EXHIBIT 10.22
SECURITIES PURCHASE AGREEMENT
Securities Purchase Agreement (together with the schedules and exhibits
hereto, this "Agreement"), dated as of February 12, 2004, by and between Auto
Data Network, Inc., a Delaware corporation (the "Company"), and each of the
Persons (as defined below) who has executed a signature page to this Agreement
(each a "Purchaser," and together, the "Purchasers").
W I T N E S S E T H:
WHEREAS, the Company desires to issue and sell to the Purchasers, and the
Purchasers desire to purchase from the Company, the Securities (as such term is
defined below) as set forth below.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements hereinafter contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
intending to be legally bound, the parties hereto hereby agree as follows:
1. Offer and Sale of Securities.
1.1 The Offering. The Company is offering for sale a minimum of 2,105,263
shares (the "Minimum Offering") and a maximum of 3,947,368 shares (the "Maximum
Offering") of its Series B Preferred Stock, par value $0.001 per share (the
"Series B Preferred Stock"). In addition, the Maximum Offering maybe increased
by up to an additional Ten Per Cent (10%) (that is, to an aggregate of 4,342,105
shares of Series B Preferred Stock) by the Company. Furthermore, in order to
satisfy the preemptive rights of the holders of the Company's Series A-1
Preferred Stock and Series A-2 Preferred Stock, the Maximum Offering may be
increased to up to 5,514,474 shares of Series B Preferred Stock; provided, that
whatever number of shares of Series B Preferred Stock in excess of 4,342,105
shares is not utilized to satisfy the preemptive rights of the holders of the
Company's Series A-1 Preferred Stock and Series A-2 Preferred Stock in respect
of the issuance of the Series B Preferred Stock shall be cancelled, retired and
eliminated by the Company from the shares of Series B Preferred Stock, as
applicable, which the Company shall be authorized to issue. Any such shares of
Series B Preferred Stock so cancelled, retired and eliminated shall have the
status of authorized and unissued shares of Preferred Stock issuable in
undesignated Series and may be redesignated and reissued in any series other
than as Series B Preferred Stock. The shares of Series B Preferred Stock which
may be issued upon exercise of preemptive rights by holders of the Company's
Series A-1 Preferred Stock and Series A-2 Preferred Stock are sometimes
hereinafter referred to as the "Preemptive Rights Shares." Each share of Series
B Preferred Stock converts to two shares of Common Stock. For each 5 shares of
Series B Preferred Stock Purchased, investors shall receive 2 warrants in the
form attached hereto as Exhibit D (the "Warrants"), each to purchase a share of
the Company's common stock (the "Common Stock"), at an initial exercise price
equal to $2.50 per share. Warrants will expire five years from the issue date.
Warrants also shall expire, to the extent not previously exercised, if the
closing price of the Company's Common Stock is at or above Four Hundred Per Cent
(400%) of the exercise price for 30 consecutive trading days. The Series B
Preferred Stock have the powers, designations, preferences, rights,
qualifications, limitations and restrictions contained in the Certificate of
Designations of the Series B Preferred Stock, in the form of Exhibit A hereto
(the "Certificate of Designations"). The Series B Preferred Stock and the
Warrants offered hereby, and the underlying shares of Common Stock, are
sometimes referred to herein as the "Securities". The shares of Common Stock
issuable upon conversion of the shares of the Series B Preferred Stock are
sometimes hereinafter referred to herein as the "Conversion Shares". The shares
of Common Stock issuable upon exercise of the Warrants are sometimes hereinafter
referred to herein as the "Warrant Shares". The Purchasers of the Series B
Preferred Stock shall have the benefit of certain registration rights in respect
of the shares of Common Stock underlying the Securities on the terms and
conditions of a Registration Rights Agreement, in the form of Exhibit B hereto
(the "Registration Rights Agreement"). The Company is offering shares of the B
Preferred Stock and the Warrants (the "Offering") for sale only to individuals,
entities or groups, including, without limitation, corporations, limited
liability companies, limited or general partnerships, joint ventures,
associations, joint stock companies, trusts, unincorporated organizations, or
governments or any agencies or political subdivisions thereof (each, a "Person")
who are "accredited investors" (as defined herein). The Company is making the
Offering of the Securities directly through certain of its officers and its
directors, but may engage a placement agent (the "Placement Agent"), and other
registered broker-dealers ("Other Participating Agents") may also place
Securities. In connection with the Offering, the Company will pay to the
Placement Agent and to Other Participating Agents, if any, commissions equal to
10% of the gross sales price of the Series B Preferred Stock sold in the
offering by the applicable Placement Agent or Other Participating Agent. In
addition, the Company will issue to the Placement Agent and Other Participating
Agents, if any, at the final Closing warrants (the "Placement Agent Warrants")
granting to the Placement Agent and Other Participating Agents, if any, the
right to purchase, for the exercise price below, a number of shares of the
Company's common stock equal to the commissions paid to that party in the
offering divided by 1.90. Those warrants shall be exercisable at $1.90/share,
subject to adjustment, commencing one year after the date of issuance and
continuing for five (5) years thereafter, and shall contain a cashless exercise
provision. If the Company designates a managing Placement Agent, that person or
entity may also receive additional compensation of up to 2% of the gross sales
price of the Series B Preferred Stock sold in the offering by other placement
agents participating in the offering and a corresponding percentage of the
Placement Agent Warrants issued to any other placement agent participating in
the Offering. All subscription proceeds in the Offering will be paid at Closing
to the account or accounts specified in Section 1.2 herein, provided that in the
event that a Placement Agent is utilized, the Company will utilize an escrow
agent (the "Escrow Agent") for receipt of funds. All references in this
Agreement to the Escrow Agent shall be deemed to be references to the Company in
the event that there is no third party Escrow Agent.
1.2 Subscription.
Subject to the terms and conditions hereinafter set forth in this
Agreement, each Purchaser hereby offers to purchase, at a price of $3.80 per
share, the number of shares of Series B Preferred Stock set forth beneath each
such Purchaser's name on the signature pages of this Agreement, for an aggregate
purchase price (the "Purchase Price") to be paid by such Purchaser in the amount
set forth on the signature page beneath such Purchaser's name, to such account
or accounts as the Company may specify by written notice to the Purchaser.
1.3 Subscription Procedures. To submit this Subscription, each Purchaser
must deliver (i) this Agreement, including, without limitation, the annexed
Purchaser Questionnaire, both duly completed and executed and (ii) an executed
Registration Rights Agreement to the following address, unless otherwise advised
by the Company:
Auto Data Network, Inc.
712 Fifth Avenue
19th Floor
New York, NY, 10019
Attention: Christopher Glover
(with any questions to be raised with Christopher Glover at (212)
561-1837)
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The Company may accept or reject subscriptions, in whole or in part, or
accept subscriptions for less than the $57,000 minimum subscription, in its sole
discretion. The Company shall notify each Purchaser of the portion, if any, of
such Purchaser's subscription which has been accepted, payment instructions for
the purchase price, including wire transfer instructions and instructions for
delivery of payment by checks, if applicable, and the date upon which the
applicable Closing shall be held and payment must be made. At each applicable
Closing, each Purchaser acquiring Securities at such Closing shall deliver and
pay the applicable purchase price in full for the Securities being purchased by
such Purchaser at such Closing, in the amount of $3.80 for each share of Series
B Preferred Stock for which such Purchaser's subscription has been accepted, in
U.S. dollars, in immediately available funds, in accordance with the payment
instructions contained in the notification to such Purchaser by the Company.
2. Closing.
Upon acceptance of subscriptions for Series B Preferred Stock totaling, at
least $8,000,000 (the "Initial Minimum Offering"), the Company may hold a
closing of the purchase and sale of such Securities (the "Initial Closing"). The
Company may thereafter hold one or more additional closings (each closing,
including the Initial Closing, a "Closing," and the final closing the "Final
Closing") upon the purchase and sale of additional Securities until an aggregate
amount of up to $15,000,000 (the "Maximum Offering") of Series B Preferred Stock
has been sold by the Company; provided, that the Company, at its election, may
increase the Maximum Offering by up to Ten Per Cent (10%); provided, further,
that in order to satisfy the preemptive rights of the holders of the Company's
Series A-1 Preferred Stock and Series A-2 Preferred Stock, the Maximum Offering
may be increased to up to 5,514,474 shares of Series B Preferred Stock. Each
Closing shall be held at such location as the Company may determine. The Final
Closing will take place not later than February 20, 2004, unless the offering
which is the subject of this Agreement is extended by the Company for up to
twenty (20) additional days, which the Company may elect to do in its sole
discretion without notice to investors. Notwithstanding the foregoing, the
Company intends to continue the offering period thereafter for up to 35 days for
the sole purpose of permitting the exercise of preemptive rights by the holders
of the Series A-1 and Series A-2 Preferred Stock. The date of the Initial
Closing will be referred to as the "Initial Closing Date" and the date of the
Final Closing is referred to as the "Final Closing Date." At the Closing with
respect to the subscription by each Purchaser, to the extent the same is
accepted by the Company, the Company will register in the name of each such
Purchaser that number of Securities being purchased by such Purchaser in
accordance with the information on the applicable signature page of this
Agreement.
2.1 Escrow. In the event that the Company engages a Placement Agent for
this Offering, pending each Closing all funds paid in respect of this Agreement
with regard to such Closing shall be deposited in an escrow account (the "Escrow
Account") maintained by the Escrow Agent in accordance with Rule 15c2-4 under
the Exchange Act (as defined herein). The Escrow Account shall not be interest
bearing. If the Company accepts subscriptions for the Securities at or prior to
the Initial Closing Date or the Final Closing Date, as the case may be, then all
subscription proceeds received for subscriptions accepted by the Company prior
to such Closing Date shall be paid over to the Company at each Closing, net of
the Placement Agent fees, if any, and other offering expenses, which shall be
paid to the appropriate parties at each such Closing. If the Company shall not
have received and accepted each Purchaser's subscription, then that subscription
shall be void and all funds paid hereunder by such Purchaser, without deduction
therefrom or interest thereon, shall be promptly returned to such Purchaser.
2.2. Return of Funds. Each Purchaser hereby authorizes and directs the
Escrow Agent to return or direct the return of any funds from the Escrow
Account, without deduction therefrom or interest thereon, to the same account
from which the funds were originally drawn, to the extent that such Purchaser's
subscription is not accepted prior to the termination of the Offering.
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3. Conditions to the Obligations of each Purchaser at Closing.
The obligation of each Purchaser to purchase and pay for the Securities
subscribed for by such Purchaser at the applicable Closing is subject to the
satisfaction on or prior to the Initial Closing Date or the Final Closing Date,
as the case may be, of the following conditions, each of which may be waived by
the applicable Purchaser:
3.1 Opinion of Counsel to the Company. The Placement Agent shall have
received from counsel for the Company, its opinion dated as of the applicable
Closing Date, and addressed to the applicable Purchasers purchasing securities
on such Closing Date), covering the matters attached hereto as Exhibit C.
3.2 Representations and Warranties. The representations and warranties of
the Company contained in this Agreement must be true and correct in all material
respects as of the Closing Date except to the extent that the representations
and warranties relate to an earlier date in which case the representations and
warranties must be true and correct as of the earlier date.
3.3 Performance of Covenants. The Company shall have performed or complied
with in all material respects all covenants and agreements required to be
performed by it on or prior to the applicable Closing pursuant to this
Agreement, including, without limitation, the delivery of certificates
evidencing the Securities issued to the Purchasers at the Closing.
3.4 No Injunctions; etc. No court or governmental injunction, order or
decree prohibiting the purchase and sale of the Securities will be in effect.
There will not be in effect any law, rule or regulation prohibiting or
restricting the sale or requiring any consent or approval of any Person that has
not been obtained to issue and sell the Securities to the Purchasers.
3.5 Closing Documents. At each Closing, the Company shall have delivered
to each applicable Purchaser the following:
(a) a certificate of the President of the Company certifying that the
conditions in Sections 3.2 and 3.3 have been satisfied;
(b) A certificate of the Secretary of the Company, dated as of that
Closing Date, certifying (i) the attached copies of the Certificate of
Incorporation and By-laws of the Company, (ii) the resolutions of the Board of
Directors of the Company (the "Board") authorizing the execution, delivery and
performance of this Agreement and the issuance of the Securities (including, but
not limited to, for purposes of Section 203 of the Delaware General Corporation
Law) and (iii) the incumbency of the officers duly authorized to execute this
Agreement and the other documents contemplated by this Agreement;
(c) a certificate of the Secretary of State of the State of Delaware,
dated as of a recent date (but no more than five business days) prior to the
date of the applicable Closing, to the effect that the Company is in good
standing in the State of Delaware and that all annual reports, if any, have been
filed as required and that all taxes and fees have been paid in connection
therewith;
(d) a copy of the Certificate of Designations certified by the Secretary
of State of the State of Delaware;
(e) a certificate evidencing the Securities purchased by such Purchaser;
and
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(f) a Registration Rights Agreement duly executed by the Company.
3.6 Waivers and Consents. The Company will have obtained all consents and
waivers necessary to execute and deliver this Agreement and all related
documents and agreements and to issue and deliver the Securities, and all
consents and waivers will be in full force and effect.
4. Conditions to the Obligations of the Company at Closing.
The obligation of the Company to issue and sell the Securities to any
Purchaser is subject to the satisfaction on or prior to each Closing Date of the
following conditions, each of which may be waived by the Company:
4.1 Receipt of Purchase Price. The Company shall have received payment in
full in immediately available funds in U.S. dollars of the Purchase Price for
the Securities with respect to which the Company has accepted the Subscription
made by such Purchaser by means of this Agreement.
4.2 Representations and Warranties. The representations and warranties of
the Purchaser contained in this Agreement must be true and correct in all
respects as of the applicable Closing Date.
4.3 Performance of Covenants. The Purchasers will have performed or
complied with in all material respects all covenants and agreements required to
be performed by the Purchasers on or prior to the Closing pursuant to this
Agreement.
4.4 Purchaser Questionnaire. All of the information furnished by such
Purchaser in the confidential purchaser questionnaire accompanying this
Agreement (the "Purchaser Questionnaire") shall have been accurate and complete
in all material respects.
4.5 No Injunctions. No court or governmental injunction, order or decree
prohibiting the purchase or sale of the Securities will be in effect.
4.6 Closing Document. The Purchasers will have delivered to the Company a
Registration Rights Agreement duly executed by the Purchasers.
4.7 Receipt of Minimum Proceeds of Offering of Series B Preferred Stock.
The Company shall have received payment in immediately available funds in U.S.
dollars of the Purchase Price for at least 2,105,263 shares of the Securities.
5. Representations and Warranties of each Purchaser.
Each Purchaser, in order to induce the Company to perform this Agreement,
hereby represents and warrants, severally and not jointly, as follows:
5.1 Due Authorization. Each Purchaser represents for such Purchaser to the
Company that such Purchaser has full power and authority and has taken all
action necessary to authorize such Purchaser to execute, deliver and perform
such Purchaser's obligations under this Agreement. This Agreement is the legal,
valid and binding obligation of such Purchaser in accordance with its terms.
5.2 Accredited Investor. Each Purchaser represents that such Purchaser is
an Accredited Investor as that term is defined in Regulation D promulgated under
the Securities Act of 1933, as amended (the "Securities Act").
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5.3 No Investment Advice. The Company has not made any other
representations or warranties to such Purchaser other than as set forth herein
or incorporated herein by reference with respect to the Company or rendered any
investment advice.
5.4 Investment Experience. Each Purchaser represents that such Purchaser
has not authorized any Person to act as such Purchaser's Purchaser
Representative (as that term is defined in Regulation D of the General Rules and
Regulations under the Securities Act) in connection with this transaction. Such
Purchaser has such knowledge and experience in financial, investment and
business matters that such Purchaser is capable of evaluating the merits and
risks of the prospective investment in the securities of the Company. Such
Purchaser has consulted with such independent legal counsel or other advisers as
such Purchaser has deemed appropriate to assist such Purchaser in evaluating the
proposed investment in the Company.
5.5 Adequate Means. Each Purchaser represents as to such Purchaser that
such Purchaser (i) has adequate means of providing for such Purchaser's current
financial needs and possible contingencies; and (ii) can afford (a) to hold
unregistered securities for an indefinite period of time as required; and (b)
sustain a complete loss of the entire amount of the subscription.
5.6 Access to Information. Each Purchaser represents that such Purchaser
has been afforded the opportunity to ask questions of, and receive answers from
the officers and/or directors of the Company acting on its behalf concerning the
terms and conditions of this transaction and to obtain any additional
information, to the extent that the Company possesses such information or can
acquire it without unreasonable effort or expense, necessary to verify the
accuracy of the information furnished; and has had such opportunity to the
extent such Purchaser considers appropriate in order to permit such Purchaser to
evaluate the merits and risks of an investment in the Company. It is understood
that all documents, records and books pertaining to this investment have been
made available for inspection, and that the books and records of the Company
will be available upon reasonable notice for inspection by investors during
reasonable business hours at its principal place of business. The foregoing
shall in no way be deemed to limit the ability of each Purchaser to rely on the
representations and warranties set forth herein or incorporated herein by
reference.
5.7 No Endorsement. Each Purchaser further acknowledges that the offer and
sale of the Securities has not been passed upon or the merits thereof endorsed
or approved by any state or federal authorities.
5.8 Non-Registered Securities. Each Purchaser acknowledges that the offer
and sale of the Securities have not been registered under the Securities Act or
any state securities laws and the Securities and the underlying shares of Common
Stock may be resold only if registered pursuant to the provisions thereunder or
if an exemption from registration is available. Each Purchaser understands that
the offer and sale of the Securities is intended to be exempt from registration
under the Securities Act, based, in part, upon the representations, warranties
and agreements of such Purchaser contained in this Agreement.
5.9 No Resale. Each Purchaser represents that the Securities being
subscribed for, and the securities underlying the subscription, are being
acquired solely for the account of such Purchaser for such Purchaser's
investment and not with a view to, or for resale in connection with, any
distribution in any jurisdiction where such sale or distribution would be
precluded. By such representation, such Purchaser means that no other Person has
a beneficial interest in the Securities or the securities underlying the
subscription, and that no other Person has furnished or will furnish directly or
indirectly, any part of or guarantee the payment of any part of the
consideration to be paid by such Purchaser to the Company in connection
therewith. Such Purchaser does not intend to dispose of all or any part of the
Securities or the securities underlying the subscription except in compliance
with the provisions of the Securities Act and applicable state securities laws,
and understands that the Securities and the securities underlying the
subscription are being offered pursuant to a specific exemption under the
provisions of the Securities Act, which exemption(s) depends, among other
things, upon the compliance with the provisions of the Securities Act.
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5.10 Legend. Each Purchaser hereby acknowledges and agrees that until
either (i) a registration statement covering the resale of the securities is
effective under the Securities Act and such securities have been disposed of
thereunder, (ii) such Securities are disposed of under Rule 144 and are no
longer required to be legended under Rule 144, or (iii) such Securities are
eligible for sale under Rule 144(k) promulgated under the Securities Act, and,
in either case, the holder properly requests that the legend be removed in
accordance therewith, the Company may insert the following or similar legend on
the face of the certificates evidencing the Securities purchased by such
Purchaser and the shares of Common Stock issued upon the conversion or exercise
thereof, as the case may be, if required in compliance with the Securities Act
or state securities laws:
"These securities have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws and
may not be sold or otherwise transferred or disposed of except pursuant to
an effective registration statement under the Securities Act and any
applicable state securities laws, or an opinion of counsel satisfactory to
counsel to the issuer that an exemption from registration under the
Securities Act and any applicable state securities laws is available."
5.11 Broker's or Finder's Commissions. Other than the Placement Agent (as
placement agent on behalf of the Company) or any Other Participating Agent, if
any, no finder, broker, agent, financial person or other intermediary has acted
on behalf of any Purchaser in connection with the sale of the Securities by the
Company or the consummation of this Agreement or any of the transactions
contemplated hereby.
Each Purchaser certifies that each of the foregoing representations and
warranties by such Purchaser set forth in this Section 5 are true as of the date
hereof and shall survive such date.
6. Representations and Warranties of the Company.
The Company represents and warrants to the Purchasers as follows as of
each applicable Closing, each such representation and warranty being made
subject to such disclosures as are made pursuant to this Agreement or any
schedule or exhibit delivered in connection herewith at the applicable Closing,
and the consummation of additional Closings as contemplated by this Agreement:
6.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has full corporate power and authority to
own and hold its properties and to conduct its business. The Company is duly
licensed or qualified to do business, and in good standing, in each jurisdiction
in which the nature of its business requires licensing, qualification or good
standing, except for any failure to be so licensed or qualified or in good
standing that would not have a material adverse effect on the Company or its
results of operations, assets, business or financial condition or on its ability
to perform its obligations under this Agreement or to issue the Securities (a
"Material Adverse Effect").
6.2 Capitalization. As of January 20, 2004, the authorized capital stock
of the Company consists of 50,000,000 shares of Common Stock and 25,000,000
shares of Preferred Stock, par value $0.001 per share (the "Preferred Stock").
As of January 20, 2004, (i) 23,248,850 shares of Common Stock were issued and
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outstanding, (ii) no shares of Common Stock were reserved for issuance upon
exercise of outstanding options issued to certain officers of the Company, (iii)
except as set forth below in respect of certain recent negotiations, no shares
of Common Stock were reserved for issuance upon exercise of outstanding options
issued to persons other than officers of the Company, (iv) 2,905,100 shares of
Series A-1 Preferred Stock and Series A-2 Preferred Stock, in the aggregate,
were issued and outstanding, and (vi) the Company is offering up to 3,947,368
shares (up to 4,342,105 shares if the Company exercises an overallotment
election) of its Series B Preferred Stock (and up to 5,514,474 shares of Series
B Preferred Stock, in the aggregate, if the maximum number of Preemptive Rights
Shares which may be issued in connection with this Offering are included), and
no other shares of Preferred Stock were issued or outstanding. All the
outstanding shares of Common Stock have been duly authorized and validly issued
and are fully paid and nonassessable and free of preemptive rights created by or
through the Company, and have been issued in compliance with all federal and
state securities laws, and were not issued in violation of any preemptive rights
or similar rights to subscribe for or purchase securities. Except set forth
prior to the date hereof in the Commission Documents (as defined below) or in
this Section 6.2 or in or pursuant to this Agreement, there are no other
options, warrants (other than the Placement Agent Warrants being issued to the
placement agents in connection with the Offering) or other rights, convertible
debt, agreements, arrangements or commitments of any character obligating the
Company to issue or sell any shares of capital stock of or other equity
interests in the Company. The Company has an obligation to issue 500,000 shares
as contingent consideration for the acquisition of County Services Limited
within thirty (30) days of approval of the Company's audited financial
statements for the fiscal year ended February 28, 2004. The Company currently
has 1,331,000 warrants outstanding exercisable at $1.25. The Company is not
obligated to retire, redeem, repurchase or otherwise reacquire any of its
capital stock or other securities except for the Company's obligations to redeem
its Series A-1 Preferred Stock and its Series A-2 Preferred Stock under the
terms thereof. Except as disclosed in the Commission Documents or in or pursuant
to this Agreement, there are no stockholders agreements, voting agreements or
other similar agreements with respect to the Common Stock to which the Company
is a party. Except as disclosed in or pursuant to this Agreement or the
Commission Documents, the Company does not directly or indirectly own or have
any investment in any of the capital stock of, or any other proprietary interest
in, any Person. The Company has not adopted a stockholders rights plan, poison
pill or similar arrangement. The consummation of the transactions contemplated
by this Agreement will not accelerate the vesting schedule of any of the
Company's outstanding options or warrants.
6.3 Corporate Power, Authorization; Enforceability. The Company has full
corporate power and authority to execute, deliver and enter into this Agreement,
the Certificate of Designations, the Warrants included in the Securities, and
the Registration Rights Agreement (collectively, the "Transaction Documents")
and to consummate the transactions contemplated hereby and thereby. Except as
contemplated by this Agreement, including the next two succeeding sentences, all
action on the part of the Company, its directors or stockholders necessary for
the authorization, execution, delivery and performance of the Transaction
Documents by the Company, the authorization, sale, issuance and delivery of the
Securities contemplated hereby and the performance of the Company's obligations
hereunder and thereunder has been taken. The Company has set aside sufficient
Securities to satisfy the exercise of preemptive rights of holders of Series A-1
and Series A-2 Preferred Stock during the thirty (30) day period following the
final Closing, but the Company has not given those holders, pursuant to Section
10 of the Series A-1 and Series A-2 Certificate of Designations, thirty (30)
days notice prior to the Initial Closing and the opportunity to exercise their
preemptive rights prior to the Initial Closing. The Company is seeking consents
and/or waivers to permit the Company to furnish preemptive rights to the holders
of the Series A-1 and Series A-2 Preferred Stock in the manner it intends as
described in this Section. These circumstances, concerning the exercise of
preemptive rights by the holders of the Series A-1 and Series A-2 Preferred
Stock, are sometimes hereinafter referred to as the "PREEMPTIVE RIGHTS
CIRCUMSTANCES". Subject to the foregoing, the Securities to be purchased on each
the Closing Date, the Conversion Shares issuable upon the conversion of the
Series B Preferred Stock and the Warrant Shares issuable upon exercise of the
Warrants have been duly authorized and, when issued in accordance with this
Agreement, the Certificate of Designations or the Warrants, as the case may be,
will be validly issued, fully paid and nonassessable and will be free and clear
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of any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance,
lien (statutory or other) or preference, priority, right or other security
interest or preferential arrangement of any kind or nature whatsoever (excluding
preferred stock and equity related preferences) (collectively, "Liens") imposed
by or through the Company other than restrictions imposed by this Agreement, the
Certificate of Designations, and the Registration Rights Agreement, as the case
may be, and applicable securities laws. Except as referenced in this Section
6.3, no preemptive or other rights to subscribe for or purchase equity
securities of the Company exists with respect to the issuance and sale of the
Securities or the shares of Common Stock issuable upon conversion of the Series
B Preferred Stock. The Transaction Documents have been duly executed and
delivered by the Company, and 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).
6.4 Financial Statements and Commission Filings; Undisclosed Liabilities.
(a) Included in the Company's Form 10-KSB/A for the year ended February 28, 2003
(the "2003 10-KSB") are true and complete copies of the audited consolidated
balance sheet (the "2003 Balance Sheet") of the Company as of February 28, 2003,
and the related audited income statement and cash flow for the period then ended
(the "Financial Statements"), accompanied by the report of each of Frank Hanson
CPA. As of their respective dates, the Financial Statements complied as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the Securities and Exchange Commission (the
"Commission") with respect thereto. The Financial Statements have been prepared
in accordance with U.S. generally accepted accounting principles ("GAAP"),
consistently applied, during the periods involved (except in the case of
unaudited interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects the
consolidated financial position of the Company as of the dates thereof and the
results of its operations and cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal year-end audit adjustments). The
Company keeps proper accounting records in which all material assets and
liabilities and all material transactions of the Company are recorded in
conformity with GAAP.
(b) Since February 28, 2003, the Company has filed all reports, schedules,
forms, statements and other documents required to be filed by it with the
Commission pursuant to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") (all of the foregoing, including, but
not limited to, the 2003 10-KSB, filed prior to the date hereof and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the
"Commission Documents") and all such Commission Documents were filed within the
time periods specified in the Exchange Act. As of their respective filing dates,
each Commission Document complied in all material respects with the requirements
of the Securities Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder applicable to the Commission Documents,
and no Commission Document contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein. As of their respective filing dates, the financial
statements of the Company included in the Commission Documents complied as to
form in all material respects with then applicable accounting requirements and
with the published rules and regulations of the Commission with respect thereto,
were prepared in accordance with GAAP and as of their respective dates, fairly
presented in all material respects the consolidated financial position of the
Company and the results of its operations as of the time and for the periods
indicated therein (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form 10-QSB, and Regulations
S-B and S-X of the Commission).
9
(c) Since February 28, 2003, the Company has not incurred any liabilities
or obligations of any nature, whether or not accrued, absolute, contingent or
otherwise ("Liabilities"), other than liabilities (i) disclosed in the
Commission Documents filed prior to the date of this Agreement, (ii) adequately
provided for in the Balance Sheet or disclosed in any related notes thereto,
(iii) incurred in connection with this Agreement, or (iv) incurred in the
ordinary course of business, in each case other than such liabilities or
obligations which do not have a Material Adverse Effect.
6.5 No Material Adverse Changes. Since February 28, 2003, except as
disclosed in the Commission Documents filed subsequent to that date, there has
not been any material adverse change in the business, financial condition or
operating results of the Company.
6.6 Absence of Certain Developments. Except as contemplated in or pursuant
to this Agreement and as contemplated by the Commission Documents, since
February 28, 2003, through the date immediately preceding each Closing Date, the
Company has not (a) issued any stock, options, bonds or other corporate
securities other than as reflected in Section 6.2 hereof, (b) borrowed any
amount or incurred or became subject to any Liabilities (absolute, accrued or
contingent), other than current Liabilities incurred in the ordinary course of
business and Liabilities under contracts entered into in the ordinary course of
business, (c) discharged or satisfied any material Lien or adverse claim or paid
any obligation or Liability (absolute, accrued or contingent), other than
current Liabilities shown on the Balance Sheet and current Liabilities incurred
in the ordinary course of business, (d) declared or made any payment or
distribution of cash or other property to the stockholders of the Company or
purchased or redeemed any securities of the Company, (e) mortgaged, pledged or
subjected to any material Lien or adverse claim any of its properties or assets,
except for Liens for taxes not yet due and payable or otherwise in the ordinary
course of business, (f) sold, assigned or transferred any of its assets,
tangible or intangible, except in the ordinary course of business or in an
amount less than $250,000, (g) suffered any extraordinary losses or waived any
rights of material value other than in the ordinary course of business, (h) made
any capital expenditures or commitments therefor other than in the ordinary
course of business or in an amount less than $250,000, (i) entered into any
other transaction other than in the ordinary course of business in an amount
less than $250,000 or entered into any material transaction, whether or not in
the ordinary course of business, (j) made any charitable contributions or
pledges, (k) suffered any damages, destruction or casualty loss, whether or not
covered by insurance, affecting any of the properties or assets of the Company
or any other properties or assets of the Company which could, individually or in
the aggregate, have or result in a Material Adverse Effect, (l) made any
material change in the nature or operations of the business of the Company, (m)
participated in any transaction that would have a Material Adverse Effect or
otherwise acted outside the ordinary course of business, (n) the Company has not
increased the compensation of any of its officers or the rate of pay of any of
its employees, except as part of regular compensation increases in the ordinary
course of business, (o) entered into any agreement or commitment to do any of
the foregoing.
6.7 No Conflict; Governmental Consents. (a) The execution and delivery by
the Company of the Transaction Documents and the consummation of the
transactions contemplated hereby and thereby will not (i) except with respect to
the Preemptive Rights Circumstances, if change is not consented to or rights
waived prior to the Initial Closing, result in the violation of any provision of
the Certificate of Incorporation or By-laws or other organizational documents of
the Company, (ii) result in any violation of any law, statute, rule, regulation,
order, writ, injunction, judgment or decree of any court or Governmental
Authority to or by which the Company is bound, or (iii) except with respect to
the Preemptive Rights Circumstances, if change is not consented to or rights
waived prior to the Initial Closing, conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute (with due notice
or lapse of time or both) a default under, any bond, debenture, note or other
evidence of indebtedness, or any material lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which the Company is a party or by which it or its property is bound, nor result
in the creation or imposition of any Lien upon any of the properties or assets
of the Company, except for, in the case of clauses (ii) and (iii) of this
subsection 6.7(a), any violation, conflict, breach or default which would not
have a Material Adverse Effect.
10
(b) No material consent, approval, license, permit, order or authorization
of, or registration, declaration or filing with, any court, administrative
agency or commission or other Governmental Authority or Person, and no lapse of
any waiting period under any Requirements of Law, remains to be obtained (or
lapsed) or is otherwise required to be obtained by the Company in connection
with the authorization, execution and delivery of the Transaction Documents or
the consummation of the transactions contemplated hereby or thereby, including,
without limitation the issue and sale of the Securities and the shares of Common
Stock underlying such Securities, except except with respect to the Preemptive
Rights Circumstances, if change is not consented to or rights waived prior to
the Initial Closing, with (i) the Commission, (ii) the National Association of
Securities Dealers, Inc. ("NASD"), or (iii) state blue sky or other securities
regulatory authorities. For purposes of this Agreement, "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 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 (each, a "Governmental
Authority") or stock exchange, in each case applicable 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.
6.8 Litigation. Except as set forth in the Commission Documents or as
disclosed in or pursuant to this Agreement, there are no claims, actions, suits,
investigations or proceedings pending or, to the Company's knowledge, threatened
proceedings against the Company or its respective assets, at law or in equity,
by or before any Governmental Authority, or by or on behalf of any third party,
except for any claim, action, suit, investigation or proceeding which would not
have a Material Adverse Effect nor does the Company have knowledge that there is
any reasonable basis for any of the foregoing. There are no claims, actions,
suits, investigations or proceedings pending or, to the Company's knowledge,
threatened proceedings against the Company contesting the right of the Company
to use, sell, import, license, or make available to any Person any of the
Company's products or services currently or previously sold, offered, licensed
or made available to any Person or used by the Company or opposing or attempting
to cancel any of the Company's Intellectual Property rights, except for any
claim, action, suit, investigation or proceeding which would not have a Material
Adverse Effect.
6.9 Compliance with Laws; No Default or Violation; Contracts. Except as
set forth in the Commission Documents or as disclosed in or pursuant to this
Agreement, 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 in all material respects. To the Company's knowledge, there
is no existing or currently proposed Requirement of Law which could reasonably
be expected to prohibit or restrict the Company from, or otherwise materially
adversely affect the Company in, conducting its business in any jurisdiction in
which it now conducts or proposes to conduct such business. The Company has all
material licenses, permits and approvals of any Governmental Authority
(collectively, "Permits") that are necessary for the conduct of the business of
the Company; (ii) such Permits are in full force and effect; and (iii) no
violations are or have been recorded in respect of any Permit. No material
expenditure is presently required by the Company to comply with any existing
Requirements of Law or order. Except disclosed in or pursuant to this Agreement
or as would not be reasonably expected to have a Material Adverse Effect, the
Company is not (i) in default under or in violation of any indenture, loan or
credit agreement or any other agreement or instrument to which it is a party of
by which it or any of its properties is bound or (ii) in violation of any order,
decree or judgment of any court, arbitrator or other Governmental Authority. The
contracts described in the Commission Documents or incorporated by reference
11
therein that are material to the Company (collectively, the "Contractual
Obligations") are in full force and effect on the date hereof, and neither the
Company nor, to the Company's knowledge, any other party to such contracts is in
breach of or default under any of such contracts nor, to the Company's
knowledge, does any condition exist that with notice or lapse of time or both
would constitute a default by such other party thereunder, except with respect
to the Preemptive Rights Circumstances, if change is not consented to or rights
waived prior to the Initial Closing,. Except as disclosed in or pursuant to this
Agrement, the Company has not received notice of a default and is not in default
under, or with respect to, any Contractual Obligation nor, to the Company's
knowledge, does any condition exist that with notice or lapse of time or both
would constitute a default thereunder. All of such Contractual Obligations are
valid, subsisting, in full force and effect and binding upon the Company and, to
the Company's knowledge, the other parties thereto, and the Company has paid in
full or accrued all amounts due thereunder and has satisfied in full or provided
for all of its liabilities and obligations thereunder.
6.10 Insurance. The Company maintains and will continue to maintain
insurance of the types and in the amounts that the Company reasonably believes
is adequate for its business, including, but not limited to, insurance covering
all real and personal property owned or leased by the Company against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against by similarly situated companies, all of which insurance is in full force
and effect.
6.11 Environmental Matters. The Company is in compliance, in all material
respects, 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 or, to the
Company's knowledge, threatened against the Company pursuant to Environmental
Laws. To the Company's knowledge, there are no past or present events,
conditions, circumstances, activities, practices, incidents, agreements, actions
or plans which could reasonably be expected to prevent compliance with, or which
have given rise to or will give rise to liability which would have a Material
Adverse Effect, under Environmental Laws. For purposes of the foregoing,
"Environmental Laws" means federal, state, local and foreign laws, principles of
common laws, civil laws, regulations, and codes, as well as orders, decrees,
judgments or injunctions, issued, promulgated, approved or entered thereunder
relating to pollution, protection of the environment or public health and
safety.
6.12 Taxes. The Company has paid or caused to be paid, or has established
reserves in accordance with GAAP for all Tax liabilities applicable to the
Company for all fiscal years that have not been examined and reported on by the
taxing authorities (or closed by applicable statutes). No additional Tax
assessment against the Company has been heretofore proposed or, to the Company's
knowledge, threatened by any Governmental Authority for which provision has not
been made on its balance sheet.
No tax audit is currently in progress and there is no unassessed
deficiency proposed or, to the Company's knowledge, threatened against the
Company. The Company has no knowledge of any change in the rates or basis of
assessment of any Tax (other than federal income tax), of the Company which
would reasonably be expected to have a Material Adverse Effect. The Company has
not agreed to or is required to make any adjustments under section 481 of the
Code by reason of a change of accounting method or otherwise. None of the assets
of the Company is required to be treated as being owned by any Person, other
than the Company or any of its subsidiaries, pursuant to the "safe harbor"
leasing provisions of Section 168(f)(8) of the Code. The company is not a
"United States real property holding corporation" (a "USRPHC") as that term is
defined in Section 897(c)(2) of the Code and the regulations promulgated
thereunder.
12
For purposes of this Agreement, "Code" means the Internal Revenue Code of
1986, as amended, and "Taxes" means any federal, state, provincial, county,
local, foreign and other taxes (including, without limitation, income, profits,
windfall profits, alternative, minimum, accumulated earnings, personal holding
company, capital stock, premium, estimated, excise, sales, use, occupancy, gross
receipts, franchise, ad valorem, severance, capital levy, production, transfer,
withholding, employment, unemployment compensation, payroll and property taxes,
import duties and other governmental charges and assessments), whether or not
measured in whole or in part by net income, and including deficiencies,
interest, additions to tax or interest, and penalties with respect thereto, and
including expenses associated with contesting any proposed adjustments related
to any of the foregoing.
6.13 Intellectual Property.
(a) "Intellectual Property" shall mean all of the following as they are
necessary in connection with the business of the Company as presently conducted
and as they exist in all jurisdictions throughout the world, in each case, to
the extent owned by or licensed to the Company: (i) patents, patent applications
and inventions, designs and improvements described and claimed therein,
patentable inventions and other patent rights (including any divisions,
continuations, continuations-in-part, reissues, reexaminations, or interferences
thereof, whether or not patents are issued on any such applications and whether
or not any such applications are modified, withdrawn, or resubmitted)
("Patents"); (ii) trademarks, service marks, trade dress, trade names, brand
names, designs, logos, or corporate names, whether registered or unregistered,
and all registrations and applications for registration thereof ("Trademarks");
(iii) copyrights and mask works, including all renewals and extensions thereof,
copyright registrations and applications for registration thereof, and
non-registered copyrights ("Copyrights"); (iv) trade secrets, inventions,
know-how, process technology, databases, confidential business information,
customer lists, technical data and other proprietary information and rights
("Trade Secrets"); (v) computer software programs, including, without
limitation, all source code, object code, and documentation related thereto
("Software"); (vi) Internet addresses, domain names, web sites, web pages and
similar rights and items ("Internet Assets"); and (vii) all licenses,
sublicenses and other agreements or permissions including the right to receive
royalties, or any other consideration related to the property described in
(i)-(vi). The Intellectual Property contains all of the intellectual property
necessary to operate the business of the Company as currently conducted.
(b) The Company exclusively owns (or otherwise has the right to use the
Intellectual Property pursuant to a valid license, sublicense or other
agreement), free and clear of all Liens, and has the unrestricted right (subject
to any such license terms, if applicable) to use, sell, license, or sublicense
all Intellectual Property.
(c) [Intentionally omitted]
(d) As used in this Agreement, the term "IP LICENSES" means all material
licenses, sublicenses, distributor agreements and other agreements or
permissions under which the Company is a (i) licensor, or (ii) licensee,
distributor, or reseller, except such licenses, sublicenses and other agreements
relating to off-the-shelf software which is commercially available on a retail
basis for less than $500 per license and $25,000 in the aggregate and used
solely on the computers of the Company ("OFF-THE-SHELF SOFTWARE"). To the
knowledge of the Company, all of the IP Licenses are valid, enforceable, and in
full force and effect, and, with respect to the Company, will continue to be on
identical terms immediately following the completion of the transactions
contemplated by this Agreement.
(e) All products made, used or sold by the Company under the Patents have
been marked with the proper patent notice.
13
(f) All products and materials made, used or sold by the Company
containing Trademarks bear the proper federal registration notice where
permitted by law.
(g) All works encompassed by the Copyrights and used by the Company have
been marked with the proper copyright notice.
(h) To the Company's knowledge, upon reasonable inquiry in accordance with
sound business practice and business judgment, all the Company's Intellectual
Property rights are valid and enforceable. The Company has taken all reasonably
necessary actions to maintain and protect each item of Intellectual Property
owned by the Company.
(i) The Company has taken all reasonable precautions to protect the
secrecy, confidentiality, and value of its Trade Secrets and the proprietary
nature and value of its Intellectual Property. To the best of the Company's
knowledge, none of the Trade Secrets, wherever located, the value of which is
contingent upon maintenance of confidentiality thereof, have been disclosed to
any employee, representative or agent of the Company or any other person not
obligated to maintain such Trade Secret in confidence pursuant to a
confidentiality agreement entered into with the Company, except as required
pursuant to the filing of a patent application by the Company.
(j) The Company is diligently prosecuting all Patent applications it has
filed, as instructed by patent counsel. The Company is diligently filing and
preparing to file Patent applications for all inventions in a manner and within
a sufficient time period to avoid statutory disqualification of any potential
Patent application.
(k) [intentionally omitted].
(l) Unless otherwise disclosed by the Company or pursuant to a current
license, it is not necessary for the Company's business to use any Intellectual
Property owned by any present or past director, officer, employee or consultant
of the Company (or persons the Company presently intends to hire). To the
knowledge of the Company, at no time during the conception or reduction to
practice of any of the Company's Intellectual Property was any developer,
inventor or other contributor to such Intellectual Property operating under any
grants from any Governmental Authority or subject to any employment agreement,
invention and assignment, nondisclosure agreement or other Contractual
Obligation with any Person that could adversely affect the Company's rights to
its Intellectual Property.
(m) To the knowledge of the Company, upon reasonable inquiry in accordance
with sound business practice and business judgment, none of the Intellectual
Property, products or services owned, used, developed, provided, sold or
licensed by the Company, or made for, used or sold by or licensed to the Company
by any person infringes upon or otherwise violates any Intellectual Property
rights of others.
(n) To the knowledge of the Company, upon reasonable inquiry in accordance
with sound business practice and business judgment, no Person is infringing upon
or otherwise violating the Intellectual Property rights of the Company.
6.14 Employee Benefit Plans.
(a) Neither the Company nor any entity which is or was under common
control within the meaning of Section 414(b), (c), (m) or (o) of the Code
maintains or contributes to, or has within the preceding six years maintained or
contributed to, or may have any liability with respect to any employee benefit
14
plan subject to Title IV of Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 412 of the Code or any "multiple employer plan"
within the meaning of the Code or ERISA. Each employee benefit plan,
arrangement, policy, program, agreement or commitment which the Company
maintains, contributes to or may have any liability in respect to (each, a
"Plan") has been established and administered in accordance with its terms, and
complies in form and in operation with the applicable requirements of ERISA, the
Code and other applicable Requirements of Law. No claim with respect to the
administration or the investment of the assets of any Plan (other than routine
claims for benefits) is pending. No event has occurred in connection with which
the Company or any Plan, directly or indirectly, could be subject to any
material liability under ERISA, the Code or any other law, regulation or
governmental order applicable to any Plan, or under any agreement, instrument,
statute, rule of law or regulation pursuant to or under which the Company has
agreed to indemnify any person against liability incurred under, or for a
violation or failure to satisfy the requirement of, any such statute, regulation
or order. The Company has no liability, whether absolute or contingent,
including any obligations under any Plan, with respect to any misclassification
of any person as an independent contractor rather than as an employee.
(b) The Company does not have any obligations to provide or any direct or
indirect liability, whether contingent or otherwise, with respect to the
provision of health or death benefits to or in respect of any former employee,
except as may be required pursuant to Section 4980B of the Code and the
corresponding provisions of ERISA and the cost of which are fully paid by such
former employees.
(c) There are no unfunded obligations under any Plan which are not fully
reflected on the Financial Statements.
6.15 Investment Company. The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for an
investment company, within the meaning of the Investment Company Act of 1940, as
amended.
6.16 Compliance. The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act, and is quoted on the OTC Bulletin Board, and the Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or terminating the
quotation of the Common Stock from the OTC Bulletin Board. The Company has not
taken and will not, in violation of applicable law, take, any action designed to
or that might reasonably be expected to cause or result in unlawful manipulation
of the price of the Common Stock to facilitate the sale or resale of the
Securities.
6.17 Private Offerings. Assuming the truth of each Purchaser's
representations and acknowledgments contained in Section 5 hereof, neither the
Company nor any Person acting on its behalf (other than the Purchasers, as to
whom the Company makes no representations) has offered or sold the Securities by
means of any general solicitation or general advertising within the meaning of
Rule 502(c) under the Securities Act. The Company has not sold the Securities to
anyone other than the subscribers to this Agreement. Each Security shall bear
substantially the same legend set forth in Section 8 hereof for at least so long
as required by the Securities Act.
6.18 Broker's or Finder's Commissions. Other than the Placement Agent (as
placement agent on behalf of the Company) or any Other Participating Agent, no
finder, broker, agent, financial person or other intermediary has acted on
behalf of the Company in connection with the sale of the Securities by the
Company or the consummation of this Agreement or any of the transactions
contemplated hereby. The Company has not had any direct or indirect contact with
any other investment banking firm (or similar firm) with respect to the offer of
the Securities by the Company to the Purchasers or the Purchasers' subscriptions
for the Securities.
15
6.19 Disclosure. The Transaction Documents do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained herein or therein, in the light of the
circumstances under which they were made, not misleading. The Company does not
have any knowledge of any fact that has specific application to the Company
(other than general economic or industry conditions) and that can reasonably be
foreseen to cause a Material Adverse Effect that has not been set forth in the
Transaction Documents or the Commission Documents.
The Company certifies that each of the foregoing representations and
warranties by the Company sets forth in this Section 6 are true as of the date
hereof and shall survive such date as contemplated in Section 7.1.
7. Indemnification.
7.1 The Company agrees to indemnify and hold harmless the Purchasers,
their affiliates and each of their respective directors, officers, general and
limited partners, principals, agents and attorneys (individually, an
"Indemnified Party" and collectively, the "Indemnified Parties") from and
against any and all losses, claims, damages, Liabilities, costs (including
reasonable attorneys' fees) and expenses (collectively, "Losses") to which any
Indemnified Party may become subject, insofar as such Losses arise out of, in
any way relate to, or result from (i) any breach of any representation or
warranty made by the Company contained in or made pursuant to this Agreement, or
(ii) the failure of the Company to fulfill any agreement or covenant contained
in or made pursuant to this Agreement. All of the representations and warranties
of the Company made herein shall survive the execution and delivery of this
Agreement until the date that is ninety (90) days after the filing by the
Company with the Commission of audited financial statements of the Company for
the fiscal year ending February 28, 2004 (or, if such fiscal year changes and no
such audited consolidated financial statements are available, then the successor
fiscal year), except for (a) Sections 6.1 (Organization, Good Standing and
Qualification), 6.2 (Capitalization), 6.3 (Corporate Power, Authorization;
Enforceability), 6.18 (Private Offerings) and 6.19 (Broker's or Finder's
Commission), which representations and warranties shall survive indefinitely (or
if indefinite survival is not permitted by law, then for the maximum period
permitted by applicable law), (b) Section 6.12 (Taxes), which representation and
warranty shall survive until the later to occur of (i) the lapse of the statute
of limitations with respect to the assessment of any tax to which such
representation and warranty relates (including any extensions or waivers
thereof) and (ii) sixty (60) days after the final administrative or judicial
determination of the Taxes to which such representation and warranty relates,
and no claim with respect to Section 6.12 may be asserted thereafter with the
exception of claims arising out of any fact, circumstance, action or proceeding
to which the party asserting such claim shall have given notice to the other
parties to this Agreement prior to the termination of such period of reasonable
belief that a tax liability will subsequently arise therefrom, and (c) Section
6.11 (Environmental Matters), which representation and warranty shall survive
until the lapse of the applicable statute of limitations. Except as set forth
herein, all of the covenants, agreements and obligations of the parties hereto
shall survive the Closing indefinitely (or if indefinite survival is not
permitted by law, then for the maximum period permitted by applicable law).
7.2 Promptly after receipt by an Indemnified Party under Section 7.1 of
notice of any claim as to which indemnity may be sought, including, without
limitation, the commencement of any action or proceeding, the Indemnified Party
will, if a claim in respect thereof may be made against the indemnifying party
under this Section, promptly notify the indemnifying party in writing of the
commencement thereof; provided that the failure of the Indemnified Party to so
notify the indemnifying party will not relieve the indemnifying party from its
obligations under this Section unless, and only to the extent that, such
16
omission results in the indemnifying party's forfeiture of substantive rights or
defenses or being materially prejudiced by the Indemnified Person's failure to
give such notice. In case any action or proceeding is brought against any
Indemnified Party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to assume the defense thereof
at its own expense, with counsel satisfactory to such Indemnified Party in its
reasonable approval (which approval will not be withheld or delayed
unreasonably); provided, however, that any Indemnified Party may, at its own
expense, retain separate counsel to participate in such defense at its own
expense. After notice from the indemnifying party to the Indemnified Party of
its election to so assume the defense thereof, the indemnifying party will not
be Liable to the Indemnified Party under that Section 7 for any legal or any
other expenses subsequently incurred by the Indemnified Party in connection with
the defense thereof (other than reasonable costs of investigation) unless
incurred at the written request of the indemnifying party. Notwithstanding the
above, the Indemnified Party will have the right to employ counsel of its own
choice in any action or proceeding (and be reimbursed by the indemnifying party
for the reasonable fees and expenses of the counsel and other reasonable costs
of the defense) if, in the written opinion of such Indemnified Party's counsel,
representation of the Indemnified Party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests or conflicts between the Indemnified Party and any other party
represented by the counsel in the action; provided, however, that the
indemnifying party will not in connection with any one action or proceeding or
separate but substantially similar actions or proceedings arising out of the
same general allegations, be Liable for the reasonable fees and expenses of more
than one separate firm of attorneys at any time for all Indemnified Parties,
except to the extent that local counsel, in addition to regular counsel, is
required in order to effectively defend against the action or proceeding. An
indemnifying party will not be Liable to any Indemnified Party for any
settlement or entry of judgment concerning any action or proceeding effected
without the consent of the indemnifying party, which consent shall not be
unreasonably withheld. The indemnifying party agrees that it will not, without
the prior written consent of the Indemnified Party, settle, compromise or
consent to the entry of any judgment in any pending or threatened claim relating
to the matters contemplated hereby (if any Indemnified Party is a party thereto
or has been actually threatened to be made a party thereto) unless such
settlement, compromise or consent includes an unconditional release of each
Indemnified Party from all liability arising or that may arise out of such
claim. The rights accorded to an Indemnified Party hereunder shall be in
addition to any rights that any Indemnified Party may have at common law, by
separate agreement or otherwise; provided, however, that notwithstanding the
foregoing or anything to the contrary contained in this Agreement, (a) nothing
in this Section 7 shall restrict or limit any rights that any Indemnified Party
may have to seek equitable relief and (b) this Section 7 shall be the sole
remedy for any breach of the Company's representations and warranties contained
in Section 6 except with respect to claims arising out of fraud or willful
misconduct.
8. Covenants.
8.1 Use of Proceeds. The Company will use the proceeds from this Offering
to pay for shares in DCS Automotive Limited, on substantially the same terms as
disclosed in the letter of intent. In the event that the Company elects to
increase the maximum amount of the Offering by up to Ten Percent (10%), as it
may do at its sole election, or if the Company obtains additional proceeds from
the exercise of preemptive rights as disclosed in this Agreement, the additional
proceeds will be used for working capital, including, without limitation, for
such acquisitions as the Company may hereafter consider from time to time.
8.2 Business Development. As soon as practicable after the Closing, the
Company shall use commercially reasonable efforts to: (a) create and implement
an annual budget, approved by the Board, (b) hire additional personnel where
necessary; and (c) obtain appropriate product liability insurance to 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.
8.3 [intentionally omitted].
17
8.4 Conduct of the Company's Business. Except as contemplated by this
Agreement, during the period from the date hereof to the Closing Date, the
Company will conduct its business and operations solely in the ordinary course
of business consistent with past practice and use reasonable commercial efforts
to keep available the services of its officers and employees and preserve its
current relationships with customers, suppliers, licensors, creditors and others
having business dealings with it.
8.5 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto will use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement at the earliest
practicable date.
8.7 Tax Matters.
(a) The Company covenants that it will use commercially reasonable efforts
not to become a USRPHC at any time while any Purchaser owns any of the
Securities.
(b) In the event that a Purchaser desires to sell or dispose of any of the
Securities or Conversion Stock as permitted under this Agreement and applicable
law, and upon demand by such Purchaser, the Company agrees to deliver to such
Purchaser a letter (the "Letter") which complies with Sections 1.1445-2(c)(3)
and 1.897-2(h) of the Treasury Regulations, addressed to such Purchaser, stating
whether or not the Company is a USRPHC. The Letter shall be delivered to the
Purchaser one business day prior to the close of any sale or disposition of the
Securities or Conversion Stock by the Purchaser (the "Delivery Date"). The
Letter shall be dated as of the Delivery Date and signed by a corporate officer
who must verify under penalties of perjury that the statement is correct to his
knowledge and belief pursuant to Section 1.897-2(h) of the Treasury Regulations.
8.8 Furnishing of Information. As long as any Purchaser owns Securities,
the Company covenants that it will use its commercially reasonable best efforts
to timely file (or obtain extensions in respect thereof and file within the
applicable grace period) all reports required to be filed by the Company after
the date hereof pursuant to the Exchange Act. As long as any Purchaser owns
Securities, if the Company is not required to file reports pursuant to such
laws, it will use its commercially reasonable best efforts to prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144.
8.9 Non-Public Information. The Company represents and warrants that
neither it nor, to the best of its knowledge, any other Person acting on its
behalf, has provided any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information. The Company understands and
acknowledges that each Purchaser is relying on the foregoing representations in
effecting transactions in securities of the Company.
8.10 Legend Removal
(a) The Company agrees that certificates evidencing the Conversion Shares
and the Warrant Shares shall not contain any legend not required by then
applicable securities laws (including judicial interpretations and
pronouncements issued by the Staff of the Commission) or provided for under
Section 5.10 of this Agreement. Consequently, in respect of any certificates
which contain a legend which is no longer so required, the Company will use its
best efforts to cause the legend permitted under Section 5.10 of this Agreement
to be removed and deliver or cause to be delivered to such Purchaser a
certificate representing such Securities free from such restrictive legend
within five (5) business days following proper delivery by such Purchaser to the
Company's transfer agent of a certificate representing the Conversion Shares or
the Warrant Shares, as the case may be, unless the failure to deliver such
certificate in a timely manner is a result of force majeure. The Company may not
make any notations on its records or give instructions to any transfer agent of
the Company that enlarge the restrictions on transfer set forth in this Section
except in accordance with applicable laws and regulations, if any.
18
(b) The Company agrees that, unless otherwise required under then
applicable securities laws (including judicial interpretations and
pronouncements issued by the Staff of the Commission), in the event that a
registration statement covering the resale of Conversion Shares and/or Warrant
Shares is declared effective by the Commission and during the period during
which such registration statement is effective, in order to facilitate the
resale of the shares covered by such registration statement the Company will use
its best efforts to cause the Company's transfer agent to deliver to each holder
of such shares covered by such registration statement a certificate or
certificates not containing the restrictive legend referenced in the preceding
paragraph on the terms and conditions set forth in the next succeeding sentence.
The Company will use its best efforts to cause the transfer agent to deliver
such replacement certificate or certificates within five (5) business days
following proper delivery by the applicable Purchaser to the Company's transfer
agent of the certificate or certificates evidencing the applicable Conversion
Shares and/or Warrant Shares
(c) In order to induce the Company to remove legends as provided in
Section 8.10(b), each Purchaser, severally, agrees that the removal of the
restrictive legend from certificates representing Securities as set forth in
Section 8.10 is predicated upon the Company's reliance that the Purchaser will
sell any Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements, or an
exemption therefrom.
9. FOR RESIDENTS OF ALL STATES: NEITHER THE SECURITIES OFFERED HEREBY OR
THE SECURITIES INTO WHICH SUCH SECURITIES MAY BE CONVERTED HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE
REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE SECURITIES ARE SUBJECT
TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION
OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
10. No Waiver.
Notwithstanding any of the representations, warranties, acknowledgments or
agreements made herein by the Purchasers, the Purchasers do not thereby or in
any manner waive any rights granted to the Purchasers under federal or state
securities laws.
11. Miscellaneous.
11.1 Notices. Any notice or other communication given hereunder by any
party hereto to any other party hereto shall be in writing and delivered
personally or by facsimile transmission or sent by registered or certified mail
or by any express mail or overnight courier service, postage or fees prepaid:
19
If to the Company:
Auto Data Network, Inc.
712 Fifth Avenue
19th Floor
New York, New York 10019
Attention: Chief Executive Officer
If to the Purchasers:
To each Purchaser at such Purchaser's name and
address set forth on the signature page to this
Agreement
Any notice that is delivered personally or by facsimile transmission in
the manner provided herein shall be deemed to have been duly given to the party
to whom it is directed upon actual receipt by such party or its agent. Any
notice that is addressed and mailed or sent by courier in the manner herein
provided shall be conclusively presumed to have been duly given to the party to
which it is addressed at the close of business, local time of the recipient, on
the fourth business day after the day it is so placed in the mail or, if
earlier, the time of actual receipt.
11.2 Successors and Assigns. This Agreement will be binding upon and inure
to the benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns, provided, that no party may assign this
Agreement without the prior written consent of the other party, such consent not
to be unreasonably withheld; provided, further, that a Purchaser may assign this
Agreement to its affiliates without consent; provided that any transfer of
Securities or shares of Common Stock underlying such Securities must be in
compliance with the Transaction Documents and all applicable law.
11.3 Entire Agreement. This Agreement sets forth the entire agreement and
understanding among the parties as to the subject matter hereof and merges and
supersedes all prior discussions, agreements and understandings of any and every
nature among them; provided that any confidentiality agreement between the
Company and any Purchaser shall remain in effect. This Agreement may be amended
only by mutual written agreement of the Company and a majority in interest of
the Purchasers, and the Company may take any action herein prohibited or omit to
take any action herein required to be performed by it, and any breach of any
covenant, agreement, warranty or representation may be waived, only if the
Company has obtained the written consent or waiver of the Purchasers purchasing
a majority of the Securities offered hereby.
11.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York with respect to contracts made
and to be fully performed therein, without regard to the conflicts of laws
principles thereof. The parties hereto hereby agree that any suit or proceeding
arising under this Agreement, or in connection with the consummation of the
transactions contemplated hereby, shall be brought solely in a federal or state
court located in the County of New York and State of New York. By its execution
hereof, both the Company and the Purchasers hereby consent and irrevocably
submit to the in personam jurisdiction of the federal and state courts located
in the County of New York and State of New York and agree that any process in
any suit or proceeding commenced in such courts under this Agreement may be
served upon it personally or by certified or registered mail, return receipt
requested, or by Federal Express or other courier service, with the same force
and effect as if personally served upon the applicable party in New York and in
the city or county in which such other court is located. The parties hereto each
waive any claim that any such jurisdiction is not a convenient forum for any
such suit or proceeding and any defense of lack of in personam jurisdiction with
respect thereto.
20
11.5 Severability. The holding of any provision of this Agreement to be
invalid or unenforceable by a court of competent jurisdiction will not affect
any other provision of this Agreement, which will remain in full force and
effect. If any provision of this Agreement is declared by a court of competent
jurisdiction to be invalid, illegal or incapable of being enforced in whole or
in part, the provision will be interpreted so as to remain enforceable to the
maximum extent permissible consistent with applicable law and the remaining
conditions and provisions or portions thereof will nevertheless remain in full
force and effect and enforceable to the extent they are valid, legal and
enforceable, and no provisions will be deemed dependent upon any other covenant
or provision unless so expressed herein.
11.6 No Waiver. A waiver by either party of a breach of any provision of
this Agreement will not operate, or be construed, as a waiver of any subsequent
breach by that same party.
11.7 Further Assurances. The parties agree to execute and deliver all
further documents, agreements and instruments and take further action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which will
together constitute the same instrument.
11.9 No Third Party Beneficiaries. Nothing in this Agreement creates in
any Person not a party to this Agreement any legal or equitable right, remedy or
claim under this Agreement, and this Agreement is for the exclusive benefit of
the parties hereto. The parties expressly recognize that this Agreement is not
intended to create a partnership, joint venture or other similar arrangement
between any of the parties or their respective affiliates.
11.10 Headings. The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or interpretation
of this Agreement.
11.11 Securities Laws Disclosure; Publicity Restrictions. The Company
shall, by 8:30 a.m. Eastern time on the trading day following each applicable
Closing, issue a press release or file a Current Report on Form 8-K disclosing
the consummation of the transactions consummated on such Closing. Except as may
be required by applicable Requirements of Law, none of the parties hereto shall
issue a publicity release or public announcement or otherwise make any
disclosure concerning this Agreement, the transactions contemplated hereby
without prior approval by the other party hereto; provided that each Purchaser
may disclose on its worldwide web pages and its offering materials, if any, the
name of the Company, the name of the Chief Executive Officer of the Company, a
brief description of the business of the Company consistent with the Commission
Documents or the Company's press releases or other public statements, the
Company's logo and the aggregate amount of such Purchaser's investment in the
Company. If any announcement is required by applicable law or the rules of any
securities exchange or market on which such shares of Common Stock are traded to
be made by any party hereto, prior to making such announcement such party will
deliver a draft of such announcement to the other parties and shall give the
other parties reasonable opportunity to comment thereon. The parties agree to
attribute and otherwise indicate ownership of the other party's trademarks and
logos.
11.12 Certification. Each Purchaser certifies that such Purchaser has read
this entire Agreement and that every statement on such Purchaser's part made and
set forth herein is true and complete.
[Remainder of page intentionally left blank.]
21
IN WITNESS WHEREOF, the undersigned has executed this Securities Purchase
Agreement on the date his signature has been subscribed and sworn to below.
The shares of Series B Preferred Stock
and the common stock purchase warrants
are to be issued in: Print Name of Investor
shares of Series B
____ individual name Preferred Stock
subscribed for
Subscription price
paid herewith:
$
____ tenants in the entirety -----------------
(being $3.80 x the
number of shares
of Series B
Preferred Stock
listed above)
Print Name of Joint
____ corporation (an officer must sign) Investor(if
applicable)
____ partnership (all general partners must sign) Signature of Investor
____ trust Signature of Joint
Investor
(with a copy to:)
____ limited liability company Address of Investor Accepted as of the ___ day of
_________, 2004 as to _______________ shares of Series B Preferred Stock;
Subscription price accepted being $______________, being $3.80 x the number of
shares of Series B Preferred Stock as to which this Subscription is accepted
(the investor also being entitled to receive _____________ common stock purchase
warrants, being 2 warrants for every 5 shares of Series B Preferred Stock for
which the subscription is accepted:
AUTO DATA NETWORK, INC.
By: ___________________________________________
Name:
Title:
22