
without limitation, additional organizational documents if such Person is a
corporation, partnership, trust or other entity and additional documentation
giving evidence of the authority of the person(s) signing the subscription
documentation to do so.
The Fund will use reasonable efforts to keep the information provided
in the answers to this Questionnaire confidential. However, this Questionnaire
may be presented to appropriate parties to establish that the offering is
exempt from registration under the 1933 Act and meets the requirements of
applicable state securities laws.
Terms used but not defined herein have the same meanings as in the
Confidential Private Placement Memorandum of the Fund dated January 16, 1995
and the Operating Agreement attached thereto as an exhibit.
If you are in doubt as to the meaning or implication of any of the
terminology used in this Questionnaire, or if you are in doubt as to the
significance of any particular question, please call the Advisor at (910)
286-7000.
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<PAGE> 8
1. Name:__________________________________________________
2. Total Capital Contribution to the Fund: $____________
3. Type of Investor(s) or Ownership (check one):
_________Individual
_________Joint Tenants with right of ownership
_________Tenants-in-common
_________Corporation
_________Partnership
_________Trust
_________Other (indicate)
4. Social Security or Tax Identification No. (for each Person):
________________________
5. If you are a corporation, partnership, trust or other entity,
were you organized for the purpose of acquiring the Shares offered?
________ Yes ________ No
IF THE ANSWER TO QUESTION 5 IS "YES", THE PROSPECTIVE INVESTOR MUST PROVIDE A
QUESTIONNAIRE FROM EACH OF ITS EQUITY OWNERS.
6. Please provide the following information about prospective
investors who are individuals. If this Questionnaire is being completed on
behalf of a corporation, partnership, trust or other entity, the person making
the investment decision on behalf of the corporation, partnership, trust or
other entity must provide the information.
(a) Name of individual completing this Questionnaire:
-------------------------------------------------
(b) Legal Residence (include county and zip code):
-------------------------------------------------
-------------------------------------------------
(c) Daytime Telephone Number (including area code):
--------------------------------------------------
(d) Evening Telephone Number (including area code):
--------------------------------------------------
(e) Age:
------------------------------------------
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<PAGE> 9
(f) Occupation:
---------------------------------------
(g) Name of Employer(s):
--------------------------
Current Position or Title:
--------------------
Length of Time in Current Position:
-----------
Business Address:
-----------------------------
Nature of Employer's Business:
----------------
(h) Send correspondence to the following address:
----------------------------------------------
----------------------------------------------
(i) Your educational background (including degrees received, if
any) including college, graduate school, major fields of study and
training in financial and business matters, is as follows:
----------------------------------------------
----------------------------------------------
(j) (1) Describe briefly the principal positions you
have held during the last five years or since graduation from college,
whichever period is shorter, giving name(s) of prior employer(s),
periods of employment and nature of duties. Please be as explicit as
possible. What is sought is a sufficient description of your business
background and the extent of your vocationally-related experience in
financial and business matters.
----------------------------------------------
----------------------------------------------
----------------------------------------------
(2) Describe any other business, financial or
investment experience that would help you evaluate the merits and
risks of an investment in the Fund:
----------------------------------------------
----------------------------------------------
----------------------------------------------
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<PAGE> 10
(k) List any professional licenses or registrations, including
bar admissions, accounting certification, real estate brokerage
licenses and Securities and Exchange Commission or state broker dealer
registrations held by you:
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
7. If you are an individual,
(a) What is your marital status? (check one):
_______Married _______Single _______Separated
(b) Of what country are you a citizen? (check one):
________U.S. ___________ other (please specify)
8. Check the item(s) below which are applicable to you:
If seeking to invest as an individual:
(a) ______ I am a natural person whose individual net worth, or
joint net worth with my spouse, at the time of my purchase of Shares
exceeds $1,000,000.
(b) ______ I am a natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint
income with my spouse in excess of $300,000 in each of those years and
have a reasonable expectation of reaching the same income level in the
current year.
If seeking to invest as a corporation, partnership, trust or other
entity :
(a) ______ I am a domestic bank or domestic savings and loan
association or other similar institution, acting in an individual or
fiduciary capacity; a broker or dealer registered pursuant to Section
15 of the Securities Exchange Act of 1934; a domestic insurance
company; an investment company registered under the Investment Company
Act of 1940 (the "Act") or a business development company as defined
in the Act; a Small Business Investment Company licensed by the U.S.
Small Business Administration under the Small Business Investment Act
of 1958; a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan
has total assets in excess of $5,000,000.
(b) ______ I am a "private business development company" as
defined in the Investment Advisers Act of 1940.
(c) ______ I am an organization described in Section 501(c)(3) of
the Internal Revenue Code of 1986, as amended (the "Code"),
corporation, Massachusetts or similar business trust, or
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<PAGE> 11
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000.
(d) ______ I am a trust with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Regulation D of the Securities and Exchange
Commission.
(e) ______ I am an entity in which each equity owner satisfies
one or more of the requirements set forth in clauses (a) through (g)
above.
(f) ______ I am an Individual Retirement Account in which the
participant satisfies either of the requirements set forth in clauses
(e) or (f) above.
(g) ______ I am a revocable trust which can be amended or revoked
at any time by the grantor, and whose grantor satisfies the
requirements set forth in clause (e) above.
9. State Securities Law Standards (imposed by certain states only)
<TABLE>
<CAPTION>
FOR ALABAMA INVESTORS WHO ARE INDIVIDUALS OR TRUSTS
<S> <C>
_______ Subscriber represents and affirms that Subscriber has, either alone or with such
initial Subscriber's purchaser representative, the knowledge and experience in financial and
business matters that Subscriber is capable of evaluating the merits and risks of
Subscriber's investment in the Fund.
<CAPTION>
FOR FLORIDA INVESTORS
<S> <C>
_______ The following information is provided for the benefit of any Subscriber who
initial or that is a resident of, or purchased his or its Shares while in, the State of
Florida:
THE SHARES IN THE FUND HAVE NOT BEEN REGISTERED UNDER THE FLORIDA SECURITIES ACT. IF SALES OF
THE FUND'S SHARES ARE MADE TO FIVE (5) OR MORE INVESTORS IN FLORIDA, ANY FLORIDA OFFEREE MAY,
AT THE OFFEREE'S OPTION, VOID ANY PURCHASE UNDER THIS SUBSCRIPTION AGREEMENT WITHIN A PERIOD OF
THREE (3) DAYS AFTER HE (A) FIRST TENDERS OR PAYS TO THE FUND, AN AGENT OF THE FUND OR AN
ESCROW AGENT THE CONSIDERATION REQUIRED HEREUNDER, OR (B) DELIVERS HIS EXECUTED SUBSCRIPTION
AGREEMENT, WHICHEVER OCCURS LATER. TO ACCOMPLISH THIS, IT IS SUFFICIENT FOR A FLORIDA OFFEREE
TO SEND A LETTER OR TELEGRAM TO THE FUND WITHIN THAT THREE (3) DAY PERIOD, STATING THAT HE IS
VOIDING AND RESCINDING THE PURCHASE. IF AN OFFEREE SENDS A LETTER, IT IS PRUDENT TO DO SO BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO INSURE THAT IT IS RECEIVED AND TO EVIDENCE THE
TIME OF MAILING.
</TABLE>
C-5
<PAGE> 12
<TABLE>
<CAPTION>
FOR NORTH CAROLINA INVESTORS
<S> <C>
_______ Subscriber represents and affirms that Subscriber has either (i) a minimum
initial net worth (exclusive of home, home furnishings and automobiles) of $60,000 and
a taxable income in the last tax year or estimated in the current tax year of
$60,000 or (ii) a minimum net worth (exclusive of home, home furnishings and
automobiles) of $225,000.
<CAPTION>
FOR SOUTH CAROLINA INVESTORS
<S> <C>
_______ Subscriber represents and affirms that Subscriber has (i) a minimum net worth
initial (exclusive of home, furniture and automobiles) of $100,000 or (ii) federal and
state income subject to the maximum rate of income tax.
</TABLE>
C-6
<PAGE> 13
SIGNATURE PAGE FOR INDIVIDUALS
(Fund Copy - Page 1 of 2 to be returned to Selling Agent)
IF THE SUBSCRIBER IS AN INDIVIDUAL, COMPLETE THE FOLLOWING SIGNATURE
LINES TO THE SUBSCRIPTION AGREEMENT:
THE UNDERSIGNED ACKNOWLEDGES THAT HE OR SHE (I) HAS READ THE PRIVATE
PLACEMENT MEMORANDUM OF THE FUND DATED JANUARY 16, 1995 (THE "MEMORANDUM"), THE
OPERATING AGREEMENT AND THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY, (II)
HAS HAD AN OPPORTUNITY TO ASK QUESTIONS OF THE ADVISOR CONCERNING THE PROPOSED
INVESTMENT ACTIVITIES OF THE FUND AND OTHER MATTERS DISCUSSED IN THE
MEMORANDUM, (III) HAS CONSIDERED AND UNDERSTANDS THE "RISK FACTORS," "CONFLICTS
OF INTEREST" AND "SUITABILITY STANDARDS" DISCUSSED IN THE MEMORANDUM, AND (IV)
MEETS THE DEFINITION OF "ACCREDITED INVESTOR" SET FORTH IN THE MEMORANDUM AND
SECTION C OF THIS SUBSCRIPTION PACKAGE.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this ______ day of _______________________, 199___.
Total purchase price of Shares subscribed for at $25,000 per Share:
$______________________
<TABLE>
<S> <C>
_______________________________________ _______________________________________
Signature of Individual Signature of Joint Purchaser, if any
_______________________________________ _______________________________________
Print Name of Individual Print Name of Joint Purchaser, if any
Preferred Mailing Address, if different
Legal Residence of Individual: from residence address:
_______________________________________ _______________________________________
Number and Street Number and Street
_______________________________________ _______________________________________
City, State, Zip Code City, State, Zip Code
_______________________________________
Social Security Number
Preferred Mailing Address, if different
Legal Residence of Joint Purchaser, if any: from residence address:
_______________________________________ _______________________________________
Number and Street Number and Street
_______________________________________ _______________________________________
City, State, Zip Code City, State, Zip Code
_______________________________________
Social Security Number
Accepted By: Southeast Interactive Technology _______________________________________
Fund I, LLC Signature of Financial Consultant
By:___________________________________ _______________________________________
Signature of Branch Manager
Title:________________________________
</TABLE>
D-1
<PAGE> 14
SIGNATURE PAGE FOR INDIVIDUALS
(Investor Copy - Page 2 of 2 to be returned to Selling Agent)
IF THE SUBSCRIBER IS AN INDIVIDUAL, COMPLETE THE FOLLOWING SIGNATURE
LINES TO THE SUBSCRIPTION AGREEMENT:
THE UNDERSIGNED ACKNOWLEDGES THAT HE OR SHE (I) HAS READ THE PRIVATE
PLACEMENT MEMORANDUM OF THE FUND DATED JANUARY 16, 1995 (THE "MEMORANDUM"), THE
OPERATING AGREEMENT AND THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY, (II)
HAS HAD AN OPPORTUNITY TO ASK QUESTIONS OF THE ADVISOR CONCERNING THE PROPOSED
INVESTMENT ACTIVITIES OF THE FUND AND OTHER MATTERS DISCUSSED IN THE
MEMORANDUM, (III) HAS CONSIDERED AND UNDERSTANDS THE "RISK FACTORS," "CONFLICTS
OF INTEREST" AND "SUITABILITY STANDARDS" DISCUSSED IN THE MEMORANDUM, AND (IV)
MEETS THE DEFINITION OF "ACCREDITED INVESTOR" SET FORTH IN THE MEMORANDUM AND
SECTION C OF THIS SUBSCRIPTION PACKAGE.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this ______ day of ____________________, 199___.
Total purchase price of Shares subscribed for at $25,000 per Share:
$______________________
<TABLE>
<S> <C>
_______________________________________ ________________________________
Signature of Individual Signature of Joint Purchaser, if any
_______________________________________ ________________________________
Print Name of Individual Print Name of Joint Purchaser, if any
Preferred Mailing Address, if different
Legal Residence of Individual: from residence address:
_______________________________________ _________________________________
Number and Street Number and Street
_______________________________________ __________________________________
City, State, Zip Code City, State, Zip Code
_______________________________________
Social Security Number
Preferred Mailing Address, if different
Legal Residence of Joint Purchaser, if any: from residence address:
_______________________________________ ____________________________________
Number and Street Number and Street
______________________________________ ___________________________________
City, State, Zip Code City, State, Zip Code
_______________________________________
Social Security Number
Accepted By: Southeast Interactive Technology _______________________________________
Fund I, LLC Signature of Financial Consultant
By:____________________________________ _______________________________________
Signature of Branch Manager
Title:_________________________________
</TABLE>
D-2
<PAGE> 15
SIGNATURE PAGE FOR CORPORATIONS,
PARTNERSHIPS, TRUSTS AND OTHER ENTITIES
(Investor Copy - Page 1 of 2 to be returned to Selling Agent)
IF THE SUBSCRIBER IS A CORPORATION, PARTNERSHIP, TRUST OR OTHER
ENTITY, COMPLETE THE FOLLOWING SIGNATURE LINES TO THE SUBSCRIPTION AGREEMENT:
THE UNDERSIGNED ACKNOWLEDGES THAT HE OR SHE (I) HAS READ THE PRIVATE
PLACEMENT MEMORANDUM OF THE FUND DATED JANUARY 16, 1994 (THE "MEMORANDUM"), THE
OPERATING AGREEMENT AND THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY, (II)
HAS HAD AN OPPORTUNITY TO ASK QUESTIONS OF THE ADVISOR CONCERNING THE PROPOSED
INVESTMENT ACTIVITIES OF THE FUND AND OTHER MATTERS DISCUSSED IN THE
MEMORANDUM, (III) HAS CONSIDERED AND UNDERSTANDS THE "RISK FACTORS," "CONFLICTS
OF INTEREST" AND "SUITABILITY STANDARDS" DISCUSSED IN THE MEMORANDUM, AND (IV)
MEETS THE DEFINITION OF "ACCREDITED INVESTOR" SET FORTH IN THE MEMORANDUM AND
SECTION C OF THIS SUBSCRIPTION PACKAGE.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this ________ day of _______________________, 199____.
<TABLE>
<S> <C>
Total purchase price of Shares subscribed for at $25,000 per Share: $_____________
Print Name of Corporation, Partnership, Trust or Other Entity:
_____________________________________________________________________
By:___________________________________________________________________
Signature of Officer or Other Authorized Representative*
Print Name and Title of Officer or Other Authorized Representative:
________________________________________________________________________
Location of Principal Place of Business of Corporation, Partnership, Trust or other Entity:
__________________________________ _____________________________________
Name and Street City, State, Zip Code
Mailing Address (if different from above):
__________________________________ _____________________________________
Name and Street City, State, Zip Code
___________________________________
Tax Identification Number of Corporation, Partnership, Trust or other Entity
</TABLE>
(*Only an officer or other representative of such corporation,
partnership, trust or other entity who is authorized to execute this
document on behalf of such entity should sign this Agreement.)
<TABLE>
<S> <C>
Accepted By: Southeast Interactive Technology _______________________________________
Fund I, LLC Signature of Financial Consultant
By:____________________________________ _______________________________________
Signature of Branch Manager
Title:_________________________________
</TABLE>
E-1
<PAGE> 16
SIGNATURE PAGE FOR CORPORATIONS,
PARTNERSHIPS, TRUSTS AND OTHER ENTITIES
(Fund Copy - Page 2 of 2 to be returned to Selling Agent)
IF THE SUBSCRIBER IS A CORPORATION, PARTNERSHIP, TRUST OR OTHER
ENTITY, COMPLETE THE FOLLOWING SIGNATURE LINES TO THE SUBSCRIPTION AGREEMENT:
THE UNDERSIGNED ACKNOWLEDGES THAT HE OR SHE (I) HAS READ THE PRIVATE
PLACEMENT MEMORANDUM OF THE FUND DATED JANUARY 16, 1994 (THE "MEMORANDUM"), THE
OPERATING AGREEMENT AND THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY, (II)
HAS HAD AN OPPORTUNITY TO ASK QUESTIONS OF THE ADVISOR CONCERNING THE PROPOSED
INVESTMENT ACTIVITIES OF THE FUND AND OTHER MATTERS DISCUSSED IN THE
MEMORANDUM, (III) HAS CONSIDERED AND UNDERSTANDS THE "RISK FACTORS," "CONFLICTS
OF INTEREST" AND "SUITABILITY STANDARDS" DISCUSSED IN THE MEMORANDUM, AND (IV)
MEETS THE DEFINITION OF "ACCREDITED INVESTOR" SET FORTH IN THE MEMORANDUM AND
SECTION C OF THIS SUBSCRIPTION PACKAGE.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this ________ day of ________________, 199___.
<TABLE>
<S> <C>
Total purchase price of Shares subscribed for at $25,000 per Share: $_____________
Print Name of Corporation, Partnership, Trust or Other Entity:
_____________________________________________________________________
By:___________________________________________________________________
Signature of Officer or Other Authorized Representative*
Print Name and Title of Officer or Other Authorized Representative:
________________________________________________________________________
Location of Principal Place of Business of Corporation, Partnership, Trust or other Entity:
__________________________________ _____________________________________
Name and Street City, State, Zip Code
Mailing Address (if different from above):
__________________________________ _____________________________________
Name and Street City, State, Zip Code
___________________________________
Tax Identification Number of Corporation, Partnership, Trust or other Entity
</TABLE>
(*Only an officer or other representative of such corporation,
partnership, trust or other entity who is authorized to execute this
document on behalf of such entity should sign this Agreement.)
<TABLE>
<S> <C>
Accepted By: Southeast Interactive Technology _______________________________________
Fund I, LLC Signature of Financial Consultant
By:____________________________________ _______________________________________
Signature of Branch Manager
Title:__________________________________
</TABLE>
E-2
