Exhibit 10.5
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SECURITIES PURCHASE AGREEMENT
AMONG
GRAPHON CORPORATION
AND EACH OF
COREL CORPORATION, COREL CORPORATION LIMITED
AND COREL, INC.
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Dated as of December 18, 1998
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TABLE OF CONTENTS
Page
ARTICLE 1 DEFINITIONS..............................................................1
1.1 Definitions......................................................1
1.2 Accounting Terms; Financial Statements...........................7
ARTICLE 2 PURCHASE AND SALE........................................................7
2.1 Purchase and Sale of Securities..................................7
2.2 Closing .........................................................7
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................7
3.1 Corporate Existence and Power....................................7
3.2 Authorization; No Contravention..................................8
3.3 Governmental Authorization.......................................8
3.4 Binding Effect...................................................8
3.5 Litigation.......................................................8
3.6 Compliance with Laws.............................................8
3.7 Capitalization...................................................8
3.8 No Default or Breach; Contractual Obligations....................9
3.9 Title to Properties.............................................10
3.10 FIRPTA..........................................................10
3.11 Financial Statements............................................10
3.12 Taxes...........................................................10
3.13 No Material Adverse Change......................................11
3.14 Investment Company..............................................11
3.15 Private Offering................................................11
3.16 Labor Relations.................................................11
3.17 Title to Assets.................................................11
3.18 Liabilities.....................................................12
3.19 Intellectual Property...........................................12
3.20 Insurance.......................................................12
3.21 Environmental Matters...........................................12
3.22 Broker's, Finder's or Similar Fees..............................13
3.23 Complete Disclosure.............................................13
3.24 Best Efforts....................................................13
3.25 Private Placement Memorandum....................................13
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS........................13
4.1 Existence and Power.............................................13
4.2 Authorization; No Contravention.................................13
4.3 Governmental Authorization; Third Party Consents................13
4.4 Binding Effect..................................................13
4.5 Purchase for Own Account........................................14
4.6 Restricted Securities...........................................14
4.7 Broker's, Finder's or Similar Fees..............................15
ARTICLE 5 CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE..................15
5.1 Representations and Covenants...................................15
5.2 Secretary's Certificate.........................................15
5.3 Documents.......................................................15
5.4 Warrant.........................................................15
5.5 Purchased Shares................................................15
5.6 Consents and Approvals..........................................16
5.7 Securities Exemption............................................16
5.8 Due Diligence Review............................................16
5.9 Additional Private Placement Closing............................16
5.10 Private Placement Memorandum....................................16
ARTICLE 6 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE....................16
6.1 Representations and Covenants...................................16
6.2 Secretary's Certificate.........................................17
6.3 Documents.......................................................17
6.4 Asset Purchase Agreement........................................17
6.5 Consents and Approvals..........................................17
ARTICLE 7 AFFIRMATIVE COVENANTS...................................................17
7.1 Financial Statements and Other Information......................17
7.2 Reservation of Common Stock.....................................18
7.3 Books and Records...............................................18
7.4 Board of Directors..............................................18
7.5 Issuance of Stock...............................................18
7.6 Market Stand-Off................................................18
7.7 Registration....................................................19
7.8 Preemptive Rights...............................................19
ARTICLE 8 MISCELLANEOUS...........................................................20
8.1 Survival of Representations and Warranties......................20
8.2 Notices.........................................................20
8.3 Successors and Assigns; Third Party Beneficiaries...............21
8.4 Amendment and Waiver............................................21
8.5 Counterparts....................................................21
8.6 Headings........................................................22
8.7 GOVERNING LAW...................................................22
8.8 Severability....................................................22
8.9 Entire Agreement................................................22
8.10 Further Assurances..............................................22
8.11 Arbitration.....................................................22
ARTICLE 9 TERMINATION OF AGREEMENT................................................23
9.1 TERMINATION.....................................................23
9.2 SURVIVAL........................................................23
ARTICLE 10 INDEMNIFICATION........................................................23
10.1 Indemnification by Purchaser....................................23
10.2 Indemnification by Company......................................24
10.3 Notice of Claim.................................................25
10.4 Direct Claims...................................................26
10.5 Third Party Claims..............................................26
10.6 Settlement of Third Party Claims................................26
ARTICLE 11 LIMITATION ON WARRANTY CLAIMS..........................................27
11.1 Limitation on Warranty Claim(s) by Purchaser....................27
11.2 Limitation on Warranty Claim(s) by Company......................27
EXHIBITS
A. Warrant
B. Asset Purchase Agreement
COMPANY DISCLOSURE SCHEDULES
3.5 Litigation
3.8 Defaults or Breaches of Contractual Obligations; Contractual
Obligations
3.13 No Material Adverse Change; Ordinary Course of Business
3.19(b) Intellectual Property
3.19(c) Intellectual Property
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT, dated as of December 18, 1998
(this "Agreement"), among GRAPHON CORPORATION, a California corporation (the
"Company") and COREL CORPORATION, a corporation incorporated under the laws of
Canada, together with its wholly owned subsidiaries, COREL CORPORATION LIMITED,
a corporation incorporated under the laws of the Republic of Ireland, and COREL,
INC., a corporation incorporated under the laws of the State of Delaware
(collectively, the "Purchaser")
WHEREAS, upon the terms and conditions set forth in this
Agreement, the Company proposes to issue and sell to Purchaser (i) an aggregate
of 3,886,503 shares, no par value per share, of Common Stock of the Company (the
"Common Stock") and (ii) a warrant to purchase up to 388,650 shares of Common
Stock pursuant to the terms and conditions of the Warrant to Purchase Common
Stock of GraphOn Corporation, dated the date hereof, attached hereto as EXHIBIT
A (the "Warrant").
WHEREAS, upon the terms and conditions set forth in that
certain asset purchase agreement by and between the Company and the Purchaser,
dated the date hereof, the form of which is attached hereto as EXHIBIT B (the
"Asset Purchase Agreement"), Purchaser shall transfer the Assets (as defined
therein) to the Company and the Company shall assume the Assumed Liabilities (as
defined therein).
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
and adequacy of which hereby is acknowledged, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, and unless the context
requires a different meaning, the following terms have the meanings indicated:
"ADDITIONAL PURCHASED SHARES" has the meaning given in
Section 7.5 of this Agreement.
"AFFILIATE" shall mean any Person who is an "affiliate" as
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.
"AGREEMENT" has the meaning set forth in the recitals to this
Agreement, as the same may be amended, supplemented or modified in accordance
with the terms hereof.
"ARTICLES OF INCORPORATION" means the Articles of
Incorporation of the Company in effect on the Closing Date as the same may be
amended from time to time.
"ASSET PURCHASE AGREEMENT" has the meaning set forth in the
recitals to this Agreement.
"AUDITED FINANCIAL STATEMENTS" has the meaning set forth in
Section 3.11 of this Agreement.
"BOARD OF DIRECTORS" means the Board of Directors of the
Company.
"BUSINESS DAY" means any day other than a Saturday, Sunday or
other day on which commercial banks in the State of California are authorized or
required by law or executive order to close.
"BY-LAWS" means the by-laws of the Company in effect on the
Closing Date, as the same may be amended from time to time.
"CAPITAL LEASE OBLIGATIONS" of any Person shall mean, as of
the date of determination, the obligations of such Person to pay rent or other
amounts under any lease of (or other arrangement conveying the right to use)
real or personal property, or a combination thereof, which obligations are
required to be classified and accounted for as capital leases on a balance sheet
of such Person under GAAP and, for the purposes of this Agreement, the amount of
such obligations at any time shall be the capitalized amount thereof at such
time determined in accordance with GAAP consistently applied.
"CLAIMS" has the meaning set forth in Section 3.5 of this
Agreement.
"CLOSING" has the meaning set forth in Section 2.2 of this
Agreement.
"CLOSING DATE" has the meaning set forth in Section 2.2 of
this Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended, or
any successor thereto.
"COMMISSION" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act.
"COMMON STOCK" has the meaning set forth in the recitals to
this Agreement.
"COMPANY" has the meaning set forth in the recitals to this
Agreement.
"COMPANY DISCLOSURE SCHEDULE" has the meaning set forth in the
first paragraph of Article 3 of this Agreement.
"COMPANY INDEMNITEES" shall the following Persons:
(a) Company;
(b) Company's current and future Affiliates, but
excluding Purchaser;
(c) the respective Representatives of the Persons
referred to in clauses (a) and (b) above; and
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(d) the respective successors and assigns of the
Persons referred to in clauses (a), (b) and (c) above.
"CONDITION OF THE COMPANY" means the assets, properties,
results of operations or financial condition of the Company, taken as a whole.
"CONTINGENT OBLIGATION" means, applied to any Person, any
liability of that Person with respect to any Indebtedness, lease, guaranty,
letter of credit or other similar obligation.
"CONTRACTUAL OBLIGATIONS" means as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other instrument to
which such Person is a party or by which it or any of its property is bound.
"COPYRIGHTS" means any foreign or United States copyright
registrations and applications for registration thereof, and any non-registered
copyrights.
"DAMAGES" shall include any loss, damage, injury, liability,
claim, demand, settlement, judgment, award, fine, penalty, tax, fee (including
reasonable legal fees), charge, costs (including reasonable costs of
investigation) or reasonable expenses of any nature.
"DIRECT CLAIM" has the meaning set forth in Section 10.3 of
this Agreement.
"EMPLOYMENT AGREEMENTS" has the meaning set forth in the
recitals to this Agreement.
"ENVIRONMENTAL LAWS" means federal, state and local laws,
regulations and codes, as well as orders, decrees, judgments or injunctions
issued, promulgated, approved or entered thereunder relating to pollution or
protection of the environment.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"FINANCIAL STATEMENTS" has the meaning set forth in
Section 3.11.
"GAAP" means United States generally accepted accounting
principles consistently applied.
"GOVERNMENTAL AUTHORITY" means the government of any nation,
state, city, locality or other political subdivision thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"INDEBTEDNESS" means, as to any Person, (a) all obligations of
such Person for borrowed money (including, without limitation, reimbursement and
all other obligations with respect to surety bonds, letters of credit and
bankers' acceptances, whether or not matured), (b) all obligations of such
Person evidenced by notes, bonds, debentures or similar instruments,
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(c) all Capital Lease Obligations of such Person, (d) all indebtedness secured
by any Lien (other than Liens in favor of lessors under leases other than leases
included in clause (c)) on any property or asset owned or held by that Person
regardless of whether the indebtedness secured thereby shall have been assumed
by that Person or is non-recourse to the credit of that Person and (e) any
Contingent Obligations of such Person.
"INDEMNIFICATION PERIOD" means the period commencing on the
Closing Date and terminating on the date which is the one year anniversary
thereof.
"INDEMNIFIED PARTY" has the meaning set forth in Section 10.3
of this Agreement.
"INITIAL PUBLIC OFFERING" has the meaning set forth in
Section 7.5 of this Agreement.
"INTELLECTUAL PROPERTY" has the meaning set forth in
Section 3.19 of this Agreement.
"INTERNET ASSETS" means any internet domain names and other
computer user identifiers and any rights in and to sites on the worldwide web,
including rights in and to any text, graphics, audio and video files and html or
other code incorporated in such sites.
"LEGAL PROCEEDING" shall mean any action, suit, litigation,
arbitration proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding), hearing, inquiry, audit, examination or
investigation commenced, brought, conducted or heard by or before, or otherwise
involving any court or other Governmental Authority or any arbitrator or
arbitration panel.
"LIABILITIES" has the meaning set forth in Section 3.18 of
this Agreement.
"LIEN" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority, right or other security interest or similar preferential arrangement
of any kind or nature whatsoever (excluding preferred stock and equity related
preferences).
"MATERIAL CONTRACTUAL OBLIGATION" has the meaning set forth in
Section 3.8 of this Agreement.
"ORDERS" has the meaning set forth in Section 3.2 of this
Agreement.
"PATENTS" means any foreign or United States patents and
patent applications, including any divisions, continuations,
continuations-in-part, substitutions or reissues thereof, whether or not patents
are issued on such applications and whether or not such applications are
modified, withdrawn or resubmitted.
"PERSON" means any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, limited liability company, Governmental Authority or other entity of
any kind, and shall include any successor (by merger or otherwise) of such
entity.
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"PLACEMENT AGENT" has the meaning set forth in Section 3.7 of
this Agreement.
"PURCHASER INDEMNITEE" shall mean the following Persons:
(a) Purchaser;
(b) Purchaser's current and future Affiliates, but
excluding Company;
(c) the respective Representatives of the Persons
referred to in clauses (a) and (b) above; and
(d) the respective successors and assigns of the
Persons referred to in clauses (a), (b) and (c) above.
"PREEMPTIVE RIGHT NOTICE" has the meaning set forth in
Section 7.8(b) of the Agreement.
"PREFERRED STOCK" has the meaning set forth in Section 3.7 of
this Agreement.
"PRIVATE PLACEMENT MEMORANDUM" has the meaning set forth in
Section 3.7 of this Agreement.
"PRO RATA PORTION" has the meaning set forth in Section 7.8(c)
of this Agreement.
"PURCHASED SHARES" has the meaning set forth in Section 2.1 of
this Agreement.
"PURCHASER" has the meaning set forth in the recitals to this
Agreement.
"REGULATIONS" means the Treasury Regulations promulgated under
the Code.
"REPRESENTATIVES" means officers, directors, employees,
agents, legal counsel, accountants, advisors and representatives.
"REQUIREMENTS OF LAW" means, as to any Person, any law,
statute, treaty, rule, regulation, right, privilege, qualification, license or
franchise or determination of an arbitrator or a court or other Governmental
Authority or stock exchange, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its property is
subject or pertaining to any or all of the transactions contemplated or referred
to herein.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
"SELL" has the meaning set forth in Section 7.6 of this
Agreement.
"SOFTWARE" means any computer software programs, source code,
object code, data and documentation.
"STOCK EQUIVALENTS" means any security or obligation which is
by its terms convertible into or exchangeable for shares of Common Stock or
other capital stock or securities
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of the Company, and any option (including options granted pursuant to the Stock
Option Plan), warrant or other subscription or purchase right with respect to
Common Stock or such other capital stock or securities.
"STOCK OPTION PLAN" means the 1998 Stock Option/Stock Issuance
Plan pursuant to which up to an aggregate of 791,500 of the fully diluted shares
of Common Stock outstanding immediately following the Closing are or may be
subject to option grants to certain employees, directors and consultants of the
Company and other Persons approved by the Board of Directors.
"SUBSIDIARIES" means, as of the date hereof, a Person of which
50% or more of the voting power of the outstanding securities or 50% or more of
the outstanding economic equity interest is held, directly or indirectly, by the
Company.
"TAXABLE" has the meaning set forth in Section 3.12 of this
Agreement.
"TAX AUTHORITY" has the meaning set forth in Section 3.12 of
this Agreement.
"TAXES" has the meaning set forth in Section 3.12 of this
Agreement.
"TAX RETURN" has the meaning set forth in Section 3.12 of this
Agreement.
"THIRD PARTY CLAIM" has the meaning set forth in Section 10.3
of this Agreement.
"TRADE SECRETS" means any trade secrets, research records,
processes, procedures, manufacturing formulae, technical know-how, technology,
blue prints, designs, plans, inventions (whether patentable and whether reduced
to practice), invention disclosures and improvements thereto.
"TRADEMARKS" means any foreign or United States trademarks,
service marks, trade dress, trade names, brand names, designs and logos,
corporate names, product or service identifiers, whether registered or
unregistered, and all registrations and applications for registration thereof.
"TRANSACTION DOCUMENTS" means collectively, this Agreement,
the Warrant, and the Asset Purchase Agreement.
"TRANSFER TAXES" has the meaning set forth in Section 3.12 of
this Agreement.
"UNAUDITED FINANCIAL STATEMENTS" has the meaning set forth in
Section 3.11 of this Agreement.
"WARRANT" has the meaning set forth in the recitals to this
Agreement.
"WARRANTY CLAIM" means a claim made by either the Company or
the Purchaser based on or with respect to the inaccuracy or non-performance or
non-fulfillment or breach of any representation, covenant or warranty made by
the other party contained in this Agreement or the Asset Purchase Agreement or
contained in any document or certificate given in order to carry out the
transactions contemplated hereby.
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1.2 ACCOUNTING TERMS; FINANCIAL STATEMENTS. All accounting terms used
herein not expressly defined in this Agreement shall have the respective
meanings given to them in accordance with GAAP.
ARTICLE 2
PURCHASE AND SALE
2.1 PURCHASE AND SALE OF SECURITIES. Subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the
Purchaser, and the Purchaser agrees that it will purchase from the Company, on
the Closing Date, 3,886,503 shares of Common Stock (the "Purchased Shares") and
the Warrant. In consideration of the purchase and sale of the Purchased Shares
and the Warrant, the Company and the Purchaser each agree to execute and deliver
the Asset Purchase Agreement.
2.2 CLOSING . Unless this Agreement shall have been terminated pursuant
to Article 9 and subject to the satisfaction or waiver of the conditions set
forth in Articles 5 and 6, the closing of the sale and purchase of the Purchased
Shares and the Warrant, and the execution and delivery of the Asset Purchase
Agreement (the "Closing") shall take place at the Palo Alto offices of Brobeck
Phleger & Harrison LLP at 10:00 a.m., Pacific Daylight Time, on the Business Day
on which the conditions set forth in Articles 5 and 6 shall be satisfied or
waived in accordance with this Agreement, or at such other time, place and date
that the Company and the Purchaser mutually may agree (the "Closing Date"). On
the Closing Date, the Company shall deliver to the Purchaser (i) a certificate
representing the Purchased Shares and (ii) the Warrant being purchased by such
Purchaser against delivery to the Company by the Purchaser of the Asset Purchase
Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in a disclosure schedule delivered by the
Company to the Purchaser concurrently with the execution hereof (the "Company
Disclosure Schedule") identifying each such exception by a specific reference to
the applicable Section of this Article 3 (it being understood that any exception
identified by reference to one Section of this Article which reasonably is
applicable to another Section of this Article shall be deemed an exception to
such other Section of this Article), the Company represents and warrants to the
Purchaser the following:
3.1 CORPORATE EXISTENCE AND POWER. The Company (a) is a corporation
duly incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, (b) has all requisite power and authority to
own and operate its property, to lease the property it operates as lessee and to
conduct the business in which it currently is engaged, (c) is duly qualified as
a foreign corporation, licensed and in good standing under the laws of each
jurisdiction in which its ownership, lease or operation of property or the
conduct of its business requires such qualification, except to the extent that
the failure to do so would not reasonably be
7
expected to have a material adverse effect on the Condition of the Company and
(d) has the corporate power and authority to execute, deliver and perform its
obligations under this Agreement and each of the other Transaction Documents to
which it is a party.
3.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and
performance by the Company of this Agreement and each of the other Transaction
Documents and the transactions contemplated hereby and thereby (a) have been
duly authorized by all necessary corporate action of the Company, (b) do not
contravene the terms of the Certificate of Incorporation or the By-laws, (c) do
not violate, conflict with or result in any breach or contravention of, or
result in the creation of any material Lien under any Material Contractual
Obligation of the Company or Requirement of Law applicable to the Company and
(d) do not violate any judgment, injunction, writ, award, decree or order
(collectively, "Orders") of any Governmental Authority against, or binding upon,
the Company.
3.3 GOVERNMENTAL AUTHORIZATION. No approval, consent, compliance,
exemption, authorization or other action by, or notice to or filing with any
Governmental Authority or any other person, and no lapse of a waiting period
under a Requirement of Law, is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, the Company of
this Agreement and the other Transaction Documents or the transactions
contemplated hereby and thereby, except for the filing pursuant to Section
25102(f) of the California Corporate Securities Law of 1968, as amended, and the
rules thereunder.
3.4 BINDING EFFECT. This Agreement has been, and as of the Closing Date
each of the other Transaction Documents will have been duly executed and
delivered by the Company, and this Agreement constitutes, and as of the Closing
Date each of the other Transaction Documents will constitute, the legal, valid
and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium or similar laws affecting the enforcement of creditors'
rights generally and by general principles of equity relating to enforceability
(regardless of whether considered in a proceeding at law or in equity).
3.5 LITIGATION. Except as set forth in Section 3.5 of the Company
Disclosure Schedule, there are no actions, suits, proceedings, claims,
complaints, disputes, arbitrations or investigations (collectively, "Claims")
pending at law, in equity, in arbitration or before any Governmental Authority
by or against the Company. No Order has been issued by any court or other
Governmental Authority against the Company purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any of the other
Transaction Documents.
3.6 COMPLIANCE WITH LAWS. The Company is in compliance in all material
respects with all Requirements of Law and all Orders issued by any court or
Governmental Authority against the Company.
3.7 CAPITALIZATION.
(a) On the Closing Date, after giving effect to the
transactions contemplated by this Agreement, the authorized capital stock of the
Company shall consist of (i) 50,000,000 shares of Common Stock, of which
11,895,003 are issued and outstanding, including the
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Purchased Shares, and (ii) 5,000,000 shares of preferred stock, no par value per
share (the "Preferred Stock"), none of which are issued and outstanding, and
Stock Equivalents, including the Warrant but excluding shares of Common Stock
issued or issuable under the Stock Option Plan, exercisable for or convertible
into up to 1,125,000 shares of Common Stock. The Company has reserved 1,916,500
shares of Common Stock for issuance under the Stock Option Plan and pursuant to
the exercise or conversion of issued and outstanding Stock Equivalents,
including the Warrant, as set forth in Section 3.7 of the Company Disclosure
Schedule. The Company has entered into that certain Private Placement
Memorandum, dated September 2, 1998 (with any supplement thereto, the "Private
Placement Memorandum"), with Spencer Trask Securities Incorporated ("the
Placement Agent") regarding the issuance and sale of units, each consisting of
100,000 shares of Common Stock. Pursuant to the Private Placement Memorandum,
the Company has sold 1,000,000 shares of Common Stock and the Company intends to
issue and sell between 1,500,000 and 3,500,000 additional shares of Common Stock
(which stock the Company covenants shall be the only stock issued and sold in
connection with any exercise of the preemptive rights described in clause "iii"
below in connection with the issuance of the Purchased Shares, the Additional
Purchased Shares or the Warrant pursuant to this Agreement) and the Company has
a discretionary option to sell up to 675,000 additional shares of Common Stock
solely to cover over-subscriptions. Other than (i) such Stock Equivalents, (ii)
the requirement that the Placement Agent consent to the sale of any securities
by the Company or any rights to acquire any securities of the Company (except
pursuant to options, warrants, rights or option plans described in the Private
Placement Memorandum) at a price less than $1.00 per share, (iii) the rights
which, for greater certainty, are deemed to be Stock Equivalents granted to each
investor pursuant to the Private Placement Memorandum to purchase pro rata
portions of any securities offered by the Company, including the securities
offered hereby, prior to the issuance of such securities and until such time as
there is the Initial Public Offering, and as contemplated by this Agreement,
there are no options, warrants, conversion privileges, subscription or purchase
rights or other rights presently outstanding to purchase or otherwise acquire
(a) any authorized but unissued, unauthorized or treasury shares of the
Company's capital stock, (b) any Stock Equivalents or (c) other securities of
the Company. The issued and outstanding shares of Common Stock are all duly
authorized, validly issued, fully paid (to the Company's knowledge) and
nonassessable, and were issued in compliance with the registration and
qualification requirements of all applicable federal and state securities laws.
The Purchased Shares, the Warrant and the Additional Purchased Shares are duly
authorized, and when issued and sold pursuant to this Agreement, will be validly
issued, and the Purchased Shares and, if issued, the Additional Purchased
Shares, will be fully paid and nonassessable and, assuming the truth and
accuracy of the Purchaser's representations and warranties contained herein,
will be issued in compliance with the registration and qualification
requirements of all applicable federal and state securities laws. The Company
has no Subsidiaries.
3.8 NO DEFAULT OR BREACH; CONTRACTUAL OBLIGATIONS. Section 3.8 of the
Company Disclosure Schedule lists all of the Contractual Obligations to which
the Company is a party, which involve an outstanding amount in excess of
$100,000 or which are otherwise material to the Condition of the Company (each
of the foregoing, a "Material Contractual Obligation"). The Company has not
received notice of, and is not in default under, any Material Contractual
Obligation. All of such Material Contractual Obligations are valid, subsisting,
in full force and effect and binding upon the Company. The Company has not
received any notice of termination of any Material Contractual Obligation.
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3.9 TITLE TO PROPERTIES. The Company has good, record and marketable
title in fee simple to, or holds interests as lessee under leases in full force
and effect in, all real property used by it in connection with its business or
otherwise owned or leased by it, except for such defects in title as would not,
individually or in the aggregate, have a material adverse effect on the
Condition of the Company.
3.10 FIRPTA. The Company is not a "foreign person" within the meaning
of Section 1445 of the Code.
3.11 FINANCIAL STATEMENTS. The Company has delivered to the Purchaser
the audited consolidated financial statements of the Company (balance sheet and
statements of operation, cash flow and stockholders' equity, together with the
notes thereto) for the fiscal period ended December 31, 1997 (the "Audited
Financial Statements"), and the unaudited consolidated financial statements of
the Company (balance sheet and statement of operations) for the fiscal period
ended September 30, 1998 (the "Unaudited Financial Statements" and, together
with the Audited Financial Statements, the "Financial Statements"). The
Financial Statements have been prepared in accordance with GAAP, applied on a
consistent basis throughout the periods indicated and with each other, except
that the Unaudited Financial Statements do not contain footnotes or year-end
adjustments. The Financial Statements fairly present the financial condition,
operating results and cash flows of the Company as of the respective dates and
for the respective periods indicated in accordance with GAAP, subject in the
case of the Unaudited Financial Statements to normal year-end adjustments.
3.12 TAXES. (a) All material Taxes (as defined below) which have come
due and are required to be paid by the Company through the date hereof have been
paid by or on behalf of the Company or adequately reserved for in accordance
with GAAP on the Financial Statements; (b) all material Tax Returns (as defined
below) required to be filed on or before the date hereof (including all
applicable extensions) by the Company have been timely filed or caused to be
filed and all such Tax Returns are accurate and complete in all material
reports; (c) with respect to all Tax Returns of the Company there is no (i)
claim or other proceeding pending against or with respect to the Company in
respect of any Tax, (ii) deficiency proposed against the Company or (iii) audit
or other examination of any Tax Return of the Company being conducted by a Tax
Authority nor has the Company been notified of any request for such an audit or
examination and (d) all provisions for income and other Tax liabilities of the
Company made in the Financial Statements have been made in accordance with GAAP
consistently applied and all liabilities for Taxes of the Company attributable
to periods prior to or ending on the Closing Date have been accrued on the
Financial Statements in accordance with GAAP. The Company has not elected
pursuant to the Code to be treated as an "S" corporation or a collapsible
corporation pursuant to Section 341(f) or Section 1362(a) of the Code. For
purposes of this Agreement, the following terms have the following meanings:
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any net
income, alternative or add-on minimum tax, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Authority (a "Tax Authority") responsible for the imposition of any
such tax (domestic or foreign); provided, however, that Tax shall not
10
include any Transfer Taxes, (ii) any liability for the payment of any amounts of
the type described in (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any Taxable period and (iii) any
liability for the payment of any amounts of the type described in (i) or (ii) as
a result of any express or implied obligation to indemnify any other person. As
used herein, "Tax Return" shall mean any return, statement, report or form
(including, without limitation,) estimated Tax Returns and reports, withholding
Tax Returns and reports and information reports and returns required to be filed
with respect to Taxes, and "Transfer Taxes" shall mean any state and local
sales, use or other transfer taxes attributable to the sale of the assets to the
Company pursuant to the Asset Purchase Agreement.
3.13 NO MATERIAL ADVERSE CHANGE. Since September 30, 1998, other than
as provided in the Transaction Documents and except as set forth in Section 3.13
of the Company Disclosure Schedule, the Company has not:
(a) incurred any Indebtedness for money borrowed individually
in excess of $50,000 or in excess of $100,000 in the aggregate or otherwise
permitted any of its assets to become subject to any Lien;
(b) entered into any Contractual Obligations or otherwise
sold, leased, transferred or licensed any assets (other than Intellectual
Property) individually in excess of $100,000 or in excess of $200,000 in the
aggregate;
(c) sold, assigned, leased, licensed or transferred any
Intellectual Property (other than the license and sublicense of Intellectual
Property in the ordinary course of business);
(d) changed any of its methods of accounting or accounting
practices in any material respect for financial, accounting or Tax purposes; or
(e) agreed or committed to do any of the things described in
this Section 3.13.
3.14 INVESTMENT COMPANY. The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
3.15 PRIVATE OFFERING. No form of general solicitation or general
advertising was used by the Company or its representatives in connection with
the offer or sale of the Purchased Shares or the Warrant. Assuming the truth and
accuracy of the Purchaser's representations and warranties contained herein, no
registration of the Purchased Shares, the Additional Purchased Shares or the
Warrant pursuant to the provisions of the Securities Act or any state securities
or "blue sky" laws will be required by the offer, sale or issuance of the
Purchased Shares, the Additional Purchased Shares or the Warrant.
3.16 LABOR RELATIONS. The Company is in compliance in all material
respects with all applicable state and federal equal employment opportunity laws
and the Federal Fair Labor Standards Act.
3.17 TITLE TO ASSETS. The Company owns and has good, valid and
marketable title to all properties and
11
assets that are necessary for the conduct of its business, which properties and
assets include the properties and assets reflected as owned by it on the
Financial Statements or so described in the Company Disclosure Schedule
(collectively, the "Assets").
3.18 LIABILITIES. All direct and indirect obligations or liabilities
(the "Liabilities") of the Company which should, in accordance with GAAP, be
disclosed on the Financial Statements or in the footnotes thereto, adequately
are reflected or reserved against on such Financial Statements other than
Liabilities incurred since September 30, 1998 (i) as a result of the
transactions contemplated hereby or (ii) in the ordinary course of business.
3.19 INTELLECTUAL PROPERTY.
(a) The Company is the owner of, or has the license or right
to use, sell (other than off-the shelf software which is commercially available
for retail purchase and used solely on the computers of the Company) or license
(other than off-the shelf software which is commercially available for retail
purchase and used solely on the computers of the Company), all of the
Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets and Software
(collectively, "Intellectual Property") that are used, sold or licensed in
connection with its business as presently conducted free and clear of all Liens.
(b) Section 3.19(b) of the Company Disclosure Schedule sets
forth all of the registered Intellectual Property owned by, and filings and
applications for any of the above filed by, the Company. None of the
Intellectual Property owned by the Company listed on Section 3.19(b) of the
Company Disclosure Schedule is subject to any outstanding Order, and no action,
suit, proceeding, hearing, investigation, charge, complaint, claim or demand is
pending or, to the Company's knowledge, threatened, which challenges the
validity, enforceability, use or ownership of the item.
(c) Except as set forth in Section 3.19(c) of the Company
Disclosure Schedule, the use, sale or license by the Company of the Intellectual
Property currently sold or licensed by the Company to any Person or used by or
licensed to the Company does not infringe upon or otherwise violate any
Intellectual Property rights of others.
(d) No litigation is pending and no Claim has been made
against the Company contesting the right of the Company to sell or license to
any Person or use the Intellectual Property presently sold or licensed to such
Person or used by the Company.
3.20 INSURANCE. The insurance policies held by or on behalf of the
Company are valid and enforceable in accordance with their terms and are in full
force and effect and cover all risks associated with the Company's business that
are customarily insured against in the industry in such amounts as are customary
in the industry.
3.21 ENVIRONMENTAL MATTERS. The Company is in material compliance with
all applicable Environmental Laws. There is no civil, criminal or administrative
judgment, action, suit, demand, claim, hearing, notice of violation,
investigation, proceeding, notice or demand letter pending against the Company
pursuant to Environmental Laws which would reasonably be expected to result in a
fine, penalty or other obligation, cost or expense that would have a material
adverse affect on the Condition of the Company.
12
3.22 BROKER'S, FINDER'S OR SIMILAR FEES. There are no brokerage
commissions, finder's fees or similar fees or commissions payable by the Company
in connection with the transactions contemplated hereby based on any agreement,
arrangement or understanding with the Company or any action taken by any such
Person.
3.23 COMPLETE DISCLOSURE. The copies of all instruments, agreements,
other documents and written information delivered by the Company to the
Purchaser or its counsel are and will be complete in all material respects as of
the date of delivery thereof.
3.24 BEST EFFORTS. The Company shall use its best efforts to effectuate
the transactions contemplated hereby and cause to be fulfilled the conditions to
Closing under this Agreement.
3.25 PRIVATE PLACEMENT MEMORANDUM. The Private Placement Memorandum
does not and will not on the Closing Date contain any untrue statements of a
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstance under which they were made, not
misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
The Purchaser hereby represents and Warrant to the Company as
follows:
4.1 EXISTENCE AND POWER. The Purchaser is a corporation duly organized
and validly existing under the laws of the jurisdiction of its formation and has
the requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement and each of the other Transaction Documents to
which it is a party.
4.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and
performance by the Purchaser of this Agreement and each of the other Transaction
Documents to which it is a party and the transactions contemplated hereby and
thereby (a) have been duly authorized by all necessary action, (b) do not
contravene the terms of such Purchaser's organizational documents or any
amendment thereof, (c) do not violate, conflict with or result in any breach or
contravention of, or the creation of any Lien under, any Contractual Obligation
of such Purchaser or any Requirement of Law applicable to such Purchaser and (d)
do not violate any Order of any Governmental Authority against or binding upon
the Purchaser.
4.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. No approval,
consent, compliance, exemption, authorization or other action by, or notice to,
or filing with any Governmental Authority or any other Person, and no lapse of a
waiting period under any Requirement of Law, is necessary or required in
connection with the execution, delivery or performance by, or enforcement
against, such Purchaser of this Agreement and each of the other Transaction
Documents to which such Purchaser is a party, or the transactions contemplated
hereby and thereby.
4.4 BINDING EFFECT. This Agreement and each of the other Transaction
Documents to which such Purchaser is a party have been duly executed and
delivered by such Purchaser and
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constitute the legal, valid and binding obligations of such Purchaser,
enforceable against it in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer, moratorium or similar laws affecting the enforcement of
creditors' rights generally or by equitable principles relating to
enforceability (regardless of whether considered in a proceeding at law or in
equity).
4.5 PURCHASE FOR OWN ACCOUNT. The Purchased Shares, the Additional
Purchased Shares and the Warrant to be acquired by the Purchaser pursuant to
this Agreement are being or will be acquired for its own account and with no
intention of distributing or reselling such Purchased Shares, Additional
Purchased Shares, the Warrant or any part thereof in any transaction that would
be in violation of the securities laws of the United States of America or any
state, without prejudice, however, to the rights of such Purchaser at all times
to sell or otherwise dispose of all or any part of such Purchased Shares,
Additional Purchased Shares or the Warrant under an effective registration
statement under the Securities Act or under an exemption from such registration
available under the Securities Act, and subject, nevertheless, to the
disposition of such Purchaser's property being at all times within its control.
If such Purchaser should in the future decide to dispose of any of such
Purchased Shares, Additional Purchased Shares or the Warrant such Purchaser
understands and agrees that it may do so only in compliance with the Securities
Act and applicable state securities laws, as then in effect. Such Purchaser
agrees to the imprinting, so long as required by law, of a legend on
certificates representing all of its Purchased Shares and Additional Purchased
Shares and shares of Common Stock issuable upon exercise of the Warrant, as the
case may be, to the following effect:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE
SECURITIES LAWS OF ANY JURISDICTION OF THE UNITED STATES. THE SECURITIES MAY NOT
BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN OPINION OF
COUNSEL TO THE COMPANY OR OTHER COUNSEL REASONABLY SATISFACTORY TO THE COMPANY,
IF REQUESTED BY THE COMPANY, THAT THERE IS AN APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
4.6 RESTRICTED SECURITIES. Such Purchaser understands that the
Purchased Shares, the Additional Purchased Shares and the Warrant will not be
registered at the time of their issuance under the Securities Act for the reason
that the sale provided for in this Agreement is exempt pursuant to Section 4(2)
of the Securities Act and that the reliance of the Company on such exemption is
predicated in part on such Purchaser's representations set forth herein. The
Purchaser represents that it is experienced in evaluating companies such as the
Company, has such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of its investment and has the
ability to suffer the total loss of its investment. The Purchaser further
represents that it has had the opportunity to ask questions of and receive
answers from the Company concerning the terms and conditions of the offering and
to obtain additional information to such Purchaser's satisfaction and is an
"accredited investor" as defined in Rule 501 of Regulation D promulgated under
the Securities Act. The Purchaser also
14
acknowledges that the Company makes no representations or warranties other than
those set forth in this Agreement and the Asset Purchase Agreement.
4.7 BROKER'S, FINDER'S OR SIMILAR FEES. There are no brokerage
commissions, finder's fees or similar fees or commissions payable by the
Purchaser in connection with the transactions contemplated hereby based on any
agreement, arrangement or understanding with the Purchaser or any action taken
by the Purchaser.
ARTICLE 5
CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE
The obligation of the Purchaser to purchase the Purchased
Shares, the Additional Purchased Shares and the Warrant pursuant to this
Agreement, to execute and deliver the Transaction Documents and to perform any
obligations hereunder or thereunder shall be subject to the satisfaction as
determined by, or waiver by, the Purchaser of the following conditions on or
before the Closing Date.
5.1 REPRESENTATIONS AND COVENANTS. The representations and warranties
of the Company contained in this Agreement shall be true in all material
respects (except for any such representations and warranties which are qualified
by their terms by a reference to materiality or material adverse effect, which
representations and warranties as so qualified shall be true and correct in all
respects) on and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date. The Company shall have performed and
complied in all material respects with all covenants and agreements required by
this Agreement to be performed or complied with by the Company on or prior to
the Closing Date.
5.2 SECRETARY'S CERTIFICATE. The Purchaser shall have received a
certificate from the Company, in form and substance satisfactory to the
Purchaser, dated the Closing Date and signed by the Secretary or an Assistant
Secretary of the Company, certifying that the attached copies of resolutions of
the Board of Directors approving this Agreement and each of the other
Transaction Documents, as necessary, to which the Company is a party and the
transactions contemplated hereby and thereby, are all true, complete and correct
and remain unamended and in full force and effect.
5.3 DOCUMENTS. The Purchaser shall have received true, complete and
correct copies of such documents and other materials as it reasonably may
request in connection with or relating to the purchase and sale of the Purchased
Shares and the Warrant and the transactions contemplated hereby.
5.4 WARRANT. The Company shall have duly executed and delivered the
Warrant.
5.5 PURCHASED SHARES. The Company shall be prepared to deliver to the
Purchaser certificates in definitive form representing the Purchased Shares,
registered in the name of such Purchaser.
15
5.6 CONSENTS AND APPROVALS. All consents, exemptions, authorizations or
other actions by, or notices to, or filings with Governmental Authorities and
other Persons in respect of all Requirements of Law and with respect to those
Contractual Obligations of the Company required to be obtained prior to the
Closing Date shall have been obtained and be in full force and effect, and the
Purchaser shall have been furnished with appropriate evidence thereof, as
requested.
5.7 SECURITIES EXEMPTION. The offer and sale of the Purchased Shares,
the Additional Purchased Shares and the Warrant shall be exempt from the
registration requirements of the Securities Act and shall comply with any
Requirements of Law and the registration and/or qualification requirements of
all other applicable state securities laws and Canadian federal or provincial
securities laws.
5.8 DUE DILIGENCE REVIEW. The Purchaser shall have completed and
satisfied itself with respect to its due diligence review of the Company and the
transactions contemplated by the Transaction Documents including all matters
disclosed by the Company herein and therein to its sole satisfaction.
5.9 ADDITIONAL PRIVATE PLACEMENT CLOSING. The Company shall have issued
and received payment for not less than an additional 2,000,000 shares of Common
Stock at a price of $1.00 per share pursuant to the terms of the Private
Placement Memorandum.
5.10 PRIVATE PLACEMENT MEMORANDUM
The Company's shall have delivered to the Purchaser a copy of any
supplement to the Private Placement Memorandum and the Purchaser shall be
satisfied with such supplement in its sole discretion.
ARTICLE 6
CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE
The obligation of the Company to issue and sell the Purchased
Shares and the Warrant pursuant to this Agreement, to execute and deliver the
Transaction Documents and to perform any obligations hereunder or thereunder
shall be subject to the satisfaction as determined by, or waiver by, the Company
of the following conditions on or before the Closing Date:
6.1 REPRESENTATIONS AND COVENANTS. The representations and warranties
of the Purchaser contained in this Agreement shall be true in all material
respects (except for any such representations and warranties which are qualified
by a reference to materiality or material adverse effect, which representations
and warranties as so qualified shall be true and correct in all respects) on and
as of the Closing Date with the same force and effect as though made on and as
of the Closing Date. The Purchaser shall have performed and complied with all
covenants and agreements required by this Agreement to be performed or complied
with by it on or prior to the Closing Date.
16
6.2 SECRETARY'S CERTIFICATE. The Company shall have received a
certificate from the Purchaser, in form and substance satisfactory to the
Company, dated the Closing date and signed by the Secretary or an Assistant
Secretary of the Purchaser, certifying that the attached copies of resolutions
of the Board of Directors of the Purchaser approving this Agreement and each of
the other Transaction Documents, as necessary, to which the Purchaser is a party
and the transactions contemplated hereby or thereby, are all true, complete and
correct and remain unamended and in full force and effect.
6.3 DOCUMENTS. The Company shall have received the complete and collect
copies of such documents and other materials as it reasonably may request in
connection with or relating to the Transaction Documents and the transactions
contemplated hereby.
6.4 ASSET PURCHASE AGREEMENT. The Purchaser shall have duly executed
and delivered the Asset Purchase Agreement.
6.5 CONSENTS AND APPROVALS. All consents, exemptions, authorizations or
other actions by, or notices to, or filings with Governmental Authorities and
other Persons in respect of all Requirements of Law and with respect to any
Contractual Obligations of the Purchaser required to be obtained prior to the
Closing Date shall have been obtained and be in full force and effect, and the
Company shall have been furnished with appropriate evidence thereof, as
requested.
6.6 DUE DILIGENCE REVIEW. The Company shall have completed, and
satisfied itself with respect to, its due diligence review of Purchaser and the
transactions contemplated by the Transaction Documents, including all matters
disclosed by the Purchaser herein and therein, to its sole satisfaction.
ARTICLE 7
AFFIRMATIVE COVENANTS
7.1 FINANCIAL STATEMENTS AND OTHER INFORMATION. Until the date as of
which the Company shall have completed the initial public offering of any of its
equity securities pursuant to an effective registration statement filed under
the Securities Act, the Company shall deliver to the Purchaser, in form and
substance satisfactory to such Purchaser:
(a) As soon as available, but not later than 60 days, if
available, and in any event not later than 75 days after the end of each fiscal
year of the Company, a copy of the audited consolidated balance sheet of the
Company as of the end of such fiscal year and the related statements of
operations and cash flows for such fiscal year, setting forth in each case in
comparative form the figures for the previous year all in reasonable detail, and
accompanied by the opinion of a nationally recognized independent certified
public accounting firm, which report shall state without qualification that such
consolidated financial statements present fairly the consolidated financial
condition as of such date and results of operations and cash flows for the
periods indicated in conformity with GAAP applied on a consistent basis; and
17
(b) Commencing with the fiscal period ending on March 31,
1999, as soon as available, but in any event not later than 45 days after the
end of each of the first three fiscal quarters of each fiscal year, the
consolidated unaudited balance sheet of the Company, and the related statements
of operations and cash flows for such quarter and for the period commencing on
the first day of the fiscal year and ending on the last day of such quarter, all
certified by an appropriate officer of the Company as presenting fairly the
consolidated financial condition as of such date and results of operations and
cash flows for the periods indicated in conformity with GAAP applied on a
consistent basis, subject to normal year-end adjustments and the absence of
footnotes required by GAAP.
7.2 RESERVATION OF COMMON STOCK. From and after the Closing Date, the
Company shall at all times reserve and keep available out of its authorized
shares of Common Stock, solely for the purpose of issuance or delivery of the
Additional Purchased Shares and upon exercise of the Warrant, the maximum number
of shares of Common Stock that may be issuable or deliverable upon such
exercise.
7.3 BOOKS AND RECORDS. The Company shall keep proper books of record
and account, in accordance with GAAP consistently applied.
7.4 BOARD OF DIRECTORS. From and after the Closing Date and until such
time as the Purchaser controls less than 17% of the voting power of the Company,
the Purchaser shall be entitled to appoint one member of the Board of Directors
and the Company shall take such action necessary to ensure such appointment.
Until the date which is two years after the date of the Initial Public Offering,
the Company agrees not to reduce the size of the Board of Directors below six
without Purchaser's prior written consent.
7.5 ISSUANCE OF STOCK. As of the date which is 18 months after the
Closing Date, if the Company has not completed the initial public offering of
any of its equity securities pursuant to an effective registration statement
filed under the Act, including, including without limitation, in connection with
said sale, conveyance or disposal of all or substantially all of its property,
or business or any merger or consolidation with any other entity, in a
transaction or series of related transactions (the "Initial Public Offering"),
the Company shall issue Purchaser an additional 1,607,000 shares of Common Stock
(the "Additional Purchased Shares"), for no additional consideration, subject to
the execution of standard investment representations by Purchaser as set forth
in Section 4 hereof.
7.6 MARKET STAND-OFF. Subject to Section 7.7 hereof, Purchaser hereby
agrees that, during the period commencing on the Closing Date and terminating on
the date which is three years thereafter, it shall not, directly or indirectly,
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) ("Sell") any securities of the
Company held by it at any time during such period; PROVIDED, HOWEVER, that: (i)
Purchaser may Sell up to 2% of the securities of the Company held by it per
fiscal quarter of the Company, on a cumulative basis, beginning in the fiscal
quarter ending March 31, 2000 and (ii) Purchaser may, at all times, Sell
securities of the Company owned by it pursuant to the provisions of Rule 144
promulgated under the Act.
18
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the securities of the Company owned
by Purchaser until the end of such period.
7.7 REGISTRATION. Subject to and subordinate to any registration rights
granted to any investors pursuant to the Private Placement Memorandum, if the
Company in its discretion at any time proposes to register any of its securities
under the Act for sale to the public, whether for its own account or for the
account of other security holders or both (except with respect to registration
statements on Forms S-4 or S-8), each such time it will give written notice to
such effect to the Purchaser at least 30 days prior to such filing. Upon the
written request of the Purchaser, received by the Company within 30 days after
the giving of any such notice by the Company, to register any of its Common
Stock, the Company will cause the Common Stock as to which registration shall
have been so requested to be included in the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
requisite to permit the sale or other disposition by the Purchaser of such
Common Stock so registered. Notwithstanding the foregoing, in the event that any
registration pursuant to this Section 7.7 shall be, in whole or in part, an
underwritten public offering of Common Stock, the number of shares of Common
Stock of the Purchaser to be included in such an underwriting may be reduced if
and to the extent that the managing underwriter shall be of the good faith
opinion that such inclusion would reduce the number of shares to be offered by
the Company. Notwithstanding the foregoing provisions, the Company may withdraw
any registration statement referred to in this Section 7.7 without thereby
incurring any liability to the Purchaser.
7.8 PREEMPTIVE RIGHTS.
(a) Prior to the second anniversary of the Closing Date, the
Company shall not, without the Purchaser's prior written consent, sell any
securities or any rights to acquire any securities of the Company (except
pursuant to any existing options, warrants and rights and option plans described
in the Private Placement Memorandum) at a price less than $1.00 per share.
(b) Subject to Section 7.8(a), the Company shall, until such
time as there is an Initial Public Offering, prior to any issuance by the
Company of any of its securities, offer to the Purchaser, by written notice (the
"Preemptive Right Notice"), the right to purchase the Purchaser's Pro Rata
Portion (as defined below) for cash at an amount equal to the price or other
consideration for which such securities are to be issued; PROVIDED, that the
preemptive rights set forth in this Section 7.8 shall not apply to securities
issued pursuant to the exception described in the parenthetical clause in
Section 7.8(a) and, PROVIDED FURTHER, that such preemptive rights shall not
apply to securities issued by the Company in connection with or in consideration
of (i) any acquisition by the Company of another corporation or entity by
consolidation, merger, purchase of all or substantially all of the assets or
other business combination in which the Company is the surviving entity,
provided such issuance is approved by a majority of the Board of Directors of
the Company or (ii) any equipment or real property lease, loan, credit line,
guaranty of indebtedness or acquisition of assets (other than cash, but
including, without limitation, intellectual property or other intangible
assets).
(c) The Preemptive Right Notice shall describe the securities
that the Company proposes to issue and specify the number, price and payment
terms. The Purchaser
19
shall be entitled to purchase its pro rata portion of such securities ("Pro Rata
Portion"), which shall be the number of securities as is equal to the full
number of securities offered by the Company multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock held by the
Purchaser as of the date of the Preemptive Right Notice and the denominator of
which shall be the aggregate number of shares of Common Stock issued and
outstanding. The Purchaser may accept the Company's offer as to all or part of
its Pro Rata Portion, by written notice thereof given to the Company given
within 30 days after receipt of the Preemptive Right Notice, in which event the
Company shall promptly sell and the Purchaser shall buy, upon the terms
specified, the number of securities agreed to be purchased by the Purchaser.
(d) The Company shall be free at any time prior to 90 days
after the date of the Preemptive Right Notice to offer and sell to any third
party or parties the number of such securities not purchased by the Purchaser at
a price and on payment terms no less favorable to the Company than those
specified in the Preemptive Right Notice. However, if such third party sale or
sales are not consummated within such 90 day period, the Company shall not sell
such securities as shall not have been purchased within such period without
again complying with this Section 7.8.
ARTICLE 8
MISCELLANEOUS
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties made herein shall survive the execution and
delivery of this Agreement until the date which is one year after the date
hereof; PROVIDED, HOWEVER, that such representations and warranties shall not
survive the termination of this Agreement pursuant to Article 9 hereof.
8.2 NOTICES. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopier, courier
service or personal delivery:
(a) if to the Company:
GraphOn Corporation
150 Harrison Avenue
Campbell, CA 96008
Telecopy: (408) 370-5047
Attention: Walt Keller
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Telecopy: (650) 496-2722
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Attention: Thomas A. Bevilacqua
if to Purchaser:
Corel Corporation
Corporate Headquarters
1600 Carling Avenue
Ottawa, Ontario K1Z8R7
Canada
Telecopy: (613) 725-2691
Attention: President
with a copy to:
Legal Department
Telecopy: (613) 725-2691
Attention: Eric J. Smith
All such notices and communications shall be deemed to have
been duly given when delivered by hand, if personally delivered; when delivered
by courier, if delivered by commercial courier service; and five Business Days
after being deposited in the mail, postage prepaid, if mailed; and when receipt
is mechanically acknowledged, if telecopied.
8.3 SUCCESSORS AND ASSIGNS; THIRD PARTY BENEFICIARIES. This Agreement
shall inure to the benefit of and be binding upon the successors and permitted
assigns of the parties hereto. Neither the Company or the Purchaser may assign
any of its rights under this Agreement without the written consent of the other
party hereto. No Person other than the parties hereto and their successors and
permitted assigns is intended to be a beneficiary of this Agreement.
8.4 AMENDMENT AND WAIVER.
(a) No failure or delay on the part of the Company or the
Purchaser in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
Company or the Purchaser at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure by the Company or the Purchaser from the terms of
any provision of this Agreement shall be effective only if it is made or given
in writing and signed by the Company and the Purchaser.
8.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
21
8.6 HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
8.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW OF ANY JURISDICTION.
8.8 SEVERABILITY. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.
8.9 ENTIRE AGREEMENT. This Agreement, together with the Company
Disclosure Schedule, exhibits and schedules hereto and the other Transaction
Documents is intended by the parties as a final expression of their agreement
and intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and therein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein or therein. This
Agreement, together with the exhibits hereto and the other Transaction
Documents, supersede all prior agreements and understandings between the parties
with respect to such subject matter.
8.10 FURTHER ASSURANCES. Each of the parties shall execute such
documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations or other actions by, or
giving any notices to, or making any filings with any Governmental Authority or
any other Person, and otherwise fulfilling, or causing the fulfillment of, the
conditions to Closing set forth in Articles 5 and 6 hereof) as may reasonably be
required or desirable to carry out or to perform the provisions of this
Agreement and to consummate and make effective as promptly as possible the
transactions contemplated by this Agreement.
8.11 ARBITRATION. The parties agree that they shall use all reasonable
efforts to amicably settle disagreements arising from or in connection with this
Agreement. To this effect, following notice of any party to the others of a
disagreement (which shall include any failure to agree upon a matter to be
agreed upon) the parties shall consult and negotiate with one another in good
faith an understanding to reach a just and equitable solution. If those attempts
fail after a period of 15 Business Days from the time the parties have been
notified of the disagreement, then either party may refer the matter to
arbitration. Notwithstanding the foregoing, the parties shall be entitled to
seek injunctive relief or other equitable remedies form any court of competent
jurisdiction. Except where clearly prevented by the issue in dispute, the
parties agree to continue performing their respective obligations under this
Agreement and the other related agreements entered into in connection with this
Agreement while the dispute is being resolved unless and until such obligations
are terminated or expire in accordance with the provisions hereof.
22
ARTICLE 9
TERMINATION OF AGREEMENT
9.1 TERMINATION. This Agreement may be terminated prior to the Closing
as follows:
(a) at any time on or prior to the Closing Date, by mutual
written consent of the Company and the Purchaser;
(b) at the election of the Company or the Purchaser by written
notice to the other parties hereto after 5:00 p.m., California time, on December
31, 1998, if the Closing shall not have occurred, unless such date is extended
by the mutual written consent of the Company and the Purchaser;
(c) at the election of the Company, if there has been a
material breach of any representation, warranty, covenant or agreement on the
part of the Purchaser contained in this Agreement, which breach has not been
cured within 15 Business Days of notice to the Purchaser of such breach; or
(d) at the election of the Purchaser, if there has been a
material breach of any representation, warranty, covenant or agreement on the
part of the Company contained in this Agreement, which breach has not been cured
within 15 Business Days notice to the Company of such breach.
If this Agreement so terminates, it shall become null and void
and have no further force or effect, except as provided in Section 9.2.
9.2 SURVIVAL. If this Agreement is terminated and the transactions
contemplated hereby are not consummated as described above, this Agreement shall
become void and of no further force and effect; except for the provisions of
Article 1 and this Section 9.2; PROVIDED that (a) none of the parties hereto
shall have any liability in respect of a termination of this Agreement pursuant
to Section 9.1(a) or 9.1(b) and (b) nothing shall relieve any of the parties
from liability for actual damages resulting from a termination of this Agreement
pursuant to Section 9.1(c) or 9.1(d); and PROVIDED, FURTHER, that none of the
parties hereto shall have any liability for speculative, indirect, unforeseeable
or consequential damages resulting from any legal action relating to this
Agreement or any termination of this Agreement.
ARTICLE 10
INDEMNIFICATION
10.1 INDEMNIFICATION BY PURCHASER.
(a) From and after Closing during the Indemnification Period,
Purchaser shall hold harmless, defend, indemnify and pay for the defense of each
of the Company Indemnitees from and against, and shall compensate and reimburse
each of the Company Indemnitees for, any Damages which are suffered or incurred
by any of the Company Indemnitees or to which any of the Company Indemnitees may
otherwise become subject (regardless of whether or not such
23
Damages relate to any third-party claim) and which arise from or as a result of,
or are connected with:
(i) any inaccuracy in or breach of any representation
or warranty set forth in Article 4 hereunder or in any certificate delivered by
Purchaser in connection with this Agreement;
(ii) any breach of any covenant or obligation of
Purchaser hereunder;
(iii) any Legal Proceeding resulting from the items
referred to in clause (i) or (ii) above (including any Legal Proceeding
commenced by any Company Indemnitee for the purpose of enforcing any of its
rights under this Section 10.1 if such Company Indemnitee is the prevailing
party in any such Legal Proceeding);
(iv) any third party claim commenced after the
Closing Date which alleges (i) that the Purchased Software (as defined in the
Asset Purchase Agreement), Trademarks (as defined in the Asset Purchase
Agreement), or any other right or property acquired by Purchaser hereunder,
infringe any U.S. or Canadian copyright, trademark, trade secret right, patent
right that has been issued as of the date hereof, or other proprietary right.
The foregoing indemnification does not extend to any claim arising out of a
modification by Purchaser to the Purchased Software to the extent such claim
would not have arisen had such modification not been made or the combination of
any portion of the Purchased Software with any other software or hardware
product.
THE FOREGOING STATES THE ENTIRE LIABILITY AND OBLIGATIONS OF
PURCHASER AND THE EXCLUSIVE REMEDY OF PURCHASER WITH RESPECT
TO ANY ALLEGED INTELLECTUAL PROPERTY INFRINGEMENT BY THE
PURCHASED SOFTWARE.
(b) The obligations of indemnification by the Purchaser
pursuant to Section 10.1(a) are:
(i) subject to the limitations referred to in Section
8.1 with respect to the survival of the representations and warranties by the
Purchaser;
(ii) subject to the provisions of Sections 10.3,
10.4, 10.5 and 10.6; and
(iii) subject to the limitations referred to in
Section 11.2.
10.2 INDEMNIFICATION BY COMPANY.
(a) From and after Closing during the Indemnification Period,
Company shall hold harmless, defend, indemnify and pay for the defense of each
of the Purchaser Indemnitees from and against, and shall compensate and
reimburse each of the Purchaser Indemnitees for, any Damages which are suffered
or incurred by any of the Purchaser Indemnitees or to which any of the Purchaser
Indemnitees may otherwise become subject (regardless of whether or not
24
such Damages relate to any third-party claim) and which arise from or as a
result of, or are connected with:
(i) any inaccuracy in or breach of any representation
or warranty set forth in Article 3 hereunder or in any certificate delivered by
Company in connection with this Agreement;
(ii) any breach of any covenant or obligation of
Company hereunder;
(iii) any Legal Proceeding resulting from the items
referred to in clause (i) or (ii) above (including any Legal Proceeding
commenced by any Purchaser Indemnitee for the purpose of enforcing any of its
rights under this Section 10.2 if such Purchaser Indemnitee is the prevailing
party in any such Legal Proceeding); or
(iv) any third party claim after Closing alleging
that any product developed, marketed or distributed by or on behalf of Company,
excluding the unmodified Purchased Software, infringes any copyright,
trade-mark, confidentiality right, patent or other intellectual property right
of any third party.
(b) The obligations of indemnification by the Company pursuant
to Section 10.2(a) are:
(i) subject to the limitations referred to in Section
8.1 with respect to the survival of the representations and warranties by the
Company;
(ii) subject to the provisions of Sections 10.3,
10.4, 10.5 and 10.6; and
(iii) subject to the limitations referred to in
Section 11.1.
10.3 NOTICE OF CLAIM. If a party entitled to indemnification hereunder
(an "Indemnified Party") becomes aware of a claim or Legal Proceeding in respect
of which indemnification is provided for pursuant to either of Section 10.1 or
10.2, as the case may be, the Indemnified Party shall promptly give written
notice of the claim or Legal Proceeding to the party obligated to indemnify the
Indemnified Party (the "Indemnifying Party"). Such notice shall specify whether
the claim or Legal Proceeding arises as a result of a claim by a Person against
the Indemnified Party (a "Third Party Claim") or whether the claim does not so
arise (a "Direct Claim"), and shall also specify with reasonable particularity
(to the extent that the information is available):
(a) the factual basis for the claim; and
(b) the amount of the claim, if known, the basis
thereof and documentation supporting the same.
If, through the fault of the Indemnified Party, the Indemnifying Party does not
receive notice of any claim or Legal Proceeding in time effectively to contest
the determination of any liability susceptible of being contested, then the
liability of the Indemnifying Party to the Indemnified Party under this Article
shall be
25
reduced by the amount of any losses incurred by the Indemnifying Party resulting
from the Indemnified Party's failure to give such notice on a timely basis.
10.4 DIRECT CLAIMS. In the case of a Direct Claim, the Indemnifying
Party shall have 30 days from receipt of notice of the claim within which to
make such investigation of the claim as the Indemnifying Party considers
necessary or desirable. For the purpose of such investigation, the Indemnified
Party shall make available to the Indemnifying Party the information relied upon
by the Indemnified Party to substantiate the claim, together with all such other
information as the Indemnifying Party may reasonably request, PROVIDED, HOWEVER,
that the Indemnifying Party agrees at all times to maintain the confidentiality
of such information. If both parties agree at or before the expiration of such
30 day period (or any mutually agreed upon extension thereof) to the validity
and amount of such claim, the Indemnifying Party shall immediately pay to the
Indemnified Party the full agreed upon amount of the claim, failing which the
matter shall be referred to binding arbitration in accordance with Section 8.11.
10.5 THIRD PARTY CLAIMS. In the case of a Third Party Claim, the
Indemnifying Party shall have the right, at its expense, to participate in or
assume control of the negotiation, settlement or defense of the claim or Legal
Proceeding and, in such event, the Indemnifying Party shall reimburse the
Indemnified Party for all of the Indemnified Party's out-of-pocket expenses as a
result of such participation or assumption. If the Indemnifying Party elects to
assume such control, the Indemnified Party shall have the right to participate
in the negotiation, settlement or defense of such Third Party Claim and to
retain counsel to act on its behalf, provided that the fees and disbursements of
such counsel shall be paid by the Indemnified Party unless the Indemnifying
Party consents to the retention of such counsel at its expense. If the
Indemnifying Party, having elected to assume such control, thereafter fails to
defend the Third Party Claim within a reasonable time, the Indemnified Party
shall be entitled to assume such control and the Indemnifying Party shall be
bound by the results obtained by the Indemnified Party with respect to such
Third Party Claim and shall solely bear all reasonable expenses associated with
the defense of such Third Party Claim. If either party makes a payment,
resulting in settlement of the Third Party Claim, which precludes a final
determination of the merits of the Third Party Claim and the Indemnified Party
and the Indemnifying Party are unable to agree whether such payment was
unreasonable in the circumstances having regard to the amount and merits of the
Third Party Claim, then such dispute shall be referred to and finally settled by
binding arbitration in accordance with Section 8.11.
10.6 SETTLEMENT OF THIRD PARTY CLAIMS. If the Indemnifying Party fails
to assume control of the defense of any Third Party Claim, the Indemnified Party
shall have the exclusive right to contest, settle or pay the amount claimed and
the Indemnifying Party shall be bound by the results obtained by the Indemnified
Party with respect to such Third Party Claim and shall solely bear all
reasonable expenses associated with the defense of such Third Party Claim.
Whether or not the Indemnifying Party assumes control of the negotiation,
settlement or defense of any Third Party Claim, neither party shall settle any
Third Party Claim without the written consent of the other party, which consent
shall not be unreasonably withheld or delayed; PROVIDED, HOWEVER, that the
liability of such party shall be limited to the proposed settlement amount if
any such consent is not obtained for any reason within a reasonable time after
the request therefor. If the exercise by Company of any of the rights granted to
it pursuant to this Agreement is enjoined or, in Purchaser's reasonable opinion,
is likely to be enjoined due to the
26
type of infringement or misappropriation specified in Section 10.1 above,
without prejudice to the rights and remedies of Company, Purchaser shall upon
request of Company and at Company's expense, provide reasonable cooperation to
Company and its counsel with all necessary technical information related to the
design regarding defense or other resolution of the claim.
ARTICLE 11
LIMITATION ON WARRANTY CLAIMS
11.1 LIMITATION ON WARRANTY CLAIM(S) BY PURCHASER.
(a) The Purchaser shall not be entitled to make a Warranty Claim if the
Purchaser has been advised in writing or otherwise has actual knowledge prior to
Closing of the inaccuracy, non-performance, non-fulfilment or breach which is
the basis for such Warranty Claim and the Purchaser completes the transactions
hereunder notwithstanding such inaccuracy, non-performance, non-fulfilment or
breach.
(b) The amount of any damages which may be claimed by the Purchaser
pursuant to a Warranty Claim shall be calculated to be the cost or loss to the
Purchaser after giving effect to:
(i) any insurance proceeds available to the
Purchaser in relation to the matter which is
the subject of the Warranty Claim, and
(ii) the value of any related, determinable tax
benefits realized, or to be realized within
a two year period following the date of
incurring such cost or loss, by the
Purchaser in relation to the matter which is
the subject of the Warranty Claim.
(c) The Purchaser shall not be entitled to make any Warranty Claim
until such time as the total amount of all Damages (including the Damages
directly arising from such inaccuracy or breach and all other Damages arising
from any other inaccuracies in or breaches of any representations, warranties,
covenants or obligations) that have been directly suffered or incurred by the
Purchaser exceeds $25,000. Notwithstanding the foregoing, in the event the total
amount of all such Damages exceed $25,000, the Company's liability shall include
the initial $25,000 amount. Except in the event of a breach by the Company of
the confidentially provisions set out in Section 8.2 of the Asset Purchase
Agreement (to which the limitation in this section 11.1 shall not apply), the
maximum aggregate liability of the Company in respect of all Warranty Claims by
the Purchaser will be limited to $760,000.
11.2 LIMITATION ON WARRANTY CLAIM(S) BY COMPANY
(a) The Company shall not be entitled to make a Warranty Claim if the
Company has been advised in writing or otherwise has actual knowledge prior to
Closing of the inaccuracy, non-performance, non-fulfilment or breach which is
the basis for such Warranty Claim and the Company completes the transactions
hereunder notwithstanding such inaccuracy, non-performance, non-fulfilment or
breach.
27
(b) The amount of any damages which may be claimed by the Company
pursuant to a Warranty Claim shall be calculated to be the cost or loss to the
Company after giving effect to:
(i) any insurance proceeds available to the
Company in relation to the matter which is
the subject of the Warranty Claim, and
(ii) the value of any related, determinable tax
benefits realized, or to be realized within
a two year period following the date of
incurring such cost or loss, by the Company
in relation to the matter which is the
subject of the Warranty Claim.
(c) The Company shall not be entitled to make any Warranty Claim until
such time as the total amount of all Damages (including the Damages directly
arising from such inaccuracy or breach and all other Damages arising from any
other inaccuracies in or breaches of any representations, warranties, covenants
or obligations) that have been directly suffered or incurred by the Company
exceeds $25,000. Notwithstanding the foregoing, in the event the total amount of
all such Damages exceed $25,000, Purchaser's liability shall include the initial
$25,000 amount. Except in the event of a breach by Purchaser of the
confidentially provisions set out in Section 8.2 of the Asset Purchase Agreement
(to which the limitation in this section 11.2 shall not apply), the maximum
aggregate liability of the Purchaser in respect of all Warranty Claims by the
Company will be limited to $760,000.
28
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective officers hereunto
duly authorized on the date first above written.
GRAPHON CORPORATION
By:
----------------------------------------
Name: Walt Keller
Title: President
COREL CORPORATION
By:
----------------------------------------
Name:
Title:
By:
----------------------------------------
Name:
Title:
COREL CORPORATION LIMITED
By:
----------------------------------------
Name:
Title:
COREL, INC.
By:
----------------------------------------
Name:
Title:
[Signature Page to Securities Purchase Agreement]
EXHIBIT A
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO SUCH SECURITIES OR DELIVERY OF AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH
OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
No. W-1
WARRANT TO PURCHASE COMMON STOCK
OF
GRAPHON CORPORATION (THE "COMPANY")
This warrant (the "Warrant") certifies that, in consideration
of that certain Securities Purchase Agreement, dated December 18, 1998, by and
between the Company and Corel Corporation (including its assignees, the
"Holder") and the transactions contemplated thereby, and for other good and
valuable consideration, the receipt of which hereby is acknowledged, the Holder
is entitled, upon surrender of this Warrant at the principal office of the
Company (or at such other place as the Company shall notify Holder in writing),
to purchase up to 388,650 shares of the Common Stock of the Company (the "Common
Stock") at $1.00 per share (such price, as adjusted from time to time, is herein
referred to as the "Exercise Price"). The shares of Common Stock issuable
pursuant to this Warrant (the "Warrant Shares") shall be subject to adjustment
pursuant to Section 8 hereof.
1. EXERCISE PERIOD. This Warrant is exercisable, in whole or
in part, commencing upon the date hereof and shall remain so exercisable for a
period of 5 years following such date, subject to earlier termination as set
forth in Section 8(b) hereof.
2. EXERCISE OF WARRANT.
(a) The purchase rights represented by this Warrant
are exercisable by the Holder in whole or in part, at any time or from time to
time, during the exercise period hereof as described in Section 1 above. Such
exercise shall be effected by the surrender of this Warrant and the Notice of
Exercise annexed hereto duly completed and executed on behalf of the Holder, at
the office of the Company, upon payment of the Exercise Price in cash or by
check.
A-1
(b) This Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
Warrant Shares issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date. As
promptly as practicable on or after such date, the Company at its expense shall
issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of Warrant Shares issuable upon such
exercise. If such exercise is for less than all of the Warrant Shares, the
Company shall additionally, as promptly as practicable on or after such date, at
its expense, issue and deliver a replacement warrant identical to this Warrant,
except that the number of shares available for exercise shall be reduced by the
number of Warrant Shares exercised.
3. NET ISSUE EXERCISE. In lieu of exercising this Warrant by
paying the Exercise Price in cash or by check, Holder may elect to receive
shares equal to the value of this Warrant (or the portion thereof being
canceled) by surrender of this Warrant at the principal office of the Company,
together with notice of such election, in which event the Company shall issue to
Holder a number of shares of the Common Stock computed using the following
formula:
Where X - The number of shares of Common Stock to be issued to
Holder.
X= (Y)(A-B)
A
Y - The number of shares of Common Stock to be canceled
pursuant to such exercise under this Warrant.
A - The fair market value of one share of Common Stock.
B - Exercise Price (as adjusted to the date of such
calculations).
For purposes of this Section, while the Company is privately
held, the fair market value of one share of the Common Stock shall be the fair
market value of such share as determined in good faith by the Board of Directors
of the Company.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. NO RIGHTS OF SHAREHOLDER. The Holder shall not be entitled
to vote or receive dividends or be deemed the holder of Common Stock or any
other securities of the Company or receive any benefits thereunder, accrued or
otherwise, that may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained herein be construed to confer upon the
Holder, as such, any of the rights of a shareholder of the Company or any right
to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant shall have
A-2
been exercised and the Warrant Shares purchasable upon the exercise hereof shall
have been issued, as provided herein.
6. TRANSFER OF WARRANT.
(a) WARRANT REGISTER. The Company will maintain a
register (the "Warrant Register") containing the names and addresses of the
Holder (or Holders, if any portion of this Warrant is transferred pursuant to
this Section 6). Any Holder of this Warrant or any portion thereof may change
his address as shown on the Warrant Register by written notice to the Company
requesting such change. Any notice or written communication required or
permitted to be given to the Holder may be delivered or given by mail to such
Holder as shown on the Warrant Register and at the address shown on the Warrant
Register. Until this Warrant is transferred on the Warrant Register of the
Company, the Company may treat the Holder as shown on the Warrant Register as
the absolute owner of this Warrant for all purposes, notwithstanding any notice
to the contrary.
(b) NON-TRANSFERABILITY AND NON-NEGOTIABILITY OF
WARRANT. This Warrant may not be transferred or assigned without compliance with
all applicable federal and state securities laws by the transferor and the
transferee (including the delivery of investment representation letters and
legal opinions reasonably satisfactory to the Company).
(c) COMPLIANCE WITH SECURITIES LAWS.
i) PURCHASE ENTIRELY FOR OWN ACCOUNT. The
Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and
the Warrant Shares to be issued upon exercise hereof are being acquired solely
for the Holder's own account and not as a nominee for any other party, and for
investment, and that the Holder will not offer, sell or otherwise dispose of
this Warrant or any Warrant Shares to be issued upon exercise hereof except
under circumstances that will not result in a violation of the Act or any state
securities laws. Upon exercise of this Warrant, the Holder shall, if requested
by the Company, confirm in writing, in a form satisfactory to the Company, that
the Warrant Shares so purchased are being acquired solely for the Holder's own
account and not as a nominee for any other party, for investment, and not with a
view toward distribution or resale.
ii) DISCLOSURE OF INFORMATION. The Holder
believes that it has received all the information it considers necessary or
appropriate with respect to this Warrant. The Holder further represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of this Warrant.
iii) INVESTMENT EXPERIENCE. The Holder is an
investor in securities of companies in the development stage and acknowledges
that it is able to fend for itself, can bear the economic risk of its investment
and has such knowledge and experience in financial or business matters that it
is capable of evaluating the merits and risks of this Warrant. If other than an
individual, the Holder also represents that it has not been organized for the
purpose of acquiring the Warrant.
A-3
iv) ACCREDITED INVESTOR. The Holder is an
"accredited investor" within the meaning of SEC Rule 501 of Regulation D, as
presently in effect and understands the meaning of that term.
v) RESTRICTED SECURITIES. The Holder
understands that this Warrant and the Warrant Shares issuable upon exercise
hereof are "restricted securities" under the federal securities laws inasmuch as
they are being acquired from the Company in a transaction not involving a public
offering and that under such laws and applicable regulations such securities may
be resold without registration under the Act only in certain limited
circumstances. In this connection, the Holder represents that it is familiar
with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
vi) FURTHER LIMITATIONS ON DISPOSITION.
Without in any way limiting the representations set forth in (i) above, the
Holder further agrees not to make any disposition of all or any portion of this
Warrant or any Warrant Shares to be issued upon exercise hereof unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 6, provided and to the extent such sections are then applicable,
and:
(A) there is then in effect a registration
statement under the Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(B) (1) the Holder shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition and
(2) upon request by the Company, the Holder shall have furnished the Company
with an opinion of counsel, satisfactory to the Company, that such disposition
will not require registration of such securities under the Act.
vii) LEGENDS. This Warrant and all Warrant Shares
issued upon exercise hereof may bear one or all of the following legends:
(A) "THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH
SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER, SALE, TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT."
(B) Any legend required under any applicable state
securities laws.
7. RESERVATION OF STOCK. The Company covenants that during the
term this Warrant is exercisable, the Company will reserve from its authorized
and unissued Common Stock a sufficient number of shares to provide for the
issuance of the Warrant Shares upon the exercise of this Warrant and, from time
to time, will take all steps necessary to amend its Articles
A-4
of Incorporation to provide sufficient reserves of shares of Common Stock
issuable upon exercise of this Warrant, to the extent the Company can readily
ascertain the number of shares of Common Stock. The Company further covenants
that all shares that may be issued upon the exercise of rights represented by
this Warrant and payment of the Exercise Price, as set forth herein, shall be
free from all liens and charges in respect of the issue thereof. The Company
agrees that its issuance of this Warrant shall constitute full authority to its
officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for shares of Common Stock upon the
exercise of this Warrant.
8. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.
The number of and kind of securities purchasable upon exercise of this Warrant
and the Exercise Price shall be subject to adjustment from time to time as
follows:
(a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the
Company shall at any time prior to the expiration of this Warrant subdivide its
Common Stock, by split-up or otherwise, or combine its capital stock, or issue
additional securities as a dividend with respect to any shares of its Common
Stock, the number of Warrant Shares issuable upon the exercise of this Warrant
shall forthwith be proportionately increased, in the case of a subdivision or
stock dividend, or proportionately decreased in the case of a combination.
Appropriate adjustments shall also be made to the Exercise Price payable per
share, but the aggregate purchase price payable for the total number of Warrant
Shares purchasable under this Warrant (as adjusted) shall remain the same. Any
adjustment under this Section 8(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective, or as of
the record date of such dividend, or in the event that no record date is fixed,
upon the making of such dividend.
(b) RECLASSIFICATION, REORGANIZATION, MERGER OR SALE. In case
of any reclassification, capital reorganization, change in the capital stock of
the Company (other than as a result of a subdivision, combination or stock
dividend provided for in Section 8(a) above), or any consolidation or merger of
the Company with another corporation, or the sale of all or substantially all of
its assets to another corporation effected in such a way that holders of Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then, as a condition of such reclassification,
reorganization, change, merger or sale, lawful provision shall be made, and duly
executed documents evidencing the same from the Company or its successor shall
be delivered to the Holder, so that the Holder shall have the right at any time
prior to the expiration of this Warrant to purchase, at a total price equal to
that payable upon the exercise of this Warrant, the kind and amount of shares of
stock and other securities and property receivable in connection with such
reclassification, reorganization, change, merger or sale, by a holder of the
same number of shares of capital stock as were purchasable by the Holder
immediately prior to such reclassification, reorganization, change, merger or
sale. In any such case appropriate provisions shall be made with respect to the
rights and interest of the Holder so that the provisions hereof shall thereafter
be applicable with respect to any shares of stock or other securities and
property deliverable upon exercise hereof, and appropriate adjustments shall be
made to the Exercise Price per share payable hereunder, provided the aggregate
purchase price shall remain the same.
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(c) NOTICE OF ADJUSTMENT. When any adjustment is required to
be made in the number or kind of shares purchasable upon exercise of the
Warrant, or in the Exercise Price, the Company promptly shall notify the Holder
of such event and of the number of shares, the adjusted Exercise Price and the
type of securities or property thereafter purchasable upon exercise of the
Warrant.
9. AMENDMENTS.
(a) Any term of this Warrant may be amended only with the written
consent of the Company and the Holder.
(b) No waivers of or exceptions to any term, condition or provision of
this Warrant, in any one or more instances, shall be deemed to be, or construed
as, a further or continuing waiver of any such term, condition or provision.
10. MISCELLANEOUS.
(a) GOVERNING LAW. This Warrant shall be governed by and construed
under the laws of the State of California, excluding that body of law relating
to conflict of laws.
(b) NOTICES. Unless otherwise provided, any notice required or
permitted under this Warrant shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof in the case of the
Company, and on the Warrant Register in the case of the Holder, or at such other
address as such party may designate by ten days' advance written notice to the
other parties.
(c) COUNTERPARTS. This Warrant may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: December 31, 1998 GRAPHON CORPORATION
By:
---------------------------------------
Name: Walt Keller
Title: President
Address: 150 Harrison Avenue
Campbell, CA 96008
ACCEPTED:
COREL CORPORATION
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
Address: Corporate Headquarters
1600 Carling Avenue
Ottawa, Ontario
K1Z8R7
Canada
[SIGNATURE PAGE TO WARRANT TO PURCHASE COMMON STOCK]
NOTICE OF EXERCISE
To: GraphOn Corporation (the "Company")
The undersigned hereby elects to purchase __________ shares of
the Common Stock (or such stock or securities receivable upon the exercise of
the Warrant) at an exercise price per share as set forth in the Warrant.
The undersigned hereby:
______ "Net-exercises" the Warrant.
______ Tenders payment of the aggregate exercise
price in cash, check and/or cancellation of debt.
The undersigned requests that the Company issue a certificate
or certificates representing said shares of the Common Stock (or such stock or
securities receivable upon exercise of the Warrant) of the Company in the name
of the undersigned or in such other name as is specified below:
---------------------------------------
(Print Name)
By its signature below, the undersigned hereby confirms and
acknowledges that the shares of Common Stock issuable upon exercise of the
Warrant (or such stock or securities receivable upon exercise of the Warrant)
are being acquired solely for the account of the undersigned and not as a
nominee for any other party, and for investment, and that the undersigned will
not offer, sell or otherwise dispose of any such shares of Common Stock (or such
stock or securities receivable upon the exercise of the Warrant) except under
circumstances that will not result in a violation of the ____________or any
state securities laws.
Date:
------------------ ---------------------------------------------
(Print Name)
---------------------------------------------
(Signature)
By:
------------------------------------------
(Name and title of signatory, if non-natural
person)
Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned or in such other name as is
specified below:
------------------------------------------
[Name]
------------------------------------------
- ----------------- ------------------------------------------
[Date] [Signature]