SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14A-
6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-12
Xceed Inc.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: Not
Applicable
2) Aggregate number of securities to which transaction applies: Not
Applicable
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): Not
Applicable
4) Proposed maximum aggregate value of transaction: Not Applicable
5) Total fee paid: Not Applicable
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ___________________________________
2) Form, Schedule or Registration Statement No.: _____________
3) Filing Party: _____________________________________________
4) Date Filed: _______________________________________________
XCEED INC.
233 Broadway
New York, New York 10279
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 5, 2000
To the Stockholders of Xceed Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Xceed Inc., a Delaware corporation (the "Company") will be held at
the Loews New York Hotel, 569 Lexington Avenue (at 51st Street), New York, New
York 10022, on October 5, 2000, at 11:00 a.m. to consider and take action on
the following matters:
1. To approve an amendment to the Company's Certificate of Incorporation
to change the Company's name to Worldwide Xceed Group, Inc.;
2. To approve and ratify the Xceed Inc. Amended and Restated Millennium
Stock Option Plan;
3. To approve and ratify the issuance of shares of Series A Cumulative
Convertible Preferred Stock (the "Preferred Stock"), warrants to purchase
shares of the Company's common stock (the "Warrants") and shares of the
Company's common stock issuable upon conversion of the Preferred Stock and
exercise of the Warrants; and
4. To transact such other business as may properly come before the
meeting.
Holders of record of the Company's common stock at the close of business on
August 9, 2000, are entitled to notice of and to vote at the Special Meeting or
any adjournments thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE PROVIDED. ANY PERSON GIVING A
PROXY HAS THE POWER TO REVOKE IT AT ANY TIME PRIOR TO ITS EXERCISE AND IF
PRESENT AT THE MEETING MAY WITHDRAW IT AND VOTE IN PERSON.
By Order of the Board of Directors,
/s/ Werner G. Haase
Werner G. Haase, Co-Chairman
New York, New York
September 8, 2000
XCEED INC.
233 Broadway
New York, New York 10279
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 5, 2000
PROXY STATEMENT
This Proxy Statement is being furnished in connection with the solicitation
by the Board of Directors of Xceed Inc. (the "Company") of proxies to be voted
at the Special Meeting of Stockholders of the Company to be held at the Loews
New York Hotel, 569 Lexington Avenue (at 51st Street), New York, New York 10022
at 11:00 a.m. on October 5, 2000 or at any adjournments thereof.
The shares represented by proxies that are properly filled out and received
in the enclosed form will be voted in accordance with the specifications made
thereon. In the absence of specific instructions, proxies will be voted in
accordance with the recommendations made herein with respect to the proposals
described in this Proxy Statement. A proxy may be revoked by a stockholder at
any time before it is exercised by filing an instrument revoking it with our
Corporate Secretary, by filing a duly executed proxy bearing a later date or by
attending the meeting and electing to vote in person. This Proxy Statement and
accompanying proxy card will be mailed to stockholders on or about September 8,
2000.
Holders of record of the Company's common stock, par value $.01 per share
(the "Common Stock"), at the close of business on August 9, 2000, are entitled
to notice of and to vote at the Special Meeting or any adjournments thereof. At
the close of business on August 9, 2000, there were 24,063,304 shares of Common
Stock outstanding and entitled to vote at the meeting. There were 870 record
holders as of August 9, 2000. Each share of Common Stock is entitled to one
vote.
SECURITIES OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following sets forth information regarding beneficial ownership of our
Common Stock as of August 9, 2000 by:
. each person known to us who beneficially owns more than 5% of the
outstanding shares of our Common Stock;
. each of our directors and named executive officers; and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each person below is c/o Xceed
Inc., 233 Broadway, New York, New York 10279.
Percentage of
Number of Shares Common Stock
Name and Address of Beneficial Owner Beneficially Owned Outstanding
- ------------------------------------ ------------------ -------------
Werner G. Haase(1)(2)........................ 2,410,150 10.0%
Nurit Kahane Haase(2)........................ 2,410,150 10.0%
Scott A. Mednick(3).......................... 1,300,000 5.4%
Howard A. Tullman(4)......................... 2,200 *
William N. Zabit............................. 1,187,077 4.9%
Norman Docteroff(5).......................... 125,000 *
81 Two Bridges Road
Fairfield, NJ 07004
John A. Bermingham(6)........................ 100,000 *
9 Raintree Court
Kinnelon, NJ 07405
Theodore Deikel(7)........................... 1,318,359 5.5%
2424 West Lake of the Isles
Minneapolis, MN 55405
Terry A. Anderson(8)......................... 5,000 *
19197 River Road
Athens, OH 45701
Edward A. Bennett(9)......................... 262,411 1.1%
725 Washington Street
New York, NY 10014
Raymond Marcy................................ -- --
2050 Spectrum Boulevard
Fort Lauderdale, FL 33309
Directors and Executive Officers as a Group
(15 persons)................................ 6,856,877 28.5%
- --------
(1) Consists of 589,450 shares of Common Stock and 743,750 options, all of
which have vested and are exercisable at various prices ranging from $1.52
per share to $4.40 per share. See "Executive Compensation--Aggregate
Option/SAR Exercises in Last Fiscal Year; Fiscal Year End Option/SAR
Values."
(2) Werner Haase owns 1,333,200 shares of Common Stock, which represents 5.5%
of the Common Stock outstanding. Nurit Kahane Haase owns 1,076,950 shares
of Common Stock, which represents 4.5% of the Common Stock outstanding. Mr.
Haase disclaims any beneficial interest in the shares held by his wife
Nurit Kahane Haase. Mrs. Haase disclaims any beneficial interest in the
shares held by her husband Werner Haase.
(3) Represents 1,000,000 shares of Common Stock issuable upon the exercise of
options at an exercise price of $6.00 per share and 300,000 shares of
Common Stock issuable upon the exercise of options at an exercise price of
$17.38 per share. All of these options are currently exercisable. See
"Employment Agreements" and "Executive Compensation--Aggregate Option/SAR
Exercises in Last Fiscal Year; Fiscal Year End Option/SAR Values."
(4) Excludes 1,000,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Tullman in connection with the execution of his employment
agreement. The options are exercisable in equal annual increments at a
price of $7.75 per share commencing in August 2001. The exercise price of
$7.75 was the closing sale price of the Common Stock as quoted on the
Nasdaq National Market System on the date of grant. See "Employment
Agreements."
2
(5) Excludes 50,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Docteroff for his service as a member of the Board of
Directors during fiscal 2000. These options will vest and become
exercisable at a price of $12.125 per share in 2001. The exercise price was
the closing sale price of the Common Stock as quoted on the Nasdaq National
Market System on the date of grant.
(6) Represents 50,000 shares of Common Stock issuable upon the exercise of
options at an exercise price of $3.44 per share and 50,000 shares of Common
Stock issuable upon the exercise of options at an exercise price of $11.50
per share, which Mr. Bermingham has received as compensation for serving as
a member of the Board of Directors. Excludes 50,000 shares of Common Stock
issuable upon exercise of options granted to Mr. Bermingham for his service
as a member of the Board of Directors during fiscal 2000. These options
will vest and become exercisable at a price of $12.125 per share in 2001.
The exercise prices were the closing sale prices of the Common Stock as
quoted on the Nasdaq National Market System on the dates of the grants.
(7) Mr. Deikel purchased his shares pursuant to a private placement offering by
the Company in May 1999. The above figure includes 439,453 shares of Common
Stock and warrants which are exercisable to purchase 878,906 shares of
Common Stock at an exercise price of $19.01 per share.
(8) Represents shares issuable upon the exercise of options at an exercise
price of $6.06 per share, which Mr. Anderson has received as compensation
for serving as a member of the Board of Directors. The exercise price was
the market price of the Common Stock as quoted on the Nasdaq National
Market System on the date of the grant.
(9) Excludes 300,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Bennett in connection with his agreement to serve as a
member of the Board of Directors. These options will vest and become
exercisable at a price of $9.25 per share beginning in 2001 in three equal
annual increments at the end of each year of Mr. Bennett's service on the
Board of Directors.
* Represents less than one percent (1%) ownership.
Board Committees
Audit Committee. The Audit Committee reviews the preparations for and the
scope of the audit of our annual financial statements, reviews drafts of such
statements, makes recommendations as to the engagement and fees of our
independent auditors and monitors the functioning of our accounting and
internal control systems by meeting with representatives of management and the
independent auditors. The Audit Committee has direct access to our independent
auditors and legal counsel and performs such other duties relating to the
maintenance of the proper books of account and records and other matters as the
Board of Directors may assign from time to time. Norman Docteroff, John
Bermingham and Terry Anderson comprise the Audit Committee.
Compensation Committee. The Compensation Committee supervises and makes
recommendations with respect to our employees' compensation levels. The
Compensation Committee approves the terms of employment of all of our officers
and administers the Company's option plans, including establishing the terms
and amounts of option grants. Norman Docteroff and John Bermingham comprise the
Compensation Committee.
All directors attended at least 75% of the Board meetings and assigned
committee meetings during the fiscal year ended August 31, 1999. The Board of
Directors held six meetings during the year, the Audit Committee held one
meeting and the Compensation Committee held three meetings.
Compensation of Directors
Other than as discussed in the paragraph below, directors who are our
employees receive no additional compensation for their services as directors.
Directors who are not our employees do not receive a fee for attendance in
person at meetings of the Board of Directors or committees of the Board of
Directors, but are reimbursed for travel expenses and other out-of-pocket costs
incurred in connection with their attendance at the meetings.
3
Terry Anderson received a fee of $40,000 during fiscal 1999 for rendering
consulting services to us. When Mr. Anderson agreed to join the Board of
Directors, he received a grant of 5,000 options with an exercise price of
$6.06 per share, which was the market price of the Common Stock as quoted by
the Nasdaq National Market System on the date of the grant. During fiscal
1999, Mr. Docteroff and Mr. Bermingham were each granted options to purchase
50,000 shares of Common Stock. The options became exercisable in February 2000
and have an exercise price of $11.50 per share. During fiscal 2000, Mr.
Docteroff and Mr. Bermingham were also granted options to purchase 50,000
shares of Common Stock, which will become exercisable at $12.125 per share in
2001. The exercise prices were the closing sale prices of the Common Stock as
quoted on the Nasdaq National Market System on the dates of the grants.
Indemnification
The Delaware General Corporation Law provides that a company may indemnify
its directors and officers as to certain liabilities. Our Certificate of
Incorporation provides for the indemnification of our directors and officers
to the fullest extent permitted by law. The effect of such provision is to
indemnify our directors and officers against all costs, expenses and
liabilities they may incur in connection with any action, suit or proceeding
in which they are involved because of their affiliation with us. We maintain
directors and officers liability insurance to effectuate these provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationships currently exist between our officers and
members of the Compensation Committee. Mr. Haase was a member of the
Compensation Committee until he stepped down in March 1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Exchange Act") requires that our directors and executive officers and
beneficial owners of more than 10% of our Common Stock file reports of
holdings and transactions in our Common Stock with the Securities and Exchange
Commission and the Nasdaq National Market. Each of William Zabit, John
Bermingham, Norman Docteroff and Terry Anderson failed to file a Form 5 on a
timely basis with respect to transactions in fiscal 1999. The total number of
late reports was three for Mr. Zabit, one for Mr. Bermingham, one for Mr.
Docteroff and one for Mr. Anderson. Wolf Boehme (a former officer) failed to
file a Form 3 on a timely basis upon becoming a director or executive officer
of the Company. Theodore Deikel, who was a 10% holder of our Common Stock,
failed to file a Form 3 on a timely basis and untimely reported one sale
transaction on Form 4. During fiscal 1999, Mr. Zabit untimely reported three
purchase transactions on Form 4. The Company has instituted a compliance
program to assist its directors and executive officers with Section 16
filings.
EXECUTIVE OFFICERS
The following table sets forth the name, position and age of our executive
officers as of August 9, 2000:
Name Age Position with the Company
- ---- --- -------------------------
Scott A. Mednick............... 44 Co-Chairman
Werner G. Haase................ 62 President and Co-Chairman
Howard A. Tullman.............. 55 Chief Executive Officer and Director
John P. Gandolfo............... 39 Senior Vice President and Chief Financial
Officer
Gary S. Kahl................... 37 Executive Vice President of National
Practices
Kevin D. Labick................ 30 Executive Vice President, National Business
Operations
Adeo Ressi di Cervia........... 28 Executive Vice President, Corporate
Strategies
Paul P. Schmidman.............. 47 Chief Corporate Architect and Executive Vice
President, Business Development
4
FAMILY RELATIONSHIPS
Werner Haase, the Co-Chairman and President and former Chief Executive
Officer, and Nurit Kahane Haase, the Company's former Senior Vice President and
Secretary, are married. Mr. Haase stepped down as Chief Executive Officer of
the Company on August 4, 2000, but continues to serve as the Co-Chairman and
President. See "Employment Agreements." Mrs. Haase resigned her positions as
Senior Vice President and Secretary on July 31, 2000. See "Certain
Transactions." There are no other family relationships among directors or
executive officers.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes the compensation paid to or earned by the
Chief Executive Officer and each of the four other most highly compensated
executive officers of the Company (the "Named Executive Officers") during the
last three fiscal years.
Long-Term Compensation Awards
------------------------------
Annual Compensation
--------------------------------
Payouts Securities
------------------- Restricted Underlying
Name and Principal Fiscal Other Annual Stock Options/ LTIP All Other
Position Year Salary Bonus Compensation Awarded SARs(#) Pay-outs Compensation
- ------------------ ------ -------- ---------- ------------ ---------- ---------- -------- ------------
Scott A. Mednick........ 1999 $350,000 $1,080,000 $0 $0 300,000 $0 $ 0
Co-Chairman 1998 $ 43,750 $ 80,000 $0 $0 1,000,000 $0 $ 0
1997 $ 0 $ 0 $0 $0 0 $0 $ 0
Werner G. Haase......... 1999 $500,000 $ 150,000 $0 $0 0 $0 $84,299(2)
President, Co-Chairman 1998 $500,000 $ 300,000 $0 $0 500,000 $0 $80,859(2)
and former Chief 1997 $500,000 $ 300,000 $0 $0 0 $0 $82,152(2)
Executive Officer(1)
Nurit Kahane Haase...... 1999 $250,000 $ 0 $ 0 $ 0 0 $ 0 $ 0
Former Senior Vice 1998 $250,000 $ 0 $ 0 $ 0 0 $ 0 $ 0
President and 1997 $250,000 $ 0 $ 0 $ 0 0 $ 0 $ 0
Secretary(3)
William N. Zabit(4)..... 1999 $400,000 $ 0 $0 $0 0 $ 0 $ 7,066(2)
Former President 1998 $ 0 $ 0 $0 $0 0 $ 0 $ 0
1997 $ 0 $ 0 $0 $0 0 $ 0 $ 0
Wolf Boehme(5).......... 1999 $212,347 $ 125,000 $0 $0 250,000 $0 $ 0
Former Chief Operating 1998 $ 28,558 $ 0 $0 $0 0 $0 $ 0
Officer 1997 $ 0 $ 0 $0 $0 0 $0 $ 0
- --------
(1) Mr. Haase stepped down as Chief Executive Officer of the Company in August
2000.
(2) Includes premiums for life insurance policies paid by us on behalf of the
noted persons.
(3) Mrs. Haase resigned her positions as Senior Vice President and Secretary in
July 2000.
(4) Mr. Zabit resigned as President in March 2000.
(5) Mr. Boehme resigned his position as Chief Operating Officer in December
1999.
The aggregate amount of personal benefits cannot be specifically or
precisely ascertained and do not, in any event, exceed $50,000 or 10% of
compensation as to any person. We offer health insurance to all of our
employees. At the present time we do not have any retirement, pension, profit
sharing, or other similar programs or benefits for our executive officers.
5
Option/SAR Grants in Last Fiscal Year
The table below sets forth information regarding stock options granted
during fiscal 1999 to each of the Named Executive Officers who were granted
options in fiscal 1999.
Individual Grants Potential Realizable
----------------------------- Value at Assumed
Number of Percent of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation for
Underlying Granted to Exercise Option Term
Options/SARs Employees in Price -----------------------
Name Granted(#) Fiscal Year ($/Sh) Expiration Date 5%($) 10%($)
- ---- ------------ ---------------- -------- ----------------- ----------- -----------
Scott A. Mednick........ 300,000 7.1% $17.38 August 3, 2004(1) $1,440,532 $3,183,199
Co-Chairman
Wolf Boehme............. 250,000 5.9% $7.25 November 19, 2001 $285,000 $602,500
Former Chief Operating
Officer(2)
- --------
(1) The vesting and exercise of these options has been accelerated pursuant to
the terms of Mr. Mednick's employment agreement. See "Employment
Agreements."
(2) Mr. Boehme resigned his position as Chief Operating Officer in December
1999.
Aggregate Option/SAR Exercises in Last Fiscal Year; Fiscal Year End Option/SAR
Values
The following table sets forth information concerning the value of
unexercised in-the-money options held by the Named Executive Officers as of
August 31, 1999. The last reported sale price of the Common Stock on August 31,
1999 was $17.81 per share. Accordingly, the values set forth below have been
calculated based on that price less the applicable exercise price per share,
multiplied by the number of shares underlying the options.
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares Fiscal Year End Fiscal Year End
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable
- ---- ----------- ----------- --------------- ---------------
Scott A. Mednick........ 0 0 1,000,000 $11,810,000
Co-Chairman (Exercisable) (Exercisable)
300,000 $ 129,000
(Unexercisable) (Unexercisable)
Werner G. Haase......... 0 0 743,750 $10,609,000
President, Co-Chairman (Exercisable) (Exercisable)
and Former Chief
Executive Officer(1)
Wolf Boehme(2).......... 10,000 $72,500 73,333 $ 774,396
Former Chief Operating (Exercisable) (Exercisable)
Officer 166,667 $ 1,760,004
(Unexercisable) (Unexercisable)
- --------
(1) Mr. Haase stepped down as Chief Executive Officer of the Company in August
2000.
(2) Mr. Boehme resigned his position as Chief Operating Officer in December
1999.
6
Performance Graph
The graph set forth below compares for the periods indicated the "cumulative
stockholder return" to stockholders of the Company as compared with the return
of the Nasdaq National Market and a group of eleven companies that the Company
deems comparable consisting of AnswerThink Consulting Group, Inc., Sapient
Corporation, Organic Inc., Cysive, Inc., iXL Enterprises, Inc., RareMedium
Group Inc., Proxicom, Inc., Lante Corporation, Scient Corporation, Razorfish,
Inc. and marchFIRST (the "Peer Group Index"). "Cumulative stockholder return"
has been computed assuming an investment of $100 at the beginning of the period
indicated and assumes a reinvestment of all dividends. These indices are
included for comparative purposes only and do not necessarily reflect
management's opinion that such indices are an appropriate measure of the
relative performance of the stocks involved, and are not intended to forecast
or be indicative of future performance.
[GRAPH]
Indexed Returns
Base Years Ending
Period -----------------------------------------------
Company Index Aug. 93 Aug. 94 Aug. 95 Aug. 96 Aug. 97 Aug. 98 Aug. 99
------------- ------- ------- ------- ------- ------- ------- -------
XCEED INC.............. $100 $ 66.55 $ 75.04 $111.21 $144.57 $266.90 $792.43
NASDAQ (US)............ $100 $104.10 $140.21 $158.07 $220.54 $209.71 $383.14
PEER GROUP............. $100 $197.24 $300.69 $255.76 $339.93 $430.09 $765.20
7
Employment Agreements
We have employment agreements with Scott A. Mednick, Werner G. Haase, Howard
A. Tullman, William N. Zabit and Nurit Kahane Haase.
Scott A. Mednick. In July 1998, we entered into an employment agreement with
Scott Mednick, our Co-Chairman, which provides for an initial term of two
years, and a renewal term of two years if not terminated at the end of the
initial two year term. Mr. Mednick's employment agreement was amended in
September 1999 and March 2000. Mr. Mednick has the right to terminate his
employment on or after July 17, 2001, if he gives at least 60 days advance
written notice. In accordance with his employment agreement, Mr. Mednick
received a signing bonus of $960,000. Mr. Mednick receives an annual base
salary of $350,000, which automatically increases 10% annually. Mr. Mednick's
employment agreement provides for a guaranteed bonus of $100,000 during each
year of his employment and Mr. Mednick is also eligible to receive additional
bonuses based on the Company's growth and performance.
Under his employment agreement, Mr. Mednick received options to purchase
1,000,000 shares of Common Stock at an exercise price of $6.00 per share. If
Mr. Mednick exercises more than 500,000 of these options, for a 48-month
period, he may not sell, assign or transfer the shares in excess of 500,000
unless the trading price of the Common Stock attains certain price levels
ranging from $12.00 per share to $24.00 per share. As part of the 1999
amendment to his employment agreement, Mr. Mednick was granted options, all of
which are currently exercisable, to acquire an additional 300,000 shares of
Common Stock at an exercise price of $17.38 per share. As part of the March
2000 amendment to his employment agreement, in exchange for Mr. Mednick's
agreement to extend the initial term of his employment from two to three years,
we granted Mr. Mednick options to acquire 250,000 shares of Common Stock at an
exercise price of $13.63 per share. All of these options are currently
exercisable. In the event of a change in control of the Company, Mr. Mednick is
entitled to receive a one-time payment equal to three times his then-current
annual compensation (including bonuses). If Mr. Mednick is terminated without
cause, he is entitled to receive his annual salary for the balance of his
employment term. Mr. Mednick's employment agreement contains a non-compete
covenant that is in effect during the term of his employment, for so long as he
receives base compensation for termination without cause, and for 12 months
after the final base compensation payment is made. In addition, the non-compete
covenant remains in effect if Mr. Mednick elects not to extend the employment
agreement after the initial four-year term, or he voluntarily resigns prior to
the expiration of the initial four-year term.
Werner G. Haase. In December 1996, we entered into a five year employment
agreement with Werner Haase, our President and Co-Chairman and our former Chief
Executive Officer. Mr. Haase receives a base salary of $500,000 per year.
During Mr. Haase's employment, we are to pay premiums, interest and other
payments on a number of policies insuring his life with an aggregate face value
of at least $2,300,000. Mr. Haase's agreement also entitles him to receive
bonuses, stock options and other incentives at the discretion of our Board of
Directors. In the event of a change in control of the Company, Mr. Haase is
entitled to receive a one-time payment equal to three times his then-current
annual compensation (including bonuses). Upon termination without cause, all
debts owed by Mr. Haase to the Company or to Journeycraft (the Company's wholly
owned subsidiary) shall be cancelled in full and we are to pay Mr. Haase an
amount in cash equal to 100% of the amount of indebtedness cancelled. As of
August 9, 2000, the amount of Mr. Haase's indebtedness to the Company was
$1,570,103. See "Certain Transactions." Mr. Haase's employment agreement
contains a non-compete covenant during the period of his employment and for 12
months following his termination. We are in the process of renegotiating the
terms of Mr. Haase's employment agreement with Mr. Haase in light of his recent
resignation of his position as Chief Executive Officer.
Howard A. Tullman. In August 2000, we entered into a three year employment
agreement with Howard Tullman, our Chief Executive Officer. Mr. Tullman was
selected by the Board of Directors to succeed Mr. Haase upon his resignation of
the position of Chief Executive Officer in August 2000. Pursuant to his
employment agreement, Mr. Tullman receives an annual base salary of $400,000
and has been granted options to purchase 1,000,000 shares of Common Stock at an
exercise price of $7.75 per share. Mr. Tullman's options
8
vest and become exercisable at the end of each year of service in increments of
216,666 shares over the next three years, provided that Mr. Tullman is employed
with the Company on the vesting date; the remaining options to purchase 350,000
shares will vest in August 2004, provided the Company and Mr. Tullman agree to
extend his employment agreement for a fourth year. Mr. Tullman is also eligible
to receive bonuses at the discretion of the Board of Directors. If Mr. Tullman
is terminated by the Company without cause: (i) during the first year of his
employment, he is entitled to receive the balance of his annual salary up to
and through the 18th month of his employment term; (ii) during the second or
third year of his employment, he is entitled to receive the balance of his
annual salary up to and through the 36th month of his employment term; or (iii)
after his initial three year term, he is entitled to six months severance. In
addition to the foregoing severance arrangements, if the Company breaches any
material provision of Mr. Tullman's employment agreement: (i) during the first
year of his employment, options to purchase 325,000 shares of Common Stock vest
immediately; or (ii) during the second or third year of his employment, options
to purchase 650,000 shares of Common Stock vest immediately. In the event of a
change in control of the Company during the initial three-year term of Mr.
Tullman's employment agreement, where the controlling entity does not assume
the employment agreement or breaches its provisions, Mr. Tullman is entitled to
the severance arrangements and acceleration of his options as set forth above.
Mr. Tullman's employment agreement contains a non-compete covenant that is in
effect during the term of his employment and for 12 months after his
termination.
William N. Zabit. In September 1998, we entered into a four year employment
agreement with William Zabit, the former President of the Company. Mr. Zabit's
employment agreement provides for an annual base salary of $400,000. Mr. Zabit
resigned his position as President in March 2000 (at which time Mr. Haase
became President) but continues to be employed by the Company under the
employment agreement. We pay premiums, interest and other payments on a policy
insuring his life with a face value of at least $2,000,000. Mr. Zabit's
agreement also entitles him to receive bonuses, stock options and other
incentives at the discretion of our Board of Directors. In the event of a
change in control of the Company, Mr. Zabit is entitled to receive a one-time
payment equal to three times his then-current annual compensation (including
bonuses). Upon termination without cause, all debts owed to the Company by Mr.
Zabit are to be cancelled in full. As of August 9, 2000, Mr. Zabit was not
indebted to the Company. Pursuant to certain promissory notes executed in
connection with our acquisition of Zabit & Associates, the Company was indebted
to Mr. Zabit and another former shareholder of Zabit & Associates; however, as
of August 9, 2000, the Company had paid off the promissory notes in full and
was not indebted to those individuals. See "Certain Transactions." Mr. Zabit's
employment agreement contains a non-compete covenant that is in effect during
the period of his employment and for 18 months following termination of his
employment for cause.
Nurit Kahane Haase. In July 1996, we entered into a five year employment
agreement with Nurit Kahane Haase, our former Senior Vice President and
Secretary. On July 31, 2000, Mrs. Haase resigned her positions with the
Company, releasing the Company from any further obligations under her
employment agreement. See "Certain Transactions." While employed with the
Company, Mrs. Haase received an annual base salary of $250,000. Mrs. Haase was
entitled to receive a one-time payment equal to three times her then-current
annual compensation (including bonuses) in the event of a change in control of
the Company. Mrs. Haase's employment agreement contained a non-compete covenant
that was in effect during the term of her employment and for 12 months
following her termination.
Stock Option Plans
The Company has adopted five stock option plans. The Non-Qualified Stock
Option Plan, which expired on April 6, 1994, covered 187,500 shares of Common
Stock, pursuant to which officers and employees of the Company were eligible to
receive non-qualified stock options. All options granted under the Non-
Qualified Stock Option Plan have been at exercise prices equal to at least the
fair market value of the Common Stock on the date of grant. As of August 9,
2000, options to acquire 159,375 shares had been exercised and options to
acquire 28,125 shares at an exercise price of $1.52 per share remained
outstanding under this plan.
9
Under the 1990 Stock Option Plan the Company may grant options to purchase
up to 187,500 shares of Common Stock to its officers, key employees and others
who render services to the Company. The exercise price of such options may not
be less than the fair market value per share in the case of incentive stock
options or 85% of the fair market value in the case of non-qualified options.
The 1990 Stock Option Plan expired on January 31, 2000. As of August 9, 2000,
options to acquire 162,500 shares had been exercised and options to acquire
25,000 shares at an exercise price of $1.52 per share remained outstanding
under this plan.
The 1995 Stock Option Plan operates on substantially the same terms as the
1990 Stock Option Plan except that it includes options to purchase up to
500,000 shares of Common Stock. Any options granted under the plan expire ten
years from the date of the grant. The plan expires March 3, 2005. As of August
9, 2000, options to acquire 166,000 shares had been exercised under the 1995
Stock Option Plan and options to acquire a total of 334,000 shares of Common
Stock at an exercise price of $2.19 per share remained outstanding under this
plan.
At the annual meeting of stockholders on February 20, 1998, stockholders
approved the adoption of the 1998 Stock Option Plan, which provides for the
issuance of options for the purchase of up to 2,000,000 shares of Common Stock.
The 1998 Stock Option Plan authorizes the issuance of incentive stock options,
which qualify under Section 422A of the Internal Revenue Code as well as the
issuance of non-statutory options. The 1998 Stock Option Plan authorizes the
issuance of options to employees, officers and employee-directors. Non-
statutory options may also be issued to others who render services to the
Company. Any options granted under the 1998 Stock Option Plan, unless
specifically designated otherwise, expire on March 3, 2008. As of August 9,
2000, options to acquire 800,894 shares had been exercised under the 1998 Stock
Option Plan and options to acquire 1,170,871 shares at exercise prices ranging
from $3.44 to $32.19 per share remained outstanding under this plan.
At the annual meeting of stockholders held on March 12, 1999, stockholders
approved the adoption of the 1999 Long-Term Incentive Plan which provides for
the issuance of options to purchase up to 3,000,000 shares of Common Stock. The
1999 Long-Term Incentive Plan authorizes the issuance of incentive stock, stock
appreciation rights, restricted stock, restricted stock units, performance
units, performance shares and other awards. As of August 9, 2000, options to
acquire 120,300 shares had been exercised under the 1999 Long-Term Incentive
Plan and options to acquire 2,868,033 shares at exercise prices ranging from
$7.50 to $45.56 per share remained outstanding under this plan.
At the annual meeting of stockholders held on May 4, 2000, stockholders
approved the adoption of the Millennium Stock Option Plan, which provides for
the issuance of options to purchase up to 3,000,000 shares of Common Stock. The
Millennium Stock Option Plan authorizes the issuance of incentive stock options
and non-qualified stock options. As of August 9, 2000, options to acquire
200,385 shares had been exercised under the Millennium Stock Option Plan and
options to acquire 2,465,132 shares at exercise prices ranging from $0.31 to
$40.25 per share remained outstanding under this plan.
All of the Plans are administered by the Compensation Committee consisting
of Norman Docteroff and John Bermingham.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
reviewing the Company's overall compensation policies and, with the input of
the Company's Chief Executive Officer, setting the compensation of the
Company's executive officers. The Compensation Committee is comprised solely of
two non-employee directors, Messrs. Docteroff and Bermingham. Werner Haase was
on the Compensation Committee until he stepped down in March 1999.
Compensation Philosophies and Goals
The Company's executive compensation program for fiscal 1999, which
consisted of a combination of base salary, cash bonuses and stock options, was
designed in large part to align executive incentives with the
10
Company's strategic goals. Accordingly, a significant portion of the total cash
compensation of the Company's senior executives was directly linked to the
Company's and the executive's satisfaction of specified goals. By tying
compensation to the achievement of the Company's core objectives and
fundamental values, the Company believes that a performance-oriented
environment is created for its executives and other employees.
The Company's executive compensation program for fiscal 1999 was also
intended to align executive and stockholder interests by providing executives
with an equity interest in the Company through the granting of stock options.
The size of option grants was recommended by the Chief Executive Officer to the
Compensation Committee for approval. The Compensation Committee based its
review of such recommended grants on various factors, including the executive's
responsibilities, the executive's past, present and expected contributions to
the Company and the executive's current stock and option holdings.
In addition to structuring its executive compensation program in a manner
which will reward executives for the achievement of the Company's business
objectives as well as for individual performance, the Company also seeks to
attract and retain key executives through its compensation program.
Compensation in Fiscal 1999
Cash Compensation
In keeping with the Company's desire to create a performance-oriented
environment through its compensation programs, the bonus component is a
significant percentage of the overall cash compensation payable to the
Company's executive officers. Base salaries of the executive officers for
fiscal 1999 were determined by the Compensation Committee.
The Company adopted an executive bonus plan for 1999, which covered the
executive officers and other senior management of the Company. Under the bonus
plan, the Chief Executive Officer recommended to the Compensation Committee for
approval the target amount of bonus compensation payable to each participant
for the year. Each participant's actual bonus compensation was determined based
on the Company's and the participant's, as the case may be, achievement of
specified goals in four key measurement areas: client satisfaction, financial
performance, organizational goals and personal goals. The weighting of each of
the four measurements varied for each participant, depending on his or her role
in the Company. Also, depending on a participant's role in the Company, the
achievement of certain goals was measured on a Company-wide, industry-specific
or individual office basis.
In November 1999, the Compensation Committee reviewed the Company's and each
executive officer's performance against the objective criteria described above.
Based on this review, and in accordance with the criteria described above,
bonus payments were approved to each executive officer as indicated in the
Summary Compensation Table.
Incentive Compensation
During fiscal 1999, the Named Executive Officers received options to
purchase an aggregate of 550,000 shares of Common Stock at a weighted average
exercise price of $12.76 per share, as indicated in the table in "Option/SAR
Grants in Last Fiscal Year."
1999 Compensation of Chief Executive Officer
Mr. Haase's base salary, bonus and grants of options were determined in
accordance with the same procedures and standards as for other executive
officers of the Company.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
disallows a federal income tax deduction to public companies for certain
compensation in excess of $1,000,000 paid to a corporation's
11
chief executive officer or any of its four other most highly compensated
executive officers. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. The Company has
structured its option plans to qualify income received upon the exercise of
stock options granted under the plans as performance-based compensation. The
Compensation Committee intends to review the potential effects of Section
162(m) periodically and in the future may decide to structure additional
portions of the Company's compensation program in a manner designed to permit
unlimited deductibility for federal income tax purposes.
CERTAIN TRANSACTIONS
Prior to the Company's acquisition of Journeycraft in July 1996, Werner
Haase borrowed funds from Journeycraft. At the time of our acquisition of
Journeycorp, the amount of Mr. Haase's loan equaled $1,000,000. A condition of
our acquisition of Journeycorp was the transfer of the loan to the Company. The
loan bears interest at a rate of 7% per annum and is payable in annual
installments of $100,000. The loan is due in December 2016. As of August 9,
2000, $1,570,103 was due under this loan.
In connection with our acquisition of Zabit & Associates, we agreed to pay
off certain promissory notes which were due to two former shareholders of Zabit
& Associates in March 1999. We paid William Zabit, the former President of the
Company, $3,974,000, consisting of $3,840,000 of principal and $134,000 of
interest and paid the other shareholder, who is now an employee of the Company,
$993,600, consisting of $960,000 of principal and $33,600 of interest. In
addition, in connection with this acquisition, the Company in May, 2000 paid
off promissory notes to Mr. Zabit and to another former shareholder of Zabit &
Associates in the aggregate amount of $2,161,000.
On July 31, 2000, we sold all of the assets and liabilities associated with
Journeycorp, our travel management division, to Journey Corp. .Com, a company
formed and privately-owned by Nurit Kahane Haase, in an arms-length negotiated
transaction in exchange for: (i) a promissory note in the amount of $704,000,
which bears interest at a rate of 6% per annum and is payable to us in equal
quarterly installments of $58,666.67 over three years; and (ii) an exclusivity
agreement whereby all of the Company's U.S. offices will use their best efforts
to make their corporate travel arrangements through Journey Corp. .Com until
July 31, 2003. Upon consummation of the sale of Journeycorp to Journey Corp.
.Com, Mrs. Haase resigned her positions with the Company.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our consolidated financial
statements and the accompanying notes that appear elsewhere in this document.
The following discussion contains forward-looking statements relating to future
events and our future financial performance. Actual results could be
significantly different than those discussed below. Factors that could cause or
contribute to such differences include those set forth in the section entitled
"Risk Factors," in our Form 10-K/A, a copy of which is available upon request
as described below.
Overview
We are Interactive Architects who provide Internet professional services
that seek to transform the way companies conduct eBusiness. We offer a full
range of services that allow us to deliver end-to-end solutions enabling
companies to capitalize on the reach and efficiency of the Internet.
In addition, through our performance enhancement business, we provide sales
and marketing performance improvement services. These include Internet-based
performance improvement programs, and training and education programs that
enhance performance and assist in increasing revenues and earnings of corporate
clients. Based upon a decision of our Board of Directors to divest ourselves of
assets that are not related to our Internet professional services business, we
are currently pursuing strategic alternatives for our performance enhancement
business, including the sale of all or part of this business.
We derive our revenues from these services based on two pricing
arrangements: time and materials and fixed price. The services performed under
these arrangements are substantially identical.
We bill and recognize revenues from time and materials projects on the basis
of costs incurred in the period. We estimate these costs according to an
internally-developed process. This process takes into account the type and
overall complexity of the project, the anticipated number of personnel of
various skill sets needed, their associated billing rates and the estimated
duration of and risks associated with the project. Management personnel
familiar with the production process evaluate and price all project proposals.
We also recognize revenues from certain time and materials projects in our
performance enhancement business on a completed contract basis, whereby revenue
is only recognized when the project is complete or substantially complete.
Costs of projects in progress are accumulated on our balance sheet, and
revenues and profits are not recorded prior to completion or substantial
completion of the work.
We recognize revenues from fixed price projects using the percentage of
completion method. Fees are billed to the client over the course of the
project. We use the same methodology to estimate the price for fixed price
projects and time and materials projects. All fixed price proposals must first
be approved by a member of our senior management team.
Provisions for estimated losses on both types of contracts are made during
the period in which such losses become probable and can reasonably be
estimated. To date, such losses have not been significant.
We have been able to increasingly leverage both knowledge and technology
components in the delivery of our client solutions. This has allowed us to work
more efficiently and in a less resource-intensive manner than operating without
such components. Since we can leverage our knowledge to new engagements, we
have been moving to a value-based pricing model which emphasizes the value of
our solutions to the client, rather than merely the time and materials required
to deliver a solution. Our value-based pricing model is expected to deliver
higher gross profits to us and provide more timely solutions for our customers.
The agreements entered into for a project, whether time and materials or
fixed price, are generally terminable by the client with prior written notice
of 30 days, or in some cases, less than 30 days. A terminating
13
client is required to pay us for the time, materials and expenses we have
incurred through the effective date of termination.
Our expenses include cost of revenues, selling, general and administrative,
provision for doubtful accounts, stock-based compensation, depreciation and
amortization and research and development.
Internet professional services acquisitions
Since August 1998, we have acquired 8 companies engaged in operations such
as Internet consulting, interactive marketing and e-commerce development
strategies, custom software design, systems administration and strategic
consulting for mergers and acquisitions, process management and large systems
implementation. These acquisitions were accounted for by the purchase method
under accounting principles generally accepted within the United States of
America.
Purchase
Company Acquired Date Acquired Location Price Core Competency
---------------- ------------- -------- ----------- ---------------
Reset, Inc. ............ August 5, 1998 New York $ 6,250,000 Interactive
development and
strategic consulting
Mercury Seven, Inc. .... September 9, 1998 New York $ 8,282,000 Interactive
development and
strategic consulting
Zabit & Associates, September 14, 1998 San Francisco $32,012,000 Integrated
Inc. .................. communications
Troon, Ltd. ............ March 10, 1999 Los Angeles $ 270,000 Interactive branding
and marketing
Enterprise Solution
Group, Inc. ........... August 30, 1999 Phoenix $ 5,200,000 Systems integration
5th Floor Interactive, October 21, 1999 New York $ 1,850,000 Interactive
LLC.................... development
Distributed Systems
Solutions, Inc. ....... November 2, 1999 Phoenix $ 9,500,000 Systems integration
Catalyst Consulting
Services, Inc. ........ November 8, 1999 Phoenix $ 1,550,000 Change management and
business
transformation
On April 29, 1999, we acquired Xceed Atlanta, Inc., an Atlanta-based company
that provided marketing services that complemented our performance enhancement
business. We acquired Xceed Atlanta for $3.9 million.
Subsequent to the issuance of the Company's financial statements for the
year ended August 31, 1999, management determined that it had capitalized costs
relating to a signing bonus that should have been expensed when paid. In
addition, management determined that it had inappropriately excluded the value
of stock issued to employees from the calculation of the purchase price and
utilized the incorrect market values of its publicly-traded Common Stock to
arrive at total stock consideration issued in connection with certain business
combinations accounted for as purchase transactions. As a result, the 1999
financial statements have been restated from amounts previously reported to
properly account for these transactions. A summary of the details of such
restatement is discussed in Note 2.s to the financial statements included in
this proxy statement.
14
Results of Operations
The following tables set forth the percentage of revenues to certain items
included in our consolidated statements of operations.
Fiscal years
ended
August 31,
--------------------
1999 1998 1997
----- ----- ----
Revenues.................................................. 100.0% 100.0% 10.0%
----- ----- ----
Operating expenses:
Cost of revenues........................................ 82.8% 86.2% 84.8%
Selling, general and administrative..................... 28.5% 15.6% 12.1%
Provision for doubtful accounts......................... 1.6% -- 0.1%
Stock-based compensation................................ 0.7% 0.4% --
Depreciation and amortization........................... 8.2% -- 0.1%
Research and development................................ 0.9% 2.0% 0.9%
----- ----- ----
Total operating expenses.................................. 122.7% 104.2% 98.0%
Operating income (loss)................................... (22.7)% (4.2)% 2.0%
Income (loss) from continuing operations.................. (15.3)% (0.6)% 1.1%
Nine Months
Ended
May 31,
-------------
2000 1999
----- -----
Revenues........................................................ 100.0% 100.0%
----- -----
Operating expenses:
Cost of revenues.............................................. 75.0% 73.0%
Selling, general and administrative........................... 43.0% 31.0%
Stock-based compensation...................................... -- --
Research and development...................................... -- 11.0%
Depreciation and amortization................................. 16.0% 1.0%
----- -----
Total operation expenses........................................ 134.0% 116%
Operating loss.................................................. (34.0)% (16.0)%
Loss from continuing operations................................. (23.0)% (12.0)%
Fiscal Year Ended August 31, 1999 Compared to Fiscal Year Ended August 31,
1998
Revenues for fiscal 1999 increased 50% to $63.5 million from $42.3 million
for fiscal 1998. Internet professional service revenues were $19.5 million in
fiscal 1999 and performance enhancement business revenues increased 4% from
$42.3 million for fiscal 1998 to $44.0 million for fiscal 1999. The increase in
Internet professional services revenues reflected the continued internal
organic growth of our Internet professional services, which increased in both
the size and the number of client projects. This increase was also attributable
to a series of acquisitions.
Cost of revenues for fiscal 1999 increased 44% to $52.5 million from $36.4
million for fiscal 1998. This increase in cost of revenues was primarily due to
the hiring of additional Internet professional services personnel, and the
personnel-related expenses from acquisitions in the Internet professional
services area. As a percentage of revenues, cost of revenues decreased to 82.8%
for fiscal 1999 from 86.2% for fiscal 1998.
Selling, general and administrative expense for fiscal 1999 increased 176%
to $18.1 million from $6.6 million for fiscal 1998. As a percentage of
revenues, selling, general and administrative expense increased to 28.5% in
fiscal 1999 from 15.6% in fiscal 1998. The increase in selling, general and
administrative expense was a direct result of increased selling, marketing and
corporate expenses, including corporate personnel and infrastructure-related
costs associated with the expansion of our Internet professional services
business. In addition, we incurred additional general and administrative
expense related to acquisitions.
15
Provision for doubtful accounts for fiscal 1999 increased to $1.0 million
from $4,000 in fiscal 1998. The increase in provision for doubtful accounts
reflects the inclusion of startup entities in the client base of our Internet
professional services business.
Stock-based compensation expense for fiscal 1999 increased 147% to $420,000
from $170,000 for fiscal 1998. As a percentage of revenues, stock compensation
expense increased to 0.7% for fiscal 1999 from 0.4% for fiscal 1998. Stock-
based compensation expense resulted primarily from stock and stock option
grants to consultants and employees in lieu of cash payments for services
rendered.
Depreciation and amortization expense for fiscal 1999 increased to $5.2
million from $20,000 for fiscal 1998. As a percentage of revenues, depreciation
and amortization expense increased to 8.2% in fiscal 1999 from 0.0% in fiscal
1998. The increase in depreciation and amortization expense is primarily the
result of the amortization of intangible assets from acquisitions. In addition,
we incurred increased depreciation expense as a result of increased fixed
assets purchases of computers and other related equipment.
Research and development expense for fiscal 1999 decreased 33% to $579,000
from $866,000 for fiscal 1998. As a percentage of revenues, research and
development expense decreased to 0.9% for fiscal 1999 from 2.0% for fiscal
1998. Research and development expense for fiscal 1999 was primarily incurred
in connection with the development of products for e-commerce ventures.
Research and development expense for fiscal 1998 was incurred in connection
with the development of Maestro software for our performance enhancement
business.
Other income, net for fiscal 1999 decreased 68% to $396,000 from $1.2
million for fiscal 1998. The decrease during fiscal 1999 was primarily
attributable to a $522,000 gain on the sale of investments in fiscal 1998, as
well as interest expense incurred in fiscal 1999 as a result of our acquisition
of Zabit & Associates, Inc. completed in September 1998.
An income tax benefit of $4.3 million was recorded for fiscal 1999, compared
to $257,000 for fiscal 1998. Our effective tax rate for fiscal 1999 was 30.9%
compared to 49.4% for fiscal 1998. This decreased rate reflected the impact of
the amortization of non-tax deductible goodwill in connection with certain
Internet professional services acquisitions.
For fiscal 1999, we incurred a loss from continuing operations of $9.7
million compared to a loss from continuing operations of $263,000 for fiscal
1998. Our fiscal 1999 loss reflects the personnel requirements and increased
corporate infrastructure and related expenses required for our rapidly growing
Internet professional services business. We believe these costs are required in
order to accommodate the anticipated rapid growth of our business.
Income, net of related taxes, from discontinued operations increased 15% for
fiscal 1999 to $2.1 million from $1.8 million for fiscal 1998.
We reported a net loss of $7.6 million for fiscal 1999 compared to net
income of $1.6 million for fiscal 1998. The decrease of $9.2 million was due to
the factors described above.
Fiscal Year Ended August 31, 1998 Compared to Fiscal Year Ended August 31,
1997
Revenues for fiscal 1998 decreased 8% to $42.3 million from $46.0 million
for fiscal 1997. The decrease in revenues was primarily attributable to a
decrease in our performance enhancement business revenues resulting from a
change in revenue recognition policy associated with certain products, as well
as the temporary discontinuance of an incentive sales and marketing project.
Cost of revenues for fiscal 1998 decreased 7% to $36.4 million from $39.0
million for fiscal 1997. This decrease in cost of revenues was primarily due to
a reduction in direct costs associated with decreased sales
16
and marketing services revenues. As a percentage of revenues, cost of revenues
increased to 86.2% in fiscal 1998 from 84.8% in fiscal 1997.
Selling, general and administrative expense for fiscal 1998 increased 18%
to $6.6 million from $5.5 million for fiscal 1997. As a percentage of
revenues, selling, general and administrative expense increased to 15.6% in
fiscal 1998 from 12.1% in fiscal 1997. The increase in selling, general and
administrative expense was a direct result of an increase in sales and
marketing services, personnel costs and compensation expense for our officers.
In addition, we incurred additional general and administrative expense related
to acquisitions.
Stock-based compensation expense for fiscal 1998 increased to $170,000 from
$0 for fiscal 1997. Stock-based compensation expense resulted primarily from
stock and stock option grants to consultants and employees in lieu of cash
payments for services rendered.
Depreciation and amortization expense for fiscal 1998 decreased to $20,000
from $68,000 for fiscal 1997.
Research and development expense for fiscal 1998 increased 102% to $866,000
from $429,000 for fiscal 1997. As a percentage of revenues, research and
development expense increased to 2.0% for fiscal 1998 from 0.9% for fiscal
1997. Research and development expense increased in connection with our
continuing development of our performance enhancement business' Maestro
software.
Other income, net for fiscal 1998 increased 361% to $1.2 million from
$271,000 for fiscal 1997. The increase during fiscal 1998 is primarily
attributable to a $522,000 gain on sale of investments and interest income of
$691,000 for fiscal 1998, compared to a loss on sale of investments of $20,000
and interest income of $451,000 for fiscal 1997.
An income tax benefit of $257,000 was recorded for fiscal 1998, compared to
an income tax provision of $706,000 for fiscal 1997. Our effective tax rate
for fiscal 1998 was 49.4% compared to 58.6% for fiscal 1997. This decreased
rate reflects a decrease in our state tax provision and an increase in federal
income tax credits.
For fiscal 1998, we incurred a loss from continuing operations of $263,000
compared to income from continuing operations of $498,000 for fiscal 1997. Our
fiscal 1998 loss reflects increased personnel requirements and increased
corporate infrastructure and related expenses.
Income, net of related taxes, from discontinued operations increased 31%
for fiscal 1998 to $1.8 million from $1.4 million for fiscal 1997.
We reported net income of $1.6 million for fiscal 1998, a decrease of 17%
from the $1.9 million of net income for fiscal 1997. The decrease of $327,000
was due to the factors described above, and part of this difference was offset
by a decrease in our effective tax rate in fiscal 1998 as compared to fiscal
1997.
Nine Months Ended May 31, 2000 Compared to Nine Months Ended May 31, 1999
Net revenues for the nine months ended May 31, 2000 and 1999, respectively,
were $74.7 million and $43.6 million, representing a 72% increase. Net
revenues for the three months ended May 31, 2000 and 1999, respectively, were
$33.7 million and $19.3 million representing a 74% increase. The increases in
net revenues for the nine and three months ended May 31, 2000 are primarily
attributable to the Company's continued rapid organic growth of its
Interactive business, along with the growth due to acquisitions. The organic
growth was the result of substantial increases in the number and size of
interactive engagements.
Cost of revenues for the nine months ended May 31, 2000 and 1999,
respectively, were $55.7 million and $31.8 million, representing an increase
of $23.9 million, or 75% in the current period. Cost of revenues for the three
months ended May 31, 2000 and 1999, respectively, were $25.1 million and $13.5
million, representing an increase of $11.6 million, or 86% in the current
period. The continued increase in cost of revenues during
17
the current period is a direct result of increased staffing requirements, cost
of acquisitions and continued increase in market share of the Company's
Interactive business.
Selling, general and administrative expense for the nine months ended May
31, 2000 and 1999, respectively, were $32.5 million and $13.5 million,
representing an increase of $18.9 million, or 140% in the current period.
Selling, general and administrative expense for the three months ended May 31,
2000 and 1999, respectively, were $13.2 million and $6.9 million, representing
an increase of $6.3 million, or 92% in the current period. The continued
increase in selling, general and administrative expense during the current
period is a result of the Company's continued effort to evolve its core
business into a fully-integrated communications company. A significant portion
of this increase has resulted from expenses related to acquisitions and
increased selling, marketing and corporate expenses. As a percentage of
revenues, selling, general and administrative expense increased to 43% during
the current nine month period as compared to 31% for the corresponding prior
period.
Depreciation and amortization expense for the nine months ended May 31, 2000
and 1999, respectively, were $11.8 million and $4.6 million, representing an
increase of $7.1 million, or 154% for the current period. Depreciation and
amortization expense for the three months ended May 31, 2000 and 1999,
respectively, were $6.5 million and $1.6 million, representing an increase of
$4.9 million, or 312% for the current period. The increase in depreciation and
amortization expense during the current period is primarily attributable to the
amortization of intangible assets in connection with acquisitions made in the
Interactive business. Also, the Company is incurring increased depreciation
expense as a result of purchases of computer and related equipment and
leasehold improvements. As a percentage of revenues, depreciation and
amortization expense approximated 16% in the current nine month period as
compared to 11% for the corresponding prior period.
Other income (expense) for the nine months ended May 31, 2000 was $2.5
million as compared to ($182,000) for the corresponding prior period. Other
income (expense) for the three months ended May 31, 2000 was $2.2 million as
compared to ($28,000) for the corresponding prior period. The increase in other
income (expense) during the current periods is a direct result of the Company's
sale of its Channel Seven division in March 2000 which accounted for
approximately $2.0 million.
The Company's effective tax benefit rate for the nine months ended May 31,
2000 and 1999 approximated (25%). This rate reflects the amortization of non-
deductible goodwill in connection with the acquisitions.
Liquidity and Capital Resources
Historically, we have primarily relied on our cash flow from operations, the
proceeds from private placements of Common Stock and preferred stock and the
exercise of warrants and options to finance our working capital requirements.
At May 31, 2000 the Company had working capital of $40.8 million as compared to
$26.0 million at August 31, 1999.
At August 31, 1999 the Company had working capital of approximately $26.0
million as compared to $17.3 million at August 31, 1998.
For 1999, the Company used $5.5 million in operating activities. This was
the result of a net loss of $7.6 million partially offset by depreciation and
amortization of $5.5 million and non-cash compensation of $0.4 million. In
addition, the Company had an increase in accounts receivable and earnings in
excess of billings of approximately $5.3 million in 1999.
During 1999, the Company used $5.6 million to fund its growth strategy
through acquisitions in the Interactive business and approximately $2.3 million
for the purchase of property and equipment.
The Company raised approximately $24.0 million during 1999 through the
proceeds of a private placement of securities as well as proceeds from the
exercise of stock options and warrants offset by principal payments of long-
term debt of approximately $5.8 million.
18
In January 2000, we received cash proceeds of $4.0 million in connection
with the divestiture of net assets of our Water-Jel division. Also, in January
2000, we received net proceeds of $29.0 million from the sale of 30,000 shares
of Series A Cumulative Convertible Preferred Stock.
In April 2000, we received net proceeds of $24.8 million from the sale of
2,000,000 shares of Common Stock in a private transaction.
In July 2000, in connection with the divestiture of net assets of our
Journeycorp division, we received a note in the amount of $704,000, which bears
interest at a rate of 6% per annum and is payable to us in equal quarterly
installments of $58,666.67 over three years.
The condensed statement of cash flows for the nine months ended May 31, 2000
reflects net cash used in operating activities of $16.7 million reflecting a
net loss of $15.6 million, an increase in accounts receivable of $8.5 million
and an increase in programs costs and earnings in excess of customer billings
of $2.7 million offset by an increase in customer billings in excess of program
costs of $3.5 million. Cash used in investing activities was $28.8 million,
resulting from business acquisitions of $12.8 million and acquisitions of
property and equipment of $16.3 million. Cash provided by financing activities
was $54.0 million, resulting primarily from the net proceeds from the issuance
of 30,000 shares of Series A Preferred Stock for $29.0 million and the issuance
of 2,000,000 shares of Common Stock for $24.8 million.
We anticipate financing our growth strategy through current cash resources,
cash flow from operations and existing and prospective third party credit
facilities, including a bank line of credit in the amount of $5.0 million, all
of which is currently available, as well as through the issuance of equity or
debt securities. We believe the combination of these sources will be sufficient
to fund our operations and to satisfy our cash requirements for the next 12 to
24 months. There may be circumstances, however, that would accelerate the use
of our liquid resources. If this occurs, we may, from time to time, incur
additional indebtedness or issue, in public or private transactions, equity or
debt securities.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On January 21, 2000, the Company dismissed Holtz Rubenstein & Co., LLP
("Holtz Rubenstein") as the Company's independent auditor. The decision to
change independent auditors was approved by the Board of Directors. No
disagreements exist between the Company and Holtz Rubenstein with respect to
any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure. On January 21, 2000, the Board of
Directors appointed Deloitte & Touche, LLP ("Deloitte & Touche") as the
Company's independent certified public accountants to replace Holtz Rubenstein
and to act as principal accountant to audit the Company's financial statements.
The stockholders of the Company ratified the appointment of Deloitte & Touche
at the Company's annual meeting of stockholders on May 4, 2000. One or more
representatives of Deloitte & Touche will be present at the Special Meeting.
They will have the opportunity to respond to appropriate questions and to make
a statement if they wish to do so.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain our cash equivalents in a money market fund. As of August 31,
1999, all of our cash equivalent investments will mature in three months or
less. We did not hold any derivative financial instruments as of August 31,
1999 and have never held such investments. Currently, all of our revenues and
expenses are denominated in U.S. dollars and, as a result, we have not had any
material exposure to foreign currency rate fluctuations.
Our exposure to market risk is currently expected to be confined principally
to our short-term available-for-sale securities, which have short maturities
and, therefore, minimal and immaterial market risk.
19
PROPOSAL 1--AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
The Company's Certificate of Incorporation currently reflects that the
Company's name is "Xceed Inc." The Board of Directors is proposing an amendment
to the Certificate of Incorporation to change the Company's name to "Worldwide
Xceed Group, Inc." If the stockholders approve this proposal, the First Article
of the Company's Certificate of Incorporation will be amended to read in its
entirety as follows:
FIRST: The name of the corporation is:
Worldwide Xceed Group, Inc.
This change is intended to accurately reflect our strategy to establish a
global presence in the interactive business arena. We believe that the proposed
name will more effectively convey the current character and capabilities of the
Company to current and prospective customers, business partners and investors.
Vote Required for Approval
Approval of the proposal to amend our Certificate of Incorporation will
require the affirmative vote of a majority of the outstanding stock entitled to
vote thereon. The enclosed proxy will be voted as specified, but if no
specification is made with respect to the proposal, it will be voted in favor
of the proposal to amend the Certificate of Incorporation.
The Board of Directors recommends a vote FOR amendment of the Certificate of
Incorporation to change the name of the Company to Worldwide Xceed Group, Inc.
and, unless marked to the contrary, proxies received from stockholders will be
voted in favor of such change.
20
PROPOSAL 2--TO APPROVE AND RATIFY THE XCEED INC.
AMENDED AND RESTATED MILLENNIUM STOCK OPTION PLAN
In May, 2000, the stockholders of the Company approved the Xceed Inc.
Millennium Stock Option Plan (the "Millennium Plan"). As currently in effect,
the purpose of the Millennium Plan is to provide for the grant of options to
officers, directors, existing employees and consultants of the Company for the
purpose of offering such individuals incentives to contribute to the Company's
progress and to promote the Company's best interests. The Millennium Plan
provides for the grant of options that qualify as incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code") and
options that do not so qualify ("NQSOs"). Pursuant to the terms of the
Millennium Plan, the Company may grant options exercisable to purchase up to
3,000,000 shares of Common Stock. As of August 9, 2000, the Company had
granted options to acquire up to 2,665,517 shares of Common Stock under the
Millennium Plan. Such options become exercisable one year after the date of
grant, are exercisable over a four-year period in equal annual increments and
expire up to ten years from the date of grant. None of the options are
currently exercisable. The exercise prices of the options granted to date
range from $0.31 to $40.25 per share.
The Board of Directors has authorized amendment of the Millennium Plan to
provide for the issuance of more shares of Common Stock as set forth in the
Xceed Inc. Amended and Restated Millennium Stock Option Plan, a copy of which
has been attached hereto as Exhibit A (the "Amended Plan") subject to
stockholder approval and ratification as contemplated herein. The Amended Plan
provides for the grant of options exercisable to purchase up to 9,000,000
shares of Common Stock, an increase of 6,000,000 shares from the 3,000,000
shares of Common Stock currently underlying the Millennium Plan. Pursuant to
the rules and regulations of the Nasdaq National Market System, the foregoing
amendment requires approval of the stockholders of the Company. The Company
has not yet made any determination as to which individuals shall be granted
options to purchase these additional shares. We believe this amendment is
necessary to enable us to continue to attract and retain experienced and
dynamic management and highly talented employees and to provide these
individuals with incentives to promote the Company's best interests in our
increasingly competitive marketplace.
A copy of the Amended Plan is attached hereto as Exhibit A. The following
summary of the material provisions of the Amended Plan set forth herein is not
intended to be complete and is qualified in its entirety by reference to such
plan.
General
The Amended Plan provides for the grant of ISOs and NQSOs with respect to,
in the aggregate, up to 9,000,000 shares of Common Stock (which number is
subject to adjustment in the event of stock dividends, stock splits and other
similar events). No employee may be issued more than 1,000,000 shares pursuant
to options granted under the Amended Plan during the term of the plan. To the
extent that an ISO or NQSO is not exercised within the period of
exercisability specified therein, it will expire as to the then unexercised
portion. If any ISO or NQSO terminates prior to exercise thereof and during
the duration of the Amended Plan, the shares of Common Stock as to which such
option or right was not exercised will again become available under the
Amended Plan for the grant of additional options or rights to any eligible
individual. The shares of Common Stock subject to the Amended Plan may be made
available from authorized but unissued shares, treasury shares, or both. In
the event that the Amended Plan is not approved and ratified by the
stockholders, the Millennium Plan shall remain in force and any options
granted thereunder shall automatically be deemed to be NQSOs.
As of August 9, 2000, an aggregate of 686 persons were eligible to
participate in the Millennium Plan.
21
Administration
Pursuant to its terms, the Amended Plan may be administered by: (a) the
Board of Directors; or (b) in the discretion of the Board of Directors, a
committee (the "Committee") consisting of two or more members of the Board of
Directors, each of whom must be (i) a "Non-Employee" director as such term is
defined by Rule 16b-3 (as amended from time to time, "Rule 16b-3") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and (ii) an
"Outside Director" as such term is defined in Section 162(m) of the Code and
the regulations thereunder. The Board of Directors or the Committee (by a
majority vote or, in the case of two members, by unanimous vote) generally has
the authority to determine the individuals to whom and the date on which
options are to be granted, the number of shares of stock to be subject to each
option, the exercise price of such options, the terms of any vesting or
forfeiture schedule and the other terms and provisions of each option. Only the
Committee may grant options to employees covered under Section 162(m) of the
Code. Currently, each of the Company's stock option plans is administered by
the Compensation Committee. All options granted under the Amended Plan will be
evidenced by option agreements, which shall contain the applicable terms and
conditions.
Section 16(b) Compliance
It is intended that transactions pursuant to the Amended Plan will satisfy
the conditions of Rule 16b-3, as amended, promulgated under Section 16 of the
Exchange Act. Section 16(b) of the Exchange Act provides that any so-called
"short-swing profits," that is, a profit realized by an officer, director or
owner of ten percent (10%) or more of the outstanding securities on a purchase
and a sale of stock within a six-month period, are recoverable by the issuer of
the securities. Although the application of Section 16(b) (and the rules
promulgated thereunder) is complex, Rule 16b-3 generally mitigates the impact
of Section 16(b) by providing an exemption from the liability provisions for
transactions that satisfy the conditions of Rule 16b-3.
Eligibility and Extent of Participation
ISOs may be granted pursuant to the Amended Plan only to employees
(including officers and directors) of the Company (and its subsidiaries). NQSOs
may be granted pursuant to the Amended Plan to officers, directors, employees
or consultants of the Company (and its subsidiaries).
There is no minimum number of shares of Common Stock with respect to which
an option may be granted. However, if the aggregate fair market value (as of
the time of grant) of shares of Common Stock with respect to which ISOs are
exercisable for the first time by any individual during any calendar year
(under all stock option plans of the Company) exceeds $100,000, such excess
options shall be treated as NQSOs.
Purchase Price and Exercise of Options
The price at which shares of Common Stock subject to an option may be
purchased is determined by the Board of Directors (or the Committee); however,
the exercise price of shares of Common Stock issuable upon exercise of an ISO
may not be less than one hundred percent (100%) of the fair market value of the
Common Stock on the date of grant. However, if an ISO is granted to an optionee
who owns more than ten percent (10%) of the voting power of the capital stock
of the Company, the minimum exercise price may not be less than one hundred ten
percent (110%) of the fair market value of the Common Stock on the date of
grant. Any cash proceeds received by the Company from the exercise of the
options will be used for general corporate purposes.
Expiration and Transfer of Options
The Board of Directors (or the Committee) has the sole discretion to fix the
period within which any ISO or NQSO may be exercised. Any ISO granted under the
Amended Plan to a ten percent (10%) or less stockholder and any NQSO shall be
exercised during a period of not more than ten years from the date of grant
22
and any ISO granted to a greater than ten percent (10%) stockholder shall be
exercised within five years from the date of grant. No ISO may be granted under
the Amended Plan more than ten years after the date of adoption of the Amended
Plan.
Options granted under the Amended Plan are not transferable except upon
death. Options generally may be exercised only while the optionholder is
employed by the Company, or in some cases, within three months of termination
of employment. In the event of disability of an optionholder, options may
generally be exercised to the extent of the accrued right to exercise the
option within one year of termination of employment due to disability. In the
event of the death of an optionholder, options may be exercised subject to
expiration of the option within three years after the date of death, to the
extent of the accrued right to exercise the option at the date of death. In the
event the employment of an optionholder is terminated for cause, an
optionholder's rights under all options are generally immediately forfeited.
Upon a reorganization, merger or consolidation of the Company as a result of
which the outstanding Common Stock is changed into or exchanged for cash or
property or securities not of the Company's issue, or upon a sale of
substantially all the property of the Company, the Amended Plan will terminate
and all outstanding options previously granted thereunder shall terminate,
unless provision is made in connection with such transaction for the
continuance of the Amended Plan or for the assumption of options theretofore
granted. If the Amended Plan and unexercised options are to terminate pursuant
to such transaction, persons owning any unexercised portions of options then
outstanding will have the right, prior to the consummation of the transaction,
to exercise the unexercised portions of their options, including the portions
thereof which would, but for such transaction, not yet be exercisable.
Federal Income Tax Considerations
In general, an optionholder will not recognize taxable income upon grant or
exercise of an ISO and the Company will not be entitled to any business expense
deduction with respect to the grant or exercise of an ISO. However, upon the
exercise of an ISO, the excess of the fair market value on the date of the
exercise of the shares received over the exercise price of shares will be
treated as an adjustment to the optionholder's alternative minimum taxable
income. In order for the exercise of an ISO to qualify for the foregoing tax
treatment, the optionholder generally must be an employee of the Company or a
subsidiary from the date the ISO is granted through the date three months
before the date of exercise, except in the case of death or disability, where
special rules apply.
If the optionholder has held the ISO (or the shares acquired upon exercise
thereof) for at least two years after the date of grant and the shares acquired
upon exercise of the options for at least one year after the date of exercise,
upon disposition of the shares by the optionholder, the difference, if any,
between the sale price of the shares and the exercise price of the option will
be treated as long-term capital gain or loss. If the optionholder does not
satisfy these holding period requirements, the optionholder will recognize
ordinary income at the time of the disposition of the shares, generally in an
amount equal to the excess of the fair market value of the shares at the time
the option was exercised over the exercise price of the option. The balance of
gain realized, if any, will be long-term capital gain or short-term capital
gain, depending upon whether or not the shares were sold more than one year
after the option was exercised. If the optionholder sells the shares prior to
the satisfaction of the holding period requirements but at a price below the
fair market value of the shares at the time the option was exercised, the
amount of ordinary income will be limited to the excess of the amount realized
on the sale over the exercise price of the option. If the optionholder includes
the ordinary income in income or the Company complies with the applicable
reporting requirements, it will be entitled to a business expense deduction in
the same amount and at the same time as the optionholder recognizes ordinary
income, subject to any deduction limitation under Section 162(m).
In general, an optionholder to whom a NQSO is granted will recognize no
income and the Company will not be entitled to any business expense deduction
at the time of the grant of the option. Upon exercise of a NQSO, an
optionholder will recognize ordinary income in an amount equal to the amount by
which the fair
23
market value of the shares on the date of exercise exceeds the exercise price
of the option. If the optionholder includes such amount in income or the
Company complies with applicable reporting requirements, it will be entitled to
a business expense deduction in the same amount and at the same time as the
optionholder recognizes ordinary income, subject to any deduction limitation
under Section 162(m).
Section 162(m) of the Code and the regulations promulgated thereunder
generally would disallow the Company a federal income tax deduction for
compensation paid to the chief executive officer and the four other most highly
compensated executive officers to the extent such compensation paid to any of
such individuals exceeds $1,000,000 in any year. Section 162(m) generally does
not disallow a deduction for payments of qualified "performance-based
compensation" the material terms of which have been disclosed to and approved
by stockholders. The Company intends that compensation attributable to options
and subject to performance objectives granted under the Amended Plan will be
qualified "performance-based compensation."
Under certain circumstances, the accelerated vesting or the cashout or
exercise of options in connection with a change in control of the Company might
be deemed an "excess parachute payment" for purposes of the golden parachute
tax provisions of Section 280G of the Code. To the extent it is so considered,
the optionholder may be subject to a 20% excise tax and the Company may be
denied a tax deduction.
Exercise of Options
Generally, an option will be exercised by the tender of written notice of
the optionholder's intention to exercise, and payment in cash of the aggregate
exercise price for the shares of Common Stock for which the option is being
exercised. The Board of Directors (or the Committee) may, however, permit an
optionee to pay all or a portion of the exercise price by delivering to the
Company shares of Common Stock having an aggregate fair market value at least
equal to such aggregate exercise price. An option may also be exercised by
tender to the Company of a written notice of exercise together with advice of
the delivery of an order to a broker to sell part or all of the shares of
Common Stock subject to such exercise notice and an irrevocable order to such
broker to deliver to the Company sufficient proceeds from the sale of such
shares to pay the exercise price and any withholding taxes (a "cashless
exercise") provided all documentation and procedures are approved in advance by
the Board of Directors (or the Committee). The Company has the authority under
the Amended Plan to assist any employee of the Company with the payment of the
purchase price of the Common Stock by lending the amount of the purchase price
to the employee, on terms, including rate of interest and security for the
loan, as the Board of Directors (or the Committee) shall authorize.
Amendments to the Amended Plan and Termination
The Board of Directors may at any time terminate the Amended Plan or make
such amendments thereto as it deems advisable and in the best interests of the
Company, without action on the part of the Company's stockholders, unless such
approval is required pursuant to Section 422 of the Code or other federal or
state law, rule or regulation and, provided that, no such action may be taken
if it affects or impairs the rights of an individual holding options previously
granted (absent such holder's consent). No ISO may be granted ten years after
the adoption of the Amended Plan.
Vote Required for Approval
Approval and ratification of the Amended Plan will require the affirmative
vote of a majority of the votes cast at the Special Meeting. The enclosed proxy
will be voted as specified, but if no specification is made with respect to the
proposal, it will be voted in favor of the proposal to approve the Amended
Plan.
The Board of Directors recommends a vote FOR approval and ratification of
the Xceed Inc. Amended and Restated Millennium Stock Option Plan as set forth
in Exhibit A hereto, and, unless marked to the contrary, proxies received from
stockholders will be voted in favor of such plan.
24
PROPOSAL 3--TO APPROVE AND RATIFY THE ISSUANCE OF
PREFERRED STOCK, WARRANTS AND UNDERLYING COMMON STOCK
On January 13, 2000, the Company closed a private offering of its securities
(the "Offering") pursuant to the terms of a Subscription Agreement, a copy of
which is attached hereto as Exhibit B (the "Subscription Agreement") with
Peconic Fund, Inc., Leonardo, L.P. and HFTP Investment, L.L.C. (collectively,
the "Investors"). Pursuant to the terms of the Subscription Agreement, the
Company issued to the Investors: (i) 30,000 shares of Series A Cumulative
Convertible Preferred Stock having a par value of $.05 per share and a stated
value of $1,000 per share (the "Preferred Stock"); and (ii) warrants to
purchase 183,273 shares of common stock of the Company (the "Common Stock") at
an exercise price of $50.10 per share, subject to adjustment (the "Warrants").
The terms of the Preferred Stock are more fully described elsewhere herein and
in the Certificate of Designation, Preferences and Rights of the Preferred
Stock, a copy of which is attached hereto as Exhibit C (the "Certificate of
Designation"). The terms of the Warrants are more fully described elsewhere
herein and in the Form of Common Stock Purchase Warrant, a copy of which is
attached hereto as Exhibit D. In exchange for the issuance of the Preferred
Stock and the Warrants, the Investors paid the Company an aggregate of
$30,000,000 to be used by the Company for working capital and general corporate
purposes, including strategic acquisitions and investments, hiring of
additional personnel and technical upgrades of systems. On April 4, 2000, the
Company issued additional Warrants to purchase 1,350,000 shares of Common Stock
at an exercise price of $15.75 per share to the Investors in connection with
the amendment of certain of the terms of the Subscription Agreement and the
Preferred Stock and Warrants.
In connection with the Offering the Company also entered into a Registration
Rights Agreement with the Investors, a copy of which is attached hereto as
Exhibit E (the "Registration Agreement"). (The Subscription Agreement, the
Certificate of Designation, the Warrants and the Registration Agreement, as the
same has been amended from time to time, may be collectively referred to as the
"Offering Documents".) Pursuant to the terms of the Offering Documents, the
Company filed a registration statement relating to the shares of Common Stock
issuable upon conversion of the Preferred Stock and exercise of the Warrants
(collectively, the "Underlying Shares"). The registration statement was
declared effective by the Securities and Exchange Commission on May 12, 2000.
The Company is proposing for approval and ratification of the stockholders
of the Company the issuance of the Preferred Stock, the Warrants and the
Underlying Shares (the "Securities"). Pursuant to the rules and regulations of
the Nasdaq National Market System, the foregoing issuance requires approval of
the stockholders of the Company. In addition, section 5.14 of the Subscription
Agreement requires the Company to obtain stockholder approval of the issuance
of the Securities within 60 days after the date on which the holders of the
Securities have the right, upon conversion or exercise thereof, to receive
Underlying Shares equal to or in excess of 2,804,009 shares of Common Stock
(the "Redemption Event"). Beginning on October 13, 2000, the conversion price
applicable to the Preferred Stock will adjust (pursuant to the terms of the
Offering Documents), to the then-current market price of the Common Stock as
quoted on the Nasdaq National Market System. If the market prices as quoted
remain at the current levels, a Redemption Event will have occurred. In
anticipation of the occurrence of this Redemption Event, the Company has
determined it to be in the best interests of the Company and its stockholders
to present this proposal to the stockholders for approval in advance of such
event.
Failure by the Company to obtain the requisite stockholder approval within
the prescribed 60-day period would enable the Investors to exercise their
redemption rights under the Offering Documents, as more fully described in the
Certificate of Designation. If the redemption rights of the Investors are
exercised, the Company will be forced to redeem the Preferred Stock at 125% of
its aggregate value (including accrued and paid dividends), which, as of August
9, 2000, is equal to approximately $37,820,547 (the "Aggregate Value"). The
expense to the Company of a redemption would generate a significant drain on
the Company's cash position and impact the Company's revenues and results of
operations. Additionally, should the stockholders of the Company not approve
the proposal, the Company will lose its right to convert the Preferred Stock at
its option, subject to the restrictions set forth in the Certificate of
Designation.
25
Preferred Stock
The Preferred Stock pays a 4% quarterly dividend and has no voting rights.
The dividend accumulates daily on each share of Preferred Stock whether or not
earned or declared, until such share has been converted or redeemed. If the
Company does not pay a dividend for a particular quarter, the dividends
accumulate and compound quarterly until paid. At its option, the Company may
pay a dividend by increasing the Aggregate Value of the Preferred Stock by the
amount of the unpaid dividend; provided the Company provides timely notice of
its election to do so in advance of a dividend payment date. The Aggregate
Value for each share of Preferred Stock is the sum of the stated value of each
share of Preferred Stock, plus accumulated but unpaid dividends thereon.
The Preferred Stock ranks senior to the Common Stock with respect to
dividend rights and preferences as to distributions and payments, and
currently, there is no security of the Company that ranks on parity with the
Preferred Stock. The holders of at least two-thirds of the Preferred stock must
consent in writing before the Company may: (i) issue any additional shares of
Preferred Stock; (ii) issue any stock that ranks senior to, or on parity with,
the Preferred Stock; or (iii) amend its Certificate of Incorporation or Bylaws
or file any resolution of its Board of Directors that would adversely affect or
impair the rights of the holders of the Preferred Stock.
Upon the occurrence of an Extraordinary Transaction, as defined in the
Certificate of Designation, each holder of Preferred Stock (each a "Holder")
has the right to cause the Company to redeem any of its shares of Preferred
Stock at a redemption price per share equal to 120% of the Aggregate Value. In
the event of a Triggering Event, as defined in the Certificate of Designation,
each Holder has the right to cause the Company to redeem any of its shares of
Preferred Stock at a redemption price per share equal to 125% of the Aggregate
Value. Extraordinary Transactions include, without limitation, such events as
the merger, consolidation or other business combination of the Company with or
into another corporation, and the transfer of all or substantially all of the
Company's assets to another entity. Triggering Events include, without
limitation, such events as the delisting of the Common Stock from the Nasdaq
National Market System or the failure of the Company to obtain approval of this
proposal by the stockholders of the Company (which is the Redemption Event
described above).
In addition to the foregoing, the Company has the right to redeem all of the
outstanding shares of Preferred Stock at any time at a redemption price per
share equal to 110% of the Aggregate Value plus: (i) 1% of the Aggregate Value
per share for each month since January 13, 2000, up to a maximum redemption
price equal to 140% of the Aggregate Value; and (ii) accumulated but unpaid
dividends that have not been previously added to the Aggregate Value.
Each Holder may convert any portion of its shares of Preferred Stock into
Common Stock at any time. Subject to certain restrictions, conditions and
limitations as set forth in the Certificate of Designation, the Company may
choose to convert any portion of the Preferred Stock into Common Stock at any
time prior to October 13, 2000. The number of shares of Common Stock issuable
upon conversion by either the Holders or the Company is determined by dividing
the Aggregate Value plus unpaid dividends by $36, subject to adjustment as set
forth in the Certificate of Designation. Notwithstanding the foregoing, the
Company has a mandatory conversion right to convert the Preferred Stock into
Common Stock provided the closing price of the Common Stock exceeds $54 for 30
consecutive trading days. On January 13, 2005 or such later date agreed to by
the parties to the Subscription Agreement, the Company must convert all of the
outstanding shares of Preferred Stock into Common Stock in accordance with the
terms of the Certificate of Designation.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the Holders are entitled to receive, before any
amount is paid to the holders of any subordinate securities, cash in an amount
per share of Preferred Stock equal to the Aggregate Value.
26
Warrants
Pursuant to the Offering Documents, the Investors received Warrants to
purchase shares of Common Stock. Warrants to purchase 183,273 shares of Common
Stock at an exercise price of $50.10 are exercisable for a term of five years
ending on January 13, 2005 and Warrants to purchase 1,350,000 shares of Common
Stock at an exercise price of $15.75 are exercisable for a term of five years
ending on April 4, 2005. As of August 9, 2000, the Investors had not exercised
any of the Warrants.
Upon the occurrence of certain events as summarized below and more fully set
forth in the Warrants, the number and kinds of securities purchasable upon
exercise of the Warrants and the exercise price are subject to adjustment.
. In the case of a "triggering event," as defined in the Warrants to
include, among other things, the merger or consolidation of the Company
where it is not the surviving entity, or the transfer of all or
substantially all of the Company's assets to another entity, the
Investors will be entitled to receive at the then-current exercise price
of the Warrants, including any adjustments (the "Warrant Price"), cash
and property to which the Investors would have been entitled had they
exercised the Warrants immediately prior to such triggering event.
. In the event the Company effects: (i) a stock-split or subdivision of the
Common Stock, the Warrant Price will be proportionately reduced to
reflect the increase in the total number of shares of Common Stock
outstanding as a result of such subdivision; or (ii) a reverse stock-
split or combination of the Common Stock, the Warrant Price will be
proportionately increased to reflect the reduction in the total number of
shares of Common Stock outstanding as a result of such combination.
. In the event the Company pays a stock dividend, or makes any other
distribution of the Common Stock to its stockholders, the Warrant Price
will be adjusted, as at the record date set for such stock dividend or
distribution, to the price determined by multiplying the Warrant Price in
effect prior to such record date by the fraction in which: (i) the
numerator equals the total shares of Common Stock outstanding immediately
prior to such stock dividend or distribution; and (ii) the denominator
equals the total shares of Common Stock outstanding immediately after
such stock dividend or distribution.
. In the event the Company pays a dividend, makes any distribution (other
than as described above) of its assets with respect to the Common Stock,
or offers options or rights to subscribe for shares of Common Stock, then
each Investor holding a Warrant will receive what each would have
received had it exercised its Warrant in full prior to the record date of
such dividend or distribution.
. In the event the Company issues "additional shares of Common Stock," as
defined in the Warrants, without consideration or at a price per share
less than the lower of the Warrant Price or the closing price of the
Common Stock on the date preceding such issuance, then the Warrant Price
will be adjusted to the price determined by multiplying the Warrant Price
by the fraction in which: (i) the numerator equals the total shares of
Common Stock outstanding immediately prior to such issuance, plus the
number of shares of Common Stock equal in value to the aggregate
consideration for the issued "additional shares of Common Stock," based
on a price equal to the greater of the Warrant Price or the closing price
of the Common Stock on the date preceding such issuance; and (ii) the
denominator equals the total shares of Common Stock outstanding
immediately after such issuance.
. In the event the Company issues "common stock equivalents," as defined in
the Warrants, at a price per share less than the lower of the Warrant
Price or the closing price of the Common Stock on the date preceding such
issuance, then the Warrant Price will be adjusted to the price determined
by multiplying the Warrant Price by the fraction in which: (i) the
numerator equals the total shares of Common Stock outstanding immediately
prior to such issuance, plus the number of shares of Common Stock equal
in value to the aggregate consideration for the issued "common stock
equivalents," based on a price equal to the greater of the Warrant Price
or the closing price of the Common Stock on the date preceding such
issuance; and (ii) the denominator equals the total shares of Common
Stock outstanding immediately after such issuance.
27
. In the event the Company purchases, redeems or otherwise acquires any
shares of Common Stock at a price per share greater than the closing
price of the Common Stock on the date preceding such event then the
Warrant Price will be adjusted to the price determined by multiplying the
Warrant Price by the fraction in which: (i) the numerator equals the
total shares of Common Stock outstanding immediately prior to such event,
minus the number of shares of Common Stock equal in value to the
aggregate consideration for the total number of shares of Common Stock
purchased, redeemed or otherwise acquired at the applicable closing
price; and (ii) the denominator equals the total shares of Common Stock
outstanding immediately after such event.
. Upon the adjustment of the Warrant Price as a result of any of the events
set forth above, the number of shares of Common Stock underlying the
Warrants will be adjusted to the amount obtained by multiplying the
number of shares of Common Stock underlying the Warrants immediately
prior to such Warrant Price adjustment by the fraction in which: (i) the
numerator equals the Warrant Price prior to such adjustment; and (ii) the
denominator equals the adjusted Warrant Price.
Vote Required for Approval
Approval and ratification of the issuance of the Securities will require the
affirmative vote of a majority of the votes cast at the Special Meeting. The
enclosed proxy will be voted as specified, but if no specification is made with
respect to the proposal, it will be voted in favor of the proposal to approve
the issuance of the Securities.
The Board of Directors recommends a vote FOR approval and ratification of
the issuance of the Securities to the Investors.
28
VOTING PROCEDURES
Shares can be voted only if the stockholder is present at the Special
Meeting in person or by proxy. Whether or not you plan to attend the Special
Meeting in person, you are encouraged to sign and return the enclosed proxy
card in the enclosed envelope. If you sign your proxy, but do not mark your
choices, your shares will be voted in favor of the amendment to the Company's
Certificate of Incorporation, in favor of approving the Xceed Inc. Amended and
Restated Millennium Stock Option Plan, and in favor of approving the issuance
of the Securities.
You can revoke your proxy at any time before it is exercised. To do so, you
must give written notice of revocation to our Corporate Secretary, submit
another properly executed proxy with a more recent date, or vote in person at
the Special Meeting.
VOTE REQUIRED FOR APPROVAL OF THE PROPOSALS
A "quorum" is the presence at the meeting, in person or by proxy, of the
holders of a number of shares entitling them to exercise a majority of the
voting power of the outstanding shares of Common Stock entitled to vote at the
Special Meeting. There must be a quorum for the meeting to be held. Abstentions
are counted for the purposes of determining the presence of a quorum, but are
not considered a vote cast under Delaware law.
The affirmative vote of a majority of the votes cast at the Special Meeting
is required for approval of the Xceed Inc. Amended and Restated Millennium
Stock Option Plan and for approval of the issuance of the Securities. The
affirmative vote of a majority of the outstanding stock entitled to vote at the
Special Meeting is required for approval of the amendment to the Company's
Certificate of Incorporation.
STOCKHOLDER PROPOSALS
To be considered for inclusion in our proxy statement for the 2001 annual
meeting, director nominations and other proposals of stockholders must be
submitted in writing to our Corporate Secretary a reasonable time before the
Company begins to print and mail its proxy materials for the 2001 annual
meeting. For any director nomination or other proposal that is not submitted
for inclusion in next year's proxy statement but is instead sought to be
presented directly to the stockholders at the 2001 annual meeting, management
will be able to vote proxies in its discretion if the Company:
. receives notice of the proposal before the close of business on February
25, 2001 and advises stockholders in the proxy statement for the 2001
annual meeting about the nature of the proposal and how management
intends to vote on the proposal, or
. does not receive notice of the proposal a reasonable time before the
Company begins to print and mail its proxy materials for the 2001 annual
meeting.
All director nominations and other proposals of stockholders with regard to
the 2001 annual meeting should be submitted by certified mail, return receipt
requested, to Xceed Inc., 233 Broadway, New York, New York 10279, Attention:
Secretary.
OTHER MATTERS
The management of the Company knows of no other business that will be
presented for consideration at the meeting, except for the possible
presentation of a stockholder proposal that has been omitted from the Proxy
Statement in accordance with the rules of the Securities and Exchange
Commission. However, if any other matters, including any omitted stockholder
proposals, are properly presented at the meeting, it is the intention of the
proxy holders named in the accompanying proxy card to vote such proxies in
accordance with their best judgment.
29
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report on Forms 10-K and 10-K/A for the fiscal year
ended August 31, 1999 and the Company's Quarterly Reports on Form 10-Q for the
fiscal quarters ended November 30, 1999, February 29, 2000 and May 31, 2000,
each as filed with the Securities and Exchange Commission, are available upon
request. All requests should be directed to Alex Alaminos, Stockholder
Relations, at (212) 553-3047. In addition, the Annual Report and the Quarterly
Reports as well as additional filings with the Securities and Exchange
Commission are available through our website at www.xceed.com.
EXPENSE OF SOLICITATION
The cost of soliciting proxies, which also includes the preparation,
printing and mailing of this Proxy Statement, will be borne by the Company.
Solicitation will be made by the Company primarily through the mail. The
Company has engaged the firm of Georgeson & Company, Inc. to assist in the
distribution and solicitation of proxies. Georgeson & Company, Inc. will
receive a fee of $7,500 plus expenses for these services. Directors, officers
and regular employees of the Company may solicit proxies personally, by
telephone or telegram. The Company will request brokers and nominees to obtain
voting instructions of beneficial owners of stock registered in their names and
will reimburse them for any expenses incurred in connection therewith.
PLEASE DATE, SIGN AND RETURN THE PROXY CARD AT YOUR EARLIEST CONVENIENCE IN
THE ENCLOSED RETURN ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES. A PROMPT RETURN OF YOUR PROXY CARD WILL BE APPRECIATED AS IT WILL SAVE
THE EXPENSE OF FURTHER MAILINGS.
By Order of the Board of Directors,
/s/ Werner G. Haase
Werner G. Haase, Co-Chairman
New York, New York
September 8, 2000
30
XCEED INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
---------
Report of Deloitte & Touche LLP, Independent Auditors................ F-2
Report of Holtz Rubenstein & Co., LLP, Independent Auditors.......... F-3
Consolidated Balance Sheets at August 31, 1999 (Restated) and 1998... F-4
Consolidated Statements of Operations for the years ended
August 31, 1999 (Restated), 1998 and 1997........................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 1999 (Restated), 1998 and 1997........................... F-6
Consolidated Statements of Cash Flows for the years ended
August 31, 1999 (Restated), 1998 and 1997........................... F-7
Notes to Consolidated Financial Statements........................... F-8-F-24
Condensed Consolidated Balance Sheets as of May 31, 2000 and August
31, 1999............................................................ F-25
Condensed Consolidated Statements of Operations for the nine and
three months ended
May 31, 2000 and 1999............................................... F-26
Condensed Consolidated Statements of Cash Flows for the nine months
ended
May 31, 2000 and 1999............................................... F-27
Notes to Condensed Consolidated Financial Statements................. F-28-F-31
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Xceed Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheet of Xceed Inc.
and Subsidiaries (the "Company") as of August 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of August 31, 1999, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2.s., the accompanying 1999 financial statements have
been restated.
/s/ Deloitte & Touche LLP
New York, New York
March 20, 2000
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Xceed, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheet of Xceed, Inc.
and Subsidiaries as of August 31, 1998 and the related consolidated statements
of operations, stockholders' equity and cash flows for the two years ended
August 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Xceed, Inc. and Subsidiaries as of August 31, 1998 and the results of their
operations and their cash flows for the two years ended August 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Holtz Rubenstein & Co., LLP
_________________________________
Holtz Rubenstein & Co., LLP
Melville, New York
November 19, 1999 (except for Note 4,
as to which the date is January 13, 2000)
F-3
XCEED INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
August 31,
---------------------
1999 1998
------------- -------
(As restated,
see Note 2.s)
ASSETS
Current Assets:
Cash and cash equivalents............................. $19,754 $13,789
Investment in marketable securities (Note 5).......... 367 97
Accounts receivable, net of allowance for
uncollectible accounts of $1,190 and $25,
respectively......................................... 9,868 6,379
Program costs and earnings in excess of customer
billings............................................. 3,735 2,233
Income tax refund receivable.......................... 2,437 --
Inventories........................................... -- 1,022
Prepaid expenses and other current assets............. 470 861
Deferred income taxes (Note 10)....................... 358 14
Net assets related to discontinued operations (Note
4)................................................... 2,999 --
------- -------
Total current assets................................ 39,988 24,395
Property and equipment, net (Notes 6 and 9)............. 3,268 1,533
Due from officer (Note 7)............................... 1,223 1,223
Goodwill and intangible assets--net of accumulated
amortization of $4,308 and $0, respectively (Note 3)... 42,999 6,088
Deferred income taxes (Note 10)......................... 1,046 484
Other assets............................................ 3,411 993
------- -------
Total assets........................................ $91,935 $34,716
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, banks (Note 8)......................... $ 862 $ --
Accounts payable and accrued expenses (Note 3)........ 6,611 3,157
Accrued compensation.................................. 2,588 2,636
Current portion of long-term debt (Note 9)............ 389 41
Customer billings in excess of program costs and
earnings............................................. 3,538 1,009
Income taxes payable (Note 10)........................ -- 219
------- -------
Total current liabilities........................... 13,988 7,062
Long-term debt (Note 9)................................. 2,625 --
Accrued lease obligation................................ 875 875
Deferred revenue........................................ 296 587
------- -------
Total liabilities................................... 17,784 8,524
------- -------
Commitments and contingencies (Note 13).................
Stockholders' equity (Notes 3, 5, 10 and 11):
Common stock, $.01 par value; authorized 30,000,000
shares; 17,747,554 and 10,277,053 issued and
17,732,554 and 10,262,053 outstanding, respectively.. 177 103
Preferred stock, $.05 par value; authorized 1,000,000
shares; none issued or outstanding................... -- --
Accumulated other comprehensive loss.................... (20) (27)
Additional paid-in capital.............................. 78,258 22,657
Deferred stock compensation............................. (225) (112)
Treasury stock, at cost; 15,000 shares.................. (71) (71)
Retained earnings (accumulated deficit)................. (3,968) 3,642
------- -------
Total stockholders' equity.......................... 74,151 26,192
------- -------
Total liabilities and stockholders' equity.......... $91,935 $34,716
======= =======
See notes to consolidated financial statements.
F-4
XCEED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Years Ended August 31,
--------------------------------
1999 1998 1997
---------- --------- ---------
(As
restated,
see Note
2.s)
Revenues (Note 2).............................. $ 63,450 $ 42,266 $ 46,007
---------- --------- ---------
Operating expenses: (Notes 2 and 11)
Cost of revenues............................. 52,516 36,413 39,005
Selling, general and administrative
(excluding stock-based compensation)........ 18,132 6,561 5,545
Provision for doubtful accounts.............. 1,000 4 27
Stock-based compensation..................... 420 170 --
Depreciation and amortization................ 5,219 20 68
Research and development..................... 579 866 429
---------- --------- ---------
77,866 44,034 45,074
---------- --------- ---------
Operating income (loss)...................... (14,416) (1,768) 933
---------- --------- ---------
Other income (expense):
Interest income.............................. 735 691 451
Interest expense............................. (485) (4) (71)
Gain (loss) on sale of investments........... 24 522 (20)
Other, net................................... 122 39 (89)
---------- --------- ---------
396 1,248 271
---------- --------- ---------
(Loss) income from continuing operations before
(benefit) provision for income taxes.......... (14,020) (520) 1,204
Income tax (benefit) provision (Note 10)....... (4,329) (257) 706
---------- --------- ---------
(Loss) income from continuing operations....... (9,691) (263) 498
Discontinued operations:
Income from operations, net of taxes of
$1,579, $1,545 and $1,602, respectively
(Note 4).................................... 2,081 1,813 1,379
---------- --------- ---------
Net (loss) income.............................. $ (7,610) $ 1,550 $ 1,877
========== ========= =========
Net (loss) income per common share (Note 11):
Basic:
(Loss) income from continuing operations... $(.64) $(.03) $.07
Income from discontinued operations........ .14 .23 .20
---------- --------- ---------
Net (loss) income.......................... $(.50) $.20 $.27
========== ========= =========
Diluted:
(Loss) income from continuing operations... $(.64) $(.03) $.07
Income from discontinued operations........ .14 .23 .19
---------- --------- ---------
Net (loss) income.......................... $(.50) $.20 $.26
========== ========= =========
Weighted average number of shares outstanding:
Basic........................................ 15,219,140 7,755,795 7,023,770
========== ========= =========
Diluted...................................... 15,219,140 7,755,795 7,339,625
========== ========= =========
See notes to consolidated financial statements.
F-5
XCEED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share data) (Notes 3, 5, 10, 11)
Common stock Preferred stock
30,000,000 1,000,000
shares shares, $.05
$.01 par value par value Accumulated Retained
---------------- ------------------ Additional other Deferred earning
Par Par Paid-in comprehensive stock (accumulated Treasury
Shares value Shares value Capital income (loss) compensation deficit) stock Total
---------- ----- -------- -------- ---------- ------------- ------------ ------------ -------- -------
Balance,
September 1,
1996............ 7,020,180 $ 70 -- $ -- $10,163 $ 307 $ -- $ 215 $(56) $10,699
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- 1,877
Net change in
the valuation
adjustment on
marketable
equity
securities..... -- -- -- -- -- (91) -- -- --
Other
comprehensive
income......... 1,786
Exercise of
options/warrants.. 23,000 -- -- 48 -- -- -- -- 48
---------- ---- ------- -------- ------- ----- ----- ------- ---- -------
Balance, August
31, 1997........ 7,043,180 70 -- -- 10,211 216 -- 2,092 (56) 12,533
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- 1,550 --
Net change in
the valuation
adjustment on
marketable
equity
securities..... -- -- -- -- -- (243) -- -- --
Other
comprehensive
income......... 1,307
Exercise of
options/warrants.. 1,983,873 20 -- -- 5,927 -- -- -- -- 5,947
Purchase of 5,000
shares of
treasury stock.. -- -- -- -- -- -- -- -- (15) (15)
Issuance of stock
options for
services........ -- -- -- -- 282 -- (262) -- -- 20
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- 150 -- -- 150
Common stock
issued for
acquired
businesses...... 1,250,000 13 -- -- 6,237 -- -- -- -- 6,250
---------- ---- ------- -------- ------- ----- ----- ------- ---- -------
Balance, August
31, 1998........ 10,277,053 103 -- -- 22,657 (27) (112) 3,642 (71) 26,192
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- (7,610) --
Net change in
the valuation
adjustment on
marketable
equity
securities..... -- -- -- -- -- 7 -- -- --
Other
comprehensive
loss........... (7,603)
Exercise of
options/warrants.. 2,809,910 28 -- -- 14,011 -- -- -- -- 14,039
Common stock
issued for
acquired
business (as
restated, see
Note 2.s)....... 3,174,143 31 -- -- 30,516 -- -- -- -- 30,547
Securities issued
in private
placement....... 976,562 10 -- -- 9,990 -- -- -- -- 10,000
Issuance of
securities for
services........ 509,886 5 -- -- 528 -- (533) -- -- --
Amortization of
deferred stock
compensation (as
restated, see
Note 2.s)....... -- -- -- -- -- -- 420 -- -- 420
Tax benefit from
exercise of
stock options... -- -- -- -- 556 -- -- -- -- 556
---------- ---- ------- -------- ------- ----- ----- ------- ---- -------
Balance, August
31, 1999........ 17,747,554 $177 -- $ -- $78,258 $ (20) $(225) $(3,968) $(71) $74,151
========== ==== ======= ======== ======= ===== ===== ======= ==== =======
See notes to consolidated financial statements.
F-6
XCEED INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended August 31,
------------------------------
1999 1998 1997
------------- ------- -------
(As restated,
see Note 2.s)
Cash flows from operating activities:
Net (loss) income.............................. $(7,610) $ 1,550 $ 1,877
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Gain (loss) on sale of marketable securities... (24) (522) 20
Gain (loss) on sale of equipment............... 6 (9) --
Loss on impairment of notes receivable......... -- -- 100
Provision for losses on accounts receivable.... 1,000 4 27
Stock-based compensation....................... 420 170 --
Depreciation and amortization.................. 5,514 351 461
Deferred income taxes.......................... (1,676) (135) 451
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Accounts receivable............................ (4,819) (2,220) 575
Inventories.................................... (114) 342 (262)
Program costs and earnings in excess of
billings...................................... (448) (184) (1,775)
Prepaid expenses and other current assets...... 435 (527) (53)
Other assets................................... 476 (105) 32
Increase (decrease) in liabilities:
Accounts payable and accrued expenses.......... 1,441 1,435 771
Income taxes payable........................... (2,086) (358) 139
Customer billings in excess of program costs... 2,205 95 (1,208)
Accrued lease liability........................ -- 11 22
Deferred revenues.............................. (170) 587 --
Other current liabilities...................... -- -- (15)
------- ------- -------
Net cash (used in) provided by operating
activities................................... (5,450) 475 1,162
------- ------- -------
Cash flows from investing activities:
Investments in marketable securities........... (822) (741) (27)
Proceeds from sale of marketable securities.... 588 1,527 138
Increase in note receivable.................... -- -- (100)
Proceeds from sale of property and equipment... -- 10 13
Acquisition of businesses, net of cash
acquired...................................... (5,592) 44 --
Acquisition of property and equipment.......... (2,335) (207) (150)
------- ------- -------
Net cash (used in) provided by investing
activities................................... (8,161) 633 (126)
------- ------- -------
Cash flows from financing activities:
Principal payments on long-term debt........... (5,765) (49) (39)
Repayment of notes payable..................... (787) -- (1,065)
Proceeds from notes payable.................... 862 -- --
Proceeds from long-term debt................... 1,227 -- --
Advances to affiliate.......................... -- (432) (83)
Purchase of treasury stock..................... -- (15) --
Proceeds from the exercise of warrants and
options....................................... 14,039 5,947 48
Proceeds from private placement offering....... 10,000 -- --
------- ------- -------
Net cash provided by (used in) financing
activities................................... 19,576 5,451 (1,139)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 5,965 6,559 (103)
Cash and cash equivalents,
Beginning of period............................ 13,789 7,230 7,333
------- ------- -------
Cash and cash equivalents,
End of period.................................. $19,754 $13,789 $ 7,230
======= ======= =======
See notes to consolidated financial statements.
F-7
XCEED INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Three Years Ended August 31, 1999
(In thousands, except share and per share data)
1. ORGANIZATION AND NATURE OF OPERATIONS
Xceed Inc. and Subsidiaries (the "Company") provides Internet professional
services ("Internet Professional Services"), and performance enhancement
business services ("Performance Enhancement Business"). These services include
strategic consulting, creative design, technology integration, business
transformation, research and analysis and marketing and branding.
The fiscal year ended August 31, 1999 represented a transitional year for
the Company as it completed several strategic acquisitions to enable it to
become a provider of a full range of services that allow it to deliver end-to-
end solutions enabling companies to capitalize on the reach and efficiency of
the Internet. A significant portion of the Company's historic revenues in the
accompanying financial statements have been generated from Performance
Enhancement Business, including the fulfillment of awards pursuant to incentive
performance programs and fees designing and implementing training and
communications programs in the health field. In addition, the Company has
generated revenues from its Water-Jel division, which sold first aid health
products, and from its Journeycorp division, which generates revenues from
travel management services rendered to major U.S. corporations. The Company's
management adopted a plan to dispose of its Water-Jel and Journeycorp
divisions, and in January 2000, completed the sale of its Water-Jel division
(see Note 4). The Company is actively pursuing opportunities to sell the
Journeycorp division and expects that such a sale should be completed during
the Company's fiscal 2000. As a result, the Water-Jel and Journeycorp divisions
have been reflected as discontinued operations in the accompanying consolidated
financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of presentation--The consolidated financial statements are prepared
on the accrual basis utilizing accounting principles generally accepted in the
United States of America.
b. Principles of consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been eliminated.
c. Revenue recognition--The Company has historically earned revenues from
three segments of its business:
. Health products (Water-Jel division);
. Travel management (Journeycorp division); and
. Integrated corporate communications (including its Internet Professional
Services and Performance Enhancement Business).
Revenues from the sale of health products are earned when goods are shipped
to the customer. A provision is made for estimated returns on such shipments,
which is reflected as a reduction of revenue.
Revenues from the travel management business are recognized upon the
ticketing of flights.
Revenues for the Company's Internet Professional Services and Performance
Enhancement Business are recognized based on the nature of the contract.
Revenues from fixed price contracts are recognized using the percentage of
completion method. Revenues from time-and-materials contracts are accounted for
as time is incurred.
F-8
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company periodically evaluates cost and revenue assumptions in fixed
price contracts. Provisions for estimated losses on uncompleted contracts are
made on a contract by contract basis and are recognized in the period in which
such losses become probable and estimable. Most contracts are cancelable by
either the Company or the client upon 30 days notice, with payments due for
services completed through the date of termination. No significant losses have
been incurred on cancelled contracts.
Unbilled services on contracts are comprised of costs plus earnings in
excess of contractual billings on such contracts. Billings in excess of cost
plus earnings and billings in excess of revenue recognized under the percentage
of completion method on fixed price contracts are classified as deferred
revenue and the current portion is included in accounts payable and accrued
expenses in the accompanying balance sheet. Performance program costs include
the costs of goods and services incurred for award fulfillment.
d. Investments in marketable securities--Debt and equity securities are
classified as "available-for-sale securities" and reported at market value,
with the unrealized gains and losses excluded from operating results and
reported as a separate component of stockholders' equity. A decline in the
market value of any available-for-sale security below cost that is deemed other
than temporary is charged to earnings resulting in the establishment of a new
cost basis for the security.
Gains and losses on the sale of securities available-for-sale are computed
on the basis of specific identification of the adjusted cost of each security.
e. Property and equipment--Property and equipment is stated at cost, net of
accumulated depreciation and amortization. Property and equipment is
depreciated on a straight-line basis over the estimated useful lives of the
related assets. Amortization of leasehold improvements is computed using the
straight-line method over the estimated useful lives of the related assets or
the remaining term of the lease, whichever is shorter.
f. Goodwill and intangible assets--Goodwill, which represents the excess of
the purchase price over the fair value of the net assets acquired, is being
amortized over a period of seven to twelve years, on a straight-line basis.
Other identifiable intangible assets associated with customer base, workforce
and industry contacts are being amortized over a seven-year period on a
straight-line basis. Amortization of goodwill and intangible assets was $4,308
for the year ended August 31, 1999. There was no amortization expense related
to goodwill and intangible assets for the years ended August 31, 1997 or 1998.
The Company reviews goodwill and certain identifiable intangibles for
impairment in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", as described in Note 2g.
g. Accounting for long-lived assets--The Company follows the provisions of
SFAS No. 121. This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to these assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of. The
Company reviews long-lived assets and certain identifiable intangibles to be
held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset exceeds the fair value of the
asset. If other events or changes in circumstances indicate that the carrying
amount of an asset that the Company expects to hold and use may not be
recoverable, the Company will estimate the undiscounted future cash flows
expected to result from the use of the asset and its eventual disposition, and
recognize an impairment loss. The impairment loss, if determined to be
necessary, would be measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
h. Concentration of risk--The Company invests its excess cash in deposits
and money market accounts with major financial institutions and in commercial
paper of companies with strong credit ratings. Generally,
F-9
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the investments mature within 90 days and therefore, are subject to little
risk. The Company has not experienced losses related to these investments.
The concentration of credit risk in the Company's accounts receivable is
mitigated by the Company's credit evaluation process, reasonably short
collection terms and the geographical dispersion of revenue. However, the
integrated corporate communications group includes startup companies in its
client base. Although the Company generally does not require collateral,
reserves for potential credit losses are maintained and such losses have been
within management's expectations.
A significant portion of revenues earned by the Company's retail corporate
travel business segment is derived from commissions earned on airline bookings
with major U.S. and foreign airline carriers.
One customer accounted for 26%, 23% and 26% of the Company's 1999, 1998 and
1997 revenues, respectively.
i. Income taxes--The Company accounts for income taxes under the provisions
of SFAS No. 109, "Accounting for Income Taxes." SFAS 109 establishes financial
accounting and reporting standards for the effect of income taxes that result
from the differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
j. Stock-based compensation--The Company accounts for stock-based
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and accounts for stock issued for services provided by others than
employees in accordance with and complies with the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expenses are based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price. A
new measurement date for purposes of determining compensation is established
when there is a substantive change to the terms of an underlying option.
k. Basic and diluted net income per common share--Basic net income per
common share is based on the weighted average number of shares of common stock
outstanding during each year. Diluted net income per common share is based on
the weighted average number of shares of common stock outstanding during each
year, adjusted for the dilutive effect of potentially issuable common shares
arising from the assumed exercise of stock options and warrants and conversion
of preferred shares. Basic loss per common share was computed by dividing net
loss by the weighted average number of shares of common stock outstanding.
Diluted loss per common share does not give effect to the impact of options,
warrants and conversion of preferred shares because their effect would have
been anti-dilutive.
l. Research and product development costs--Research and product development
costs, consisting of salaries and materials related to software development,
are expensed as incurred. SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility and prior to general release of the software. Based
on the Company's development process, technological feasibility is established
upon completion of a working model. The period between technological
feasibility and general release is relatively short and the costs incurred
during this period have been too insignificant to warrant capitalization.
m. Use of estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts
F-10
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Such estimates primarily relate to
accounts receivable, recoverability and lives of goodwill and revenues and
costs on percentage of completion contracts. Actual results could differ from
those estimates.
n. Advertising costs--Advertising costs are charged to operations when the
advertising first takes place. The Company incurred advertising costs of
$1,223, $169 and $86 for the years ended August 31, 1999, 1998 and 1997,
respectively.
o. Cash and cash equivalents--The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
p. Comprehensive income (loss)--Other comprehensive income refers to
revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from net
income as these amounts are recorded directly as an adjustment to stockholders'
equity. The Company's other comprehensive income is comprised of net unrealized
gain (loss) on marketable securities. The tax benefit or expense, as well as
any reclassifications related to the components of other comprehensive income
were not significant.
q. New accounting pronouncements--In 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which was subsequently amended by SFAS No. 137,
"Accounting for Derivative Financial Instruments and Hedging Activities--
Deferral of the effective date of SFAS No. 133." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal
quarters beginning after June 15, 2000 and therefore will be effective for the
Company's fiscal year 2001. The Company has not completed its evaluation of the
effects of SFAS No. 133 and expects to complete such by the end of fiscal 2000.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending August 31, 2000. Adoption of SOP 98-1 is not expected to
have a material impact on the Company's financial condition or results of
operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. As the Company has expensed
these costs historically, the adoption of this standard is not expected to have
a significant impact on the Company's results of operations or financial
position.
r. Reclassifications--Certain reclassifications have been made to the
Company's 1997 and 1998 financial statements to conform to the 1999
presentation.
s. Restatement--Subsequent to the issuance of the Company's financial
statements for the year ended August 31, 1999, management determined that it
had capitalized costs relating to a signing bonus that should have been
expensed when paid. In addition, management determined that it had excluded the
value of stock
F-11
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
issued to employees from the calculation of the purchase price and utilized the
incorrect market values of its publicly-traded common stock to arrive at total
stock consideration issued in connection with certain business combinations
accounted for as purchase transactions. As a result, the 1999 financial
statements have been restated from amounts previously reported to properly
account for these transactions. A summary of the significant effects of the
restatements are as follows:
As
Previously As
Reported Restated
---------- --------
As of August 31, 1999:
Goodwill and intangible assets....................... $40,575 $42,999
Prepaid expenses and other current assets............ 1,024 470
Total assets......................................... 90,065 91,935
Deferred stock compensation.......................... (3,216) (225)
Additional paid-in capital........................... 79,379 78,258
Total stockholders' equity........................... 72,281 74,151
For the Year Ended August 31, 1999:
Selling, general & administrative expense (excluding
stock-based compensation)........................... $17,578 $18,132
Stock-based compensation............................. 1,390 420
Depreciation & amortization.......................... 4,803 5,219
The restatements to the statement of operations did not have an impact on
loss from continuing operations, net loss or basic or diluted loss per share.
t. Segment information--On September 1, 1998, the Company adopted SFAS No.
131, "Disclosures About Segments of An Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas, and major customers. This Statement did not impact the
Company's consolidated financial position, results of operations, or cash
flows. Because the Company currently operates a single line of business and
manages its operations under a unified management and reporting structure, no
additional segment disclosures are provided.
3. BUSINESS COMBINATIONS
a. Acquired entities--During the period from August 5, 1998 through August
31, 1999, the Company completed the acquisitions of four Internet professional
services firms in various transactions accounted for as purchase business
combinations. Collectively, the companies are referred to herein as the
"Acquired Entities." The aggregate purchase price of the Acquired Entities was
approximately $20,265, including 2,640,364 shares of common stock, with a value
of $18,472 and $1,793 of cash and related expenses.
The acquisition prices of the Acquired Entities were allocated, on an
entity-by-entity basis, to the assets acquired, including tangible and
intangible assets and liabilities assumed based upon the fair values of such
assets and liabilities on the dates of the acquisitions. The historical
carrying amounts of the tangible assets and liabilities approximated their fair
values on the dates of acquisitions. Approximately $20,885 of the aggregate
purchase price was allocated to goodwill, primarily workforce in place, and is
being amortized over its estimated useful life of seven years.
b. Zabit & Associates--In September 1998, the Company acquired Zabit &
Associates, Inc. and one of its affiliates ("Zabit"), a company engaged in
integrated corporate communications. In exchange for all of the
F-12
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding shares of Zabit, the Company issued 2,258,724 shares of restricted
common stock having a market value of $20,442 and notes totaling $6,730,
together with cash consideration of $5,200. The Company accounted for this
acquisition under the purchase method of accounting. Approximately $30,372 and
$3,000 of the purchase price was allocated to goodwill and trademark (which is
included in intangible assets), respectively, and are being amortized over
their estimated useful lives of 12 years.
c. Xceed Atlanta--In April 1999, the Company acquired the remaining 50%
interest in Xceed Atlanta, Inc. ("Xceed Atlanta") that was owned by an
individual shareholder. To acquire this interest, the Company issued 210,000
shares of common stock, valued at $3,885. Xceed Atlanta provided marketing
services that complemented the Company's Performance Enhancement Business. The
shares had not been issued as of August 31, 1999, and accordingly, the
consideration due is included in Accounts Payable and Accrued Expenses in the
accompanying financial statements. The transaction has been accounted for under
the purchase method of accounting.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the business combinations described above
had occurred on September 1, 1997:
Fiscal years
ended August 31,
-----------------
1999 1998
-------- -------
Revenues................................................. $ 67,440 $63,592
Loss from continuing operations.......................... (10,519) (5,203)
Net loss................................................. (8,539) (3,390)
Basic and diluted net loss per share..................... $ (0.54) $ (0.26)
The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable. The pro forma results do not necessarily
represent results which would have occurred if the business combination, had
taken place at the date and on the basis assumed above.
Subsequent to year end, the Company entered into additional business
combinations (see Note 16).
4. DISCONTINUED OPERATIONS
In January 2000, the Company completed the sale of its Water-Jel division
for cash of $4 million to an unrelated Company. The selling price is subject to
certain adjustments, which in the opinion of the Company's management, should
not have a significant impact on the Company's financial condition or results
of operations. As a result, a gain of approximately $1.7 million will be
recorded by the Company during the second quarter of fiscal year ending August
31, 2000.
In January 2000, the Company's Board of Directors approved a plan to sell
its Journeycorp division. Accordingly, the operating results of Journeycorp for
the years ended August 31, 1999, 1998 and 1997 have been segregated from
continuing operations and reported with the Water-Jel results as a separate
line item in the statement of operations.
The Company has restated its prior financial statements to present the
operating results of its Water-Jel and Journeycorp divisions as discontinued
operations. Net assets to be disposed of, at their book value, have been
separately classified in the accompanying balance sheet at August 31, 1999. The
balance sheet as of August 31, 1998 has not been restated to reflect these
dispositions.
F-13
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information for Water-Jel and Journeycorp as
discontinued operations for the fiscal years ended August 31, 1999, 1998 and
1997 is as follows:
Fiscal years ended
August 31,
-----------------------
1999 1998 1997
------- ------- -------
Revenues........................................... $16,485 $16,932 $16,878
Income from discontinued operations, before tax
provision......................................... 3,660 3,358 2,981
Income from discontinued operations, net of tax
provision......................................... 2,081 1,813 1,379
Net assets relating to these discontinued operations primarily relate to
accounts receivable and accounts payable.
5. INVESTMENT IN MARKETABLE SECURITIES
Marketable equity securities, which are classified as available for sale
securities, are carried at the fair value of the securities and the unrealized
gain (loss) on the securities, net of income taxes, is reflected in
stockholders' equity. During the fiscal years ended August 31, 1999, 1998 and
1997, the net change in the valuation adjustment on marketable securities
classified as available-for-sale amounted to $7, $(243) and $(91),
respectively.
The carrying amounts of investment securities as shown in the Company's
balance sheet and their approximate values were as follows:
August 31, 1999
-----------------------
Unrealized
------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale equity investments................ $400 $ 6 $(39) $367
==== ==== ==== ====
August 31, 1998
-----------------------
Unrealized
------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale equity investments................ $170 $-- $(73) $ 97
6. PROPERTY AND EQUIPMENT--NET
Property and equipment, at cost, consists of the following:
August 31,
-------------
1999 1998
------ ------
Machinery and equipment....................................... $4,211 $2,490
Furniture and fixtures........................................ 461 457
Software...................................................... 342 175
Transportation equipment...................................... -- 61
Leasehold improvements........................................ 563 1,031
------ ------
5,577 4,214
Less accumulated depreciation and amortization................ 2,309 2,681
------ ------
$3,268 $1,533
====== ======
F-14
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization expenses related to property and equipment
approximated $667, $20 and $68, for the years ended August 31, 1999, 1998 and
1997, respectively.
7. DUE FROM OFFICER
Due from officer represents a loan to the Company's President, Chief
Executive Officer and Co-Chairman. The loan bears interest at 7% and is payable
in annual installments of $100, which is first applied to accrued interest with
the balance applied to principal. The remaining unpaid principal and any
accrued interest is payable in full in December 2016.
8. NOTES PAYABLE, BANK
In 1999, the Company entered into a credit agreement with a bank which
allowed for borrowings of up to $5,000. As of August 31, 1999, there were no
amounts outstanding under this line of credit. The line expired on February 29,
2000 and is collateralized by the Company's personal property. The Company is
currently negotiating with the bank for a one-year extension of such line of
credit.
Zabit is party to a credit agreement which provides for maximum borrowings
equal to the lesser of (i) $950 or (ii) 85% of eligible accounts receivable.
Borrowings are due on demand and bear interest at 9.25%. As of August 31, 1999,
$862 was outstanding under this agreement. Of this amount, $500 was paid in
February 2000, with the remainder to be repaid over six equal monthly
installments through August 2000.
9. LONG-TERM DEBT
Long-term debt consists of the following:
August 31,
-----------
1999 1998
------ ----
Notes payable, bearing interest at 7%, payable in September
2002(a)........................................................... $1,930 $--
Note payable, bearing interest at 10%, payable in monthly
installments of $13 through October 2002; collateralized by
equipment......................................................... 486 --
Note payable, bearing interest at 9.5% payable in monthly
installments of $1 through April 2004; collateralized by
equipment......................................................... 73 --
Capital leases, payable in monthly installments of $17, including
interest, expiring from April 2001 through January 2002,
collateralized by equipment....................................... 413 --
Other.............................................................. 112 41
------ ----
3,014 41
Less current portion............................................... 389 41
------ ----
Long-term debt, excluding current portion.......................... $2,625 $--
====== ====
- --------
a. Payable to former Zabit shareholders in connection with acquisition (see
Note 3). The noteholders are currently officers/employees of the Company.
F-15
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maturities of long-term debt are as follows:
Bank and Capitalized
Fiscal year ending August 31, other debt leases Total
----------------------------- ---------- ----------- ------
2000......................................... $ 230 $209 $ 439
2001......................................... 220 209 429
2002......................................... 170 53 223
2003......................................... 1,971 -- 1,971
2004......................................... 10 -- 10
------ ---- ------
Total minimum payments..................... 2,601 471 3,072
Less amounts representing interest ($50 in
2000)....................................... -- (58) (58)
------ ---- ------
Present value of minimum payments............ $2,601 $413 $3,014
====== ==== ======
Certain notes are guaranteed by corporate officers.
Capital lease obligations are collateralized by property and equipment with
a net book value of $408 at August 31, 1999.
10. INCOME TAXES
The Company files a consolidated U.S. federal income tax return that
includes all wholly-owned subsidiaries. State tax returns are filed on a
consolidated or separate basis, depending on applicable laws.
The provision (benefit) for income taxes from continuing operations is
comprised of the following:
Fiscal years ended
August 31,
--------------------
1999 1998 1997
------- ----- ----
Current:
Federal............................................. $(2,424) $(125) $324
State............................................... 216 (85) 219
------- ----- ----
(2,208) (210) 543
------- ----- ----
Deferred:
Federal............................................. (952) (18) 141
State............................................... (1,169) (29) 22
------- ----- ----
(2,121) (47) 163
------- ----- ----
$(4,329) $(257) $706
======= ===== ====
The Company's provision for income taxes reflects benefits from the
utilization of net operating loss carryforwards of approximately $386 for the
year ended August 31, 1997.
The Company has various state net operating loss carryforwards which expire
at various dates through August 31, 2019. These loss carryforwards can be used
to offset future taxable income.
F-16
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net deferred tax amounts included in the financial statements consist of
the following:
August 31,
-----------
1999 1998
------ ----
Deferred tax assets:
Property and equipment........................................ $ 109 $118
Accrued liabilities........................................... 725 402
Accounts receivable........................................... 508 10
Goodwill and other assets..................................... 430 --
Deferred revenue.............................................. 184 270
Stock compensation............................................ 162 78
State loss carryforwards...................................... 522 --
Other......................................................... 6 40
------ ----
Total deferred tax assets................................... 2,646 918
------ ----
Deferred tax liabilities:
Cash basis adjustment......................................... 739 --
Deferred salaries and commissions............................. 336 113
Investment in subsidiary...................................... -- 307
Deferred commission........................................... 52 --
Other......................................................... 115 --
------ ----
Total deferred tax liabilities.............................. 1,242 420
------ ----
Net deferred income tax assets................................ $1,404 $498
====== ====
The Company's effective tax rates on income (loss) from continuing
operations differs from the Federal statutory rate as follows:
Fiscal years ended August 31,
-----------------------------------
1999 1998 1997
---------- ---------- ---------
Federal statutory rate.................. (34.0)% (34.0)% 34.0%
State taxes, net of federal benefit..... (10.0) (13.5) 17.2
Federal income tax credits.............. -- 5.3 (1.9)
Permanent differences................... 8.8 (4.5) 1.8
Other................................... 4.3 (2.7) 7.5
---------- ---------- ---------
(30.9)% (49.4)% 58.6%
========== ========== =========
The tax effect of excess deductions for stock-based awards, whose
compensation cost recorded for tax purposes exceeds the compensation cost
recorded for financial reporting purposes, is recognized as additional paid-in
capital.
11. STOCKHOLDERS' EQUITY
a. Capitalization--The Company is authorized to issue 30,000,000 shares of
$0.01 par value common stock and 1,000,000 shares of $0.05 par value preferred
stock. The Company's Board of Directors has the authority to issue the
undesignated preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof.
F-17
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
b. Private placement of securities--In June 1999, the Company completed a
private sale of securities to a group of accredited investors. Under the terms
of the offering, the Company issued an aggregate of 976,562 shares of common
stock and options to acquire an additional 976,562 shares of common stock for
proceeds of $10,000. The options have an exercise price of $19.01 and are
exercisable for a five year period beginning in November 1999.
c. Stock options--
(i) The Company adopted incentive stock option plans in various years
from 1990 through 1999 which provide for the granting of options to
employees, officers, directors, and others who render services to the
Company. Under all of these plans, in the aggregate, options to purchase
not more than 5,687,500 shares of common stock may be granted, at a price
which may not be less than the fair market value per share in the case of
incentive stock options or 85% of fair market value for non-qualified
options. Options expire at various dates through August 2009.
A summary of the status of the Company's various fixed stock option
plans at August 31, 1999, 1998 and 1997 and changes during the years then
ended is presented below:
Fiscal years ended August 31,
-----------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Weighted average Weighted average Weighted average
Fixed Stock Options Shares exercise price Shares exercise price Shares exercise price
------------------- --------- ---------------- --------- ---------------- --------- ----------------
Outstanding, beginning
of year................ 3,076,625 $ 4.03 1,185,125 $1.80 1,187,125 $1.80
Granted................. 3,901,375 15.37 2,006,000 5.20 32,500 2.00
Exercised............... (765,330) 3.11 (114,500) 1.53 (22,000) 2.04
Canceled................ (23,500) 7.89 -- -- (12,500) 2.32
--------- ------ --------- ----- --------- -----
Outstanding, end of
year................... 6,189,170 $11.27 3,076,625 $4.03 1,185,125 $1.80
========= ====== ========= ===== ========= =====
Options exercisable, end
of year................ 2,719,452 $ 5.12 2,036,125 $4.63 1,185,125 $1.80
========= ====== ========= ===== ========= =====
The weighted-average fair value of options granted was $5.21, $2.84 and
$1.52 during the years ended August 31, 1999, 1998 and 1997.
The following table summarizes information regarding the Company's stock
options outstanding at August 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Range of Weighted average Weighted Weighted
exercise Number remaining average Number average
price outstanding contractual life exercise price outstanding exercise price
-------- ----------- ---------------- -------------- ----------- --------------
$1.52 -
$4.44... 1,351,028 2.10 $ 3.23 1,350,028 $ 3.23
$6.00 -
$11.50.. 1,633,267 2.42 6.83 1,267,257 6.50
$12.00 -
$17.38.. 1,144,000 4.63 14.38 102,167 12.78
$18.00 -
$22.37.. 2,060,875 9.93 18.27 -- --
(ii) The Company has granted options to acquire shares of common stock
under certain of its employment agreements (see Note 13).
In 1999 and 1998, the Company issued 100,000 and 200,000 options to
consultants which resulted in compensation approximating $287 and $282,
respectively.
F-18
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(iii) The Company has elected the disclosure-only provisions of
Statement of Financial Accounting Standard No. 123, Accounting for Stock-
Based Compensation ("FASB 123") in accounting for its stock options.
Accordingly, no compensation expense has been recognized. If the Company
had recorded compensation expense for the stock options based on the fair
value at the grant date of awards, consistent with the provisions of SFAS
No. 123, the Company's net (loss) income and net (loss) income per share
would have been modified to the following pro forma amounts:
Fiscal Years Ended
August 31,
-----------------------
1999 1998 1997
-------- ------ ------
Net (loss) income:
Actual............................................. $ (7,610) $1,550 $1,877
Pro forma.......................................... (10,868) 1,188 1,871
(Loss) income per share:
Basic:
Actual............................................. $ (.50) $ .20 $ .27
Pro forma.......................................... (.71) .15 .27
Diluted:
Actual............................................. $ (.50) $ .18 $ .26
Pro forma.......................................... (.71) .14 .25
For the purposes of the pro forma presentation, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option pricing model. The following range of weighted average assumptions
were used for grants during the fiscal years ended August 31, 1999, 1998
and 1997:
Fiscal years ended August
31,
---------------------------
1999 1998 1997
------------- ------ ------
Dividend yield................................. 0.00% 0.00% 0.00%
Volatility..................................... 74.00%-90.00% 78.00% 78.00%
Risk-free interest rate........................ 4.94%-5.85% 5.90% 5.90%
Expected life.................................. Various 1 year 1 year
d. Warrants--In connection with a follow-on public offering of its
securities in 1988, the Company issued Class A warrants. Each Class A warrant
entitled the holder to receive one share of common stock and one Class B
warrant at an exercise price of $3.00 per share. Each Class B warrant entitled
the holder to purchase one share of common stock for an exercise price of $6.00
per share.
During fiscal 1998, holders of Class A warrants exercised approximately
1,690,000 warrants prior to the extended expiration date of April 30, 1998. In
February 1999, the Company redeemed all outstanding Class B warrants. Holders
of Class B warrants exercised approximately 1,893,000 warrants.
e. Common stock reserved--Common stock reserved at August 31, 1999 is as
follows:
Incentive stock option plans..................................... 5,057,170
Non-qualified stock option plan.................................. 28,125
Key employees' options........................................... 1,220,000
Consultant's options............................................. 150,000
---------
6,455,295
=========
F-19
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
f. Net (loss) income per common share and per common equivalent share--The
reconciliation of (loss) income from continuing operations for the fiscal years
ended August 31, 1999, 1998 and 1997 is as follows:
Fiscal year ended August 31, 1999
---------------------------------------
Loss Shares Per share
---------- ------------- -------------
Basic loss per share................. $ (9,691) 15,219,140 $ (.64)
Effect of diluted securities--common
stock options and warrants.......... -- -- --
---------- ------------- --------
Diluted loss per share.............. $ (9,691) 15,219,140 $ (.64)
========== ============= ========
Fiscal year ended August 31, 1998
---------------------------------------
Loss Shares Per share
---------- ------------- -------------
Basic loss per share................. $ (263) 7,755,795 $ (.03)
Effect of diluted securities--common
stock options and warrants.......... -- -- --
---------- ------------- --------
Diluted loss per share.............. $ (263) 7,755,795 $ (.03)
========== ============= ========
Fiscal year ended August 31, 1997
---------------------------------------
Income Shares Per share
---------- ------------- -------------
Basic loss per share................. $ 498 7,023,770 $ .07
Effect of diluted securities--common
stock options and warrants.......... -- 315,855 --
---------- ------------- --------
Diluted loss per share.............. $ 498 7,339,625 $ .07
========== ============= ========
For the three years ended August 31, 1999, 1998 and 1997, approximately 7.1
million, 5.4 million and 2.7 million shares of stock issuable from the
potential exercise of dilutive options and warrants have been excluded from the
calculation of diluted earnings (loss), per share since their impact would be
anti-dilutive.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of the following
classes of financial instruments were:
Current assets and current liabilities--The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Long-term debt--The fair value of the Company's long-term debt,
including the current portion, was estimated using a discounted cash flow
analysis, based on the Company's assumed incremental borrowing rates for
similar types of borrowing arrangements. The carrying amount of variable
and fixed rate debt at August 31, 1999 and 1998 approximates fair value.
13. COMMITMENTS
a. Lease commitment--The Company conducts its operations from leased space
in various locations throughout the United States. These leases (classified as
operating leases) expire at various dates through 2014. The Company's
management expects these leases will be renewed or replaced by other leases in
the normal course of business.
F-20
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At August 31, 1999, future net minimum rental payments under operating
leases having initial or remaining non-cancelable terms in excess of one year
are as follows:
Fiscal year ending August 31,
-----------------------------
2000............................................................... $1,551
2001............................................................... $1,403
2002............................................................... $1,249
2003............................................................... $1,062
2004............................................................... $ 984
Thereafter......................................................... $4,062
Rental expenses approximated $1,900, $860 and $870 for the fiscal years
ended August 31, 1999, 1998 and 1997, respectively.
The Company recognizes rent expenses on its leases on a straight-line basis.
The excess of rent expenses on a straight-line basis over the rental payments
made is recorded as an accrued liability.
In October 1999, the Company entered into a 15 year lease agreement for an
operating facility in New York. The agreement provides for monthly rental
payments ranging from $111 to $135. The Company was required to provide a
security deposit of $1,300 in the form of a letter of credit, collateralized by
cash.
b. Employment agreements--The Company is party to employment and consulting
agreements with officers/consultants which provide for minimum annual salaries.
Certain agreements provide for incentive bonuses based upon divisional
profitability and also include a one-time compensation payment of three times
the current annual compensation in the event of a change in corporate control,
as defined.
On August 30, 1999, options to acquire approximately 2,034,000 shares of
common stock at an exercise price of $18.25 were granted under 10 of the
agreements. Certain of the options become exercisable only if specified
financial goals are attained.
Options to acquire 1,000,000 shares of common stock at $6.00 per share and
300,000 shares of common stock at $17.38 per share were granted to an employee
under one of the agreements.
The aggregate minimum commitment under employment agreements are as follows:
Fiscal year ending August 31,
-----------------------------
2000............................................................... $3,998
2001............................................................... $3,595
2002............................................................... $1,049
2003............................................................... $ 250
2004............................................................... $ 250
c. Consulting agreement--The Company is party to a consulting agreement with
an investment banker. The agreement provides for a base quarterly fee of $25.
The agreement also provides for additional remuneration in the event that the
investment banker participates in arranging a merger or acquisition.
d. Retirement Plans--The Company maintains retirement plans which are salary
deferral plans under Section 401(k) of the Internal Revenue Code. Participation
in the plans is voluntary, and any participant may elect to contribute up to
15% of his or her earnings. The Company generally matches 10% of the first 6%
of the employee's contribution. The Company's contribution approximated $25,
$17 and $14 for the fiscal years ended August 31, 1999, 1998 and 1997,
respectively.
F-21
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
e. Litigation--The Company is involved in various lawsuits and claims
incidental to its business. In the opinion of the Company's management, the
ultimate liabilities, if any, resulting from such lawsuits and claims, will not
materially affect the financial position or results of operations of the
Company.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Fiscal years ended
August 31,
---------------------
1999 1998 1997
------- ------ ------
Supplemental disclosures:
Cash paid for interest.............................. $ 483 $ 13 $ 81
======= ====== ======
Cash paid for income taxes.......................... $ 207 $1,719 $1,384
======= ====== ======
Non-cash financing and investing activities:
Common stock issued for acquisitions................ $27,707 $6,250 $ --
======= ====== ======
Stock-based compensation............................ $ 420 $ 150 $ --
======= ====== ======
15. SUBSEQUENT EVENTS (Unaudited)
Acquisitions--
Subsequent to August 31, 1999, the Company has acquired seven companies
engaged in operations such as Internet consulting, interactive marketing and e-
commerce development strategies, custom software design, systems administration
and strategic consulting for mergers and acquisitions, process management and
large systems implementation for an aggregate purchase price of $120,227,
consisting of $17,650 of cash and 2,842,891 shares of the Company's common
stock valued at $102,577. The Company will account for these acquisitions under
the purchase method of accounting. These acquisitions are summarized below
using management's estimates and preliminary evaluation. The actual purchase
price accounting adjustments to reflect the fair value of the net assets will
be based on management's final evaluation, therefore, the information below is
subject to change pending the final allocation of purchase price.
On October 21, 1999, the Company completed the acquisition, by way of
merger, of 5th Floor Interactive, LLC, a New York-based privately held company
which engaged in interactive development. The consideration for the acquisition
consisted of 84,616 shares of the Company's common stock having a market value
of $1,650 and cash of $200.
On November 2, 1999, the Company completed the acquisition, by way of
merger, of Distributed Systems Solutions, Inc., a Phoenix-based privately held
company that provided systems integration services. The consideration for the
acquisition consisted of 248,523 shares of the Company's common stock having a
market value of $5,000 and cash of $4,500.
On November 8, 1999, the Company completed the acquisition, by way of
merger, of Catalyst Consulting Services, Inc., a Phoenix-based privately held
company which provided change management and business transformation services.
The consideration for the acquisition consisted of 68,320 shares of the
Company's common stock having a market value of $1,550.
On January 21, 2000, the Company completed the acquisition, by asset
purchase, of Big Theory, LLC. a privately held company that provided
interactive development and systems integration services. The consideration for
the acquisition consisted of 335,613 shares of the Company's common stock
having an approximate market value of $12,377 and three cash installments
aggregating $4,000.
F-22
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 6, 2000, the Company completed the acquisition, by way of
merger, of Sterling Carteret, Inc., a Colorado Springs privately held company
which provided back end enterprise solutions. The consideration for the
acquisition consisted of 187,920 shares of the Company's common stock having a
market value of $7,000 and cash of $2,950.
On February 10, 2000, the Company completed the acquisition, by way of
merger, of methodfive, inc., a New York-based privately held company engaged in
interactive development. The consideration consisted of 1,797,094 shares of the
Company's common stock equal to $70,500 and cash of $4,500.
On February 25, 2000, the Company completed the acquisition of Pulse
Interactive, B.V., a privately held company based in Amsterdam. Pulse
Interactive engages in interactive development. Consideration consisted of
120,805 shares of the Company's common stock having a market value of $4,500
and cash of $1,500.
Certain of these agreements provided for payment of additional consideration
in the event certain specific performance criteria are met. Furthermore, in
certain of the foregoing transactions, the Company entered into employment
agreements with certain key personnel of the acquired companies.
Cumulative Redeemable Convertible Preferred Stock--
In January 2000, the Company sold 30,000 shares of Series A cumulative
redeemable convertible preferred stock (the "Series A Preferred Stock") to a
group of investors. The net proceeds to the Company were approximately $29,000.
Each share of Series A Preferred Stock is convertible, at the option of the
holder at any time, into 28 shares of common stock, subject to certain
limitations, at a conversion price per share of not less than $25 or greater
than $36. In accordance with Emerging Issues Task Force Consensus No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features,"
the Company recorded $6,466 of the net proceeds of its sale of Series A
Preferred Stock as a dividend in order to recognize the immediate beneficial
conversion feature resulting from the difference between the fair value of its
common stock as of the date of agreement and the maximum conversion price of
$36.
In connection with the issuance, the Company also issued warrants to
purchase 183,273 shares of common stock at an exercise price of $50.10 per
share. The warrants expire on January 13, 2005. Utilizing the Black-Scholes
option pricing model and relative value method, a value of $4,286 of the net
proceeds was allocated to common stock warrants in order to recognize the fair
value of the warrants at the time of issuance.
Since the Series A Preferred Stock is convertible at the option of the
holder at any time, the amount that has been ascribed to the warrants has been
reflected as a deemed dividend so that the Series A Preferred Stock can be
carried at its redemption value of $30,000.
The Series A Preferred Stock has a cumulative annual dividend of 4.0% per
annum and is payable quarterly at the option of the Company in cash or by
increasing the aggregate value of the Series A Preferred Stock. The Series A
Preferred Stock has senior preference and priority as to the dividend as well
as distributions and payments upon the liquidation, dissolution, or winding up
of affairs before any payment to other shareholders of the Company.
A holder may request that the Company redeem such holder's Series A
Preferred Stock upon the consummation of certain transactions set forth in the
Company's Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (the "Certificate of Designation"). In the event of such a
redemption, the Company is to pay 120% of the aggregate value of the Series A
Preferred Stock on the date of consummation
F-23
XCEED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the transaction. If certain events in the Certificate of Designation are
triggered, the Company is to redeem the Series A Preferred Stock at a price
equal to 125% of the aggregate value of the Series A Preferred Stock on the
date of the triggering event. In addition, the Company has the option, at any
time, to redeem the Series A Preferred Stock at a price equal to 110% of the
aggregate value of such stock plus 1% of the aggregate value of the Series A
Preferred Stock since the date of the issuance of such stock, up to a maximum
of 140% of the aggregate value of the Series A Preferred Stock and any
accumulated, but unpaid dividends on the Series A Preferred Stock being
redeemed.
The Series A Preferred Stock matures in January 2005 at which time all
shares of Series A Preferred Stock will be automatically converted into the
Company's common stock.
F-24
XCEED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
May 31, 2000 August 31, 1999
------------ ---------------
(Unaudited)
ASSETS
------
Current Assets:
Cash and cash equivalents....................... $ 28,320 $19,754
Investment in marketable securities............. 755 367
Accounts receivable, net of allowance for
doubtful accounts of $1,597 and $1,190,
respectively................................... 23,645 9,868
Income tax refund receivable.................... 2,437 2,437
Program costs and earnings in excess of customer
billings....................................... 6,626 3,735
Prepaid expenses and other current assets....... 1,576 470
Deferred income taxes........................... 358 358
Net assets related to discontinued operations... -- 2,999
-------- -------
Total current assets.......................... 63,717 39,988
Property and equipment, net....................... 19,836 3,268
Intangible assets, net............................ 157,619 42,999
Deferred income taxes............................. 5,668 1,046
Other assets...................................... 6,955 4,634
-------- -------
Total assets.................................... $253,795 $91,935
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Notes payable, bank............................. $ 181 $ 862
Accounts payable and accrued expenses........... 13,028 9,199
Current portion of long-term debt............... 280 389
Notes payable, other............................ 2,000 --
Customer billings in excess of program costs.... 7,023 3,538
Net liabilities related to discontinued
operations..................................... 326 --
-------- -------
Total current liabilities..................... 22,838 13,988
-------- -------
Long-term debt.................................... 1,266 2,625
Accrued lease obligations......................... 875 875
Deferred revenues................................. -- 296
-------- -------
Total liabilities............................... 24,979 17,784
-------- -------
Cumulative redeemable convertible preferred stock
and dividends:
Series A 4%, $.05 par value; authorized 30,000
shares; 30,000 issued and outstanding.......... 30,450 --
-------- -------
Stockholders' Equity:
Common stock, $.01 par value, authorized
100,000,000 shares; 23,759,104 and 17,732,554
shares issued and outstanding, respectively.... 238 177
Preferred stock, $.05 par value; authorized
1,000,000 shares; -0- issued and outstanding... -- --
Common stock warrants........................... 12,087 --
Accumulated other comprehensive income.......... (85) (20)
Additional paid-in capital...................... 224,744 78,258
Unearned compensation........................... -- (225)
Treasury stock, 15,000 shares, respectively..... (71) (71)
Accumulated deficit............................. (38,547) (3,968)
Total stockholders' equity...................... 198,366 74,151
-------- -------
Total liabilities and stockholders' equity.... $253,795 $91,935
======== =======
See notes to condensed consolidated financial statements.
F-25
XCEED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine Months Ended Three Months Ended
May 31, May 31,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues, net.............. $ 74,701 $ 43,555 $ 33,663 $ 19,306
----------- ----------- ----------- -----------
Cost and expenses:
Cost of revenues........... 55,652 31,785 25,079 13,461
Selling, general and
administrative............ 32,463 13,516 13,236 6,912
Research and development... 34 447 24 245
Depreciation and
amortization.............. 11,773 4,643 6,466 1,571
----------- ----------- ----------- -----------
99,922 50,391 44,805 22,189
----------- ----------- ----------- -----------
Operating loss............. (25,221) (6,836) (11,142) (2,883)
----------- ----------- ----------- -----------
Other income (expense):
Interest and dividend
income.................... 554 246 192 27
Interest expense........... (231) (393) (108) (68)
Gain on sale of investment
in marketable securities.. 159 -- 48 6
Other...................... 2,059 (35) 2,105 7
----------- ----------- ----------- -----------
2,541 (182) 2,237 (28)
----------- ----------- ----------- -----------
Loss before income taxes... (22,680) (7,018) (8,905) (2,911)
Income tax benefit......... (5,728) (1,758) (1,601) (653)
----------- ----------- ----------- -----------
Loss from continuing
operations................ (16,952) (5,260) (7,304) (2,258)
----------- ----------- ----------- -----------
Discontinued operations:
Income from operations, net
of tax provision of $855,
$1,009, $103 and $481,
respectively.............. 1,116 1,363 121 639
Gain (loss) on sale of
discontinued operations,
net of tax provision
(benefit) of $174, $--,
$(230) and
$--, respectively......... 260 -- (345) --
----------- ----------- ----------- -----------
Income (loss) from
discontinued operations... 1,376 1,363 (224) 639
----------- ----------- ----------- -----------
Net loss................... (15,576) (3,897) (7,528) (1,619)
Preferred stock dividends.. 19,003 -- 8,100 --
----------- ----------- ----------- -----------
Net loss applicable to
common shareholders....... $ (34,579) $ (3,897) $ (15,628) $ (1,619)
=========== =========== =========== ===========
Net loss per share
applicable to common
shareholders
--basic and diluted
Loss from continuing
operations.............. $ (1.81) $ (0.36) $ (0.70) $ (0.14)
Income from discontinued
operations.............. 0.06 0.09 0.01 0.04
Gain (loss) on sale of
discontinued
operations.............. 0.01 -- (0.02) --
----------- ----------- ----------- -----------
Net loss................... $ (1.74) $ (0.27) $ (0.71) $ (0.10)
----------- ----------- ----------- -----------
Weighted average number of
Shares outstanding........ 19,846,079 14,466,202 22,009,827 16,136,296
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
F-26
XCEED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended May 31,
-----------------
2000 1999
-------- -------
Cash flows from operating activities:
Net loss................................................... $(15,576) $(3,897)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Gain on sale of marketable securities..................... (159) (11)
Depreciation and amortization............................. 11,705 4,716
Provision for doubtful accounts........................... 1,207 350
Equity gain on investment................................. -- (28)
Non-cash compensation..................................... 436
Deferred income taxes..................................... (4,578) (550)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable....................................... (9,705) (5,578)
Inventories............................................... 1,136 (120)
Program costs and earnings in excess of customer
billings................................................. (2,682) 686
Prepaid expenses and other current assets................. (755) (175)
Other assets.............................................. (1,700) 208
Increase (decrease) in liabilities:
Accounts payable and accrued expenses..................... 1,093 2,490
Income taxes payable...................................... -- (219)
Customer billings in excess of program costs and
earnings................................................. 3,485 3,722
Deferred revenue.......................................... (557) (114)
-------- -------
Net cash (used in) provided by operating activities..... (16,650) 1,480
-------- -------
Cash flows from investing activities:
Investment in marketable securities........................ (930) (548)
Proceeds from sale of marketable securities................ 972 359
Cash allocated to discontinued operations.................. (349) --
Business acquisitions, net of cash acquired................ (12,780) (5,261)
Proceeds from sale of fixed assets......................... 650 --
Acquisition of property and equipment...................... (16,299) (1,556)
-------- -------
Net cash used in investing activities................... (28,736) (7,006)
-------- -------
Cash flows from financing activities:
Principal payments of long-term debt....................... (1,105) (4,854)
Repayment of notes payable................................. (2,930) --
Proceeds from long-term debt............................... -- 614
Deferred offering costs.................................... (2,894) --
Net proceeds from issuance of redeemable preferred stock... 29,000 --
Net proceeds from private placement........................ 24,750 --
Proceeds from exercise of warrants and options............. 7,131 19,269
-------- -------
Net cash provided by financing activities............... 53,952 15,029
-------- -------
Net increase in cash and cash equivalents................... 8,566 9,503
Cash and cash equivalents,
Beginning of period........................................ 19,754 13,789
-------- -------
Cash and cash equivalents,
End of period.............................................. $ 28,320 $23,292
======== =======
See notes to condensed consolidated financial statements.
F-27
XCEED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000
(Unaudited)
(In thousands, except share and per share data)
1. BASIS OF QUARTERLY PRESENTATION
The accompanying quarterly financial statements have been prepared in
conformity with generally accepted accounting principles.
The financial statements of the Company included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission and, in the opinion of management, reflect all adjustments
(consisting of normal and recurring adjustments) which are necessary to present
fairly the results for the period ended May 31, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations; however,
management believes that the disclosures are adequate to make the information
presented not misleading. This report should be read in conjunction with the
financial statements and footnotes therein included in the audited annual
report on Form 10-K/A as of August 31, 1999.
2. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Upon consolidation, intercompany
accounts and transactions are eliminated.
3. SUPPLEMENTARY INFORMATION--STATEMENTS OF CASH FLOW
Nine Months
Ended May 31,
----------------
2000 1999
-------- -------
Interest paid.............................................. $ 231 $ 396
======== =======
Income taxes paid.......................................... $ 133 $ 413
======== =======
None-Cash Financing and Investment Activities:
Common stock issued in connection with acquisitions........ $103,280 $26,120
Non-cash compensation...................................... $ 436 $ --
During the nine months ended May 31, 2000, the Company's acquisition of
property and equipment approximating $879 was financed through long-term debt.
4. DISCONTINUED OPERATIONS
In January 2000, the Company completed the sale of its Water-Jel division
for $4.0 million in cash to an unrelated company. The selling price is subject
to certain adjustments, which in the opinion of the Company's management,
should not have a significant impact on the Company's financial condition or
results of operations. As a result, the Company recorded a gain net of expenses
of $0.4 million during the nine months ended May 31, 2000.
In January 2000, the Company's Board of Directors approved a plan to sell
its Journeycorp division. Accordingly, the operating results of Journeycorp for
the quarter and year ended May 31, 2000 and August 31, 1999, respectively, have
been segregated from continuing operations and reported with the Water-Jel
results as a separate line item in the statement of operations.
F-28
XCEED INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has restated its prior financial statements to present the
operating results of its Water-Jel and Journeycorp divisions as discontinued
operations. Net assets (liabilities) to be disposed of, at their book value,
have been separately classified in the accompanying balance sheets at August
31, 1999 and May 31, 2000.
Summarized financial information for the Water-Jel and Journeycorp divisions
as discontinued operations for the nine months ended May 31, 2000 and 1999 is
as follows:
Nine Months
Ended May 31,
---------------
2000 1999
------- -------
Revenues.................................................... $10,610 $12,135
Income from discontinued operations, before tax provision... $ 1,971 $ 2,372
Income from discontinued operations, net of tax provision... $ 1,116 $ 1,363
5. BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic net income per common share is based on the weighted average number of
shares of common stock outstanding during each year. Diluted net income per
common share is based on the weighted average number of shares of common stock
outstanding during each year, adjusted for the dilutive effect of potentially
issuable shares of common stock arising from the assumed exercise of stock
options and warrants and conversion of outstanding Series A Cumulative
Convertible Preferred Stock. Basic loss per common share was computed by
dividing net loss less preferred stock dividends by the average number of
shares of common stock outstanding. Diluted loss per common share does not give
effect to the impact of options, warrants and conversion of preferred shares
because their effect is anti-dilutive for all periods presented.
6. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
7. RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements for the
nine months ended May 31, 1999 to conform with the classifications used in
2000.
8. BUSINESS COMBINATIONS
During the nine months ended May 31, 2000, the Company completed the
acquisitions of seven internet professional services firms in various
transactions accounted for as purchase business combinations. The aggregate
purchase price of these acquisitions was approximately $127,775, including
3,218,640 shares of common stock issued/issuable (having an approximate value
of $110,075) and cash of $17,700. Certain of the agreements provide for
additional consideration in the event certain specific performance criteria are
met.
The acquisition prices were preliminarily allocated, on an entity-by-entity
basis, to the assets acquired, including tangible and intangible assets and
liabilities assumed based upon the fair values of such assets and liabilities
on the dates of the acquisitions. The historical carrying amounts of the
tangible assets and liabilities approximated their fair values on the dates of
acquisitions. Approximately $122,124 of the aggregate purchase price was
allocated to goodwill and will be amortized over its estimated useful life of
seven years.
F-29
XCEED INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisitions described above were recorded using management's estimates
and preliminary evaluation. The actual purchase price accounting adjustments to
reflect the fair value of net assets will be based on management's final
evaluation, therefore, the information above is subject to change pending the
final allocation of purchase price.
9. STOCKHOLDERS' EQUITY
a. Common Stock--In April 2000, the Company sold 2,000,000 shares of common
stock in a private transaction, at a price equal to the closing transaction
price as quoted by NASDAQ. The net proceeds to the Company were $24,750.
b. Series A Cumulative Convertible Preferred Stock--In January 2000, the
Company sold 30,000 shares of Series A Cumulative Convertible Preferred Stock
to a group of investors. The net proceeds to the Company were approximately
$29,000.
Each share of Series A Preferred Stock is convertible, by the holder and in
certain instances by the Company, into shares of the Company's common stock,
subject to certain limitations, at a conversion price per share of not greater
than $36, subject to adjustments as set forth in the Certificate of
Designation, Preferences and Rights of the Series A Cumulative Convertible
Preferred Stock, which the Company filed with the Securities and Exchange
Commission as an exhibit to Form 8-K on January 20, 2000. The Series A
Preferred Stock is also redeemable by the Company and, in certain instances, by
the holder, subject to certain limitations as set forth in the Certificate of
Designation, Preferences and Rights. In accordance with Emerging Issues Task
Force Consensus No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features," the Company recorded $6,466 of net proceeds of
its sale of Series A Preferred Stock as a dividend in order to recognize the
immediate beneficial conversion feature resulting from the difference between
the fair value of its common stock as of the date of agreement and the maximum
conversion price of $36.
In connection with the issuance, the Company also issued warrants to
purchase 183,273 shares of common stock at an exercise price of $50.10 per
share. The warrants expire on January 13, 2005. Utilizing the Black-Scholes
option pricing model and relative value method, a value of $4,286 of the net
proceeds was allocated to common stock warrants in order to recognize the fair
value of the warrants at the time of issuance.
Since the Series A Preferred Stock is convertible at the option of the
holder at any time, the amount that has been ascribed to the warrants has been
reflected as a deemed dividend so that the Series A Preferred Stock can be
carried at its redemption value of $30,000.
The Series A Preferred Stock has a cumulative annual dividend of 4.0% per
annum and is payable quarterly at the option of the Company in cash or by
increasing the aggregate value of the Series A Preferred Stock. The Series A
Preferred Stock has senior preference and priority as to the dividend as well
as distribution and payments upon the liquidation, dissolution, or winding up
of affairs before any payment to other shareholders of the Company. As of May
31, 2000 $450 has been accrued for such dividends. In June 2000, the Company
elected to satisfy the dividends due by increasing the aggregate value of the
Series A Preferred Stock. Accordingly, the accrued dividends at May 31, 2000
have been included in the Cumulative Redeemable Convertible Preferred Stock
balance in the accompanying balance sheet.
In April 2000, the Company issued warrants to purchase an additional
1,350,000 shares of the Company's common stock to the holders of the Series A
Preferred Stock in exchange for a waiver of their rights under certain
provisions of the Subscription Agreement, Registration Rights Agreement and
Certificate of Designation, Preferences and rights, each dated January 13,
2000. As a result of the issuance of these additional
F-30
XCEED INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
warrants in April 2000, an additional dividend of approximately $7,800,
calculated under the Black-Scholes pricing model was recorded in the third
quarter of fiscal 2000.
c. Stock Options--On April 17, 2000, management announced a Company-wide
stock option grant to all employees who had stock options vested or vesting by
December 31, 2000. Any employee who held such options, which also had a strike
price equal to or above $7.00 were granted additional options in an amount
equal to the options already held and which were expected to fully vest by
December 31, 2000.
The terms of the new options provide for an exercise price of $7.50 and
allow the employee to exercise the options on or after January 1, 2001. The
Company granted approximately 1,700,000 options in connection with this grant.
10. GAIN ON SALE OF CHANNEL SEVEN
In March 2000, the Company recognized a gain of $2,000 on the sale of its
Channel Seven Internet Magazine, which was included in other income.
11. SUBSEQUENT EVENT
In June 2000, the Company's Board of Directors approved a plan to sell its
Performance Group line of business.
F-31
Exhibit A
XCEED INC.
AMENDED AND RESTATED
MILLENNIUM STOCK OPTION PLAN
ARTICLE I
Establishment and Purpose
Section 1.1. Xceed Inc., a Delaware corporation (the "Company"), hereby
establishes a stock option plan to be named the Amended and Restated Millennium
Stock Option Plan (the "Plan").
Section 1.2. The purpose of this Plan is to induce persons to whom the
Company determines to extend offers of employment to agree to become employees
of the Company (or any of its subsidiaries), to offer incentives to new and
existing employees, officers, directors and consultants to contribute to the
Company's progress, and to encourage said persons to promote the best interests
of the Company. This Plan provides for the grant to such persons options to
purchase shares of common stock of the Company, par value $.01 per share (the
"Common Stock") which qualify as incentive stock options ("Incentive Options")
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), as well as options which may not be so qualified ("Non-Qualified
Options"). Incentive Options and Non-Qualified Options may be collectively
referred to hereinafter as the "Options" as the context may require. Persons
granted Options hereunder may be referred to hereinafter as the "Optionees."
Section 1.3. All Options granted on or after the date that this Plan has
been approved and adopted by the Company's board of directors (the "Board of
Directors") shall be governed by the terms and conditions of this Plan unless
the terms of any such Option specifically indicate that it is not to be so
governed.
Section 1.4. Any Option granted hereunder which is intended to qualify as an
Incentive Option which, for any reason whatsoever, fails to so qualify, shall
be deemed to be a Non-Qualified Option granted hereunder.
Section 1.5. Prior to the approval and ratification of this Plan by the
stockholders of the Company, only new employees shall be granted Options under
this Plan.
ARTICLE II
Administration
Section 2.1. All determinations hereunder concerning the selection of
persons eligible to receive awards under this Plan and determinations with
respect to the timing, pricing and amount of an award hereunder (other than
pursuant to a non-discretionary formula hereinafter set forth, shall be made by
an administrator (the "Administrator")). The Administrator shall be either: (a)
the Board of Directors, or (b) in the discretion of the Board of Directors, a
committee of not less than two members of the Board of Directors (the
"Committee"), each of whom is both (i) a "Non-Employee" Director as such term
is defined in Rule 16b-3 (as such rule may be amended from time to time, "Rule
16b-3") under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and (ii) an "Outside Director" as such term is defined in Section 162(m)
of the Code and the regulations thereunder. In the event this Plan is
administered by the Committee, the Committee shall select one of its members to
serve as the chairman thereof and shall hold its meetings at such times and
places as it may determine. In such case, a majority of the total number of
members of the Committee shall be necessary to constitute a quorum; and (i) the
affirmative act of a majority of the members present at any meeting at which a
quorum is present, or (ii) the approval in writing by a majority of the members
of the Committee, shall be necessary to constitute action by the Committee.
Only the Committee may grant Options to employees who are covered under Section
162(m) of the Code.
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Section 2.2. The provisions hereof relating to Incentive Options are
intended to comply in every respect with Section 422 of the Code ("Section
422") and the regulations promulgated thereunder. In the event that any future
statute or regulation shall modify Section 422, this Plan shall be deemed to
incorporate by reference such modification. Any agreement relating to the grant
of any Incentive Option hereunder, which Option is outstanding and unexercised
at the time that any modifying statute or regulation becomes effective, shall
also be deemed to incorporate by reference such modification and no notice of
such modification need be given to the Optionee. Any agreement relating to an
Incentive Option granted hereunder shall provide that the Optionee hold the
stock received upon exercise of such Incentive Option for a minimum of two
years from the date of grant of the Incentive Option and one year from the date
of exercise of such Incentive Option, absent the written approval, consent or
waiver of the Administrator.
Section 2.3. If any provision of this Plan is determined to disqualify the
shares of Common Stock purchasable upon exercise of an Incentive Option granted
hereunder from the special tax treatment provided by Section 422, such
provision shall be deemed to incorporate by reference the modification required
to qualify such shares of Common Stock for said tax treatment.
Section 2.4. The Company shall grant Options hereunder in accordance with
determinations made by the Administrator pursuant to the provisions hereof. All
Options granted pursuant hereto shall be clearly identified as Incentive
Options or Non-Qualified Options. The Administrator may from time to time adopt
(and thereafter amend or rescind) such rules and regulations for carrying out
this Plan and take such action in the administration of this Plan, not
inconsistent with the provisions hereof, as it shall deem proper. The Board of
Directors or, subject to the supervision of the Board of Directors, the
Committee, as the Administrator, shall have plenary discretion, subject to the
express provisions of this Plan, to determine which officers, directors,
employees and consultants shall be granted Options, the number of shares
subject to each Option, the time or times when an Option may be exercised
(whether in whole or in installments), the terms and provisions of the
respective agreements relating to the grant of Options (which need not be
identical), including such terms and provisions which may be amended from time
to time as shall be required, in the judgment of the Administrator, to conform
to any change in any law or regulation applicable hereto, and to make all other
determinations deemed necessary or advisable for the administration of this
Plan. The interpretation and construction of any provision of this Plan by the
Administrator (unless otherwise determined by the Board of Directors) shall be
final, conclusive and binding upon all persons.
Section 2.5. No member of the Administrator shall be liable for any action
or determination made in good faith with respect to administration of this Plan
or the Options granted hereunder. Members of the Board of Directors and/or the
Committee, as the Administrator, shall be indemnified by the Company, pursuant
to the Company's bylaws, for any expenses, judgments or other costs incurred as
a result of a lawsuit filed against such member claiming any rights or remedies
arising out of such member's participation in the administration of this Plan.
ARTICLE III
Total Number of Shares to be Optioned
Section 3.1. There shall be reserved for issuance or transfer upon exercise
of the Options granted from time to time hereunder an aggregate of 9,000,000
shares of Common Stock (subject to adjustment as provided in Article VIII
hereof). The shares of Common Stock issued upon exercise of any Option granted
hereunder may be shares of Common Stock previously issued and reacquired by the
Company at any time or authorized but unissued shares of Common Stock, as the
Board of Directors from time to time may determine. No employee may be issued
more than 1,000,000 shares pursuant to Options granted hereunder during the
term of the Plan.
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Section 3.2. In the event that any Options outstanding under this Plan for
any reason expire or are terminated without having been exercised in full, the
unpurchased shares of Common Stock subject to such Option and any such
surrendered shares of Common Stock may again be available for transfer
hereunder.
Section 3.3. No Options shall be granted pursuant hereto to any Optionee
after the tenth anniversary of the earlier of: (a) the date that this Plan is
adopted by the Board of Directors, or (b) the date that this Plan is approved
by the stockholders of the Company.
ARTICLE IV
Eligibility
Section 4.1. Options may be granted hereunder to employees, officers,
directors and consultants of the Company (or any of its subsidiaries) selected
by the Administrator. For purposes of determining who is an employee with
respect to eligibility hereunder, the provisions of Section 422 of the Code
shall govern. The Administrator may determine (in its sole discretion) that any
person who would otherwise be eligible to be granted Options shall,
nonetheless, be ineligible to receive any award under this Plan.
Section 4.2. The Administrator shall (in its discretion) determine the
persons to be granted Options, the time or times at which Options shall be
granted, the number of shares of Common Stock subject to each Option, the terms
of a vesting or forfeiture schedule, if any, the type of Option issued, the
period during which such Options may be exercised, the manner in which Options
may be exercised and all other terms and conditions of the Options; provided,
however, no Option shall be granted which has terms or conditions inconsistent
with those stated in Articles V and VI hereof. Relevant factors in making such
determinations may include the value of the services rendered by the respective
Optionee, his or her present and potential contributions to the Company, and
such other factors which are deemed relevant by the Administrator in
accomplishing the purpose of this Plan.
ARTICLE V
Terms and Conditions of Options
Section 5.1. Each Option granted under this Plan shall be evidenced by a
stock option agreement (the "Option Agreement") in a form consistent with this
Plan, provided that the following terms and conditions shall apply:
(a) The price at which each share of Common Stock covered by an Option
may be purchased shall be set forth in the Option Agreement and shall be
determined by the Administrator, provided that the option price for any
Incentive Option shall not be less than the "fair market value" of the
shares of Common Stock at the time of grant determined. Notwithstanding the
foregoing, if an Incentive Option to purchase shares of Common Stock is
granted hereunder to an Optionee who, on the date of the grant, directly or
indirectly owns more than ten percent (10%) of the voting power of all
classes of capital stock of the Company (or its parent or subsidiary), not
including the shares of Common Stock obtainable upon exercise of the
Option, the minimum exercise price of such Option shall be not less than
one hundred ten percent (110%) of the "fair market value" of the shares of
Common Stock on the date of grant determined in accordance with Section
5.1(b) below.
(b) The "fair market value" shall be determined by the Administrator,
which determination shall be binding upon the Optionee, the Company and its
officers, directors, employees and consultants. The determination of the
"fair market value" shall be based upon the following: (i) if the Common
Stock is not listed and traded upon a recognized securities exchange and
there is no report of stock prices with respect to the Common Stock
published by a recognized stock quotation service, on the basis of the
recent purchases and sales of the Common Stock in arms-length transactions;
(ii) if the Common Stock is not then listed and traded upon a recognized
securities exchange or quoted on the NASDAQ National Market
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System, and there are reports of stock prices by a recognized quotation
service, upon the basis of the last reported sale or transaction price of
the Common Stock on the date of grant as reported by a recognized quotation
service, or, if there is no last reported sale or transaction price on that
day, then upon the basis of the mean of the last reported closing bid and
closing asked prices for the Common Stock on that day or on the date
nearest preceding that day; or (iii) if the Common Stock shall then be
listed and traded upon a recognized securities exchange or quoted on the
NASDAQ National Market System, upon the basis of the last reported sale or
transaction price at which shares of Common Stock were traded on such
recognized securities exchange on the date of grant or, if the Common Stock
was not traded on such date, upon the basis of the last reported sale or
transaction price on the date nearest preceding that date. The
Administrator shall also consider such other factors relating to the "fair
market value" of the Common Stock as it shall deem appropriate.
(c) For the purpose of determining whether an Optionee owns more than
ten percent (10%) of the voting power of all classes of stock of the
Company, an Optionee shall be considered to own those shares of stock which
are owned directly or indirectly through brothers and sisters (including
half-blooded siblings), spouse, ancestors and lineal descendants; and
proportionately as a shareholder of a corporation, a partner of a
partnership, and/or a beneficiary of a trust or an estate that owns shares
of capital stock of the Company.
(d) Notwithstanding any other provision hereof, in accordance with the
provisions of Section 422(d) of the Code, to the extent that the aggregate
"fair market value" (determined at the time the Option is granted) of the
shares of Common Stock with respect to which Incentive Options (without
reference to this provision) are exercisable for the first time by any
individual in any calendar year under any and all stock option plans of the
Company (and its subsidiary corporations and its parent, if any) exceeds
$100,000, such Options shall be treated as Non-Qualified Options.
(e) An Optionee may, in the Administrator's discretion, be granted more
than one Option during the duration of this Plan and may be issued a
combination of Non-Qualified Options and Incentive Options.
(f) The duration of any Option shall be within the sole discretion of
the Administrator; provided, however, that any Incentive Option granted to
a ten percent (10%) or less stockholder or any Non-Qualified Option shall,
by its terms, be exercised within ten years after the date the Option is
granted and any Incentive Option granted to a greater than ten percent
(10%) stockholder shall, by its terms, be exercised within five years after
the date the Option is granted.
(g) An Option shall not be transferable by the Optionee other than by
will, or by the laws of descent and distribution. An Option may be
exercised during the Optionee's lifetime only by the Optionee.
(h) At least six (6) months shall elapse from the date on which an
Option is granted to an officer, director, or beneficial owner of more than
ten percent (10%) of the outstanding shares of Common Stock of the Company
under this Plan by the Administrator to the date on which any share of
Common Stock underlying such Option is sold, unless the Administrator
otherwise consents in writing.
ARTICLE VI
Employment or Service of Optionee
Section 6.1. If the employment or service of an Optionee is terminated for
cause, the option rights of such Optionee, both accrued and future, under any
then outstanding Option shall terminate immediately, subject to the provisions
of any employment agreement between the Company (or any subsidiary) and an
Optionee which, by its terms, provides otherwise. In the event that an employee
who is an Optionee hereunder has entered into a written employment agreement
with the Company (or a subsidiary), "cause" shall have the meaning attributed
thereto in such employment agreement; otherwise, "cause" shall mean
incompetence in the performance of duties, disloyalty, dishonesty, theft,
embezzlement, unauthorized disclosure of patents, processes or trade secrets of
the Company, individually or as an employee, partner, associate, officer or
director of any
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organization. The determination of the existence and the proof of "cause" shall
be made by the Administrator and, subject to the review of any determination
made by the Administrator, such determination shall be binding on the Optionee
and the Company.
Section 6.2. Subject to the provisions of any employment agreement between
the Company (or a subsidiary) and an Optionee, if the employment or service of
an Optionee is terminated by either the Optionee or the Company for any reason
other than cause, death, or for disability (as defined in Section 22(e)(3) of
the Code or pursuant to the terms of such an employment agreement), the option
rights of such Optionee under any then outstanding Option shall, subject to the
provisions of Section 5.1(h) hereof, be exercisable by such Optionee at any
time prior to the expiration of the Option or within three months after the
date of such termination, whichever period of time is shorter, but only to the
extent of the accrued right to exercise an Option at the date of such
termination.
Section 6.3. Subject to the provisions of any employment agreement between
the Company (or a subsidiary) and an Optionee, in the case of an Optionee who
becomes disabled (as defined by Section 22(e)(3) of the Code or pursuant to the
terms of such an employment agreement), the option rights of such Optionee
under any then outstanding Option shall, subject to the provisions of Section
5.1(h) hereof, be exercisable by such Optionee at any time prior to the
expiration of the Option or within one year after the date of termination of
employment or service due to disability, whichever period of time is shorter,
but only to the extent of the accrued right to exercise an Option at the date
of such termination.
Section 6.4. In the event of the death of an Optionee, the option rights of
such Optionee under any then outstanding Option shall be exercisable by the
person or persons to whom these rights pass by will or by the laws of descent
and distribution, at any time prior to the expiration of the Option or within
three years after the date of death, whichever period of time is shorter, but
only to the extent of the accrued right to exercise an Option at the date of
death. If a person or estate acquires the right to exercise an Option by
bequest or inheritance, the Administrator may require reasonable evidence as to
the ownership of such Option, and may require such consents and releases of
taxing authorities as the Administrator may deem advisable.
Section 6.5. The Administrator may also provide that an employee must be
continuously employed by the Company for such period of time as the
Administrator, in its discretion, deems advisable before the right to exercise
any portion of an Option granted to such employee will accrue, and may also set
such other targets, restrictions or other terms relating to the employment of
the Optionee which targets, restrictions, or terms must be fulfilled or
complied with, as the case may be, prior to the exercise of any portion of an
Option granted to any employee.
Section 6.6. Options granted hereunder shall not be affected by any change
of duties or position, so long as the Optionee continues in the service of the
Company.
Section 6.7. Nothing contained in this Plan or in any Option granted
pursuant hereto shall confer upon any Optionee any right with respect to
continuance of employment or service by the Company nor interfere in any way
with the right of the Company to terminate the Optionee's employment or service
or change the Optionee's compensation at any time.
ARTICLE VII
Purchase of Shares
Section 7.1. Except as provided in this Article VII, an Option shall be
exercised by tender to the Company of the full exercise price of the shares of
Common Stock with respect to which an Option is exercised and written notice of
the exercise. The right to purchase shares of Common Stock shall be cumulative
so that, once the right to purchase any shares of Common Stock has accrued,
such shares or any part thereof may be purchased at any time thereafter until
the expiration or termination of the Option. A partial exercise of
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an Option shall not affect the right of the Optionee to subsequently exercise
his or her Option from time to time, in accordance with this Plan, as to the
remaining number of shares of Common Stock subject to the Option. The purchase
price payable upon exercise of an Option shall be in United States dollars and
shall be payable in cash or by certified bank check. Notwithstanding the
foregoing, in lieu of cash, an Optionee may, with the approval of the
Administrator, exercise his or her Option by tendering to the Company shares of
Common Stock owned by him or her having an aggregate fair market value at least
equal to the aggregate purchase price. The "fair market value" of any shares of
Common Stock so surrendered shall be determined by the Administrator in
accordance with Section 5.1(b) hereof.
Section 7.2. Except as provided in Article VI above, an Option may not be
exercised unless the holder thereof is an employee of the Company at the time
of exercise.
Section 7.3. No Optionee or Optionee's executor, administrator, legatee, or
distributee or other permitted transferee, shall be deemed to be a holder of
any shares of Common Stock subject to an Option for any purpose whatsoever
unless and until such Option has been exercised and a stock certificate or
certificates for the shares of Common Stock purchased by the Optionee are
issued to the Optionee in accordance with the terms of this Plan. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights for which the
record date is prior to the date that any such stock certificate is issued,
except as provided in Article VIII hereof.
Section 7.4. If: (i) the listing, registration or qualification of the
Options issued hereunder or of any securities issuable upon exercise of such
Options (the "Subject Securities") upon any securities exchange or quotation
system or under federal or state law is necessary as a condition of or in
connection with the issuance or exercise of the Options; (ii) the consent or
approval of any governmental regulatory body is necessary as a condition of or
in connection with the issuance or exercise of the Options; or (iii) any other
consent or approval required by applicable law, rule or regulation is necessary
as a condition of or in connection with the issuance or exercise of the
Options, the Company shall not be obligated to deliver the certificates
representing the Subject Securities or to accept or to recognize an Option
exercise unless and until such listing, registration, qualification, consent or
approval shall have been effected or obtained. The Company will take reasonable
action to so list, register, or qualify the Options and the Subject Securities,
or effect or obtain such consent or approval, so as to allow for issuance
and/or exercise.
Section 7.5. An Optionee may be required to represent to the Company as a
condition of his or her exercise of Options issued under this Plan that: (i)
the Subject Securities acquired upon exercise of his or her Option are being
acquired by him or her for investment purposes only and not with a view to
distribution or resale, unless counsel for the Company is then of the view that
such a representation is not necessary and is not required under the Securities
Act of 1933, as amended (the "Securities Act"), or any other applicable
statute, law, regulation or rule; and (ii) that the Optionee shall make no
exercise or disposition of an Option or of the Subject Securities in
contravention of the Securities Act, the Exchange Act of 1934, or the rules and
regulations thereunder. Optionees may also be required to provide (as a
condition precedent to exercise of an Option) such documentation as may be
reasonably requested by the Company to assure compliance with applicable law
and the terms and conditions of this Plan and the subject Option.
Section 7.6. An Option may be exercised by tender to the Administrator of a
written notice of exercise together with advice of the delivery of an order to
a broker to sell part or all of the shares of Common Stock subject to such
exercise notice and an irrevocable order to such broker to deliver to the
Company (or its transfer agent) sufficient proceeds from the sale of such
shares to pay the exercise price and any withholding taxes. All documentation
and procedures to be followed in connection with such a "cashless exercise"
shall be approved in advance by the Administrator.
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ARTICLE VIII
Change in Number of Outstanding Shares of
Stock, Adjustments, Reorganizations, Etc.
Section 8.1. In the event that the outstanding shares of Common Stock of the
Company are hereafter increased or decreased or changed into or exchanged for a
different number of shares or kind of shares or other securities of the Company
or of another corporation by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split, combination of shares, or a
dividend payable in capital stock, appropriate adjustment shall be made by the
Administrator in the number and kind of shares for the purchase of which
Options may be granted under this Plan, including the maximum number that may
be granted to any one person. In addition, the Administrator shall make
appropriate adjustments in the number and kind of shares as to which
outstanding Options, or portions thereof then unexercised, shall be
exercisable, to the end that the Optionee's proportionate interest shall be
maintained as before the occurrence to the unexercised portion of the Option
and with a corresponding adjustment in the option price per share. Any such
adjustment made by the Administrator shall be conclusive.
Section 8.2. The grant of an Option hereunder shall not affect in any way
the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part
of its business or assets.
Section 8.3. Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company as a result of which the
outstanding securities of the class then subject to Options hereunder are
changed into or exchanged for cash or property or securities not of the
Company's issue, or upon a sale of substantially all the property of the
Company to an association, person, party, corporation, partnership, or control
group as that term is construed for purposes of the Exchange Act, this Plan
shall terminate, and all Options theretofore granted hereunder shall terminate,
unless provision be made in writing in connection with such transaction for the
continuance of this Plan and/or for the assumption of Options theretofore
granted, or the substitution for such Options of options covering the stock of
a successor employer corporation, or a parent or a subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices, in
which event this Plan and options theretofore granted shall continue in the
manner and under the terms so provided. If this Plan and unexercised Options
shall terminate pursuant to the foregoing sentence, all persons owning any
unexercised portions of Options then outstanding shall have the right, at such
time prior to the consummation of the transaction causing such termination as
the Company shall designate, to exercise the unexercised portions of their
Options, including the portions thereof which would, but for this Section 8.3
not yet be exercisable.
ARTICLE IX
Duration, Amendment and Termination
Section 9.1. The Board of Directors may at any time terminate this Plan or
make such amendments hereto as it shall deem advisable and in the best
interests of the Company, without action on the part of the stockholders of the
Company unless such approval is required pursuant to Section 422 of the Code or
the regulations thereunder or other federal or state law, rule or regulation;
provided, however, that no such termination or amendment shall, without the
consent of the individual to whom any Option shall theretofore have been
granted, affect or impair the rights of such individual under such Option.
Pursuant to (S) 422(b) of the Code, no Incentive Option may be granted pursuant
to this Plan after ten years from the date this Plan is adopted or the date
this Plan is approved by the stockholders of the Company, whichever is earlier.
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ARTICLE X
Restrictions
Section 10.1. Any Options and shares of Common Stock issued pursuant hereto
shall be subject to such restrictions on transfer and limitations as shall, in
the opinion of the Administrator, be necessary or advisable to assure
compliance with the laws, rules and regulations of the United States government
or any state or jurisdiction thereof. In addition, the Administrator may in any
Option Agreement impose such other restrictions upon the disposition or
exercise of an Option or upon the sale or other disposition of the shares of
Common Stock deliverable upon exercise thereof as the Administrator may, in its
sole discretion, determine. By accepting the grant of an Option pursuant
hereto, each Optionee shall agree to any such restrictions.
Section 10.2. Any certificate evidencing shares of Common Stock issued
pursuant to exercise of an Option shall bear such legends and statements as the
Administrator, the Board of Directors or counsel to the Company shall deem
advisable to assure compliance with the laws, rules and regulations of the
United States government or any state or jurisdiction thereof. No certificate
evidencing shares of Common Stock shall be delivered pursuant to exercise of
the Options granted under this Plan until the Company has obtained such
consents or approvals from such regulatory bodies of the United States
government or any state or jurisdiction thereof as the Administrator, the Board
of Directors or counsel to the Company deems necessary or advisable.
ARTICLE XI
Financial Assistance
Section 11.1 The Company is vested with the authority hereunder to assist
any employee to whom an Option is granted hereunder (including any officer or
director of the Company or any of its subsidiaries who is also an employee) in
the payment of the purchase price payable upon exercise of such Option, by
lending the amount of such purchase price to such employee on such terms and at
such rates of interest and upon such security (or unsecured) as shall have been
authorized by or under authority of the Board of Directors. Any such assistance
shall comply with the requirements of Regulation G promulgated by the Board of
the Federal Reserve System, as amended from time to time, and any other
applicable law, rule or regulation.
ARTICLE XII
Application of Funds
Section 12.1. The proceeds received by the Company from the issuance and
sale of Common Stock upon exercise of Options granted pursuant to this Plan are
to be added to the general funds of the Company and used for its corporate
purposes as determined by the Board of Directors.
ARTICLE XIII
Effectiveness of Plan
Section 13.1 This Plan shall become effective upon adoption by the Board of
Directors, and Options may be issued hereunder from and after that date subject
to the provisions of Section 3.3 above. This Plan must be approved by the
Company's stockholders in accordance with the applicable provisions (relating
to the issuance of stock or options) of the Company's governing documents and
state law or, if no such approval is prescribed therein, by the affirmative
vote of the holders of a majority of the votes cast at a duly held stockholders
meeting at which a quorum representing a majority of all the Company's
outstanding voting stock is present and voting (in person or by proxy) or,
without regard to any required time period for approval, by any other method
permitted by Section 422 of the Code and the regulations thereunder. If such
stockholder
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approval is not obtained within one year of the adoption of this Plan by the
Board of Directors or within such other time period required under Section 422
of the Code and the regulations thereunder, this Plan shall remain in force;
provided however, that all Options issued and issuable hereunder shall
automatically be deemed to be Non-Qualified Options.
IN WITNESS WHEREOF, pursuant to the approval of this Plan by the Board of
Directors, this Plan is executed and adopted this 13th day of January, 2000.
XCEED INC.
/s/ Werner G. Haase
By: _________________________________
Werner G. Haase,
Chief Executive Officer
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Exhibit B
SUBSCRIPTION AGREEMENT
This SUBSCRIPTION AGREEMENT (the "Agreement"), dated as January 13, 2000,
has been executed by the undersigned (individually, a "Subscriber" and
collectively, the "Subscribers") in connection with the offer and sale (the
"Offering") of (i) up to 30,000 shares of Series A Cumulative Convertible
Preferred Stock, par value $0.05 per share (the "Preferred Stock"), of Xceed,
Inc., a Delaware corporation (the "Company"), for a purchase price of $1,000
per share, convertible into shares of common stock, par value $0.01 per share,
of the Company (the "Common Stock"), and possessing such other rights and
preferences as are set forth in the Certificate of Designation, Preferences and
Rights of the Preferred Stock, attached hereto as EXHIBIT A and filed with
Secretary of State of the State of Delaware on or prior to the date hereof (the
"Certificate"), and (ii) warrants (the "Warrants") to purchase an aggregate of
183,273 shares of Common Stock substantially in the form attached hereto as
EXHIBIT B. The solicitation of this Agreement and, if accepted by the Company,
the offer and sale of the Preferred Stock and the Warrants, are being made in
reliance upon the provisions of Regulation D ("Regulation D") promulgated by
the Securities and Exchange Commission (the "SEC") under the United States
Securities Act of 1933, as amended (the "Securities Act"). The shares of Common
Stock issuable upon conversion of the Preferred Stock (the "Underlying Common
Shares") and the shares of Common Stock issuable upon exercise of the Warrants
(the "Underlying Warrant Shares") are sometimes referred to in this Agreement
as the "Underlying Shares."
Upon the terms and subject to the conditions set forth herein, the
Subscribers hereby, severally but not jointly, agree to purchase, and the
Company hereby agrees to issue and sell, up to 30,000 shares of Preferred Stock
and the Warrants at the aggregate purchase price set forth in Section 14 in the
name, number of shares of Preferred Stock and the Warrants set forth opposite
the name of each Subscriber on Schedule I attached hereto. In consideration of
the mutual promises, representations, warranties and conditions set forth
herein, and intending to be legally bound hereby, the Company and the
Subscribers hereby agree as follows:
1. Agreement to Subscribe
1.1 Purchase and Sale of Preferred Stock and Warrants. On the basis of the
representations and warranties contained in this Agreement and subject to the
terms and conditions hereinafter set forth, the Company shall issue and sell to
each Subscriber and each Subscriber hereby subscribes for and shall purchase
the specified number of shares of Preferred Stock and the specified number of
Warrants set forth opposite the name of such Subscriber on Schedule I attached
hereto for an aggregate purchase price of $1,000 for each share of Preferred
Stock and related Warrants. The closing of the purchase of the shares of
Preferred Stock and Warrants (the "Closing") shall occur on January 13, 2000 or
such other date as may be agreed to in writing by the Company and the
Subscribers (the "Closing Date"); provided that: (a) the aggregate purchase
price for the subscriptions evidenced hereby shall have been delivered by the
Subscribers to the Company or as otherwise agreed between the parties (in
immediately available funds via a wire transfer pursuant to instructions
previously delivered for such purpose); (b) the shares of Preferred Stock and
the Warrants subscribed for hereby shall have been issued and delivered by the
Company to the Subscribers or as otherwise agreed between the parties; and (c)
all other conditions precedent to the obligations of the Subscribers and the
Company to the Closing set forth herein shall have been satisfied or waived in
writing.
1.2 Conditions Precedent to the Obligation of the Company at Closing. The
obligation of the Company hereunder to issue and sell the shares of Preferred
Stock to each Subscriber is subject to the satisfaction at or before the
Closing of each of the conditions set forth below. Each of these conditions are
for the Company's sole benefit and may be waived in writing by the Company with
respect to any or all Subscribers at any time in its sole discretion.
B-1
(a) Accuracy of the Subscribers' Representations and Warranties. The
representations and warranties of each Subscriber shall be true and correct
as of the date when made and in all material respects as of the Closing
Date as though made at each time.
(b) Performance by the Subscribers. Each Subscriber shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement or any
other Transaction Documents (as defined in Section 1.3(j) hereof) to be
performed, satisfied or complied with by such Subscriber at or prior to the
Closing.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent
jurisdiction which prohibits or adversely effects any of the transactions
contemplated by this Agreement and the other Transaction Documents, and no
proceeding shall have been commenced which may have the effect of
prohibiting or adversely affecting any of the transactions contemplated
hereby and thereby.
(d) Legal Investment. At the time of the Closing, the purchase of the
shares of Preferred Stock and the Warrants by the Subscribers shall be
legally permitted by all statutes, rules and regulations to which each of
the Subscribers and the Company are subject.
1.3 Conditions Precedent to the Obligation of the Subscribers at
Closing. The obligation of each of the Subscribers hereunder to acquire and pay
for the shares of Preferred Stock and Warrants is subject to the satisfaction
at or before the Closing of each of the conditions set forth below. Each of
these conditions is for each Subscriber's sole benefit and may be waived in
writing by each such Subscriber at any time in its sole discretion (any such
waiver shall have effect only with respect to the waiving Subscriber).
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct as
of the date when made and in all material respects as of the Closing Date
as though made at such time.
(b) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement or any of the other
Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent
jurisdiction which prohibits or adversely effects any of the transactions
contemplated by this Agreement and the other Transaction Documents, and no
proceeding shall have been commenced which may have the effect of
prohibiting or adversely affecting any of the transactions contemplated
hereby and thereby.
(d) Adverse Changes. For the period from August 31, 1999 until the
Closing Date, except as (i) publicly disclosed in the Company's press
releases or filings (the "Recent Exchange Act Reports") pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (ii)
set forth on Schedule 1.3(d) hereto (collectively, "Prior Public
Disclosures"), no event shall have occurred or be threatened to occur which
has had or is likely to have a Material Adverse Effect (as defined in
Section 3.6 hereof) on the Company.
(e) No Suspension of Trading in or Delisting of Common Stock. The
trading in the Common Stock shall not have been suspended by the SEC or the
National Association of Securities Dealers, Inc. (the "NASD"); the Common
Stock shall not have been delisted from the Nasdaq National Market and the
Company shall not have received any notice of threatened or pending
proceedings for delisting the Common Stock from the Nasdaq National Market;
and trading in securities generally as reported by the Nasdaq National
Market shall not have been suspended or limited or minimum prices shall not
have been established on securities whose trades are reported by the Nasdaq
National Market.
B-2
(f) Legal Opinion. The Company shall have delivered to the Subscribers
an opinion of Akin Gump Strauss Hauer & Feld, L.L.P., counsel to the
Company, substantially in the form of EXHIBIT C annexed hereto, dated the
Closing Date.
(g) Officer's Certificate. The Company shall have delivered to the
Subscribers a certificate in form and substance reasonably satisfactory to
the Subscribers, executed by an executive officer of the Company, to the
effect that all the conditions to the Closing shall have been satisfied and
that the representations and warranties of the Company contained in the
Agreement are true and correct in all respects on and as of the Closing
Date with the same force and effect as though such representations and
warranties had been made on the date hereof.
(h) Registration Rights Agreement. The Company shall have entered into
the Registration Rights Agreement with the Subscribers (the "Registration
Rights Agreement"), substantially in the form of EXHIBIT D annexed hereto.
(i) Certificate of Designation. The Company shall have filed the
Certificate in accordance with the provisions hereof, the Certificate shall
have become effective and the Company shall have delivered evidence thereof
to the Subscribers.
(j) Reservation of Shares. On or prior to the Closing Date, the Company
shall have duly reserved the number of Underlying Shares required by this
Agreement, the Certificate, the Registration Rights Agreement, and the
Warrants (collectively, the "Transaction Documents") to be reserved for
issuance upon conversion of the Preferred Stock and upon exercise of the
Warrants.
(k) Legal Investment. At the time of the Closing, the purchase of the
Preferred Stock and the Warrants by the Subscribers shall be legally
permitted by all statutes, rules and regulations to which the Subscriber
and the Company are subject.
(l) Warrants. The Company shall have executed and delivered to each
Subscriber its respective Warrants.
(m) Secretary's Certificate. The Company shall have delivered to the
Subscribers a certificate in form and substance reasonably satisfactory to
each Subscriber, executed by the secretary of the Company, certifying as to
the truth and accuracy of the certificate of incorporation of the Company
(the "Certificate of Incorporation"), as in effect on the Closing Date, the
By-Laws of the Company, as in effect on the Closing Date, and the
resolutions duly adopted by the Board of Directors authorizing and
approving the execution and delivery of this Agreement and the other
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby.
(n) Nasdaq Filing. Pursuant to Rule 4310(c)(17) of The Nasdaq Stock
Market, Inc.'s Marketplace Rules, the Company shall have filed a form with
The Nasdaq Stock Market, Inc. designated by The Nasdaq Stock Market, Inc.
for the listing of the Underlying Shares not later than required by The
Nasdaq Stock Market, Inc.
(o) Good Standing. On or prior to the Closing Date, the Company shall
have delivered to the Subscribers a long-form certificate of good standing
and tax status of the Company and each of its subsidiaries, if any,
certified as of a recent date by the Secretary of State of the State of
Delaware, and from every jurisdiction in which the Company is qualified to
do business.
2. Representations and Warranties of the Subscribers
Each Subscriber, with respect only to itself, represents and warrants to the
Company that:
2.1 No Government Recommendation or Approval. The Subscriber understands
that no federal or state agency or similar agency of any other country, has
passed upon or made any recommendation or endorsement of the Company or of
the Offering.
B-3
2.2 Intent. The Subscriber (i) is purchasing the Preferred Stock and the
Warrants, (ii) upon conversion of the Preferred Stock, will acquire the
Underlying Common Shares and (iii) upon exercise of the Warrants, will
acquire the Underlying Warrant Shares (the Preferred Stock, the Warrants,
the Underlying Common Shares and the Underlying Warrant Shares collectively
are referred to herein as the "Securities") for its own account for
investment purposes only and not with a present view toward resale or
distribution and the Subscriber has no contract, agreement, undertaking or
other arrangement to sell the Securities to or through any person or
entity; provided, however, that by making the representation herein, the
Subscriber does not agree, other than as may be required to be in
compliance with applicable federal and state securities laws, to hold the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with federal and state
securities laws. The Subscriber understands that the Securities must be
held indefinitely unless such Securities are subsequently the subject of
registration under the Securities Act or an exemption from the registration
requirement of the Securities Act is available. The Subscriber has been
advised or is aware of the provisions of Rule 144 promulgated under the
Securities Act.
2.3 Sophisticated Investor. The Subscriber is an "accredited investor"
(as defined in Rule 501 of Regulation D), and the Subscriber has such
experience in business and financial matters that it is capable of
evaluating the merits and risks of an investment in the Securities. The
Subscriber acknowledges that the Securities are speculative and involve a
high degree of risk.
2.4 Independent Investigation. The Subscriber, in making the decision to
purchase the Securities, has relied upon an independent investigation made
by it and/or its representatives and has not relied on any information or
representations made by third parties or on any oral or written
representations or assurances from the Company or any representative or
agent of the Company other than the representations of the Company set
forth herein, in the other Transaction Documents and in Prior Public
Disclosures. The Subscriber has had a reasonable opportunity to ask
questions of, and receive answers from, the Company concerning the Company,
the Securities and the Offering. The Subscriber acknowledges that the price
and terms of the Securities and the conversion and exercise prices of the
Underlying Shares have been determined by negotiation based in substantial
part on the market price for the Common Stock, and that it does not
necessarily bear any relationship to the assets, book value or potential
performance of the Company or any other recognized criteria of value.
Neither such inquiries nor any other due diligence investigations conducted
by such Subscriber, its representatives and advisors, if any, shall modify,
amend or affect such Subscriber's right to rely on the Company's
representations and warranties contained in Section 3 below.
2.5 Authority. This Agreement has been duly authorized and validly
executed and delivered by the Subscriber and is a legal, valid and binding
obligation of the Subscriber, enforceable against the Subscriber in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or
by other equitable principles of general application.
2.6 No Legal Advice from Company. The Subscriber acknowledges that it
has had sufficient and ample opportunity to review this Agreement and the
other Transaction Documents and to evaluate the transactions contemplated
herein and therein with its own legal counsel and investment and tax
advisors. Except for any statements or representations of the Company made
in this Agreement and the other Transaction Documents, the Subscriber is
relying solely on its counsel and advisors and not on any statements or
representations of the Company or any of its representatives or agents for
legal, tax or investment advice with respect to this investment, the
transactions contemplated by this Agreement and the other Transaction
Documents or the securities laws of any jurisdiction.
2.7 No Brokers. The Subscriber 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 Company relating to this Agreement or the
transactions contemplated hereby.
2.8 Not an Affiliate. The Subscriber is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of Securities Act) of the
Company.
B-4
2.9 Reliance on Representations and Warranties. The Subscriber
understands that the Securities are being offered and sold to it in
reliance on specific provisions of federal and state securities laws
(including specifically, but without limitation, the provisions of
Regulation D) and that the Company is relying upon the truth and accuracy
of the representations, warranties, agreements, acknowledgments and
understandings of the Subscriber set forth in this Agreement and the other
Transaction Documents in order to determine the availability of such
provisions.
2.10 No General Solicitation. The Subscribers acknowledges that the
Securities were not offered or sold to the Subscriber by means of general
solicitation, publicly disseminated advertisement or sales literature.
2.11 Information Provided by Subscribers. All of the information which
the Subscriber has provided to the Company concerning such Subscriber, such
Subscriber's financial condition/position and such Subscriber's knowledge
of financial and business matters was correct and complete when provided
and is correct and complete as of the date hereof. The Subscriber agrees
that, to the extent required by applicable laws, rules and regulations, any
information provided by the Subscriber may be disclosed by the Company.
Each Subscriber further agrees, if requested by the Company or its
representative, to provide bank and other references confirming the
information provided by such Subscriber.
3. Representations and Warranties of Company
The Company represents and warrants to each Subscriber that:
3.1 Company Status. The Company has registered its Common Stock pursuant
to Section 12(b) or 12(g) of the Exchange Act, is in full compliance with
all reporting requirements of the Exchange Act, and the Company has
maintained all requirements for the continued quotation of its Common Stock
on the Nasdaq National Market, and such Common Stock is currently listed
for trading on the Nasdaq National Market.
3.2 Current Public Information. The Recent Exchange Act Reports are the
only filings made by the Company with the SEC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act since August 31, 1999.
3.3 No Directed Selling Efforts or General Solicitation in Regard to
this Transaction. The Company has not conducted any general solicitation
(as that term is used in Regulation D) with respect to the Securities, nor
has it 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 Securities Act.
3.4 Valid Issuance of Capital Stock. (a) The Company has an authorized
capitalization consisting of 30,000,000 shares of Common Stock and
1,000,000 shares of preferred stock, par value $0.05 per share. The Company
has issued and outstanding on the date hereof 18,693,390 shares of Common
Stock, of which zero shares are held in treasury. As of the date hereof,
the Company has outstanding the following securities convertible into or
exercisable or exchangeable for Common Stock (the "Derivative Securities"):
(i) options to purchase 4,999,161 shares of Common Stock; and (ii) warrants
to purchase 976,562 shares of Common Stock.
(b) All of the issued shares of capital stock of the Company have been
duly and validly authorized and issued and are fully paid and non-
assessable. On or before the Closing Date, the authorized capitalization of
the Company shall include the Preferred Stock and the Warrants; upon
issuance and payment therefor in accordance with the Certificate, the
shares of Preferred Stock shall be (i) validly authorized and issued, fully
paid and non-assessable, (ii) free and clear from all taxes, liens and
charges with respect to the issuance thereof and (iii) entitled to the
rights and preferences set forth in the Certificate. The number of shares
of Common Stock required hereunder and under the other Transaction
Documents to be reserved for issuance upon conversion of the Preferred
Stock and exercise of the Warrants (subject to adjustment pursuant to the
Company's covenant set forth in Section 5.2 below) have
B-5
been duly authorized and reserved for issuance. Upon conversion of the
Preferred Stock and exercise of the Warrants, in each case, in accordance
with the terms thereof, the Underlying Shares will be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with
respect to the issuance thereof, with the holders thereof being entitled to
all rights accorded to holders of Common Stock. The holders of outstanding
shares of capital stock of the Company are not and shall not be entitled to
preemptive or other rights afforded by the Company to subscribe for the
capital stock or other securities of the Company as a result of the sale of
the Securities or the issuance of Underlying Shares upon the conversion or
exercise thereof. The issuance by the Company of the Securities is exempt
from registration under the Securities Act. The issuance by the Company of
the Securities is being made in reliance upon the exemption from
registration set forth in Rule 506 of Regulation D under the Securities Act
and is only being made to "accredited investors" that meet the requirements
of Rule 501(a) of Regulation D and similar exemptions under state law.
(c) Other than as set forth in Section 3.4(a): (i) no shares of the
Company's capital stock are subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) there are no outstanding debt securities issued by the
Company; (iii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to,
or securities or rights convertible into, any shares of capital stock of
the Company (or any subsidiary of the Company (each hereinafter referred to
as a "Subsidiary" and collectively, the "Subsidiaries"), or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of capital
stock of the Company or any Subsidiary or options, warrants, scrip, rights
to subscribe to, calls or commitments of any character whatsoever relating
to, or securities or rights convertible into, any shares of capital stock
of the Company or any Subsidiary; (iv) there are no agreements or
arrangements under which the Company (or any Subsidiary) is obligated to
register the sale of any of their securities under the Securities Act
(except the Registration Rights Agreement); (v) there are no outstanding
securities of the Company or any Subsidiary which contain any redemption or
similar provisions, and there are no contracts, commitments, understandings
or arrangements by which the Company or any Subsidiary is or may become
bound to redeem a security of the Company or any Subsidiary; (vi) there are
no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities as described in
this Agreement; and (vii) the Company does not have any stock appreciation
rights or "phantom stock" plans or agreements or any similar plan or
agreement.
(d) All of the authorized shares of capital stock of each Subsidiary are
owned by the Company, free and clear of any lien, charge, security
interest, encumbrance, adverse claim or other restriction, and all the
issued and outstanding shares of capital stock of the Subsidiaries are
validly issued and are fully paid, non-assessable and free of preemptive
and similar rights. Except as set forth on Schedule 3.4(d) hereto, there
are no outstanding agreements or commitments requiring the Company or any
Subsidiary to issue capital stock or Derivative Securities.
3.5 Share Issuance. The number of shares of Common Stock issuable upon
conversion of the Preferred Stock may increase substantially in certain
circumstances, including, but not necessarily limited to, the circumstance
wherein the trading price of the Common Stock declines prior to conversion
of the Preferred Stock. The Company's executive officers and directors have
studied and fully understand the nature of the Preferred Stock being sold
hereby and recognize that they have a potentially dilutive effect. The
Board of Directors of the Company has concluded, in its good faith business
judgment, that such issuance is in the best interest of the Company. The
Company specifically acknowledges that its obligation to issue the
Underlying Common Shares upon conversion of the Preferred Stock is binding
upon the Company and enforceable regardless of the dilution such issuance
may have on the ownership interests of other stockholders of the Company.
3.6 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power to own its
properties and assets and to carry on its business as now being conducted.
The Subsidiaries are listed
B-6
on Schedule 3.6 hereto. Except as set forth on Schedule 3.6 hereto, the
Company owns no securities other than the capital stock of the
Subsidiaries. Each Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its respective state of
organization, with the requisite corporate power to own its properties and
assets and to carry on its business as now being conducted. The Company and
each Subsidiary is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification
necessary other than those jurisdictions in which the failure so to qualify
would not have a Material Adverse Effect. "Material Adverse Effect" means
any material adverse effect on the business, operations, properties, cash
flows, prospects or condition (financial or otherwise) of the Company and
the Subsidiaries taken as a whole and any condition or situation which
would prohibit or otherwise materially adversely interfere with the ability
of the Company to enter into and perform its obligations under the
Transaction Documents.
3.7 Authorization; Enforcement. (a) The Company has the requisite
corporate power and authority to enter into and perform this Agreement and
the other Transaction Documents, to issue the Preferred Stock in accordance
with the terms hereof and thereof and to file and perform its obligations
under the Certificate and its Certificate of Incorporation; (b) the
execution and delivery of this Agreement and the other Transaction
Documents, the issuance and delivery of the Preferred Stock and the
Warrants, the filing of the Certificate by the Company and the consummation
by the Company of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate action, and no further
consent or authorization of the Company or its Board of Directors or
stockholders is required; (c) this Agreement has been, and on or before the
Closing Date each of the other Transaction Documents will be, duly executed
and delivered by the Company and on the Closing Date, the Certificate will
be duly filed and effective; and (d) this Agreement constitutes, and upon
execution and delivery thereof, each of the other Transaction Documents
shall constitute, legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable
principles of general application.
3.8 Corporate Documents. The Company has furnished or made available to
the Subscribers true, correct and complete copies of the Certificate of
Incorporation, as in effect on the date hereof, and each Subsidiary's
articles of incorporation, as in effect on the date hereof (each, a
"Subsidiary Charter"), and the Company's and each Subsidiary's Bylaws, as
in effect on the date hereof (the Certificate of Incorporation, the
Certificate, each Subsidiary Charter, the Company's Bylaws and each
Subsidiary's Bylaws are collectively referred to herein as the "Charter
Documents"). Neither the Company nor any Subsidiary is in violation of any
of the provisions of its Charter Documents.
3.9 No Conflicts. The execution, delivery and performance of this
Agreement and the other Transaction Documents and consummation of the
transactions contemplated hereby and thereby (including the issuance of the
Preferred Stock and the Warrants, conversion of the Preferred Stock,
exercise of the Warrants, issuance of the Underlying Shares upon conversion
of the Preferred Stock and upon exercise of the Warrants and the filing of
the Certificate) do not and will not: (i) result in a violation of the
Charter Documents; or (ii) result in the creation of any lien, charge,
security interest or encumbrance upon any of the assets of the Company or
any Subsidiary pursuant to the terms or provisions of or, conflict with, or
constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture, credit facility or instrument to which the Company or any
Subsidiary is a party, or result in a violation of any federal, state,
local or foreign law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to
the Company or any Subsidiary or by which any property or asset of the
Company or any Subsidiary is bound or affected, except, in the case of
clause (ii), for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or
in the aggregate, have a Material Adverse Effect. The businesses of each of
the Company and each Subsidiary are not being conducted in violation of any
law, ordinance or regulations of
B-7
any governmental entity, except for violations or potential violations
which either individually or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state
or local law, rule or regulation in the United States to obtain any
consent, authorization or order of, or make any filing or registration
with, any court or governmental or self-regulatory agency in order for it
to execute, deliver or perform any of its obligations under this Agreement
or the Registration Rights Agreement or issue and sell the Preferred Stock,
the Warrants or the Underlying Common Shares in accordance with the terms
hereof and thereof (other than any SEC, NASD, The Nasdaq Stock Market, Inc.
or state securities filings which may be required to be made by the
Company, any registration statement which may be filed pursuant hereto and
the filing of the Certificate).
3.10 Exchange Act Reports. The Company has filed all reports required to
be filed by it under the Exchange Act, including pursuant to Section 13(a)
or 15(d) thereof, since August 31, 1995 (the foregoing materials being
collectively referred to herein as the "Exchange Act Reports"). The Company
has delivered or made available to the Subscribers true, correct and
complete copies of the Exchange Act Reports (including, without limitation,
proxy information and solicitation materials). The Company has not provided
to the Subscribers 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 applicable federal, state and local laws, rules and
regulations, 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
not misleading. The audited financial statements of the Company included in
the Exchange Act Reports comply or will comply in all material respects as
to form 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 (a) as may be otherwise indicated in
such financial statements or the notes thereto or (b) 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 (or will
fairly present) in all material respects the consolidated financial
position of the Company as of the dates thereof and the consolidated
results of operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).
The Company has filed (including filing such documents by incorporation by
reference) all agreements or documents to which the Company is a party that
are required to be filed as exhibits to the Exchange Act Reports.
3.11 No Material Adverse Change. Since August 31, 1999, except as
disclosed in the Prior Public Disclosures, no Material Adverse Effect has
occurred or exists with respect to the Company and the Subsidiaries taken
as a whole.
3.12 No Undisclosed Liabilities. The Company and the Subsidiaries have
no liabilities or obligations not disclosed in the Exchange Act Reports,
other than those incurred in the ordinary course of the Company's or such
Subsidiary's respective businesses since August 31, 1999 and which,
individually or in the aggregate, do not or would not have a Material
Adverse Effect.
3.13 No Undisclosed Events or Circumstances. No event or circumstance
has occurred or exists with respect to the Company or any Subsidiary or
their respective business, operations, properties, prospects or condition
(financial or otherwise), which, under applicable law, rule or regulation,
requires public disclosure or announcement by the Company but which has not
been so publicly announced or disclosed.
3.14 Application of Takeover Protections. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws
of the State of Delaware which is or
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could become applicable to the Subscribers as a result of the Subscribers
and the Company fulfilling their obligations under the Transaction
Documents, including, without limitation, the Company's issuance of the
Securities and the Subscribers' ownership of the Securities.
3.15 No Brokers. The Company has not taken any action which would give
rise to a claim by any person for brokerage commissions, finder's fees or
similar payments by any Subscriber relating to this Agreement or the
transactions contemplated hereby.
3.16 Effectiveness of SEC Filings. The SEC has not issued any stop order
or other order suspending the effectiveness of any registration statement
filed by the Company or the Subsidiary under the Exchange Act or the
Securities Act.
3.17 No Material Litigation Proceedings. Neither the Company nor any
Subsidiary is a party to or the subject of any litigation, arbitration or
other proceeding which, if adversely determined, would individually or in
the aggregate have a Material Adverse Effect. There is no action, suit,
proceeding or investigation pending, or, to the knowledge of the Company,
threatened, against the Company or any Subsidiary before or by any court,
regulatory body or administrative agency or any other governmental agency
or body, domestic or foreign, or any action, suit, proceeding or
investigation pending, or, to the knowledge of the Company, threatened,
which in any such case challenges the validity of any action taken or to be
taken by the Company or any Subsidiary pursuant to or in connection with
this Agreement, the other Transaction Documents or the issuance of the
Securities.
3.18 Compliance with Instruments, etc. Neither the Company nor any
Subsidiary (or the manner in which any of them conducts its businesses) is
in breach or violation of, or in default under, any term or provision of
(i) its Charter Documents, (ii) any indenture, mortgage, deed of trust,
voting trust agreement, stockholders agreement, note agreement or other
agreement or instrument to which it is a party or by which it is or may be
bound or to which any of its property or assets is or may be subject, or
any indebtedness, the effect of which breach or default, individually or in
the aggregate, would have a Material Adverse Effect, or (iii) any statute,
judgment, decree, order, rule or regulation applicable to the Company or
any Subsidiary or of any arbitrator, court, regulatory body, administrative
agency or any other governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or any of their
respective activities, properties or assets and the effect of which breach
or default, individually or in the aggregate, would have a Material Adverse
Effect.
3.19 Intellectual Property. (a) Each of the Company and each Subsidiary
has full and exclusive right, title and interest in and to, or license
rights to, all patents, patent applications, registered or unregistered
trademarks, service marks and trade names, registered or unregistered
copyrights and applications therefor, licenses, approvals or governmental
authorizations to conduct their business as now conducted, know-how,
proprietary rights and processes, trade secrets, customer lists,
methodologies (to the extent protectible), proprietary development and
marketing information and know-how, inventions, inventors' notes (to the
extent such notes exist), drawings, designs associated with the foregoing,
and other confidential information (collectively, "Intellectual Property")
relating to their respective businesses or otherwise used in or necessary
for the proper conduct of their respective businesses, free and clear of
all liens, security interests, claims and encumbrances of any nature; and
(ii) neither the Company nor any Subsidiary has any obligation to any other
person or entity with respect to the Intellectual Property or any product
or process of the Company or any Subsidiary utilizing or embodying any
Intellectual Property.
(b) There is (i) no infringement, misuse or misappropriation of any
Intellectual Property owned, licensed or controlled by any third party
arising out of any product or process now being used, manufactured or
distributed, or ever having been used, manufactured or distributed at any
time previously, by or on behalf of the Company or the Subsidiaries, (ii)
no pending or, to the knowledge of the Company, threatened claim or
challenge of or proceeding for infringement, misuse or misappropriation of
or interference with any Intellectual Property owned, licensed or
controlled by any third party arising out of any product or process now
being used, manufactured or distributed, or ever having been used,
manufactured or distributed at any time previously, by or on behalf of the
Company or the Subsidiaries,
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(iii) except as set forth in Schedule 3.22 hereto, no pending or threatened
or potential claim, challenge or proceeding by the Company or any
Subsidiary against any third party for infringement, misuse or
misappropriation of or interference with any Intellectual Property owned,
licensed or controlled by the Company or such Subsidiary or (iv) no notice
or, to the knowledge of the Company, facts or information rendering any
Intellectual Property owned, controlled or licensed by the Company or the
Subsidiaries invalid or unenforceable, nor, to the knowledge of the
Company, is there any allegation that any such Intellectual Property is
invalid or unenforceable.
3.20 Material Contracts. All contracts to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary is bound
which are filed as or incorporated by reference as exhibits to the Exchange
Act Reports (the "Material Contracts"), are valid, binding and enforceable
in accordance with their terms (assuming the other parties thereto are
bound) and are in full force and effect, except where such invalidity or
unenforceability would not have a Material Adverse Effect. No payment
default, breach or violation or alleged default by the Company or any
Subsidiary exists under the Material Contracts.
3.21 Investment Company. The Company is not, and is not controlled by or
under common control with an affiliate of, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
3.22 No Integration. Neither the Company nor any of its affiliates nor
any person acting on the Company's behalf has, directly or indirectly, at
any time within the past six (6) months made any offer or sale of any
security or solicitation of any offer to buy any security under
circumstances that would (i) eliminate the availability of the exemption
from registration under Regulation D in connection with the offer and sale
of the Securities as contemplated hereby; or (ii) cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings
by the Company for purposes of the Securities Act or any applicable
stockholder approval provisions, including, without limitation, under the
rules and regulations of the NASD, as applicable.
3.23 Year 2000 Compliance. All computer hardware, software, databases,
systems and other computer equipment (collectively, "Software") used by the
Company or the Subsidiaries can be used during and after the calendar year
2000, and shall operate during each such time period, both on a stand-alone
basis and when interacting or interoperating with third-party Software,
without error relating to the processing, calculating, comparing,
sequencing or other use of Date Data. "Date Data" is any data derived from
or dependent upon the proper recognition by software or hardware of dates
prior to or after the year 2000.
3.24 Form S-3 Eligible. The Company currently meets the requirements for
use of Form S-3 under the Securities Act.
3.25 Disclosure. The written information with respect to the Company and
the Subsidiaries heretofore provided and to be provided by the Company
pursuant to this Agreement and the other Transaction Documents, including
the schedules and exhibits hereto, and each of the agreements, documents,
certificates and writings to be delivered to the Subscribers or their
respective representatives at the Closing, do not and will not on the
Closing Date contain any untrue statement of a material fact or omit to
state a material fact required to be stated herein or therein or necessary
in order to make the statements and writings contained herein and therein
not false or misleading in the light of the circumstances under which they
were made.
4. Covenants of each Subscriber
4.1 Resales. No Subscriber shall make any offers or sales of the Securities
other than pursuant to an effective registration statement under the Securities
Act or pursuant to an exemption from registration under the Securities Act.
Each Subscriber will comply with applicable prospectus delivery requirements.
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5. Covenants of the Company
5.1 Reservation of Common Stock. As of the Closing, the Company will reserve
and the Company shall continue to reserve and keep available at all times, free
of preemptive rights, shares of Common Stock in a number sufficient to enable
the Company to satisfy one and one-half times the number of shares necessary to
satisfy any obligation to issue shares of Common Stock upon conversion of the
Preferred Stock as if all the Preferred Stock were converted as of the Closing
at the then applicable conversion price and at all times thereafter, plus the
number of additional shares of Common Stock as would be issued upon exercise of
the Warrants. The number of shares so reserved may be reduced by the number of
shares actually delivered pursuant to conversion of a portion of the Preferred
Stock (provided that in no event shall the number of shares so reserved be less
than one and one-half times the number required to satisfy the remaining
conversion rights on the unconverted Preferred Stock) and the number of shares
so reserved shall be increased to reflect stock splits and stock dividends and
distributions.
5.2 Listing of Underlying Shares. The Company hereby agrees, promptly
following the Closing, to take such action to cause the Underlying Shares to be
quoted for trading on the Nasdaq National Market not later than the effective
date of the registration statement relating to the Underlying Shares required
to be filed pursuant to the terms of the Registration Rights Agreement (the
"Registration Statement"). The Company further agrees, if the Company applies
to have the Common Stock traded on any other principal stock exchange or
market, that it will include in such application the Underlying Shares and will
take such other action as is reasonably necessary to cause the Underlying
Shares to be listed on such other exchange or market concurrently with any
other Common Stock.
5.3 Exchange Act Registration. The Company will use its best efforts: (a) to
cause its Common Stock to continue to be registered under Section 12(b) or
12(g) of the Exchange Act; (b) to comply in all material respects with its
reporting and filing obligations under the Exchange Act; and (c) not to take
any action or file any document (whether or not permitted by the Exchange Act
or the rules and regulations thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under the Exchange Act. The Company will use its best efforts to continue the
listing and trading of its Common Stock on the Nasdaq National Market and will
use its best efforts to comply in all material respects with the Company's
reporting, filing and other obligations under the bylaws or rules of the NASD
and the Nasdaq National Market.
5.4 Legends. Except as provided in Section 6.1 below, the Underlying Shares
and certificates evidencing the same shall at all times be free of legends,
"stop transfers," "stock transfer restrictions" or other restrictions, upon the
effectiveness of the Registration Statement.
5.5 Corporate Existence. So long as any Subscriber beneficially owns any
Preferred Stock or Warrants, the Company shall maintain its corporate existence
and shall not sell all or substantially all of the Company's assets, except in
the event of a merger or consolidation or sale of all or substantially all of
the Company's assets, where the surviving or successor entity in such
transaction assumes the Company's obligations hereunder and under the other
Transaction Documents; and (ii) is a publicly traded corporation on the New
York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or
The Nasdaq SmallCap Market.
5.6 Transfer Agent Instructions. The Company covenants and agrees that,
promptly following execution and delivery of this Agreement, it shall issue
irrevocable instructions (the "Irrevocable Transfer Agent Instructions") to its
transfer agent for the Common Stock, and any subsequent transfer agent, such
instructions to be in form and substance reasonably acceptable to the
Subscribers, to facilitate trades of the Underlying Shares and to permit the
Subscribers to timely deliver within any applicable settlement period
certificates representing such shares in connection with any transfer or
disposition of the Underlying Shares. The Company further covenants and agrees
that, except as otherwise required by law, no instruction, other than the
Irrevocable Transfer Agent Instructions, will be given by the Company to its
transfer agent and that the
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Underlying Shares shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement. Each of the Subscribers and the Company
acknowledge and agree that their respective obligations pursuant to this
Section 5.6 are subject to compliance by each of them with applicable
securities laws. The Company covenants that it will use its best efforts to
cause the Company's transfer agent to deliver certificates representing shares
issued in connection with a transfer of Underlying Shares as promptly as
practicable but in no event later than three (3) business days after delivery
by a Subscriber of all required documentation in respect of such transfer to
both the Transfer Agent and the Company as required pursuant to Paragraphs 7
and 8 of the Certificate. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Subscribers by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of
its obligations under this Section 5.6 will be inadequate and agrees, in the
event of a breach or threatened breach by the Company of the provisions of this
Section 5.6, that the Subscribers shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
5.7 Use of Proceeds. The Company shall use all the proceeds of the Offering
for general corporate purposes, including working capital and for the repayment
of the Company's borrowings, provided that the Company shall not use the
proceeds to redeem its equity or equity-equivalent securities. Pending
application of the proceeds of the Offering in the manner permitted hereby, the
Company will invest such proceeds in interest bearing accounts and/or short-
term, investment grade interest bearing securities.
5.8 Rule 144A Information. The Company will (i) make available, upon
request, to any holder of Securities and any prospective purchaser thereof
designated by such a holder, upon the request of such holder or prospective
purchaser, the information required to be provided to such holder or
prospective purchaser by Rule 144A(d)(4) under the Securities Act and (ii)
update such information from time to time in order to prevent such information
from becoming false and misleading and will take such other actions as are
reasonably necessary to ensure that the safe harbor exemption from the
registration requirements of the Securities Act under Rule 144A is and will be
available for resales of the Preferred Stock and the Warrants Shares conducted
in accordance with Rule 144A.
5.9 Notice of Adverse Change. The Company will notify the Subscribers
promptly (but in any event within seven days) after becoming aware of the
existence of any condition or event which has had or is likely to have a
Material Adverse Effect.
5.10 Dividends and Distributions. Until the delivery by the Company to the
Subscribers of all of the shares of Common Stock issuable upon conversion of
the Preferred Stock or all sums of cash upon redemption of the Preferred Stock,
as applicable, such that after such delivery upon any such conversion or
redemption no more than 10% of the Preferred Stock issued on the Closing Date
remains outstanding, the Company shall not make or fix a record date for the
determination of holders of Common Stock or other securities entitled to
receive a dividend or other distribution (special or otherwise) or declare a
cash dividend or other distribution payable in cash or property of the Company.
5.11 Filing of Current Report on Form 8-K. On or before the second business
day following the Closing Date, the Company shall file with the SEC a Current
Report on Form 8-K in a form reasonably acceptable to the Subscribers
describing the terms of the transaction consummated at the Closing.
5.12 Form D. The Company agrees to file one or more Form D's with respect to
the Offering as required under Regulation D and to provide a copy thereof to
the Subscribers promptly upon request.
5.13 Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or
sale of the Securities in a manner that would require the registration under
the Securities Act of the sale of any or all of such Securities to any
Subscriber.
B-12
5.14 Shareholder Approval. The Company shall provide each stockholder
entitled to vote at a meeting of the stockholders of the Company, which meeting
shall occur on or before the date which is 60 days after the Proxy Statement
Triggering Date (as defined below) (the "Stockholder Meeting Deadline"), a
proxy statement, which has been previously reviewed by the Subscribers and
counsel of their choice, soliciting each such stockholder's affirmative vote at
such stockholder meeting for approval of the Company's issuance of all of the
Securities as described in this Agreement, and the Company shall use its best
efforts to (i) solicit its stockholders' approval of such issuance of the
Securities and (ii) cause the Board of Directors of the Company to recommend to
the stockholders that they approve such proposal. A "Proxy Statement Triggering
Date" shall mean the first date after the date of this Agreement on which the
sum of (A) the number of Underlying Shares issued and (B) the number of
Underlying Shares issuable upon conversion of all the outstanding shares of
Preferred Stock based on the Conversion Price (as defined in the Certificate),
and upon exercise of all the outstanding Warrants based on the Warrant Price
(as defined in the Warrants) in effect on the date of such determination
(without regard to any limitation upon the conversion of any shares of
Preferred Stock or exercise of Warrants), equals or exceeds 15% of the number
of shares of Common Stock issued and outstanding immediately prior to the
Closing Date.
6. Legends; Subsequent Transfer of Securities; Denominations
6.1 Legend. The Company shall issue one or more certificates evidencing the
Preferred Stock and the Warrants in the name of each Subscriber and in such
number of shares to be specified by such Subscriber prior to (or from time to
time subsequent to) the Closing. The Preferred Stock, the Warrants and the
Underlying Shares shall bear the following legend (the "Legend"):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY
NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND
ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
Following the effectiveness of the Registration Statement, the Company will
issue certificates representing the Securities without the Legend to any
transferee other than holders who are "affiliates" of the Company (as such term
is defined under the Securities Act). In addition, the Company will issue
certificates representing the Securities without the Legend, promptly upon
request, if: (i) the holder thereof is permitted to dispose of Securities
pursuant to Rule 144 under the Securities Act; (ii) the Securities are sold to
a purchaser or purchasers in a transaction exempt from registration under the
Securities Act, as evidenced by an opinion of counsel to the transferor
delivered and reasonably satisfactory to the Company; or (iii) the Securities
are sold to a purchaser or purchasers pursuant to an effective registration
statement and the prospectus delivery requirements under the Securities Act are
met.
6.2 Subscriber's Compliance. Nothing in this Section 6 shall affect in any
way the Subscribers' obligations and agreement to comply with all applicable
securities laws upon resale of the Securities.
6A. Payment Set Aside
To the extent that the Company makes a payment or payments to any Subscriber
hereunder or pursuant to the Registration Rights Agreement or the Certificate
or any Subscriber enforces or exercises its rights hereunder or thereunder, and
such payment or payments or the proceeds of such enforcement or exercise or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action) by the
court of competent jurisdiction in a final non-appealable judgment, then to the
extent of any such restoration the obligation or part thereof originally
intended to be
B-13
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or set-off had not occurred.
7. Governing Law; Jurisdiction
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware, without regard to principles of
conflicts of law or choice of law, except for matters arising under the
Securities Act or the Exchange Act which matters shall be construed and
interpreted in accordance with such laws. The Company and the Subscribers
hereby agree that all actions or proceedings arising directly or indirectly
from or in connection with this Agreement shall be litigated only in the
Supreme Court of the State of Delaware or the United States District Court of
Delaware located in New Castle County, Delaware. The Company and each
Subscriber consents to the jurisdiction and venue of the foregoing courts and
consent that any process or notice of motion or other application to either of
said courts or a judge thereof may be served inside or outside the State of
Delaware by registered mail, return receipt requested, directed to the such
party at its address set forth in this Agreement (and service so made shall be
deemed complete five (5) days after the same has been posted as aforesaid) or
by personal service or in such other manner as may be permissible under the
rules of said courts. The parties hereto hereby waive any right to a trial by
jury in connection with any litigation pursuant to this Agreement and the
transactions contemplated hereby.
8. Assignment; Entire Agreement; Amendment
8.1 Assignment. Neither this Agreement nor any rights hereunder may be
assigned by either party without the prior written consent of the other party
hereto; provided, however, that the Company may assign its rights and
obligations under this Agreement in connection with a transaction of the nature
contemplated by Section 5.5 hereof and any Subscriber may assign its rights
under this Agreement to an affiliate of such Subscriber who agrees to be bound
by the terms hereof. To the extent that any party assigns this Agreement with
the prior written consent of the other or any Subscriber assigns this Agreement
as permitted herein to an affiliate of such Subscriber, the provisions of this
Agreement, the Certificate and the Registration Rights Agreement shall inure to
the benefit of, be binding upon, and be enforceable by and against any such
assignee. Notwithstanding anything to the contrary contained herein or any
other Transaction Document, any Subscriber shall be entitled to pledge the
Securities in connection with a bona fide margin account or other loan secured
by the Securities.
8.2 Entire Agreement; Amendment. This Agreement, the Certificate, the
Registration Rights Agreement, the Warrants and the other documents delivered
pursuant hereto and thereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and no party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth in
this Agreement or therein. Except as expressly provided in this Agreement,
neither this Agreement nor any term hereof may be amended, waived, discharged
or terminated other than by a written instrument signed by the party against
whom enforcement of any such amendment, waiver, discharge or termination is
sought.
9. Publicity
The Company and the Subscribers shall consult with each other in issuing any
press releases or otherwise making public statements with respect to the
transactions contemplated hereby and no party shall issue any such press
release or otherwise make any such public statement without the prior written
consent of the others, which consent shall not be unreasonably withheld or
delayed, except that no prior consent shall be required if such disclosure is
required by law or applicable law, to the extent a party determines in good
faith that it is legally obligated to do so, in which such case the disclosing
party shall provide the other parties with prior notice of such public
statement. The Company shall not publicly or otherwise disclose the names of
any of the
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Subscribers without each such Subscriber's prior written consent unless
otherwise required by law, in which case the Company shall inform such
Subscriber of such disclosure in writing prior to making such disclosure.
10. Notices, Etc.; Expenses, Indemnity
10.1 Notices. Any notice, demand or request required or permitted to be
given by either the Company or the Subscribers pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or by facsimile, with a hard copy to follow by two day courier,
addressed to the parties at the addresses of the parties set forth on Schedule
I hereto or such other address as a party may request by notifying the other in
writing. Copies of all notices to a Subscriber shall be sent to its designee or
representative.
10.2 Expenses. The Company shall reimburse the Subscribers for their
respective reasonable expenses and fees in connection with this Agreement,
which amount shall be withheld by the Subscribers from the purchase price, in
an amount not to exceed an aggregate of $50,000.
10.3 Indemnification. 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.
11. Counterparts
This Agreement may be executed in any number of counterparts, each of which
shall be enforceable against the parties actually executing such counterparts,
and all of which together shall constitute one instrument.
12. Survival; Severability
The representations, warranties, covenants and agreements of the parties
hereto shall survive the Closing notwithstanding any due diligence
investigation conducted by or on behalf of the Subscribers. In the event that
any provision of this Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Agreement shall
continue in full force and effect without said provision; provided that no such
severability shall be effective if it materially changes the economic benefit
of this Agreement to any party.
13. Titles and Subtitles
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Company and the Subscribers have caused this
Subscription Agreement to be duly executed as of the date first written above.
COMPANY: SUBSCRIBERS:
XCEED, INC. PECONIC FUND, LTD.
/s/ Werner Haase By:Ramius Capital Group, LLC,
By: _________________________________ Its:Investment Advisor
Name: Werner Haase
Title: Chief Executive Officer /s/ Jeffrey M. Solomon
By: _________________________________
Name: Jeffrey M. Solomon
Title: Managing Officer
LEONARDO, L.P.
By:Angelo, Gordon & Co., L.P.
Its:General Partner
/s/ Michael L. Gordon
By: _________________________________
Name: Michael L. Gordon
Title: Chief Operating Officer
HTFP INVESTMENT L.L.C.
By:Promethean Asset Management,
L.L.C.
Its:Investment Manager
/s/ James F. O'Brien, Jr.
By: _________________________________
Name: James F. O'Brien, Jr.
Title: Managing Member
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Exhibit C
XCEED, INC.
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
Pursuant to Section 151(g) of the General Corporation Law of the State of
Delaware, I, Werner Haase, Chief Executive Officer of XCEED, INC., a Delaware
corporation (the "Corporation"), hereby certify that the following is a true
and correct copy of a resolution duly adopted by the unanimous written consent
of the Board of Directors of the Corporation on January 13, 2000 and that said
resolution has not been rescinded or amended and is in full force and effect at
the date hereof:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Corporation's Board of Directors by the Certificate of
Incorporation of the Corporation, as amended to date, the Board of
Directors hereby authorizes, creates and provides for a series of
Preferred Stock of the Corporation, par value $0.05 per share, to be
designated the "Series A Cumulative Convertible Preferred Stock",
which series shall consist of thirty thousand (30,000) shares, each
having stated value of $1,000 per share and the voting powers,
designations, preferences and relative, participating, optional or
other rights, and the qualifications, limitations or restrictions
thereof as set forth in the Certificate of Designation, Preferences
and Rights as follows:
1. Use of Defined Terms. Capitalized defined terms used herein but not
otherwise defined shall have the respective meanings ascribed to them in
Paragraph 19 hereof.
2. Designation and Dividends. (a) There is hereby created out of the
authorized but unissued shares of Preferred Stock a series to be designated as
the "Series A Cumulative Convertible Preferred Stock" and defined (and referred
to) herein as the "Series A Preferred Stock." The number of shares in such
series shall be thirty thousand (30,000) and the stated value of each such
share of Series A Preferred Stock shall be $1,000 per share (the "Stated
Value"). Each share of Series A Preferred Stock shall be entitled to receive,
in preference to the holders of Junior Securities, cumulative annual dividends
at the rate of 4.0% per annum on the Aggregate Value thereof. Such dividends
shall be due and payable quarterly in arrears on each Dividend Payment Date
commencing on March 31, 2000. Dividends shall accumulate daily on each share of
Series A Preferred Stock from the Issuance Date, whether or not earned or
declared, until such share of Series A Preferred Stock has been converted or
redeemed as herein provided. To the extent dividends are not paid on the
applicable Dividend Payment Date, such dividends shall be cumulative and shall
compound quarterly until the date on which payment of such dividend is made.
The dividends so payable will be paid to the Holder as reflected on the
Preferred Stock Register; provided, however, that the Corporation's obligation
to a transferee of a share of Series A Preferred Stock shall arise only if such
transferee has agreed in writing to be bound by and the subject transfer, sale
or other disposition is made in accordance with the terms and conditions hereof
and the Subscription Agreement executed and delivered by the original or
transferring Holder as of the Issuance Date.
(b) The dividends are payable in such coin or currency of the United States
of America as at the time of payment is legal tender, to the Holder on the
tenth calendar day prior to the applicable Dividend Payment Date and at the
address last appearing on the Preferred Stock Register as designated in writing
by such Holder from time to time; provided, however, that, in lieu of paying
such dividends in coin or currency, the Corporation may, at its option, in full
or in part, pay dividends on the shares of Series A Preferred Stock on any
Dividend Payment Date by increasing the Aggregate Value of the Series A
Preferred Stock by the amount of such dividend such that the sum of (i) the
amount of such increase in the Aggregate Value and (ii) the amount of cash
dividend paid in part, if any, is equal to the amount of the cash dividend
which would otherwise be paid on such Dividend Payment Date if such dividend
were paid entirely in cash. Any such increase in the Aggregate Value (plus the
amount of cash dividend, if any, paid together therewith) shall constitute full
payment of such dividend. When any dividend is added to the Aggregate Value,
such dividend shall,
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commencing on the Dividend Payment Date, be deemed to be part of the Aggregate
Value for purposes of determining dividends thereafter payable hereunder and
amounts thereafter convertible into Common Stock hereunder, and all references
herein to the Aggregate Value shall mean the Aggregate Value, as adjusted
pursuant to these provisions.
(c) If the Corporation shall elect to pay any part of a dividend by
increasing the Aggregate Value as described in Paragraph 2(b), the Corporation
shall provide the Dividend Notice setting forth the new Aggregate Value to each
Holder on or prior to the applicable Dividend Payment Date.
(d) If the cash dividends due hereunder are not paid or the Dividend Notice
is not delivered to each Holder within ten (10) calendar days after the
applicable Dividend Payment Date, the Corporation shall no longer have the
right to choose the method by which dividends are paid, and each Holder may
elect either cash dividends or dividends payable by increasing the Aggregate
Value.
(e) Except as specifically provided herein, neither (i) an election by the
Corporation to pay dividends, in full or in part, in cash on any Dividend
Payment Date, nor (ii) failure by the Corporation to make payment on a prior
Dividend Payment Date or provide the Dividend Notice within the specified ten
(10) day period in Paragraph 1(d) above, shall preclude the Corporation from
electing any other available alternative in respect of payment of all or any
portion of any subsequent dividend.
(f) So long as any shares of Series A Preferred Stock are outstanding, no
dividends, including without limitation, dividends or distributions paid in
shares of, or options, warrants or rights to subscribe for or purchase Junior
Securities whether with respect to dividends or upon liquidation, dissolution,
winding up of the Corporation or otherwise or on Parity Securities whether with
respect to dividends or upon liquidation, dissolution, winding up of the
Corporation or otherwise, shall be declared or paid or set apart for payment or
other distribution upon the Junior Securities or the Parity Securities, nor
shall any Junior Securities or Parity Securities be redeemed, purchased or
otherwise acquired for any consideration (or any monies to be paid to, or made
available for, a sinking fund for the redemption of any shares of any such
stock) by the Corporation, directly or indirectly (except by conversion to, or
exchange for, Junior Securities or Parity Securities, respectively).
3. Preferred Rank. (a) The Series A Preferred Stock shall, in respect of
dividend rights and preferences as to distributions and payments upon the
liquidation, dissolution, winding up of the Corporation or otherwise, rank
senior to all classes of Junior Securities.
(b) So long as any shares of Series A Preferred Stock are outstanding,
without the prior express written consent of Holders of not less than two-
thirds ( 2/3) of the then outstanding shares of Series A Preferred Stock, the
Corporation shall not hereafter (i) issue any additional shares of Series A
Preferred Stock (except with respect to payments of dividends made in kind on
the Series A Preferred Stock as provided elsewhere herein); (ii) authorize or
issue any capital stock that ranks senior to the Series A Preferred Stock in
respect of dividend rights or the preferences as to distributions and payments
upon the liquidation, dissolution, winding up of the Corporation or otherwise;
(iii) authorize or issue any Parity Securities with terms and conditions more
favorable than the terms herein (except with respect to payments of dividends
made in kind on the Series A Preferred Stock as provided elsewhere herein); or
(iv) authorize or make any amendment to the Corporation's Certificate of
Incorporation or Bylaws, or file any resolution of the Board of Directors of
the Corporation with the Secretary of State of the State of Delaware containing
any provisions, which, in the case of clause (iv), would adversely affect or
otherwise impair the rights or relative priority of the Holders of the shares
of Series A Preferred Stock relative to the holders of Parity Securities, the
holders of Junior Securities or the holders of any other class of capital
stock.
(c) In the event of the merger, consolidation or other business combination
of the Corporation with or into another corporation, the Series A Preferred
Stock shall maintain its relative powers, designations and
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preferences provided for herein and no merger, consolidation or other business
combination shall result inconsistent therewith.
4. Extraordinary Transactions. If at any time any of the following events
occurs (each, an "Extraordinary Transaction"): (i) any merger, consolidation or
other business combination of the Corporation, with or into any other
corporation, entity or person (whether or not the Corporation is the surviving
corporation) or there occurs any other corporate reorganization or transaction
or series of related transactions, and as a result thereof the shareholders of
the Corporation pursuant to such merger, consolidation, reorganization or other
transaction own in the aggregate less than 50% of the voting power and common
equity of the ultimate parent corporation or other entity surviving or
resulting from such merger, consolidation, reorganization or other transaction,
(ii) the Corporation transfers all or substantially all of the Corporation's
assets to another corporation or other entity or person, (iii) a purchase,
tender or exchange offer is made to and accepted by the holders of more than
50% of the outstanding shares of Common Stock, or (iv) the Corporation, without
obtaining stockholder approval at a duly convened meeting of stockholders,
issues or enters into an agreement providing for the issuance (contingent or
otherwise) of any Common Stock or Derivative Securities of the Corporation
representing greater than 19.99% of the outstanding Common Stock of the
Corporation immediately prior to the issuance (for purposes of such
calculation, including the shares of Common Stock underlying the Derivative
Securities to be issued but excluding the shares of Common Stock underlying the
Series A Preferred Stock and the Warrants), then each Holder of the Series A
Preferred Stock then outstanding, in its sole discretion may participate in any
such transaction as a class with the holders of the Common Stock, by
converting, on the same basis as if the Series A Preferred Stock had been
converted into Common Stock immediately prior to the announcement date (or
record date for such distribution, dividend or offer) of such Extraordinary
Transaction.
5. Redemption.
(a) Redemption Upon an Extraordinary Transaction. At the option of each
Holder, the Corporation shall redeem all or any portion of such Holder's
outstanding shares of Series A Preferred Stock effective as of the effective
date of an Extraordinary Transaction, and the Holder shall be entitled to
receive on the specified redemption date a redemption price per share of Series
A Preferred Stock being redeemed equal to 120% of the Aggregate Value at the
effective date of the Extraordinary Transaction. Each Holder shall be entitled
to make an election for redemption by delivering the Redemption Notice by
facsimile (with the original of such notice forwarded to the Corporation via
overnight courier) to the Corporation at its principal executive office
indicating that such Holder elects to have redeemed the number of shares of
Series A Preferred Stock (plus accumulated but unpaid dividends thereon,
whether or not earned or declared) specified therein, at any time up to five
(5) days prior to the effective date of any Extraordinary Transaction;
provided, however, at the discretion of such Holder, such Holder may, at any
time, elect to convert its shares of Series A Preferred Stock, in accordance
with the terms of Paragraph 6 hereof, into such number of fully paid, validly
issued and nonassessable shares of Common Stock as determined by the
application of the Conversion Rate, so long as the Corporation has not redeemed
such shares of Series A Preferred Stock.
(b) Redemption Upon a Triggering Event. At the option of each Holder, the
Corporation shall redeem all or any portion of such Holder's outstanding shares
of Series A Preferred Stock effective as of the date of the occurrence of a
Triggering Event, and the Holder shall be entitled to receive on the specified
redemption date a redemption price per share of Series A Preferred Stock being
redeemed equal to 125% of the Aggregate Value as of the effective date of the
Triggering Event. Each Holder shall be entitled to make an election for
redemption at any time following the occurrence of a Triggering Event by
delivering the Redemption Notice by facsimile (with the original of such notice
forwarded to the Corporation via overnight courier) to the Corporation at its
principal executive office indicating that such Holder elects to have redeemed
the number of shares of Series A Preferred Stock specified therein; provided,
however, at the discretion of such Holder, such Holder may, at any time, elect
to convert its shares of Series A Preferred Stock, in accordance with the terms
of Paragraph 6 hereof, into such number of fully paid, validly issued and
nonassessable shares of Common Stock as determined by the application of the
Conversion Rate, so long as the Corporation has not redeemed such
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shares of Series A Preferred Stock. In addition to the foregoing, upon the
occurrence of a Triggering Event, the Holders shall have the right to receive a
2.0% reduction in the Conversion Price of the Series A Preferred Stock for each
thirty (30) day period (or part thereof) following a Triggering Event.
(c) Redemption at the Option of the Corporation. The Corporation may, at its
option, at any time, redeem the outstanding shares of Series A Preferred Stock
at a redemption price per share equal to the Corporation Redemption Price;
provided, however, at the discretion of such Holder, such Holder may, at any
time, elect to convert its shares of Series A Preferred Stock, in accordance
with the terms of Paragraph 6 hereof, into such number of fully paid, validly
issued and nonassessable shares of Common Stock as determined by the
application of the Conversion Rate, so long as the Corporation has not redeemed
such shares of Series A Preferred Stock. If the Corporation redeems any shares
of Series A Preferred Stock pursuant to this paragraph, it must redeem all of
the shares of Series A Preferred Stock. The Corporation shall give the
Corporation Redemption Notice, which shall be signed on its behalf by the
President or Chief Executive Officer of the Corporation, to the Holders not
less than thirty (30) days prior to the date upon which the redemption is to be
made pursuant to this paragraph. The Corporation Redemption Notice shall
specify: (i) the Corporation Redemption Price and (ii) the date of such
redemption. The Corporation Redemption Notice having been so given, the amount
of the Corporation Redemption Price of the shares of Series A Preferred Stock
shall become due and payable on the specified redemption date.
(d) Mechanics of Redemption.
(i) In order to redeem any shares of Series A Preferred Stock (in whole
or in part), the applicable Holder shall surrender the stock certificate(s)
representing the shares of Series A Preferred Stock to be redeemed, by
either overnight courier or two-day courier, to the principal executive
office of the Corporation; provided, however, that the Corporation shall
not be obligated to pay the applicable redemption price unless either the
stock certificate(s) evidencing the shares of Series A Preferred Stock
being redeemed is delivered to the Corporation as provided above, or if the
Holder notifies the Corporation that such certificate(s) has been lost,
stolen or destroyed and follows such procedures as are set forth in
Paragraph 18. If fewer than all the shares represented by such certificate
or certificates are to be redeemed, the Corporation shall issue and deliver
to or on the order of the Holder thereof, at the expense of the
Corporation, a new certificate or certificates representing the unredeemed
shares, to the same extent as if the certificate theretofore representing
such unredeemed shares had not been surrendered on redemption.
(ii) The Corporation shall pay the applicable redemption price on the
date of redemption set forth on the Redemption Notice or Corporation
Redemption Notice and after receipt by the Corporation of such stock
certificate(s) evidencing the shares of Series A Preferred Stock being
redeemed (or, in the case of loss, theft or destruction, receipt by the
Corporation of such affidavit, agreement and indemnification set forth in
Paragraph 18), to such Holder and, to the extent that only a portion of the
Series A Preferred Stock evidenced by a certificate(s) is submitted for
redemption, a stock certificate evidencing the number of shares of Series A
Preferred Stock not submitted for redemption; provided that in the case
where more than one Holder submits shares of Series A Preferred Stock for
redemption simultaneously and the Corporation is unable to redeem all
shares of Series A Preferred Stock submitted for such redemption, the
Corporation shall redeem an amount from each Holder equal to each Holder's
pro rata amount (based on the number of shares of Series A Preferred Stock
held by each Holder relative to the aggregate number of shares of Series A
Preferred Stock outstanding) of all shares of Series A Preferred Stock
being redeemed.
(iii) If the Corporation shall fail to redeem all of the shares of
Series A Preferred Stock submitted for redemption, in addition to any
remedy each Holder may have under this Certificate of Designation, the
Subscription Agreement and the Registration Rights Agreement, the
applicable redemption price payable in respect of such unredeemed shares of
Series A Preferred Stock shall bear interest at the rate of 2.0% for the
first three thirty (30) day periods after the required date of payment of
the redemption price and 1.0% for each thirty (30) day period thereafter
(in each case, pro rated for partial periods) until such redemption price
is paid in full or the maximum rate permitted by law (which amount shall be
paid as liquidated damages and not as a penalty). Until the Corporation
pays such unpaid redemption price in full to a
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Holder, such Holder shall have the option, in lieu of redemption, but not
in limitation of its rights to receive interest as liquidated damages or
any other remedy such Holder may have under law, this Certificate of
Designation, the Subscription Agreement and the Registration Rights
Agreement, to require the Corporation to promptly return to such Holder all
of the shares of Series A Preferred Stock submitted for redemption by such
Holder and for which the applicable redemption price has not been paid, by
sending written notice thereof to the Corporation via facsimile (a
"Revocation Notice"). Upon the Corporation's receipt of such Revocation
Notice and prior to payment in full of the applicable redemption price to
such Holder, (i) the Redemption Notice shall be null and void with respect
to those shares of Series A Preferred Stock submitted for redemption and
for which the applicable redemption price has not been paid, (ii) the
Corporation shall immediately return any shares of Series A Preferred Stock
submitted to the Corporation for redemption for which the applicable
redemption price has not been paid, and (iii) the Ceiling Price of those
returned shares shall be converted to the lesser of (A) the Ceiling Price
prior to the date of the Revocation Notice or (B) 90% of the Conversion
Period Conversion Price.
(e) Notwithstanding the foregoing, in the event of a dispute as to the
determination of the calculation of the applicable redemption price, the amount
of the redemption price that is not in dispute shall be promptly paid to the
Holder in accordance with Paragraph 5(d)(ii) hereof. The Holder shall then be
entitled, within sixty (60) days of receipt of the Redemption Notice by the
Corporation, to submit such dispute to the American Arbitration Association for
resolution according to the then applicable rules thereof, which determination
shall be final and binding on all parties. If it shall be determined that a
Holder shall receive additional monies in respect of such redemption, the
Corporation shall deliver to such Holder such amount within three (3) business
days of written notice of such determination. The cost of such proceeding shall
be borne by the Corporation, except that the prevailing party, as determined by
the arbitrator presiding over the arbitration, shall be entitled to recover
reasonable attorneys' fees, in addition to other costs and expenses and any
other available remedy.
6. Conversion at the Option of the Holder. Subject to the limitations of
Paragraph 15, the Holder shall have the following conversion rights:
(a) Holder's Right to Convert. Subject to the restrictions set forth below,
shares of Series A Preferred Stock shall be convertible (in whole or in part)
at any time at the option of the Holder thereof, into fully paid, validly
issued and nonassessable shares of Common Stock in accordance with the terms
herein for such number of shares of Common Stock as determined by the
application of the Conversion Rate.
(b) Mechanics of Conversion.
(i) Holder's Delivery Requirements. In order to convert any shares of
Series A Preferred Stock (in whole or in part) into full shares of Common
Stock, the Holder (A) shall, if required by Paragraph 6(b)(iii) below,
surrender the original certificate(s) representing the shares of Series A
Preferred Stock to be converted, by either overnight courier or two-day
courier, to the Transfer Agent, and (B) shall deliver the Conversion Notice
by facsimile (with the original of such notice forwarded to the Corporation
via either overnight courier or two-day courier) to the Corporation at its
principal executive office with a copy thereof to the Transfer Agent to the
effect that such Holder elects to have converted the number of shares of
Series A Preferred Stock (plus accumulated but unpaid dividends thereon)
specified therein.
(ii) Corporation's Response. Upon receipt by the Corporation of a copy
of the Conversion Notice, the Corporation shall, as soon as practicable,
but in no event later than one (1) business day, send, via facsimile, a
confirmation of receipt of such Conversion Notice to such Holder and the
Transfer Agent, which confirmation shall constitute an instruction to the
Transfer Agent to process such Conversion Notice in accordance with the
terms herein.
(iii) Book-Entry. Notwithstanding anything to the contrary set forth
herein, upon conversion of shares of Series A Preferred Stock in accordance
with the terms hereof, the Holder thereof shall not be required to
physically surrender the certificate representing the shares of Series A
Preferred Stock to the
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Corporation unless the full number of shares of Series A Preferred Stock
represented by such certificate are being converted. Each Holder and the
Corporation shall maintain records showing the number of shares of Series A
Preferred Stock so converted and the dates of such conversions or shall use
such other method, reasonably satisfactory to the Holders and the
Corporation, so as not to require physical surrender of the certificates
representing shares of Series A Preferred Stock upon each such conversion.
In the event of any dispute or discrepancy, such records of the Corporation
shall be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if shares of Series A Preferred Stock
represented by a certificate are converted as aforesaid, the Holder may not
transfer the certificate representing the Series A Preferred Stock unless
the Holder first physically surrenders the certificate representing shares
of Series A Preferred Stock to the Corporation, whereupon the Corporation
will forthwith issue and the deliver upon the order of the Holder a new
certificate of like tenor, registered as the Holder may request,
representing in the aggregate the remaining number of shares of Series A
Preferred Stock represented by such certificate. The Holder and any
assignee, by acceptance of a certificate, acknowledge and agree that, by
reason of the provisions of this paragraph, following conversion of any
shares of Series A Preferred Stock, the number of shares of Series A
Preferred Stock represented by such certificate may be less than the number
of shares of Series A Preferred Stock stated on the face thereof.
(c) The Corporation shall use its best efforts to issue and deliver within
three (3) business days after receipt by the Corporation of any Conversion
Notice and, if required by Paragraph 6(b)(iii) above, certificate(s) evidencing
the shares of Series A Preferred Stock being converted, or after receipt of the
affidavit, agreement and indemnification as set forth in Paragraph 18, to the
Holder, or to its designee, certificates representing the number of shares of
Common Stock to which such Holder shall be entitled hereunder or, if requested
by the Holder, the Corporation shall cause such shares to be issued in
electronic format (i.e., DWAC), together with a certificate, certified by an
appropriate officer of the Corporation, setting forth the calculation of the
Conversion Rate. The Person(s) entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the Holder
of such shares of Common Stock effective on the Holder Conversion Date.
(d) Each certificate representing shares of Series A Preferred Stock
surrendered to the Corporation for conversion pursuant to this Paragraph 6
shall, on the Holder Conversion Date and subject to issuance of the shares of
Common Stock issuable upon conversion thereof, be deemed to be canceled and
retired by the Corporation. Upon issuance of the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock pursuant to this
Paragraph 6 the shares of Series A Preferred Stock formerly represented thereby
shall be deemed to be canceled and shall no longer be considered to be issued
and outstanding for any purpose, including without limitation, for purposes of
accumulating dividends thereon. Such shares of Series A Preferred Stock shall
be retired.
7. Conversion at the Option of the Corporation.
(a) On any date during the Corporation-Directed Period, the Corporation
shall have the right to exercise the Corporation Conversion Election requiring
the outstanding shares of Series A Preferred Stock to be converted into fully
paid, validly issued and nonassessable shares of Common Stock in accordance
with the terms herein for such number of shares of Common Stock as determined
by the application of the Conversion Rate; provided that the Conditions to
Conversion at the Corporation's Election are satisfied as of the Corporation
Election Conversion Period Commencement Date and throughout the Corporation
Election Conversion Period. The Corporation shall exercise the Corporation
Conversion Election by delivering to each Holder the Corporation Election
Conversion Notice by facsimile and overnight courier setting forth: (i) the
Aggregate Value of the shares of Series A Preferred Stock the Corporation has
selected for conversion, (ii) the Corporation Election Conversion Period, (iii)
the Corporation Election Conversion Period Commencement Date, and (iv) each
Holder's Pro Rata Conversion Amount. Subject to the last paragraph of this
Paragraph 7(a), a Corporation Conversion Election Period shall not exceed
beyond the expiration of the Corporation-Directed Period. If the Corporation
elects to require conversion of some, but not all, of such shares of Series A
Preferred Stock then outstanding, the Corporation shall require conversion of
the Pro Rata Conversion Amount from each
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Holder. Each Holder shall, during the Corporation Election Conversion Period,
deliver one or more Conversion Notices in accordance with Paragraph 6(b)(i),
which one or more Conversion Notices shall relate to an aggregate number of
shares of Series A Preferred Stock having an Aggregate Value equal to such
Holder's Pro Rata Conversion Amount. Upon the expiration of the Corporation
Election Conversion Period, each Holder will be deemed to have submitted a
Conversion Notice (as of the last day of the Corporation Election Conversion
Period) in accordance with Paragraph 6(b)(i) for a number of shares of Series A
Preferred Stock having an Aggregate Value equal to (a) such holder's Pro Rata
Conversion Amount minus (b) the number of shares of Series A Preferred Stock
previously converted by such Holder during the Corporation Election Conversion
Period; provided, however, in no event shall any Holder be required to convert
during any Corporation Election Conversion Period shares of Series A Preferred
Stock having an Aggregate Value in excess of such Holder's pro rata portion
(determined in the same manner as the Pro Rata Conversion Amount above) of 10%
of the aggregate trading volume of the Common Stock on the Principal Market (as
reported by Bloomberg, L.P.) during the Corporation Election Conversion Period.
During the continuance of any Corporation Election Conversion Period, the
Corporation shall not be permitted to deliver any additional Corporation
Election Conversion Notices without the consent of each Holder.
Notwithstanding any other provision of this Agreement, upon the expiration
of the Corporation-Directed Period, the Corporation shall be deemed to have
provided a Corporation Election Conversion Notice and to have commenced a
Corporation Election Conversion Period, which Corporation Election Conversion
Period will continue in effect through and including the Maturity Date.
(b) At such time as the Closing Price of the Common Stock shall be greater
than the Mandatory Conversion Price for thirty (30) consecutive trading days,
the Corporation shall have the right to exercise the Mandatory Conversion
Election to require that some or all of the outstanding shares of Series A
Preferred Stock be converted into fully paid, validly issued and nonassessable
shares of Common Stock in accordance with the terms herein for such number of
shares of Common Stock as determined by the application of the Conversion Rate;
provided that the Conditions to Mandatory Conversion are satisfied as of the
Mandatory Conversion Date. The Corporation shall exercise the Mandatory
Conversion Election by delivering to each Holder a Corporation Election
Conversion Notice by facsimile and overnight courier setting forth (i) the
Aggregate Value of the shares of Series A Preferred Stock the Corporation has
selected for conversion, (ii) the Mandatory Conversion Date, and (iii) each
Holder's Pro Rata Conversion Amount. The Corporation may only consummate the
transactions contemplated by the Mandatory Conversion Election if the Closing
Price of the Common Stock remains at least equal to the Mandatory Conversion
Price for the period of time between the giving of the Corporation Election
Conversion Notice and the trading day immediately preceding the Mandatory
Conversion Date. If the Corporation elects to require conversion of some, but
not all, of the shares of Series A Preferred Stock then outstanding, the
Corporation shall require each Holder (or its predecessor) to convert its Pro
Rata Conversion Amount. Each Holder shall, on the Mandatory Conversion Date, be
deemed to have delivered a Conversion Notice in accordance with Paragraph
6(b)(i), which Conversion Notice shall relate to an aggregate number of shares
of Series A Preferred Stock having an Aggregate Value equal to such Holder's
Pro Rata Conversion Amount.
8. Maturity.
(a) On the Maturity Date, the Corporation shall cause the shares of Series A
Preferred Stock then outstanding to be automatically converted into that number
of fully paid, validly issued and nonassessable shares of Common Stock
determined in accordance with the terms of this Certificate of Designation by
application of the then applicable Conversion Rate.
(b) The Corporation shall give the Holders written notice of the automatic
conversion pursuant to Paragraph 8(a) not less than ten (10) days prior to the
Maturity Date, and such written notice shall specify (i) the Maturity Date, and
(ii) the place or places to which stock certificates representing the Series A
Preferred
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Stock are to be surrendered for conversion. Such conversion shall be effected
as of the Maturity Date in accordance with and pursuant to the terms of this
Certificate of Designation at the then applicable Conversion Rate and in
accordance with the procedures set forth in Paragraph 6(b) of this Certificate
of Designation; provided, however, that the Holder shall not be obligated to
provide the Conversion Notice required in Paragraph 6(b)(i) to the Corporation.
(c) Each certificate representing shares of Series A Preferred Stock
surrendered to the Corporation for conversion pursuant to this Paragraph 8
shall, on the Maturity Date and subject to issuance of the shares of Common
Stock issuable upon conversion, be canceled and retired by the Corporation.
Upon issuance of the shares of Common Stock issuable upon conversion of the
Series A Preferred Stock pursuant to this Paragraph 8, the shares of Series A
Preferred Stock formerly represented thereby shall be deemed to be canceled and
shall no longer be considered to be issued and outstanding for any purpose,
including without limitation, for purposes of accumulating dividends thereon.
(d) The Corporation shall use its best efforts to issue and deliver within
three (3) business days after receipt by the Corporation of the certificate(s)
evidencing the shares of Series A Preferred Stock to be converted pursuant to
this Paragraph 8 (or, in the case of loss, theft or destruction, after receipt
of the affidavit, agreement and indemnification described in Paragraph 18) to
the Holders (or to their respective designees), a certificate representing the
number of shares of Common Stock to which each Holder shall be entitled
hereunder or, if requested by the Holder, the Corporation shall cause such
shares to be issued in electronic format (i.e., DWAC), together with a
certificate, certified by an appropriate officer of the Corporation, setting
forth the calculation of the Conversion Rate. 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 of such shares of Common Stock on
the Maturity Date. The Maturity Date shall be deemed a "Holder Conversion Date"
for purposes of the Series A Preferred Stock.
9. Stock Splits; Dividends; Adjustments; Reorganizations.
(a) Stock Splits and Combinations. So long as any shares of Series A
Preferred Stock is outstanding, the Corporation shall not effect any stock
split, subdivision or combination with an effective date within thirty (30)
trading days of the Maturity Date. If the Corporation at any time subdivides
(by any stock split, subdivision or otherwise) its outstanding shares of Common
Stock into a greater number of shares, the Ceiling Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Corporation
at any time combines (by combination, reverse stock split or otherwise) one or
more of its outstanding shares of Common Stock into a smaller number of shares,
the Ceiling Price in effect immediately prior to such combination will be
proportionately increased.
(b) Certain Dividends and Distributions. So long as any shares of Series A
Preferred Stock is outstanding, the Corporation shall not make or fix a record
date for the determination of holders of Common Stock or other securities
entitled to receive a dividend or other distribution payable in additional
shares of Common Stock, with an effective date within thirty (30) trading days
of the Maturity Date.
(c) Adjustment for Other Dividends and Distributions. So long as any shares
of Series A Preferred Stock is outstanding, in the event the Corporation makes
or fixes a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in securities
other than shares of Common Stock, then and in each such event, provision shall
be made so that the Holders shall receive upon conversion of their shares of
Series A Preferred Stock pursuant to Paragraphs 5 and 8 hereof, in addition to
the number of shares of Common Stock receivable thereupon, the amount of such
other securities to which a Holder on the relevant record or payment date, as
applicable, of the number of shares of Common Stock so receivable upon
conversion would have been entitled, plus any dividends or other distributions
which would have been received with respect to such securities had such Holder
thereafter, during the period from the date of such event to and including the
Holder Conversion Date, retained such securities, subject to all other
adjustments called for during such period under this Paragraph 9 with respect
to the rights of the Holders. For
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purposes of this Paragraph 9(c), the number of shares of Common Stock so
receivable upon conversion by the Holder shall be deemed to be that number
which the Holder would have received upon conversion of the Series A Preferred
Stock if the Holder Conversion Date had been the day preceding the date upon
which the Corporation announced the making of such dividend or other
distribution.
(d) Adjustment of Conversion Period Conversion Price upon Issuance of
Derivative Securities. So long as any shares of Series A Preferred Stock is
outstanding, if the Corporation in any manner issues or sells Derivative
Securities (other than Derivative Securities issuable pursuant to or in
connection with any business acquisitions, mergers, consolidations or other
corporate combinations or transactions heretofore or hereafter undertaken by
the Corporation in which the Corporation is the surviving entity and any
Derivative Securities issuable pursuant to or in connection with any stock
option or other similar plan of the Corporation pursuant to which the
Corporation issues Derivative Securities to its officers, directors and
employees) at a price which varies with the market price of the Common Stock
(the formulation for such variable price being herein referred to as the
"Changing Price") and such Changing Price is not calculated using the same
formula used to calculate the Conversion Period Conversion Price in effect
immediately prior to the time of such issue or sale, the Corporation shall
provide written notice thereof via facsimile and overnight courier to each
holder of the shares of Series A Preferred Stock ("Changing Notice") on the
date of issuance of such Derivative Securities. If the holders of shares of
Series A Preferred Stock representing at least two-thirds ( 2/3) of the shares
of Series A Preferred Stock then outstanding provide written notice via
facsimile and overnight courier (the "Changing Price Election Notice") to the
Corporation within five (5) business days of receiving a Changing Notice that
such holders desire to replace the Conversion Period Conversion Price then in
effect with the Changing Price described in such Changing Notice, then from and
after the date of the Corporation's receipt of the Changing Price Election
Notice the Conversion Period Conversion Price will automatically be replaced
with the Changing Price (together with such modifications to this Certificate
of Designations as may be required to give full effect to the substitution of
the Changing Price for the Conversion Period Conversion Price). In the event
that a holder delivers a Conversion Notice at any time after the Corporation's
issuance of Derivative Securities with a Changing Price but before such
holder's receipt of the Corporation's Changing Notice, then such holder shall
have the option by written notice to the Corporation to rescind such Conversion
Notice or to have the Conversion Price be equal to such Changing Price for the
conversion effected by such Conversion Notice.
(e) Adjustment for Reclassification, Exchange and Substitution. So long as
any shares of Series A Preferred Stock is outstanding, in the event that the
Common Stock issuable upon the conversion of the Series A Preferred Stock is
changed into the same or a different number of shares of any class or classes
of stock, whether by recapitalization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend or reorganization
provided for elsewhere in this Paragraph 9 or a merger, consolidation or other
business transaction provided for in Paragraph 4), then and in each such event
each Holder shall thereafter have the right upon conversion to receive the kind
and amount of shares of stock and other securities, cash and property
receivable upon such recapitalization, reclassification or other change, by
holders of the number of shares of Common Stock which the Holder of shares of
Series A Preferred Stock would have received had it converted such shares
immediately prior to such recapitalization, reclassification or other change,
at the Conversion Price then in effect (the kind, amount and price of such
stock and other securities to be subject to adjustments as herein provided).
Prior to the consummation of any recapitalization, reclassification or other
change contemplated hereby, the Corporation will make appropriate provision (in
form and substance reasonably satisfactory to the Holders of a majority of the
Preferred Stock then outstanding) to ensure that each of the Holders of the
Series A Preferred Stock will thereafter have the right to acquire and receive
in lieu of or in addition to (as the case may be) the shares of Common Stock
otherwise acquirable and receivable upon the conversion of such Holder's Series
A Preferred Stock, such shares of stock, securities or assets that would have
been issued or payable in such recapitalization, reclassification or other
change with respect to or in exchange for the number of shares of Common Stock
which would have been acquirable and receivable upon the conversion of such
Holder's Series A Preferred Stock had such recapitalization, reclassification
or other change not taken place (without taking into account any limitations or
restrictions on the timing or amount of
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conversions). In the event of such recapitalization, reclassification or other
change, the formulae set forth herein for conversion and redemption shall be
equitably adjusted to reflect such change in number of shares or, if shares of
a new class of stock are issued, to reflect the market price of the class or
classes of stock (applying the same factors used in determining the Conversion
Price for shares of Common Stock) issued in connection with the above described
events.
(f) Reorganization. So long as any shares of Series A Preferred Stock is
outstanding, if is a capital reorganization of the Common Stock (other than a
recapitalization, subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this Paragraph 9) then, as a part of such
reorganization, provisions shall be made so that the Holders shall thereafter
be entitled to receive upon conversion of its shares of Series A Preferred
Stock the number of shares of stock or other securities or property to which a
holder of the number of shares of Common Stock deliverable upon conversion
would have been entitled to receive had the holder of shares of Series A
Preferred Stock converted such shares immediately prior to such capital
reorganization, at the Conversion Price then in effect. In any such case,
appropriate adjustments shall be made in the application of the provisions of
this Paragraph 9 with respect to the rights of the Holders after such capital
reorganization to the extent that the provisions of this Paragraph 9 shall be
applicable after that event and be as equivalent as may be practicable,
including, by way of illustration and not limitation, by equitably adjusting
the formulae set forth herein for conversion and redemption to reflect the
market price of the securities or property (applying the same factors used in
determining the Conversion Price for shares of Common Stock) issued in
connection with the above described events.
(g) Dispute. In the event of a dispute between a Holder and the Corporation
with respect to any of the adjustments required pursuant to the provisions of
this Paragraph 9, upon conversion of the Series A Preferred Stock, such Holder
shall be entitled to receive the number of shares of Common Stock as to which
no dispute exists and, within sixty (60) days of receipt of the Schedule of
Computations, to submit such dispute to the American Arbitration Association
for resolution according to the then applicable rules thereof, which
determination shall be final and binding on all parties. If it shall be
determined that the subject Holder should have received additional shares of
Common Stock or other securities upon such conversion, then, within three (3)
trading days of receipt of written notice of such determination, the
Corporation shall issue to such Holder that number of additional shares of
Common Stock or other securities as shall have a value, based upon the then
Conversion Price for shares of Common Stock, as shall equal the number of
shares of Common Stock or other securities that such Holder shall have been
entitled to receive but for the dispute multiplied by the Conversion Price for
shares of Common Stock on the date of conversion. The cost of such proceeding
shall be borne by the Corporation, except that the prevailing party, as
determined by the arbitrator presiding over the arbitration, shall be entitled
to recover reasonable attorney's fees, in addition to other costs and expenses
and any other available remedy.
(h) Schedule of Computations. The Corporation shall provide written notice
to the Holders of all adjustments pursuant to this Paragraph 9 within three (3)
trading days of the occurrence thereof and such notice shall be accompanied by
the Schedule of Computations. If so requested by a Holder, the Corporation
shall provide to such Holder within ten (10) business days of its written
request therefor a certificate of concurrence to the Schedule of Computations
by the independent certified public accountants of the Corporation.
10. Fractional Shares. No fractional shares of Common Stock or scrip
representing fractional shares of Common Stock shall be issuable hereunder. The
number of shares of Common Stock that are issuable upon any conversion shall be
rounded up or down to the nearest whole share.
11. Reservation of Stock; Conversion Default.
(a) Reservation Requirement. So long as any shares of the Series A Preferred
Stock are outstanding, the Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock such number
of shares of Common Stock as shall be necessary for the purpose of effecting
the conversion of shares of Series A Preferred Stock, which shares shall be
free of preemptive rights, for the
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purpose of enabling the Corporation to satisfy any obligation to issue shares
of its Common Stock, or other securities, upon conversion of all shares of
Series A Preferred Stock pursuant hereto. The Corporation shall initially
reserve a number of shares of Common Stock equal to one and one-half times the
number of shares necessary to satisfy its obligations on conversion of the
Series A Preferred Stock if all such shares were converted on the Issuance
Date.
(b) Default. If the Corporation: (i) notifies a Holder via facsimile or
pursuant to a public disclosure, including but not limited to a press release,
that the Corporation cannot or does not intend to issue shares of Common Stock
upon conversion of any shares of Series A Preferred Stock; (ii) fails to
effectuate a resale by a Holder because there is an insufficient number of
shares covered by the Registration Statement; or (iii) fails to issue shares of
Common Stock registered for resale under the Registration Statement for any
reason (a "Conversion Default"), including without limitation, because the
Corporation: (x) does not have a sufficient number of shares of Common Stock or
other securities authorized and available; or (y) is otherwise prohibited by
applicable law or by the rules and regulations of any stock exchange,
interdealer quotation system or other self-regulatory organization with
jurisdiction over the Corporation or its securities, from issuing all of the
Common Stock which is to be issued to a Holder, then the Corporation shall
issue as many shares of Common Stock as it is able to issue in accordance with
such Holder's Conversion Notice, and with respect to the unconverted shares of
Series A Preferred Stock, notify the Holder of such Conversion Default (a
"Default Notice") which notice shall indicate: (I) the reason why the
Corporation is unable to fully satisfy such holder's Conversion Notice; (II)
the number of shares of Series A Preferred Stock which cannot be converted; and
(III) the applicable mandatory redemption price (as calculated pursuant to the
terms below). Such Holder must within ten (10) business days of (i) receipt of
such Default Notice or (ii) becoming aware of such Conversion Default, deliver
written notice via facsimile to the Corporation ("Remedies Notice") of its
election pursuant to the following provisions.
(c) Each Holder may, upon receipt of a Default Notice and at its election:
(i) demand from the Corporation immediate redemption of its shares of Series A
Preferred Stock in cash at a price equal to 130% of the Aggregate Value; (ii)
if the Corporation's inability to fully convert Series A Preferred Stock is
pursuant to Subparagraph (b)(ii) above, require the Corporation to issue
restricted shares of Common Stock in accordance with such Holder's Conversion
Notice; or (iii) void its Conversion Notice and have returned to it the
unconverted shares of Series A Preferred Stock that were otherwise to be
converted pursuant to such Holder's Conversion Notice. Notwithstanding the
foregoing, no Remedies Notice may be delivered by a Holder subsequent to
receipt by such Holder of notice from the Corporation (sent by overnight or
two-day courier with a copy sent by facsimile) of the availability of
sufficient shares of Common Stock or other securities to perfect conversion (a
"Post-Default Conversion") of all the Series A Preferred Stock; provided that
such rights as set forth herein and election as set forth in the Remedies
Notice shall be reinstated if the Corporation shall thereafter fail to perfect
such Post-Default Conversion by delivery of Common Stock certificates or
certificates representing other securities in accordance with the applicable
provisions hereof and payment of all accumulated and unpaid dividends in cash
with respect thereto within five (5) business days of delivery of the notice of
Post-Default Conversion.
(d) In addition to the foregoing, upon a Conversion Default, the Holders
shall have the right to receive a 2.0% reduction in the Conversion Price of the
Preferred Stock (including shares of Preferred Stock for which a Conversion
Notice has not yet been sent) for each thirty (30) day period (or part thereof)
following a Conversion Default; provided, however, that if the Company's
inability to fully convert shares of the Series A Preferred Stock is pursuant
to subparagraph (b)(iii)(y) above, the Corporation shall have sixty (60) days
to cure such default prior to giving rise to the right of the Holder to
exercise remedies pursuant to this Paragraph 11.
12. Taxes. The Corporation shall pay any and all taxes attributable to the
issuance and delivery of Common Stock or other securities upon conversion of
the Series A Preferred Stock.
13. Voting Rights. The Holders shall have no voting rights, except as
required by law, including, but not limited to, the Delaware General
Corporation Law, and as expressly provided in this Certificate of Designation.
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14. Liquidation, Dissolution, Winding-Up. (a) In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, the
Holders shall be entitled to receive in cash out of the assets of the
Corporation, whether from capital or from earnings available for distribution
to its stockholders (the "Preferred Funds"), before any amount shall be paid to
the holders of any Junior Securities, an amount per share of Series A Preferred
Stock equal to the Aggregate Value (the "Liquidation Value"); provided that, if
the Preferred Funds are insufficient to pay the full amount due to the Holders
and any holders of Parity Securities, then each Holder and each holder of
Parity Securities shall receive a ratable percentage of the Preferred Funds in
accordance with the respective amounts that would be payable in full to such
holder as a liquidation preference, in accordance with their respective
Certificate of Designation, Preferences and Rights.
(b) The purchase or redemption by the Corporation of stock of any class, in
any manner permitted by law, shall not, for the purposes hereof, be regarded as
a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other person, nor
the sale or transfer by the Corporation of less than substantially all of its
assets, shall, for the purposes hereof, be deemed to be a liquidation,
dissolution or winding up of the Corporation.
(c) No Holder shall be entitled to receive any amounts with respect thereto
upon any liquidation, dissolution or winding up of the Corporation other than
the amounts provided for herein.
15. Limitation on Number of Conversion Shares. (a) The Corporation shall not
be obligated to issue any shares of Common Stock upon conversion of shares of
Series A Preferred Stock if the issuance of such shares of Common Stock would
exceed that number of shares of Common Stock which the Corporation may issue
upon conversion of the shares of Series A Preferred Stock (the "Exchange Cap")
without breaching the Corporation's obligations under the rules or regulations
of the Principal Market, or the market or exchange where the Common Stock is
then traded, except that such limitation shall not apply in the event that the
Corporation (i) obtains the approval of its stockholders as required by the
Section 5.14 of the Subscription Agreement or (ii) obtains a written opinion
from outside counsel to the Corporation that such approval is not required,
which opinion shall be reasonably satisfactory to the Holders of a majority of
the shares of Series A Preferred Stock then outstanding. Until such approval or
written opinion is obtained or such action has been taken by the required
Holders of Shares of Series A Preferred Stock, no Holder shall be issued, upon
conversion of shares of Series A Preferred Stock, shares of Common Stock in an
amount greater than the product of (i) the Exchange Cap amount multiplied by
(ii) a fraction, the numerator of which is the number of shares of Series A
Preferred Stock issued to such Holder pursuant to the Subscription Agreement
and the denominator of which is the aggregate amount of all shares of Series A
Preferred Stock issued to the Holders pursuant to the Subscription Agreement
(the "Cap Allocation Amount"). In the event that any Holder shall sell or
otherwise transfer any such Holder's Series A Preferred Stock, the transferee
shall be allocated a pro rata portion of such Holder's Cap Allocation Amount.
In the event that any Holder shall convert all of such Holder's Series A
Preferred Stock into a number of shares of Common Stock which, in the
aggregate, is less than such Holder's Cap Allocation Amount, then the
difference between such Holder's Cap Allocation Amount and the number of shares
of Common Stock actually issued to such Holder shall be allocated to the
respective Cap Allocation Amounts of the remaining Holders of Series A
Preferred Stock on a pro rata basis in proportion to the number of Shares of
Series A Preferred Stock then held by each such Holder.
(b) In no event shall a Holder be permitted to convert any shares of Series
A Preferred Stock in excess of the number of such shares upon the conversion of
which, (x) the number of shares of Common Stock owned by such Holder and such
Holder's "affiliates" (as defined in Rule 144 of the Act) (other than shares of
Common Stock issuable upon conversion of shares of Series A Preferred Stock or
upon the exercise of the Warrants) plus (y) the number of shares of Common
Stock issuable upon such conversion of such shares of Series A Preferred Stock,
would be equal to or exceed (z) 4.99% of the number of shares of Common Stock
then issued and outstanding, including shares issuable on conversion of the
Series A Preferred Stock held by such Holder after application of this
Paragraph 15(b). For purposes of the foregoing sentence, the aggregate number
of shares of Common Stock beneficially owned by such Holder and its affiliates
shall include the number of shares of Common Stock issuable upon conversion of
the shares of Series A Preferred Stock with respect to which the
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determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (i) conversion of the
remaining, nonconverted shares of Series A Preferred Stock beneficially owned
by such Holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Corporation
(including, without limitation, any warrants or convertible preferred stock)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by the Holder and its affiliates. Except as
provided in the preceding sentence, for purposes of this Paragraph 15(b),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Exchange Act and the rules and regulations thereunder. To the extent that
the limitation contained in this Paragraph 15(b) applies, the determination of
whether shares of Series A Preferred Stock are convertible (in relation to
other securities owned by a Holder) and of which shares of Series A Preferred
Stock are convertible shall be in the sole discretion of such Holder, and the
submission of shares of Series A Preferred Stock for conversion shall be deemed
to be such Holder's determination of whether such shares of Series A Preferred
Stock are convertible (in relation to other securities owned by a Holder) and
of which shares of Series A Preferred Stock are convertible, in each case
subject to such aggregate percentage limitation, and the Company shall have no
obligation to verify or confirm the accuracy of such determination. Nothing
contained herein shall be deemed to restrict the right of a Holder to convert
such shares of Series A Preferred Stock at such time as such conversion will
not violate the provisions of this paragraph. No conversion in violation of
this paragraph but otherwise in accordance with this Certificate of Designation
shall affect the status of the securities issued upon such conversion as
validly issued, fully-paid and nonassessable.
16. No Impairment. The Corporation shall not intentionally take any action
which would impair the rights and privileges of the Series A Preferred Stock
set forth herein or the rights of the Holders thereof.
17. Registration Suspension. In the event that at any time or from time to
time the Registration Statement is suspended or trading in the Common Stock on
the Nasdaq National Market is suspended for a period of time (excluding
disruptions from business announcements that result in any halt(s) in trading
of not more than three (3) days on each occasion) and other suspension of
trading on such market in general (each, a "Blackout Period"), the Maturity
Date hereunder shall be extended for a period equal to l.5 times the number of
days in such Blackout Period.
18. Replacement Certificate. In the event that any Holder notifies the
Corporation that a stock certificate evidencing shares of Series A Preferred
Stock has been lost, stolen, destroyed or mutilated, the Corporation shall
issue a replacement stock certificate evidencing the Series A Preferred Stock
identical in tenor and date (or if such certificate is being issued for shares
not covered in a redemption or conversion, or if such Holder has previously
converted shares of Series A Preferred Stock and no new certificate has been
issued to such Holder in accordance with the provisions of Paragraph 6(b)
hereunder, in the applicable tenor and date) to the original stock certificate
evidencing the Series A Preferred Stock, provided that the Holder executes and
delivers to the Corporation an affidavit of lost stock certificate and an
agreement reasonably satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such stock
certificate; provided, however, the Corporation shall not be obligated to re-
issue replacement stock certificates if the Holder contemporaneously requests
the Corporation to convert or redeem the full number of shares evidenced by
such lost, stolen, destroyed or mutilated certificate.
19. Definitions. For purposes hereof the following definitions shall apply:
"Act" shall mean the Securities Act of 1933, as amended.
"Aggregate Value" shall mean for each share of Series A Preferred Stock the
sum of (a) the Stated Value thereof, plus (b) accumulated but unpaid dividends
thereon (whether or not earned or declared).
"Ceiling Price" shall mean $36.00; provided, however, that if, at any time
after the Issuance Date, the Corporation offers, sells, contracts to sell or
otherwise issues or agrees to issue any Derivative Securities in a private
placement transaction (other than pursuant to any existing stock or option or
similar existing equity-
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based compensation plan for employees, officers, directors or consultants),
with a maximum conversion price per share of Common Stock of an amount less
than the Ceiling Price, then the "Ceiling Price" shall mean such lower
conversion price or offer price per share for the Series A Preferred Stock not
yet converted. The Ceiling Price shall also be subject to adjustment from time
to time ratably for any events set forth in Paragraphs 5 and 8 hereof.
"Closing Price" shall mean the price of one share of Common Stock determined
as follows:
(a) If the Common Stock is listed for quotation on the Nasdaq National
Market or The Nasdaq SmallCap Market, the closing transaction price per
share, as reported by Bloomberg, L.P. on the subject valuation date (or, if
there is no closing transaction price for such date, the last closing
transaction price reported prior to the valuation date);
(b) If the Common Stock is listed on a national securities exchange, the
last reported closing transaction price on such exchange on the subject
valuation date (or, if there is no closing transaction price for such date,
the last closing transaction price prior to the valuation date);
(c) If neither (a) nor (b) immediately above apply, but the Common Stock
is traded in the over-the-counter market on the pink sheets or the
electronic bulletin board, the closing bid price on the subject valuation
date; and
(d) If none of clause (a), (b) or (c) immediately above applies, the
market value as determined by a nationally recognized investment banking
firm or other nationally recognized financial advisor retained in good
faith by the Board of Directors of the Corporation, taking into
consideration among other factors, the earnings history, book value and
prospects for the Corporation, and the prices at which shares of Common
Stock recently have been traded. Such determination shall be conclusive and
binding on all persons.
"Common Stock" shall mean the common stock, par value $0.01 per share, of
the Corporation, and any stock into which such Common Stock may hereafter be
changed.
"Conditions to Conversion at the Corporation's Election" shall mean the
following conditions: (i) on each day during the period beginning on and
including the date the Registration Statement is declared effective by the SEC
and ending on and including the last day of the Corporation Election Conversion
Period, such Registration Statement which includes the Registrable Securities
relating to the Series A Preferred Stock selected for conversion shall be
effective and available for the sale of no less than all the Registrable
Securities required to be included in such Registration Statement; (ii) on each
day during the period beginning on the Issuance Date and ending on and
including the last day of the Corporation Election Conversion Period, the
Common Stock is designated for quotation on the Principal Market and shall not
have been suspended from trading on the Principal Market nor shall delisting or
suspension by the Principal Market (other than suspensions of not more than one
day and occurring prior to the delivery of the Corporation Election Conversion
Notice due to business announcements by the Corporation) have been threatened
either (A) in writing by the Principal Market or (B) by falling below the
minimum listing maintenance requirements of the Principal Market; (iii) during
the period beginning on the Issuance Date and ending on and including the last
day of the Corporation Election Conversion Period, there shall not have
occurred (A) an event constituting a Triggering Event or (B) an event that with
the passage of time and without being cured would constitute a Triggering
Event; (iv) the aggregate number of shares of Series A Preferred Stock selected
for conversion by the Corporation as reflected in the Corporation Election
Conversion Notice is at least 500; (v) during the period beginning on the
Issuance Date and ending on and including the last day of the Corporation
Election Conversion Period, the Corporation shall have delivered shares of
Common Stock upon conversion of shares of Series A Preferred Stock and upon
exercise of the Warrants to the holders thereof on a timely basis as set forth
in Section 6 hereof and Sections 2(a) and 2(b) of the Warrants, respectively;
(vi) the Company otherwise shall have been in compliance in all material
respects with this Certificate of Designation, the Subscription Agreement, the
Warrants and the Registration Rights Agreement and shall not have breached in
any material respect any provision of this Certificate of Designation, the
Subscription Agreement, the Warrants or the
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Registration Rights Agreement; (vii) the Company shall not have delivered a
Company's Conversion Election Notice during any Company's Mandatory Conversion
Period; and (viii) the Company's Election Conversion Date is not later than the
date which is nine (9) months after the Issuance Date.
"Conditions to Mandatory Conversion" shall mean the following conditions:
(i) on the Mandatory Conversion Date, the Registration Statement which includes
the Registrable Securities relating to the Series A Preferred Stock selected
for conversion shall be effective and available for the sale of no less than
all the Registrable Securities required to be included in such Registration
Statement; (ii) on the Mandatory Conversion Date, the Common Stock is
designated for quotation on the Principal Market and shall not have been
suspended from trading on the Principal Market nor shall delisting or
suspension by the Principal Market (other than suspensions of not more than one
day and occurring prior to the delivery of the Corporation Election Conversion
Notice due to business announcements by the Corporation) have been threatened
either (A) in writing by the Principal Market or (B) by falling below the
minimum listing maintenance requirements of the Principal Market; (iii) on the
Mandatory Conversion Date, there shall not have occurred (A) an event
constituting a Triggering Event or (B) an event that with the passage of time
and without being cured would constitute a Triggering Event; (iv) the aggregate
number of shares of Series A Preferred Stock selected for conversion by the
Corporation as reflected in the Corporation Election Conversion Notice is at
least 500; (v) during the period beginning on the Issuance Date and ending on
and including the Mandatory Conversion Date, the Corporation shall have
delivered shares of Common Stock upon conversion of shares of Series A
Preferred Stock and upon exercise of the Warrants to the holders thereof on a
timely basis as set forth in Section 6 hereof and Sections 2(a) and 2(b) of the
Warrants, respectively; and (vi) the Company otherwise shall have been in
compliance in all material respects with this Certificate of Designation, the
Subscription Agreement, the Warrants and the Registration Rights Agreement and
shall not have breached in any material respect any provision of this
Certificate of Designation, the Subscription Agreement, the Warrants or the
Registration Rights Agreement.
"Conversion Notice" shall mean the written notice of conversion required to
be delivered by a Holder to the Corporation requesting conversion of the Series
A Preferred Stock into Common Stock in the form attached hereto as Exhibit 3.
"Conversion Period Conversion Price" shall mean the lowest of the daily
weighted average trading prices on the Principal Market as reported by
Bloomberg, L.P. (on the VAP function) during the Valuation Period.
"Conversion Price" shall mean (a) the Ceiling Price or (b) (i) during any
Corporation Election Conversion Period, (ii) at any time after the Corporation
shall have delivered a Corporation Redemption Notice or (iii) upon the
occurrence of an Extraordinary Transaction, an amount that is equal to the
lesser of (A) the Ceiling Price and (B) the Conversion Period Conversion Price,
in each case, subject to adjustment as provided herein.
"Conversion Rate" shall mean the number of shares of Common Stock issuable
upon conversion of each share of Series A Preferred Stock determined by the
application of the following formula where D equals the accumulated but unpaid
dividends (whether or not earned or declared) for each share of Series A
Preferred Stock (not previously added to the Aggregate Value pursuant to
Paragraph 1 hereof) as of the Holder Conversion Date:
Aggregate Value + D
__________________
Conversion Price
"Corporation Conversion Election" shall mean the Corporation's right, in its
sole discretion, to require that any or all of the outstanding shares of Series
A Preferred Stock be converted in accordance with Paragraph 7(a) hereof.
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"Corporation-Directed Period" shall mean the period beginning on the date
which is ten (10) business days after the Registration Statement has been
declared effective by the SEC and ending on and including the date which is
nine (9) months after the Issuance Date.
"Corporation Election Conversion Notice" shall mean the written notice in
the form attached hereto as Exhibit 4 required to be delivered to the Holders
indicating that the Corporation (i) has chosen to exercise the Corporation
Conversion Election or (ii) has been required to exercise the Mandatory
Conversion Election.
"Corporation Election Conversion Period" shall mean the period selected by
the Corporation pursuant to the Corporation Conversion Election Notice during
which it may require conversion of the Series A Preferred Stock in accordance
with Paragraph 7(a) hereof. Such period shall be not less than ten (10)
business days nor more than fifty (50) business days during the Corporation-
Directed Period.
"Corporation Election Conversion Period Commencement Date" shall mean the
date which is two (2) business days after the date of delivery of the
Corporation Election Conversion Notice.
"Corporation Redemption Notice" shall mean the written notice in the form
attached hereto as Exhibit 2 required to be delivered by the Corporation to the
Holders upon exercise by the Corporation of its right to redeem Series A
Preferred Stock in accordance with Paragraph 5(c) hereof.
"Corporation Redemption Price" shall mean the price per share of Series A
Preferred Stock equal to 110% of the Aggregate Value per share of Series A
Preferred Stock as of the date upon which redemption is made, plus: (i) 1% of
the Aggregate Value per share of Series A Preferred Stock for each month since
the Issuance Date up to a maximum per share redemption price equal to 140% of
the Aggregate Value per share; and (ii) accumulated but unpaid dividends on the
shares of Series A Preferred Stock being redeemed (not previously added to
Aggregate Value pursuant to Paragraph 2 hereof).
.
"Derivative Securities" shall mean securities of the Corporation which are,
directly or indirectly, convertible into or exercisable or exchangeable for
Common Stock.
"Dividend Notice" shall mean written notice from the Corporation to the
Holders stating the then Aggregate Value of the shares of Series A Preferred
Stock in accordance with Paragraph 2(c) hereof which notice shall be delivered
to each Holder within ten (10) calendar days after the applicable Dividend
Payment Date to which such notice refers.
"Dividend Payment Date" shall mean the last day of March, June, September
and December of each year.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Holder" shall mean the person in whose name the shares of Series A
Preferred Stock is recorded on the Preferred Stock Register.
"Holder Conversion Date" shall mean the effective date of conversion of the
Series A Preferred Stock into Common Stock, which shall be the date on which
the Corporation receives by facsimile the Conversion Notice.
"Issuance Date" shall mean January 13, 2000.
"Junior Securities" shall mean equity securities of the Corporation,
including the Common Stock, to which the Series A Preferred Stock ranks senior
with respect to dividend rights and preferences as to distributions and
payments upon liquidation, dissolution, winding up or otherwise of the
Corporation.
"Mandatory Conversion Date" shall mean that date selected by the Corporation
to require conversion of the Series A Preferred Stock pursuant to exercise of
its Mandatory Conversion Election, which date shall not be
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less than thirty (30) days nor more than sixty (60) days after delivery of the
Corporation Election Conversion Notice relating to such mandatory conversion.
"Mandatory Conversion Election" shall mean the Corporation's right in its
sole discretion, at such time as the Closing Price is greater than the
Mandatory Conversion Price, to require conversion of the Series A Preferred
Stock in accordance with Paragraph 7(b) hereof.
"Mandatory Conversion Price" shall mean that price per share which is equal
to 150% of the Ceiling Price.
"Maturity Date" shall mean that date which is five (5) years from the
Issuance Date or such later date to which such date has been extended pursuant
to Paragraph 17 hereof.
"Parity Securities" shall mean equity securities of the Corporation which
rank on parity with the Series A Preferred Stock with respect to dividend
rights and preferences as to distributions and payments upon liquidation,
dissolution, winding up or otherwise of the Corporation.
"Person" means and includes an individual, a partnership, a joint venture, a
corporation, a company, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
"Preferred Stock Register" shall mean the records of the Corporation and/or
the Transfer Agent regarding registration and transfer of the Series A
Preferred Stock.
"Principal Market" shall mean the Nasdaq National Market, or if the Common
Stock is not traded on the Nasdaq National Market, then the principal
securities exchange or trading market for the Common Stock.
"Pro Rata Conversion Amount" shall mean the amount of shares of Series A
Preferred Stock owned by each Holder based on the Stated Value of the shares of
Series A Preferred Stock owned by a Holder relative to the total Stated Value
of the number of shares of Series A Preferred Stock then outstanding.
"Redemption Notice" shall mean the written notice in the form attached
hereto as Exhibit 1 required to be delivered via facsimile to the Corporation
by a Holder electing redemption of such Holder's securities pursuant to
Paragraphs 5(a) and 5(b) hereof.
"Registrable Securities" shall have the meaning ascribed to such term in the
Registration Rights Agreement.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated as of the Issuance Date, by and among the Corporation and the
purchasers of the Series A Preferred Stock named therein.
"Registration Statement" shall mean the registration statement filed by the
Corporation with the SEC relating to the resale of the shares of Common Stock
issuable upon conversion of shares of Series A Preferred Stock.
"Schedule of Computations" shall mean the schedule detailing the
computations of certain adjustments which is required to accompany the written
notice of adjustment required to be delivered by the Corporation to Holders
pursuant to Paragraph 9 hereof.
"SEC" shall mean the Securities and Exchange Commission and any successor
entity thereto.
"Subscription Agreement" shall mean the Subscription Agreement, dated as of
the Issuance Date, by and among the Corporation and the Persons named therein
subscribing for shares of Series A Preferred Stock.
C-17
"Transfer Agent" shall mean American Stock Transfer and Trust Company.
"Triggering Event" shall mean the occurrence of any of the following events:
(a) the Common Stock is either delisted or suspended from trading on the
Nasdaq National Market, The Nasdaq SmallCap Market, The New York Stock
Exchange, Inc. or The American Stock Exchange, Inc. for a period of five
(5) consecutive trading days, or any such delisting or suspension is
threatened in writing or pending (excluding disruptions from business
announcements that result in any halt(s) in trading of not more than three
(3) days on each occasion) and other than as a result of the suspension of
trading in securities on such market in general; or
(b) (i) the failure of the Registration Statement to be declared
effective by the SEC on or prior to the date that is 150 days from the
Issuance Date, or (ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the shares of Series A Preferred Stock for
sale of all of the Registrable Securities (as defined in the Registration
Rights Agreement) in accordance with the terms of the Registration Rights
Agreement, and such lapse or unavailability continues for a period of ten
(10) consecutive trading days or for more than an aggregate of thirty (30)
trading days in any 365-day period; or
(c) notice by the Corporation or by the Corporation's transfer agent to
any holder of shares of Series A Preferred Stock, including by way of
public announcement, at any time, of its intention not to comply with a
request for conversion of any shares of Series A Preferred Stock into
shares of Common Stock that are tendered in accordance with the provisions
of this Certificate of Designation; or
(d) a Conversion Default; or
(e) a Holder has not received all of the shares of Common Stock to which
such Holder is entitled prior to the tenth business day after the date of
receipt by the Corporation of a Conversion Notice; or
(f) the Company shall not have complied with Section 5.14 of the
Subscription Agreement or shall not have received the requisite stockholder
approval at the stockholder meeting contemplated by Section 5.14 of the
Subscription Agreement; or
(g) the Corporation shall not be in compliance with or shall have
breached any of the provisions of this Certificate of Designation, the
Subscription Agreement, the Warrants, the Registration Rights Agreement or
any other document, certificate, agreement or other instrument delivered in
connection with the transactions contemplated hereby and thereby.
"Valuation Period" shall mean the ten (10) trading days immediately
preceding and including the Holder Conversion Date or the redemption date set
forth in the Redemption Notice, subject to adjustment from time to time ratably
for any events set forth in Paragraph 9 hereof that occur during such ten (10)
trading day period.
"Warrants" shall mean the warrants to purchase shares of Common Stock issued
by the Corporation in connection with the issuance of the Series A Preferred
Stock.
[Remainder of Page Intentionally Left Blank]
C-18
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations to be duly executed by an officer thereunto duly authorized this
13th day of January, 2000.
XCEED, INC.
/s/ Werner Haase
By: _________________________________
Name: Werner Haase
Title: Chief Executive Officer
C-19
EXHIBIT 1
HOLDER REDEMPTION NOTICE
Reference is made to the Certificate of Designation, Preferences and Rights
(the "Certificate of Designation") of Xceed, Inc., a Delaware corporation (the
"Corporation"). In accordance with and pursuant to the Certificate of
Designation, the undersigned hereby elects to have the Corporation redeem the
number of shares of Series A Cumulative Convertible Preferred Stock, par value
$0.05 per share (the "Series A Preferred Stock"), of the Corporation, indicated
below by tendering the stock certificate(s) representing the share(s) of Series
A Preferred Stock specified below as of the date specified below.
Date of Redemption:
----------------------------------
Number of shares of
Series A Preferred Stock to be redeemed:
----------------------------------
Stock certificate no(s). of
Series A Preferred Stock to be redeemed:
----------------------------------
Please confirm the following information:
Redemption Price:
----------------------------------
The undersigned holder hereby represents, warrants and reaffirms to the
Corporation, as of the date hereof, the accuracy of the representations and
warranties made by it in Article 2 of the Subscription Agreement dated January
13, 2000 executed by the undersigned and accepted by the Corporation.
Please issue any check drawn on an account of the Corporation into which the
Series A Preferred Stock are being redeemed, and, if applicable, issue any
shares of Series A Preferred Stock, in the following name and to the following
address:
Pay to:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Facsimile Number:
----------------------------------
Authorization:
----------------------------------
By:__________________________________
Title:_______________________________
Dated:
----------------------------------
C-20
EXHIBIT 2
CORPORATION REDEMPTION NOTICE
Reference is made to the Certificate of Designation, Preferences and Rights
(the "Certificate of Designation") of Xceed, Inc., a Delaware corporation (the
"Corporation"). In accordance with and pursuant to the Certificate of
Designation, the Corporation hereby elects to redeem the number of shares of
Series A Cumulative Convertible Preferred Stock, par value $0.05 per share (the
"Series A Preferred Stock"), of the Corporation in accordance with the
information set forth below. Please tender the stock certificate(s)
representing the share(s) of Series A Preferred Stock specified below as of the
Redemption Date.
Date of Redemption:
-------------------------------------------
Corporation Redemption Price:
-------------------------------------------
XCEED, INC.
By: _________________________________
Name:
Title:
Dated:
-------------------------------------------
C-21
EXHIBIT 3
HOLDER CONVERSION NOTICE
Reference is made to the Certificate of Designation, Preferences and Rights
(the "Certificate of Designation") of Xceed, Inc., a Delaware corporation (the
"Corporation"). In accordance with and pursuant to the Certificate of
Designation, the undersigned hereby elects to have the Corporation convert the
number of shares of Series A Cumulative Convertible Preferred Stock, par value
$0.05 per share (the "Series A Preferred Stock"), of the Corporation, indicated
below into shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of the Corporation, by tendering the stock certificate(s) representing
the share(s) of Series A Preferred Stock specified below as of the date
specified below.
Date of Conversion:
---------------------------------
Number of Shares of
Series A Preferred Stock to be converted:
---------------------------------
Stock certificate no(s). of
Series A Preferred Stock to be converted:
---------------------------------
Please issue the Common Stock and, if applicable, any check drawn on an account
of the Corporation into which the Series A Preferred Stock are being converted
in the following name and to the following address:
Issue to:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
Facsimile Number:
---------------------------------
Authorization:
---------------------------------
By:__________________________________
Title:_______________________________
Dated:
---------------------------------
C-22
EXHIBIT 4
CORPORATION ELECTION CONVERSION NOTICE
Reference is made to the Certificate of Designation, Preferences and Rights
(the "Certificate of Designation") of Xceed, Inc., a Delaware corporation (the
"Corporation"). In accordance with and pursuant to the Certificate of
Designation, the Corporation hereby elects to have the Holders convert the
number of shares of Series A Cumulative Convertible Preferred Stock, par value
$0.05 per share (the "Series A Preferred Stock"), of the Corporation, having an
Aggregate Value indicated below into shares of Common Stock, par value $0.01
per share (the "Common Stock"), of the Corporation.
Aggregate Value of the Series
A Preferred Stock selected for
conversion:
-------------------------------------------
[Corporation Election
Conversion Period:
From:
-------------------------------------------
To:
-------------------------------------------
Corporation Election
Conversion Period Commencement
Date: _______________________________________]/1/
-or-
[Mandatory Conversion Date _______________________________________]/2/
Holder's Pro Rata Conversion
Amount:
-------------------------------------------
XCEED, INC.
By: _________________________________
Name:
Title:
Dated:
-------------------------------------------
- --------
/1/If conversion is made pursuant to Section 8(a).
/2/If conversion is made pursuant to Section 8(b).
C-23
Exhibit D
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
XCEED, INC.
Expires January 13, 2005
No. W- New York, New York
January 13, 2000
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, XCEED, INC., a Delaware corporation (together with its successors
and assigns, the "Issuer"), hereby certifies that
HFTP INVESTMENT L.L.C.
or its registered assigns is entitled to subscribe for and purchase, during the
period specified in this Warrant, up to 61,091 shares (subject to adjustment as
hereinafter provided) of the duly authorized, validly issued, fully paid and
non-assessable common stock, par value $0.01 per share, of the Issuer (the
"Common Stock"), at an exercise price per share equal to the Warrant Price then
in effect, subject, however, to the provisions and upon the terms and
conditions hereinafter set forth. Capitalized terms used in this Warrant and
not otherwise defined herein shall have the respective meanings specified in
Section 7 hereof.
1. Term. The right to subscribe for and purchase shares of Warrant Stock
represented hereby shall commence on the date of issuance of this Warrant and
shall expire at 5:00 p.m., New York City time, on January 13, 2005 (such period
being the "Term"). Prior to the end of the Term, the Issuer will not take any
action which would terminate the Warrants.
2. Method of Exercise; Payment; Issuance of New Warrant; Registration;
Transfer and Exchange.
(a) Time of Exercise. The purchase rights represented by this Warrant may be
exercised in whole or in part at any time and from time to time during the
Term.
(b) Method of Exercise. The Holder hereof may exercise this Warrant, in
whole or in part, by the surrender of this Warrant (with the exercise form
attached hereto duly executed) at the principal executive office of the Issuer,
and by the payment to the Issuer of an amount of consideration therefor equal
to the Warrant Price in effect on the date of such exercise multiplied by the
number of shares of Warrant Stock with respect to which this Warrant is then
being exercised, payable at such Holder's election (i) by certified or official
bank check, (ii) if the Per Share Market Value is greater than the Warrant
Price (at the date of calculation as set forth below), in lieu of exercising
this Warrant for cash, by receiving shares equal to the value (as determined
below) of this Warrant (or the portion thereof being canceled) by surrender of
this Warrant at the principal executive office of the Company together with the
properly endorsed Subscription Form
D-1
annexed hereto and notice of such election in which event the Company shall
issue to the Warrantholder a number of shares of Common Stock computed using
the following formula:
X = Y(A-B)
------
A
Where X = the number of shares of Common Stock to be issued to the Holder
Y = the number of shares of Common Stock purchasable under the Warrant
or, if only a portion of the Warrant is being exercised, the
portion of the Warrant being canceled (at the date of such
calculation)
A = the Per Share Market Value of one share of the Common Stock (at
the date of such calculation)
B = Warrant Price (as adjusted to the date of such calculation),
or (iii) by a combination of the foregoing methods of payment selected by the
Holder of this Warrant. In any case where the consideration payable upon such
exercise is being paid in whole or in part pursuant to the provisions of clause
(ii) of this subsection (b), such exercise shall be accompanied by written
notice from the Holder of this Warrant specifying the manner of payment thereof
and containing a calculation showing the number of shares of Warrant Stock with
respect to which rights are being surrendered thereunder and the net number of
shares to be issued after giving effect to such surrender.
(c) Issuance of Stock Certificates. In the event of any exercise of this
Warrant in accordance with and subject to the terms and conditions hereof, (i)
certificates for the shares of Warrant Stock so purchased shall be dated the
date of such exercise and the Issuer shall use its best efforts to deliver to
the Holder hereof within a reasonable time, not exceeding three Trading Days
after such exercise, and the Holder hereof shall be deemed for all purposes to
be the Holder of the shares of Warrant Stock so purchased as of the date of
such exercise, and (ii) unless this Warrant has expired, a new Warrant
representing the number of shares of Warrant Stock, if any, with respect to
which this Warrant shall not then have been exercised (less any amount thereof
which shall have been cancelled in payment or partial payment of the Warrant
Price as hereinabove provided) shall also be issued to the Holder hereof at the
Issuer's expense within such time.
(d) Registration. The Warrants shall be numbered and shall be registered in
a Warrant register (the "Warrant Register"). The Issuer shall be entitled to
treat the registered holder of any Warrant on the Warrant Register (the
"Holder") as the owner in fact thereof for all purposes and shall not be bound
to recognize any equitable or other claim to or interest in such Warrant on the
part of any other person, and shall not be liable for any registration of
transfer of Warrants which are registered or are to be registered in the name
of a fiduciary or the nominee of a fiduciary unless made with the actual
knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration of transfer, or with such knowledge of such facts
that its participation therein amounts to bad faith. The Warrants shall be
registered initially in the name of Holder as set forth in the first sentence
of this Warrant in such denominations as Holder may request in writing to the
Issuer.
(e) Transfer of Warrant. Until such time as the shares of Warrant Stock
issuable hereunder shall have been the subject of registration and are covered
by an effective registration statement under the Securities Act, or there is
available (in the opinion of counsel to the Issuer or counsel to the Holder,
acceptable to the Issuer) an exemption from the registration requirements of
the Securities Act, the Warrants shall not be sold, transferred, assigned or
hypothecated, in part or in whole (other than by will or pursuant to the laws
of descent and distribution), and then only to registered assigns of the Holder
and thereafter only upon delivery thereof duly endorsed by the Holder or by his
duly authorized attorney or representative, or accompanied by proper
D-2
evidence of succession, assignment or authority to transfer. In all cases of
transfer by an attorney, the original power of attorney, duly approved, or an
official copy thereof, duly certified, shall be deposited with the Issuer. In
case of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited with the Issuer in its
discretion. Upon any registration of transfer, the Issuer shall deliver a new
Warrant or Warrants to the persons entitled thereto. The Warrants may be
exchanged at the option of the Holder thereof for another Warrant, or other
Warrants, of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of shares of Common Stock upon
surrender to the Issuer or its duly authorized agent. Notwithstanding the
foregoing, the Issuer shall have no obligation to cause Warrants to be
transferred on its books to any person if such transfer would violate the
Securities Act.
(f) Compliance with Securities Laws.
(i) The Holder of this Warrant, by acceptance hereof, acknowledges that
neither this Warrant nor the shares of Warrant Stock to be issued upon
exercise hereof have been registered under the Securities Act and have been
offered and sold by the Issuer in reliance upon exemption from the
registration provisions of the Securities Act and the Holder represents
that such securities are being acquired solely for the Holder's own account
and not as a nominee for any other party, and for investment, and that the
Holder will not offer, sell or otherwise dispose of this Warrant or any
shares of Warrant Stock to be issued upon exercise hereof except pursuant
to an effective registration statement, or an exemption from registration,
under the Securities Act and any applicable state securities laws.
(ii) Except as provided in paragraph (iii) below, this Warrant and all
certificates representing shares of Warrant Stock issued upon exercise
hereof shall be stamped or imprinted with a legend in substantially the
following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
(iii) The restrictions imposed by this subsection (f) upon the transfer
of this Warrant and the shares of Warrant Stock to be purchased upon
exercise hereof shall terminate (A) when such securities shall have been
effectively registered under the Securities Act, (B) upon the Issuer's
receipt of an opinion of counsel, in form and substance reasonably
satisfactory to the Issuer, addressed to the Issuer to the effect that such
restrictions are no longer required to ensure compliance with the
Securities Act or (C) upon the Issuer's receipt of other evidence
reasonably satisfactory to the Issuer that such registration is not
required. Whenever such restrictions shall cease and terminate as to any
such securities, the Holder thereof shall be entitled to receive from the
Issuer (or its transfer agent and registrar), without expense (other than
applicable transfer taxes, if any), new Warrants (or, in the case of shares
of Warrant Stock, new stock certificates) of like tenor not bearing the
applicable legends required by paragraph (ii) above relating to the
Securities Act and state securities laws.
(g) Continuing Rights of Holder. The Issuer will, at the time of or at any
time after each exercise of this Warrant, upon the request of the Holder hereof
or of any shares of Warrant Stock issued upon such exercise, acknowledge in
writing the extent, if any, of its continuing obligation to afford to such
Holder all rights to which such Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant, provided that if any
such Holder shall fail to make any such request, the failure shall not affect
the continuing obligation of the Issuer to afford such rights to such Holder.
D-3
3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.
(a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees
that all shares of Warrant Stock which may be issued upon the exercise of this
Warrant or otherwise hereunder will, upon issuance and payment in accordance
with the terms hereof, be duly authorized, validly issued, fully paid and non-
assessable and free from all taxes, liens and charges created by or through
Issuer. The Issuer further covenants and agrees that during the period within
which this Warrant may be exercised, the Issuer will at all times have
authorized and reserved for the purpose of the issue upon exercise of this
Warrant a sufficient number of shares of Common Stock to provide for the
exercise of this Warrant.
(b) Payment of Taxes. The Issuer will pay all documentary stamp taxes, if
any, attributable to the issuance of Warrant Stock; provided, however, that the
Issuer shall not be required to pay any tax or taxes which may be payable in
respect of any transfer involved in the issue or delivery of any certificates
for Warrant Stock in a name other than that of the Holder of Warrants in
respect of which such Warrant Stock is issued.
(c) Reservation. If any shares of Common Stock required to be reserved for
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. The transfer agent for
the Common Stock (the "Transfer Agent"), and every subsequent transfer agent,
if any, for the Warrant Stock will be irrevocably authorized and directed at
all times until the end of the Term to reserve such number of authorized and
unissued shares of Common Stock as shall be required for such purpose. The
Issuer will keep a copy of this Agreement on file with the Transfer Agent and
with every subsequent transfer agent for the Issuer's securities issuable upon
the exercise of the Warrants. The Issuer will supply the Transfer Agent or any
subsequent transfer agent with duly executed certificates for such purpose and
will itself provide or otherwise make available any cash which may be
distributable as provided in Section 6 of this Agreement. All Warrants
surrendered in the exercise of the rights thereby evidenced shall be canceled,
and such canceled Warrants shall constitute sufficient evidence of the number
of Shares that have been issued upon the exercise of such Warrants. No shares
of Common Stock shall be subject to reservation in respect of unexercised
Warrants subsequent to the end of the Term. If the Issuer shall list any shares
of Common Stock on any securities exchange or market it will, at its expense,
list thereon, maintain and increase when necessary such listing, of, all shares
of Warrant Stock from time to time issued upon exercise of this Warrant or as
otherwise provided hereunder, and, to the extent permissible under the
applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the
Holder of this Warrant shall be entitled to receive upon the exercise of this
Warrant if at the time any securities of the same class shall be listed on such
securities exchange or market by the Issuer.
(d) Covenants. The Issuer shall not by any action including, without
limitation, amending the certificate of incorporation or the by-laws of the
Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of the Holder hereof against dilution (to the
extent specifically provided herein) or impairment. Without limiting the
generality of the foregoing, the Issuer will (i) not permit the par value, if
any, of its Common Stock to exceed the then effective Warrant Price, (ii) not
amend or modify any provision of the certificate of incorporation or by-laws of
the Issuer in any manner that would adversely affect in any way the powers,
preferences or relative participating, optional or other special rights of the
Common Stock or which would adversely affect the rights of the Holders of the
Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, claims, encumbrances and
restrictions (other than as provided herein) upon the exercise of this Warrant,
and (iv) use its best efforts to obtain all such authorizations, exemptions or
D-4
consents from any public regulatory body having jurisdiction thereof as may be
reasonably necessary to enable the Issuer to perform its obligations under this
Warrant.
(e) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing
the right to purchase the same number of shares of Common Stock.
(f) Rights and Obligations under the Registration Rights Agreement. This
Warrant and the Warrant Stock are entitled to the benefits and subject to the
terms of the Registration Rights Agreement dated as of even date herewith
between the Issuer and the Holders listed on the signature pages thereof (as
amended from time to time, the "Registration Rights Agreement"). The Issuer
shall keep or cause to be kept a copy of the Registration Rights Agreement, and
any amendments thereto, at its principal executive office and shall furnish,
without charge, copies thereof to the Holder upon request.
4. Adjustment of Warrant Price and Warrant Share Number. The number and kind
of Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) Recapitalization, Reorganization, Reclassification, Consolidation,
Merger or Sale.
(i) In case the Issuer after the Original Issue Date shall do any of
the following (each, a "Triggering Event"): (a) consolidate with or
merge into any other Person and the Issuer shall not be the continuing
or surviving corporation of such consolidation or merger, or (b) permit
any other Person to consolidate with or merge into the Issuer and the
Issuer shall be the continuing or surviving Person but, in connection
with such consolidation or merger, any Capital Stock of the Issuer
shall be changed into or exchanged for Securities of any other Person
or cash or any other property, or (c) transfer all or substantially all
of its properties or assets to any other Person, or (d) effect a
capital reorganization or reclassification of its Capital Stock, then,
and in the case of each such Triggering Event, proper provision shall
be made so that, upon the basis and the terms and in the manner
provided in this Warrant, the Holder of this Warrant shall be entitled,
upon the exercise hereof at any time after the consummation of such
Triggering Event, to the extent this Warrant is not exercised prior to
such Triggering Event, or is redeemed in connection with such
Triggering Event, to receive at the Warrant Price in effect at the time
immediately prior to the consummation of such Triggering Event in lieu
of the Common Stock issuable upon such exercise of this Warrant prior
to such Triggering Event, the Securities, cash and property to which
such Holder would have been entitled upon the consummation of such
Triggering Event if such Holder had exercised the rights represented by
this Warrant immediately prior thereto, subject to adjustments and
increases (subsequent to such corporate action) as nearly equivalent as
possible to the adjustments provided for in Section 4 hereof.
(ii) Notwithstanding anything contained in this Warrant to the
contrary, the Issuer will not effect any Triggering Event unless, prior
to the consummation thereof, each Person (other than the Issuer) which
may be required to deliver any Securities, cash or property upon the
exercise of this Warrant as provided herein shall assume, by written
instrument delivered to, and reasonably satisfactory to, the Holder of
this Warrant: (A) the obligations of the Issuer under this Warrant (and
if the Issuer shall survive the consummation of such Triggering Event,
such assumption shall be in addition to, and shall not release the
Issuer from, any continuing obligations of the Issuer under this
Warrant); and (B) the obligation to deliver to such Holder such shares
of Securities, cash or property as, in accordance with the foregoing
provisions of this subsection (a).
(b) Subdivision or Combination of Shares. If the Issuer, at any time
while this Warrant is outstanding, shall subdivide or combine any shares of
Common Stock, (i) in case of subdivision of shares,
D-5
the Warrant Price shall be proportionately reduced (as at the effective
date of such subdivision or, if the Issuer shall take a record of Holders
of its Common Stock for the purpose of so subdividing, as at the applicable
record date, whichever is earlier) to reflect the increase in the total
number of shares of Common Stock outstanding as a result of such
subdivision, or (ii) in the case of a combination of shares, the Warrant
Price shall be proportionately increased (as at the effective date of such
combination or, if the Issuer shall take a record of Holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of
shares of Common Stock outstanding as a result of such combination.
(c) Certain Dividends and Distributions. If the Issuer, at any time
while this Warrant is outstanding, shall:
(i) Stock Dividends. Pay a dividend in, or make any other
distribution to its stockholders (without consideration therefor) of,
shares of Common Stock, the Warrant Price shall be adjusted, as at the
date the Issuer shall take a record of the Holders of the Issuer's
Capital Stock for the purpose of receiving such dividend or other
distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying
the Warrant Price in effect immediately prior to such record date (or
if no such record is taken, then immediately prior to such payment or
other distribution), by a fraction (1) the numerator of which shall be
the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution, and (2) the denominator of
which shall be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution (plus in the event that
the Issuer paid cash for fractional shares, the number of additional
shares which would have been outstanding had the Issuer issued
fractional shares in connection with said dividends); or
(ii) Other Dividends. Pay a dividend on, or make any distribution of
its assets upon or with respect to (including, but not limited to, a
distribution of its property as a dividend in liquidation or partial
liquidation or by way of return of capital), the Common Stock (other
than as described in clause (i) of this subsection (c)), or in the
event that the Issuer shall offer options or rights to subscribe for
shares of Common Stock, or issue any Common Stock Equivalents, to all
of its holders of Common Stock, then on the record date for such
payment, distribution or offer or, in the absence of a record date, on
the date of such payment, distribution or offer, the Holder shall
receive what the Holder would have received had it exercised this
Warrant in full immediately prior to the record date of such payment,
distribution or offer or, in the absence of a record date, immediately
prior to the date of such payment, distribution or offer.
(d) Issuance of Additional Shares of Common Stock. If the Issuer, at any
time while this Warrant is outstanding, shall issue any Additional Shares
of Common Stock (otherwise than as provided in the foregoing subsections
(a) through (c) of this Section 4), at a price per share less than the
lower of (x) the Warrant Price then in effect or (y) the Per Share Market
Value then in effect or without consideration, then the Warrant Price upon
each such issuance shall be adjusted to the price (rounded to the nearest
cent) determined by multiplying the Warrant Price then in effect by a
fraction:
(i) the numerator of which shall be equal to the sum of (A) the number
of shares of Common Stock outstanding immediately prior to the issuance of
such Additional Shares of Common Stock plus (B) the number of shares of
Common Stock (rounded to the nearest whole share) which the aggregate
consideration for the total number of such Additional Shares of Common
Stock so issued would purchase at a price per share equal to the greater of
the Per Share Market Value then in effect and the Warrant Price then in
effect; and
(ii) the denominator of which shall be equal to the number of shares of
Common Stock outstanding immediately after the issuance of such Additional
Shares of Common Stock.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b)
or (c) of this Section 4. No adjustment of the Warrant Price
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shall be made under this subsection (d) upon the issuance of any Additional
Shares of Common Stock which are issued pursuant to any Common Stock
Equivalent if upon the issuance of such Common Stock Equivalent (x) any
adjustment shall have been made pursuant to subsection (e) of this Section
4 or (y) no adjustment was required pursuant to subsection (e) of this
Section 4. No adjustment of the Warrant Price shall be made under this
subsection (d) in an amount less than $.01 per share, but any such lesser
adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment, if any, which together with
any adjustments so carried forward shall amount to $.01 per share or more,
provided that upon any adjustment of the Warrant Price as a result of any
dividend or distribution payable in Common Stock or Convertible Securities
or the reclassification, subdivision or combination of Common Stock into a
greater or smaller number of shares, the foregoing figure of $.01 per share
(or such figure as last adjusted) shall be adjusted (to the nearest one-
half cent) in proportion to the adjustment in the Warrant Price.
(e) Issuance of Common Stock Equivalents. If the Issuer, at any time
while this Warrant is outstanding, shall issue any Common Stock Equivalent
and the price per share for which Additional Shares of Common Stock may be
issuable thereafter pursuant to such Common Stock Equivalent shall be less
than the lower of (w) the Warrant Price then in effect or (x) the Per Share
Market Value then in effect, or if, after any such issuance of Common Stock
Equivalents, the price per share for which Additional Shares of Common
Stock may be issuable thereafter is amended or adjusted, and such price as
so amended shall be less than the lower of (y) the Warrant Price or (z) the
Per Share Market Value in effect at the time of such amendment, then the
Warrant Price upon each such issuance or amendment shall be adjusted as
provided in the first sentence of subsection (d) of this Section 4 on the
basis that (1) the maximum number of Additional Shares of Common Stock
issuable pursuant to all such Common Stock Equivalents shall be deemed to
have been issued (whether or not such Common Stock Equivalents are actually
then exercisable, convertible or exchangeable in whole or in part) as of
the earlier of (A) the date on which the Issuer shall enter into a firm
contract for the issuance of such Common Stock Equivalent, or (B) the date
of actual issuance of such Common Stock Equivalent, and (2) the aggregate
consideration for such maximum number of Additional Shares of Common Stock
shall be deemed to be the minimum consideration received or receivable by
the Issuer for the issuance of such Additional Shares of Common Stock
pursuant to such Common Stock Equivalent. No adjustment of the Warrant
Price shall be made under this subsection (e) upon the issuance of any
Convertible Security which is issued pursuant to the exercise of any
warrants or other subscription or purchase rights therefor, if any
adjustment shall previously have been made in the Warrant Price then in
effect upon the issuance of such warrants or other rights pursuant to this
subsection (e). If no adjustment is required under this subsection (e) upon
issuance of any Common Stock Equivalent or once an adjustment is made under
this subsection (e) based upon the Per Share Market Value in effect on the
date of such adjustment, no further adjustment shall be made under this
subsection (e) based solely upon a change in the Per Share Market Value
after such date.
(f) Purchase of Common Stock by the Issuer. If the Issuer at any time
while this Warrant is outstanding shall, directly or indirectly through a
Subsidiary or otherwise, purchase, redeem or otherwise acquire any shares
of Common Stock at a price per share greater than the Per Share Market
Value then in effect, then the Warrant Price upon each such purchase,
redemption or acquisition shall be adjusted to that price determined by
multiplying such Warrant Price by a fraction (i) the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior
to such purchase, redemption or acquisition minus the number of shares of
Common Stock which the aggregate consideration for the total number of such
shares of Common Stock so purchased, redeemed or acquired would purchase at
the Per Share Market Value; and (ii) the denominator of which shall be the
number of shares of Common Stock outstanding immediately after such
purchase, redemption or acquisition. For the purposes of this subsection
(f), the date as of which the Per Share Market Value shall be computed
shall be the earlier of (x) the date on which the Issuer shall enter into a
firm contract for the purchase, redemption or acquisition of such Common
Stock, or (y) the date of actual purchase, redemption or acquisition of
such Common Stock. For the purposes of this subsection (f), a purchase,
redemption or acquisition of a Common Stock Equivalent shall be deemed to
be a purchase of the underlying Common Stock, and the computation
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herein required shall be made on the basis of the full exercise, conversion
or exchange of such Common Stock Equivalent on the date as of which such
computation is required hereby to be made, whether or not such Common Stock
Equivalent is actually exercisable, convertible or exchangeable on such
date.
(g) Other Provisions Applicable to Adjustments Under this Section 4. The
following provisions shall be applicable to the making of adjustments in
the Warrant Price hereinbefore provided in Section 4:
(i) Computation of Consideration. The consideration received by the
Issuer shall be deemed to be the following: to the extent that any
Additional Shares of Common Stock or any Common Stock Equivalents shall
be issued for a cash consideration, the consideration received by the
Issuer therefor, or if such Additional Shares of Common Stock or Common
Stock Equivalents are offered by the Issuer for subscription, the
subscription price, or, if such Additional Shares of Common Stock or
Common Stock Equivalents are sold to underwriters or dealers for public
offering without a subscription offering, the public offering price, in
any such case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any
compensation, discounts, commissions, or expenses paid or incurred by
the Issuer for or in connection with the underwriting thereof or
otherwise in connection with the issue thereof; to the extent that such
issuance shall be for a consideration other than cash, then, except as
herein otherwise expressly provided, the fair market value of such
consideration at the, time of such issuance as determined in good faith
by the Board. The consideration for any Additional Shares of Common
Stock issuable pursuant to any Common Stock Equivalents shall be the
consideration received by the Issuer for issuing such Common Stock
Equivalents, plus the additional consideration payable to the Issuer
upon the exercise, conversion or exchange of such Common Stock
Equivalents. In case of the issuance at any time of any Additional
Shares of Common Stock or Common Stock Equivalents in payment or
satisfaction of any dividend upon any class of Capital Stock of the
Issuer other than Common Stock, the Issuer shall be deemed to have
received for such Additional Shares of Common Stock or Common Stock
Equivalents a consideration equal to the amount of such dividend so
paid or satisfied. In any case in which the consideration to be
received or paid shall be other than cash, the Board shall notify the
Holder of this Warrant of its determination of the fair market value of
such consideration prior to payment or accepting receipt thereof. If,
within thirty days after receipt of said notice, the Majority Holders
shall notify the Board in writing of their objection to such
determination, a determination of the fair market value of such
consideration shall be made by an Independent Appraiser selected by the
Majority Holders with the approval of the Board (which approval shall
not be unreasonably withheld), whose fees and expenses shall be paid by
the Issuer.
(ii) Readjustment of Warrant Price. Upon the expiration or
termination of the right to convert, exchange or exercise any Common
Stock Equivalent the issuance of which effected an adjustment in the
Warrant Price, if such Common Stock Equivalent shall not have been
converted, exercised or exchanged in its entirety, the number of shares
of Common Stock deemed to be issued and outstanding by reason of the
fact that they were issuable upon conversion, exchange or exercise of
any such Common Stock Equivalent shall no longer be computed as set
forth above, and the Warrant Price shall forthwith be readjusted and
thereafter be the price which it would have been (but reflecting any
other adjustments in the Warrant Price made pursuant to the provisions
of this Section 4 after the issuance of such Common Stock Equivalent)
had the adjustment of the Warrant Price been made in accordance with
the issuance or sale of the number of Additional Shares of Common Stock
actually issued upon conversion, exchange or issuance of such Common
Stock Equivalent and thereupon only the number of Additional Shares of
Common Stock actually so issued shall be deemed to have been issued and
only the consideration actually received by the Issuer (computed as in
clause (i) of this subsection (g)) shall be deemed to have been
received by the Issuer.
(iii) Outstanding Common Stock. The number of shares of Common Stock
at any time outstanding shall (A) not include any shares thereof then
directly or indirectly owned or held by or for the account of the
Issuer or any of its Subsidiaries, and (B) be deemed to include all
shares of Common Stock then issuable upon conversion, exercise or
exchange of any then outstanding
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Common Stock Equivalents or any other evidences of indebtedness, shares
of Capital Stock (including, without limitation, the Preferred Stock)
or other Securities which are or may be at any time convertible into or
exchangeable for shares of Common Stock or Other Common Stock.
(h) Adjustment of Warrant Share Number. Upon each adjustment in the
Warrant Price pursuant to any of the foregoing provisions of this Section
4, the Warrant Share Number shall be adjusted, to the nearest one hundredth
of a whole share, to the product obtained by multiplying the Warrant Share
Number immediately prior to such adjustment in the Warrant Price by a
fraction, the numerator of which shall be the Warrant Price immediately
before giving effect to such adjustment and the denominator of which shall
be the Warrant Price immediately after giving effect to such adjustment. If
the Issuer shall be in default under any provision contained in Section 3
of this Warrant so that shares issued at the Warrant Price adjusted in
accordance with this Section 4 would not be validly issued, the adjustment
of the Warrant Share Number provided for in the foregoing sentence shall
nonetheless be made and the Holder of this Warrant shall be entitled to
purchase such greater number of shares at the lowest price at which such
shares may then be validly issued under applicable law. Such exercise shall
not constitute a waiver of any claim arising against the Issuer by reason
of its default under Section 3 of this Warrant.
(i) Form of Warrant after Adjustments. The form of this Warrant need not
be changed because of any adjustments in the Warrant Price or the number
and kind of Securities purchasable upon the exercise of this Warrant.
5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number
shall be adjusted pursuant to Section 4 hereof (for purposes of this Section 5,
each an "adjustment"), the Issuer shall cause its Chief Financial Officer to
prepare and execute a certificate setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated (including a description of the basis on
which the Board made any determination hereunder), and the Warrant Price and
Warrant Share Number after giving effect to such adjustment, and shall cause
copies of such certificate to be delivered to the Holder of this Warrant
promptly after each adjustment. Any dispute between the Issuer and the Holder
of this Warrant with respect to the matters set forth in such certificate may
at the option of the Holder of this Warrant be submitted to one of the national
accounting firms currently known as the "big five" selected by the Holder,
provided that the Issuer shall have ten days after receipt of notice from such
Holder of its selection of such firm to object thereto, in which case such
Holder shall select another such firm and the Issuer shall have no such right
of objection. The firm selected by the Holder of this Warrant as provided in
the preceding sentence shall be instructed to deliver a written opinion as to
such matters to the Issuer and such Holder within thirty days after submission
to it of such dispute. Such opinion shall be final and binding on the parties
hereto. The fees and expenses of such accounting firm shall be paid by the
Issuer.
6. Fractional Shares. No fractional shares of Warrant Stock will be issued
in connection with and exercise hereof, but in lieu of such fractional shares,
the Issuer shall make a cash payment therefor equal in amount to the product of
the applicable fraction multiplied by the Per Share Market Value then in
effect.
7. Definitions. For the purposes of this Warrant, the following terms have
the following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock
issued by the Issuer after the Original Issue Date, and all shares of Other
Common, if any, issued by the Issuer after the Original Issue Date, except:
(i) Warrant Stock; (ii) any shares of Common Stock issuable upon conversion
of the Preferred Stock pursuant to the Preferred Stock Certificate of
Designation; (iii) any shares of Common Stock issuable pursuant to or in
connection with exercise of (A) any Convertible Security or (B) any other
Common Stock Equivalent, outstanding on the date hereof; (iv) any shares of
Common Stock issuable pursuant to or in connection with any business
acquisitions, mergers, consolidations or other corporate combinations or
transactions heretofore or hereafter undertaken by the Issuer in which the
Issuer is the surviving entity (including, without limitation, shares
issuable under Common Stock Equivalents that may be issued pursuant to or
in connection with any of the foregoing transactions); (v) any shares of
Common Stock issuable pursuant to or in connection with any stock option or
other similar plan of the Issuer
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pursuant to which the Issuer issues Common Stock to its officers, directors
and employees; and (vi) any shares of Common Stock issued in an
underwritten public offering of securities by the Issuer.
"Board" shall mean the Board of Directors of the Issuer.
"Capital Stock" means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred or
preference stock, (ii) all partnership interests (whether general or
limited) in any Person which is a partnership, (iii) all membership
interests or limited liability company interests in any limited liability
company, and (iv) all equity or ownership interests in any Person of any
other type.
"Common Stock" means the Common Stock, $0.01 par value, of the Issuer
and any other Capital Stock into which such stock may hereafter be changed.
"Common Stock Equivalent" means any Convertible Security or warrant,
option or other right to subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Security.
"Convertible Securities" means evidences of indebtedness, shares of
Capital Stock or other Securities which are or may be at any time
convertible into or exchangeable for Additional Shares of Common Stock. The
term "Convertible Security" means one of the Convertible Securities.
"Governmental Authority" means any governmental, regulatory or self-
regulatory entity, department, body, official, authority, commission,
board, agency or instrumentality, whether federal, state or local, and
whether domestic or foreign.
"Holders" mean the Persons who shall from time to time own any Warrant.
The term "Holder" means one of the Holders.
"Independent Appraiser" means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants
of recognized standing (which may be the firm that regularly examines the
financial statements of the Issuer) that is regularly engaged in the
business of appraising the Capital Stock or assets of corporations or other
entities as going concerns, and which is not affiliated with either the
Issuer or the Holder of any Warrant.
"Issuer" means Xceed, Inc., a Delaware corporation, and its successors.
"Majority Holders" means at any time the Holders of Warrants exercisable
for a majority of the shares of Warrant Stock issuable under the Warrants
at the time outstanding.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"Original Issue Date" means January 13, 2000.
"Other Common" means any other Capital Stock of the Issuer of any class
which shall be authorized at any time after the date of this Warrant (other
than Common Stock) and which shall have the right to participate in the
distribution of earnings and assets of the Issuer without limitation as to
amount.
"Person" means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint
venture, Governmental Authority or other entity of whatever nature.
"Per Share Market Value" means on any particular date (a) the closing
price per share of the Common Stock on such date on the Nasdaq National
Market, The Nasdaq SmallCap Market or other registered national stock
exchange on which the Common Stock is then listed or if there is no such
price on such date, then the closing price on such exchange or quotation
system on the date nearest preceding such date, or (b) if the Common Stock
is not listed then on the Nasdaq National Market, The Nasdaq SmallCap
Market or any registered national stock exchange, the closing price for a
share of Common Stock in the over-the-counter market, as reported by NASDAQ
or in the National Quotation Bureau Incorporated or similar organization or
agency succeeding to its functions of reporting prices) at the close
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of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or
agency succeeding to its functions of reporting prices), then the average
of the "Pink Sheet" quotes for the relevant conversion period, as
determined in good faith by the holder, or (d) if the Common Stock is not
then publicly traded the fair market value of a share of Common Stock as
determined by an Independent Appraiser selected in good faith by the
Majority Holders; provided, however, that the Issuer, after receipt of the
determination by such Independent Appraiser, shall have the right to select
an additional Independent Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such
Independent Appraiser; and provided, further that all determinations of the
Per Share Market Value shall be appropriately adjusted for any stock
dividends, stock splits or other similar transactions during such period.
The determination of fair market value by an Independent Appraiser shall be
based upon the fair market value of the Issuer determined on a going
concern basis as between a willing buyer and a willing seller and taking
into account all relevant factors determinative of value, and shall be
final and binding on all parties. In determining the fair market value of
any shares of Common Stock, no consideration shall be given to any
restrictions on transfer of the Common Stock imposed by agreement or by
federal or state securities laws, or to the existence or absence of, or any
limitations on, voting rights.
"Preferred Stock" means the Issuer's Series A Cumulative Convertible
Preferred Stock, $0.05 par value and stated value $1,000 per share.
"Preferred Stock Certificate of Designation" means the Certificate of
Designation, Powers, Preferences and Rights of the Preferred Stock adopted
by the Board on January 13, 2000.
"Registration Rights Agreement" has the meaning specified in Section
3(f) hereof.
"Securities" means any debt or equity securities of the Issuer, whether
now or hereafter authorized, any instrument convertible into or
exchangeable for Securities or a Security, and any option, warrant or other
right to purchase or acquire any Security. "Security" means one of the
Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose outstanding
Voting Stock shall at the time be owned directly or indirectly by the
Issuer or by one or more of its Subsidiaries, or by the Issuer and one or
more of its Subsidiaries.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market, The Nasdaq SmallCap Market or other registered
national stock exchange on which the Common Stock has been listed, or (b)
if the Common Stock is not listed on the Nasdaq National Market, The Nasdaq
SmallCap Market or any registered national stock exchange, a day or which
the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC
Bulletin Board, a day on which the Common Stock is quoted in the over-the-
counter market as reported by the National Quotation Bureau Incorporated
(or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common
Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then
Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government
action to close.
"Term" has the meaning specified in Section 1 hereof.
"Voting Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) having
ordinary voting power for the election of a majority of the members of the
Board of Directors (or other governing body) of such corporation, other
than Capital Stock having such power only by reason of the happening of a
contingency.
"Warrants" means the Warrants issued and sold pursuant to the
Subscription Agreement, dated January 13, 2000, including, without
limitation, this Warrant, and any other warrants of like tenor issued in
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substitution or exchange for any thereof pursuant to the provisions of
Section 2(c), 2(d) or 2(e) hereof or of any of such other Warrants.
"Warrant Price" means $50.10, as such price may be adjusted from time to
time as shall result from the adjustments specified in Section 4 hereof.
"Warrant Share Number" means at any time the aggregate number of shares
of Warrant Stock which may at such time be purchased upon exercise of this
Warrant, after giving effect to all prior adjustments and increases to such
number made or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any Warrant
or Warrants or otherwise issuable pursuant to any Warrant or Warrants.
8. Other Notices. In case at any time:
(A) the Issuer shall make any distributions to the holders of Common
Stock; or
(B) the Issuer shall authorize the granting to all holders of its Common
Stock of rights to subscribe for or purchase any shares of Capital Stock of
any class or of any Common Stock Equivalents or Convertible Securities or
other rights; or
(C) there shall be any reclassification of the Capital Stock of the
Issuer; or
(D) there shall be any capital reorganization by the Issuer; or
(E) there shall be any (i) consolidation or merger involving the Issuer
or (ii) sale, transfer or other disposition of all or substantially all of
the Issuer's property, assets or business (except a merger or other
reorganization in which the Issuer shall be the surviving corporation and
its shares of Capital Stock shall continue to be outstanding and except a
consolidation, merger, sale, transfer or other disposition involving a
wholly-owned Subsidiary); or
(F) there shall be a voluntary or involuntary dissolution, liquidation
or winding-up of the Issuer or any partial liquidation of the Issuer or
distribution to holders of Common Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
days prior to the action in question and not less than twenty days prior to the
record date or the date on which the Issuer's transfer books are closed in
respect thereto. The Issuer shall give to the Holder notice of all meetings and
actions by written consent of its stockholders, at the same time in the same
manner as notice of any meetings of stockholders is required to be given to
stockholders who do not waive such notice (or, if such requires no notice, then
two Trading Days written notice thereof describing the matters upon which
action is to be taken). The Holder shall have the right to send two
representatives selected by it to each meeting, who shall be permitted to
attend, but not vote at, such meeting and any adjournments thereof. This
Warrant entitles the Holder to receive copies of all financial and other
information distributed or required to be distributed to the holders of the
Common Stock.
9. Amendment and Waiver. Any term, covenant, agreement or condition in this
Warrant may be amended, or compliance therewith may be waived (either generally
or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the
Majority Holders; provided, however, that no such amendment or waiver shall
reduce the Warrant Share number, increase the Warrant Price, shorten the period
during which this Warrant may be exercised or modify any provision of this
Section 9 without the consent of the Holder of this Warrant.
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10. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW.
11. Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., New York City time,
on a Business Day, (ii) the Business Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice later than 5:00 p.m., New York City time,
on any date and earlier than 11:59 p.m., New York City time, on such date,
(iii) the Business Day following the date of mailing, if sent by nationally
recognized overnight courier service or (iv) actual receipt by the party to
whom such notice is required to be given. The addresses for such communications
shall be with respect to the Holder of this Warrant or of Warrant Stock issued
pursuant hereto, addressed to such Holder at its last known address or
facsimile number appearing on the books of the Issuer maintained for such
purposes, or with respect to the Issuer, addressed to:
Xceed, Inc.
488 Madison Avenue
New York, New York 10022
Attention: Werner Haase
Facsimile No.: (212) 758-4385
or to such other address or addresses or facsimile number or numbers as any
such party may most recently have designated in writing to the other parties
hereto by such notice. Copies of notices to the Holder shall be sent to Stroock
& Stroock & Lavan LLP, 180 Maiden Lane, New York New, York 10038-4982,
Attention: James R. Tanenbaum, facsimile no.: (212) 806-6006. Copies of notices
to the Issuer shall be sent to Akin, Gump, Strauss, Hauer & Feld, LLP,
Attention: Victoria A. Baylin, facsimile no.: (202) 887-4288.
12. Warrant Agent. The Issuer may, by written notice to each Holder of this
Warrant, appoint an agent having an office in New York, New York for the
purpose of issuing shares of Warrant Stock on the exercise of this Warrant
pursuant to subsection (b) of Section 2 hereof, exchanging this Warrant
pursuant to subsection (d) of Section 2 hereof or replacing this Warrant
pursuant to subsection (d) of Section 3 hereof, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be,
shall be made at such office by such agent.
13. Remedies. The Issuer stipulates that the remedies at law of the Holder
of this Warrant in the event of any default or threatened default by the Issuer
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate and that, to the fullest extent permitted by law,
such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
14. Successors and Assigns. This Warrant and the rights evidenced hereby
shall inure to the benefit of and be binding upon the successors and assigns of
the Issuer, the Holder hereof and (to the extent provided herein) the Holders
of Warrant Stock issued pursuant hereto, and shall be enforceable by any such
Holder or Holder of Warrant Stock.
15. Modification and Severability. If, in any action before any court or
agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
D-13
16. Headings. The headings of the Sections of this Warrant are for
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
D-14
IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and
year first above written.
XCEED, INC.
By: ___________________________________
Name: Werner Haase
Title: Chief Executive Officer
D-15
SUBSCRIPTION AGREEMENT
(To be signed only upon exercise of Warrant)
To XCEED, INC.:
The undersigned, the holder of the within Warrant, hereby irrevocably elects
to exercise the purchase right represented by such Warrant for, and to purchase
thereunder, /1/ shares of Common Stock of XCEED, INC. and herewith (a) makes
payment of $ therefor, or (b) exercises Warrants with a Per Share Market
Value of $ . The undersigned requests that the certificates for such shares
be issued in the name of, and delivered to, , whose address is
.
Dated: _____________________, 20 _____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
_____________________________________
(Address)
- --------
/1/Insert here the number of shares called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the
Warrant is being exercise), in either case without making any adjustment for
additional Common Stock or any other stock or other securities or property or
cash which, pursuant to the adjustment provisions of the Warrant, may be
deliverable upon exercise.
D-16
ASSIGNMENT
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all
of the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock of XCEED, INC. covered thereby set forth
hereinbelow unto:
Name of
Assignee Address No. of Shares
- -------- ------- -------------
Dated: ____________________, 20 _____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
_____________________________________
(Address)
Signed in the presence of:
_____________________________________
I.
D-17
Exhibit E
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Registration Rights Agreement")
entered into as of January 13, 2000, by and among the Subscribers set forth on
the signature pages hereof (each, a "Subscriber," and collectively, the
"Subscribers") and Xceed, Inc., a Delaware corporation, with offices at 488
Madison Avenue, New York, New York 10022 (the "Company").
WITNESSETH:
WHEREAS, pursuant to the Subscription Agreement, dated as of the date hereof
(the "Agreement"), by and among the Company and the Subscribers, the Company
has agreed to sell and the Subscribers have agreed to purchase up to Thirty
Thousand (30,000) shares of Series A Cumulative Convertible Preferred Stock,
par value $.05 per share (the "Preferred Stock"), of the Company at a purchase
price of $1,000 per share, with such other rights and preferences as are set
forth in the Certificate of Designation, Preferences and Rights of the
Preferred Stock (the "Certificate");
WHEREAS, the Preferred Stock is convertible into shares of the Company's
common stock, par value $.01 per share (the "Underlying Common Shares"); and
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Subscribers' purchase of the Preferred Stock, the Company has agreed to provide
the Subscribers with certain registration rights with respect to Underlying
Common Shares and any shares of the Company's common stock underlying warrants
(the "Warrants") issued to the Subscribers on the date hereof (such shares are
referred to as the "Underlying Warrant Shares," and, together with the
Underlying Common Shares, 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 Subscribers agree as
follows:
1. Certain Definitions. As used in this Registration Rights Agreement, the
following terms shall have the following respective meanings, and terms not
otherwise defined herein shall have their respective meanings as assigned to
them in the Agreement:
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Filing Date" means April 1, 2000.
"Holder" means the applicable Subscriber and any transferee of the
Warrants, the Preferred Stock, Shares or other Registrable Securities (as
defined herein), to whom the registration rights conferred by this
Registration Rights Agreement have been transferred in compliance with
Section 13 of this Registration Rights Agreement.
"Person" means and includes an individual, a partnership, a joint
venture, a corporation, a company, a limited liability company, a trust, an
unincorporated organization and a government or any department or agency
thereof.
"Prospectus" means any prospectus relating to the Shares as filed with
the Commission pursuant to Rule 424(b) under the Securities Act or, if no
such filing is required, any form of final prospectus relating to the
Shares included in the Registration Statement, as the case may be, at the
time the Registration Statement is declared effective by the Commission, in
either case, including all amendments and
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supplements to such prospectus or Registration Statement, including post-
effective amendments, and all material, if any, incorporated by reference
therein.
The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing with the Commission 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" means all expenses incurred by the Company in
connection with the registration, qualification or compliance with Section
2 of this Registration Rights 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 counsel to Holders relating directly to review of the
Registration Statement and related documents, and the expense of any
special audits incident to or required by any such registration. With
respect to fees and expenses of counsel to the Holders, Registration
Expenses shall include only fees and disbursements for one (1) designated
counsel for all the Holders of Preferred Stock, which counsel shall be
reasonably acceptable to the Company.
"Registration Statement" means any Piggyback Registration Statement, the
Shelf Registration Statement and any additional registration statements
contemplated by Section 2(b), including (in each case) the Prospectus,
amendments and supplements to such registration statement or Prospectus,
including pre- and post-effective amendments, all exhibits thereto, and all
material incorporated by reference in such registration statement.
"Registrable Securities" means any Shares or other securities issued or
issuable to the Holder upon the conversion of any Preferred Stock or
exercise of the Warrants.
"Regulation D" means Regulation D as promulgated pursuant to the
Securities Act, and as it may be subsequently amended.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Expenses" means all brokerage fees, underwriting discounts and
selling commissions applicable to the offer and sale of Registrable
Securities and all fees and disbursements of counsel for Holders not
included under "Registration Expenses."
2. Registration Requirements. The Company shall use its diligent best
efforts to effect the registration of the Registrable Securities (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 would permit or facilitate the sale or
distribution of all the Registrable Securities in the manner (including manner
of sale) and in all states reasonably requested by the Holders under a broad-
based plan of distribution reasonably acceptable to the Holders. Such best
efforts by the Company shall include, without limitation, the following:
(a) Piggy-Back Registration. For so long as any shares of Preferred
Stock, Warrants or any Registrable Securities are outstanding but in no
event for more then two years following the Filing Date, if at any time
when there is not an effective Registration Statement covering the Shares,
the Company shall determine to prepare and file with the Commission a
registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities,
other than a registration statement on Form S-4 or Form S-8 (each as
promulgated under the Securities Act) and including any successor forms or
their then equivalents relating to equity securities (each, a "Piggyback
Registration Statement"), the Company shall send to each Holder of
Registrable Securities written notice of such determination (the
"Registration Notice") and, if within thirty (30) days after receipt of
such notice, any such Holder shall so request in writing (which request
shall specify the Registrable Securities intended to be disposed of by such
Holder), the Company will cause to be included in the Piggy-Back
Registration Statement all Registrable Securities which the Company has
been so requested to include by
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the Holder, provided that if at any time after giving the Registration
Notice and prior to the effective date of the Piggy-Back Registration
Statement, the Company shall determine for any reason not to proceed or to
delay registration of such securities, the Company may, at its election,
give written notice of such determination to such Holder and, thereupon:
(i) in the case of a determination not to proceed, shall be relieved of its
obligation to include any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses
in accordance with Section 3 hereof); and (ii) in the case of a
determination to delay registration, shall be permitted to delay
registration of any Registrable Securities requested to be included
pursuant to this Section 2(a) for the same period as the delay in
registration of the other securities included in the Piggy-Back
Registration Statement. The Company shall include in the Piggy-Back
Registration Statement all or any part of such Registrable Securities such
Holder requests to be registered; provided, however, that the Company shall
not be required to include in the Piggy-Back Registration Statement the
number of Registrable Securities held by a Holder that are eligible for
sale pursuant to Rule 144 under the Securities Act. In the event that the
Piggy-Back Registration Statement relates to an underwritten public
offering, if the managing underwriter(s) determines that marketing factors
require limitation or exclusion of the Registrable Securities and objects
to the inclusion of the Registrable Securities in the Piggy-Back
Registration Statement, then if the Company (after consultation with the
managing underwriter(s)) determines to include in the Piggy-Back
Registration Statement fewer or none of the Registrable Securities of the
Holders, then the number of Registrable Securities of the Holders, to the
extent permitted to be included in the Piggy-Back Registration Statement,
shall be reduced pro-rata among such Holders (based upon the total number
of Registrable Securities requested by the Holders to be included in the
Piggy-Back Registration Statement); provided, however, that if securities
are being offered for the account of other Persons as well as the Company,
such reduction shall not represent a greater fraction of the number of
Registrable Securities intended to be offered by the Holders than the
fraction of similar reductions imposed on such other Persons (other than
the Company). To the extent that Registrable Securities of a Holder are
included in a Piggy-Back Registration Statement that relates to an
underwritten public offering, the right of such Holder to have its
Registrable Securities included therein shall be conditioned upon such
Holder's participation in and agreement with the terms of such
underwriting. Each Holder shall (together with the Company and such other
Persons including securities in the Piggy-Back Registration Statement)
enter into an underwriting agreement in customary form with the
underwriter(s) and shall use such Holder's commercially reasonable efforts
to prepare and provide all documents and opinions required to be delivered
thereunder in respect of their participation as selling securityholders in
the subject offering. In connection with the foregoing, the Company and the
Holder's shall also comply with the provisions of Section 2(e) below. In
the event that the managing underwriter(s) permits inclusion of a Holder's
Registrable Securities, such Holder may be prohibited from selling other
Registrable Securities for a period of time following the effective date of
the Piggy-Back Registration Statement as required by the underwriter(s),
such period not to exceed 90 days from the effective date of the Piggy-Back
Registration Statement.
(b) Additional Registration. Not later than the Filing Date, the Company
shall file: (i) a registration statement on Form S-3 with the Commission
pursuant to Rule 415 under the Securities Act covering the Registrable
Securities (the "Shelf Registration Statement"); (ii) such blue sky filings
as shall be necessary (based upon the determination of counsel to the
Company or counsel to the Holders reasonably acceptable to the Company) to
enable the Holders to resell their Registrable Securities in such
jurisdictions as they reasonably request in writing; and (iii) any required
filings with the National Association of Securities Dealers, Inc., the
Nasdaq National Market or such other exchange or market on which the Shares
are traded. Thereafter, the Company shall use its best efforts to: (i)
respond timely to all comments received from the Commission on the Shelf
Registration Statement and/or any documents incorporated by reference
therein; and (ii) cause such Shelf Registration Statement and any filings
incorporated therein to be declared effective as promptly as practicable
but in no event later than 60 days from the Filing Date. If an additional
Registration Statement is required to be filed because the actual number of
Registrable Securities exceeds the number of shares of Common Stock
included in the Shelf Registration Statement or the Piggy-Back Registration
Statement, the Company shall use its best efforts to cause an additional
E-3
Registration Statement (the "Additional Registration Statement") to be
filed and declared effective by the Commission as soon as possible, but in
no event later than 60 days after the filing thereof.
(c) The Company and the Subscribers agree that the Holders will suffer
damages if one or more Registration Statements covering all of the
Registrable Securities are not filed on or prior to the Filing Date and not
declared effective by the Commission on or prior to the 90th day after the
Filing Date and maintained in the manner contemplated herein during the
Effectiveness Time or if certain other events occur. The Company and the
Holders further agree that it would not be feasible at this time to
ascertain the extent of such damages with precision. Accordingly, if: (i)
one or more Registration Statements covering all of the Registrable
Securities are not filed with the Commission on or prior to the Filing
Date; (ii) after 90 days from the Filing Date, such Registration Statement
or Statements have not been declared effective by the Commission; or (iii)
in the event that filing of the Additional Registration Statement is
necessary, and the Additional Registration Statement is not declared
effective with the time periods set forth in Section 2(b) (any such failure
or breach, being referred to as an "Event," and the date following
expiration of the applicable time periods on which such Event occurs, being
referred to as "Event Date"), and such Event is in no manner the result of
action or inaction on the part of a Subscriber or Subsequent Holder, the
Holders shall have, in addition to, and without limiting, any other rights
they may have at law, in equity or under the Certificate, the Agreement or
this Registration Rights Agreement (including the right to specific
performance), the right to receive cash payment from the Company, as
liquidated damages, in an amount equal to 1.5% of the Aggregate Value (as
defined in the Certificate) of the shares of Preferred Stock held by such
Holder plus the Aggregate Value of any shares of Preferred Stock that have
been converted to the extent any of the Underlying Common Shares issued
upon such conversion have not been sold (or previously included in a
Registration Statement in the case of an Event arising in connection with
an Additional Registration Statement), for each 30-day period (or portion
thereof) from the Event Date until the applicable Event is cured. Payments
to be made pursuant to this Section 2(c) shall be due and payable
immediately upon demand in immediately available funds. In addition to the
foregoing, if at any time after 120 days from the Filing Date, one or more
Registration Statements covering all of the Registrable Securities have not
been declared effective by the Commission, then upon demand of any Holder,
the Company shall redeem all or any specified portion of the Preferred
Stock held by such Holder at a redemption price equal to 125% of the
Aggregate Value (as defined in the Certificate) thereof, together with all
other payments due under this Section 2, the Certificate and the Agreement.
(d) If the Holders intend to distribute the Registrable Securities
covered by the Registration Statement by means of an underwritten offering,
the Holders shall so advise the Company. The Holders will have the right to
select the investment bankers for such underwriting subject to such
investment bankers being reasonably satisfactory to the Company. If, in the
opinion of the managing underwriter of such offering, the inclusion of the
Registrable Securities requested to be registered hereunder would adversely
affect the marketing of such shares, after any shares otherwise intended to
be included by the Company or other holders of Common Stock have been
excluded, Registrable Securities to be included by the Holders shall be
excluded in such manner that the Registrable Securities to be included
shall be allocated among such Holders pro rata based on their ownership of
Registrable Securities.
(e) In the event that the Registrable Securities are included in a
Registration Statement relating to an underwritten offering:
(i) the Company and the Holders shall enter into such customary
agreements (including a customary underwriting agreement) with the
underwriter(s) and take all such other actions reasonably requested in
connection therewith in order to expedite or facilitate the disposition
of such Registrable Securities.
(ii) the Company and the Holders shall make such representations and
warranties to the Holders (with respect to the Company), to the Company
(with respect to the Holders) and to the underwriter(s), in form,
substance and scope as are customarily made in secondary underwritten
offerings;
E-4
(iii) the Company shall cause to be delivered to the Holders of
Registrable Securities included in the underwritten offering and to the
underwriter(s) opinions of counsel to the Company, dated as of the
effective date of the Registration Statement (which counsel and
opinions, shall be reasonably satisfactory in form, scope and substance
to the managing underwriter(s) and counsel of the Holders), addressed
to the Holders and the underwriter(s) covering the matters customarily
covered in opinions requested in secondary underwritten offerings;
(iv) the Company shall cause to be delivered, immediately prior to
the effectiveness of the Registration Statement, a "comfort" letter
from the Company's independent certified public accountants addressed
to the Holders and the underwriter(s) stating that such accountants are
independent public accountants within the meaning of the Securities Act
and the applicable published rules and regulations thereunder, and
otherwise in customary form and covering such financial and accounting
matters as are customarily covered by letters of the independent
certified public accountants delivered in connection with secondary
underwritten public offerings;
(v) if an underwriting agreement is entered into, the same shall set
forth in full the indemnification and contribution provisions and
procedures of Sections 6 and 7 with respect to all parties to be
indemnified pursuant to such sections;
(vi) the Company and the Holders shall deliver such documents and
certificates as may be reasonably requested by the underwriter(s) to
evidence compliance with clause (ii) above and with any customary
conditions contained in the underwriting agreement, if any, or other
agreement entered into by the Company in connection with such
underwritten offering; and
(vii) the Holders shall use their reasonable commercial efforts to
timely prepare and provide all information, documentation and opinions
addressed to the underwriter(s), in form, scope and substance
reasonably satisfactory to counsel to the underwriter(s) as customarily
required in secondary underwritten offerings.
(f) The Company shall make available for inspection during normal
business hours and upon reasonable request by a representative or
representatives of the Holders, the underwriter(s) participating in a
proposed underwritten offering pursuant to a Registration Statement, and
the attorney and/or accountant retained by such Holders or underwriter(s),
customary financial and other records for such purposes, pertinent
corporate documents and properties of the Company, and use its best efforts
to cause the Company's officers, directors and employees to supply
information reasonably and customarily requested in connection with such an
underwritten offering, in the case of an underwriting, and, in any event,
in connection with preparation of such a Registration Statement. The
Holders (and each representative, accountant and counsel thereto) shall
keep all information deemed by the Company to be "non-public" information
which is supplied to the Holders (and any representative, accountant and
counsel thereto) confidential unless and until such information is included
in the Registration Statement filed with the Commission.
3. Expenses of Registration. All Registration Expenses shall be borne by the
Company and all Selling Expenses shall be borne by the Holders.
4. Registration on Form S-3. The Company shall use its best efforts to
qualify under the Securities Act for registration on Form S-3 or any comparable
or successor form or forms.
5. Registration Procedures. In the case of each Registration Statement
(other than a Piggyback Registration Statement) filed by the Company pursuant
to this Registration Rights Agreement, the Company shall keep the Holders
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company shall use its best efforts to:
(a) Keep such Registration Statement continuously effective for the
period ending at the earlier of the following: (i) twenty four (24) months
after the effective date of the Registration Statement (as such time period
is extended pursuant to Section 5A hereof), (ii) the time the Holders have
completed their
E-5
distribution of the Shares; or (iii) the time all of the Registrable
Securities are eligible for distribution to the public by the Holder
pursuant to Rule 144 under the Securities Act (or any similar provision
then in force) (the earliest of (i), (ii) and (iii) being referred to as
the "Effectiveness Time");
(b) Furnish such number of prospectuses, and amendments and supplements
thereto, and other documents incident thereto as any Holder from time to
time may reasonably request;
(c) Prepare and file with the Commission such amendments and post-
effective amendments to the Registration Statement as may be necessary to
keep such Registration Statement effective for the applicable period; cause
the related Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424 under
the Securities Act; and comply with the provisions of the Securities Act
applicable to it with respect to the disposition of all securities covered
by such Registration Statement during the applicable period in accordance
with the intended methods of disposition by the sellers thereof set forth
in such Registration Statement or supplement to such Prospectus;
(d) Promptly notify each Holder of Registrable Securities included in
the Registration Statement, counsel for the Holders and the managing
underwriters, if any, promptly, and (if reasonably requested by any such
Person) confirm such notice (a "Notice") in writing: (i) when a Prospectus
or any Prospectus supplement or post-effective amendment has been filed,
and, with respect to a Registration Statement or any post-effective
amendment, when the same has become effective; (ii) of any request by the
Commission for amendments or supplements to a Registration Statement or
related Prospectus or for additional information; (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that
purposes; (iv) if at any time the representations and warranties of the
Company contained in agreements contemplated by Section 2(d) cease to be
true and correct; (v) of the receipt by the Company of any notification
with respect to the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (vi) of the happening of
any event as a result of which the Prospectus included in the Registration
Statement (as then in effect) contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein (in the case of the Prospectus or
any preliminary Prospectus, in light of the circumstances under which they
were made) not misleading; and (vii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement
would be appropriate or that there exist circumstances not yet disclosed to
the public which make further sales under such Registration Statement
inadvisable pending such disclosure and post-effective amendment;
(e) Upon the occurrence of any event contemplated by Section 5(d)(ii)
through (vii) and immediately upon the expiration of any Blocking Period
(as defined in Section 5A), prepare, if the occurrence of such event or
period requires such preparation, a supplement or post-effective amendment
to the Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so
that the Prospectus thereafter delivered to the purchasers of the
Registrable Securities being sold thereunder will not contain an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements made therein not misleading;
(f) Make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement or the lifting
of any suspension of the qualification of any of the Registrable Securities
for sale in any jurisdiction, at the earliest possible moment;
(g) To the extent applicable or otherwise required to enable the Holders
to resell their Registrable Securities, ensure that the Registrable
Securities subject to the Registration Statement shall be registered or
qualified for offer and sale under the securities or blue sky laws of such
jurisdictions as the Holder(s) or underwriter(s), if any, reasonably
request in writing; use its best efforts to keep each such registration or
qualification effective, including through new filings or amendments or
renewals, during the period such Registration Statement is required to be
kept effective hereunder and do any and all other acts or things reasonably
necessary or advisable (based on the opinion of counsel to the Company or
counsel, reasonably
E-6
acceptable to the Company, of the Holders or the underwriter(s), as the
case may be) to enable the disposition in such jurisdictions of the
Registrable Securities covered by the applicable Registration Statement;
provided, however, that the Company will not be required to qualify to do
business or take any action that would subject it to taxation or general
service of process in any jurisdiction where it is not then so qualified or
subject;
(h) Use its best efforts to cause the Registrable Securities covered by
the Registration Statement to be registered with or approved by the
National Association of Securities Dealers, Inc. as may be necessary to
enable the Holders or the underwriters, if any, to consummate the
disposition of such Registrable Securities in accordance with the chosen
method or methods of distribution; and
(i) Cause all Registrable Securities included in such Registration
Statement to be listed, by the date of first sale of Registrable Securities
pursuant to such Registration Statement, on the Nasdaq National Market, The
Nasdaq SmallCap Market or such other principal securities exchange or
automated interdealer system on which the same class of securities of the
Company are then listed or traded.
5A. Suspensions of Effectiveness.
(a) The Company may suspend dispositions under the Registration Statement
and notify the Holders that they may not sell the Registrable Securities
pursuant to any Registration Statement or Prospectus (a "Blocking Notice") if
the Company's board of directors determines in its reasonable good faith
judgment that the Company's obligation to ensure that such Registration
Statement and Prospectus are current and complete would require the Company to
take actions that might reasonably be expected to have a materially adverse
detrimental effect on the Company and its stockholders; provided that the
Company shall diligently and expeditiously take all actions it reasonably
determines to be necessary or advisable to cause such Registration Statement
and Prospectus to be current and complete and to remove such suspension
pursuant to a Blocking Notice or the Notice described below or as a result of
the circumstances described in Section 5(d)(ii) through (vii). Each Holder
agrees by acquisition of the Registrable Securities that, upon receipt of a
Blocking Notice or "Notice" from the Company of the existence of any fact of
the kind described in the following sentence, such Holder shall not dispose of,
sell or offer for sale the Registrable Securities pursuant to the Registration
Statement until such Holder receives: (i) copies of the supplemented or amended
Prospectus, or until counsel for the Company shall have determined that such
disclosure is not required due to subsequent events; (ii) notice in writing
(the "Advice") from the Company that the use of the Prospectus may be resumed;
and (iii) copies of any additional or supplemental filings that are
incorporated by reference in the Prospectus. Pursuant to the immediately
preceding sentence, the Company may provide such Notice to such Holder upon the
determination by the Company of the existence of any fact or the happening or
any event that makes any statement of a material fact made in the Registration
Statement, the Prospectus, any amendment or supplement thereto, or any document
incorporated by reference therein untrue in any material respect, or that
requires the making of any additions to or changes in the Registration
Statement or the Prospectus, in order to make the statements therein not
misleading in any material respect. If so directed by the Company in connection
with any such notice, each Holder will deliver to the Company (at the Company's
expense) all copies, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Registrable Securities that was
current immediately prior to the time of receipt of such notice.
(b) In the event: (i) the Company shall give any such Blocking Notice or
Notice, pursuant to Section 5A(a) or (ii) the Registration Statement is
suspended (including, but not limited to, suspensions resulting from the
delisting of the Common Stock or a stop order issued by the Commission) or
trading in the Common Stock on the Nasdaq National Market is suspended for a
period of time (excluding disruptions from business announcements that result
in any halt(s) in trading of not more than one day on each occasion) and other
suspension of trading on such market in general (each, a "Blackout Period"),
the time regarding the effectiveness of such Registration Statement set forth
in Section 5(a) and the Maturity Date (as defined in the Certificate) of the
Preferred Stock and the expiration date of the Warrants shall be extended by
one and one-half (1 1/2) times the number of days during the period (i) from
and including the date of the giving of such Blocking Notice or Notice to and
including the date when the Holders shall have received the copies of the
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supplemented or amended Prospectus, the Advice and any additional or
supplemental filings that are incorporated by reference in the Prospectus or
(ii) from and including the date of such suspension to and including the date
when the Registration Statement is declared effective, as applicable. Delivery
of a Blocking Notice or Notice and the related suspension of any Registration
Statement or the occurrence of a Blackout Period shall not constitute a default
under this Registration Rights Agreement and shall not create any obligation to
pay liquidated damages under Section 2 hereof. However, if the Holder's ability
to sell under the Registration Statement is suspended for more than ten
consecutive trading days or for sixty (60) days (whether or not consecutive)
during any twelve (12) month period (an "Excess Blocking Period"), then the
Holders shall have the right to receive a 2.0% reduction in the Conversion
Price (as defined in the Certificate) of the Preferred Stock for each 30-day
period (or part thereof) following the beginning of an Excess Blocking Period
until the Excess Blocking Period terminates. In addition, if the Excess
Blocking Period continues for more than an aggregate of 180 days in any 360-day
period, then at Holder's option, the Company shall redeem Holder's Preferred
Stock at a redemption price equal to 130% of the Aggregate Value thereof,
together with all payments due under this Section and the Agreement.
6. Indemnification.
(a) Company Indemnity. The Company will indemnify each Holder whose
securities are included in a Registration Statement, each of its officers,
directors, managers, members and partners, and each person controlling such
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 Registration Rights Agreement,
and each underwriter, if any, and each person who controls, within the meaning
of Section 15 of the Securities Act and the rules and regulations thereunder,
any underwriter, 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,
offering circular or other document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or arising out of 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 each Holder,
each of its officers, directors and partners, and each person controlling such
Holder, each such underwriter and each person who controls any such
underwriter, 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 solely on any untrue statement or omission (or
alleged untrue statement or omission) that is made in reliance upon and in
conformity with written information furnished to the Company by such Holder or
the underwriter expressly for use therein. The indemnity agreement contained in
this Section 6(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. Each 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, managers, members and partners, and each person
controlling such other Holder within the meaning of Section 15 of the
Securities Act and the rules and regulations thereunder 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 arising out of or based on 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,
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managers, members 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 such Holder expressly for use therein; provided that no Holder shall
be liable under this indemnity for an amount in excess of the net proceeds
received by such Holder from the sale of the Registrable Securities pursuant to
such registration statement. The indemnity agreement contained in this Section
6(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
such 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 the Indemnified Party's expense; 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
Section 6 except to the extent that the Indemnifying Party is materially and
adversely affected by such failure to provide notice. The Indemnifying Party
shall not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) at any time for such Indemnified
Party; provided, however, that if separate firm(s) of attorneys are required
due to a conflict of interest, then the Indemnifying Party shall be liable for
the reasonable fees and expenses of each such separate firm. 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.
7. Contribution. (a) If the indemnification provided for in Section 6 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 on the one hand and the Holder or
underwriters, as the case may be, on the other, in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Holder 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.
(b) The relative benefits received by the Company on the one hand and the
Holders 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
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the initial sale of the Registrable Securities by the Company to the Holders
pursuant to this Registration Rights Agreement bear to the net proceeds
received by the Holders from the sale of Registrable Securities pursuant to the
Registration Statement 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 Holders 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
Holders or by the underwriters.
(c) 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 clauses (a) or (b) of Section 6 hereof had been available under the
circumstances.
(d) The Company and the Holders agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro
rated allocation (even if the Holders or the underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account 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 7, no Holder or
underwriter shall be required to contribute any amount in excess of the amount
by which (i) in the case of such Holder, the total price at which the shares of
Common Stock offered by such Holder and distributed to the public, or offered
to the public, exceed the amount paid by such Holder for the underlying
Preferred Stock converted into such shares of Common Stock, (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 Holders or underwriter have
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.
8. Changes in Common Stock or Preferred Stock. If, and as often as, there is
any change in the Common Stock or Preferred Stock by way of a stock split,
stock dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the Common
Stock or Preferred Stock as so changed.
9. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit
the sale of the Preferred Stock and the Shares to the public without
registration, at all times after ninety (90) days after any registration
statement covering a public offering of securities of the Company under the
Securities Act shall have become effective, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the Commission in a timely manner
all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each Holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of such
Rule 144 and of the Securities 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 by the Company as such holder may reasonably request
in availing itself of any rule or
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regulation of the Commission allowing such Holder to sell any Preferred
Stock or Shares without registration.
10. Rule 416. The Company and the Subscribers each acknowledge that an
indeterminate number of Registrable Securities shall be registered pursuant to
Rule 416 under the Securities Act so as to include in such Registration
Statement any and all Registrable Securities which may become issuable (i) to
prevent dilution resulting from stock splits, stock dividends or similar
transactions and (ii) if permitted by law, by reason of reductions in the
Conversion Price (as defined in the Certificate) of the Preferred Stock in
accordance with the terms of thereof, including, without limitation, the terms
which case the Conversion Period Conversion Price (as defined in the
Certificate) to decrease as the price of the Common Stock decreases
(collectively, the "Rule 416 Securities"). In this regard, the Company agrees
to use all reasonable efforts to ensure that the maximum number of Registrable
Securities which may be registered pursuant to Rule 416 under the Securities
Act are covered by the Registration Statement and, absent guidance from the
Commission or other definitive authority to the contrary, the Company shall use
all reasonable efforts to affirmatively support and not to take any position
adverse to the position that the Registration Statement filed hereunder covers
all of the Rule 416 Securities.
11. Survival. The indemnity and contribution agreements contained in
Sections 6 and 7 and the representations and warranties of the Company referred
to in Section 2(e)(i) shall remain operative and in full force and effect
regardless of (a) any termination of this Registration Rights Agreement or any
underwriting agreement, (b) any investigation made by or on behalf of any
Indemnified Party or by or on behalf of the Company and (c) the consummation of
the sale or successive resales of the Registrable Securities.
12. Information by Holder. Each Holder shall promptly 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 Registration Rights Agreement; provided,
however, each Holder shall be given at least ten (10) days to respond to such
request. All information provided to the Company by such Holder shall be
accurate and complete in all material respects and such Holder shall promptly
notify the Company if any such information becomes incorrect or incomplete. If
such Holder does not timely provide such reasonably requested information, such
Holder shall not be entitled to the liquidated damages contemplated by Section
2(c) to the extent that such delay in the Registration Statement becoming
effective is caused by such failure to timely provide information unless such
Holder shall be able to demonstrate to the Company's satisfaction that such
failure to timely provide did not proportionately contribute to the event
giving rise to the damages obligation.
13. Transfer or Assignment of Registration Rights. The rights granted to the
Subscribers 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 together with any transfer or assignment of the
Registrable Securities, provided that the Company is given written notice by
any applicable 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 agrees in writing to be bound by this
Registration Rights Agreement.
14. Representations and Warranties of the Company. The Company represents
and warrants that there are no agreements, understandings or commitments, oral
or written, between the Company and the holders of its securities pursuant to
which such holders have a right to require the Company to register or qualify
any of its securities under the Securities Act or any applicable state
securities laws.
15. Miscellaneous.
(a) Entire Agreement. This Registration Rights Agreement contains the entire
understanding and agreement of the parties with respect to the subject matter
hereof, and may not be modified or terminated except by a written agreement
signed by the parties.
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(b) Notices. Any notice, demand or request required or permitted to be given
by either the Company or the Holders pursuant to the terms of this Registration
Rights Agreement shall be in writing and shall be deemed given when delivered
personally, by overnight courier service or by facsimile, with a hard copy to
follow by overnight or two day courier, addressed to the other party at the
address of the party set forth at the end of this Registration Rights Agreement
or such other address as a party may request by notifying the other in writing.
Copies of all notices to the Holders or to the Company shall be sent to the
address set forth on Schedule I to the Subscription Agreement or to such other
address as the Holders or the Company, as applicable, may hereafter designate.
(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 shall be governed by and construed and enforced in accordance with
the laws of the State of Delaware, without regard to principles of conflicts of
law or choice of law except for matters arising under the Securities Act or the
Securities Exchange Act of 1934, as amended, which matters shall be construed
and interpreted in accordance with such laws. The Company and the Holders
hereby agree that all actions or proceedings arising directly or indirectly
from or in connection with this Registration Rights Agreement shall be
litigated only in the Supreme Court of the State of Delaware or the United
States District Court of Delaware located in New Castle County, Delaware. The
Company and the Holders consent to the jurisdiction and venue of the foregoing
courts and consent that any process or notice of motion or other application to
either of said courts or a judge thereof may be served inside or outside the
State of Delaware by registered mail, return receipt requested, directed to the
such party at its address set forth in this Registration Rights Agreement (and
service so made shall be deemed complete five (5) days after the same has been
posted as aforesaid) or by personal service or in such other manner as may be
permissible under the rules of said courts. The parties hereto hereby waive any
right to a trial by jury in connection with any litigation.
(e) Severability. Notwithstanding any provision of this Registration Rights
Agreement, neither the Company nor any other party hereto shall be required to
take any action which would be in violation of any applicable law. The
invalidity or unenforceability of any provision of this Registration Rights
Agreement in any jurisdiction shall not affect the validity, legality or
enforceability of any other provision of this Registration Rights Agreement in
such jurisdiction or the validity, legality or enforceability of this
Registration Rights Agreement, including any such provision, in any other
jurisdiction, it being intended that all rights and obligations of the parties
hereunder shall be enforceable to the fullest extent permitted by law.
(f) Further Assurances. Each of the parties hereto shall execute such
documents and other papers and perform such further acts as may be reasonably
required or deemed necessary to carry out the provisions of this Registration
Rights Agreement and the transactions contemplated hereby.
(g) Titles. The titles used in this Registration Rights Agreement are used
for convenience of reference only and are not to be considered in construing or
interpreting this Registration Rights Agreement.
(h) Counterparts. This Registration Rights Agreement may be executed in any
number of counterparts, each of which shall be enforceable against the parties
actually executing such counterparts and all of which together constitute one
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed as of the date first above written.
XCEED, INC.
/s/ Werner Haase
By: _________________________________
Name: Werner Haase
Title: Chief Executive Officer
PECONIC FUND, LTD.
By:Ramius Capital Group, LLC
Its:Investment Advisor
/s/ Jeffrey M. Solomon
By: _________________________________
Name: Jeffrey M. Solomon
Title: Managing Officer
LEONARDO, L.P.
By:Angelo, Gordon & Co., L.P.
Its:General Partner
/s/ Michael L. Gordon
By: _________________________________
Name: Michael L. Gordon
Title: Chief Operating Officer
HTFP INVESTMENT L.L.C.
By:Promethean Asset Management,
L.L.C.
Its:Investment Advisor
/s/ James F. O'Brien, Jr.
By: _________________________________
Name: James F. O'Brien, Jr.
Title: Managing Member
E-13
PROXY
XCEED INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Scott A. Mednick and Werner G. Haase
jointly and individually, as proxies, each with full power of substitution, and
hereby authorizes them to represent and to vote, as directed on the reverse
side, all shares of Common Stock, par value $0.01 per share, of Xceed Inc., a
Delaware corporation (the "Company"), that the undersigned would be entitled to
vote if personally present at the Special Meeting of Stockholders of the Company
to be held on October 5, 2000, or any adjournments thereof, as follows on the
reverse side.
- --------------------------------------------------------------------------------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
[X] Please mark your votes as in this example.
FOR AGAINST ABSTAIN
1. THE APPROVAL OF THE AMENDMENT TO THE COMPANY'S [ ] [ ] [ ]
CERTIFICATE OF INCORPORATION.
2. THE APPROVAL AND RATIFICATION OF THE XCEED INC. [ ] [ ] [ ]
AMENDED AND RESTATED MILLENIUM STOCK OPTION PLAN.
3. THE APPROVAL AND RATIFICATION OF THE ISSUANCE OF [ ] [ ] [ ]
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK,
WARRANTS AND THE FUTURE ISSUANCE OF THE
UNDERLYING COMMON STOCK.
IF NO CONTRARY SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS
ONE, TWO and THREE.
PLEASE MARK, SIGN AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
SIGNATURE(S)_______________________________________DATE __________________
*NOTE: When shares are held by joint tenants, both should sign. Persons signing
as executor, administrator, trustee, etc. should so indicate. Please sign
exactly as the name appears on the proxy.