<PAGE>
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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to________________
Commission file number: 0-26302
VIDEOLAN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1283466
(State of incorporation) (I.R.S. Employer Identification No.)
100 Mallard Creek Road, Suite 250, Louisville, Kentucky 40207
(Address of principal executive offices) (Zip Code)
502-895-4858
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding at September 30, 1996
- ---------------------- --------------------------------------
Common stock, $.01 par value per share 14,018,398
This document contains 15 pages.
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<PAGE>
INDEX
Page
PART I. Financial Information
ITEM 1. Financial Statements
Unaudited Condensed Balance Sheet as of September 30, 1996 3
Unaudited Condensed Statements of Operations for the three months
ended September 30, 1995 and 1996, the nine months ended September
30, 1995 and 1996, and for the period from May 11, 1994(Inception)
to September 30, 1996. 4
Unaudited Condensed Statement of Stockholders' Equity for the
Nine Months ended September 30, 1996. 5
Unaudited Condensed Statements of Cash Flows for the three months
ended September 30, 1995 and 1996, the nine months ended September
30, 1995 and 1996, and for the period from May 11, 1994(Inception)
to September 30, 1996. 6
Notes to Unaudited Condensed Financial Statements 8
ITEM 2 Management's Discussion and Analysis or Plan of
Operations 11
PART II. Other Information 13
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES 15
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<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED BALANCE SHEET
September 30, 1996
(Unaudited)
<TABLE>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................. $ 712,100
Accounts receivable ................................... 474,145
Inventories ........................................... 1,352,877
Prepaid expenses and other current assets ............. 281,631
-------
Total Current Assets ............................... $ 2,820,753
Property and equipment, net ................................... 582,340
Other assets:
Patents pending or granted ............................ 89,722
Notes receivable ...................................... 33,800
Deferred offering cost ................................ 186,553
Security deposits ..................................... 102,782
-------
412,857
-------
$ 3,815,950
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities .............. $ 631,498
Capital lease obligations-current ..................... 113,894
-------
Total Current Liabilities .......................... $ 745,392
Long term liabilties:
Capital lease obligations-non current ................. 25,359
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value 5,000,000
shares authorized, none issued
Common stock, $.01 par value; 20,000,000 shares
authorized; 14,018,398 shares issued and outstanding 140,184
Additional paid-in-capital ............................ 16,722,132
Deficit accumulated during the development stage ...... (13,817,117)
-----------
Total Stockholders' Equity ......................... 3,045,199
---------
$ 3,815,950
============
</TABLE>
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<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
May 11, 1994
(Inception)
Three Months Ended Nine Months Ended through
September 30, September 30, September 30,
1995 1996 1995 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales ................................... $ 50,053 $ 488,947 $ 50,053 $ 488,947 $ 539,000
Cost of sales ............................... 37,372 283,444 37,372 283,444 320,816
------------ ------------ ------------ ------------ ------------
Gross profit ................................ 12,681 205,503 12,681 205,503 218,184
Selling, general and administrative expenses:
Salaries .............................. 154,385 417,646 356,206 1,397,920 2,162,591
Compensation expense .................. - 1,125,000 3,254,875
Payroll taxes ......................... 30,163 43,855 74,875 133,767 278,481
Consulting fees ....................... 86,805 47,430 134,641 328,851 1,199,964
Marketing cost ........................ 16,995 30,218 97,410 171,523 370,313
Professional fees ..................... 110,932 175,923 192,362 340,018 780,229
Travel and entertainment .............. 94,133 111,981 262,018 337,001 805,915
Research and development .............. 494,603 488,879 985,124 1,343,543 3,857,533
Equipment Expense ..................... 23,186 121,102 73,090 344,079 500,023
Rent .................................. 21,750 52,663 50,205 125,489 244,407
Insurance ............................. (2,014) 65,465 30,253 153,891 198,832
Office ................................ 26,313 60,905 91,416 151,096 326,065
Depreciation and amortization ......... 6,605 33,703 14,915 77,885 111,274
Stock Administration Charges .......... - 29,394 - 67,293 67,293
Other ................................. 6,581 73,903 14,747 119,588 146,798
Franchise Tax Expense ................. - - 5,242 -
------------ ------------ ------------ ------------ ------------
Total expenses ...................... 1,070,437 1,753,067 3,507,504 5,091,944 14,304,593
Other income (expense)
Interest income ....................... 21,357 37,060 33,614 161,878 297,121
Interest expense ...................... (6,317) (9,866) (8,498) (19,666) (28,164)
Other Income .......................... - (1,971) 335 335
------------ ------------ ------------ ------------ ------------
15,040 25,223 25,116 142,547 269,292
Net loss ............................ $ (1,042,716) $ (1,522,341) $ (3,469,707) $ (4,743,894) $(13,817,117)
============ ============ ============ ============ ============
Loss per share .............................. $ (0.08) $ (0.11) $ (0.30) $ (0.34) $ (1.13)
============ ============ ============ ============ ============
Weighted average common
shares outstanding ........................ 12,405,998 13,986,328 11,447,665 13,913,791 12,178,705
============ ============ ============ ============ ============
</TABLE>
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VideoLan Technologies, Inc.
(a development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During Total
Preferred ------------------------- Paid-In Development Stockholders'
Stock Shares Amount Capital Stage Equity
----------- ---------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 .......... $ 13,843,498 $ 138,435 $ 16,424,980 $ (9,073,223) $ 7,490,192
Warrants converted to Common Stock .. 5,000 50 34,950 35,000
Employee stock options exercised .... 169,900 1,699 262,202 263,901
Net loss ............................ (4,743,894) (4,743,894)
----------- ---------- ------------ --------------- ------------ ------------
Balances at September 30, 1996 ...... $ 14,018,398 $ 140,184 $ 16,722,132 $(13,817,117) $ 3,045,199
----------- ========== ============ =============== ============ ============
</TABLE>
5 of 15
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
May 11, 1994
(Inception)
Three Months Ended Nine Months Ended through
September 30, September 30, September 30,
1995 1996 1995 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating and
development stage activities:
Net loss $(1,042,716) $(1,522,341) $(3,469,707) $(4,743,894) $(13,817,117)
Adjustments to net loss:
Issuances of common stock for
Services rendered 1,125,000 1,146,875
Issuances of common stock for
consulting services rendered 665,000
Issuances of common stock for purchased
research and development 709,125
Issuances of stock options to consultants 2,108,000
Depreciation and amortization 6,605 33,703 14,915 77,885 111,274
Gain on sale of assets 1,972 1,884 1,884
Increase in accounts receivable (27,391) (449,558) (27,391) (449,481) (474,145)
Increase in interest receivable (2,500)
Increase(decrease) in inventories (155,836) 84,733 (542,879) (536,167) (1,356,536)
Increase in prepaid expenses and other
current assets (13,913) (83,656) (26,733) (119,490) (277,971)
Increase(decrease) in security deposits (1,977) 19,977 (10,517) (77,121) (102,782)
Increase in accounts payable and
accrued liabilities 1,323 231,990 221,757 286,657 631,499
----------- ----------- ----------- ----------- ------------
Net cash used in operating and
development stage activities (1,233,905) (1,683,180) (2,718,055) (5,559,727) (10,654,894)
----------- ----------- ----------- ----------- ------------
Cash flow from investing activities:
Acquisition of property and equipment (39,700) (89,596) (86,052) (205,729) (446,495)
Proceeds from sale of assets 1,230 (99,745) 1,730 1,730
Patent application costs (1,006) (4,452) (54,506) (89,721)
----------- ----------- ----------- ----------- ------------
Net cash used in investing activities: (39,700) (89,372) (190,249) (258,505) (534,486)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock
in private placement 2,202,747 2,655,647
Offering costs (158,805) (288,703) (326,263)
Proceeds from the exercise of stock options
by employees 156,901 298,901 298,901
Proceeds from initial public offering 11,500,000 11,500,000 11,500,000
Underwriter's commissions and expense allowances (1,449,000) (1,449,000) (1,449,000)
Offering costs (234,812) (445,970) (186,553) (632,523)
Proceeds from exercise of common stock warrants -
Proceeds from notes payable (331,000) 331,000
Repayment of notes payable (331,000)
Repayment of capital lease obligations (4,056) (45,861) (12,881) (91,013) (111,482)
Proceeds from bridge loans 900,000 900,000
Repayment of bridge loans (450,000) (900,000) (900,000)
Loans to employees, net 35,311 (33,800)
Cash overdraft (31,003)
----------- ----------- ----------- ----------- ------------
Net cash provided by(used in)
financing activities: 9,362,132 (47,765) 11,179,501 21,335 11,901,480
----------- ----------- ----------- ----------- ------------
Increase(decrease) in cash and cash equivalents: 8,088,527 (1,820,317) 8,271,197 (5,796,897) 712,100
Cash and cash equivalents at beginning of period 182,670 2,532,417 - 6,508,997 -
----------- ----------- ----------- ----------- ------------
Cash and cash equivalents at end of period $ 8,271,197 $ 712,100 $ 8,271,197 $ 712,100 $ 712,100
=========== =========== =========== =========== ============
</TABLE>
Supplemental disclosure of cash flow information: Capital lease obligations of
$140,071 were incurred when the Company entered into new leases for testing
equipment. Interest expense paid in cash was $2,785.
6 of 15
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VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
NOTE A-DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
VideoLan Technologies, Inc. (the "Company"), is a development stage
enterprise established to acquire certain technology and the rights to a U.S.
Patent application and several pending foreign patent applications for an
analog video distribution communications system designed to provide real-time,
interactive video, to and from a desktop personal computer over local and wide
area networks ("VideoLan Technology"). Since inception, the Company has
primarily been engaged in research and development.
In the course of its development stage activities, the Company has
incurred significant losses which have been funded with resources from the
Chairman, bridge loan financing, proceeds from a private placement, and
proceeds from an initial pubic offering.
Unless income from sales of the VideoLan VL2000 System is obtained,
the timing, sufficiency and receipt of which the Company cannot predict, future
development and commercialization of the Company's technology will depend upon
arrangements with third parties to finance research and development projects,
or the Company's ability to obtain other additional financing on terms
satisfactory to the Company. The Company's inability to obtain such financing
could have a material adverse effect on the Company`s operations.
During October 1996, the Company completed a $5,200,000 financing
through the sale of preferred shares in a Regulation D private placement. The
Company is evaluating whether to seek an additional $2,300,000 more in gross
proceeds from the same private placement. The net proceeds of the $5,200,000
private placement after commissions will be $4,888,000.
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Research and Development Costs
Research and development costs are expensed as incurred.
2. Net Loss Per Share of Common Stock
The computation of loss per common share is based on the weighted
average number of outstanding shares. Stock options and warrants have not been
included in the calculation as their inclusion would be antidilutive.
3. Cash and Cash Equivalents
Cash equivalents consist of short-term government obligations. These
securities have original maturity dates not exceeding three months. Such
investments are carried at cost which approximates market, and are considered
cash equivalents for purposes of reporting cash flows.
4. Interim Financial Statements
The unaudited balance sheet as of September 30, 1996 and the unaudited
statements of operations and cash flows for the three months and the nine
months ended September 30, 1996 and 1995 as well as the period May 11, 1994
(inception) through September 30, 1996 and the statement of stockholders'
equity for the nine months ended September 30, 1996 contain all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
the Company's management, necessary to present the financial position of the
Company as of September 30, 1996 and results of operations and the cash flows
for the three months, and the nine months ended September 30, 1996 and 1995,
and the period May 11, 1994 (inception) through September 30, 1996.
7 of 15
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VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
5. Patents Pending or Issued
Patent pending applications consist of filing fees and certain legal
costs relating to the filing of domestic and international patent applications
for the VideoLan technology.
NOTE C-COMMITMENTS AND CONTINGENCIES
Employee Compensation
On January 17, 1996, Mr. John Haines' employment as CEO of the Company
ceased. As a result of his termination and release agreement with the Company,
Mr. Haines received $15,625 per calendar month, prorated for partial months,
through September 24, 1996. The termination and release agreement allows Mr.
Haines to retain vested options to purchase 150,000 shares of common stock at
$3 per share granted to him under his consulting agreement. The termination and
release agreement also required the Company to register 50,000 of the 150,000
shares on June 20, 1996 and provides Mr. Haines certain piggyback registration
rights for the remaining 100,000 options. Upon entering the termination and
release agreement, Mr. Haines resigned as a director of the Company.
Effective February 15, 1996, Richard Dean Jackson resigned as
Executive Vice President of the Company. As part of his severance and release
agreement with the Company, Mr. Jackson received $125,000 paid over a four
month period, commencing March 1996. Mr. Jackson concurrently signed a
marketing representative agreement to serve as a commissioned marketing
representative of the Company. Additionally, he was issued options to purchase
150,000 shares of the Company's common stock at $12 per share.
On September 27, 1996 Mr. Jack Shirman joined the Company as CEO. His
employment contract is for a two year term. Mr. Shirman's annual base salary
will be $200,000 with possible bonuses which are to be determined at a later
date. Mr. Shirman was also granted 300,000 stock options at an exercise price
of $6.12 per share. Mr. Shirman may exercise 100,000 stock options on September
27, 1997 and 1998 and 50,000 shares on September 27, 1999 and 2000. The options
expire on September 27, 2001. Effective with Mr. Shirman taking over as CEO,
Mr. Ted Ralston resigned as interim CEO. Mr. Ralston remains Chairman of the
Board of Directors
New Facility
In May 1996, the Company leased a 9,778 square foot facility in
Jeffersontown, Kentucky. The Company relocated the Product Engineering and the
Research and Development Departments from the Corporate Office to this new
facility. The minimum annual lease payments under this five year lease are as
follows:
1996 $ 15,282
1997 61,128
1998 73,128
1999 77,128
2000 85,128
Thereafter 28,376
============
$ 340,170
============
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<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
Patents Pending or Issued
The claims under VideoLan's U.S. Patent application for
"bi-directional transport of video bandwidth signals have been approved by the
U.S. Patent and Trademark Office. The U.S. Patent (No. 5537142) was issued July
16, 1996.
The Company's remaining pending international patent applications
claim an efficient network for the real time, simultaneous, bi-directional
transmission of voice, video, and data among a plurality of users connected to
a plurality of hubs.
Patents and patent applications involve complex legal and factual
issues. A number of companies have filed applications for, or have been issued,
patents relating to products or technology that is similar to some of the
products or technology being developed or used by the Company. There can be no
assurance that the Company's patent will afford protection against the
development of similar or related technology by competitors.
Although the Company believes that its VideoLan VL2000 System and
technology do not and will not infringe on patents or proprietary rights of
others, it is possible that such infringement or violation has occurred or may
occur or that others may infringe on the Company's patents.
In the event that the Company's products or technologies infringe on
patents or other proprietary rights of others, the Company could be required to
discontinue the sale of its products, including the VideoLan VL2000 System, and
redesign its product or obtain licenses. There can be no assurance that the
Company would be able to do so in a timely manner, upon acceptable terms and
conditions, or at all, or that the failure to do any of the foregoing would not
have a material adverse effect on the Company. If any of the Company's products
or technologies are deemed to infringe on patents or other proprietary rights
of others, the Company could, under certain circumstances, become liable for
damages, which could also have a material adverse effect on the Company.
In June 1996, Datapoint Corporation ("Datapoint") filed a lawsuit
against the Company in the United States District Court for the District of New
Jersey claiming patent infringement, contributory infringement and inducing
infringement. No claims are made in the lawsuit regarding the validity of the
Company's patent. Datapoint, which is currently experiencing financial
difficulties, has made similar claims in lawsuits filed against other
videoconferencing companies. However, to the Company's knowledge, Datapoint has
not obtained a final verdict of infringement against any of these companies.
The Company's independent outside patent counsel has reviewed Datapoint's
claims and believes that they are without merit. Accordingly, management does
not believe the lawsuit will have a material adverse effect on the Company's
results of operations or financial condition.
Sales Agency Agreement
In July of 1996, the Company entered into a Sales Agency Agreement
with Quest Enterprises, Inc. ("QEI"). QEI was appointed a nonexclusive
authorized sales agent of the Company to sell to approved accounts in the
United States. The Company will pay a sales commission equal to five percent of
net sales to QEI on these approved accounts. The Company also granted to QEI an
option to purchase 75,000 shares of common stock at an exercise price of $16
per share. The option to purchase 25,000 of these shares is irrevocable and is
exercisable at any time prior to its expiration and is not be affected by the
termination of the Sales Agency Agreement. The option to purchase any or all of
the remaining shares will not be exercisable until and unless prior to the
termination of the Sales Agency Agreement (i) the Company has received net
sales from approved accounts of at least $5,000,000 or (ii) the Company obtains
equity financing of at least $5,000,000 through QEI on terms that are
acceptable to the Company.
9 of 15
<PAGE>
VideoLan Technologies, Inc.
(a development stage enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
Software Development Consulting Agreement
In July of 1996 the Company signed a one year consulting agreement
with Video Network Service, Inc. ("VNS") to provide full time software
supervision and development. The consulting agreement calls for VNS to be paid
$280,000 over the term of the one year contract. Additionally, 40,000 stock
options were granted to VNS and become executable at specific increments once
mutually agreed upon milestones are met.
NOTE D-CAPITAL STOCK
At the Annual Meeting of Stockholders in June 1996, the Company's
stockholders approved a proposal to increase the Company's authorized shares of
common stock from 20,000,000 to 80,000,000. The proposal permitted the
Company's management to defer the effectiveness of the increase to a later
date. The increase was made effective on October 16, 1996. Additionally, the
stockholders approved a proposal to increase the number of shares available
under the Company's 1995 Stock Option Plan from 1,000,000 to 2,000,000.
On August 9, 1996 the Company made a stock option grant totaling
182,000 shares to all of its employees as of that date, pursuant to the
restated VideoLan 1995 Stock Option Plan. These incentive stock options were
granted at an exercise price of $9.875. 50% of the options granted become
exercisable on August 9, 1998 and the balance on August 9, 1999.
NOTE E-SUBSEQUENT EVENTS
Private Placement
During October 1996, the Company completed a $5,200,000 financing
through the sale of preferred shares in a Regulation D private placement. The
Company is evaluating raising an additional $2,300,000 more in gross proceeds
from the same private placement. The net proceeds of the $5,200,000 private
placement after commissions will be $4,888,000. This offering could create
significant dilution if these preferred shares are converted at low prices.
10 of 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Introduction
The Company is a development stage enterprise engaged in the
continuing development of communications products which utilize their
proprietary technology to transmit and receive real time, interactive video,
voice and data signals over unshielded twisted pair copper wire ("UTP"), as
well as coaxial cable and fiber, to and from desktop personal computers over
local and wide area networks. On July 16, 1996 the US Patent and Trademark
office issued the Company a patent (No. 5537142) for a bi-directional
transmission of video banded signals, including a switching matrix. There are
several international patents still pending.
In August 1995, the Company concluded its initial public offering
("IPO") of 2,875,000 units, each unit consisting of one share of common stock
and one redeemable common stock purchase warrant exercisable for one share of
common stock at a price of $7.00 subject to certain adjustments based upon
anti-dilution provisions, at any time until August 10, 2000. The net proceeds
of the offering to the Company, after payment of underwriters discounts and
commissions, and other expenses of the offering were approximately $9,600,000,
and it was anticipated that the proceeds would be sufficient for at least 12
months after the date of the offering.
$750,000 of the proceeds of the IPO were originally budgeted to
accomplish the Company's marketing strategy for the VideoLan VL2000 System
($266,362 used as of September 30, 1996). This is reflecting the Company's plan
to rely in part on the marketing organizations of the original equipment
manufacturers ("OEM's"), value added resellers ("VARS's"), systems integrators
and distributors through which it intends to sell the VideoLan VL2000 System.
The Company plans to minimize operating expenses by subcontracting
manufacturing, installation and field maintenance services. Additionally,
approximately $3,000,000 of the proceeds of the offering were allocated to the
purchase of inventory ($1,256,610 used as of September 30, 1996), and
approximately $1,500,000 was allocated to enhancements of the VideoLan VL2000
System and development of the Company's technology for Video Services
($2,270,813 used as of September 30, 1996). Thereafter, the Company anticipated
that cash flow from the sales of the VideoLan VL2000 System and/or development
contracts with RBOC's, cable companies or other third parties would be required
to finance the integration of the Company's technology into existing RBOC or
cable company infrastructures for video services. The balance of the IPO
proceeds was allocated for general corporate working capital.
Originally, the Company budgeted $1,500,000 for research and
development to enhance the VideoLan VL2000 System and develop the Company's
technology for video services. The Company has exceeded the original budgeted
amount by $770,813. The Company is also devoting some of its resources to
developing new applications for the technology as well as additional features
for existing applications.
There can be no assurance that the Company will establish satisfactory
distribution channels for the VideoLan VL2000 System or that the VideoLan
VL2000 System will be accepted in the marketplace. There can also be no
assurance that the Company will enter into satisfactory development contracts
for video services and or that it can complete development before other
technologies are selected by video services providers.
11 of 15
<PAGE>
Results of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Revenues. The Company has engaged in limited marketing of the VideoLan
VL2000 System and is currently beginning to implement its marketing strategy.
During the third quarter of 1996, the Company commenced shipping the VideoLan
VL2000 System which provided revenues of $488,947 as compared with $50,053 in
the comparable period in 1995. The Company's marketing efforts in the third
quarter of 1996 were significantly impaired by the sharp decline in the trading
price of the Company's common stock and the Company's low cash position. As a
result, the Company anticipates that revenues during the fourth quarter of 1996
will be nominal. The Company believes its improved cash position resulting from
a recent private placement will enhance the Company's ability to market the
VideoLan VL2000 System although significant revenues are unlikely to be
realized until the second quarter of 1997 at the earliest
In the third quarter of 1996, the Company invoiced Samsung Corporation
for $154,291.75 in sales of the VideoLan VL2000 System pursuant to Samsung's
August 26, 1995 Exclusive Distribution Agreement with the Company.
Subsequently, Samsung has notified the Company that Samsung has decided to
terminate the Agreement and return all VideoLan VL2000 System products to the
Company. Management of the Company has contacted officers of Samsung in an
attempt to reinstate the Agreement on its current terms or renegotiated terms.
There can be no assurance that the Company will be successful in doing so.
Accordingly, the Company has determined not to recognize as revenue any sales
to Samsung during the third quarter of 1996.
Selling, General and Administrative Expenses. Total selling, general
and administrative expenses for the nine months ended September 30, 1996 were
$5,091,944 as compared with $3,507,504 in the comparable period of the prior
year. Salaries, consulting fees and related payroll taxes increased by
$1,294,816 to $1,860,538 in the nine months ended September 30, 1996 compared
to $565,722 in the nine months ended September 30, 1995. Research and
development expenses for the nine months ending September 30, 1996 were
$1,343,543 as compared with $985,124 for the same period in 1995, and marketing
costs were $171,523 in 1996 as compared with $97,410 for the same period in
1995.
Net Loss. The net loss of the Company for the nine months ended
September 30, 1996 was $4,743,894 ($0.34) as compared with $3,469,707 ($0.30)
for the nine months ended September 30, 1995. The Company expects to incur
continuing losses until significant quantities of the VideoLan VL2000 System
are sold.
Liquidity and Capital Resources
Through September 30, 1996, an aggregate of $10,654,894 has been
expended in the operating and development stage activities of the Company,
principally for research and development, salaries and professional fees. An
additional $534,486 has been used to prepare the Company's patent applications
and purchase certain equipment. Additional funds will be necessary to pay for
additional engineers, technical personnel and increased marketing costs in
connection with the sale of the Company's products.
Through September 30, 1996, the Company financed its operations
primarily through investments by individual investors, the 1995 private
placement which raised net proceeds of approximately $1,900,000, and from the
IPO which was completed in August 1995 and generated net proceeds of
$9,600,000. As of September 30, 1996, the Company had approximately $712,000 in
cash and cash equivalents remaing from such financings. The Company initially
sought to raise additional funds as early as April of 1996 in a public offering
through Kensington Wells Incorporated, the underwriter for the Company's IPO.
Kensington Wells was unable to complete this public offering. In September
1996, the Company sought to raise additional funds through a common stock
private placement also through Kensington Wells.
12 of 15
<PAGE>
However, Kensington Wells was unable to complete this offering as well
in part because of the sharp decline in the trading price of the Company's
common stock and the circulation of adverse information concerning Kensington
Wells in various media. Management believes the decline in the trading price
was largely attributable to substantial short selling of the Company's stock
and the absence of support by the Company's principal market-maker, Kensington
Wells.
During October 1996, the Company completed a $5,200,000 financing
through the sale of convertible preferred shares in a private placement under
Regulation D. The Company is evaluating raising an additional $2,300,000 more
in gross proceeds from the same private placement. The net proceeds of the
$5,200,000 private placement after commissions will be $4,888,000. The
Preferred Stock sold in the Offering will be convertible into Common Stock on
or after January 17, 1997 at the lesser of $4.88 or the five day average
trading price of the Common Stock at the time of conversion less a discount of
between 15% and 20%. The Company may redeem the Preferred Stock upon conversion
under certain circumstances. The Company is required to register the Common
Stock issuable upon conversion of the Preferred Stock on or before January 17,
1997. If the Company fails to register the Common Stock by such date, the
amount of Common Stock issuable upon conversion will increase. In connection
with the private placement, the Company will issue a warrant to the broker for
6% of the aggregate amount raised at $4.88 per share. It is anticipated that
the proceeds from this offering will be sufficient to fund the Company's
operations into the second quarter of 1997. The Company may seek additional
financing to fund its activities in the fourth quarter of 1996 or the first or
second quarters of 1997.
The Company believes that, during the past year, inflation has not had
a significant impact on the Company's operating results.
13 of 15
<PAGE>
VideoLan Technologies, Inc.
(A Development Stage Enterprise)
Part II: Other Information
ITEM 1. Legal Proceedings
In June 1996, Datapoint Corporation ("Datapoint") filed a lawsuit
against the Company in the United State District Court for the
District of New Jersey claiming patent infringement, contributory
infringement and inducing infringement. No claims are made in the
lawsuit regarding the validity of the Company's patent. Datapoint,
which is currently experiencing financial difficulties, has made
similar claims in lawsuits filed against other videoconferencing
companies. However, to the Company's knowledge, Datapoint has not
obtained a final verdict of infringement against any of these
companies. The Company's independent outside patent counsel has
reviewed Datapoint's claims and determined that they are without
merit. Accordingly, management does not believe the lawsuit will
have a material adverse effect on the Company's results of
operations or financial condition.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6 Exhibits and Reports:
(a) Exhibits
10.9 Employment agreement and option agreement between the Company
and Jack Shirman
10.10 Registration Rights Agreement: Applicable to 7 Investors
10.11 Subscription Agreement: Applicable to 7 Investors
10.12 Registration Rights Agreement: Applicable to 2 Investors
10.13 Subscription Agreement: Applicable to 2 Investors
10.14 Certificate of Designation
27.0 Financial Data Schedule
(b) Reports
None
14 of 15
<PAGE>
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VideoLan Technologies, Inc.
Date: November 11, 1996 /s/ Jack Shirman
-------------------------------
Jack Shirman
Chief Executive Officer
Date: November 11, 1996 /s/ Steven B. Rothenberg
---------------------------------
Steven B. Rothenberg
Chief Financial and Accounting Officer
15 of 15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of September 27, 1996, by and
among VIDEOLAN TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and
JACK SHIRMAN (the "Executive").
W I T N E S S E T H:
WHEREAS the Company desires to induce the Executive to enter the
employ of the Company for the period provided in this Agreement in accordance
with the terms and conditions set forth below; and
WHEREAS, the Executive is willing to accept such employment with the
Company on a full-time basis in accordance with such terms and conditions;
NOW, THEREFORE, for and in consideration of the premises hereof and
the mutual covenants contained herein, the parties hereto hereby covenant and
agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as Chief
Executive Officer of the Company, and the Executive hereby accepts such
employment with the Company, for the period set forth in Section 2 hereof, all
upon the terms and conditions hereinafter set forth.
(b) The Company shall use its best efforts to cause the
Executive to be nominated to the Company's Board of Directors and, in addition,
the Executive shall be entitled to nominate one individual to the Company's
Board of Directors, subject to approval by the Nominating Committee of the
Board of Directors.
(c) The Executive affirms and represents that he is under no
obligation to any former employer or other party which is in any way
inconsistent with, or which imposes any restriction upon, the Executive's
acceptance of employment hereunder with the Company, the employment of the
Executive by the Company, or the Executive's undertakings under this Agreement.
2. Term of Employment. Unless earlier terminated as
hereinafter provided, the term of the Executive's employment under this
Agreement shall be for a period beginning on the date September 27, 1996 (the
"Employment Date") and ending on September 26, 1998 (such period referred to as
the "Initial Term"). Unless earlier terminated as hereinafter provided, the
term of the Executive's employment under this Agreement shall be automatically
extended on a year-to-year basis (September 30 through September 29 of each
successive year) (such one-year periods referred to as "Additional Terms") upon
the expiration of the Initial Term or any Additional Term, unless prior to the
commencement of a 90-day period expiring at the end of such Initial Term or any
Additional Term, the Company or the Executive shall have given written notice
to the other stating that the term of this Agreement shall not be extended. For
purposes of this Agreement, the term "Employment Term" shall mean the Initial
Term plus all Additional Terms.
3. Duties. The Executive shall be employed as Chief Executive
Officer of the Company and shall faithfully and competently perform such
employment duties and responsibilities as the Board of Directors of the Company
may from time to time prescribe. The Executive shall perform his duties at such
places and times as the Board of Directors of the Company may reasonably
prescribe. Except as may otherwise be approved in advance by the Board of
Directors of the Company, and except during vacation periods and reasonable
periods of absence due to sickness, personal injury or other disability, the
Executive shall devote his full time throughout the Employment Term to the
services required of him hereunder. The Executive shall render his services
exclusively to the Company during the Employment Term. The Executive agrees to
perform his duties hereunder to the best of his ability and at a level of
competency consistent with the position occupied, to act on all matters in a
manner he reasonably believes to be in and not opposed to the best interests of
the Company, and to use his best efforts, skill and ability to promote the
profitable growth of the Company. The Executive and the Company agree that the
Executive shall perform his duties primarily at the Company's corporate office
and that he shall travel as necessary to perform his duties. The Executive
agrees to locate in the Louisville, Kentucky area on or before September 29,
1997.
4. Compensation.
(a) Salary. As compensation for the complete
and satisfactory performance by the Executive of the services to be performed
by the Executive hereunder during the Employment Term, the Company shall pay the
Executive a base salary ("Base Salary") at the annual rate of not less than Two
Hundred Thousand Dollars ($200,000). Any Base Salary payable hereunder shall be
paid in regular intervals in accordance with the Company's payroll practices.
(b) Stock Option. Upon the execution of this Agreement and
approval by the Company's Board of Directors, the Company shall grant the
Executive stock options for an aggregate of 300,000 shares of the Company's
common stock subject to the terms and conditions of a Stock Option Agreement of
even date hereof between the Company and the Executive (the "Stock Option
Agreement"), a copy of which is attached hereto.
(c) Annual Bonuses. The Executive shall be entitled to
receive annual bonuses under an annual executive bonus plan to be developed by
the Executive, if such plan is approved by the Company's Board of Directors.
(d) Withholding, etc. The payment of any Base Salary and
bonuses hereunder shall be subject to applicable withholding and payroll taxes,
and such other deductions as may be required under the Company's employee
benefit plans.
5. Benefits. During the Employment Term, the Executive shall:
(a) be eligible to participate in all employee fringe
benefits and any pension and/or profit sharing plans that may be provided by
the Company for its key executive employees in accordance with the provisions
of any such plans, as the same may be in effect on and after the date hereof,
excluding equity or bonus plans unless specifically granted by the Board of
Directors of the Company;
(b) be entitled to the same period of paid vacation
provided by the Company for its key executive employees;
(c) be entitled to sick leave, sick pay and disability
benefits in accordance with any Company policy that may be applicable on
and after the date hereof to key executive employees;
(d) be entitled to reimbursement for all reasonable and
necessary itemized out-of-pocket business expenses incurred by the Executive in
the performance of his duties hereunder in accordance with the Company's
policies applicable (on and after the date hereof) thereto;
(e) be entitled to reimbursement of the Executive's reasonable
expenses incurred in connection with his relocation to Louisville, Kentucky in
an aggregate amount not to exceed $40,000, including reasonable moving and
travel expenses for the Executive and his family, reasonable temporary
furnished dwelling costs in Louisville, Kentucky, and reasonable costs
associated with purchasing a permanent residence;
(f) be entitled to reimbursement of the Executive's reasonable
interim expenses incurred prior to his relocation to Louisville, Kentucky,
including weekly business class round-trip airfare between the Executive's
current residence and Louisville, Kentucky, local housing in Louisville,
Kentucky (i.e., apartment or hotel) and local transportation in Louisville,
Kentucky.
(g) be entitled to reimbursement of the costs incurred in
connection with the preparation of the Executive's income tax return in an
amount not to exceed $2,000 annually.
6. Termination.
(a) The Executive's employment hereunder shall be terminated
upon the occurrence of any of the following:
(i) death of the Executive;
(ii) termination of the Executive's employment hereunder by
the Executive at any time for any reason whatsoever (including, without
limitation, resignation or retirement);
(iii) termination of the Executive's employment hereunder by
the Company because of the Executive's inability to perform his duties on
account of disability or incapacity for a period of 90 or more days or for
shorter periods aggregating a period of ninety or more days, whether or not
consecutive, occurring within any period of 12 consecutive months;
(iv) termination of the Executive's employment hereunder by
the Company at any time "for cause," such termination to take effect
immediately upon written notice from the Company to the Executive; and
(v) termination of the Executive's employment hereunder by
the Company at any time, other than termination by reason of disability or
incapacity as contemplated by clause (iii) above or termination by the Company
"for cause" as contemplated by clause (iv) above.
The following actions, failures or events by or affecting the
Executive shall constitute "cause" for termination within the meaning of clause
(iv) above: (1) conviction of having committed a felony, (2) acts of dishonesty
or moral turpitude that are materially detrimental to the Company and/or its
Affiliates, (3) acts or omissions which the Executive knew or should have
reasonably known were likely to materially damage the business of the Company
and/or any Affiliate of the Company, (4) failure by the Executive to obey the
reasonable and lawful directions of the Board of Directors of the Company, (5)
gross negligence by the Executive in the performance of, or continuing failure
by the Executive to perform, his obligations hereunder, or (6) the Executive's
willful breach of any material agreement or covenant of this Agreement or any
fiduciary duty owed to the Company.
(b) In the event that the Executive's employment is terminated
pursuant to clause (i), (iii) or (v) of paragraph (a) above at any time, then
the Company shall continue to pay to the Executive, as severance pay or
liquidated damages or both, the amount of his Base Salary and bonus, if any,
which the Executive would have otherwise been entitled to receive pursuant to
Section 4(a) and (c) hereof had the Executive's employment not been so
terminated, from the date of termination through the later of (i) the date that
is twelve months after the date of such termination and (ii) September 26, 1998
(such amount being herein referred to as the "Severance Payments" and such
period being herein referred to as the "Severance Period"); provided, however,
that the Severance Payments payable pursuant to this paragraph (b) shall be
reduced by any amounts earned by the Executive as a result of his employment by
any business (whether as a director, officer, employee, manager, owner,
consultant, independent contractor, advisor or otherwise) during the Severance
Period; provided, further, however, that nothing in this paragraph (b) shall be
construed to require the Executive to seek employment or otherwise mitigate or
reduce the Severance Payments to be made hereunder. The Severance Payments
shall be made at the same intervals as the Base Salary and bonuses were payable
immediately prior to termination.
(c) Notwithstanding anything to the contrary expressed or
implied herein, except as required by applicable law, in the event that:
(i) any person other than the Company shall acquire
more than 50% of the Company's then outstanding Common Stock through a tender
offer, exchange offer or otherwise; or there shall be a sale of all or
substantially all of the assets of the Company (either such event being
referred to as the "Change in Control"); and
(ii) within one year from the date of the Change in
Control: (A) the Executive's employment is terminated by the Company pursuant
to clause (v) of paragraph (a) above; or (B) the Executive resigns his
employment with the Company after there is a material reduction in his title,
duties and responsibilities with the Company following such Change in Control
(other than the failure of the Executive to assume responsibilities over new
operations acquired by the Company as a result of the Change in Control);
then the Executive shall be entitled to receive as severance pay or liquidated
damages or both, the amount of Base Salary and bonus, if any, which the
Executive would have otherwise been entitled to receive pursuant to Section
4(a) and (c) hereof had the Executive's employment not been so terminated, from
the date of termination until the end of the Initial Term or the date that is
twelve months after the date of such termination, whichever is later.
(d) Notwithstanding anything to the contrary expressed or
implied herein, except as required by applicable law and except as set forth in
paragraphs (b) and (c) above, the Company (and its Affiliates) shall not be
obligated to make any payments to the Executive or an his behalf of whatever
kind or nature by reason of the Executive's cessation of employment (including,
without limitation, by reason of termination of the Executive's employment by
the Company for "cause"), other than (i) such amounts, if any, of his Base
Salary and bonus, if any, as shall have accrued and remained unpaid as of the
date of said cessation and (ii) such other amounts which may be then otherwise
payable to the Executive from the Company's benefits plans or reimbursement
policies, if any.
(e) No interest shall accrue on or be paid with respect to any
portion of any payments due under this Section 6.
(f) Amounts payable pursuant to this Section 6 are in lieu of
any severance pay that would otherwise be payable to the Executive upon
termination of his employment with the Company under the Company's severance
pay policies, if any.
7. Confidentiality. The Executive hereby covenants, agrees and
acknowledges as follows:
(a) The Executive's employment hereunder creates a
relationship of confidence and trust between the Executive and the Company with
respect to certain information pertaining to the business of the Company and
its Affiliates (as hereinafter defined) or pertaining to the business of any
client or customer of, or supplier to, the Company or its Affiliates which may
be made known to the Executive by the Company or any of its Affiliates or by
any client or customer of, or supplier to, the Company or any of its Affiliates
or learned by the Executive during the period of his employment by the Company.
(b) The Executive agrees that he will not without the prior
written consent of the Board of Directors of the Company use for his benefit or
disclose at any time during his employment by the Company, or thereafter,
except to the extent required by the performance by him of his duties as an
employee of the Company, any information obtained or developed by him while in
the employ of the Company with respect to any actual or potential customers,
clients, suppliers, products, services, employees, financial affairs,
technologies, applications, patents, patent application processes, or methods
of marketing, service or procurement of the Company or any of its Affiliates,
or any confidential matter regarding the business of the Company or any of its
Affiliates that, except information that at the time is generally known to the
public other than as a result of disclosure by him not permitted hereunder
(collectively, "Confidential Information").
(c) Upon written request of the Executive, the Company will
provide, from time to time, written notice stating whether or not it considers
any particular item of information to be Confidential Information. In any
event, the Executive agrees to contact the Company prior to any disclosure of
any information acquired during the term of his employment by the Company, to
determine whether the Company considers the information subject to the
continuing obligations hereunder.
(d) The Executive agrees that upon termination of his
employment by the Company for any reason, the Executive shall forthwith return
to the Company all documents and papers relating to Confidential Information
and other physical property in his possession belonging to the Company or any
of its Affiliates.
(e) Without limiting the generality of Section 12 hereof, the
Executive hereby expressly agrees that the foregoing provisions of this Section
7 shall be binding upon the Executive's heirs, successors and legal
representatives.
8. Ownership of Certain Works Created by the Executive. The Executive
will promptly disclose and describe to the Company all inventions,
improvements, discoveries, technical developments and works of authorship,
whether or not patentable or copyrightable, made or conceived by him either
alone or with others during the Employment Term. All such works, made, devised
or discovered by the Executive, whether by himself or jointly with others,
which relate or pertain in any way to the business of the Company or any of its
Affiliates ("Work Products") shall inure to the benefit of the Company or such
Affiliate and become and remain the Company's or such Affiliate's sole and
exclusive property. Work Products may be created within or without the
facilities of the Company or its Affiliates and before, during or after normal
business hours. Work Products are specifically intended to be works made for
hire by the Executive, but in any event, the Executive agrees to execute an
assignment (and does hereby assign) to the Company, the Executive's entire
right, title and interest in and to Work Products, and to execute any other
instruments and documents that may be requested by the Company for the purpose
of applying for and obtaining patents or registration of copyright with respect
thereto in the United States and in all foreign countries. The Executive
further agrees, whether or not in the employ of the Company, to cooperate to
the extent and in the manner reasonably requested by the Company in the
prosecution or defense of any litigation or other proceedings involving any
Work Products, but all of the Executive's reasonable expenses in connection
therewith shall be paid by the Company. If a patent application or copyright
registration is filed by the Executive, or on the Executive's behalf, within
one year after leaving the Company's employ, describing a work within the scope
of the Executive's work for the Company or any of its Affiliates or which
otherwise relates to the business of the Company or any of its Affiliates, it
is to be conclusively presumed that such work was conceived by the Executive
during the period of his employment hereunder and that the work is to be
treated as a Work Product for all purposes hereunder.
9. Non-Assignability.
(a) Neither this Agreement nor any right or interest hereunder
shall be assignable by the Executive, his beneficiaries, or legal
representatives without the prior written consent of the Company, provided,
however, that nothing in this Section 9(a) shall preclude the Executive from
designating a beneficiary to receive any benefit payable hereunder upon his
death or incapacity.
(b) Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation or to
exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
10. Competition, etc. Until the termination of the Executive's
employment hereunder and during the two-year period following the termination
of the Executive's employment hereunder for any reason whatsoever:
(a) The Executive will not make any statement or perform any
act intended to advance an interest of any existing or prospective competitor
of the Company or any of its Affiliates in any way that will or may injure an
interest of the Company or any of its Affiliates in its relationship and
dealings with existing or potential suppliers, customers or clients, or solicit
or encourage any other employee of the Company or any of its Affiliates to do
any act that is disloyal to the Company or any of its Affiliates, inconsistent
with the interest of the Company or any of its Affiliate's interests or in
violation of any provision of this Agreement;
(b) The Executive will not make any statement or perform any
act intended to cause any existing or potential customers or clients of the
Company or any of its Affiliates to make use of the services or purchase the
products of any existing or future business in which the Executive has or
expects to acquire a proprietary interest or in which the Executive is or
expects to be made an employee, officer, director, manager, consultant,
independent contractor, advisor or otherwise, if such services or products in
any way compete with the services or products sold or provided or expected to
be sold or provided by the Company or any of its Affiliates to any existing or
potential customer or client;
(c) The Executive will not directly or indirectly (as an
employee, officer, director, manager, consultant, independent contractor,
advisor or otherwise) engage in competition with, or acquire any proprietary
interest in, perform any services for, lend his name to, participate in or be
connected with any business involved in the research, development,
commercialization, manufacture, assembly, sale, licensing, sublicensing,
distribution, supplying or marketing of any service or product which in any way
compete with the services or products sold or provided or expected to be sold
or provided by the Company to any existing or potential customer or client, as
such services or products currently exist or are developed in the future,
including, without limitation, desktop video conferencing and video on demand
products, from any location in the United States of America or elsewhere where
the Company conducts business during the term of this Agreement;
(d) The Executive agrees that, when the Executive has or
expects to acquire a proprietary interest in, or is or expects to be made an
employee, officer, director, manager, consultant, independent contractor,
advisor or otherwise of, any existing or future business that provides or may
provide services or products which in any way compete with the services or
products sold or provided or expected to be sold or provided by the Company or
any of its Affiliates to any existing or potential customer or client, the
Executive will immediately furnish to the Company all information that may
reasonably be of assistance to the Company in acting promptly to protect its
relationships with any existing or potential suppliers, customers or clients
with whom the Executive has had any dealings as a result of his employment by
the Company or any of its Affiliates;
(e) The Executive will not directly or indirectly solicit for
employment, or advise or recommend to any other person that they employ or
solicit for employment, any employee of the Company or any of its Affiliates;
and
(f) The Executive will not directly or indirectly hire,
engage, send any work to, place orders with, or in any manner be associated
with any supplier, contractor, subcontractor or other person or firm which
rendered manufacturing or other services, or sold any products, to the Company
or any of its Affiliates if such action by him would have a material adverse
effect on the business, assets or financial condition of the Company or any of
its Affiliates.
In connection with the foregoing provisions of this Section 10, the
Executive represents that his experience, capabilities and circumstances are
such that such provisions will not prevent him from earning a livelihood. The
Executive further agrees that the limitations set forth in this Section 10
(including, without limitation, any time or territorial limitations) are
reasonable and properly required for the adequate protection of the businesses
of the Company and its Affiliates. It is understood and agreed that the
covenants made by the Executive in this Section 10 (and in Sections 7 and 8
hereof) shall survive the expiration or termination of this Agreement.
For purposes of this Section 10, proprietary interest in a business is
ownership, whether through direct or indirect stock holdings or otherwise, of
one percent (1%) or more of such business. The Executive shall be deemed to
expect to acquire a proprietary interest in a business or to be made an
employee, officer, director, manager, consultant, independent contractor,
advisor or otherwise of such business if such possibility has been discussed
with any officer, director, employee, agent, or promoter of such business.
11. Injunctive Relief. The Executive acknowledges and agrees that a
remedy at law for any breach or threatened breach of the provisions of Sections
7, 8, or 10 hereof would be inadequate and, therefore, agrees that the Company
and any of its Affiliates shall be entitled to injunctive relief in addition to
any other available rights and remedies in cases of any such breach or
threatened breach; provided, however, that nothing contained herein shall be
construed as prohibiting the Company or any of its Affiliates from pursuing any
other rights and remedies available for any such breach or threatened breach.
12. Binding Effect. Without limiting or diminishing the effect of
Section 9 hereof, this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, successors, legal
representatives and assigns.
13. Affiliate. For the purposes of this Agreement, the term
"Affiliate" or "Affiliates" shall mean any entity which (i) directly or
indirectly, controls the Company, (ii) is controlled, directly or indirectly,
by the Company or (iii) is under common control, directly or indirectly, with
the Company.
14. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and either delivered in person or
sent by first class certified or registered mail, postage prepaid, if to the
Company, at the Company's principal place of business, and if to the Executive,
at his home address most recently filed with the Company, or to such other
address or addresses as either party shall have designated in writing to the
other party hereto.
15. Law Governing. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Kentucky.
16. Severability. The Executive agrees that in the event that any
court of competent jurisdiction shall finally hold that any provision of
Sections 7, 8 or 10 hereof is void or constitutes an unreasonable restriction
against the Executive, the provisions of such Sections 7, 8 or 10 hereof shall
not be rendered void but shall apply with respect to such extent as such court
may judicially determine constitutes a reasonable restriction under the
circumstances. If any part of this Agreement other than Sections 7, 8 or 10
hereof is held by a court of competent jurisdiction to be invalid, illegal or
incapable of being enforced in whole or in part by reason of any rule of law or
public policy, such part shall be deemed to be severed from the remainder of
this Agreement for the purpose only of the particular legal proceedings in
question and such part and all other covenants and provisions of this Agreement
shall in every other respect continue in full force and effect and no covenant
or provision shall be deemed dependent upon any other covenant or provision.
17. Waiver. Failure to insist upon strict compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such
term, covenant or condition, nor shall any waiver or relinquishment of any
right or power hereunder at any one or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
18. Entire Agreement; Modifications. This Agreement and the Stock
Option Agreement constitute the entire and final expression of the agreement of
the parties with respect to the subject matter hereof and thereof and supersede
all prior agreements, oral and written, between the parties hereto with respect
to the subject matter hereof and thereof, including without limitation, the
Employment Offer Term Sheet. This Agreement may be modified or amended only by
an instrument in writing signed by both parties hereto.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and the Executive have duly executed
and delivered this Agreement as of the day and year first above written.
VIDEOLAN TECHNOLOGIES, INC.
By: /s/ PETER S. BECK
Peter S. Beck, Vice President of
Strategic Market Development
/s/ JACK SHIRMAN
JACK SHIRMAN
EXHIBIT A
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered
into as of this 27th day of September, 1996 (the "Effective Date"), by and
between VIDEOLAN TECHNOLOGIES, INC., a Delaware corporation (the "Company") and
JACK SHIRMAN, an employee of the Company (the "Optionee").
RECITALS:
WHEREAS, the Company and the Optionee have entered into an Employment
Agreement of even date herewith (the "Employment Agreement") pursuant to which
the Optionee will become Chief Executive Officer of the Company;
WHEREAS, under the Employment Agreement, the Board of Directors of the
Company has agreed to grant to the Optionee an option to purchase shares of the
common stock, $.01 par value (the "Common Stock"), of the Company;
NOW, THEREFORE, in consideration of the premises, mutual covenants
hereinafter set forth, and other good and valuable consideration, the Company
and the Optionee agree as follows:
1. Grant of the Option. The Company hereby grants to the Optionee, as
a matter of separate inducement and agreement in connection with the Optionee's
employment by the Company and the Employment Agreement, and not in lieu of any
salary or other compensation for the Optionee's services, the right and option
to purchase (the "Option") all or any part of an aggregate of 300,000 Shares
(the "Shares"), on the terms and conditions set forth herein, subject to
adjustment as provided in Section 8 hereof, at a purchase price as established
under Section 2. The Option shall constitute an "Incentive Stock Option" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
2. Option Exercise Price. The exercise price of the Option (the
"Exercise Price") shall be $6.12 per Share, subject to adjustment in accordance
with Section 8 hereof.
3. Duration of Option. Unless earlier terminated, pursuant to Section
7 hereof, the Option shall expire on September 26, 2001 (the "Termination
Date").
4. Exercise of Option.
(a) The Option shall vest and become exercisable with respect
to 100,000 Shares on September 27, 1997.
(b) The Option shall vest and become exercisable with respect
to an additional 100,000 Shares on September 27, 1998.
(c) The Option shall vest and become exercisable with respect
to an additional 50,000 Shares on September 27, 1999.
(d) The Option shall vest and become exercisable with respect
to the remaining 50,000 Shares on September 27, 2000.
(e) If the Optionee ceases to be employed by the Company for
any reason, the Optionee shall have no rights with respect to that portion of
the Option which is not then exercisable.
5. Conditions to Exercise of the Option.
(a) Exercise of the Option. Subject to the provisions of
Section 4 hereof, the Optionee may exercise the Option by delivering written
notice ("Notice") of exercise to the Company in the form of Annex A hereto
specifying the number of Shares to be purchased accompanied by payment in full
of the Exercise Price in accordance with Section 5(b) hereof.
(b) Payment of Exercise Price. The Company shall accept as
payment for the Exercise Price either a check payable to the order of the
Company in the amount of the Exercise Price multiplied by the number of Shares
for which the Option is being exercised or any other form of payment acceptable
to the Board of Directors of the Company.
(c) Partial Exercise. Subject to the limitations expressed
herein, the Option may be exercised with respect to all or a part of the Shares
that are currently exercisable; provided, however, that no partial exercise of
the Option shall result in the issuance of less than 100 Shares.
(d) Delivery of Shares on Exercise. As soon as practicable
after receipt of the Notice and payment of the Exercise Price, the Company
shall deliver to the Optionee, without transfer or issuance tax or other
incidental expense to the Optionee, at the office of the Company, or at such
other place as may be mutually acceptable, or, at the election of the Company,
by certified mail addressed to the Optionee at the Optionee's address shown in
the employment records of the Company, a certificate or certificates for the
number of Shares set forth in the Notice and for which the Company has received
payment in the manner prescribed herein.
6. Option Not Transferable Except in Event of Death. During the
Optionee's lifetime, the Option shall be exercisable only by the Optionee or
his duly appointed guardian or personal representative, and neither the Option
nor any right hereunder shall be transferable other than by will or the laws of
decent and distribution. The Option may not be subject to execution or other
similar process. If the Optionee attempts to alienate, assign, pledge,
hypothecate or otherwise dispose of the Option or any of the Optionee's rights
hereunder, except as provided herein, or in the event of any levy or any
attachment, execution or similar process upon the rights or interests hereby
conferred, the Company may terminate the Option by notice to the Optionee and
it shall thereupon become null and void.
7. Exercise of the Option upon Termination of Employment. In the
event the Optionee shall cease to be employed by the Company, the Option shall
expire at the earlier of the expiration of the Termination Date or the
following:
(i) three months after termination due to normal
retirement, or earlier retirement with consent of the Board of Directors of the
Company, under a formal plan or policy of the Company;
(ii) three months after the Optionee's termination
pursuant to Section 6(a)(v) of the Employment Agreement;
(iii) one year after termination due to disability
within the meaning of section 105(d)(4) of the Internal Revenue Code of 1986,
as amended (the "Code"), as determined by the Board of Directors of the
Company;
(iv) one year after the Optionee's death; or
(v) coincident with the date of termination if due to
any other reason.
8. Adjustments in Authorized Shares and the Option. In the event of a
merger, reorganization, consolidation, recapitalization, reclassification,
split-up, spin-off, separation, liquidation, share dividend, share split,
reverse share split, share combination, share exchange or other change in the
capital structure of the Company affecting the Common Stock, the Board of
Directors of the Company may substitute or adjust the total number and class of
Shares or other securities that may be issued hereunder, and the Exercise
Price, as it determines to be appropriate and equitable to prevent dilution or
enlargement of the rights of the Optionee and to preserve, without diluting or
exceeding, the value of the Option.
9. Cancellation of Option. The Company shall have the right to
terminate the right of the Optionee to exercise the Option, effective thirty
(30) days after receipt by the Optionee of a written notice from the Company
informing the Optionee that this Option is to be cancelled (the "Cancellation
Notice"). The Company may issue a Cancellation Notice only in connection with
(i) the sale of substantially all of the Company's assets, or (ii) a merger,
consolidation or other corporate transaction in which the Company would not be
the surviving entity. Following receipt of a Cancellation Notice and during the
period prior to the effective date of the termination, the Optionee shall have
the right to exercise the Option (to the extent not previously exercised) with
respect to all Shares, if any, which were immediately exercisable by the
Optionee hereunder during the period following receipt of a Cancellation Notice
until the effective date of the termination.
10. Agreement Does Not Grant Employment Rights. The grant of the
Option shall not be construed as giving the Optionee the right to be retained
in the employ by the Company. Further, the Company expressly reserves the
right, at any time, to dismiss the Optionee with or without cause, free from
any liability, or any claim, except as provided herein or in the Employment
Agreement.
11. Limitation of Company's Liability for Nonissuance. The inability
of the Company to obtain, from any regulatory body having jurisdiction,
authority reasonably deemed by the Company's counsel to be necessary for the
lawful issuance and sale of any Shares under this Agreement shall relieve the
Company of any liability in respect of the nonissuance or sale of such Shares
as to which such requisite authority shall not have been obtained.
12. 1995 Option Plan. The Option has been granted pursuant to the
Amended and Restated 1995 Stock Option Plan of the Company, as amended from
time to time, and is subject to all of the provisions thereof.
13. Miscellaneous.
(a) No Rights as Shareholder. The Optionee shall have no
rights to dividends (other than the adjustment rights described in Section 8 of
this Agreement) or other rights of a shareholder with respect to Shares unless
and until the Optionee has given the Notice and paid in full for such Shares.
(b) Captions. The captions and section headings used herein
are for convenience only, shall not be deemed part of this Agreement and shall
not in any way restrict or modify the context and substance of any section or
paragraph of this Agreement.
(c) Governing Law; Construction. This Agreement shall be
governed by, and construed in accordance with, the laws of the Commonwealth of
Kentucky.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and both of which
together shall be deemed an Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
VIDEOLAN TECHNOLOGIES, INC.
By:
-----------------------------
Peter S. Beck, Vice President of
Strategic Market Development
-----------------------------
JACK SHIRMAN
EXHIBIT "C"
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Registration Rights
Agreement"), entered into as of October 17, 1996 by and between (the
"Purchaser"), and VIDEOLAN TECHNOLOGIES, INC., a Delaware corporation with
offices at 100 Mallard Creek Road, Suite 250, Louisville, Kentucky 40207,
U.S.A. (the "Company").
W I T N E S S E T H:
WHEREAS, pursuant to a Subscription Agreement, dated as of
the date hereof (the "Agreement"), by and between the Company and the
Purchaser, the Company has agreed to sell and the Purchaser has agreed to
purchase 150 shares of the Company's Series 1996A Convertible Preferred Stock
(the "Preferred Stock") convertible into shares of the Company's Common Stock,
$.01 par value (the "Shares");
WHEREAS, pursuant to the terms of, and in partial
consideration for, the Purchaser's agreement to enter into the Agreement, the
Company has agreed to provide the Purchaser with certain registration rights
with respect to the Shares as set forth in this Registration Rights Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the
Agreement and this Registration Rights Agreement, the Company and the Purchaser
agree as follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Registrable Securities" shall mean the Shares issued to
Purchaser or its designee upon conversion of the Preferred Stock or upon any
stock split, stock dividend, recapitalization or similar event with respect to
such Shares; provided, however, that Registrable Securities shall cease to be
Registrable Securities when they may be sold pursuant to Rule 144 under the
Securities Act.
Registrable Securities shall not include the Preferred Stock.
The terms "register", "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness of
such registration statement.
"Registration Expenses" shall mean all expenses to be
incurred by the Company in connection with Purchaser's exercise of its
registration rights under this Agreement, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, reasonable fees and
disbursements of one counsel to the Holder and the other securityholders
participating in the registration for a review of the Registration Statement
and related documents, and the expense of any special audits incident to or
required by any such registration (but excluding the compensation of regular
employees of the Company, which shall be paid in any event by the Company).
"Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for Holder not included with "Registration
Expenses".
"Holder" shall include the Purchaser and any permitted
transferee of Preferred Stock, Shares or Registrable Securities which have not
been sold to the public to whom the registration rights conferred by this
Agreement have been transferred in compliance with Section 11 of this
Agreement.
"Registration Statement" shall have the meaning set forth in
Section 2(a) herein.
"Regulation D" shall mean Regulation D as promulgated
pursuant to the Securities Act, and as subsequently amended.
"Rule 144" shall mean Rule 144 under the Securities Act, as
such rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
2. Demand Registration
(a) After the Closing Date the Company shall use its
best efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act) as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request in the states specified in such request.
Subject to the previous paragraph, the Company shall file (i)
a registration statement with the Commission pursuant to Rule 415 under the
Securities Act on Form S-3 under the Securities Act (or in the event that the
Company in ineligible to use such form, such other form as the Company is
eligible to use under the Securities Act) covering the Registrable Securities
so requested to be registered ("Registration Statement") ; (ii) such blue sky
filings as shall have been requested by the Holder; and (iii) any required
filings with the National Association of Securities Dealers, Inc. or exchange
where the Shares are traded, as soon as practicable, after receipt of the
request of the Holder. Thereafter the Company shall use its best efforts to
have such Registration Statement and other filings declared effective no later
than 90 days from the Closing Date, as that term is defined in the Subscription
Agreement.
(b) (i) Subject to the conditions contained in
Section 2(a) above, if the Company fails to have such Registration Statement
declared effective by the Commission within ninety (90) days from the Closing
Date as a result of the Company's failure to use its best efforts to effect
such registration, the Holder shall have, in addition to and without limiting
any other rights it may have at law, in equity or under the Preferred Stock,
the Agreement, or this Registration Rights Agreement (including the right to
specific performance), the right to receive, as liquidated damages, additional
shares of common stock of the Company as provided in subparagraph (ii) of this
section.
(ii) If after ninety (90) days from the Closing
Date, the Registration Statement has not been declared effective by the
Commission as a result of the Company's failure to use its best efforts to
effect such registration, then the Company shall issue to the Purchaser an
additional amount of common stock shares (the "Additional Shares") upon
conversion of such Holder's Preferred Stock. For each 30-day period that the
Company is late in having its Registration Statement declared effective by the
Commission as a result of the Company's failure to use its best efforts to
effect such registration, the Company shall issue a number of Additional Shares
equal to 2% (which Additional Shares shall be issued pro rata for any period of
less than 30 days) of the original principal amount of Preferred Stock held by
Purchaser, which Additional Shares shall be issued to the Purchaser upon its
conversion of Preferred Stock. The number of Additional Shares shall increase
to 4% of the original principal amount of Preferred Stock if the Registration
Statement is not declared effective after 150 days following the Closing Date
as a result of the Company's failure to use its best efforts to effect such
registration per each 30-day period (which Additional Shares shall be issued
pro rata for any period of less than 30 days), and to 6% of the original
principal amount of Preferred Stock, if the Registration Statement is not
declared effective after 210 days after the Closing Date as a result of the
Company's failure to use its best efforts to effect such registration per each
additional 30-day period thereafter (which Additional Shares shall be issued
pro rata for any period of less than 30 days), until the effective date of the
Registration Statement.
(iii) The Company acknowledges that its failure
to register the Registrable Securities in accordance with this Registration
Rights Agreement as a result of the Company's failure to use its best efforts
to effect such registration will cause the Holder to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Registration Rights Agreement a provision
for liquidated damages. The parties acknowledge and agree that the liquidated
damages provisions set forth in paragraph 2(b)(ii) above represent the parties'
good faith effort to quantify such damages and, as such, agree that the form
and amount of such liquidated damages are reasonable and will not constitute a
penalty. The payment of liquidated damages shall not relieve the Company from
its obligations to register the Registrable Securities pursuant to this
Agreement.
(c) If there is more than one Holder, such Holders
shall act with respect to their rights under this Registration Rights Agreement
according to the vote of a majority-in-interest.
(d) The Company shall make available for inspection
by a representative or representatives of the Holder, and any attorney or
accountant retained by such Holder, all financial and other records customary
for such purposes, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such representative, attorney or
accountant in connection with such Registration Statement. The Holder will
agree to keep all non-public information supplied to it confidential until such
information is included in a Registration Statement which has been made
publicly available.
(e) The Company shall not be obligated to keep such
Registration Statement continuously effective for a period of more than two
years from the date it is declared effective by the Commission; provided,
however, that if so requested by the holders of a majority-in-interest of the
Registrable Securities the Company shall agree to extend the period for which
the Registration Statement remains effective to the same extent that
"suspension periods" are imposed pursuant to the next paragraph, but only so
long as the then unsold Registrable Securities covered by such Registration are
too numerous to be sold under the volume limitations of Rule 144 in any
applicable three month period by any Holder.
Following the effectiveness of the Registration Statement
pursuant to this Registration Rights Agreement, the Company may, at any time,
suspend the effectiveness of such Registration Statement and sales thereunder
for up to ten (10) days, as appropriate (a "Suspension Period"), by giving
notice to each Holder (or underwriter, if any) selling thereunder, if the
Company shall have determined that the Company may be required to disclose any
material corporate development which disclosure (i) may have a material adverse
effect on the Company, (ii) may have a material adverse affect on the
transaction or matter to be disclosed, or (iii) would be detrimental to the
Company or its stockholders. Notwithstanding the foregoing, no more than two
Suspension Periods (i.e., twenty (20) days) may occur in immediate succession,
and the Company shall use its best efforts to limit the duration and number of
any suspension periods. Holder agrees (and shall require that any underwriter
agree) that, upon receipt of any notice from the Company of any Suspension
Period, Holder shall forthwith discontinue disposition of shares covered by the
Registration Statement or Prospectus until such Holder (i) is advised in
writing by the Company that the use of the applicable Prospectus may be
resumed, (ii) has received copies of a supplemental or omitted Prospectus, if
applicable, and (iii) has received copies of any additional or supplemental
filings which are incorporated or deemed to be incorporated by reference in
such Prospectus.
3. Company Registration. If at any time, or from time to time
prior to the registration of the Registrable Securities, the Company shall
determine to register any of its securities, either for its own account or the
account of a security holder or holders exercising their respective demand
registration rights, other than (i) a registration on Form S-8 or (ii) a
registration on Form S-4 relating solely to a transaction pursuant to Rule 145,
the Company will promptly give to each Holder written notice thereof and
include in such registration statement all the Registrable Securities specified
in a written request made within 30 days after mailing of written notice by the
Company.
4. Expenses of Registration. All Registration Expenses
incurred in connection with any registration, qualification or compliance with
registration pursuant to this Agreement shall be borne by the Company, and all
Selling Expenses shall be borne by the Holder.
5. Registration on Form S-3. Although the Company shall use
its best efforts to qualify for registration on Form S-3 or any comparable or
successor form or forms, or in the event that the Company is ineligible to use
such form, such form as the Company is eligible to use under the Securities
Act, nothing in the Agreement or this Registration Rights Agreement is intended
to require the Company to pay dividends in order to use Form S-3.
6. Registration Procedures. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep the
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense, the Company will use its best efforts
to:
(a) Keep such Registration Statement effective for the
period ending twenty-four (24) months after the registration has been declared
effective by the Commission or until the Holder has completed the distribution
described in the Registration Statement relating thereto, whichever first
occurs.
(b) Furnish such number of prospectuses and other documents
incident thereto as the Holder from time to time may reasonably request.
7. Indemnification.
(a) Company Indemnity. The Company will indemnify the
Holder, each of its officers, directors and partners, and each person
controlling Holder, within the meaning of Section 15 of the Securities Act and
the rules and regulations thereunder with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, (including any
related registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
the Company of the Securities Act or any state securities law or in either
case, any rule or regulation thereunder applicable to the Company and relating
to action or inaction required of the Company in connection with any such
registration, qualification or compliance, and will reimburse the Holder, each
of its officers, directors and partners, and each person controlling such
Holder, for any legal and any other expenses reasonably incurred in connection
with investigating and defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission based upon written information
furnished to the Company by Holder and stated to be specifically for use
therein. The indemnity agreement contained in this Section 7(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent will not be unreasonably withheld).
(b) Holder Indemnity. The Holder will, if Registrable
Securities held by it are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors, officers, partners, and each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act and the rules and regulations thereunder, each
other Holder (if any), and each of their officers, directors and partners, and
each person controlling such other Holder against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statement therein
not misleading, and will reimburse the Company and such other Holders and their
directors, officers and partners, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by Holder and stated to be specifically for use therein, and provided
that the maximum amount for which the Holder shall be liable under this
indemnity shall not exceed the net proceeds received by the Holder from the
sale of the Registrable Securities. The indemnity agreement contained in this
Section 7(b) shall not apply to amounts paid in settlement of any such claims,
losses, damages or liabilities if such settlement is effected without the
consent of Holder (which consent shall not be unreasonably withheld). (c)
Procedure. Each party entitled to indemnification under this Article (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Article
except to the extent that the Indemnifying Party is materially and adversely
affected by such failure to provide notice. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation. Each Indemnified Party shall
furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be reasonably
required in connection with the defense of such claim and litigation resulting
therefrom.
8. Contribution. If the indemnification provided for in
Section 7 herein is unavailable to the Indemnified Parties in respect of any
losses, claims, damages or liabilities referred to herein (other than by reason
of the exceptions provided therein), then each such Indemnifying Party, in lieu
of indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) as between the Company and the Holder on the one hand and the
underwriters on the other, in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Holder on the one hand or
underwriters, as the case may be, on the other from the offering of the
Registrable Securities, or if such allocation is not permitted by applicable
law, in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and of the
Holder or underwriters, as the case may be, on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations and (ii) as
between the Company on the one hand and the Holder on the other, in such
proportion as is appropriate to reflect the relative fault of the Company and of
the Holder in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations.
The relative benefits received by the Company on the one hand
and the Holder or the underwriters, as the case may be, on the other shall be
deemed to be in the same proportion as the proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company from the initial sale of the Preferred Stock which can be
converted into Registrable Securities by the Company to the Holder pursuant to
the Subscription Agreement which corresponds to this Registration Rights
Agreement bear to the gain realized by such Holder or the total underwriting
discounts and commissions received by the underwriters as set forth in the
table on the cover page of the prospectus, as the case may be. The relative
fault of the Company on the one hand and of the Holder or underwriters, as the
case may be, on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company, by the Holder or by the underwriters.
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 7 exceed the amount that such Indemnifying Party
would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 7(a) or 7(b) hereof had been
available under the circumstances.
The Company and the Holder agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Holder or the underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraphs. The amount paid or payable by an Indemnified Party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraphs shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such Indemnified Party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this section, no Holder or
underwriter shall be required to contribute any amount in excess of the amount
by which (i) in the case of the Holder, the net proceeds received by the Holder
from the sale of Registrable Securities or (ii) in the case of an underwriter,
the total price at which the Registrable Securities purchased by it and
distributed to the public were offered to the public exceeds, in any such case,
the amount of any damages that the Holder or underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
9. Survival. The indemnity and contribution agreements
contained in Sections 6 and 7 shall remain operative and in full force and
effect regardless of (i) any termination of the Agreement or any underwriting
agreement, (ii) any investigation made by or on behalf of any Indemnified Party
or by or on behalf of the Company and (iii) the consummation of the sale or
successive resales of the Registrable Securities.
10. Information by Holder. The Holder shall furnish to the
Company such information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Agreement.
11. Transfer or Assignment of Registration Rights. The
rights, granted to Purchaser by the Company under this Registration Rights
Agreement, to cause the Company to register Registrable Securities, may be
transferred or assigned to a transferee or assignee of not less than 50 shares
of Preferred Stock, provided that the Company is given written notice by Holder
at the time of or within a reasonable time after said transfer or assignment,
stating the name and address of said transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned, and provided further that the transferee or assignee of such
rights is not deemed by the board of directors of the Company, in its
reasonable judgment, to be a competitor of the Company; and provided further
that the transferee or assignee of such rights agrees to be bound by this
Registration Rights Agreement.
Purchaser is one of a group of holders of Registrable
Securities issued or issuable pursuant to a total aggregate amount of up to
$7.5 million of Preferred Stock purchased by Purchaser and others in a
transaction designed to qualify as an offering pursuant to Section 4(2),
Section 4(6) and Regulation D. Any action to be taken under this Registration
Rights Agreement or any term of this Registration Rights Agreement may be
amended or waived only with written action by the Company and the holders of at
least a majority-in-interest of the total of the Registrable Securities. Any
action, amendment or waiver effected in accordance with this paragraph shall be
binding upon each of the other holders of Registrable Securities at the time
then outstanding.
12. Miscellaneous.
(a) Entire Agreement. This Registration Rights
Agreement contains the entire understanding and agreement of the parties, and
may not be modified or terminated except by a written agreement signed by both
parties.
(b) Notices. Any notice or other communication given
or permitted under this Agreement shall be in writing and shall be deemed to
have been duly given if personally delivered or sent by registered or certified
mail, return receipt requested, postage prepaid or by air courier, (a) if to
Purchaser, at its address hereinabove set forth, (b) if to the Company, at its
address hereinabove set forth, and (c) if to a holder other than Purchaser, at
the address thereof furnished by like notice to the Company, or (d) to any such
addresses at such other address or addresses as shall be so furnished to the
other parties by like notice.
(c) Gender of Terms. All terms used herein shall be
deemed to include the feminine and the neuter, and the singular and the plural,
as the context requires.
(d) Governing Law; Consent of Jurisdiction. This
Registration Rights Agreement and the validity and performance of the terms
hereof shall be governed by and construed in accordance with the laws of the
State of Delaware. The parties hereto hereby consent to, and waive any
objection to the exercise of, personal jurisdiction in the State of New York
with respect to any action or proceeding arising out of this Registration
Rights Agreement.
(e) Titles. The titles used in this Registration
Rights Agreement are used for convenience only and are not to be considered in
construing or interpreting this Registration Rights Agreement.
(f) Prospectus Delivery Requirements. Holder agrees,
on Holder's behalf, and shall require any transferee or assignee pursuant to
Section 10 above to agree, to comply with all prospectus delivery requirements
applicable to resales of the securities pursuant to the Registration Statement.
(g) Termination. The rights of Holder to require the
Company to request a Registration pursuant to this Registration Rights
Agreement shall terminate on the date which is five (5) years from the date of
this Registration Rights Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed as of the date first above
written.
(The Purchaser)
By:
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Title:
VideoLan Technologies, Inc.
a Delaware Corporation
By:
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Title:
Execution Copy
THE SECURITIES DESCRIBED IN THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF
CERTAIN STATES, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE LAWS, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE LAW IS
AVAILABLE.
INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN MAKING AN
INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE
COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND THE RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED OR DETERMINED THE ACCURACY OR ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SUBSCRIPTION AGREEMENT
This Subscription Agreement (the "Agreement"), dated October 17, 1996, is
entered into by and between VideoLan Technologies, Inc., a Delaware corporation
(the "Company"), and (the "Buyer").
The Company has offered for sale pursuant to applicable provisions of Sections
4(2) and 4(6), and Regulation D under the United States Securities Act of 1933,
as amended (the "Act") up to 7,500 shares of Series 1996A Convertible Preferred
Stock (the "Preferred Stock" or "Securities"), convertible into common stock of
the Company ("Common Stock"). The Buyer has been offered 150 shares of the
Preferred Stock, at $1,000 per each share. The terms on which the Preferred
Stock may be converted into shares of Common Stock (such shares of Common Stock
underlying the Preferred Stock being referred to herein as "Shares")and the
other terms of the Preferred Stock are set forth in the Certificate of
Designation in the form attached hereto as Exhibit "A" (the "Certificate of
Designation"), the terms of which are hereby incorporated by reference.
Capitalized terms used herein and not defined herein shall have the meanings
given to them in Regulation D as the same may be amended from time to time.
The parties hereto agree as follows:
1. Purchase and Sale of Securities Upon the basis of the representations and
warranties, and subject to the terms and conditions, set forth in this
Agreement, the Company covenants and agrees to sell to the Buyer on the Closing
Date (as hereinafter defined) 150 shares of the Preferred Stock at a price of
$1,000 per share, and upon the basis of the representations and warranties, and
subject to the terms and conditions, set forth in this Agreement, the Buyer
covenants and agrees to purchase from the Company, on the Closing Date 150
shares of the Preferred Stock of the Company at $1,000 per share.
Closing Instructions to Escrow Agent
(a) The closing of the purchase and sale of the Preferred Stock pursuant
to Section 1 hereof shall take place on or before October 17, 1996 (the
"Closing Date") after the Company has delivered to the offices of First Bermuda
Securities Limited (the "Escrow Agent") located at Jardine House, 3rd Floor,
33/35 Reid Street, Hamilton, HM 12 Bermuda certificates representing 150 shares
of Preferred Stock registered in the names provided by the Buyer (representing
the number of shares of Preferred Stock to be purchased by the Buyer
hereunder).
(b) The Company and the Buyer agree that they shall instruct the
Escrow Agent as provided in Exhibit "B" and as follows:
(i) On the Closing Date, for each share of Preferred Stock
subscribed for and delivered to the Escrow Agent pursuant to paragraph 2(a)
above, the Escrow Agent shall, upon confirmation in the form of a Federal funds
wire number that First Bermuda Securities Limited ("First Bermuda") has wired
payment of the Purchase Price for the Preferred Stock (less any fees Company
has authorized Escrow Agent to deduct) in immediately available funds to the
Company's account as provided in the escrow instructions attached as Exhibit
"B", release the certificates of Preferred Stock described in paragraph 2(a)
above. The Escrow Agent shall return to the Company any shares of Preferred
Stock that the Buyer does not purchase on the Closing Date.
(ii) The Escrow Agent will make delivery of the number of
shares of Preferred Stock set forth in clause 2(a) above in accordance with the
instructions of the Buyer subject to customary settlement procedures upon
confirmation of the wiring of funds to the Company as described in clause
2(b)(i) above.
3. Representations and Warranties of the Buyer: The Buyer understands and
represents and warrants to, and agrees with the Company that:
(a) The Buyer understands that no federal or state agency has
passed on, or made any recommendation or endorsement of the Securities.
(b) The Buyer acknowledges that, in making the decision to
purchase the Securities, it has relied solely upon independent investigations
made by it and not upon any representations made by the Company with respect to
the Company or the Securities, except for the representations and warranties in
this Agreement, the Certificate of Designation, the Registration Rights
Agreement and the Officers Certificate, except that the Buyer has received,
reviewed and relied upon the Opinion of Counsel, the Company Memorandum dated
October 1, 1996 (the "Company Memorandum") and copies of the report on Form
10-QSB for the quarter ended June 30, 1996, the report Form 10-KSB for the year
ended December 31, 1995, filed by the Company pursuant to the Securities
Exchange Act of 1934, as amended, and all other filings, which together with
any filings by Company after the date hereof and prior the Closing, are defined
as "Exchange Act Reports".
(c) The Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from or
non-application of the registration requirements of Federal and state
securities laws and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments and understandings
of the Buyer set forth herein in order to determine the applicability of such
exemptions and the suitability of the Buyer to acquire the Securities.
(d) The Buyer is aware that the Securities and the Shares
issuable upon exercise of conversion rights have not been and will not be
registered under the Act (except as may be required under the Registration
Rights Agreement) and may only be offered or sold pursuant to registration
under the Act or an available exemption therefrom.
The Buyer has the full right, power and authority to enter
into this Agreement and to carry out and consummate the transactions
contemplated herein. This Agreement constitutes the legal, valid and binding
obligation of the Buyer.
The Buyer is an "Accredited Investor" as that term is defined
in Section 501(a) of Regulation D promulgated under the Act, because the
undersigned meets one or more of the following requirements: PLEASE CHECK AS
MANY BOXES THAT APPLY:
_ He or she is a natural person whose individual net worth, or joint
net worth with such investor's spouse, exceeds $1,000,000;
_ He or she is a natural person who had individual income in excess of
$200,000 in each of the two most recent years, or (except in California) joint
income with such investor's spouse in excess of $300,000 in each of those years
and reasonably expects to reach the same income level in the current year;
_ It is an organization described in ss. 501(c)(3) of the Internal
Revenue Code of 1986 as amended, (i.e., tax exempt entities), corporation,
Massachusetts or similar business trust, or partnership, not formed for the
specific purpose of acquiring the proposed investment, with total assets in
excess of $5,000,000;
_ It is a trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the proposed investment, whose purchases
are directed by a sophisticated person as described;
_ It is a bank as defined in ss. 3(a)(2) of the Act, or a savings and
loan association or other institution as defined in ss. 3(a)(5)(A) of the Act
whether acting in its individual or fiduciary capacity;
_ It is a broker registered pursuant toss. 15 of the Securities
Exchange Act of 1934 (the Exchange Act");
_ It is an insurance company as defined in ss. 2(13) of the Act;
_ It is an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in ss. 2(a)(48) of
that Act;
_ It is a Small Business Investment Company licensed by the U.S. Small
Business Administration under ss. 301 (c) or (d) of the Small Business
Investment Act of 1958;
_ It is a private business development company as defined in ss.
202(a)(22) of the Investment Advisers Act of 1940;
_ It is an employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974, if the investment decision is
made by a plan fiduciary, as defined in ss. 3(21) of such Act, 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 as described above;
_ He or she is a director or executive officer of the Company;
_ It is an entity in which all the equity owners are Accredited
Investors since they are all described above.
(g) The Buyer has reviewed this Agreement and each Exhibit
hereto.
(h) The Buyer has the financial ability to bear the economic
risk of the Buyer's investment, can afford to sustain a complete loss of such
investment, has adequate means of providing for the Buyer's current needs and
personal contingencies and has no need for liquidity in the Buyer's investment
in the Company.
(i) The Buyer will acquire the Securities for its own account
(or for the joint account of the Buyer and the Buyer's spouse either in joint
tenancy, tenancy by the entirety or tenancy in common) for investment and not
with a view to the sale or distribution thereof or the granting of any
participation therein, and the Buyer has no present intention of distributing
or selling to others any of such interest or granting any participation
therein, other than pursuant to an effective registration statement under the
Act.
(j) The Buyer has read the Company Memorandum and the
Exchange Act Reports, has been given the opportunity to ask questions of and to
receive answers from persons acting on the Company's behalf concerning the
terms and conditions of this transaction and also has been given the
opportunity to obtain any additional information which the Company possesses or
can acquire without unreasonable effort or expense. As a result, the Buyer is
cognizant of the financial condition, capitalization, use of proceeds from this
transaction and the operations and financial condition of the Company, has
available full information concerning its affairs and has been able to evaluate
the merits and risks of the investment in the Securities.
(k) The Buyer represents that an investment in the Securities
is a suitable investment for the Buyer, taking into consideration the
restrictions on transferability affecting the Securities.
(l) The Buyer understands and agrees that the Preferred Stock
as well as the Shares issuable upon conversion of Preferred Stock have not been
registered under the Act or any state or foreign securities laws and are
restricted securities within the meaning of Rule 144 of the General Rules and
Regulations under the Act and under applicable state statutes.
(m) The Buyer is not an associated person or affiliate of any
member firm of the National Association of Securities Dealers, Inc.
(n) In making the purchase of the Securities, Buyer
understands that the information set forth in the Company Memorandum and the
Exchange Act Reports and this Agreement was accurate as of its date with
respect to the Company.
(o) Without the prior written consent of the Company, the
Buyer and any subsequent transferee shall not sell the Securities or the Shares
in a transaction that is exempt from the registration requirements of the Act
pursuant to Regulation S thereunder.
4. Registration Rights On or prior to the Closing Date, the Company and the
Buyer agree to execute a Registration Rights Agreement in the form
substantially set out in Exhibit "C" attached hereto (the "Registration Rights
Agreement"), the terms of which are herein incorporated by reference.
5. Conversion of Preferred Stock The holders of Preferred Stock shall be
entitled to convert the Preferred Stock into Shares in accordance with the
terms set forth in the Certificate of Designation.
6. Representations and Warranties of the Company The Company represents and
warrants to, and agrees with, the Buyer that:
(a) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Delaware.
(b) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally and to general principles
of equity; and the Company has full corporate power and authority necessary to
enter into this Agreement and to perform its obligations thereunder.
(c) No consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction over the
Company or any of its affiliates is required for execution of this Agreement,
including, without limitation, the issuance and sale of the Securities, or the
performance of its obligations hereunder.
(d) Except as disclosed to the Buyer or its representatives
in writing, neither the sale of Securities pursuant to, nor the performance of
its obligations under this Agreement by the Company will (i) violate or
conflict with, result in a breach of, or constitute a default (or an event
which with the giving of notice or the lapse of time or both would be
reasonably likely to constitute a default) under (A) the Certificate of
Incorporation (the "Certificate of Incorporation") or By-laws (the "By-laws")
of the Company or any of its affiliates, (B) any decree, judgment, order, law,
treaty, rule, regulation or determination applicable to the Company or any of
its affiliates of any court, governmental agency or body, or arbitrator having
jurisdiction over the Company or any of its affiliates or over the properties
or assets of the Company or any of its affiliates, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any material
agreement, stock option or other similar plan, indenture, lease, mortgage, deed
of trust or other material instrument to which the Company or any of its
affiliates is a party, by which the Company or any of its affiliates is bound,
or to which any of the properties of the Company or any of its affiliates is
subject, or (D) the terms of any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company or any of its affiliates
is a party to; or (ii) result in the creation or imposition of any lien, charge
or encumbrance upon the Securities or any of the assets of the Company or any
of its affiliates.
(e) The Company has an authorized capitalization consisting
of 80,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000
shares of Preferred Stock, par value $.01 per share ("Preferred Stock"). The
Company has issued and outstanding 14,026,398 shares of Common Stock and no
shares of Preferred Stock on the date hereof. All of the issued shares of
capital stock of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable; prior to the Closing Date, the authorized
capitalization shall include the Shares to be issued upon conversion of the
Securities. The Shares issuable upon conversion of the Securities, when issued
and delivered in accordance with the terms of the Securities, will be duly and
validly issued, fully paid and nonassessable. The issuance of the Shares will
not be in violation of any preemptive or similar rights of the holders of any
securities of the Company. The Securities (i) are free and clear of any
security interests, liens, claims or other encumbrances, (ii) have been duly
and validly authorized and on the Closing Date will be duly and validly issued,
fully paid and non assessable, (iii) will not have been, individually and
collectively, issued or sold in violation of any preemptive or other similar
rights of the holders of any securities of the Company, (iv) will not subject
the holders thereof to personal liability by reason of being such holders, and
(v) the Shares underlying the Securities are quoted on, and will be, following
the registration of the Shares as set forth in the Registration Rights
Agreement be eligible for trading on, the National Association of Securities
Dealers Inc. SmallCap Market ("Nasdaq").
(f) The Company complies with the eligibility requirements
for use of Form S-3, as set forth in the Act. The Company's stock is listed on
Nasdaq and the Company has received no notice, oral or written, with respect to
its continued eligibility for such listing. The Company hereby agrees, promptly
following the closing of the transactions contemplated by this Agreement, to
take such action as is necessary to cause the Shares issued upon exercise of
conversion rights under the Preferred Stock to be listed on Nasdaq upon such
conversion following the effective date of the registration statement, as
provided in the Registration Rights Agreement (subject, if required, to notice
to Nasdaq of the actual number of shares issued). The Company further agrees,
if the Company applies to have the Common Stock traded on any other principal
stock exchange or market, it will include in such application the Shares and
will take such other action as is necessary or desirable to cause the Shares to
be listed on such other exchange or market upon effective date of the
registration statement.
(g) The Exchange Act Reports are the only filings made by the
Company since December 31, 1995 pursuant to Sections 13(a), 13(c), 14 and 15(d)
of the Exchange Act, and the Company will cause its Common Stock to continue to
be registered under Section 12(g) or 12(b) of the Securities Exchange Act of
1934, will comply in all respects with its reporting and filing obligations
under said Act, and will not take any action or file any document (whether or
not permitted by said Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under the Exchange Act. The Company will take all action necessary to continue
the listing and trading of its Common Stock on Nasdaq and will comply in all
respects with the Company's reporting, filing and other obligations under the
by-laws or rules of the NASD and Nasdaq.
(h) The Company has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company
does not have any subsidiaries. The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary other than those in which the failure so to qualify
would not have a Material Adverse Effect. "Material Adverse Effect" means any
adverse effect on the business, operations, properties, prospects, or financial
condition of the entity with respect to which such term is used and which is
material to such entity.
(i) The Company has furnished or made available to the Buyer
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof, and the Company's By-laws, as in effect on the date
hereof.
(j) The Company has delivered or made available to the Buyer
true and complete copies of the Exchange Act Reports (including, without
limitation, proxy information and solicitation materials excluding any
preliminary proxy not distributed). The Company has not provided to the Buyer
any information which, according to applicable law, rule or regulation, should
have been disclosed publicly by the Company but which has not been so
disclosed. As of their respective dates, the Exchange Act Reports complied in
all material respects with the requirements of the Exchange Act and the rules
and regulations of the SEC promulgated thereunder and other federal, state and
local laws, rules and regulations applicable to such Exchange Act Reports, and
none of the Exchange Act Reports contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Exchange Act Reports comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes
or may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal year-end audit adjustments).
(k) Except as set forth in the financial statements and other
documents filed by the Company under the Exchange Act, the Company has no
liabilities, contingent or otherwise, other than (i) liabilities incurred in
the ordinary course of business subsequent to December 31, 1995 and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in such financial statements, which individually or in the aggregate,
are not material to the financial condition or operating results of the
Company. The Company has not provided to the Buyer any information which,
according to applicable law, rule or regulation, should have been disclosed
publicly by the Company but which has not been so disclosed.
(l) Since December 31, 1995 there has been no material
adverse change and no material adverse development in the business, properties,
operations, financial condition, results of operations or prospects of the
Company, except as disclosed in accordance with the Exchange Act Reports or the
Company Memorandum and except that the Company continues to incur losses.
(m) There is no material action, suit, proceeding, inquiry or
to the knowledge of the Company or any of its subsidiaries, investigation
before or by any court, public board, government agency, self-regulatory
organization or body pending, or to the knowledge of the Company or any of its
subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, except as disclosed in the Exchange Act Reports or the Company
Memorandum.
(n) Neither the Company, nor any or its affiliates, nor any
person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of the Securities under the
Act.
(o) The Company has taken no action which would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments by the Buyer relating to this Agreement of the transactions
contemplated hereby, except for dealings with First Bermuda Securities Limited,
whose commissions and fees will be paid for by the Company.
(p) As of the date hereof, the Company has reserved and the
Company shall continue to reserve and keep available at all times, free of
preemptive rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligation to issue shares of its Common Stock upon
conversion of the Securities; provided, however, that the number of shares so
reserved shall at all times be at least 3,000,000. The number of shares so
reserved may be reduced by the number of shares actually delivered pursuant to
the conversion of the Securities (provided that in no event shall the number of
shares so reserved be less than the number required to satisfy the remaining
conversion rights on the unconverted Securities) and the number of shares so
reserved shall be increased to reflect stock splits and stock dividends and
distributions.
(q) The Preferred Stock and the Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"). Each of
the Securities shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR THE SECURITIES LAWS OF CERTAIN STATES, AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
ACT AND ANY APPLICABLE STATE LAWS, (ii) TO THE EXTENT APPLICABLE, RULE
144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT (OTHER THAN PURSUANT
TO REGULATION S) AND APPLICABLE STATE LAW IS AVAILABLE.
Certain registration rights with respect to the Securities
are set forth in the Registration Rights Agreement. This offering is not a
public offering and is intended to be made pursuant to Section 4(2) and 4(6) of
the Act and Regulation D as promulgated by the Securities and Exchange
Commission ("SEC") under the Act. This offering is also intended to be exempt
from the registration requirements of various state securities laws. A
substantial number of state securities commissions and securities industry
associations have established investor suitability standards for marketing
private offerings of securities within their respective jurisdictions. Some
have also established minimum dollar levels for purchases in their states. The
Company shall comply with these restrictions to the extent applicable.
(r) With a view to making available the benefits of certain
rules and regulations of the SEC that may permit the sale of certain of the
Securities, to the public without registration, the Company shall use its best
efforts to:
(i) make and keep public information regarding the Company
available, as those terms are understood and defined in Rule 144 under the Act,
at all times following the Closing Date (as hereinafter defined);
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the Exchange Act;
(iii) so long as the Buyer owns any Securities, furnish to
the Buyer forthwith upon written request a written statement by the Company as
to its compliance with the reporting requirements of Rule 144, and of the Act
and the Exchange Act, a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed as the Buyer may
reasonably request in availing itself of any rule or regulation of the SEC
allowing the Buyer to sell any such securities without registration.
(iv) make all necessary filings in connection with this
offering as required by the laws and regulations of all appropriate
jurisdictions and securities exchanges in the United States of America.
(s) Each party shall indemnify the other against any loss,
cost or damages (including reasonable attorney's fees and expenses) incurred as
a result of such parties' breach of any representation, warranty, covenant or
agreement in this Agreement.
7. Offering Materials. All offering materials and documents used in connection
with offers and sales of the Securities prior to the registration of the
Securities as provided in the Registration Rights Agreement shall include
statements to the effect that the Securities and the Shares issuable upon the
exercise of conversion rights have not been registered under the Act and that
the Buyer, may not sell the Securities or Shares unless the Securities or
Shares are registered under the Act, or to the extent applicable under Rule
144, or an exemption from the registration requirements of the Act is
available. Such statements shall appear (1) on the cover of any prospectus or
offering circular used in connection with the offer or sale of the Securities
and (2) in the underwriting section of any prospectus or offering circular used
in connection with the offer or sale of the Securities. The Company represents
that all offering materials and documents used in connection with the offers
and sales of the Securities prior to the Closing of the transactions
contemplated herein have complied with the foregoing.
8. Covenants of the Company. (a) The Company agrees that during the period
beginning on the date hereof and ending 90 days following the Closing Date, the
Company will not, without the prior written consent of a "majority-in-interest"
of the Buyers, negotiate or contract with any party to obtain additional equity
financing (including debt financing with an equity component) in any form
pursuant to an exemption from the Act under Regulation D or Regulation S of the
Act (the "Future Offerings"). In addition, the Company will not conduct any
Future Offerings during the period beginning on the 90th day following the date
hereof and ending 180 days following the Closing Date unless it shall have
first delivered to the Buyer at least ten (10) business days prior to the
closing of such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof, and providing the Buyer
an option during such ten (10) day period to purchase all or any portion of its
"pro-rata" share of the securities being offered in the Future Offerings on the
same terms as contemplated by such Future Offering (the limitations referred to
in this and the immediately preceding sentence are collectively referred to as
the "Capital Raising Limitation"). The Capital Raising Limitation shall not
apply to any transaction involving the Company's commercial banking
arrangements or issuances of securities in connection with a merger,
consolidation or sale of assets, or in connection with any strategic
partnership or joint venture (the primary purpose of which is not to raise
equity capital), or in connection with the disposition or acquisition of a
business, product or license by the Company (so long as the securities so
issued are "restricted securities" within the meaning of Rule 144 under the
1933 Act and do not carry registration or piggyback rights for at least 360
days from the date of this Agreement), the issuance of securities to settle
securities litigation, or exercise of options by or the grant of performance
shares to employees, consultants or directors. The terms (i)
"majority-in-interest" means holders of Preferred Stock holding more than 50%
of the Common Stock underlying the Securities (treating the Securities on an as
converted basis) and (ii) "pro-rata share" means the number of the Securities
initially purchased divided by the aggregate number of all Securities sold
hereunder.
(b) The parties shall use their best efforts timely to satisfy each of
the conditions described in Section 9 of this Agreement.
(c) So long as the Buyer beneficially owns any of the Securities, the
Company shall timely file all reports required to be filed with the SEC
pursuant to the Exchange Act, and the Company shall satisfy the conditions
described in Section 6(r).
(d) The Company agrees to send the following reports to Buyer until
Buyer transfers, assigns, or sells all of the Securities: (i) within ten (10)
days after the filing with the SEC, a copy of its Annual Report on Form 10-KSB,
its Quarterly Reports on Form 10-QSB and any Current Reports on Form 8-K; and
(ii) within two (2) business days after release, copies of all press releases
issued by the Company or any of its subsidiaries.
(e) The Company shall at all times have authorized, and reserved for
the purpose of issuance, a sufficient number of shares of Common Stock to
provide for the full conversion of the outstanding Securities and issuance of
the Shares in connection therewith (based on the Conversion Price of the
Securities in effect from time to time). In that regard, on the Closing Date,
the Company shall have at least 3,000,000 shares reserved for issuance upon
conversion of the Securities (subject to adjustment in order to comply with the
immediately preceding sentence); provided that the Company shall not reduce the
number of shares of Common Stock reserved for issuance upon conversion of the
Securities without the consent of a majority-in-interest of the Buyers, which
consent will not be unreasonably withheld.
(f) So long as the Buyer beneficially owns any Securities, the Company
shall maintain its corporate existence, except in the event of a merger,
consolidation or sale of all or substantially all of the Company's assets, as
long as the surviving or successor entity in such transaction (i) assumes the
Company's obligations hereunder and under the agreements and instruments
entered into in connection herewith and (ii) is a publicly traded corporation
whose Common Stock is listed for trading on the AMEX, the NYSE or the Nasdaq.
The Company and the Buyer agree that the Closing Date, when certified
by Escrow Agent as the Closing shall be deemed to be a conclusion of the
offering of the Securities contemplated hereby.
(h) The Shares and the certificates evidencing the same shall at all
times be free of legends (except as provided in Section 10 below), "stock
transfer restrictions," or other restrictions, except for covenants of the
Buyer expressly set forth in this Agreement.
9. Conditions Precedent to the Buyer's Obligation. The obligations of the Buyer
hereunder are subject to the performance by the Company of its obligations
hereunder and to the satisfaction of the following additional conditions
precedent:
(a) The Buyer shall receive, on the Closing Date, an opinion
of independent counsel to the Company, dated the Closing Date, as to the
representations made by the Company in Sections 6(a) through and including 6(f)
hereof, and in Sections 6(m) and 6(n) hereof, and such other matters as Buyer
reasonably requests. The form of such opinion shall be as set forth in Exhibit
1 hereof.
(b) Delivery of the certificates representing the Preferred
Stock with restrictive legends to the Escrow Agent as set forth herein.
(c) The Company shall have delivered to the Buyer a
certificate in form and substance reasonably satisfactory to the Buyer,
executed by an executive officer of the Company, to the effect that all the
conditions to the Closing shall have been satisfied and the representations and
warranties of the Company herein are true and correct as of the date when made
and as of the Closing Date, and certifying as to the Company's Certificate of
Incorporation, By-laws, resolutions authorizing transaction, and incumbency of
Company officers.
(d) The Company and the Buyer shall have entered into the
Registration Rights Agreement contemplated by Section 4.
10. Legends (a) The certificates representing the Securities and the Shares
issued prior to the effective date of the registration statement or
availability of an exemption from registration, shall bear the legend set forth
in Section 6(q) herein (the "Legend").
(b) Following the effective date of the registration
statement or availability of an exemption from registration requirements under
Rule 144 of the Act, the Company will remove or will promptly instruct its
transfer agent (the "Transfer Agent") to remove the Legend from the Securities
and, if applicable, from the Shares issued prior to the effective date of the
registration statement (and will instruct the Transfer Agent to issue without
the Legend, the Shares issuable upon any conversion).
(c) Upon the submission, at any time after the effective date
of the registration statement or applicability of an exemption from the
registration requirements, under Rule 144 of the Act by the Buyer of a written
request for legend removal for the purpose of a bona fide pledge or deposit of
the Securities with a margin account, together with the certificates for which
the legend removal is being requested, the Company will reissue or will
promptly instruct the Transfer Agent to reissue the certificates representing
the Securities to be so pledged or deposited without the Legend.
11. Transfer Agent Instructions The Transfer Agent will be instructed to
reserve for issuance such number of shares of the Company's Common Stock as
would be issuable if the Preferred Stock were converted on the Closing Date and
such additional number of shares as, from time to time, shall be necessary to
provide for the issuance of Shares upon the conversion of the Preferred Stock.
Additionally, the Company shall deliver to the Transfer Agent at closing
irrevocable instructions substantially in the form set forth in Exhibit "D"
attached hereto, pursuant to which the Transfer Agent shall be instructed to
issue upon conversion the number of shares provided for in the Preferred Stock
being converted on the terms provided for therein without restrictive legend,
registered in the names provided by the Holders. The Company warrants and
covenants that no instructions restricting the transferability of the
Securities and the Shares other than the instructions in the immediately
preceding sentence and instructions for a "stop transfer" instruction until the
effective date of the registration statement have been given, or shall be
given, to the Transfer Agent, and that the Securities and the Shares shall
otherwise be freely transferable on the books and records of the Company.
Nothing in this section, however, shall affect in any way the obligations and
agreement of the Buyer to comply with all applicable federal, state and foreign
securities laws upon resale of the Securities.
12. Miscellaneous. (a) This Agreement may be executed in one or more
counterparts and it is not necessary that signatures of all parties appear on
the same counterpart, but such counterparts together shall constitute but one
and the same agreement.
(b) This Agreement shall be governed by and constructed in
accordance with the laws of the State of Delaware.
(c) This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their respective successors, and no other
person shall have any right or obligation hereunder. This Agreement shall not
be assignable by either party without the prior written consent of the other,
and any assignment in violation hereof shall be void. Notwithstanding the
foregoing, the Buyer may assign its rights in this Agreement to, and the
provisions of this Agreement shall inure to the benefit of, and be enforceable
by, any transferee of any of the Securities or Shares.
(d) This Agreement together with the Certificate of
Designation and the Registration Rights Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and
supersede all prior oral or written proposals or agreements related thereto.
This Agreement may not be amended or any provision hereof waived, in whole or
in part, except by a written amendment signed by both of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement, all as of the day and year above written.
BY: VIDEOLAN TECHNOLOGIES, INC.
- ----------------------------------
Name: Jack Shirman
Title: Chief Executive Officer
or
Name: Steven B. Rothenberg
Title: Vice President Finance, Treasurer and Secretary
BY: (The Buyer)
- ----------------------------------
Name:
Title:
EXHIBIT "C"
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Registration Rights
Agreement"), entered into as of October 17, 1996 by and between LIMITED, with
offices at c/o (the "Purchaser"), and VIDEOLAN TECHNOLOGIES, INC., a Delaware
corporation with offices at 100 Mallard Creek Road, Suite 250, Louisville,
Kentucky 40207, U.S.A. (the "Company").
W I T N E S S E T H:
WHEREAS, pursuant to a Subscription Agreement, dated as of
the date hereof (the "Agreement"), by and between the Company and the
Purchaser, the Company has agreed to sell and the Purchaser has agreed to
purchase 500 shares of the Company's Series 1996A Convertible Preferred Stock
(the "Preferred Stock") convertible into shares of the Company's Common Stock,
$.01 par value (the "Shares");
WHEREAS, pursuant to the terms of, and in partial
consideration for, the Purchaser's agreement to enter into the Agreement, the
Company has agreed to provide the Purchaser with certain registration rights
with respect to the Shares as set forth in this Registration Rights Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the
Agreement and this Registration Rights Agreement, the Company and the Purchaser
agree as follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
"Registrable Securities" shall mean the Shares issued to
Purchaser or its designee upon conversion of the Preferred Stock or upon any
stock split, stock dividend, recapitalization or similar event with respect to
such Shares; provided, however, that Registrable Securities shall cease to be
Registrable Securities when they may be sold pursuant to Rule 144 under the
Securities Act.
Registrable Securities shall not include the Preferred Stock.
The terms "register", "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness of
such registration statement.
"Registration Expenses" shall mean all expenses to be
incurred by the Company in connection with Purchaser's exercise of its
registration rights under this Agreement, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, reasonable fees and
disbursements of one counsel to the Holder and the other securityholders
participating in the registration for a review of the Registration Statement
and related documents, and the expense of any special audits incident to or
required by any such registration (but excluding the compensation of regular
employees of the Company, which shall be paid in any event by the Company).
"Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for Holder not included with "Registration
Expenses".
"Holder" shall include the Purchaser and any permitted
transferee of Preferred Stock, Shares or Registrable Securities which have not
been sold to the public to whom the registration rights conferred by this
Agreement have been transferred in compliance with Section 11 of this
Agreement. "Registration Statement" shall have the meaning set forth in Section
2(a) herein.
"Regulation D" shall mean Regulation D as promulgated
pursuant to the Securities Act, and as subsequently amended.
"Rule 144" shall mean Rule 144 under the Securities Act, as
such rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
2. Demand Registration
(a) After the Closing Date the Company shall use its best
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act) as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request in the states specified in such request.
Subject to the previous paragraph, the Company shall file (i)
a registration statement with the Commission pursuant to Rule 415 under the
Securities Act on Form S-3 under the Securities Act (or in the event that the
Company in ineligible to use such form, such other form as the Company is
eligible to use under the Securities Act) covering the Registrable Securities
so requested to be registered ("Registration Statement") ; (ii) such blue sky
filings as shall have been requested by the Holder; and (iii) any required
filings with the National Association of Securities Dealers, Inc. or exchange
where the Shares are traded, as soon as practicable, after receipt of the
request of the Holder. Thereafter the Company shall use its best efforts to
have such Registration Statement and other filings declared effective no later
than 110 days from the Closing Date, as that term is defined in the
Subscription Agreement.
(b) (i) Subject to the conditions contained in Section 2(a)
above, if the Company fails to have such Registration Statement declared
effective by the Commission within one hundred and ten (110) days from the
Closing Date, the Holder shall have, in addition to and without limiting any
other rights it may have at law, in equity or under the Preferred Stock, the
Agreement, or this Registration Rights Agreement (including the right to
specific performance), the right to receive, as liquidated damages, additional
shares of common stock of the Company as provided in subparagraph (ii) of this
section.
(ii) If after one hundred and ten (110) days from
the Closing Date, the Registration Statement has not been declared effective by
the Commission, then the Company shall issue to the Purchaser an additional
amount of common stock shares (the "Additional Shares") upon conversion of such
Holder's Preferred Stock. For each 30-day period that the Company is late in
having its Registration Statement declared effective by the Commission, the
Company shall issue a number of Additional Shares equal to 2% (which Additional
Shares shall be issued pro rata for any period of less than 30 days) of the
original principal amount of Preferred Stock held by Purchaser, which
Additional Shares shall be issued to the Purchaser upon its conversion of
Preferred Stock. The number of Additional Shares shall increase to 4% of the
original principal amount of Preferred Stock if the Registration Statement is
not declared effective after 150 days following the Closing Date per each
30-day period (which Additional Shares shall be issued pro rata for any period
of less than 30 days), and to 6% of the original principal amount of Preferred
Stock, if the Registration Statement is not declared effective after 210 days
after the Closing Date per each additional 30-day period thereafter (which
Additional Shares shall be issued pro rata for any period of less than 30
days), until the effective date of the Registration Statement.
(iii) The Company acknowledges that its failure to
register the Registrable Securities in accordance with this Registration Rights
Agreement will cause the Holder to suffer damages in an amount that will be
difficult to ascertain. Accordingly, the parties agree that it is appropriate
to include in this Registration Rights Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages
provisions set forth in paragraph 2(b)(ii) above represent the parties' good
faith effort to quantify such damages and, as such, agree that the form and
amount of such liquidated damages are reasonable and will not constitute a
penalty. The payment of liquidated damages shall not relieve the Company from
its obligations to register the Registrable Securities pursuant to this
Agreement.
(c) If there is more than one Holder, such Holders shall act
with respect to their rights under this Registration Rights Agreement according
to the vote of a majority-in-interest.
(d) The Company shall make available for inspection by a
representative or representatives of the Holder, and any attorney or accountant
retained by such Holder, all financial and other records customary for such
purposes, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, attorney or accountant in
connection with such Registration Statement. The Holder will agree to keep all
non-public information supplied to it confidential until such information is
included in a Registration Statement which has been made publicly available.
(e) The Company shall not be obligated to keep such
Registration Statement continuously effective for a period of more than two
years from the date it is declared effective by the Commission; provided,
however, that if so requested by the holders of a majority-in-interest of the
Registrable Securities the Company shall agree to extend the period for which
the Registration Statement remains effective to the same extent that
"suspension periods" are imposed pursuant to the next paragraph, but only so
long as the then unsold Registrable Securities covered by such Registration are
too numerous to be sold under the volume limitations of Rule 144 in any
applicable three month period by any Holder.
Following the effectiveness of the Registration Statement
pursuant to this Registration Rights Agreement, the Company may, at any time,
suspend the effectiveness of such Registration Statement and sales thereunder
for up to ten (10) days, as appropriate (a "Suspension Period"), by giving
notice to each Holder (or underwriter, if any) selling thereunder, if the
Company shall have determined that the Company may be required to disclose any
material corporate development which disclosure (i) may have a material adverse
effect on the Company, (ii) may have a material adverse affect on the
transaction or matter to be disclosed, or (iii) would be detrimental to the
Company or its stockholders. Notwithstanding the foregoing, no more than two
Suspension Periods (i.e., twenty (20) days) may occur in immediate succession,
and the Company shall use its best efforts to limit the duration and number of
any suspension periods. Holder agrees (and shall require that any underwriter
agree) that, upon receipt of any notice from the Company of any Suspension
Period, Holder shall forthwith discontinue disposition of shares covered by the
Registration Statement or Prospectus until such Holder (i) is advised in
writing by the Company that the use of the applicable Prospectus may be
resumed, (ii) has received copies of a supplemental or omitted Prospectus, if
applicable, and (iii) has received copies of any additional or supplemental
filings which are incorporated or deemed to be incorporated by reference in
such Prospectus.
3. Company Registration. If at any time, or from time to time
prior to the registration of the Registrable Securities, the Company shall
determine to register any of its securities, either for its own account or the
account of a security holder or holders exercising their respective demand
registration rights, other than (i) a registration on Form S-8 or (ii) a
registration on Form S-4 relating solely to a transaction pursuant to Rule 145,
the Company will promptly give to each Holder written notice thereof and
include in such registration statement all the Registrable Securities specified
in a written request made within 30 days after mailing of written notice by the
Company.
4. Expenses of Registration. All Registration Expenses
incurred in connection with any registration, qualification or compliance with
registration pursuant to this Agreement shall be borne by the Company, and all
Selling Expenses shall be borne by the Holder.
5. Registration on Form S-3. Although the Company shall use
its best efforts to qualify for registration on Form S-3 or any comparable or
successor form or forms, or in the event that the Company is ineligible to use
such form, such form as the Company is eligible to use under the Securities
Act, nothing in the Agreement or this Registration Rights Agreement is intended
to require the Company to pay dividends in order to use Form S-3.
6. Registration Procedures. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep the
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense, the Company will use its best efforts
to:
(a) Keep such Registration Statement effective for the period
ending twenty-four (24) months after the registration has been declared
effective by the Commission or until the Holder has completed the distribution
described in the Registration Statement relating thereto, whichever first
occurs.
(b) Furnish such number of prospectuses and other documents
incident thereto as the Holder from time to time may reasonably request.
7. Indemnification.
(a) Company Indemnity. The Company will indemnify the Holder,
each of its officers, directors and partners, and each person controlling
Holder, within the meaning of Section 15 of the Securities Act and the rules
and regulations thereunder with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any prospectus, (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by the Company of
the Securities Act or any state securities law or in either case, any rule or
regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse the Holder, each of its
officers, directors and partners, and each person controlling such Holder, for
any legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission based upon written information
furnished to the Company by Holder and stated to be specifically for use
therein. The indemnity agreement contained in this Section 7(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent will not be unreasonably withheld).
(b) Holder Indemnity. The Holder will, if Registrable
Securities held by it are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors, officers, partners, and each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act and the rules and regulations thereunder, each
other Holder (if any), and each of their officers, directors and partners, and
each person controlling such other Holder against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statement therein
not misleading, and will reimburse the Company and such other Holders and their
directors, officers and partners, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by Holder and stated to be specifically for use therein, and provided
that the maximum amount for which the Holder shall be liable under this
indemnity shall not exceed the net proceeds received by the Holder from the
sale of the Registrable Securities. The indemnity agreement contained in this
Section 7(b) shall not apply to amounts paid in settlement of any such claims,
losses, damages or liabilities if such settlement is effected without the
consent of Holder (which consent shall not be unreasonably withheld).
(c) Procedure. Each party entitled to indemnification under
this Article (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may
be sought, and shall permit the Indemnifying Party to assume the defense of any
such claim in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this Article
except to the extent that the Indemnifying Party is materially and adversely
affected by such failure to provide notice. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation. Each Indemnified Party shall
furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be reasonably
required in connection with the defense of such claim and litigation resulting
therefrom.
8. Contribution. If the indemnification provided for in
Section 7 herein is unavailable to the Indemnified Parties in respect of any
losses, claims, damages or liabilities referred to herein (other than by reason
of the exceptions provided therein), then each such Indemnifying Party, in lieu
of indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages
or liabilities (i) as between the Company and the Holder on the one hand and
the underwriters on the other, in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Holder on the one hand or
underwriters, as the case may be, on the other from the offering of the
Registrable Securities, or if such allocation is not permitted by applicable
law, in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and of the
Holder or underwriters, as the case may be, on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations and (ii) as
between the Company on the one hand and the Holder on the other, in such
proportion as is appropriate to reflect the relative fault of the Company and
of the Holder in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand
and the Holder or the underwriters, as the case may be, on the other shall be
deemed to be in the same proportion as the proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company from the initial sale of the Preferred Stock which can be
converted into Registrable Securities by the Company to the Holder pursuant to
the Subscription Agreement which corresponds to this Registration Rights
Agreement bear to the gain realized by such Holder or the total underwriting
discounts and commissions received by the underwriters as set forth in the
table on the cover page of the prospectus, as the case may be. The relative
fault of the Company on the one hand and of the Holder or underwriters, as the
case may be, on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company, by the Holder or by the underwriters.
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 7 exceed the amount that such Indemnifying Party
would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 7(a) or 7(b) hereof had been
available under the circumstances.
The Company and the Holder agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Holder or the underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraphs. The amount paid or payable by an Indemnified Party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraphs shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such Indemnified Party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this section, no Holder or
underwriter shall be required to contribute any amount in excess of the amount
by which (i) in the case of the Holder, the net proceeds received by the Holder
from the sale of Registrable Securities or (ii) in the case of an underwriter,
the total price at which the Registrable Securities purchased by it and
distributed to the public were offered to the public exceeds, in any such case,
the amount of any damages that the Holder or underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
9. Survival. The indemnity and contribution agreements
contained in Sections 6 and 7 shall remain operative and in full force and
effect regardless of (i) any termination of the Agreement or any underwriting
agreement, (ii) any investigation made by or on behalf of any Indemnified Party
or by or on behalf of the Company and (iii) the consummation of the sale or
successive resales of the Registrable Securities.
10. Information by Holder. The Holder shall furnish to the
Company such information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Agreement.
11. Transfer or Assignment of Registration Rights. The
rights, granted to Purchaser by the Company under this Registration Rights
Agreement, to cause the Company to register Registrable Securities, may be
transferred or assigned to a transferee or assignee of not less than 50 shares
of Preferred Stock, provided that the Company is given written notice by Holder
at the time of or within a reasonable time after said transfer or assignment,
stating the name and address of said transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned, and provided further that the transferee or assignee of such
rights is not deemed by the board of directors of the Company, in its
reasonable judgment, to be a competitor of the Company; and provided further
that the transferee or assignee of such rights agrees to be bound by this
Registration Rights Agreement.
Purchaser is one of a group of holders of Registrable
Securities issued or issuable pursuant to a total aggregate amount of up to
$7.5 million of Preferred Stock purchased by Purchaser and others in a
transaction designed to qualify as an offering pursuant to Section 4(2),
Section 4(6) and Regulation D. Any action to be taken under this Registration
Rights Agreement or any term of this Registration Rights Agreement may be
amended or waived only with written action by the Company and the holders of at
least a majority-in-interest of the total of the Registrable Securities. Any
action, amendment or waiver effected in accordance with this paragraph shall be
binding upon each of the other holders of Registrable Securities at the time
then outstanding.
12. Miscellaneous.
(a) Entire Agreement. This Registration Rights Agreement
contains the entire understanding and agreement of the parties, and may not be
modified or terminated except by a written agreement signed by both parties.
(b) Notices. Any notice or other communication given or
permitted under this Agreement shall be in writing and shall be deemed to have
been duly given if personally delivered or sent by registered or certified
mail, return receipt requested, postage prepaid or by air courier, (a) if to
Purchaser, at its address hereinabove set forth, (b) if to the Company, at its
address hereinabove set forth, and (c) if to a holder other than Purchaser, at
the address thereof furnished by like notice to the Company, or (d) to any such
addresses at such other address or addresses as shall be so furnished to the
other parties by like notice.
(c) Gender of Terms. All terms used herein shall be deemed to
include the feminine and the neuter, and the singular and the plural, as the
context requires.
(d) Governing Law; Consent of Jurisdiction. This Registration
Rights Agreement and the validity and performance of the terms hereof shall be
governed by and construed in accordance with the laws of the State of Delaware.
The parties hereto hereby consent to, and waive any objection to the exercise
of, personal jurisdiction in the State of New York with respect to any action
or proceeding arising out of this Registration Rights Agreement.
(e) Titles. The titles used in this Registration Rights
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Registration Rights Agreement.
(f) Prospectus Delivery Requirements. Holder agrees, on
Holder's behalf, and shall require any transferee or assignee pursuant to
Section 10 above to agree, to comply with all prospectus delivery requirements
applicable to resales of the securities pursuant to the Registration Statement.
(g) Termination. The rights of Holder to require the Company
to request a Registration pursuant to this Registration Rights Agreement shall
terminate on the date which is five (5) years from the date of this
Registration Rights Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed as of the date first above
written.
(The Purchaser)
By:
----------------------------------
Title:
VideoLan Technologies, Inc.
a Delaware Corporation
By:
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Title:
Execution Copy
THE SECURITIES DESCRIBED IN THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF
CERTAIN STATES, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE LAWS, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE LAW IS
AVAILABLE.
INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN MAKING AN
INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE
COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND THE RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED OR DETERMINED THE ACCURACY OR ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SUBSCRIPTION AGREEMENT
This Subscription Agreement (the "Agreement"), dated October 17, 1996, is
entered into by and between VideoLan Technologies, Inc., a Delaware corporation
(the "Company"), and (the "Buyer").
The Company has offered for sale pursuant to applicable provisions of Sections
4(2) and 4(6), and Regulation D under the United States Securities Act of 1933,
as amended (the "Act") up to 7,500 shares of Series 1996A Convertible Preferred
Stock (the "Preferred Stock" or "Securities"), convertible into common stock of
the Company ("Common Stock"). The Buyer has been offered 500 shares of the
Preferred Stock, at $1,000 per each share. The terms on which the Preferred
Stock may be converted into shares of Common Stock (such shares of Common Stock
underlying the Preferred Stock being referred to herein as "Shares")and the
other terms of the Preferred Stock are set forth in the Certificate of
Designation in the form attached hereto as Exhibit "A" (the "Certificate of
Designation"), the terms of which are hereby incorporated by reference.
Capitalized terms used herein and not defined herein shall have the meanings
given to them in Regulation D as the same may be amended from time to time.
The parties hereto agree as follows:
1. Purchase and Sale of Securities Upon the basis of the representations
and warranties, and subject to the terms and conditions, set forth in this
Agreement, the Company covenants and agrees to sell to the Buyer on the Closing
Date (as hereinafter defined) 500 shares of the Preferred Stock at a price of
$1,000 per share, and upon the basis of the representations and warranties, and
subject to the terms and conditions, set forth in this Agreement, the Buyer
covenants and agrees to purchase from the Company, on the Closing Date 500
shares of the Preferred Stock of the Company at $1,000 per share.
Closing Instructions to Escrow Agent
(a) The closing of the purchase and sale of the Preferred Stock pursuant
to Section 1 hereof shall take place on or before October 17, 1996 (the
"Closing Date") after the Company has delivered to the offices of First Bermuda
Securities Limited (the "Escrow Agent") located at Jardine House, 3rd Floor,
33/35 Reid Street, Hamilton, HM 12 Bermuda certificates representing 500 shares
of Preferred Stock registered in the names provided by the Buyer (representing
the number of shares of Preferred Stock to be purchased by the Buyer
hereunder).
(b) The Company and the Buyer agree that they shall instruct the
Escrow Agent as provided in Exhibit "B" and as follows:
(i) On the Closing Date, for each share of Preferred Stock
subscribed for and delivered to the Escrow Agent pursuant to paragraph 2(a)
above, the Escrow Agent shall, upon confirmation in the form of a Federal funds
wire number that First Bermuda Securities Limited ("First Bermuda") has wired
payment of the Purchase Price for the Preferred Stock (less any fees Company
has authorized Escrow Agent to deduct) in immediately available funds to the
Company's account as provided in the escrow instructions attached as Exhibit
"B", release the certificates of Preferred Stock described in paragraph 2(a)
above. The Escrow Agent shall return to the Company any shares of Preferred
Stock that the Buyer does not purchase on the Closing Date.
(ii) The Escrow Agent will make delivery of the number of
shares of Preferred Stock set forth in clause 2(a) above in accordance with the
instructions of the Buyer subject to customary settlement procedures upon
confirmation of the wiring of funds to the Company as described in clause
2(b)(i) above.
3. Representations and Warranties of the Buyer: The Buyer understands and
represents and warrants to, and agrees with the Company that:
(a) The Buyer understands that no federal or state agency has
passed on, or made any recommendation or endorsement of the Securities.
(b) The Buyer acknowledges that, in making the decision to
purchase the Securities, it has relied solely upon independent investigations
made by it and not upon any representations made by the Company with respect to
the Company or the Securities, except for the representations and warranties in
this Agreement, the Certificate of Designation, the Registration Rights
Agreement and the Officers Certificate, except that the Buyer has received,
reviewed and relied upon the Opinion of Counsel, the Company Memorandum dated
October 1, 1996 (the "Company Memorandum") and copies of the report on Form
10-QSB for the quarter ended June 30, 1996, the report Form 10-KSB for the year
ended December 31, 1995, filed by the Company pursuant to the Securities
Exchange Act of 1934, as amended, and all other filings, which together with
any filings by Company after the date hereof and prior the Closing, are defined
as "Exchange Act Reports".
(c) The Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from or
non-application of the registration requirements of Federal and state
securities laws and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments and understandings
of the Buyer set forth herein in order to determine the applicability of such
exemptions and the suitability of the Buyer to acquire the Securities.
(d) The Buyer is aware that the Securities and the Shares
issuable upon exercise of conversion rights have not been and will not be
registered under the Act (except as may be required under the Registration
Rights Agreement) and may only be offered or sold pursuant to registration
under the Act or an available exemption therefrom.
The Buyer has the full right, power and authority to enter
into this Agreement and to carry out and consummate the transactions
contemplated herein. This Agreement constitutes the legal, valid and binding
obligation of the Buyer.
The Buyer is an "Accredited Investor" as that term is defined
in Section 501(a) of Regulation D promulgated under the Act, because the
undersigned meets one or more of the following requirements: PLEASE CHECK AS
MANY BOXES THAT APPLY:
_ He or she is a natural person whose individual net worth, or joint
net worth with such investor's spouse, exceeds $1,000,000;
_ He or she is a natural person who had individual income in excess of
$200,000 in each of the two most recent years, or (except in California) joint
income with such investor's spouse in excess of $300,000 in each of those years
and reasonably expects to reach the same income level in the current year;
_ It is an organization described in ss. 501(c)(3) of the Internal
Revenue Code of 1986 as amended, (i.e., tax exempt entities), corporation,
Massachusetts or similar business trust, or partnership, not formed for the
specific purpose of acquiring the proposed investment, with total assets in
excess of $5,000,000;
_ It is a trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the proposed investment, whose purchases
are directed by a sophisticated person as described;
_ It is a bank as defined in ss. 3(a)(2) of the Act, or a savings and
loan association or other institution as defined in ss. 3(a)(5)(A) of the Act
whether acting in its individual or fiduciary capacity;
_ It is a broker registered pursuant toss. 15 of the Securities
Exchange Act of 1934 (the Exchange Act");
_ It is an insurance company as defined in ss. 2(13) of the Act;
_ It is an investment company registered under the Investment Company
Act of 1940 or a business development company as defined in ss. 2(a)(48) of
that Act;
_ It is a Small Business Investment Company licensed by the U.S. Small
Business Administration under ss. 301 (c) or (d) of the Small Business
Investment Act of 1958;
_ It is a private business development company as defined in ss.
202(a)(22) of the Investment Advisers Act of 1940;
_ It is an employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974, if the investment decision is
made by a plan fiduciary, as defined in ss. 3(21) of such Act, 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 as described above;
_ He or she is a director or executive officer of the Company;
_ It is an entity in which all the equity owners are Accredited
Investors since they are all described above.
(g) The Buyer has reviewed this Agreement and each Exhibit
hereto.
(h) The Buyer has the financial ability to bear the economic
risk of the Buyer's investment, can afford to sustain a complete loss of such
investment, has adequate means of providing for the Buyer's current needs and
personal contingencies and has no need for liquidity in the Buyer's investment
in the Company.
(i) The Buyer will acquire the Securities for its own account
(or for the joint account of the Buyer and the Buyer's spouse either in joint
tenancy, tenancy by the entirety or tenancy in common) for investment and not
with a view to the sale or distribution thereof or the granting of any
participation therein, and the Buyer has no present intention of distributing
or selling to others any of such interest or granting any participation
therein, other than pursuant to an effective registration statement under the
Act.
(j) The Buyer has read the Company Memorandum and the
Exchange Act Reports, has been given the opportunity to ask questions of and to
receive answers from persons acting on the Company's behalf concerning the
terms and conditions of this transaction and also has been given the
opportunity to obtain any additional information which the Company possesses or
can acquire without unreasonable effort or expense. As a result, the Buyer is
cognizant of the financial condition, capitalization, use of proceeds from this
transaction and the operations and financial condition of the Company, has
available full information concerning its affairs and has been able to evaluate
the merits and risks of the investment in the Securities.
(k) The Buyer represents that an investment in the Securities
is a suitable investment for the Buyer, taking into consideration the
restrictions on transferability affecting the Securities.
(l) The Buyer understands and agrees that the Preferred Stock
as well as the Shares issuable upon conversion of Preferred Stock have not been
registered under the Act or any state or foreign securities laws and are
restricted securities within the meaning of Rule 144 of the General Rules and
Regulations under the Act and under applicable state statutes.
(m) The Buyer is not an associated person or affiliate of any
member firm of the National Association of Securities Dealers, Inc.
(n) In making the purchase of the Securities, Buyer
understands that the information set forth in the Company Memorandum and the
Exchange Act Reports and this Agreement was accurate as of its date with
respect to the Company.
(o) Without the prior written consent of the Company, the
Buyer and any subsequent transferee shall not sell the Securities or the Shares
in a transaction that is exempt from the registration requirements of the Act
pursuant to Regulation S thereunder.
4. Registration Rights On or prior to the Closing Date, the Company and the
Buyer agree to execute a Registration Rights Agreement in the form
substantially set out in Exhibit "C" attached hereto (the "Registration Rights
Agreement"), the terms of which are herein incorporated by reference.
Conversion of Preferred Stock The Buyer of Preferred Stock shall be
entitled to convert the Preferred Stock into Shares in accordance with the
terms set forth in the Certificate of Designation. In addition to the
conversion rights set forth in the Certificate of Designations, the Buyer of
Preferred Stock purchased pursuant to this Agreement shall be entitled to the
following additional rights:
(a) Buyer's Right to Elect to Receive Notice of Cash
Redemption by Company. A Buyer of Preferred Stock purchased pursuant to this
Agreement shall have the right to require the Company to provide advance notice
stating whether the Company will elect to redeem such Buyer's shares in cash,
pursuant to the Company's redemption rights discussed in Section 7 of the
Certificate of Designations.
(b) Mechanics of Buyer's Election Notice. A Buyer shall send
notice to the Company by facsimile ("Election Notice") stating Buyer's
intention to require the Company to disclose if the Buyer were to exercise his,
her or its right of conversion (pursuant to Section 2 of the Certificate of
Designations) whether the Company would elect to redeem the Buyer's Preferred
Stock for cash in lieu of issuing Common Stock. The Company is required to
disclose to the Buyer what action the Company would take over the subsequent
five (5) day period, including the date the Company receives such Election
Notice.
(c) Company's Response. The Company must respond within one
business day of receipt of Buyer's Election Notice (I) via facsimile and (2)
via overnight courier. If the Company does not respond to the Buyer within one
business day via facsimile and overnight courier, the Company shall be required
to issue to the Buyer Common Stock upon the Buyer's conversion within three (3)
business days after the Election Notice was sent by the Buyer.
(d) Buyer's Right Withdraw Conversion to Notice The Buyer of
Preferred Stock purchased pursuant to this Agreement shall be entitled to
withdraw their Conversion Notice (as defined in the Certificate of
Designations) if the Company has not paid the Redemption Price (as defined in
the Certificate of Designations) within the time period set forth in the
Certificate of Designations. To effect such withdrawal, the Buyer must deliver
a written notice to the Company within five days after the Company's failure to
pay the Redemption Price.
6. Representations and Warranties of the Company The Company represents and
warrants to, and agrees with, the Buyer that:
(a) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Delaware.
(b) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally and to general principles
of equity; and the Company has full corporate power and authority necessary to
enter into this Agreement and to perform its obligations thereunder.
(c) No consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction over the
Company or any of its affiliates is required for execution of this Agreement,
including, without limitation, the issuance and sale of the Securities, or the
performance of its obligations hereunder.
(d) Except as disclosed to the Buyer or its representatives
in writing, neither the sale of Securities pursuant to, nor the performance of
its obligations under this Agreement by the Company will (i) violate or
conflict with, result in a breach of, or constitute a default (or an event
which with the giving of notice or the lapse of time or both would be
reasonably likely to constitute a default) under (A) the Certificate of
Incorporation (the "Certificate of Incorporation") or By-laws (the "By-laws")
of the Company or any of its affiliates, (B) any decree, judgment, order, law,
treaty, rule, regulation or determination applicable to the Company or any of
its affiliates of any court, governmental agency or body, or arbitrator having
jurisdiction over the Company or any of its affiliates or over the properties
or assets of the Company or any of its affiliates, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any material
agreement, stock option or other similar plan, indenture, lease, mortgage, deed
of trust or other material instrument to which the Company or any of its
affiliates is a party, by which the Company or any of its affiliates is bound,
or to which any of the properties of the Company or any of its affiliates is
subject, or (D) the terms of any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company or any of its affiliates
is a party to; or (ii) result in the creation or imposition of any lien, charge
or encumbrance upon the Securities or any of the assets of the Company or any
of its affiliates.
(e) The Company has an authorized capitalization consisting
of 80,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000
shares of Preferred Stock, par value $.01 per share ("Preferred Stock"). The
Company has issued and outstanding 14,026,398 shares of Common Stock and no
shares of Preferred Stock on the date hereof. All of the issued shares of
capital stock of the Company have been duly and validly authorized and issued,
are fully paid and non-assessable; prior to the Closing Date, the authorized
capitalization shall include the Shares to be issued upon conversion of the
Securities. The Shares issuable upon conversion of the Securities, when issued
and delivered in accordance with the terms of the Securities, will be duly and
validly issued, fully paid and nonassessable. The issuance of the Shares will
not be in violation of any preemptive or similar rights of the holders of any
securities of the Company. The Securities (i) are free and clear of any
security interests, liens, claims or other encumbrances, (ii) have been duly
and validly authorized and on the Closing Date will be duly and validly issued,
fully paid and non assessable, (iii) will not have been, individually and
collectively, issued or sold in violation of any preemptive or other similar
rights of the holders of any securities of the Company, (iv) will not subject
the holders thereof to personal liability by reason of being such holders, and
(v) the Shares underlying the Securities are quoted on, and will be, following
the registration of the Shares as set forth in the Registration Rights
Agreement be eligible for trading on, the National Association of Securities
Dealers Inc. SmallCap Market ("Nasdaq").
(f) The Company complies with the eligibility requirements
for use of Form S-3, as set forth in the Act. The Company's stock is listed on
Nasdaq and the Company has received no notice, oral or written, with respect to
its continued eligibility for such listing. The Company hereby agrees, promptly
following the closing of the transactions contemplated by this Agreement, to
take such action as is necessary to cause the Shares issued upon exercise of
conversion rights under the Preferred Stock to be listed on Nasdaq upon such
conversion following the effective date of the registration statement, as
provided in the Registration Rights Agreement (subject, if required, to notice
to Nasdaq of the actual number of shares issued). The Company further agrees,
if the Company applies to have the Common Stock traded on any other principal
stock exchange or market, it will include in such application the Shares and
will take such other action as is necessary or desirable to cause the Shares to
be listed on such other exchange or market upon effective date of the
registration statement.
(g) The Exchange Act Reports are the only filings made by the
Company since December 31, 1995 pursuant to Sections 13(a), 13(c), 14 and 15(d)
of the Exchange Act, and the Company will cause its Common Stock to continue to
be registered under Section 12(g) or 12(b) of the Securities Exchange Act of
1934, will comply in all respects with its reporting and filing obligations
under said Act, and will not take any action or file any document (whether or
not permitted by said Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under the Exchange Act. The Company will take all action necessary to continue
the listing and trading of its Common Stock on Nasdaq and will comply in all
respects with the Company's reporting, filing and other obligations under the
by-laws or rules of the NASD and Nasdaq.
(h) The Company has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company
does not have any subsidiaries. The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary other than those in which the failure so to qualify
would not have a Material Adverse Effect. "Material Adverse Effect" means any
adverse effect on the business, operations, properties, prospects, or financial
condition of the entity with respect to which such term is used and which is
material to such entity.
(i) The Company has furnished or made available to the Buyer
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof, and the Company's By-laws, as in effect on the date
hereof.
(j) The Company has delivered or made available to the Buyer
true and complete copies of the Exchange Act Reports (including, without
limitation, proxy information and solicitation materials excluding any
preliminary proxy not distributed). The Company has not provided to the Buyer
any information which, according to applicable law, rule or regulation, should
have been disclosed publicly by the Company but which has not been so
disclosed. As of their respective dates, the Exchange Act Reports complied in
all material respects with the requirements of the Exchange Act and the rules
and regulations of the SEC promulgated thereunder and other federal, state and
local laws, rules and regulations applicable to such Exchange Act Reports, and
none of the Exchange Act Reports contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Exchange Act Reports comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes
or may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal year-end audit adjustments).
(k) Except as set forth in the financial statements and other
documents filed by the Company under the Exchange Act, the Company has no
liabilities, contingent or otherwise, other than (i) liabilities incurred in
the ordinary course of business subsequent to December 31, 1995 and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in such financial statements, which individually or in the aggregate,
are not material to the financial condition or operating results of the
Company. The Company has not provided to the Buyer any information which,
according to applicable law, rule or regulation, should have been disclosed
publicly by the Company but which has not been so disclosed.
(l) Since December 31, 1995 there has been no material
adverse change and no material adverse development in the business, properties,
operations, financial condition, results of operations or prospects of the
Company, except as disclosed in accordance with the Exchange Act Reports or the
Company Memorandum and except that the Company continues to incur losses.
(m) There is no material action, suit, proceeding, inquiry or
to the knowledge of the Company or any of its subsidiaries, investigation
before or by any court, public board, government agency, self-regulatory
organization or body pending, or to the knowledge of the Company or any of its
subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, except as disclosed in the Exchange Act Reports or the Company
Memorandum.
(n) Neither the Company, nor any or its affiliates, nor any
person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of the Securities under the
Act.
(o) The Company has taken no action which would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments by the Buyer relating to this Agreement of the transactions
contemplated hereby, except for dealings with First Bermuda Securities Limited,
whose commissions and fees will be paid for by the Company.
(p) As of the date hereof, the Company has reserved and the
Company shall continue to reserve and keep available at all times, free of
preemptive rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligation to issue shares of its Common Stock upon
conversion of the Securities; provided, however, that the number of shares so
reserved shall at all times be at least 3,000,000. The number of shares so
reserved may be reduced by the number of shares actually delivered pursuant to
the conversion of the Securities (provided that in no event shall the number of
shares so reserved be less than the number required to satisfy the remaining
conversion rights on the unconverted Securities) and the number of shares so
reserved shall be increased to reflect stock splits and stock dividends and
distributions.
(q) The Preferred Stock and the Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"). Each of
the Securities shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR THE SECURITIES LAWS OF CERTAIN STATES, AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
ACT AND ANY APPLICABLE STATE LAWS, (ii) TO THE EXTENT APPLICABLE, RULE
144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT (OTHER THAN PURSUANT
TO REGULATION S) AND APPLICABLE STATE LAW IS AVAILABLE.
Certain registration rights with respect to the Securities
are set forth in the Registration Rights Agreement. This offering is not a
public offering and is intended to be made pursuant to Section 4(2) and 4(6) of
the Act and Regulation D as promulgated by the Securities and Exchange
Commission ("SEC") under the Act. This offering is also intended to be exempt
from the registration requirements of various state securities laws. A
substantial number of state securities commissions and securities industry
associations have established investor suitability standards for marketing
private offerings of securities within their respective jurisdictions. Some
have also established minimum dollar levels for purchases in their states. The
Company shall comply with these restrictions to the extent applicable.
(r) With a view to making available the benefits of certain
rules and regulations of the SEC that may permit the sale of certain of the
Securities, to the public without registration, the Company shall use its best
efforts to:
(i) make and keep public information regarding the Company
available, as those terms are understood and defined in Rule 144 under the Act,
at all times following the Closing Date (as hereinafter defined);
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the Exchange Act;
(iii) so long as the Buyer owns any Securities, furnish to
the Buyer forthwith upon written request a written statement by the Company as
to its compliance with the reporting requirements of Rule 144, and of the Act
and the Exchange Act, a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed as the Buyer may
reasonably request in availing itself of any rule or regulation of the SEC
allowing the Buyer to sell any such securities without registration.
(iv) make all necessary filings in connection with this
offering as required by the laws and regulations of all appropriate
jurisdictions and securities exchanges in the United States of America.
(s) Each party shall indemnify the other against any loss,
cost or damages (including reasonable attorney's fees and expenses) incurred as
a result of such parties' breach of any representation, warranty, covenant or
agreement in this Agreement.
7. Offering Materials. All offering materials and documents used in connection
with offers and sales of the Securities prior to the registration of the
Securities as provided in the Registration Rights Agreement shall include
statements to the effect that the Securities and the Shares issuable upon the
exercise of conversion rights have not been registered under the Act and that
the Buyer, may not sell the Securities or Shares unless the Securities or
Shares are registered under the Act, or to the extent applicable under Rule
144, or an exemption from the registration requirements of the Act is
available. Such statements shall appear (1) on the cover of any prospectus or
offering circular used in connection with the offer or sale of the Securities
and (2) in the underwriting section of any prospectus or offering circular used
in connection with the offer or sale of the Securities. The Company represents
that all offering materials and documents used in connection with the offers
and sales of the Securities prior to the Closing of the transactions
contemplated herein have complied with the foregoing.
8. Covenants of the Company. (a) The Company agrees that during the period
beginning on the date hereof and ending 90 days following the Closing Date, the
Company will not, without the prior written consent of a "majority-in-interest"
of the Buyers, negotiate or contract with any party to obtain additional equity
financing (including debt financing with an equity component) in any form
pursuant to an exemption from the Act under Regulation D or Regulation S of the
Act (the "Future Offerings"). In addition, the Company will not conduct any
Future Offerings during the period beginning on the 90th day following the date
hereof and ending 180 days following the Closing Date unless it shall have
first delivered to the Buyer at least ten (10) business days prior to the
closing of such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof, and providing the Buyer
an option during such ten (10) day period to purchase all or any portion of its
"pro-rata" share of the securities being offered in the Future Offerings on the
same terms as contemplated by such Future Offering (the limitations referred to
in this and the immediately preceding sentence are collectively referred to as
the "Capital Raising Limitation"). The Capital Raising Limitation shall not
apply to any transaction involving the Company's commercial banking
arrangements or issuances of securities (other than for cash consideration) in
connection with a merger, consolidation or sale of assets, or in connection
with any strategic partnership or joint venture (the primary purpose of which
is not to raise equity capital), or in connection with the disposition or
acquisition of a business, product or license by the Company (so long as the
securities so issued are "restricted securities" within the meaning of Rule 144
under the 1933 Act and do not carry registration or piggyback rights for at
least 360 days from the date of this Agreement), the issuance of securities to
settle securities litigation, or exercise of options by or the grant of
performance shares to employees, consultants or directors. The terms (i)
"majority-in-interest" means holders of Preferred Stock holding more than 50%
of the Common Stock underlying the Securities (treating the Securities on an as
converted basis) and (ii) "pro-rata share" means the number of the Securities
initially purchased divided by the aggregate number of all Securities sold
hereunder.
(b) The parties shall use their best efforts timely to satisfy each of
the conditions described in Section 9 of this Agreement.
(c) So long as the Buyer beneficially owns any of the Securities, the
Company shall timely file all reports required to be filed with the SEC
pursuant to the Exchange Act, and the Company shall satisfy the conditions
described in Section 6(r).
(d) The Company agrees to send the following reports to Buyer until
Buyer transfers, assigns, or sells all of the Securities: (i) within ten (10)
days after the filing with the SEC, a copy of its Annual Report on Form 10-KSB,
its Quarterly Reports on Form 10-QSB and any Current Reports on Form 8-K; and
(ii) within two (2) business days after release, copies of all press releases
issued by the Company or any of its subsidiaries.
(e) The Company shall at all times have authorized, and reserved for
the purpose of issuance, a sufficient number of shares of Common Stock to
provide for the full conversion of the outstanding Securities and issuance of
the Shares in connection therewith (based on the Conversion Price of the
Securities in effect from time to time). In that regard, on the Closing Date,
the Company shall have at least 3,000,000 shares reserved for issuance upon
conversion of the Securities (subject to adjustment in order to comply with the
immediately preceding sentence); provided that the Company shall not reduce the
number of shares of Common Stock reserved for issuance upon conversion of the
Securities without the consent of a majority-in-interest of the Buyers, which
consent will not be unreasonably withheld.
(f) So long as the Buyer beneficially owns any Securities, the Company
shall maintain its corporate existence, except in the event of a merger,
consolidation or sale of all or substantially all of the Company's assets, as
long as the surviving or successor entity in such transaction (i) assumes the
Company's obligations hereunder and under the agreements and instruments
entered into in connection herewith and (ii) is a publicly traded corporation
whose Common Stock is listed for trading on the AMEX, the NYSE or the Nasdaq.
The Company and the Buyer agree that the Closing Date, when certified
by Escrow Agent as the Closing shall be deemed to be a conclusion of the
offering of the Securities contemplated hereby.
(h) The Shares and the certificates evidencing the same shall at all
times be free of legends (except as provided in Section 10 below), "stock
transfer restrictions," or other restrictions, except for covenants of the
Buyer expressly set forth in this Agreement.
9. Conditions Precedent to the Buyer's Obligation. The obligations of the Buyer
hereunder are subject to the performance by the Company of its obligations
hereunder and to the satisfaction of the following additional conditions
precedent:
(a) The Buyer shall receive, on the Closing Date, an opinion
of independent counsel to the Company, dated the Closing Date, as to the
representations made by the Company in Sections 6(a) through and including 6(f)
hereof, and in Sections 6(m) and 6(n) hereof, and such other matters as Buyer
reasonably requests. The form of such opinion shall be as set forth in Exhibit
1 hereof.
(b) Delivery of the certificates representing the Preferred
Stock with restrictive legends to the Escrow Agent as set forth herein.
(c) The Company shall have delivered to the Buyer a
certificate in form and substance reasonably satisfactory to the Buyer,
executed by an executive officer of the Company, to the effect that all the
conditions to the Closing shall have been satisfied and the representations and
warranties of the Company herein are true and correct as of the date when made
and as of the Closing Date, and certifying as to the Company's Certificate of
Incorporation, By-laws, resolutions authorizing transaction, and incumbency of
Company officers.
(d) The Company and the Buyer shall have entered into the
Registration Rights Agreement contemplated by Section 4.
10. Legends (a) The certificates representing the Securities and the Shares
issued prior to the effective date of the registration statement or
availability of an exemption from registration, shall bear the legend set forth
in Section 6(q) herein (the "Legend").
(b) Following the effective date of the registration
statement or availability of an exemption from registration requirements under
Rule 144 of the Act, the Company will remove or will promptly instruct its
transfer agent (the "Transfer Agent") to remove the Legend from the Securities
and, if applicable, from the Shares issued prior to the effective date of the
registration statement (and will instruct the Transfer Agent to issue without
the Legend, the Shares issuable upon any conversion).
(c) Upon the submission, at any time after the effective date
of the registration statement or applicability of an exemption from the
registration requirements, under Rule 144 of the Act by the Buyer of a written
request for legend removal for the purpose of a bona fide pledge or deposit of
the Securities with a margin account, together with the certificates for which
the legend removal is being requested, the Company will reissue or will
promptly instruct the Transfer Agent to reissue the certificates representing
the Securities to be so pledged or deposited without the Legend.
11. Transfer Agent Instructions The Transfer Agent will be instructed to
reserve for issuance such number of shares of the Company's Common Stock as
would be issuable if the Preferred Stock were converted on the Closing Date and
such additional number of shares as, from time to time, shall be necessary to
provide for the issuance of Shares upon the conversion of the Preferred Stock.
Additionally, the Company shall deliver to the Transfer Agent at closing
irrevocable instructions substantially in the form set forth in Exhibit "D"
attached hereto, pursuant to which the Transfer Agent shall be instructed to
issue upon conversion the number of shares provided for in the Preferred Stock
being converted on the terms provided for therein without restrictive legend,
registered in the names provided by the Holders. The Company warrants and
covenants that no instructions restricting the transferability of the
Securities and the Shares other than the instructions in the immediately
preceding sentence and instructions for a "stop transfer" instruction until the
effective date of the registration statement have been given, or shall be
given, to the Transfer Agent, and that the Securities and the Shares shall
otherwise be freely transferable on the books and records of the Company.
Nothing in this section, however, shall affect in any way the obligations and
agreement of the Buyer to comply with all applicable federal, state and foreign
securities laws upon resale of the Securities.
12. Miscellaneous. (a) This Agreement may be executed in one or more
counterparts and it is not necessary that signatures of all parties appear on
the same counterpart, but such counterparts together shall constitute but one
and the same agreement.
(b) This Agreement shall be governed by and constructed in
accordance with the laws of the State of Delaware.
(c) This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their respective successors, and no other
person shall have any right or obligation hereunder. This Agreement shall not
be assignable by either party without the prior written consent of the other,
and any assignment in violation hereof shall be void. Notwithstanding the
foregoing, the Buyer may assign its rights in this Agreement to, and the
provisions of this Agreement shall inure to the benefit of, and be enforceable
by, any transferee of any of the Securities or Shares.
(d) This Agreement together with the Certificate of
Designation and the Registration Rights Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and
supersede all prior oral or written proposals or agreements related thereto.
This Agreement may not be amended or any provision hereof waived, in whole or
in part, except by a written amendment signed by both of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement, all as of the day and year above written.
BY: VIDEOLAN TECHNOLOGIES, INC.
- ----------------------------------
Name: Jack Shirman
Title: Chief Executive Officer
or
Name: Steven B. Rothenberg
Title: Vice President Finance, Treasurer and Secretary
BY: (The Buyer)
- ----------------------------------
Name:
Title:
CERTIFICATE OF DESIGNATION, NUMBER, POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL, AND OTHER SPECIAL RIGHTS AND THE
QUALIFICATIONS, LIMITATIONS, RESTRICTIONS,
AND OTHER DISTINGUISHING CHARACTERISTICS OF
PREFERRED STOCK
OF
VIDEOLAN TECHNOLOGIES, INC.
Jack Shirman and Steven B. Rothenberg hereby certify that:
I. They are the Chief Executive Officer and Secretary, respectively,
of VideoLan Technologies, Inc., a Delaware corporation (the "Corporation").
II. The certificate of incorporation of the Corporation authorizes the
issuance of 5,000,000 shares of Preferred Stock, $.01 par value per share, and
expressly vests in the Board of Directors of the Corporation the authority
provided herein to issue any or all of said shares in one or more series and by
resolution or resolutions to establish the designation, number, full or limited
voting powers, or the denial of voting powers, preferences and relative,
participating, optional, and other special rights and the qualifications,
limitations, restrictions, and other distinguishing characteristics of each
series to be issued.
III. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, has adopted the following
resolutions creating an issue of Preferred Stock:
RESOLVED, that Seven Thousand Five Hundred (7,500) of the Five Million
(5,000,000) authorized shares of Preferred Stock of the Corporation shall be
designated "Series 1996A Convertible Preferred Stock" (the "Preferred Stock")
and shall possess the rights and privileges set forth below:
A. Par Value. Each share of Preferred Stock shall have a par
value of $.01.
B. Dividend Rights. Holders of Preferred Stock shall be
entitled to receive cumulative dividends at the annual rate of sixty dollars
($60.00) per share, when and as declared by the Board of Directors.
C. Liquidation Preference.
1. In the event of any liquidation, dissolution or
winding-up of the Corporation, either voluntary or involuntary (a
"Liquidation"), the holders of shares of the Preferred Stock then issued and
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its shareholders, whether from capital, surplus
or earnings, before any payment shall be made to the holders of shares of the
Common Stock or upon any other series of Preferred Stock of the Corporation
with a liquidation preference subordinate to the liquidation preference of the
Preferred Stock, an amount per share equal to the sum of (i) One Thousand
Dollars ($1,000) (the "Original Issue Price") for each outstanding share of
Preferred Stock, and (ii) an amount equal to six percent (6%) of the Original
Issue Price for each outstanding share of Preferred Stock multiplied by the
fraction N/365, where N equals the number of days elapsed since full payment
for the shares of Preferred Stock was deposited with the escrow agent. If, upon
any Liquidation of the Corporation, the assets of the Corporation available for
distribution to its shareholders shall be insufficient to pay the holders of
shares of the Preferred Stock and the holders of any other series of Preferred
Stock with a liquidation preference equal to the liquidation preference of the
Preferred Stock the full amounts to which they shall respectively be entitled,
the holders of shares of the Preferred Stock and the holders of any other
series of Preferred Stock with liquidation preference equal to the liquidation
preference of the Preferred Stock shall receive all of the assets of the
Corporation available for distribution and each such holder of shares of the
Preferred Stock and the holders of any other series of Preferred Stock with a
liquidation preference equal to the liquidation preference of the Preferred
Stock shall share ratably in any distribution in accordance with the amounts
due such shareholders. After payment shall have been made to the holders of
shares of the Preferred Stock of the full amount to which they shall be
entitled, as aforesaid, the holders of shares of the Preferred Stock shall be
entitled to no further distributions thereon and the holders of shares of the
Common Stock and of shares of any other series of stock of the Corporation
shall be entitled to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available for
distribution to its shareholders.
2. A merger or consolidation of the Corporation with
or into any other corporation, or a sale, lease, exchange, or transfer of all
or any part of the assets of the Corporation which shall not in fact result in
the liquidation (in whole or in part) of the Corporation and the distribution
of its assets to its shareholders shall not be deemed to be a voluntary or
involuntary liquidation (in whole or in part), dissolution, or winding-up of
the Corporation.
D. Conversion of Preferred Stock.
The holders of Preferred Stock shall have the
following conversion rights:
1. Right to Convert. Subject to paragraph 7 of this
Section D, each share of Preferred Stock shall be convertible, on the
Conversion Dates and at the Conversion Prices set forth below, into fully paid
and nonassessable shares of Common Stock (sometimes referred to herein as
"Conversion Shares").
2. Mechanics of Conversion. Each holder of Preferred
Stock who desires to convert the same into shares of Common Stock shall provide
notice ("Conversion Notice") via telecopy (facsimile) to the Corporation. The
original Conversion Notice and the certificate or certificates representing the
Preferred Stock for which conversion is elected, shall be delivered to the
Corporation by international courier, duly endorsed. The date upon which a
Conversion Notice is received by the Corporation shall be a "Notice Date."
Upon receipt by the Corporation of a facsimile copy of a Conversion Notice,
the Corporation shall immediately send to the holder, via telecopy (facsimile),
a confirmation of receipt of the Conversion Notice which shall specify that the
Conversion Notice has been received and the name and telephone number of a
contact person at the Corporation whom the holder should contact regarding
information related to the conversion. The Corporation shall use all reasonable
efforts to issue and deliver within three (3) business days after the Notice
Date, to such holder of Preferred Stock at the address of the holder on the
stock books of the Corporation, a certificate or certificates for the number of
shares of Common Stock to which the holder shall be entitled as aforesaid;
provided that the original shares of Preferred Stock to be converted are
received by the transfer agent or the Corporation within three (3) business
days after the Notice Date and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date. If the original certificate(s) representing the shares of Preferred Stock
to be converted are not received by the transfer agent or the Corporation
within five business days after the Notice Date, the Conversion Notice shall
become null and void.
3. Lost or Stolen Certificates. Upon receipt by the
Corporation of evidence of the loss, destruction, theft or mutilation of any
Preferred Stock certificates (the "Certificates") and (in the case of loss,
theft or destruction) of indemnity or security reasonably satisfactory to the
Corporation, and upon surrender and cancellation of the Certificates, if
mutilated, the Corporation shall execute and deliver new Preferred Stock
Certificates of like tenor and date. However, the Corporation shall not be
obligated to re-issue such lost or stolen Preferred Stock Certificates if the
holder thereof contemporaneously requests the Corporation to convert such
Preferred Stock into Common Stock, in which event the Corporation shall be
entitled to rely on an affidavit of loss, destruction or theft of the Preferred
Stock Certificate or, in the case of mutilation, tender of the mutilated
certificate, and shall issue the Conversion Shares.
4. Conversion Period. The Preferred Stock shall
become convertible into shares of Common Stock at any time commencing the
earlier of (i) the effective date of a registration statement covering the
Conversion Shares; or (ii) January 15, 1997.
5. Conversion Formula/Conversion Price. Each share
of Preferred Stock shall be convertible into the number of shares of Common
Stock determined by dividing the Original Issue Price by the Conversion Price
(the "Conversion Formula"). For purposes hereof, the term "Conversion Price"
shall mean the lesser of (x) 115% of the average Closing Bid Price (as that
term is defined below) for the five (5) trading days immediately preceding
October 17, 1996 (the "Closing Date"), or (y) the average Closing Bid Price for
the five (5) trading days immediately preceding the Notice Date multiplied by
the Applicable Percentage as of the Notice Date.
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price of the Common Stock on the Nasdaq SmallCap Stock Market, or
if no longer traded on the Nasdaq SmallCap Stock Market, the closing bid price
on the Over-The Counter Market or the closing bid price on the principal
national securities exchange on which the Common Stock is so traded, all as
reported in the Wall Street Journal.
For purposes hereof, the term "Applicable Percentage" shall mean:
Period Applicable Percentage
On or before March 1, 1997 85.0%
March 2, 1997 through April 16, 1997 82.5%
On or after April 17, 1997 80.0%
6. Conversion by the Corporation. On or after the
earlier of June 30, 1997 at the election of the Corporation, any outstanding
share of Preferred Stock may be converted into Common Stock on such date in
accordance with the Conversion Formula and the Conversion Price then in effect.
If the Corporation desires to convert any shares of Preferred Stock it shall
provide notice via telecopy (facsimile) to the holder of such shares. Such
notice shall be delivered to the holder of such shares by international
courier, duly endorsed. The date upon which a Conversion Notice is received by
the Holder shall be deemed the "Notice Date" for purposes of determining the
Conversion Price.
7. Redemption Option. If the Corporation receives a
Conversion Notice with respect to any shares of Preferred Stock for which the
Conversion Price would be less than the average Closing Bid Price for the five
(5) trading days immediately preceding the Closing Date, at the election of the
Corporation, each such share may be redeemed by the Company rather than
converted. The redemption price (the "Redemption Price") for shares to be
redeemed shall be the Original Issue Price divided by the Applicable Percentage
as of the Notice Date. The Redemption Price shall be paid to the holder of the
redeemed shares of Preferred Stock within five (5) business days of the Notice
Date.
8. No Fractional Shares. If any conversion of the
Preferred Stock would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
if the aggregate, shall be the next higher number of shares.
9. Reservation of Stock Issuable Upon Conversion.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Preferred Stock, such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock; and if
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, the Corporation will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
10. Adjustment to Conversion Price.
(a) If, prior to the conversion of all shares of
Preferred Stock, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, or other similar event, the Conversion Price
shall be proportionately reduced, or if the number of outstanding shares of
Common Stock is decreased by a combination or reclassification of shares, or
other similar event, the Conversion Price shall be proportionately increased.
(b) If, prior to the conversion of all shares of
Preferred Stock, there shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a result of which
shares of Common Stock of the Corporation shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities of the Corporation or another entity, then the holders of Preferred
Stock shall thereafter have the right to purchase and receive upon conversion
of shares of Preferred Stock, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore issuable upon conversion, such shares of stock and/or securities as
may be issued or payable with respect to or in exchange for the number of
shares of Common Stock immediately theretofore purchasable and receivable upon
the conversion of shares of Preferred Stock held by such holders had such
merger, consolidation, exchange of shares, recapitalization or reorganization
not taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of the holders of the Preferred Stock to
the end that the provisions hereof (including, without limitation, provisions
for adjustment of the Conversion Price and of the number of shares issuable
upon conversion of the Preferred Stock) shall thereafter be applicable, as
nearly as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the exercise hereof. The Corporation shall not
effect any transaction described in this subsection unless the resulting
successor or acquiring entity (if not the Corporation) assumes by written
instrument the obligation to deliver to the holders of the Preferred Stock such
shares of stock and/or securities as, in accordance with the foregoing
provisions, the holders of the Preferred Stock may be entitled to purchase.
(c) If any adjustment under this subsection would
create a fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded the number of
shares of Common Stock issuable upon conversion shall be the next higher number
of shares.
E. Voting. Except as otherwise provided below or by the
General Corporation Law of the State of Delaware, the holders of the Preferred
Stock (the "Holders") shall have no voting power whatsoever, and no holder of
Preferred Stock shall vote or otherwise participate in any proceeding in which
actions shall be taken by the Corporation or the shareholders thereof or be
entitled to notification as to any meeting of the Board of Directors or the
shareholders.
To the extent that under Delaware law and vote of the Holders, voting
separately as a class, is required to authorize a given action of the
Corporation, the affirmative vote or consent of the Holders of at least a
majority of the shares of the Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of a majority of the
shares of Preferred Stock (except as otherwise may be required under Delaware
law) shall constitute the approval of such action by the class. To the extent
that under Delaware law the Holders are entitled to vote on a matter with
holders of Common Stock, voting together as one (1) class, each share of
Preferred Stock shall be entitled to a number of votes equal to the number of
shares of Common Stock into which it is then convertible using the record date
for the taking of such vote of stockholders as the date as of which the
Conversion Price is calculated. The Holders also shall be entitled to notice of
all shareholder meetings or written consents with respect to which they would
be entitled to vote, which notice would be provided pursuant to the
Corporation's by-laws and applicable statues.
F. Status of Converted Stock. In the event any shares of
Preferred Stock shall be converted or redeemed as contemplated by this
Designation, the shares so converted or redeemed shall be canceled, shall
return to the status of authorized but unissued Preferred Stock of no
designated class or series, and shall not be issuable by the Corporation as
Preferred Stock.
G. Taxes. All shares of Common Stock issued upon conversion
of Preferred Stock will be validly issued, fully paid and nonassessable. The
Corporation shall pay any and all documentary stamp or similar issue or
transfer taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such transfer has paid to the Corporation the
amount of any such tax or has established to the satisfaction of the
Corporation that such tax has been paid or that no such tax is payable. The
Corporation shall adjust the amount of dividends paid or accrued so as to
indemnity the holders of Preferred Stock against any withholding or similar tax
in respect of such dividends.
FURTHER RESOLVED, that the statements contained in the foregoing
resolutions creating and designating the said Preferred Stock and fixing the
number, powers, preferences and relative, optional, participating, and other
special rights and the qualifications, limitations, restrictions, and other
distinguishing characteristics thereof shall, upon the effective date of said
series, be deemed to be included in and be a part of the Certificate of
Incorporation of the Corporation pursuant to the provisions of the General
Corporation Law of the State of Delaware.
IV. This Certificate of Designation of the Corporation has been duly
approved by the Board of Directors.
V. The total number of outstanding shares of Common Stock of the
Corporation is 14,026,398. There are no outstanding shares of Preferred Stock
of the Corporation. There are no other shares of any other class of stock
outstanding. No vote of any class of stock of the Corporation is required for
the adoption and approval of this Certificate of Designations.
We further declare under penalty of perjury under the laws of the
State of Delaware that the matters set forth in this Certificate are true and
correct of our own knowledge.
Date: October 16, 1996 /s/ JACK SHIRMAN
Jack Shirman, Chief Executive Officer
/s/ STEVEN B. ROTHERNBERG
Steven B. Rothenberg, Secretary
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,658
<SECURITIES> 705,442
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<INVENTORY> 1,352,877
<CURRENT-ASSETS> 2,820,753
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0
0
<COMMON> 140,184
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<TOTAL-LIABILITY-AND-EQUITY> 3,815,950
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