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SCHEDULE 14A INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary
Proxy Statement [ ] Confidential, For UsePursuant to Section 14(a) of
the Commission Only (as permitted by Rule
14a-6(e)(2)Securities Exchange Act of 1934 (Amendment No. )
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
| Filed by the Registrantý | ||
Filed by a Party other than the Registranto | ||
Check the appropriate box: | ||
| o | Preliminary Proxy Statement | |
| o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
| ý | Definitive Proxy Statement | |
| o | Definitive Additional Materials | |
| o | Soliciting Material Pursuant to §240.14a-12 | |
Firstwave Technologies, Inc. | ||||
(Name of Registrant as Specified In Its Charter) | ||||
(Name of Person(s) Filing Proxy Statement, if other than the Registrant) | ||||
| Payment of Filing Fee (Check the appropriate box): | ||||
| ý | No fee required | |||
| o | Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11 | |||
| (1) | Title of each class of securities to which transaction applies: | |||
| (2) | Aggregate number of securities to which transaction applies: | |||
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): | |||
| (4) | Proposed maximum aggregate value of transaction: | |||
| (5) | Total fee paid: | |||
| o | Fee paid previously with preliminary materials. | |||
| o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. | |||
| (1) | Amount Previously Paid: | |||
| (2) | Form, Schedule or Registration Statement No.: | |||
| (3) | Filing Party: | |||
| (4) | Date Filed: | |||
Firstwave Technologies, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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FIRSTWAVE TECHNOLOGIES, INC.
SUITE
Suite 1000
2859 PACES FERRY ROAD
ATLANTA, GEORGIAPaces Ferry Road
Atlanta, Georgia 30339
August __, 2001
April 1, 2003
Dear Shareholder:
You are cordially invited to attend the SpecialAnnual Meeting of Shareholders of Firstwave Technologies, Inc. (the "Company"), which will be held at 9:30 A.M.2:00 P.M. on August 29, 2001May 1, 2003 at the Company's corporate offices located at 2859 Paces Ferry Road, Suite 1000, Atlanta, Georgia 30339.
The principal business of the meeting will be (i) to approveelect five directors to serve until the sale
and issuance of a new series of preferred stock, designated as the Series C
Convertible Preferred Stock (and the issuance of shares of the Company's common
stock into which such shares may convert), including (1) 6,667 shares of Series
C Convertible Preferred Stocknext annual meeting, (ii) to Mercury Fund II, Ltd. upon the conversion of
the $500,025 principal amount of the secured, short-term note between the
Company and Mercury and (2) up to an additional 10,000 shares of Series C
Convertible Preferred Stock from time to time on substantially similar terms;
(ii) the sale and issuance of 10,000 shares of Series C Convertible Preferred
Stock (and the issuance of shares of the Company's common stock into which such
shares may convert) to Richard T. Brock, President and CEO of the Company, upon
the conversion of the $750,000 principal amount of the secured note held by Mr.
Brock; (iii) to approvepresent for shareholder approval an amendment to the Company's Articles1993 Stock Option Plan to increase the number of Incorporationshares reserved for future grants under the plan from 516,667 to eliminate certain provisions that require816,667 and (iii) to transact such other business as may properly come before the Company to treat its Series A
Convertible Preferred Stock and its Series B Convertible Preferred Stock as
"redeemable securities" rather than long-term equity onmeeting. During the Company's financial
statements, and to changemeeting, we will review the timing of dividend payments from annual to
monthly; and (iv) to approve an amendment to the Company's Articles of
Incorporation to effect a reverse stock split of all the issued and outstanding
sharesresults of the Company's common stock at a ratio not to exceed one-for-three as
discussed in the accompanying Proxy Statement.
YOUR VOTE IS IMPORTANT.past year and report on significant aspects of our operations for 2003.
Your vote is important. Whether or not you plan to attend the SpecialAnnual Meeting, please take the time to complete, sign, date, and return the enclosed proxy card in the postage prepaidpostage-prepaid envelope provided so that your shares will be voted at the meeting. If you decide to attend the meeting, you may, of course, revoke your proxy and personally cast your vote.
Sincerely yours,
Richard T. Brock
President and Chief Executive Officer
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FIRSTWAVE TECHNOLOGIES, INC.
SUITE
| Sincerely yours, | ||||
/s/ Richard T. Brock | ||||
Richard T. Brock President and Chief Executive Officer | ||||
Firstwave Technologies, Inc.
Suite 1000
2859 PACES FERRY ROAD
ATLANTA, GEORGIAPaces Ferry Road
Atlanta, Georgia 30339
NOTICE OF SPECIALANNUAL MEETING OF SHAREHOLDERS
The SpecialAnnual Meeting of Shareholders of Firstwave Technologies, Inc. (the "Company") will be held at 9:30 A.M.2:00 P.M. on August 29, 2001,May 1, 2003, at the Company's corporate offices located at 2859 Paces Ferry Road, Suite 1000, Atlanta, Georgia 30339. The meeting is called for the following purposes:
- (1)
- To
approveelect five directors to serve until the next annual meeting andratify the issuanceuntil their successors are elected andsale of 20% or more of the Company's common stock, and 20% or more of the Company's voting power under Nasdaq rules 4350(i)(1)(D)(ii) and 4350(i)(1)(B) in connection with the private placement of shares of the Company's Series C Convertible Preferred Stock (the "Series C Preferred Stock") or other securities of the Company that are convertible into shares of Series C Preferred Stock, including the issuance of any securities of the Company as dividends on or otherwise in respect of the Series C Preferred Stock, as follows: (a) the sale and issuance of 6,667 shares of Series C Preferred Stock (subject to certain adjustments) upon the conversion of a promissory note in the original principal amount of $500,025 issued to Mercury Fund II, Ltd. (and the shares of the Company's common stock into which the Series C Preferred Stock may convert), and the issuance of a contingent warrant to acquire up to 125,006 shares of common stock; and (b) the additional sale and issuance of 10,000 shares of Series C Preferred Stock (and the shares of the Company's common stock into which the Series C Preferred Stock may convert) from time to time on terms and conditions substantially similar to the transactions described above.qualified; - (2)
- To
approve the sale and issuance of 10,000 shares of Series C Preferred Stock and the shares of the Company's common stock into which the Series C Preferred Stock may convert to Richard T. Brock, President and CEO and a director of the Company, in exchangepresent forthe promissory note of the Company in the aggregate principal amount of $750,000 held by Mr. Brock; (3) To approveshareholder approval an amendment to the Company'sArticles1993 Stock Option Plan to increase the number ofIncorporationshares reserved for future grants under the plan from 516,667 toeliminate certain provisions that currently require the Company to treat the Company's Series A Convertible Preferred Stock816,667; andSeries B Convertible Preferred Stock (the "Existing Preferred Stock") as "redeemable securities" rather than long-term equity on the Company's financial statements, and to change the timing of dividend payments from annual to monthly commencing January 2002; (4) To approve an amendment to the Company's Articles of Incorporation to effect a reverse stock split of all issued and outstanding shares of the Company's common stock at a ratio not to exceed one-for-three as discussed in the accompanying Proxy Statement; and4 (5) - (3)
- To transact such other business as may properly come before the meeting.
The Company's Board of Directors has fixed the close of business on August 2, 2001,March 18, 2003, as the record date for the purpose of determining the shareholders who are entitled to notice of and to vote at the meeting and any adjournment or postponement thereof. Shares of the Company's common stock and
preferred stock can be voted at the meeting only if the holder is present at the
meeting in person or by valid proxy.
The officers and directors of the Company cordially invite you to attend the meeting. To ensure your representation at the meeting, you are urged to mark, date, sign and return the enclosed proxy as promptly as possible in the postage-prepaid envelope endorsedenclosed for that purpose. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE MEETING. ANY SHAREHOLDER ATTENDING THE MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED A PROXY.
By order of the Company's Board of Directors,
Richard T. Brock
President and Chief Executive Officer
August ___, 2001
| By order of the Company's Board of Directors, | ||||
/s/ Richard T. Brock | ||||
Richard T. Brock President and Chief Executive Officer | ||||
April 1, 2003
Atlanta, Georgia
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE REQUEST YOU COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY SO THAT YOUR SHARES WILL BE REPRESENTED.
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FIRSTWAVE TECHNOLOGIES, INC.
SUITE
Firstwave Technologies, Inc.
Suite 1000
2859 PACES FERRY ROAD
ATLANTA, GEORGIAPaces Ferry Road
Atlanta, Georgia 30339
This Proxy Statement is furnished by and on behalf of the Board of Directors of Firstwave Technologies, Inc. (the "Company") in connection with the solicitation of proxies for use at the SpecialAnnual Meeting of Shareholders of the Company to be held at 9:30 A.M.2:00 P.M. on August 29, 2001,May 1, 2003, at the Company's corporate offices located at 2859 Paces Ferry Road, Suite 1000, Atlanta, Georgia 30339, and at any adjournments or postponements thereof (the "Special"Annual Meeting"). This Proxy Statement and the enclosed proxy card will be first mailed on or about August __, 2001April 1, 2003 to the Company's shareholders of record on August 2, 2001March 18, 2003 (the "Record Date").
THE COMPANY'S BOARD OF DIRECTORS URGES YOU TO COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD IN THE POSTAGE PREPAID ENVELOPE PROVIDED.
SHARES ENTITLED TO VOTE AND RELATED MATTERS
- Q:
WHAT AM - What am I
VOTING ON?voting on? - A:
- You are being asked to vote on
fourtwo proposals:
Proposal 1 - —the approvalelection of five directors to serve until the next annual meeting and until their successors are elected and qualified. Three of the issuance of our Series C Preferred
Stock and common stock purchase warrants in several transactions
described in this Proxy Statement that collectively may result in the
issuance of our common stock in an amount in excess of 20% our
outstanding capital stock. This includes
- 6,667 shares of Series C Preferred Stock issuable upon the
conversion of a $500,025 promissory note issued to Mercury
Fund II, Ltd. (and the shares of our common stock into which
the Series C Preferred Stock may convert), and the issuance of
a contingent warrant to acquire up to 125,006 shares of our
common stock;
- up to 10,000 additional shares of Series C Preferred Stock
(and the shares of our common stock into which the Series C
Preferred Stock may convert)five directors who have been nominated are incumbent directors from time to time on terms and
conditions substantially similar to the transactions described
above; and
- 10,000 additional shares of Series C Preferred Stock issued to
Mr. Brock as described in Proposal 2.
2002.
Proposal 2 - the approval of the sale and issuance of 10,000 shares of
our Series C Preferred Stock and the shares of our common stock into
which the Series C Preferred Stock may convert to Richard T. Brock, who
is our President and CEO and a member of our Board of Directors, in
exchange for the promissory note of the Company in the aggregate
principal amount of $750,000 held by Mr. Brock.
Proposal 3 - —the approval of an amendment to our articles1993 Stock Option Plan to increase the number of incorporationshares reserved for future grants under the plan from 516,667 to eliminate provisions that currently require us to
treat our Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock as "redeemable securities" rather than long-term equity
on the our financial statements, and to change the timing of dividend
payments payable on our Series A and B Preferred Stock from annual to
monthly beginning in January 2002.
Proposal 4 - the approval of an amendment to our articles of
incorporation to effect a reverse stock split of all issued and
outstanding shares of our common stock at a ratio not to exceed
one-for-three. The amendment is further described below and the actual
amendment is contained in Appendix H.
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816,667.
You are also being asked to give the proxies named on the proxy card your proxy to vote on any other business properly coming before the meeting.
- Q:
WHO IS ENTITLED TO VOTE? - Who is entitled to vote?
- A:
- Holders of our common stock, our Series A Convertible Preferred Stock, our Series B Convertible Preferred Stock, and our Series
BC Convertible Preferred Stock as of the close of business onAugust 2, 2001,March 18, 2003, the record date, are entitled to vote. - Q:
HOW MANY SHARES CAN BE VOTED? - How many shares can be voted?
- A:
- As of the record date, shareholders were entitled to cast approximately
7,046,2783,292,771 votes at thespecialannual meeting, as set forth in the table below. Each shareholder of common stock is entitled to one vote for each share held. The holders of our preferred stock generally vote together with the holders of our common stock and are entitled to cast one vote for each share of common stock into which the preferred stock isconvertible; however, our articles of incorporation grant the preferred stock holders the right to vote separately as a class on amendments to our articles of incorporation that affect their rights, including the right to vote separately as a class on Proposal 3.
convertible.Shares Outstanding Votes Entitled to Class August 2, 2001 Be Cast ----- ------------------ -----------------Common Stock 6,300,841 6,300,841 Series A Preferred Stock 10,000 485,437 Series B Preferred Stock 7,020 260,000 --------- Total Votes Entitled to be cast 7,046,278
| Class | Shares Outstanding March 18, 2003 | Votes Entitled to be Cast | |||
|---|---|---|---|---|---|
| Common Stock | 2,627,625 | 2,627,625 | |||
| Series A Preferred | 10,000 | 161,812 | |||
| Series B Preferred | 7,020 | 86,667 | |||
| Series C Preferred | 10,000 | 416,667 | |||
| Total Votes Entitled to be Cast | 2,654,645 | 3,292,771 | |||
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- Q:
HOW DO - How do I
VOTE?vote? - A:
- Complete, sign and mail us your proxy card. If you return your signed proxy card but do not indicate how you wish to vote, your shares will be voted FOR each of the proposals described in this Proxy Statement. You may, of course, attend the meeting in person and vote.
EvenHowever, even if you plan to attend the meeting, we ask that you sign and return a proxy card. - Q:
WHAT IF - What if I
CHANGE MY MIND AFTERchange my mind after IRETURN MY PROXY?return my proxy? - A:
- You may revoke your proxy and change your vote at any time before the meeting. You may do this by signing and sending a written notice of revocation or another proxy with a later date than the one you want to revoke, or by voting in person at the meeting.
- Q:
WHO WILL COUNT THE VOTES? - Who will count the votes?
- A:
- The chairman of the board of directors will select the inspectors of the election for our
specialannual meeting. The inspectors will ascertain the number of shares outstanding and the voting power of the shares, determine the shares represented at the meeting, determine the validity of proxies and ballots, count all votes and determine the results of the voting. The inspectors will deliver a written report after the meeting. - Q:
WHAT CONSTITUTES A QUORUM? - What constitutes a quorum?
- A:
- There must be a quorum for the meeting to be held. A quorum is a majority of the voting power of the outstanding shares. To be counted towards the quorum, shareholders may be present at the meeting or represented by proxy. If you submit a properly executed proxy card, even if you abstain from voting, then you will be considered part of the quorum. Broker non-votes, or proxies submitted by brokers as holders of record on behalf of their customers that do not indicate how to vote on the proposal, are also considered part of the quorum. However, Broker non-votes and abstentions are not counted in the tally of votes FOR or AGAINST the proposal. As a result, Broker non-votes and abstentions will have
the same effect as votes AGAINST Proposals 3 and 4, but will haveno effect onProposals 1 and 2.the two proposals except to the extent they assist in constituting a quorum. - Q:
WHAT HAPPENS IF THE SPECIAL MEETING IS POSTPONED OR ADJOURNED? - What happens if the annual meeting is postponed or adjourned?
- A:
- If the
specialannual meeting is postponed or adjourned for any reason, including to permit the further solicitation of proxies, at any subsequent reconvening of the meeting all proxies will be voted in the same manner as27they would have been voted at the originalspecialmeeting. However, as described above, you may revoke your proxy and change your vote at any time before the reconvened meeting. - Q:
HOW MANY VOTES ARE REQUIRED TO APPROVE EACH PROPOSAL? - How many votes are required to approve each proposal?
- A:
- Each proposal will be deemed approved by the shareholders as follows:
Proposal 1 -—Directors are elected by a plurality of the votes, which means the five nominees who receive the highest number of votes FOR will be elected as directors.
Proposal 2—The Option Plan amendment will be approved if a majority of the votes cast onvoting power of all shares present, in person or by proxy, and voted at the ProposalAnnual Meeting vote FOR the proposal
Proposal 2 - if a majority of the votes cast on the Proposal vote FOR
the proposal
Proposal 3 - if a majority of the votes entitled to be cast on the
Proposal vote FOR the proposal
Proposal 4 - if a majority of the votes entitled to be cast on the
Proposal vote FOR the proposal
proposal.
- Q:
WHO IS PAYING FOR THIS PROXY SOLICITATION? - Who is paying for this proxy solicitation?
- A:
- We are paying the cost of soliciting proxies. In addition to mailing these materials, our officers, directors and employees will solicit proxies, either personally or via telephone or facsimile. They will not be paid specifically for this solicitation activity.
We will also reimburse brokerage houses and other custodians, nominees and fiduciaries who are record holders for their reasonable expenses in forwarding these materials to the beneficial owners
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of those shares. Furthermore, we may engage a firm to help solicit proxies. The extent to which we and our proxy solicitation firm must solicit proxies depends entirely upon how soon proxy cards are returned. Please send in your proxy cards immediately.
- Q:
- Where can I find more information about Firstwave?
- A:
- We are subject to the information requirements of the Exchange Act and are required to file reports, proxy statements and other information with the Securities and Exchange Commission. You may inspect and copy our reports, proxy statements and other information at the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the Commission's regional offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. You may also obtain copies of the reports, proxy statements and other information from the Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates. The Commission maintains a world wide web site on the internet athttp://www.sec.gov that contains reports, proxies, information statements, and registration statements and other information filed with the Commission through the EDGAR system. Our common stock is traded on the Nasdaq SmallCap Market (Symbol: FSTW), and our reports, proxy statements and other information can also be inspected at the offices of Nasdaq Operations, 1735 K Street, NW Washington, D.C. 20006.
PROPOSAL 1—ELECTION OF DIRECTORS
The Board of Directors of the Company presently consists of five members. The current terms of all existing directors expire upon the election and qualification of the directors to be selected at this Annual Meeting. James R. Porter, who has served on the Board of Directors since the Company's initial public offering in March of 1993, has decided not to seek reelection to the Board. The Board of Directors has nominated Roger A. Babb, Richard T. Brock, Richard D. Jackson, John F. Keane and Alan I. Rothenberg for election to the Board of Directors at the Annual Meeting. Each member is to serve until the 2004 Annual Meeting of Shareholders and until their successors are duly elected and qualified.
All Shares represented by properly executed proxies received in response to this solicitation and not revoked before they are exercised will be voted in the manner specified therein by the shareholders. If no specification is made, the proxy will be votedFOR the election of the nominees listed in this Proxy Statement to the Board of Directors. Each nominee has consented to serve as a director of the Company if elected. If at the time of the Annual Meeting any nominee is unable or declines to serve as a director, the discretionary authority provided in the enclosed proxy card will be exercised to vote for a substitute candidate designated by the Board of Directors, but in no event will the proxy be voted for more than five nominees. The Board of Directors has no reason to believe that any of its nominees will be unable or will decline to serve as a director.
Shareholders may withhold their votes from the entire slate of nominees by so indicating in the space provided on the enclosed proxy card. Shareholders may withhold their votes from any particular nominee by writing that nominee's name in the space provided for that purpose on the enclosed proxy card.
Set forth below is certain information furnished to the Company by each nominee.
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Director Nominee Biographical Information
ROGER A. BABB
Age: 56
Mr. Babb has been a director of the Company since March 1999. He is President and founder of Operation Simulation Associates, Inc., a software company developing power system simulation software and providing consulting services to the electric power industry. He is also Chief Executive Officer of Babb International and a director of Babb Lumber Company, Inc.; both are building material manufacturing companies. He earned his BS in Electrical Engineering from the Georgia Institute of Technology.
RICHARD T. BROCK
Age: 55
Mr. Brock has been a director of the Company since the Company's inception in October 1984, and currently serves as the Company's President and Chief Executive Officer. He is the founder of the Company and served as the Company's Chief Executive Officer from October 1984 until November 1992, and also from November 1994 until December 1996. Mr. Brock is the founder of Brock Capital Partners, a capital investment firm. He is also a director of Datastream Systems, Inc., a leading provider of maintenance software. Prior to founding the Company, Mr. Brock founded and served as Chief Executive Officer of Management Control Systems, Inc. Mr. Brock received a MBA from Louisiana State University and a BS from Spring Hill College. He is also a Certified Public Accountant.
RICHARD D. JACKSON
Age: 66
Mr. Jackson is Chairman of the Board of ebank.Financial Services, Inc., a unitary thrift holding company that serves the financial needs of both retail and small business customers through its Atlanta-based banking center and the Internet. From 1993 to 1996, Mr. Jackson served as Vice Chairman and Senior Executive Vice President of First Financial Management Corporation, from 1986 to 1993 served as Vice Chairman, Chief Executive Officer and President of Georgia Federal Bank and from 1974 to 1986 served as Chief Executive Officer and President of First Georgia Bank. Mr. Jackson also serves as a director of Schweitzer-Mauduit International, Inc., a diversified producer of premium specialty papers and the world's largest supplier of fine papers to the tobacco industry. Mr. Jackson earned his BBA from Marshall University and graduated from Louisiana State University School of Banking of the South.
JOHN F. KEANE
Age: 71
Mr. Keane has been a director of the Company since December 1997. He is Chairman of Keane, Inc., an application development, outsourcing, and integration services firm, which he founded in 1965. Previous to this, Mr. Keane held various positions in marketing for IBM and was a consultant for Arthur D. Little. He serves as a director of American Power Conversion Inc., a provider of power protection systems and iPower Logistics, an e-marketplace for industrial distributors and manufacturers. He is a graduate of Harvard College and Harvard School of Business.
ALAN I. ROTHENBERG
Age: 63
Mr. Rothenberg has been a director of the Company since February 2003. From 1990 until his retirement in 2000, Mr. Rothenberg was a Partner at Latham & Watkins, one of the world's largest and most successful law firms, offering sophisticated corporate finance, mergers & acquisitions, technology
4
transactions, venture & technology, and strategic partnering/private investment funds practices. From 1968 to 1990, Mr. Rothenberg was founder and Managing Partner of Manatt, Phelps, Rothenberg, & Phillips, a Los Angeles law firm specializing in business and commercial litigation including practices in the sports, entertainment, and financial fields. From 1990 through 1998, he served as President of the United States Soccer Federation. Mr. Rothenberg serves on the boards of directors of Major League Soccer, United States Soccer Foundation, Los Angeles County Bar Association Dispute Resolution Services, Constitutional Rights Foundation, Los Angeles Convention and Visitors Bureau, LA Sports Council, and Zenith National Insurance, which provides workers' compensation insurance and participates in the worldwide reinsurance business. He received his BA from the University of Michigan and his JD, with distinction, from the University of Michigan Law School.
Required Vote
Directors are elected by a plurality of the votes cast, which means the five nominees who receive the highest number of votes FOR, in person or by proxy, will be elected as directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ELECTION AS DIRECTORS OF THE NOMINEES LISTED ABOVE.
Additional Information Concerning the Board of Directors
The Company's Board of Directors held four meetings during 2002. The Board has an Audit Committee and a Compensation Committee, but does not have a Nominating Committee. No director attended less than 75% of the aggregate number of meetings of the Board and the committees of the Board on which he served. Effective October 2, 2002, Michael T. McNeight resigned his position on the Board. Effective February 7, 2003, Alan I. Rothenberg was appointed to the Board to fill the vacancy created by Mr. McNeight's resignation.
The Audit Committee in 2002 consisted of Messrs. Keane, McNeight, Porter, and Babb. Mr. Keane served as Chairman of the Audit Committee during 2002. The responsibilities of the Audit Committee include, in addition to such other duties as the Board may specify, reviewing and making recommendations to the Board regarding the Company's engagement of independent accountants, the annual audit of the Company's financial statements, and the Company's internal accounting practices and policies. The Audit Committee met twice during 2002. The Audit Committee adopted its Audit Committee Charter on March 29, 2001.
The Compensation Committee in 2002 consisted of Messrs. Keane, McNeight, Porter, and Babb. Mr. Porter served as Chairman of the Compensation Committee during 2002. The responsibilities of the Compensation Committee include, in addition to such other duties as the Board may specify, making recommendations to the Board regarding compensation arrangements for senior management of the Company (including annual bonus compensation), the adoption of any compensation plans in which management is eligible to participate and the grants of stock options or other benefits under such plans. The Compensation Committee met three times during 2002.
During 2002, each non-management director of the Company received an annual retainer of $5,000 and a fee of $2,500 for each day on which he attended a Board or committee meeting. During 2002, each non-management director of the Company was granted options to purchase a total of 1,667 shares of Common Stock pursuant to the Company's 1993 Stock Option Plan. Also during 2002, 26,002 options were granted to non-management directors related to a Stock Exchange Program which allowed each of the Company's directors and employees who held options under the Option Plan with an exercise price of greater than $10.00 the opportunity to surrender those options for cancellation in exchange for new options to be granted approximately six months and one day after cancellation. All such options were granted at fair market value on the date of grant, with the exception of those issued to Mr. Brock, which were issued at 110% of fair market value pursuant to the terms of the plan. All
5
such options vest over four years, and have an exercise period of ten years. Directors are reimbursed for expenses incurred in connection with attendance at Board and committee meetings.
Executive Officers
The executive officers of the Company serve at the discretion of the Board of Directors. At the end of 2002, the executive officers of the Company consisted of Richard T. Brock, Debbie N. Qaqish, David R. Simmons, and Judith A. Vitale. Ms. Qaqish resigned her position as Vice President of US Sales effective February 13, 2003. Set forth below is certain information furnished by each of the officers of the Company.
RICHARD T. BROCK—Please see biographical information contained on Page 3.
DAVID R. SIMMONS
Age: 47
Mr. Simmons joined the Company as Chief Operating Officer in October 2002. Prior to his role at Firstwave, Mr. Simmons served as President and CEO of the Technology Association of Georgia (TAG) from its inception in 1999 until September 2002. Mr. Simmons continues to serve on TAG's Board of Directors. Prior to TAG, Mr. Simmons was Chief Operating Officer of Measured Marketing Inc. He has an extensive background in sports management, serving as Chief Operating Officer of the 1996 Atlanta Paralympic Games and Venue Executive Director of the 1994 World Cup USA, Los Angeles. Mr. Simmons is on the Advisory Council of ICAPP, the University System of Georgia's Intellectual Capital Partnership Program, and the Advisory Board of the Dupree College of Management, and previously served on the Entrepreneurial Program and the Steering Committee for the Metropolitan Atlanta Chamber of Commerce "Industries of the Mind" initiative. Mr. Simmons received a BA in Economics from the University of California at Irvine and an MBA in Finance and Accounting from the University of Southern California.
JUDITH A. VITALE
Age: 48
Ms. Vitale has served the Company as Chief Financial Officer since November of 2001. Prior to that time, she held various positions with the Company since its formation in October 1984, including Vice President and Director of Finance and Administration, Manager of Administration, Manager of Finance, and Corporate Controller. From 1979 until the formation of the Company, Ms. Vitale was the Manager of Administration at Management Control Systems, Inc. She has a BS in Management from Shorter College.
6
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's directors, executive officers and persons who own beneficially more than 10% of the Company's Common Stock to file reports of ownership and changes in ownership of such stock with the Securities and Exchange Commission (the "SEC"). Directors, executive officers, and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all such forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, with the exception of Messrs. Porter, Brock, Keane, and McNeight and Ms. Vitale each of whom were 10 days late in filing their September 20, 2002 Forms 4 related to the Company's stock exchange program, and Mr. Simmons who was 8 days late in filing his October 11, 2002 Form 3, all of its directors and executive officers complied during 2002 with all applicable Section 16(a) filing requirements. These Forms 4 were the first filings after the August 29, 2002 enactment of the two-day reporting requirement; otherwise the filings would have been in compliance.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth as of July 1, 2001 (except as otherwise
indicated in the footnotes below), information concerning (i) those persons known by management of the Company to own beneficially more than 5% of the Company's outstanding common stock,Common Stock, (ii) the directors and director nominees of the Company, (iii) the current executive officers of the Company listednamed in the Summary Compensation Table included in the Proxy Statement for the Company's 2001 annual meeting of
shareholders,elsewhere herein (the "Named Executive Officers"), and (iv) all directors and current executive officers of the Company as a group. Except as otherwise indicated in the footnotes below, such information is provided as of March 18, 2003. According to rules adopted by the Securities Exchange Commission,SEC, a person is athe "beneficial owner" of securities if he or she has or shares the power to vote them or to direct their investment or has the right to acquire beneficial ownership of such securities within sixty (60)60 days through the exercise of an option, warrant, or right, conversion of a security or otherwise. Except as otherwise noted, the indicated owners have sole voting and investment power with respect to shares beneficially owned, and their address is 2859 Paces Ferry Road, Suite 1000, Atlanta, Georgia 30339.
| Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | |||
|---|---|---|---|---|---|
| Richard T. Brock | 1,023,359 | (1) | 33.2 | % | |
| Roger A. Babb | 16,503 | (2) | * | ||
| James R. Porter | 16,389 | (3) | * | ||
| John F. Keane | 10,836 | (4) | * | ||
| Judith A. Vitale | 9,694 | (5) | * | ||
| Alan I. Rothenberg | 2,000 | * | |||
| David R. Simmons | — | ||||
| All directors and executive officers as a group (7 persons) | 1,078,781 | (6) | 34.9 | % |
- (1)
- Includes
22,50014,544 shares subject to options exercisable and670,622 shares that may be acquired upon conversion of Series A and B preferred stock on or before August 2, 2001. (2) The address of Mercury Fund I, Ltd. is c/o Mercury Ventures, Ltd., 2707 Hibernia, Dallas, Texas 75204. (3) Includes 11,250 shares subject to options exercisable on or before August 2, 2001. (4) Includes 19,250 shares subject to options exercisable and 9,259640,207 shares that may be acquired upon conversion of preferred stock on or beforeAugust 2, 2001. (5)May 18, 2003. - (2)
- Includes
26,7609,169 shares subject to options exercisable on or beforeAugust 2, 2001. (6)May 18, 2003. - (3)
- Includes
18,750 shares subject to options exercisable on or before August 2, 2001. (7) Includes 18,750 shares subject to options exercisable on or before August 2, 2001. (8) Includes 117,26010,836 shares subject to options exercisable and679,8813,086 shares that may be acquired upon conversion of preferred stock on or beforeAugust 2, 2001. INTRODUCTION AND BACKGROUND The primary purposeMay 18, 2003.
7
- (4)
- Includes 10,836 shares subject to options exercisable on or before May 18, 2003.
- (5)
- Includes 9,691 shares subject to options exercisable on or before May 18, 2003.
- (6)
- Includes 55,076 shares subject to options exercisable and 643,293 shares that may be acquired upon conversion of preferred stock on or before May 18, 2003.
Under the SEC rules for proxy statement disclosure of executive compensation, the Compensation Committee of the various transactionsBoard of Directors of the Company has prepared the following report on executive compensation. Set forth below is a discussion of the Company's executive compensation philosophy and matters being
proposedpolicies as established and implemented by the Compensation Committee for approval2002.
Compensation Committee Report on Executive Compensation
In past years, the Compensation Committee set the levels and types of compensation for its executive officers based generally upon (i) perceived levels and types of compensation paid by the Company's competitors to their executive officers, (ii) the desire to have some portion of each executive officer's compensation be incentive in nature, and (iii) an evaluation of each executive officer's ability to contribute to the continued success of the Company. During 2002, the executive officer's compensation included short term incentive compensation based on attainment of revenue and net income goals.
In light of the Company's compensation policy, the components of its executive compensation program in 2003 will be base salaries, short term incentive awards in the form of cash bonuses or commissions, and long-term incentive awards in the form of stock options. The procedure used to determine the level of each of these components of compensation is discussed in more detail below.
Base Salaries. The Compensation Committee typically reviews various studies and reports regarding base salary levels for officers of other public companies in the software industry holding the same or similar positions as the executive officers of the Company. Although the data used by such compensation consultants may be available publicly, the Compensation Committee uses such industry information in the form provided by its compensation consultants to take advantage of the analytical input provided by such consultants that makes such industry information more directly applicable to the Company and the functions performed by its executive officers, including the Named Executive Officers. The Compensation Committee then sets each officer's salary level based on the officer's experience level, the scope and complexity of the position held (taking into account any changes to be made), and the officer's performance during the past year.
Short-Term Incentive Compensation—Bonuses and Commissions. The goal of the short-term incentive component of the Company's compensation packages is to place a significant portion of each officer's compensation at risk to encourage and reward a high level of performance each year.
For 2003, the Compensation Committee has set the short-term incentive compensation levels at 45% to 50% of total compensation. The criteria for earning bonuses are Company-level financial performance targets (including growth in revenues, operating income, and cash).
Long-Term Incentive Compensation—Stock Options. The goal of the long-term incentive component of the Company's compensation packages is to secure, motivate, and reward officers and align their interests with the interests of shareholders through the grant of stock options. Under the Option Plan, the Compensation Committee is authorized to grant incentive and non-qualified stock options to key employees. The number of options granted is based on the position held by the individual, his or her performance, the prior level of equity holdings by the officer and the Compensation Committee's assessment of the officer's ability to contribute to the long-term success of
8
the Company. The Compensation Committee receives and takes into account data provided by its compensation consultants regarding executives in comparable positions and management's recommendations concerning proposed option grants. No particular weight is given to any single factor. Options granted generally vest in equal annual increments over a period of four years and terminate at the end of 10 years. For a summary of option grants in 2002 to the Company's Named Executive Officers, see "Executive Compensation Tables—Table II—Option Grants in 2002."
Compensation of the Chief Executive Officer. The compensation of Mr. Brock was established for 2002 by the Compensation Committee. His base salary for 2002 was $250,000, which represented a $10,000 increase from his salary in 2001. The salary was based on the Compensation Committee's assessment of Mr. Brock's contributions to the Company and his experience and capabilities in the Company's industry. In 2002, Mr. Brock had a short-term incentive compensation plan whereby he could earn $250,000 (at target) in incentive pay. Due to the Company's attainment of revenue and net income goals for 2002, Mr. Brock earned 94% of his incentive target.
Compensation of the Chief Operating Officer. The compensation of Mr. Simmons was established by the Compensation Committee. His annualized base salary for 2002 was $210,000. The salary was based on the Compensation Committee's review of other executives in similar positions in the software industry as well as the assessment of Mr. Simmons experience and expected contributions to the Company. In the fourth quarter of 2002, Mr. Simmons had a short-term incentive compensation plan whereby he could earn $10,000 in incentive pay. Due to the Company's attainment of revenue and net income goals for 2002, Mr. Simmons earned 100% of his incentive target.
Compensation of the Chief Financial Officer. The compensation of Ms. Vitale was established for 2002 by the Compensation Committee. Her base salary for 2002 was $170,000. The salary was based on the Compensation Committee's assessment of Ms. Vitale's contributions to the Company and her experience and capabilities in the Company's industry. In 2002, Ms. Vitale had a short-term incentive compensation plan whereby she could earn $80,000 (at target) in incentive pay. Due to the Company's attainment of revenue and net income goals for 2002, Ms. Vitale earned 81% of her incentive target.
Limitations on Deductibility of Compensation. Under the Omnibus Budget Reconciliation Act, a portion of annual compensation payable after 1993 to any of the Company's five highest paid executive officers would not be deductible by the Company for federal income tax purposes to the extent such officer's overall compensation exceeds $1,000,000. Qualifying performance-based incentive compensation, however, would be both deductible and excluded for purposes of calculating the $1,000,000 base. Although the Compensation Committee has not and does not presently intend to award compensation in excess of the $1,000,000 cap, it will continue to address this issue when formulating compensation arrangements for executive officers.
| THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS Roger A. Babb John F. Keane James R. Porter, Chairman | ||||
The report on executive compensation of the Board of Directors shall not be deemed to be incorporated by reference as a result of any general incorporation by reference of this Proxy Statement isor any part hereof in the Company's Annual Report to helpShareholders or Form 10-K.
Compensation Committee Interlocks and Insider Participation
During 2002, the Compensation Committee of the Board of Directors consisted of Messrs. Babb, Keane, McNeight, and Porter, with Mr. Porter serving as Chairman. None of such members serves or
9
has served as an officer or employee of the Company. No executive officer of any entity with an executive officer of the Company achieve compliance with applicable continued listing
requirementsserving as one of The Nasdaq Stock Market, Inc. ("Nasdaq") governing companies
listed on the Nasdaq SmallCap Market (the "SmallCap Market"). Until August 7,
2001, the Company's common stock was listed on the Nasdaq National Market (the
"National Market"). The Company recently fell out of compliance with several
continued listing requirements that Nasdaq imposes upon companies listed on the
National Market and, after discussions with Nasdaq and based upon the results of
an appeal to the Nasdaq Listing Qualifications Panel (the "Panel"), the listing
of the Company's common stock was transferred to the SmallCap Market effective
August 8, 2001, subject to several conditions described below that are the basis
for the several proposals described in this Proxy Statement.
The Company received a letter from Nasdaq on April 19, 2001 informing
the Company that basedits directors served on the Company's financial statementsBoard of Directors during 2002.
Certain Transactions
On April 26, 1999, the Company sold 10,000 shares of its Series A Convertible Preferred Stock for an aggregate purchase price of $1,000,000 to Mr. Brock, the Company's Chief Executive Officer. The Series A Convertible Preferred Stock accumulates dividends at a rate of 9% that are payable in cash. For the year ended
December 31,of 1999, the Company paid $61,444 of dividends in cash to Mr. Brock in January 2000, pursuant to the terms of the preferred stock. For the year of 2000, the Company's net tangible assets had fallen below Nasdaq's
required minimumCompany paid $90,000 in dividends in cash with interest over twelve months, in equal payments, to Mr. Brock, beginning February 15, 2001, pursuant to the terms of $4 million for continued listing on the National Market.
Nasdaq requested thatpreferred stock. For the Company submit a plan for regaining compliance with
this requirement, which the Company submitted on May 2, 2001. Also on May 2,
2001, Nasdaq notified the Company that the Company was not in compliance with
the National Market's minimum $5,000,000 market valueyear of public float
requirement, and that the Company would be required to demonstrate compliance
within a 90-day grace period. On June 8, 2001, the Company received noticepaid $90,000 of a
determination from Nasdaq that its plan for regaining compliance withdividends in cash to Mr. Brock in January 2002, pursuant to the net
tangible assets requirement was not acceptable, and thatterms of the Company's common
stock would be delisted frompreferred stock. For the National Market effective June 18, 2001, unlessyear of 2002, the Company appealed the determinationpaid $90,000 of dividends in cash to Mr. Brock, pursuant to the Panel.terms of the preferred stock. The Preferred Stock is convertible into Common Stock of the Company at the option of the holder at a conversion price of $6.18.
On June 14,November 15, 2000, the Company sold 5,000 shares of its Series B Convertible Preferred Stock for an aggregate purchase price of $500,000 to Mr. Brock, and issued 250 shares of its Series B Convertible Preferred Stock for an aggregate purchase price of $25,000 to Mr. Jim Porter, a director of the Company. The Series B Convertible Preferred Stock accumulates dividends at a rate of 9% that are payable in cash. For the years 2000 and 2001, the Company appealedpaid $50,671 of dividends in cash to Mr. Brock and $2,453 of dividends in cash to Mr. Porter in January of 2002. For the determinationyear 2002, the Company paid dividends in cash to Mr. Brock and Mr. Porter of $45,000 and $2,250, respectively. The Preferred Stock is convertible after a period of six months from issuance into Common Stock of the Company at the option of the holder at a conversion price of $8.10.
On February 12, 2001, Richard Brock loaned the Company $750,000, pursuant to the Panel, which automatically stayedterms of a promissory note with interest paid annually at nine percent (9%), with a maturity date of January 15, 2002.
On July 18, 2001, Mr. Brock executed a new convertible secured promissory note in exchange for the delisting pending a ruling frompromissory note dated February 12, 2001, providing for the Panel.
During the pendancyautomatic conversion of the appeal tonote into preferred stock upon the Panel,required shareholder approval. Such approval was obtained September 7, 2001 at a Special Meeting of Shareholders, and the Company developed
and began implementingnote was automatically converted into 10,000 shares of Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock accumulates dividends at a plan to increase its net tangible assets and regain
compliance with all applicable Nasdaq continued listing requirements:
- On June 29,rate of 9% that are payable in cash monthly. For the year of 2001, the Company enteredpaid $21,452 of dividends in cash to Mr. Brock, pursuant to the terms of the preferred stock. For the year of 2002, the Company paid $67,500 of dividends in cash to Mr. Brock, pursuant to the terms of the preferred stock. The Preferred Stock is convertible into Common Stock of the Company at the option of the holder at a letterconversion price of intent
with$1.80.
On July 18, 2001, Mercury Fund II, Ltd. ("Mercury"), providing for the
investment by Mercury ofinvested $500,025 in the Company. BecauseCompany through the transaction would result in the issuanceform of equity that would
require shareholder approval in accordance with Nasdaq rules,
the Mercury investment was structured as thea purchase of a convertible secured promissory note that would automatically convert into equity (inin the form of a new series of preferred stock authorized by the Board and designated as Series C
Convertible Preferred Stock) when the required shareholder approval was obtained. Such approval was obtained September 7, 2001 at a Special Meeting of Shareholders, and the special meeting. The Mercury
transaction closed on July 18, 2001. If approved by the
shareholders, the effect of the Mercury transaction would be
to increase the Company's net tangible assets by $500,025. The
Mercury transaction requires shareholder approval and is
described in greater detail below under Proposal 1.
4
9
- In February 2001, Mr. Brock had loaned the Company $750,000
pursuant to a secured promissory note. In connection with the
Mercury transaction, Mercury required that Mr. Brock agree to
convert his noteinvestment was automatically converted into equity in the Company as Series C
Convertible Preferred Stock, in order to increase the
Company's net tangible assets by an additional $750,000.
Because the transaction was closely connected to the Mercury
transaction, the conversion of the Brock note into equity
would also require shareholder approval. Accordingly, the
Company and Mr. Brock executed a new convertible secured
promissory note on July 18, 2001 providing for the automatic
conversion of the note into Series C stock upon shareholder
approval. The proposed conversion of the Brock note requires
shareholder approval and is described in greater detail below
under Proposal 2.
- The holders of the Company's existing Series A and Series B
Convertible Preferred Stock agreed to waive a provision in the
Company's articles of incorporation that gave the holders a
special liquidation preference. Mr. Brock owns all of the
Series A and a majority of the Series B preferred stock.
According to generally accepted accounting principles, this
special liquidation preference prevented the Series A and B
stock from being treated as long-term equity, which under
Nasdaq rules also caused the Series A and B stock to be
excluded from the Company's net tangible assets. Deleting this
special liquidation preference would increase the Company's
net tangible assets by $1,702,000. The proposed amendment of
the Series A and B preferred stock requires shareholder
approval and is described in greater detail below under
Proposal 3.
- In connection with the Mercury transaction, the Company agreed
to use its best efforts to raise up to an additional $750,000
of new equity through the sale of additional6,667 shares of Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock accumulates dividends at a rate of 9% that are payable in a private placement. This
aspectcash monthly. For the year of 2001, the Company paid $14,302 of dividends in cash to Mercury Fund II, Ltd., pursuant to the terms of the preferred stock. For the year of 2002, the Company paid $32,036 of dividends in cash to Mercury transaction is described in greater
detail below under Proposal 1.
- On July 13, 2001,Fund II, Ltd., pursuant to the Board of Directors determined to seek
shareholder approval of a reverse stock splitterms of the Company's
common stock,preferred stock. The Preferred
10
Stock is convertible into Common Stock of the Company at the option of the holder at a ratio of up to a 1-for-3, in order to
increase the stockconversion price of the Company's common stock above
the minimum $1.00 bid price required by Nasdaq for continued
listing on both the National Market and the SmallCap Market.$1.80.
The proposed reverse stock split requires shareholder approval
and is described in greater detail below under Proposal 4.
The Company appeared before the Panel on July 19, 2001. At the hearing,
the Company submitted its revised plan and describedtransactions relating to the Panel the above
transactions that it had been pursuing. At the hearing, the Company advised the
Panel that each of the components of its plan, other than the $750,000 of new
equity, had been consummated or approved by all necessary approvals, other than
the approval by the shareholders. Without the new equity, the Company noted that
its plan would increase its net tangible assets to approximately $3,650,000, or
approximately $350,000 less than the $4 million minimum required for continued
listing on the National Market. The Company requested that the Panel grant the
Company a temporary exception from the net tangible assets rule to allow the
Company sufficient time to obtain the required shareholder approvals, and to
raise the additional $750,000 of new equity. In the alternative, the Company
requested that, if the Panel determined to allow the Company time to obtain
shareholder approval but not to grant the additional time to raise new equity,
the Panel would transfer the listing of the Company's common stock to the
SmallCap Market, where the Company felt it could more readily satisfy the
SmallCap Market's lower, $2 million minimum net tangible assets continued
listing requirement. The Company also requested a temporary exception from the
$1.00 minimum bid price requirement that applies to both the National Market and
the SmallCap Market to provide the Company enough time to submit the reverse
stock split proposal to its shareholders.
The Panel issued its opinion on August 6, 2001. In its opinion, the
Panel determined to transfer the Company's listing to the SmallCap Market,
effective August 8, 2001, subject to several conditions:
- The Company must make a public filing on or before September
4, 2001 evidencing at least $3,500,000 in net tangible assets;
5
10
- The Company must evidence a closing bid price per share of
common stock of at least $1.00 on or before September 4, 2001
and maintain a closing bid price of not less than $1.00 per
share for at least 10 consecutive trading days thereafter; and
- The Company must demonstrate full compliance with all
continued listing requirements for the SmallCap Market.
The Panel noted that the Company's common stock would be delisted from
the SmallCap Market if the Panel determines that the Company does not satisfy
all of the exceptions above. The Company believes it can meet the $3.5 million
net tangible asset condition by obtaining shareholder approval of Proposals 1, 2
and 3 at the special meeting, including the Mercury transaction, the conversion of the BrockMr. Brock's promissory note and the amendmentissuance of the Series A and B preferred stock, as
shownC Preferred Stock were described in detail in the table below.
Net Tangible Assets (6/30/2001).................................................. $ 697,000
----------
Firstwave PlanCompany's proxy statement mailed to Satisfy Nasdaq Panel Conditions for SmallCap Market:
- Mercury Transaction (Proposal 1)............................... $ 500,025
- Conversion of Brock Note (Proposal 2).......................... $ 750,000
- Amendment of Series A and B Preferred Stock to
- Eliminate Special Liquidation Preference (Proposal 3).......... $1,702,000
----------
Total Adjustments........................................................... $2,952,025
----------
Net Tangible Assets after Plan Completion........................................ $3,649,025
==========
The Company believes it can meet the minimum $1.00 bid price condition by
affecting a reverse stock split as contemplated by Proposal 4. If the shareholders reject any of the proposals, the Company believes that its common
stock would be delisted from the SmallCap Market.
REASON FOR SEEKING SHAREHOLDER APPROVAL OF PROPOSALS 1 AND 2
The Board of Directors has submitted Proposals 1 and 2 to the
shareholders for approval because the Board has been advised that the rules of
Nasdaq require that the proposals be submitted to the shareholders for their
approval. Nasdaq Rule 4350(i)(1)(D)(ii) (the "Nasdaq 20% Rule") requires
shareholder approval prior to the issuance of securitiesin August 2001 in connection with the September 7, 2001 Special Meeting of Shareholders.
Other than compensation arrangements described elsewhere in this Proxy Statement and the above referenced transactions, the Company was not a party to any transaction (other than a public offering) involving the sale(or series of transactions) nor did it have any relationship with any related party requiring disclosure of such transaction or issuancerelationship under applicable SEC disclosure rules during 2002.
11
Executive Compensation Tables
The following tables set forth certain information required by the SEC relating to various forms of compensation earned by the persons serving as Chief Executive Officer ("CEO") of the Company of commonduring 2002 and the other executive officers whose total salary and bonus for 2002 equaled or exceeded $100,000.
Table I—Summary Compensation Table
Table I presents the total compensation paid to or accrued by the Named Executive Officers during 2002, 2001, and 2000.
| | | | | | Long Term Compensation(1) | | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Annual Compensation | All Other Compensation(2) | |||||||||
| Name and Position | | ($) Salary | ($) Bonus | ($) Other Annual Compensation(3) | Options (#) | |||||||
| Year | ($) | |||||||||||
| Richard T. Brock President and CEO | 2002 2001 2000 | 250,000 240,000 240,000 | 235,022 — 38,220 | — — — | 13,334 2,417 6,667 | 3,411 — — | ||||||
| David R. Simmons(4) COO | 2002 | 46,173 | 10,000 | — | 25,000 | 263 | ||||||
| Judith A. Vitale CFO | 2002 2001 2000 | 170,000 155,000 138,333 | 64,631 — 17,200 | — — — | 11,999 10,750 3,333 | 48,628 1,987 2,328 | ||||||
| R. Kelly Mayo(5) VP, Client Services | 2002 2001 2000 | 99,098 135,000 5,625 | — — — | — — — | — 8,333 19,083 | 23,055 — | ||||||
| Debbie N. Qaqish(6) VP, Sales | 2002 2001 | 140,000 5,833 | — — | — — | — 15,000 | 12,188 — | ||||||
- (1)
- The Company did not award any restricted stock or
securities convertible intoother long-term incentives other than stock options during 2000, 2001 orexercisable for common stock, equal2002 to20% or moreits officers. Accordingly, columns relating to such awards have been omitted. - (2)
- Includes Company matching contributions to the indicated person's 401 (k) plan account, commissions, severance pay and option income.
- (3)
- Information with respect to certain perquisites and other personal benefits awarded to the named executive officers has been omitted because in each case, the aggregate value of
the common stock or 20% or more of the voting power outstanding before such issuance at a price (or in the case of convertible securities, a conversion price) per share thatthese items is less thanthe greater$50,000 or 10% of thebookexecutive's annual salary and bonus for the years reported above. - (4)
- Mr. Simmons joined the Company as an executive officer on October 11, 2002, with an annualized salary of $210,000.
- (5)
- Mr. Mayo joined the Company on December 18, 2000, with an annualized salary of $135,000. He resigned his position on September 15, 2002.
- (6)
- Ms. Qaqish joined the Company on December 17, 2001, with an annualized salary of $140,000. She resigned her position on February 13, 2003.
12
Table II—Option Grants in 2002
Table II presents information regarding options granted to the Named Executive Officers during 2002 to purchase shares of Common Stock. In accordance with SEC rules, the table shows the hypothetical "gains" or market value"option spreads" that would exist for the respective options based on assumed rates of annual compound stock price appreciation of 5% and 10% from the date the options were granted over the full option term.
| | | | | | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Individual Grants | | ||||||||||
| | No. of Securities Underlying Options Granted(1) | % of Total Options Granted to Employees during Year | | | ||||||||
| | Exercise or Base Price ($)/Share | | ||||||||||
| Name | Date of Expiration | 5% ($) | 10% ($) | |||||||||
| Richard T. Brock | 6,667 6,667 | 4.05 4.05 | 7.71 7.01 | 09/20/12 09/20/12 | 24,725 29,392 | 69,818 74,485 | ||||||
| David R. Simmons | 25,000 | 15.17 | 5.55 | 10/11/12 | 87,259 | 221,132 | ||||||
| Judith A. Vitale | 333 8,333 3,333 | 0.20 5.00 2.00 | 7.01 7.01 7.01 | 09/20/12 09/20/12 09/20/12 | 1,468 36,736 14,694 | 3,720 93,097 37,237 | ||||||
- (1)
- These options become exercisable in 25% increments on the first, second, third, and fourth anniversaries of the
common stock. Additionally, Nasdaq Rule 4350(i)(1)(B) (the "Nasdaq Control Rule") requires shareholder approvaldate of grant. Shares may be withheld upon exercise to pay applicable withholding taxes. Under certain circumstances, theissuanceoptions are subject to immediate vesting in the event ofsecurities by the Company that would result ina change of control of the Company.Although the Company does not believe that any changeThose grants shown with an expiration date ofcontrol (whether for purposes of the Nasdaq Control Rule or otherwise) is occurring as09/20/12 are grants issued a result of thetransaction contemplated by either or both of Proposals 1 and 2 below, there is no concrete test to determineOfficers' participation in theamount of securities that the Company may issue to a person without triggering the Nasdaq Control Rule. Depending on the facts and circumstances, the issuance by the Company of securities representing less than a majorityStock Exchange Program which allowed each of the Company'svoting power may resultdirectors and employees who held options under the Option Plan with an exercise price of greater than $10.00 the opportunity to surrender those options for cancellation ina change of controlexchange for new options to be granted approximately six months and one day after cancellation.
Table III—Aggregated Option Exercises in 2002 and 2002 Year-End Option Values
Table III presents information regarding options exercised for shares of the Company underCommon Stock during 2002 and the value of unexercised options held at December 31, 2002. There were no SARs outstanding during 2002. Accordingly, columns relating to such awards have been omitted. The value of exercisable and unexercisable in-the-money options at year-end was calculated based on $15.92, the closing sale price of a share of Common Stock reported on the Nasdaq Control Rule.
Therefore,SmallCap Market on December 31, 2002.
| | | | Number of Unexercised Options at Year-End (#) | | | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Value of Unexercised In-the-Money Options at Year End(1) $ | |||||||||
| | Shares Acquired on Exercise # | | ||||||||||
| Name | Value Received $ | |||||||||||
| Exercisable | Unexercisable | Exercisable | Unexercisable | |||||||||
| Richard T. Brock | — | — | 12,273 | 5,145 | 112,655 | 53,475 | ||||||
| R. Kelly Mayo | 6,857 | 17,430 | — | — | — | — | ||||||
| Debbie N. Qaqish | — | — | 3,750 | 11,250 | 56,138 | 168,413 | ||||||
| David R. Simmons | — | — | — | 25,000 | — | 259,250 | ||||||
| Judith A. Vitale | 8,939 | 45,796 | 6,171 | 11,810 | 47,384 | 124,083 | ||||||
- (1)
- Value of Unexercised In-the-Money Options at December 31, 2002 is calculated as follows: Per Share Closing Sale Price on December 31, 2002 less Per Share Exercise Price times the
CompanyNumber of Shares Subject to Unexercised Options. The per share price on December 31, 2002 was $15.92.
13
Performance Graph
The following indexed line graph indicates the Company's total return to shareholders from December 31, 1997 to December 31, 2002, as compared to total return for the Russell 2000 and Russell 2000-Technology indices for the same period. The Russell 2000 index is seeking shareholder approvalcomprised of the 2,000 publicly traded companies with market capitalizations (in terms of number of shares outstanding) ranked immediately below the 1,000 companies with the highest market capitalizations. The Russell 2000-Technology index is comprised of the 2,000 publicly traded companies in the high-technology industry with market capitalizations (in terms of number of shares outstanding) ranked immediately below the 1,000 companies in the high-technology industry with the highest market capitalizations.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG FIRSTWAVE TECHNOLOGIES, INC., THE RUSSELL 2000 INDEX
AND THE RUSSELL 2000 TECHNOLOGY SECTOR INDEX
- *
- $100 Invested on 12/31/97 in stock or index-
including reinvested of dividends.
Fiscal year ending December 31.
14
PROPOSAL 2—AMENDMENT OF THE COMPANY'S
1993 STOCK OPTION PLAN
Description of Plan and ratification ofProposed Amendment
The Firstwave Technologies, Inc. 1993 Stock Option Plan (the "Option Plan") permits the issuance of (i) the Series C Preferredboth incentive and non-qualified stock options to purchase Common Stock pursuant to the (x) conversiondirectors and employees of the Note held by Mercury,Company. The Option Plan currently provides for the conversiongrant of the Brock note, and (z) the sale of
additionaloptions to purchase up to 516,667 shares of Common Stock to such directors and key employees, as adjusted for the Series C Preferred Stock (including any securities of
the Company issued as dividends or otherwise in respect of the Series C
Preferred Stock in accordance with the terms thereof) and (ii) shares of commonone-for-three reverse stock upon the conversion of the Series C Preferred Stock as each is more
particularly described below in order to ensure compliance with the Nasdaq 20%
Rule and the Nasdaq Control Rule.
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11
Shareholder approval of the transaction is not otherwise required as a matter of
Georgia law or other applicable laws or rules or by the Company's Articles of
Incorporation or Bylaws.
Even though the actions contemplated in Proposals 1 and 2 may not
individually trigger the shareholder approval requirements of the Nasdaq 20%
Rule and the Nasdaq Control Rule, Nasdaq has advised the Company that the
transactions described in Proposals 1 and 2 are sufficiently related that they
should be considered together for purposes of determining whether the Nasdaq 20%
Rule is applicable. Such transactions collectively will involve the sale and
issuance of an aggregate beneficial ownership interest of between [27.5]% and
[36.2]% and therefore may require shareholder approval under the Nasdaq 20% Rule
and the Nasdaq Control Rule. The exact percentage will vary based on the
conversion price of the Series C Preferred Stock, which is determined based on
the average closing pricesplit of the Company's Common Stock overeffective September 12, 2001. On March 19, 2002 the Company completed a Stock Exchange Program that offered each of its directors and employees who held options under the Option Plan with an exercise price of greater than $10.00 the opportunity to surrender those options for cancellation in exchange for new options to be granted approximately six months and one day after cancellation. Approximately 81,684 options were exchanged under this program, and the Company granted 81,684 new options on September 20, trading days
immediately prior2002. As of March 18, 2003, options to purchase 378,173 shares (net of forfeitures) had been granted under the special meeting.Option Plan, leaving 12,829 shares available for future grants. The table below showsnumber of shares reserved under the effectOption Plan is subject to adjustment in the event of stock dividends, stock splits, recapitalizations, and similar events. The primary purpose of the approval of Proposals 1Option Plan is to secure and 2 onretain employees and directors by giving them an opportunity to invest in the shares held by Mr. Brock and by
Mercury, assuming several different possible conversion prices for the Series C
stock:
20-Day
Average Shareholder Prior to Shareholder
Price(1) Approval After Shareholder Approval of Proposals 1 and 2
-------- ----------- --------------------- -----------------------------------------------------------------
Shares Series Series C Common Shares
Beneficially Percent C Conversion Stock Upon Warrant Beneficially Percent
Owned Shares Price(2) Conversion(3) Shares(4) Owned
------------ ------- ------ ---------- ------------- --------- ------------ -------
$1.25 Brock(5) 2,461,346 34.8% 10,000 $0.75 1,000,000 0 3,461,346 35.6%
Mercury II -- -- 6,667 $0.75 666,700 0 666,700 6.9%
Mercury I(6) 500,000 7.1% -- -- -- -- 500,000 5.1%
Other -- -- 10,000 $0.75 1,000,000 0 1,000,000 10.3%
Series C
Investors(7)
$1.00 Brock(5) 2,461,346 34.8% 10,000 $0.75 1,000,000 0 3,461,346 35.6%
Mercury II -- -- 6,667 $0.75 666,700 0 666,700 6.9%
Mercury I(6) 500,000 7.1% -- -- -- 500,000 5.1%
Other -- -- 10,000 $0.75 1,000,000 0 1,000,000 10.3%
Series C
Investors(7)
$0.66 Brock(5) 2,461,346 34.8% 10,000 $0.50 1,500,000 187,500 4,148,846 35.9%
Mercury II -- -- 6,667 $0.50 1,000,050 125,006 1,125,056 9.7%
Mercury I(6) 500,000 7.1% -- -- -- -- 500,000 4.3%
Other -- -- 10,000 $0.50 1,500,000 187,500 1,687,500 14.6%
Series C
Investors(7)
$0.50 Brock(5) 2,461,346 34.8% 10,000 $0.50 1,500,000 187,500 4,148,846 35.9%
Mercury II -- -- 6,667 $0.50 1,000,050 125,006 1,125,056 9.7%
Mercury I(6) 500,000 7.1% -- -- -- -- 500,000 4.3%
Other -- -- 10,000 $0.50 1,500,000 187,500 1,687,500 14.6%
Series C
Investors(7)
- ---------------
(1) Calculated as the average daily closing price as reported by Nasdaq
over 20 consecutive trading days ending on the datefuture success of the special
meeting.
(2) Conversion price isCompany.
The proposed amendment of the lowerOption Plan, if approved by the shareholders of (i) $0.75 or (ii) 0.75 times the 20-day average closing price.
(3) Common Stock upon conversion isCompany, would increase from 516,667 to 816,667 the number of shares available for grants of options under the Option Plan. If the amendment of the Option Plan is approved, the Company will have 312,829 shares available for future grants under the Option Plan. Options to purchase shares of Common Stock issuable upon conversionreserved for issuance under the Option Plan may be granted to employees (93 persons as of March 18, 2003), including executive officers (five persons), and to non-employee directors (four persons).
Description of the holders sharesOption Plan
The Option Plan is administered by a committee of Series C Preferred
Stock.
(4) Warrant Shares equalsthe Board of Directors made up of at least two members. The Board of Directors will consider the advisability of complying with the disinterested standards contained in Section 162(m) of the Internal Revenue Code (the "Code") and in Rule 16(b)(3) (promulgated under the Securities Exchange Act of 1934) when appointing members. The Compensation Committee of the Board of Directors presently serves in this capacity.
The Compensation Committee selects the individuals to receive options, determines the type of option granted, the number of shares subject to an option and the other terms and conditions of Common Stock issuable
upon exercise in fullan option consistent with the provisions of the warrants receivedOption Plan; provided, however, that all terms and conditions of the grants of options to directors, as described below, are determined by the holder in
connection withprovisions of the Mercury transaction.
(5) Includes 22,500 shares subject to options exercisable and 670,622
shares thatOption Plan. No employee, however, may be acquired upon conversiongranted during any single fiscal year of Series A and B preferred
stock on or before August 2, 2001.
(6) Mercury Fund I, Ltd., an affiliate of Mercury Fund II, Ltd., acquired
500,000the Company the rights to shares of Common Stock from the Company in August 1999. Mercury
Fund II, Ltd. disclaims beneficial ownership of such shares.
(7) Assumes sale of 10,000 additional shares of Series C preferred stock.
The Company is obligated to use its best efforts to sell these shares
of Series C preferredunder options and stock to additional investors by September 30,
2001. The
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Company has not received any binding commitments to sell such
additional shares, and there can be no assurance that the Company will
be able to do so.
PROPOSAL 1
APPROVAL AND RATIFICATION OF THE SALE OF SERIES C PREFERRED STOCK
TRANSACTION WITH MERCURY FUND II, LTD.
On July 18, 2001, the Company and Mercury entered into a series of
agreements to document Mercury's investment of $500,025appreciation rights which, in the Company. In the
transaction:
- Mercury purchased a convertible secured promissory
note and a warrant from the Company for a price of
$500,025. The promissory note bears an annual
interest rate of 9% and is payable on the earlier of
October 31, 2001, the maturity date, or the date that
the promissory note converts into Series C Preferred
Stock. The promissory note will be converted into
6,667 shares of Series C Preferred Stock
automatically upon shareholder approval of Proposals
1 and 2.
- The warrant entitled Mercury to purchase 125,006aggregate, exceed 100,000 shares of Common Stock. The warrant only becomes
exercisable in two instances - (1) ifCompensation Committee also interprets the shareholders failprovisions of the Option Plan and may prescribe, amend and rescind rules and regulations relating to approve Proposals 1it. The Compensation Committee is also under certain circumstances authorized to delegate to one or more officers of the Company authority to grant options to any prospective optionee who is not and 2,will not at the warrant becomes exercisable with antime of the option grant be a "reporting person" for purposes of Section 16 of the Securities Exchange Act of 1934.
Options granted pursuant to the Option Plan are nontransferable except by will or the laws of descent and distribution. The exercise price of $1.00 per share; and (2)each option granted may be paid in cash or, if the shareholders approve
Proposals 1optionee's agreement so provides, in shares previously owned by the optionee, by any combination of shares and 2 butcash or by means of a "cashless exercise" through a broker. The term of an incentive stock option may not exceed ten years from the average price for the
Company's Common Stock over the 20 consecutive
trading days prior to the special meeting is less
than $.667 per share, in which casedate of grant and the exercise price would equalof an incentive stock
15
option may not be less than the average price.
- Under the terms of this agreement, the Series C
Preferred Stock will be convertible into Common Stock
at a conversion price of between $0.50 and $0.75,
depending upon the average daily closing pricefair market value of the Common Stock on the twenty consecutive trading days
endingdate of grant (or less than 110% of the fair market value if the optionee owns more than 10% of the outstanding Common Stock).
Options granted under the Option Plan are exercisable in such amounts, at such intervals and upon such terms as the Compensation Committee shall provide in written agreements reflecting the options, subject to certain limitations specified in the Option Plan.
Each non-management director is eligible to receive an option to acquire 1,667 shares of the Common Stock annually if they continue in service through their respective service anniversary dates (as described in the Option Plan). Each newly appointed non-management director is eligible to receive an initial option to acquire 6,667 shares of the Common Stock on the date of appointment. These grants of options to directors have a term of ten years and become exercisable in annual one-fourth increments following the special meeting.
Accordingly, underdate of grant and have a per share exercise price equal to the agreementfair market value of a share of Common Stock determined as of the option grant date.
Prior to certain changes of control of the Company, will
ultimately issue between 666,700unless the surviving entity agrees to assume the options, provisions shall be made to cause each outstanding option to become fully exercisable prior to the change in control and 1,000,050 shares
of common stock to Mercury, plus up to 125,006
additional shares underlying Mercury's warrant.
- Commencing November 30, 2001, the holdersterminate upon consummation of the Series C Preferred Stock will be entitledtransaction or event causing the change in control.
For additional information concerning the number and type of options issued pursuant to receive
a nine percent (9%) cumulative dividend payable in
cash atthe Option Plan through the end of each calendar month.
The following is2002, see "Executive Compensation—Table I—Summary Compensation Table" and "—Table II—Option Grants in 2002." For additional information concerning option exercises in 2002, see "Executive Compensation—Table III—Aggregated Option Exercises in 2002 and 2002 Year-End Option Values." As of March 18, 2003, the closing sale price of a summaryshare of the provisions of the Mercury investment
documents, including the:
- Convertible Note Purchase Agreement, dated as of July
18, 2001 between the Company and Mercury;
- Convertible Secured Promissory Note issued to
Mercury;
- Certificate of Designation of the Series C Preferred
Stock;
- Security Agreement, dated July 18, 2001, between the
Company and Mercury;
- Registration Rights Agreement, dated July 18, 2001,
between the Company and Mercury; and
- Warrant to acquire up to 125,006 shares of the
Company's common stock.
Because the following is only a summary, it may not contain all of the
provisions that may be important to you. The following summary is qualified in
its entirety by reference to, and should be read in conjunction with, such
documents. As a result, we encourage you to read each of these documents, which
are the legal documents that set out all of the terms of the Mercury investment,
prior to making your decision on Proposal No. 1. Copies of the note purchase
agreement, the promissory note, the Series C Certificate of Designation, the
security agreement, the
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registration rights agreement and the warrant are attached to this Proxy
Statement as Exhibits A, B, C, D, E, and F, respectively.
Terms of the Note
Amount, Interest Rate and Maturity. The original principal amount of
the promissory note is $500,025. The promissory note bears interest at the rate
of 9% per annum from July 19, 2001, and matures on October 31, 2001. Any amounts
not paid on October 31, 2001 will accrue interest at 18% per annum until paid in
full.
Conversion. If the shareholders approve Proposals 1 and 2, the
principal of the note will automatically convert into 6,667 shares of Series C
preferred stock, and the Company will pay all accrued interestCommon Stock reported on the note in
cash. If the shareholders do not approve Proposals 1 and 2, then the Company
will be required to repay the $500,025 purchase price, plus interest, on October
31, 2001.
Reservation of Shares. The Company has agreed to reserve enough shares
of its common stock to permit the conversion in full of the shares of Series C
Preferred Stock issuable upon the conversion of the promissory note into shares
of common stock. The Company also agreed to reserve an additional 125,006 shares
of common stock for issuance upon exercise of the warrant.
Events of Default. If the Company defaults on the promissory note,
Mercury will have the right to demand immediate repayment of the note and to
seize and sell the assets of the Company to pay off the note. See "--Other
Agreements--Security Agreement" below. Each of the following would be considered
a default under the note:
- Company fails to pay on the promissory note's maturity date,
the principal of, and interest on, or any other amount payable
under, the promissory note, and such failure continues uncured
for 5 days; or
- The Company defaults in the due observance or performance of
any covenant, condition or agreement on the part of the
Company to be observed or performed pursuant to the terms of
the promissory note or the note purchase agreement and such
default continues uncured for 15 days after notice; or
- Any representation or warranty of Company in the note purchase
agreement is false and remains uncured for 15 days after
notice; or
- The Company commits any material breach of the terms of the
promissory note or the note purchase agreement which remains
uncured for 15 days after notice; or
- The Company is dissolved or the Company's Board of Directors
and shareholders vote in favor of dissolution; or
- The Company becomes insolvent, makes an assignment for the
benefit of creditors, orNasdaq SmallCap Market was $12.21
Set forth below is the subject of certain bankruptcy
proceedings that are not dismissed within 120 days; or
- The Company admits in writing its inability to pay its debts
as they mature.
Terms of the Series C Preferred Stock
Amount. The Company has authorized a total of 26,667 shares of Series C
Preferred Stock.
Dividends. Each holder of shares of Series C Preferred Stock is
entitled to receive cumulative dividends at a rate of 9% per annum per share,
paid monthly in cash commencing November 30, 2001. The Company may not pay or
declare dividends or other distributions on any shares of the common stock of
the Company or any shares of any other class or series or issue of preferred
stock that is junior to the Series C Preferred Stock as long as any accrued
dividends on the Series C Preferred Stock remain unpaid.
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Liquidation Preference. In the event of any liquidation or winding up
of the Company, holders of the Series C Preferred Stock are entitled to receive
an amount equal to $75 per share of Series C Preferred Stock, plus any accrued
but unpaid dividends. This liquidation amount will be appropriately adjusted
from time to time for any stock splits, dividends, combinations or the like
with respect to such shares of Series C Preferred Stock.
Conversion. The holders of the Series C Preferred Stock have the right
to convert all or any part of their shares of Series C Preferred Stock into
shares of common stock at any time. The total number of sharesincentive and non-qualified options that had been granted to certain employees and certain groups of the common
stock into which the Series C Preferred Stock may be converted initially will
be determined by dividing the original purchase price by the conversion price
(See "Conversion Price" below), as the same may be adjusted for future
issuances of securities at a price below the then applicable conversion price,
and for stock splits, stock dividends, combinations and the like.
Conversion Price. The conversion price will initially be between $0.75
and $0.50 per share, calculated by taking the lower of (i) $0.75employees or (ii) .75
times the average closing price of the common stock as reported by Nasdaq for
the twenty (20) consecutive trading days ending on the date that the Company's
shareholders approve the transactions contemplated in this Proxy Statement. The
initial conversion price will not be less than $0.50 per share of Series C
Preferred Stock. Adjustments to the conversion price may result from, among
other things, combinations or consolidations of common stock, dividends,
distributions and common stock equivalents. The following table demonstrates a
range of possible conversion prices based on a range of assumed 20-day average
prices:
20-DAY AVERAGE PRICE CONVERSION PRICE
-------------------- ----------------
$1.25 $0.75
$1.00 $0.75
$0.75 $0.5625
$0.667 $0.50
$0.50 $0.50
Reservation of Shares. The Company must at all times reserve enough
shares of common stock to permit the conversion of all outstanding shares of
Series C Preferred Stock.
Anti-Dilution Protection. The Series C Preferred Stock are granted
anti-dilution protection on a weighted average basis to prevent dilution in the
event the Company issues shares at a purchase price less than the applicable
conversion price then in effect for the Series C Preferred Stock. The
conversion price of the Series C Preferred Stock is also subject to adjustment
in the event that the Company effects any subdivision or combination of the
common stock or any distribution by the Company of any stock dividend or assets
(other than cash dividends paid out of retained earnings) to holders of common
stock. No anti-dilution protection exists for (i) issuance of shares of common
stock to employees, outside directors and consultants out of the employee
option pool pursuant to the Company's stock option plans approved by the
Company's Board of Directors, (ii) any shares of common stock issued or
issuable by reason of a dividend, stock split, split-up or other distribution
on shares of common stock, (iii) any shares of common stock issued or issuable
pursuant to the warrant, (iv) the issuance of common stock upon the conversion
of the Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock or Series C Preferred Stock, (v) the issuance of shares of common stock
upon the exercise or conversion or rights, options, warrants or other
securities convertible into common stockremained outstanding as of July 19, 2001, (vi)
upDecember 31, 2002.
| Name | Incentive Options Granted(1) | Non-Qualified Options Granted(1) | ||
|---|---|---|---|---|
| Richard T. Brock | 9,084 | 8,334 | ||
| Debbie N. Qaqish | 15,000 | — | ||
| David R. Simmons | 25,000 | — | ||
| Judith A. Vitale | 17,981 | — | ||
| All executive officers as a group (4 persons) | 67,065 | 8,334 | ||
| All directors who are not Executive officers as a group (4 persons) | — | 40,005 | ||
| All non-executive employees as a group (71 persons) | 240,628 | 566 |
- (1)
- Options granted to
10,000 shares of Series C Preferred Stock (and common stock issuedexecutive officers and non-executive employees become exercisable inconversion thereof) issued upon conversion25% increments on the first, second, third and fourth anniversaries of the$750,000 promissory note helddate of grant. All of the options granted expire ten years from the date of grant or earlier if the optionee dies or ceases to be employed byRichard T. Brock, (vii) up to 10,000 additionalthe Company.
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Equity Compensation Plan Information
The table below contains certain information regarding our equity compensation plans as of the end of 2002.
| | (a) | (b) | (c) | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) | ||||||
| Equity compensation plan approved by security holders: | |||||||||
| Stock Option Plan | 356,598 | $ | 5.93 | 49,983 | (1) | ||||
| Employee Stock Purchase Plan | — | (2) | $ | — | (2) | 17,761 | |||
| Equity compensation plan not approved by security holders: | |||||||||
| Warrants | 18,667 | (3) | $ | 2.81 | 0 | ||||
| Total | 375,265 | 67,744 | |||||||
- (1)
- Excludes the proposed increase of 300,000 shares
of Series C Preferred Stock (and common stock issued upon conversion thereof) issued for cash for a purchase price of not less than $75 per share, or (viii) any shares of common stock pursuant to the exchange, conversion or exercise of any Common Stock Equivalents for which anti-dilution adjustments were previously made. The Series C Preferred Stock does not adjust solely due to changesin themarket price of the common stock. Adjustments are made only due to issuances of common stock, or securities that convert into shares of common stock, for an effective per share price less than the price paid by Mercury, and for other changes that effect 1015 the common stock generally. Both the conversion price and theaggregate number of shares of common stockintoavailable for issuance under the Amended Stock Plan, which is subject to shareholder approval as described in this proxy statement. - (2)
- We maintain an Employee Stock Purchase Plan that permits employees who have worked full-time for us for at least six months to have payroll deductions made to purchase shares of our common stock during specified purchase periods. The purchase price is 85% of the
Series C Preferred Stockfair market value per share of our common stock on the last business day of the purchase period. Consequently, we do not know the number of shares or the price at which shares will beconvertible willpurchased for any purchase periods that are currently in effect. - (3)
- Represents warrants issued to Silicon Valley Bank on December 19, 2000 related to the issuance of a Line of Credit Agreement. These warrants expire December 19, 2005.
New Plan Benefits
The table below outlines certain awards proposed to be adjusted proportionatelyissued in 2003 if the reverse split stock proposalAmended Stock Plan is approved by the shareholders and implemented, in the same way that it effects
all of the holders of the outstanding shares of common stock.
Optional Redemption by Company. Beginning July 18, 2004, the Company
shall have the right to repurchase all of the Series C Preferred Stock at theour stockholders.
| Name and Position | Dollar Value(1) | Number of Units | |||
|---|---|---|---|---|---|
| Executive Officers | 0 | 30,000 | (2) | ||
| Non-executive employee | 0 | 5,000 | (3) |
- (1)
- Options will be issued with an exercise price
paid by the holder (initially, $75 per share of Series C stock)equal to theCompany for the Series C Preferred Stock (as adjusted from time to time in respect to stock dividends, splits, combination and the like with respect to such shares) plus all accrued and unpaid dividends on the Series C Preferred Stock. Voting Rights. The holdersfair market value ofthe Series C Preferred Stock have one vote pera share of common stockinto which each share of Series C Preferred Stock may convert. The holdersdetermined as of theSeries C Preferred Stock vote together withdate theholders of common stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, and not as a separate class, except as otherwise set forth in the Series C Certificate of Designation or as required by law. See "Terms of the Series C Preferred Stock - Protective Provisions" and "Other Terms of the Transaction - Consentoptions are granted. - (2)
- Represents options proposed to
Certain Business Combinations" below. Protective Provisions. For so long as at least fifty percent (50%) of the originally issued shares of Series C Preferred Stock remains outstanding, the consent of the holders of at least sixty-six percent (66%) of the holders of the Series C Preferred Stock, voting separately as a class, is required for: (i) any amendment or change to the Company's Articles of Incorporation or Bylaws that adversely affects the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Series C Preferred Stock; (ii) any action that authorizes, creates or issues shares of any class of stock having preferences superior to or on a parity with the Series C Preferred Stock with respect to dividends or liquidation preferences; (iii) any action that reclassifies any outstanding shares into shares having preferences or priority as to dividends or assets senior to or on a parity with the preferences of the Series C Preferred Stock; or (iv) the liquidation or dissolution of the Company. Other Agreements Security Agreement. The Company and Mercury also entered into a security agreement to secure the full and prompt payment of the debts, principal, interest, and other amounts the Company owes Mercury under the promissory note, subject to the prior liens securing the Company's bank line of credit. Should the Company default on its obligations under the promissory note to Mercury, then Mercury may: - Declare all of the Company's obligations to Mercury immediately due and payable (but if certain Events of Default occur those obligations are immediately due and payable without any action by Mercury); - Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Mercury considers advisable; - Make any payments and do any acts Mercury considers necessary or reasonable to protect its property interest secured by the security agreement; - Apply to these obligations any amount held by Mercury owing to or for the credit or the account of the Company; - Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the property interest in accordance with the law; and - Dispose of the property interest according to the Georgia Uniform Commercial Code. Registration Rights Agreement. The Company entered into a registration rights agreement with Mercury in which the Company agreed to file one or more shelf registration statements with the Securities and Exchange 1116 Commission no later than the earlier of (i) 15 days after shareholder approval of the issuance of Series C Preferred Stock to Mercury and (ii) November 30, 2001. The securities to which this shelf registration relates include: (i) the common stock into which the Series C Preferred Stock maybeconverted; (ii) the shares of common stock issuable upon exercise of the warrant; (iii) 500,000 shares of common stock previously purchased by Mercury Fund I, Ltd., an affiliate of Mercury, in August 1999; and (iv) any other shares issued in respect to the foregoing. Subject to the customary extension and termination provisions set forth in the registration rights agreement, the Company must use its commercially reasonable efforts to have the shelf registration declared effective no later than one hundred twenty (120) days after the filing date and to keep it continuously effective for a period of thirty (30) months following the date on which it is declared effective. The Company has also granted Mercury incidental registration rights that will permit Mercury to include its shares of common stock in most registered offerings of Common Stock by the Company to the public. The Company agreed to pay certain costs related to the registration obligations set forth in the registration rights agreement, subject to certain exceptions, and agreed to indemnify the holders against certain liabilities, including liabilities under the Securities Act of 1933. Other Terms of the Transaction Conversion of the Promissory Note Held by Richard T. Brock. As a condition to the note purchase agreement, the Company and Mr. Brock agreed in July 2001 to amend and restate a promissory note of the Company previouslyissued toMr. Brocktwo individuals who became Executive Officers of Firstwave in connection withhis loanFirstwave's acquisition of$750,000 toConnect Care, Inc. in March, 2003. 10,000 options will vest over a one-year period and 20,000 options will vest over a 4-year period. - (3)
- Options will vest over 4 years
17
It is anticipated that if the CompanyAmended Stock Plan is approved by our stockholders, additional stock option awards will be issued in February 2001. Prior to2003. Because the amendment, the note had a principal amount of $750,000, an annual interest rateawards to be received by any participant in the Amended Stock Plan is determined by our compensation committee in its discretion, the amount of 9%,future awards to be granted to any person or group of persons (other than those listed above) is not currently determinable.
Federal Income Tax Consequences
The following discussion outlines generally the federal income tax consequences of participation in the Option Plan. Individual circumstances may affect these results. The federal income tax law and a maturity date of January 15,
2002. The note was secured by a lien on all of the Company's assets junior to
the Company's bank loans. The note was not convertible into shares of the
Company's equity securities. The July 2001 modifications were made so the terms
of the note were substantially similar to the promissory note issued to
Mercury, as required by the note purchase agreement. As further described in
Proposal 2 below, theregulations are frequently amended, and restated promissory note continues to bear an
annual interest rate of 9% and matureseach participant should rely on January 15, 2002, but it now converts
into 10,000 shares of Series C Preferred Stock automatically upon shareholder
ratification of the proposals set forth in this Proxy Statement. Repayment of
the amended and restated promissory note and the liens on the Company's assets
securing the note are now subordinated to the prior repayment of Mercury's
promissory note. Mr. Brock has agreed to vote each of his shares of the
Company's capital stock in favor of each of the transactions contemplated in
the note purchase agreement to be presented at the Special Meeting.
Furthermore, Mr. Brock and each of the other purchasers of Series C Preferred
Stock, if any, will be entitled to receive a warrant to purchase common stock
on substantially similar terms as the warrant issued to Mercury if Mercury's
warrant becomes exercisable by its terms. See "--Terms of the Series C
Preferred Stock - Warrant" below.
Company's Board of Directors. Mercury is entitled to designate one
observer to the Company's Board of Directors for so long as fifty percent (50%)
of the shares of Series C Preferred Stock remain outstanding. The observer or his or her representative will be entitledown tax counsel for advice regarding federal income tax treatment under the Option Plan.
Non-qualified Stock Options. The recipient of a non-qualified option under the Option Plan is not subject to attend allany federal income tax upon the grant of such option nor does the grant of the Company's Board
of Director meetings and will be reimbursed for all reasonable travel expenses
related to attending the Board of Director meetings.
Warrant. The Company issued a contingent warrant to Mercury to
purchase up to 125,006 shares of common stock that is only exercisable under
two circumstances:
- if shareholder approval of the proposals containedoption result in this
Proxy Statement is not obtained prior to October 31, 2001,
Mercury will be entitled to purchase 125,006 shares of common
stock, at an exercise price of $1.00 per share
- if shareholder approval is obtained by October 31, 2001, but
the average priceincome tax deduction for the Company's Common Stock over the 20
consecutive trading days prior to the special meeting is less
than $.667 per share, Mercury will be entitled to purchase
125,006 shares of common stock, at an exercise price equal
the 20-day average price.
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Private Placement. The Company agreed to use its best efforts to raise
an additional $750,000 by September 30, 2001 through a private placement of
shares of Series C Preferred Stock.
Restricted Borrowing. The Company agreed that through October 31,
2001, the Company will not draw down on the Company's existing bank line of
credit without Mercury's consent.
Consent to Certain Business Combinations. The Company agreed not to
enter into contract for the sale, merger or similar business combination of the
Company that does not result in consideration to Mercury of at least $2.00 per
share of common stock, as adjusted and determined on an as-converted to common
stock basis, without Mercury's prior consent. Mercury's consent is required as
long as it owns at least fifty percent (50%) of the shares of Series C
Preferred Stock acquired upon conversion of the promissory note (or the common
stock into which such amount of Series C Preferred Stock converts).
Transactions with Interested Shareholders. The Company agreed not to
enter into any transaction, other than in the ordinary course of business, with
any officer or shareholder who owns greater than five percent (5%) of the
Company's outstanding stock without Mercury's approval. This right of approval
remains in effect for as long as Mercury owns at least fifty percent (50%) of
the shares of Series C Preferred Stock acquired upon conversion of the
promissory note (or the common stock into which such amount of Series C
Preferred Stock converts).
Sale of Additional Shares of Series C Preferred Stock
The Company's Board of Directors also has unanimously determined that
it is in the best interests of the Company and its shareholders to sell up to
an additional 10,000 shares of Series C Preferred Stock from time to time in a
private placement on terms and conditions that are substantially similar to the
proposed sale of such preferred stock to Mercury. The Company is obligated
under the note purchase agreement to use its best efforts to sell additional
shares of Series C Preferred Stock by September 30, 2001. The Company currently
has no binding commitments to sell any additional shares of Series C Preferred
Stock, and there can be no assurance that any such shares will be sold. If the
warrant issued to Mercury is exercisable by its terms (as described above), the
Company may issue substantially similar warrants to the purchasers in the
private placement, if any, and to Mr. Brock upon the conversion of his
promissory warrant. The warrant issued to purchasers of additional shares of
Series C Preferred Stock, if any, would be exercisable to acquire up to an
aggregate of 187,500 shares of common stock. If a warrant were issued to Mr.
Brock, it would also be exercisable to acquire up to 187,500 shares of common
stock.
IMPACT OF THE SALE AND ISSUANCE FOR MERCURY AND THE PRIVATE PLACEMENT ON
EXISTING SHAREHOLDERS
The holders of the Series C Preferred Stock have rights which are
senior to those of the holders of our common stock, our Series A Convertible
Preferred Stock and our Series B Convertible Preferred Stock, as described
below and also as described above in "--Transaction With Mercury Fund II,
Ltd.--Terms of the Series C Preferred Stock." No other series may be
authorized, designated, or issued after this date, which is on parity with or
senior to the Series C Preferred Stock without the approval of holders of at
least 66% of the outstanding shares of Series C Preferred Stock. SHAREHOLDERS
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN DETERMINING WHETHER TO VOTE
FOR THE SALE OF SERIES C PREFERRED STOCK
- The issuance of the promissory note, the warrant and the
Series C Preferred Stock to Mercury and others, if any, the
ability of the holders of such securities to convert their
shares into common stock, the exercise price of the warrant
and the conversion price provisions of the Series C Preferred
Stock, may impact the trading patterns and adversely affect
the market price of the common stock.
- The holders of Series C Preferred Stock will have a claim
against the Company's assets senior to the holders of common
stock, Series A Convertible Preferred Stock, and Series B
Convertible Preferred Stock in the event of the Company's
liquidation or bankruptcy.
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- The holders of Series C Preferred Stock will receive
dividends at the rate of 9% in priority over the payment of
any dividends on the common stock, the Series A Preferred
Stock and the Series B Preferred Stock.
- Shareholders are subject to the risk of substantial dilution
to their interests which may result from the issuance of
shares of Series C Preferred Stock upon the conversion of the
promissory notes held by Mercury and Mr. Brock and from the
issuance of shares of common stock upon conversion of the
Series C Preferred Stock and the exercise of the warrant(s).Company. As a result of the issuanceexercise of such Series C Preferred Stock
and common stock,an option, the current shareholdersrecipient generally will own a smaller
percentagerecognize ordinary income in an amount equal to the excess, if any, of the outstanding common stockfair market value of the Company. In
addition, certain events triggeringshares transferred to the anti-dilution
provisionsrecipient upon exercise over the exercise price. Such fair market value generally will be determined on the date the shares of Common Stock are transferred pursuant to the exercise. However, if the recipient is subject to Section 16(b) of the Series C Preferred Stock that reduceExchange Act, the conversion pricedate on which the fair market value of the shares transferred is determined will cause an increasebe the earlier of the last day of the six-month period beginning on the date the "property" is "purchased" or the first day on which a sale of the "property purchased" will not subject the recipient to suit under Section 16(b) of the Exchange Act. Alternatively, if such a recipient makes a timely election under Section 83(b) of the Code, such fair market value will be determined on the date the shares are transferred pursuant to the exercise without regard to the effect of Section 16(b) of the Exchange Act. The recipient will recognize ordinary income in the number of
shares of common stock issuable upon conversionyear in which the fair market value of the Series
C Preferred Stock.shares transferred is determined. The sale of additional common stock,
Series C Preferred Stock, and the warrant will have a
dilutive effect on earnings per share and (in the case of
convertible preferred stock and warrants, upon the conversion
or exercise thereof) the relative voting power of the
Company's present stockholders.
- Provided that they own at least fifty percent (50%) of the
originally issued shares of Series C Preferred Stock, the
holders of Series C Preferred Stock will have substantial
rights and preferences described above under "Terms of the
Series C Preferred Stock," including the right to consent to
certain corporate transactions, even those that are
authorized by the Company's Board of Directors or approved by
the holders of common stock. These rights may give the
holders of the Series C Preferred Stock the ability to
influence the Company's management and may prevent
transactions that holders of common stock deem beneficial.
- The 667,000 to 1,000,050 shares of common stock issuable to
Mercury upon conversion of the Series C Preferred StockCompany generally will be entitled to registration rights. Consequently, ifa federal income tax deduction equal to the amount of ordinary income recognized by the recipient when such ordinary income is recognized by the recipient, provided the Company satisfied applicable federal income tax withholding requirements.
Depending on the period the shares of Common Stock are held after exercise, the sale or other taxable disposition of shares acquired through the exercise of a non-qualified option generally will result in a short- or long-term capital gain or loss equal to the difference between the amount realized on such disposition and the fair market value of such shares are registered,when the non-qualified option was exercised.
Special tax rules apply to a recipient who exercises a non-qualified option by paying the exercise price, in whole or in part, by the transfer of shares of Common Stock to the Company.
Incentive Stock Options. The recipient of an incentive stock option is not subject to any federal income tax upon the grant of such an option pursuant to the Option Plan, nor does the grant of an incentive stock option result in an income tax deduction for the Company. Further, a recipient will not recognize income for federal income tax purposes and the Company normally will not be entitled to any federal income tax deduction as a result of the exercise of an incentive stock option and the related transfer of shares of Common Stock to the optionee. However, the excess of the fair market value of the shares transferred upon the exercise of the incentive stock option over the exercise price for such shares generally will constitute an item of alternative minimum tax adjustment to the optionee for the year in which the option is exercised. Thus, certain optionees may increase their federal income tax liability as a result of the exercise of an incentive stock option under the alternative minimum tax rules of the Code.
If the shares of Common Stock transferred pursuant to the exercise of an incentive stock option are disposed of within two years from the date the option is granted or within one year from the date
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the option is exercised, the optionee generally will recognize ordinary income equal to the lesser of (i) the gain recognized (i.e., the excess of the amount realized on the disposition over the exercise price) or (ii) the excess of the fair market value of the shares transferred upon exercise over the exercise price for such shares. If the optionee is subject to Section 16(b) of the Exchange Act, special rules may apply to determine the amount of ordinary income recognized upon the disposition. The balance, if any, of the optionee's gain over the amount treated as ordinary income on disposition generally will be freely
transferable without restriction undertreated as long- or short-term capital gain depending upon whether the Securities Actholding period applicable to long-term capital assets is satisfied. The Company normally would be entitled to a federal income tax deduction equal to any ordinary income recognized by the optionee, provided the Company satisfies applicable federal income tax withholding requirements.
If the shares of 1933, as amended (but may be subjectCommon Stock transferred upon the exercise of an incentive stock option are disposed of after the holding periods have been satisfied, such disposition will result in a long-term capital gain or loss with respect to the short-swing
profit rulesdifference between the amount realized on the disposition and other restrictions under the Exchange Act).
Such free transferabilityexercise price. The Company will not be entitled to a federal income tax deduction as a result of a disposition of such a large number of
additional shares could materially and adversely affect the
market price of our common stock.
INTERESTS OF CERTAIN PERSONS
Mr. Brock currently holds approximately 28% of the outstanding common
stock, all of outstanding shares of the Series A Convertible Preferred Stock,
and a majority of the outstanding shares of Series B Convertible Preferred
Stock. See "Beneficial Ownership of common stock" above. For a summary of the
effects of this proposal on Mr. Brock's percentage ownership, see "REASONS FOR
SEEKING SHAREHOLDER APPROVAL OF PROPOSALS 1 AND 2" above. In addition, he is a
member of the Company's Board of Directors and the President and CEO of the
Company.
The Company agreed to pay up to $20,000 of Mercury's reasonable
out-of-pocket expenses incurred in connection with the preparation,
negotiation, execution and delivery of the Note Purchase Agreement and any
amendments or modifications thereof.
Pursuant to the note purchase agreement, Mr. Brock has agreed to vote
each of his shares of the capital stock of the Company, or approximately 35% of
the votes entitled to be cast, in favor of each of the transactions
contemplated by such Agreement at the Special Meeting.
CONSEQUENCES OF NON-RATIFICATION
Although the Company can give no assurances that the ratification of
the proposal contained in this Proxy Statement willafter these holding periods have any or all of the
intended effects, if the Company's shareholders do not ratify this proposal and
each of the other proposals contained in this Proxy Statement, the following
consequences will result:
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- The common stock will be delisted from the SmallCap Market;
and
- The right to purchase shares of common stock under the
warrants issued to Mercury will become immediately vested.
REQUIRED VOTEbeen satisfied.
Required Vote
The affirmative vote of the shareholders having a majority of the voting power of all shares present, in person or by proxy, and voted at the SpecialAnnual Meeting, is required to approve and ratify Proposal 1.
THE BOARD UNANIMOUSLY (WITH MR. BROCK ABSTAINING) RECOMMENDS THAT YOU
VOTE FOR THE APPROVAL AND RATIFICATION OF THE SALE AND ISSUANCE OF SERIES C
PREFERRED STOCK AND THE SHARES OF COMMON STOCK INTO WHICH IT MAY CONVERT.
PROPOSAL 2
CONVERSION OF BROCK PROMISSORY NOTE INTO
SHARES OF SERIES C PREFERRED STOCK
The Company is seeking shareholder approval and ratification for the
conversion of a $750,000 secured convertible promissory note held by Mr. Brock,
the Company's President and CEO and a member of the Board, into shares of
Series C Preferred Stock. The Company originally issued a secured promissory
note to Mr. Brock on February 12, 2001 in the aggregate principal amount of
$750,000. This promissory note bore interest at the annual rate of 9%, matured
on January 15, 2002 and was not convertible into shares of the Company's equity
securities. Pursuant to the terms of the note purchase agreement discussed
above and as consented to by Mr. Brock, the promissory note was amended and
restated such that: (i) the principal amount of the note now converts into
10,000 shares of Series C Preferred Stock automatically upon shareholder
ratification of the proposals contained in this Proxy Statement, (ii) its
repayment is subordinated to the repayment of Mercury's promissory note and
(iii) the events of default under the Note are substantially similar to the
events of default contained in Mercury's promissory note. In connection with
the conversion of the amended and restated promissory note, Mr. Brock may be
entitled to receive a warrant to purchase additional shares of common stock,
which, if issued, will contain the same terms and conditions as the warrant
held by Mercury and those warrants which may be issued to the purchasers of the
additional shares of Series C Preferred Stock. If this warrant is issued to Mr.
Brock, it will be exercisable for up to 187,500 shares of common stock.
As discussed in greater detail above, shareholders are being requested
to vote on the approval of the (i) conversion of Mr. Brock's amended and
restated promissory note into shares of Series C Preferred Stock, and (ii) the
issuance of shares of common stock into which the shares of Series C Preferred
Stock may convert. Shareholder approval is required by Nasdaq rules, which
obligate the Company to seek the consent of its shareholders prior to the
issuance of these securities. See "REASONS FOR SEEKING SHAREHOLDER APPROVAL OF
PROPOSALS 1 AND 2." The Company is also seeking shareholder ratification for
this proposal separate from Proposal 1 because Mr. Brock is the President and
CEO and a director of the Company; however, approval of Proposal 2 is a
condition to the Mercury investment, and Proposal 1 will not be implemented
unless Proposal 2 is also approved. Nasdaq rules may require shareholder
approval for the issuance of these shares because of his position as an
executive officer and director of the Company. Accordingly, we are seeking
shareholder approval in order to ensure compliance with the Nasdaq rules. On
July 13, 2001, the Company's Board of Directors, excluding Mr. Brock who
abstained from such vote, approved this conversion. See "Other Terms of the
Transaction - Warrants" and "Sale of Additional Shares of Series C Preferred
Stock" above.
To the extent that the amended and restated promissory note continues
in effect, Mr. Brock's promissory note is subordinated to the Company's
obligations to Silicon Valley Bank and to Mercury. Therefore, subject to
certain waiver and cure provisions, if the Company is in default of certain
obligations to Mercury and /or Silicon Valley Bank, then the Company may not
pay the principal or interest on the amended and restated promissory note. Mr.
Brock's promissory note is secured by a security interest in all of the
Company's assets that is junior to the
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security interests of Silicon Valley Bank and Mercury. See "PROPOSAL 1 -- Other
Agreements - Security Agreement" above.
BENEFICIAL OWNERSHIP INTEREST OF RICHARD T. BROCK
Subsequent to the issuance of shares of Series C Preferred Stock, Mr.
Brock will be the beneficial owner of between [35.6]% and [35.9]% of the
Company's capital stock. Mr. Brock may also receive a warrant to acquire up to
187,500 shares of common stock as described in greater detail above. See
"REASONS FOR SEEKING APPROVAL OF PROPOSALS 1 AND 2."
CONSEQUENCES OF NON-RATIFICATION
Although the Company can give no assurances that the ratification of
Proposal 2 will have any or all of the intended effects, if the Company's
shareholders do not ratify this proposal and each of the other proposals
contained in this Proxy Statement, the following consequences will result:
- The common stock will be delisted from the SmallCap Market;
and
- The right to purchase shares of common stock under the
warrants issued to Mercury will become immediately vested.
REQUIRED VOTE
The affirmative vote of the shareholders having a majority of the
voting power of all shares present, in person or by proxy, and voted at the
Special Meeting, is required to approve and ratify Proposal 2.
THE BOARD UNANIMOUSLY (WITH MR. BROCK ABSTAINING) RECOMMENDS THAT YOU
VOTE FOR THE APPROVAL AND RATIFICATION OF (i) THE CONVERSION OF THE BROCK NOTE
AND THE ISSUANCE OF THE SHARES OF SERIES C PREFERRED STOCK IN CONNECTION
THEREWITH AND (ii) THE ISSUANCE OF SHARES OF COMMON STOCK ISSUABLE UPON THE
CONVERSION OF THE SERIES C PREFERRED STOCK.
PROPOSAL 3
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO ELIMINATE
CERTAIN LIQUIDATION RIGHTS OF THE
SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK
Pursuant to the Company's Amended and Restated Articles of
Incorporation, the sale, lease, exchange or transfer of all or substantially
all of the assets of the Company is deemed to be a liquidation, dissolution or
winding up of the affairs of the Company, which entitles the holders of the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
to the payment of a liquidation preference from the proceeds of such sale,
lease, exchange or transfer, even if the Company were not then liquidated,
dissolved, or wound up. After the amendment, the Series A and B preferred stock
will still be entitled to a liquidation preference, in priority to the holders
of the Common Stock but subordinate to the holders of any Series C preferred
stock, upon the liquidation, dissolution or winding up of the Company, but the
sale, lease, exchange or other transfer of all of the Company's assets will no
longer be deemed to be liquidation, dissolution or winding up.
Securities that contain these types of deemed liquidation provisions
are treated as "redeemable securities" under generally accepted accounting
principals and are not permitted to be reflected as long-term equity on the
Company's consolidated balance sheet, and therefore are not permitted to be
considered by Nasdaq rules in the calculation of the Company's net tangible
assets.
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PURPOSE AND EFFECT OF THE AMENDMENT
As described above under "BACKGROUND AND INTRODUCTION", the Company and
the holders of the Series A and B Preferred Stock agreed to amend the Company's
Articles of Incorporation in order to increase the Company's net tangible
assets and help the Company regain compliance with the Nasdaq net tangible
asset continued listing requirement. The Company has been advised by its
independent auditors that the implementation of the proposed amendment will
permit the Company to re-classify the Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock as long-term equity on the Company's
financial statements, directly increasing the Company's net tangible assets by
$1,702,000.
On June 8, 2001, the Company's Board of Directors unanimously approved
the consent and agreement to be entered into by the holders of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock to waive
their rights with respect to these deemed liquidation provision. On July 12,
2001, the holders of all outstanding shares of the Series A and B Convertible
Preferred Stock executed the consent and agreement and waived their rights with
respect to the deemed liquidation provisions. Pursuant to this consent and
waiver, the Company's Board of Directors and the holders of the Series A and B
Preferred Stock approved an amendment to the Company's Articles of
Incorporation to (i) delete the deemed liquidation provisions and (ii) modify
the timing of dividend payments on the Series A Convertible Preferred Stock and
the Series B Convertible Preferred Stock so that the Company is required to
make such payments monthly, rather than annually, commencing in January 2002.
The holders of all of the outstanding shares of Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock have agreed to vote their shares
of capital stock of the Company in favor of this amendment. Mr. Brock, the
Company's President and CEO and a director of the Company, currently holds all
of the Series A Convertible Preferred Stock and approximately 71% of the Series
B Convertible Preferred Stock.
This amendment does not change the rights and preferences of the
holders of the Company's common stock. The Company does not believe that the
amendment has any potential negative effects on the holders of the common
stock, except that the Company will be required to make the required preferred
dividends on the Series A Preferred Stock and Series B Preferred Stock on a
monthly, rather than annual, basis, beginning in January 2002. The provisions
being proposed for elimination from the Articles of Incorporation were inserted
at the request of and for the benefit of the holders of the Series A Preferred
Stock and Series B Preferred Stock in connection with the initial private
placement of those shares, and their removal will give the Company more
flexibility in determining how to use the net proceeds of any sale of all or
substantially all of the Company's assets. The Company has no current plans to
dispose of any material amount of its assets. This amendment, if approved by
the shareholders at the Special Meeting, will become effective as of the date
the amendment is filed with the Secretary of State of the State of Georgia. The
form of the amendment is attached to this Proxy Statement as Exhibit G and is
incorporated herein by reference.
CONSEQUENCES OF NON-RATIFICATION
If the Company's shareholders do not approve Proposal 3, the Company's
common stock will be delisted from the SmallCap Market because the Company
would likely not be able to meet Nasdaq's net tangible asset requirement for
continued listing.
REQUIRED VOTE
The affirmative vote of the shareholders having a majority of the
voting power of all outstanding shares of common stock, in person or by proxy,
and entitled to vote at the Special Meeting, voting as a single class, as well
as the affirmative vote of a majority of the holders of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock, each voting as a
separate class, is required to approve and ratify the amendment of the
Certificates of Designation.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY (WITH MR. BROCK
ABSTAINING) RECOMMENDS THAT YOU THE SHAREHOLDERS
VOTE FOR THE APPROVAL AND RATIFICATIONIN FAVOR OF THE
AMENDMENT OF THE CERTIFICATE OF DESIGNATION.
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PROPOSAL 4
AMENDMENT TO THE ARTICLES OF
INCORPORATION TO EFFECT A REVERSE STOCK SPLIT
OF THE COMPANY'S COMMON STOCK
The Company's Board of Directors has unanimously adopted a resolution
approving, and recommending to our shareholders for their approval, a proposal
to amend Article II of the Company's Articles of Incorporation authorizing a
reverse split of the shares of our common stock at a ratio, to be established
by the Company's Board of Directors in its sole discretion, not to exceed
one-for-three, or to abandon the reverse stock split. The form of the proposed
amendment is annexed to this Proxy Statement as Exhibit H. This amendment to
the Articles of Incorporation will effect the reverse stock split by reducing
the number of shares of our common stock by the ratio to be determined by the
Company's Board of Directors, but will not increase the par value of our common
stock, and will not change the number of authorized shares of our common stock.
REASONS FOR THE AMENDMENT TO THE ARTICLES OF INCORPORATION TO AFFECT A REVERSE
STOCK SPLIT
Listing on Nasdaq. Our common stock is currently listed on the
SmallCap Market. As further described above in "INTRODUCTION AND BACKGROUND,"
Nasdaq may delist the Company's common stock from the SmallCap Market if the
Company's shares fail to maintain a minimum bid price above $1.00 per share.
The Company's Board of Directors has determined that the continued
listing of our common stock on the SmallCap Market is in the best interests of
our shareholders. If our common stock were delisted from the SmallCap Market,
the Company's Board of Directors believes that the liquidity in the trading
market for our common stock would be significantly decreased which could reduce
the trading price and increase the transaction costs of trading shares of our
common stock.
Potential Increased Investor Interest. The Company's Board of
Directors believes a higher price may help generate investor interest in the
Company. On August __, 2001, our common stock closed at $____ per share. In
approving the reverse stock split, the Company's Board of Directors considered
that our common stock may not appeal to brokerage firms that are reluctant to
recommend lower priced securities to their clients. Investors may also be
dissuaded from purchasing lower priced stocks because the brokerage
commissions, as a percentage of the total transaction, tend to be higher for
such stocks. Moreover, the analysts at many brokerage firms do not monitor the
trading activity or otherwise provide coverage of lower priced stocks. Also,
the Company's Board of Directors believes that most investment funds are
reluctant to invest in lower priced stocks.
The Company's Board of Directors further believes that a higher stock
price would help us attract and retain employees and other service providers.
The Company's Board of Directors believes that some potential employees and
service providers are less likely to work for or provide services to a company
with a low stock price, regardless of size of the company's market
capitalization. If the reverse stock split successfully increases the per share
price of our common stock, the Company's Board of Directors believes this
increase will enhance our ability to attract and retain employees and service
providers.
PURPOSE OF THE REVERSE STOCK SPLIT AND THE EXCHANGE RATIO RANGE
The purpose of the reverse stock split is to increase the market price
per share of our common stock. The Company's Board of Directors intends to
affect a reverse split only if it believes that a decrease in the number of
shares outstanding is likely to improve the trading price of our common stock
and maintain our listing on the SmallCap Market. If the reverse stock split is
authorized by the shareholders, the Company's Board of Directors will have the
discretion to implement a reverse stock split once during the next twelve (12)
months, or effect no reverse stock split at all. The Company's Board of
Directors has requested that shareholders approve an exchange ratio range in
order to give the Company's Board of Directors discretion in determining the
precise size of the exchange ratio. If the trading price of our common stock
increases without a reverse stock split, the reverse stock split may not be
necessary. Alternatively, a reverse stock split of lesser proportions may be
required.
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In connection with any determination to effect a reverse stock split,
the Company's Board of Directors will also select the reverse stock split ratio
that, in its discretion, results in the greatest marketability of our common
stock based on prevailing market conditions. No further action on the part of
the shareholders will be required to either effect or abandon the reverse stock
split. If no reverse stock split is effected by the first anniversary of the
Special Meeting of shareholders approving the reverse stock split, the
Company's Board of Directors' authority to effect the reverse stock split will
terminate.
The Company's Board of Directors believes that shareholder approval of
an exchange ratio range, as opposed to approval of a specified exchange ratio,
in which the reverse stock split may be affected provides the Company's Board of
Directors with maximum flexibility to achieve the purposes of the reverse stock
split. If the shareholders approve the reverse stock split at the Special
Meeting, the reverse stock split will be effected, if at all, only upon a
determination by the Company's Board of Directors that the reverse stock split,
in an exchange ratio determined by the Company's Board of Directors within the
limits set forth herein, is in the best interests of the Company and our
shareholders at that time.
POTENTIAL RISKS OF THE REVERSE STOCK SPLIT
If the Company's Board of Directors does effect a reverse stock split,
there can be no assurance that the bid price of our common stock will continue
at a level in proportion to the reduction in the number of outstanding shares
resulting from the reverse stock split, that the reverse stock split will
result in a per share price that will increase our ability to attract and
retain employees and other service providers, that the market price of the
post-split common stock can be maintained at or above $1.00 per share, or that
our common stock will not be delisted from the SmallCap Market for other
reasons. The market price of our common stock will also be based on our
performance and other factors, many of which are unrelated to the number of
shares outstanding. If the reverse stock split is effected and the market price
of our common stock declines, the percentage decline as an absolute number and
as a percentage of our overall capitalization may be greater than would occur
in the absence of a reverse stock split. Furthermore, liquidity of our common
stock could be adversely affected by the reduced number of shares that would be
outstanding after the reverse stock split.
POTENTIAL EFFECTS OF THE REVERSE STOCK SPLIT
Pursuant to the reverse stock split, assuming the maximum ratio is
employed, each holder of three (3) shares of our common stock immediately prior
to the effectiveness of the reverse stock split will become a holder of one
share of our common stock.
Accounting Matters. Since the common stock is no par value stock, the
reverse stock split will have no affect on par value or the additional paid-in
capital account on our balance sheet. The per share net income or loss per
share of our common stock will be increased because there will be fewer shares
of our common stock outstanding.
Effect on authorized and outstanding shares. We are currently
authorized to issue a maximum of 10,000,000 shares of common stock. As of the
Record Date, there were 6,300,841 shares of our common stock issued and
outstanding. The table below depicts the effects of the reverse stock split
upon the number of shares of Common Stock outstanding and the number of
authorized but unissued shares of Common Stock. Due to the issuance of
additional shares to eliminate fractional shares, the actual outstanding and
authorized but unissued amounts may be different from the amounts set forth
below. See "-- Fractional Shares" below.
Authorized and
Common Stock Unissued Common
Reverse Stock Split Outstanding(1) Stock(2)
- ------------------- -------------- ---------------
Before Split.............................. 6,300,841 3,699,159
1-for-2................................... 3,150,420 6,849,580
1-for-3................................... 2,100,280 7,899,720
- ---------
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(1) As of August 2, 2001. No adjustment to the number of shares of Common
Stock outstanding has been made for the amount of reserved shares
shown in this table
(2) Equals the total number of shares of Common Stock authorized
(10,000,000), less shares outstanding.
With the exception of the number of shares issued and outstanding, the
rights and preferences of the shares of our common stock prior and subsequent
to the reverse stock split will remain the same. Following the effective date
of the reverse stock split, it is not anticipated that our financial condition,
the percentage ownership of management, the number of our shareholders, or any
aspect of our business would materially change as a result of the reverse stock
split.
The reverse stock split will be affected simultaneously for all of our
common stock and the exchange ratio will be the same for all of our Common
Stock. If the reverse split is approved, a shareholder owning 1,000 shares of
our Common Stock will, as a result of the reverse split, own the following
number of shares of Common Stock after the reverse split, depending on the
ratio selected by the Board of Directors: 500, if the Board selects a 1-for-2
ratio; or 334, if the Board selects a 1-for-3 ratio. The reverse stock split
will affect all of our shareholders uniformly and will not affect any
shareholder's percentage ownership interests in the Company, except to the
extent that the reverse stock split results in any of our shareholders owning a
fractional share. See "--Fractional Shares" below. Common stock issued pursuant
to the reverse stock split will remain fully paid and non-assessable.
Our common stock is currently registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, and as a result, we are subject to
periodic reporting and other requirements. The proposed reverse stock split
will not affect the registration of our common stock under the Exchange Act of
1934, as amended.
Effect on Outstanding Options, Warrants and Preferred Stock. On the
effective date of the reverse stock split, all outstanding options and
warrants, as well as shares of Preferred Stock convertible into Common Stock,
will be adjusted to reflect the reverse stock split. With respect to
outstanding options and warrants to purchase Common Stock, the number of shares
of Common Stock that such holders may purchase upon exercise of such options
and warrants will decrease, and the exercise prices of such options and
warrants will increase, in proportion to the fraction by which the number of
shares of Common Stock underlying such options and warrants are reduced as a
result of the reverse stock split. The number of shares of Common Stock to be
received upon the conversion of outstanding shares of Preferred Stock will also
be adjusted proportionally to reflect the reverse stock split.
Potential Odd Lots. If approved, the reverse stock split will result
in some shareholders owning "odd-lots" of less than one hundred (100) shares of
our common stock. Brokerage commissions and other costs of transactions in
odd-lots are generally somewhat higher than the costs of transactions in
"round-lots" of even multiples of one hundred (100) shares.
Increase of Shares of common stock Available for Future Issuance;
Potential Anti-Takeover Effect. The amendment to effect the reverse split will
not reduce the number of shares of Common Stock that the Company is authorized
to issue. As a result, the reverse split will result in an increase in the
number of shares which the Company may issue from authorized but unissued
shares. These additional authorized but unissued shares may be used in
connection with future acquisitions or business combinations, future
financings, investment opportunities, employee benefit plans, stock dividends
or other corporate purposes, although the Board of Directors has no present
plans for the issuance of such additional shares for any of these purposes. To
the extent that shares are subsequently issued to persons other than present
shareholders or in proportions other than the proportion that currently exists,
such issuance could have a substantial dilutive effect on book value per share
and earnings per share and on the voting power of existing shareholders. The
issuance of additional shares of Common Stock could also under certain
circumstances be deemed to have an anti-takeover effect, such as if the shares
were issued to dilute the ownership or voting power of a shareholder or group
of shareholders who may oppose the policies or plans of management or who may
attempt to obtain control of the Company through a merger, tender offer or
proxy contest.
Certain existing provisions of the Company's Articles of Incorporation
and existing agreements could also have an anti-takeover effect under certain
circumstances. The Board of Directors has the power under the Company's
Articles of Incorporation to issue shares of Preferred Stock in one or more
series and to fix the voting
20
25
rights, terms of redemption, liquidation preferences and other rights and the
number of shares of any such series without further vote or action by the
shareholders. Also, as described above in Proposal 1, Mercury's consent is
required before the Company may enter into any sale, merger or similar business
combination transaction that would result in consideration to Mercury of less
than $2.00 per share of Common Stock. The Company's management does not have
any present plans to adopt any additional arrangements or provisions that may
have material anti-takeover consequences.
The provisions discussed in the preceding paragraph, as well as any
increase in the number of authorized but unissued shares created by the reverse
split, could enable the Board of Directors to render more difficult or
discourage a bid or attempt by another person or entity to obtain control of
the Company or to remove incumbent management, even if such an attempt were
favored by a majority of independent shareholders or would result in
shareholders receiving a premium above market price in exchange for their
stock. The Board of Directors does not, however, view the reverse split as an
anti-takeover measure, and has no intention of issuing any additional
authorized but unissued shares created by the reverse split for such purposes.
Moreover, the reverse split is not being proposed in response to any effort by
a person or entity to accumulate shares of the Company's Common Stock or to
obtain control of the Company or oppose the policies of management. Other than
the reverse stock split proposal, the Company's Board of Directors does not
currently contemplate recommending the adoption of any other amendments to our
Articles of Incorporation that could be construed to affect the ability of
third parties to take over or change the control of the Company.
EFFECTIVENESS OF THE REVERSE STOCK SPLIT
The reverse stock split, if approved by our shareholders, will become
effective upon the filing with the Georgia Secretary of State a Certificate of
Amendment to our Amended and Restated Articles of Incorporation, as amended, in
substantially the form of the Articles of Amendment attached to this Proxy
Statement as Exhibit H. It is expected that such filing will take place on or
shortly after the date of the Special Meeting, assuming the shareholders
approve the reverse stock split. However, the exact timing of the filing of
such Articles of Amendment will be determined by our Company's Board of
Directors based upon its evaluation as to when such action will be most
advantageous to the Company and to our shareholders. The Company's Board of
Directors reserve the right to delay the amendment to affect the reverse stock
split for up to twelve (12) months following shareholder approval thereof. In
addition, the Company's Board of Directors reserve the right, notwithstanding
shareholder approval and without further action by the shareholders, to elect
not to proceed with the amendment to affect the reverse stock split if, at any
time prior to the filing of such amendment, the Company's Board of Directors,
in its sole discretion, determines that it is no longer in the best interests
of our shareholders.
Commencing upon the date of the filing of the amendment affecting the
reverse stock split with the Georgia Secretary of State, each certificate of
our common stock will be deemed for all corporate purposes to evidence
ownership of the reduced number of shares of common stock resulting from the
reverse stock split. As soon as practicable after the effective date,
shareholders will be notified as to the effectiveness of the reverse stock
split and instructed as to how and when to surrender their certificates
representing shares of common stock prior to the reverse stock split in
exchange for certificates representing shares of common stock after the reverse
stock split. We intend to use American Stock Transfer & Trust Company, the
Company's transfer agent, as our exchange agent in affecting the exchange of
the certificates following the effectiveness of the reverse stock split.
FRACTIONAL SHARES
We will not issue fractional shares in connection with the reverse
stock split. Instead, any fractional share which results from the reverse stock
split will be rounded up to the next whole share. For instance, if the reverse
split ratio is 1-for-3, a shareholder who owns 1,000 shares of Common Stock
would be entitled to receive after the effective date of the reverse split 333
1/3 shares. The one-third share is a fractional share, which in this example
would be rounded up to result in the shareholder receiving a certificate
representing 334 shares after the reverse split. We are doing this so that we
may avoid the expense and inconvenience of issuing and transferring fractional
shares of our common stock as a result of the stock split. The shares do not
represent separately bargained for consideration.
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26
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizing certain federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended, the
applicable treasury regulations promulgated thereunder, judicial authority and
current administrative rulings and practices in effect on the date of this
Proxy Statement. This discussion is for general information only and does not
discuss consequences which may apply to special classes of taxpayers (e.g.,
non-resident aliens, broker-dealers, or insurance companies). Shareholders are
urged to consult their own tax advisors to determine the particular
consequences to them.
The receipt of the common stock following the effective date of the
reverse stock split, including whole shares issued in lieu of fractional
shares, solely in exchange for the common stock held prior to the reverse stock
split will not generally result in a recognition of gain or loss to the
shareholders. The adjusted tax basis of a shareholder in the common stock
received after the reverse stock split will be the same as the adjusted tax
basis of the common stock held prior to the reverse stock split exchanged
therefore, and the holding period of the common stock received after the
reverse stock split will include the holding period of the common stock held
prior to the reverse stock split exchanged therefore. No gain or loss will be
recognized by the Company as a result of the reverse stock split.
REQUIRED VOTE
If the Company's shareholders do not approve the reverse stock split,
the average bid price of the Company's common stock may not satisfy the
continued listing requirements for the SmallCap Market and the common stock
will be delisted from the SmallCap Market. Approval and ratification of the
proposed amendment to our Articles of Incorporation to effect a reverse stock
split requires the affirmative vote of the holders of a majority of the
outstanding shares of the common stock and Series A and B Preferred Stock
voting together as a single class.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO EFFECT A
REVERSE STOCK SPLIT.
OPTION PLAN
The Company's Board of Directors knows of no other matters to be brought before the SpecialAnnual Meeting. However, if any other matters are properly brought before the SpecialAnnual Meeting, the persons appointed in the accompanying proxy intend to vote the shares represented thereby in accordance with their best judgment.
The cost of the solicitation of proxies on behalf of the Company will be borne by the Company. Certain directors, officers, and other employees of the Company may, without additional compensation except reimbursement for actual expenses, solicit proxies by mail, in person or by telecommunication. The Company will reimburse brokers, fiduciaries, custodians, and other nominees for out-of-pocket expenses incurred in sending the Company's proxy materials to, and obtaining instructions relating to such materials from, beneficial owners.
22
27
COMMON STOCK,
SERIES
The Board of Directors has reappointed Cherry, Bekeart & Holland L.L.P. as the Company's independent accountants for 2003. A CONVERTIBLE PREFERRED STOCK
AND
SERIES B CONVERTIBLE PREFERRED STOCK
OF FIRSTWAVE TECHNOLOGIES, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE AUGUST 29,representative of this firm is expected to attend the Annual Meeting to respond to questions from shareholders and to make a statement if he so desires.
On October 1, 2001, SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Richard T. Brock or Judith A. Vitale,
or either of them, with power of substitution to each, the proxiesAudit Committee of the undersigned to vote allBoard of the undersigned's shares of the common stock, Series
A Convertible Preferred Stock and/or Series B Convertible Preferred StockDirectors of Firstwave Technologies, Inc. (the "Company") atapproved the Special Meetingengagement of Shareholders of FIRSTWAVE TECHNOLOGIES, INC. to be held at 9:30 A.M. atCherry, Bekaert & Holland L.L.P. as the Company's corporate offices located at Suite 1000, 2859 Paces Ferry Road,
Atlanta, Georgia 30339 on August 29,independent accountants for the fiscal year ending December 31, 2001, and dismissed PricewaterhouseCoopers L.L.P.
There were no disagreements with PricewaterhouseCoopers L.L.P. within the meaning of Instruction 4 of Item 304 of Regulation S-K as to any adjournment thereof.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" ALL PROPOSALS AND UNLESS
VOTES TO THE CONTRARY ARE INDICATED, THE PROXY WILL BE SO VOTED.
1. To approve and ratify the issuance and salematter of 20%accounting principles or more of the
Company's common stock, and 20%practices,
19
financial statement disclosure, or more of the Company's voting power
under Nasdaq rules 4350(i)(1)(D)(ii) and 4350(i)(1)(B)auditing scope or procedure in connection with the private placementaudits of shares of the Company's Series C
Convertible Preferred Stock (the "Series C Preferred Stock"), including
the issuance of any securities of the Company as dividends on or
otherwise in respect of the Series C Preferred Stock, which consists of
(i) the sale of a promissory note to Mercury Fund II, Ltd. in the
original principal amount of $500,025 that is convertible by its terms
into 6,667 shares of Series C Preferred Stock, (ii) the sale and
reissuance of Series C Preferred Stock on substantially similar terms,
and (iii) the shares of the Company's common stock into which such
shares of Series C Preferred Stock may convert.
[ ] [ ] [ ]
For Against Abstain
2. To approve the sale and issuance of 10,000 shares of Series C Preferred
Stock to Richard T. Brock, President and CEO of the Company, upon the
conversion of the Company's promissory note in the principal amount of
$750,000 currently held by Mr. Brock and the shares of the Company's
common stock into which such shares of Series C Preferred Stock may
convert.
[ ] [ ] [ ]
For Against Abstain
3. To approve an amendment to the Company's Articles of Incorporation to
eliminate certain provisions that require the Company to treat the
Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock as "redeemable securities" rather than long-term equity on the Company's financial statements for the fiscal years ended December 31, 2000 and December 31, 1999, or for any subsequent interim period through June 30, 2001, which disagreements if not resolved to amendits satisfaction would have caused PricewaterhouseCoopers L.L.P. to make reference to the timingsubject matter of dividend
payments.
[ ] [ ] [ ]
For Against Abstain
23
28
4. To approvethe disagreement in their report on the Company's consolidated financial statements for such years.
The reports of PricewaterhouseCoopers L.L.P. on the Company's consolidated financial statements for the past two fiscal years did not contain an amendmentadverse opinion or a disclaimer of opinion nor were such reports qualified as to audit scope or accounting principles. The report of PricewaterhouseCoopers L.L.P. on the Company's consolidated financial statements for the fiscal year ending December 31, 2000 included an explanatory paragraph relating to the Company's Articles of Incorporationability to effectcontinue as a reverse stock split of all issuedgoing concern.
In 2002, the Company was billed the following fees by Cherry, Bekeart & Holland L.L.P. and outstanding sharesPricewaterhouseCoopers L.L.P.
Audit Fees
Cherry, Bekeart & Holland L.L.P. billed the Company $41,735 for audit-related services in 2002.
Financial Information Systems Design and Implementation Fees
No fees were billed to the Company by PricewaterhouseCoopers L.L.P. or Cherry, Bekeart & Holland L.L.P. for financial information systems design implementation services in 2002.
All other Fees
Cherry, Bekeart & Holland L.L.P. billed $8,000 for non-audit related services in 2002 which represented fees associated with the preparation of the Company's common stock at a ratio notannual income tax return. PricewaterhouseCoopers L.L.P. billed $3,500 for non-audit-related services in 2002 related to exceed one-for-three as
discussedtheir consent of the usage of their report dated April 16, 2001 in the accompanying Proxy Statement.
[ ] [ ] [ ]
For Against Abstain
5. Such other matters as may properly come before the meeting or any
adjournment thereof.
It is understood that this proxy confers discretionary authority in respect to
matters now known or determined at the time of the mailing of the notice of the
meeting to the undersigned.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders dated August___, 2001 and the Proxy Statement furnished therewith.
, 2001
---------------------------
Dated and signed
----------------------------------
Signature
----------------------------------
Signature
(Signature(s) should agree with the name(s) hereon. Executors, administrators,
trustees, guardians and attorneys should so indicate when signing. For joint
accounts, each owner should sign. Corporations should sign their full corporate
name by a duly authorized officer.)
This proxy is revocable at or at any time prior to the Special Meeting.
PLEASE SIGN AND RETURN THIS PROXY IN THE ACCOMPANYING PREPAID ENVELOPE.
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29
EXHIBIT A
CONVERTIBLE NOTE PURCHASE AGREEMENT
THIS CONVERTIBLE NOTE PURCHASE AGREEMENT (this "AGREEMENT") is made and
entered into as of the 18th day of July, 2001, by and among FIRSTWAVE
TECHNOLOGIES, INC., a Georgia corporation (the "COMPANY"), MERCURY FUND II,
LTD., a Texas limited partnership ("PURCHASER") and RICHARD T. BROCK ("BROCK").
RECITALS
WHEREAS, Purchaser desires to purchase from the Company, and the
Company desires to issue to Purchaser, a secured, short-term, subordinated
promissory note in the original aggregate principal amount of $500,025 (the
"NOTE"), in the form attached hereto as EXHIBIT A, that is automatically
convertible by its terms, subject to the approval of the Company's shareholders,
into 6,667 shares (the "PURCHASED SHARES") of the Company's Series C Convertible
Preferred Stock, no par value per share (the "SERIES C PREFERRED STOCK");
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. ISSUANCE OF THE NOTE AND AUTHORIZATION OF SERIES C PREFERRED STOCK;
WARRANT
1.1 ISSUANCE OF THE NOTE. Subject to the terms and conditions
hereof, at the Closing the Company shall issue and sell to Purchaser, and
Purchaser shall purchase from the Company the Note for the purchase price
provided in Section 1.3 below. The Note will be entitled to the benefits of a
security agreement (the "SECURITY AGREEMENT") to be entered into
contemporaneously herewith and in the form attached hereto as EXHIBIT B.
1.2 AUTHORIZATION OF THE SHARES. The Company shall, prior to the
Closing (as defined in Section 2.1), adopt and file with the Secretary of State
of the State of Georgia an amendment to its Articles of Incorporation in the
form attached hereto as EXHIBIT C (the "CHARTER AMENDMENT"), so as to authorize
26,667 shares of Series C Preferred Stock having the rights, restrictions,
privileges, redemption rights and preferences as set forth in the Charter
Amendment.
1.3 PURCHASE PRICE. The purchase price for the Note shall be Five
Hundred Thousand Twenty-five Dollars ($500,025) (the "PURCHASE PRICE").
1.4 RESERVATION OF SHARES. If the Charter Amendment is approved by
the Company's shareholders, the Company shall reserve and keep available for
issuance such number of its authorized but unissued shares of its Common Stock,
no par value per share (the "COMMON STOCK"), as will be sufficient to permit the
conversion in full of the shares of Series C Preferred Stock (issuable upon
exercise of the Note) into shares of Common Stock in accordance with the terms
of the Charter Amendment and an additional 125,006 shares of Common Stock for
issuance upon conversion of the Warrant (as hereinafter defined) (collectively,
the "RESERVED Shares"). All shares of Common Stock that are so issuable shall,
when issued upon conversion or exercise, be duly and validly issued and fully
paid and non-assessable.
30
1.5 USE OF CASH PROCEEDS. The Company shall use the cash proceeds
from the sale of the Note for working capital and general corporate purposes.
1.6 AGREEMENTS. Each of the parties hereto agrees at the Closing
to enter into the respective agreements described in Articles 5 and 6 to which
they are indicated as a party.
1.7 ISSUANCE OF WARRANT. The Company shall issue a warrant to
Purchaser to acquire shares of the Company's Common Stock, in substantially the
form attached hereto as Exhibit D (the "WARRANT"), at the Closing.
1.8 DELIVERY OF SEC DOCUMENTS. The Company has delivered or made
available to Purchaser a true and complete copy of (i) the Company's
Notification of Late Filing on Form 12B-25 filed with respect to its Form 10-Kfinancial statements for the year ended December 31, 2000, (ii)2001.
20
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Company's Board of Directors is composed of three members and acts under a written charter first adopted and approved on March 29, 2001. The members of the Audit Committee are independent directors, as defined by its charter and the rules of The Nasdaq Stock Market. The Audit Committee reviewed the Company's audited financial statements for the fiscal year ended December 31, 2002, and discussed these financial statements with the Company's management. The Audit Committee also reviewed and discussed the audited financial statements and the matters required by Statement on Auditing Standards 61 (Communication with Audit Committees) with Cherry, Bekeart & Holland L.L.P., the Company's independent accountants. In addition, the Audit Committee discussed with the independent accountants their independence from the Company. The Audit Committee also considered whether the independent accountants' provision of certain other, non-audit related services to the Company is compatible with maintaining such accountants' independence. Based on its discussions with management and the independent accountants, and its review of the representations and information provided by management and the independent accountants, the Audit Committee recommended to the Company's Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, (iii)2002.
| THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS Roger A. Babb James R. Porter John F. Keane, Chairman |
SHAREHOLDER PROPOSALS FOR ANNUAL MEETING TO BE HELD IN 2004
Any proposal that a shareholder may desire to have included in the Company's Quarterly Report
on Form 10-Qproxy material for presentation at the quarter ended March 31, 2001, and (iv) the Company's
definitive proxy statement relatingAnnual Meeting to its 2001 annual shareholders meeting
(collectively, the "SEC DOCUMENTS"). In addition to the SEC Documents, the
Company has provided Purchaser with opportunities to become familiar with the
business, financial condition, management, prospects and operations of the
Company, including reasonable opportunities to ask questions of, receive answers
from and obtain information regarding the Company and its business which is
material to Purchaser's investment decision.
1.9 VOTING AGREEMENT OF BROCK. Brock, in his capacity as a holder
of (i) all of the outstanding shares of the Company's Series A Convertible
Preferred Stock, (ii) a majority of the outstanding shares of the Company's
Series B Convertible Preferred Stock and (iii) shares of Common Stock, agrees to
vote each of his shares of the capital stock of the Company in favor of each of
the transactions contemplated in this Agreement and the approval of the
amendment of the Certificates of Designation for the Series A Preferred Stock
and the Series B Preferred Stock in substantially the form attached hereto as
EXHIBITS G AND H, respectively, and consents to designation of the Company's
Series C Convertible Preferred Stock.
2. CLOSINGS; DELIVERIES
2.1 CLOSING. The closing of the purchase and sale of the Note (the
"CLOSING") shall be held at the offices of Kilpatrick Stockton LLP, Atlanta,
Georgia, on July 18, 2001 or at such other place or on such other date as the
parties may agree (the "CLOSING DATE").
2.2 DELIVERIES AT CLOSING. At the Closing, the Company shall
deliver to Purchaser the Note, registered in Purchaser's name, representing the
aggregate original principal amount equal to the Purchase Price, against payment
by Purchaser of the Purchase Price by wire transfer to an account designated by
the Company. The Company shall also deliver such other instruments and documents
as are described in Article 5.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser as follows:
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31
3.1 DISCLOSURE. To the knowledge of the Company, no representation
or warranty of the Company contained in this Agreement and none of the
information set forth in the Schedules hereto, or otherwise furnished2004 must be received by the Company to the Purchaser (in writing) in connection with the issuance of the
Note (except for any projections, forecasts or other estimates of the Company's
future performance of any nature whatsoever, all of which are specifically
excluded from this Section 3.1), when taken as a whole, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein and therein, in light of the
circumstances under which they were made, not misleading. There is no fact
(other than matters of a general economic or political nature which do not
affect the business uniquely) known to the Company that has not been disclosed
by the Company to the Purchaser that would reasonably be expected to have or
result in a Material Adverse Effect. For purposes hereof, "MATERIAL ADVERSE
EFFECT" means any event, occurrence, fact, condition, change or effect that is
materially adverse to the business, operations, results of operations, financial
condition, properties (including intangible properties), assets (including
intangible assets) or liabilities of the business. Whenever a statement
regarding the existence or absence of facts in this Agreement is qualified by a
phrase such as "to the knowledge of the Company," it is intended by the parties
hereto that the only information to be attributed to the Company is information
actually known to anyat its executive officer of the Company.
3.2 ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Georgia. To
the knowledge of the Company, the Company has all requisite corporate power and
authority to own and lease its properties, to carry on its business as presently
conducted and as proposed to be conducted and to carry out the transactions
contemplated hereby. The Company is duly qualified to do business as a foreign
corporation and in good standing in each jurisdiction where the failure to be so
qualified would have a Material Adverse Effect on the Company. To the knowledge
of the Company, no jurisdiction in which the Company is not qualified or
licensed has claimed, in writing or otherwise, that the Company is required to
be qualified or licensed therein. The Company has no subsidiaries other than
those disclosed in this Agreement.
3.3 CAPITALIZATION. As of July 18, 2001, the authorized capital
stock of the Company was as set forth on Schedule 3.3 attached hereto. Schedule
3.3 attached hereto sets forth, as of July 18, 2001, the number of outstanding
shares of Common Stock and Preferred Stock, warrants to purchase Common Stock or
Preferred Stock, options to purchase Common Stock and options approved or
reserved for issuance pursuant to the Company's benefit plans, assuming the
consummation of the transactions contemplated hereby. Except as set forth on
Schedule 3.3, and except for the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock issuable upon conversion of the
Note, the Reserved Shares, and the Common Stock issuable to employees, directors
and consultants of the Company upon the exercise of outstanding options, there
will be no (i) outstanding warrants, options, agreements, convertible securities
or other commitments or instruments pursuant to which the Company is or may
become obligated to issue or sell any shares of capital stock or other
securities of the Company, or (ii) preemptive or similar rights to purchase or
otherwise acquire shares of capital stock of the Company pursuant to any
provision of law, the Articles of Incorporation or Bylaws of the Company or any
agreement to which the Company is party or otherwise. Except as set forth on
Schedule 3.3 and to the knowledge of the Company, the Company has never
declared, paid or set apart for payment any dividends, or made any other
distributions on, or made any payment on account
-3-
32
of the purchase, redemption or retirement of the Common Stock, or any other
class of capital stock of the Company. Except as set forth on Schedule 3.3, all
of the shares of Common Stock outstanding immediately prior to the Closing were
issued in transactions exempt from registration under Section 5 of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), and under applicable
state securities or "blue-sky" laws.
3.4 AUTHORIZATION. The execution, delivery and performance by the
Company of (i) this Agreement, (ii) the Registration Rights Agreement (the
"REGISTRATION RIGHTS AGREEMENT") by and among the Company and the Purchaser in
the form attached hereto as EXHIBIT F, and (iii) the Warrant by and among the
Purchaser and the Company in the form attached hereto as EXHIBIT D, and the
consummation of the transactions contemplated hereby and thereby, have been duly
authorized by all requisite corporate action on the part of the Company, and
this Agreement and the Registration Rights Agreement have been duly executed and
delivered by the Company (other than the Company's receipt of the approval of
its shareholders) and constitute valid and binding obligations of the Company,
enforceable in accordance with their respective terms, except as limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws relating to or affecting the rights and remedies of
creditors and debtors, (ii) equitable principles generally, regardless of
whether such principles are considered in a proceedingoffices at equity or at law, and
(iii) the indemnification provided to the parties hereunder is limited by the
principles of public policy. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement and compliance with the
provisions hereof and thereof by the Company will not conflict in any material
respect with or result in any material breach of any of the terms or provisions
or constitute (with due notice or lapse of time, or both) a default under the
Articles of Incorporation or Bylaws of the Company.
3.5 NO CONFLICTS. Except as set forth on Schedule 3.5 attached
hereto and to the knowledge of the Company, the execution, delivery and
performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby will not:
(a) result in the creation or imposition of any security
interest, lien, charge or other encumbrance against the Company's
assets, with or without the giving of notice and/or the passage of
time, with the exception of any security interest created by or in
connection with the Note or the Security Agreement related thereto, or
(b) violate, conflict with, affect acceleration of, or
result in termination, cancellation or modification of, or constitute a
default under (i) any material contract, agreement or other instrument
to which the Company is a party or by which the Company or its assets
is bound or (ii) any material note, bond, mortgage, indenture, deed of
trust, license, lease, contract, commitment, understanding,
arrangement, agreement or restriction of any kind or character to which
the Company is a party or by which the Company may be bound or
affected, or to which any of the Company's assets may be subject, or
(c) violate any federal, state, foreign or local laws
(whether statutory or otherwise), ordinances, rules, regulations,
orders, judgments, decrees, writs or injunctions of any governmental or
regulatory authority (collectively, "LAWS");
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33
which violation, conflict, acceleration, requirement, termination, modification
or default described in (a), (b), or (c) above could result in a Material
Adverse Effect on the Company.
3.6 NO CONSENT OR APPROVAL REQUIRED. Except as set forth in
Schedule 3.6, no authorization, consent, approval or other order of, or
declaration to or filing with, any governmental agency or body, shareholders or
other person or entity is required for (i) the valid authorization, execution,
delivery and performance by the Company of this Agreement, (ii) the offer, sale
or issuance of the Note and the Warrant, (iii) the consummation by the Company
of the transactions contemplated hereby or (iv) the operation of the business of
the Company as currently conducted. The Company shall use its best efforts to
solicit and receive all shareholder consents necessary for the transactions
provided for herein as soon as practicable and in any event by October 31, 2001.
3.7 AUTHORIZATION OF SERIES C PREFERRED STOCK AND THE WARRANTS.
Except as provided in this Agreement and as listed in Schedule 3.7, the
issuance, sale and delivery of the Series C Preferred Stock and the Warrant have
been duly authorized by all requisite corporate action of the Company and when
issued, sold and delivered in accordance with the terms of this Agreement and
the Charter Amendment, the Series C Preferred Stock being issued will be validly
issued and outstanding, fully paid and nonassessable and will not be subject to
any preemptive or other similar rights of the shareholders of the Company or
others which have not been waived in a writing delivered to the Company prior to
the Closing.
3.8 AUTHORIZATION OF RESERVED SHARES. The Reserved Shares have
been duly reserved for issuance upon conversion of the Series C Preferred Stock,
the Warrant and the Note in accordance with the terms of the Charter Amendment,
and when issued, sold and delivered in accordance with the terms of the Charter
Amendment and this Agreement, the Reserved Shares will be validly issued and
outstanding, fully paid and nonassessable, and will not be subject to any
preemptive or other similar rights of the shareholders of the Company or others.
3.9 FINANCIAL STATEMENTS.
3.9.1 The Company has delivered to the Purchaser Forms 10-K
and 10-Q which include financial statements of the Company consisting
of a balance sheet and related statements of income, cash flows and
owners' equity, as of and for the fiscal years ended December 31, 1998,
1999 and 2000 (the "YEAR END STATEMENTS") and interim financial
statements consisting of a balance sheet and related statements of
income and cash flows for the three months ended March 31, 2001 (the
"MARCH INTERIM STATEMENTS"). The Company has also delivered interim
unaudited financial statements that have not been filed with the SEC
consisting of a balance sheet (the "JUNE 2001 BALANCE SHEET") and
related unaudited statements of income and cash flows for the six
months ended June 30, 2001 (as qualified in Schedule 3.9, the "JUNE
INTERIM STATEMENTS", together with the March Interim Statements, the
"INTERIM STATEMENTS"). The Year End Statements and the Interim
Statements are collectively referred to herein as the "FINANCIAL
STATEMENTS". Except as otherwise set forth in the Financial Statements,
in the notes contained therein, or in Schedule 3.9 attached hereto, all
of the Financial Statements (a) were prepared in accordance with
generally accepted accounting principles consistently applied ("GAAP"),
(b) present fairly the Company's financial condition and the results of
its operations as at
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34
the relevant dates thereof and for the periods covered thereby, and (c)
contain adequate reserves in accordance with GAAP. Except as set forth
in Schedule 3.9 attached hereto, the Company does not have any
liabilities or obligations which are, individually or in the aggregate,
material, whether due or to become due, absolute, contingent or
otherwise, which are not reflected in the Financial Statements, other
than liabilities or obligations incurred after June 30, 2001 (the "JUNE
2001 BALANCE SHEET DATE") in the ordinary course of business consistent
with past practices.
3.9.2 Schedule 3.9 attached hereto contains an accounts
payable listing for the Company as of June 30, 2001.
3.10 SEC DOCUMENTS. The SEC Documents constitute all of the
documents (other than preliminary filings and supplemental material) that the
Company was required by applicable securities laws to file with the SEC since
January 1, 2001. The SEC Documents comply as to form in all material respects
with the requirements of the Securities Exchange Act of 1934, as amended.
3.11 ACCOUNTING RECORDS. The Company keeps books, records and
accounts that, in reasonable detail, accurately and fairly reflect the
transactions, dispositions and assets of the Company.
3.12 NO UNDISCLOSED OR CONTINGENT LIABILITIES. Except for (a)
liabilities or obligations incurred by the Company in the ordinary course of
business, (b) liabilities and obligations incurred by the Company in the
ordinary course of business since the date of the June 2001 Balance Sheet (none
of which could reasonably be expected to cause a Material Adverse Effect on the
Company), and (c) liabilities and obligations set forth on Schedule 3.12
attached hereto, there is no reasonable basis for the assertion against the
Company of any material liability or obligation of any nature whatsoever
(whether absolute, accrued, contingent or otherwise) that would encumber or
affect the Company which is not reflected or reserved against on the June 2001
Balance Sheet.
3.13 CONTRACTS AND COMMITMENTS. Except as set forth on Schedule
3.13 attached hereto:
(a) The Company is not a party to or bound by any
agreements, contracts or commitments which individually or when
aggregated with all related agreements, contracts or commitments, call
for the payment by the Company of at least $100,000, or that provide
for the grant of any preferential rights to purchase, sell or lease any
capital stock of the Company or any material portion of the Company's
assets;
(b) To the knowledge of the Company, no material purchase
contracts or commitments of the Company are in excess of the normal,
ordinary and usual requirements of the Company, or to the knowledge of
the Company, were entered into at prices materially in excess of those
available in the industry in arm's length transactions on the
respective dates thereof;
(c) The Company is not a party to or bound by any
outstanding agreements, arrangements or contracts with any of its
directors, officers, shareholders, employees,
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35
agents, consultants, advisors, salesmen or sales representatives (or
any of the affiliates of any of such persons) that (A) are not
cancelable by it on notice of not longer than 30 days and without the
imposition of any liability, penalty or premium, (B) require
non-cancelable payment by the Company of over $100,000, or (C) provide
for any bonus or other payment based on the sale of the Company or any
portion thereof;
(d) The Company is not a party to or bound by any
employment agreement, consulting agreement or any other agreement that
contains any provision for severance or termination pay liabilities or
obligations;
(e) The Company is not a party to or bound by:
(i) any material mortgage, indenture, note,
installment obligation or other instrument, agreement or
arrangement for or relating to any borrowing of money by the
Company;
(ii) any material guaranty, direct or indirect,
by the Company of any obligation for borrowings or otherwise,
excluding endorsements made for collection in the ordinary
course of business;
(iii) any obligation to make payments, contingent
or otherwise, of over $100,000 arising out of any prior
acquisition of the business, assets or stock of other persons;
(iv) any collective bargaining agreement with any
labor union;
(v) any lease or similar arrangement for the use
by the Company of personal property requiring payments by the
Company, on an annual basis, of over $100,000;
(vi) any agreement containing noncompetition or
other limitations restricting the conduct of the business of
the Company; and
(vii) any partnership, joint venture or similar
agreement.
3.13.2 Neither the Company nor any of its affiliates,
officers or directors is a party to or bound by any agreement (other
than this Agreement) or arrangement for the sale of any of the assets
or capital stock of the Company or for the grant of any preferential
rights to purchase any of the assets or capital stock of the Company.
3.13.3 The Company is not bound by any agreement to redeem
shares of capital stock of the Company held by any shareholder, which
agreement will not be effectively and properly terminated by the
consummation of the transactions contemplated hereby.
3.13.4 With respect to each contract and agreement listed on
Schedule 3.13, except as set forth therein, and assuming that each
contract and commitment is enforceable, (i) each of such contracts and
agreements is valid, binding and in full force and effect and is
enforceable by the Company in accordance with its terms, subject to
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36
bankruptcy, insolvency, reorganization and other laws and judicial
decisions of general applicability relating to or affecting creditors'
rights and to general principles of equity, (ii) to the Company's
knowledge there have been no cancellations or threatened cancellations
thereof nor are there any outstanding disputes thereunder, (iii)
neither the Company, nor, to the knowledge of the Company, any other
party is in breach of any provision thereof, and (iv) there does not
exist any material default under, or any event or condition which with
the giving of notice or passage of time or both would become a material
breach or default under, the terms of any such contract or agreement on
the part of the Company or, to the knowledge of the Company, on the
part of any other party thereto.
3.13.5 The Company has delivered or made available to the
Purchaser true and complete copies of each written contract or
agreement listed on Schedule 3.13 and true and accurate summaries of
any oral agreement listed thereon.
3.14 LITIGATION. Except as set forth on Schedule 3.14 attached
hereto and to the knowledge of the Company, there are no claims, actions, suits,
proceedings or investigations pending nor, to the knowledge of the Company,
threatened against the Company by or before any court or governmental agency or
arbitration panel. The foregoing includes, but is not limited to, actions
pending, or to the knowledge of the Company, threatened involving the prior
employment of any of the Company's employees, their use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of their former employers, or their obligations under any agreements with prior
employers. There is no effective injunction, writ, preliminary restraining order
or order of any nature issued by a court of competent jurisdiction restraining
or prohibiting the consummation of the transactions contemplated hereby. No
claim, action, suit, proceeding, inquiry or investigation, if any, set forth on
Schedule 3.14 attached hereto would, if adversely decided, have a Material
Adverse Effect on the Company or prevent the consummation of the transactions
contemplated hereby (except as otherwise disclosed in Schedule 3.14). Except as
set forth on Schedule 3.14 attached hereto, the Company is not a party to or a
recipient of service of process regarding (and has not otherwise been named and
noticed in) any judgment, order or decree entered in any lawsuit or proceeding
which has had or would have a Material Adverse Effect on the Company or on its
ability to acquire any property or conduct its business in any way.
3.15 INTELLECTUAL PROPERTY. Schedule 3.15 attached hereto contains
an accurate and complete list of (a) all patents, trademarks (registered or
unregistered), trade names, assumed names, copyrights, and all applications
therefor, owned or filed by the Company and used in or necessary for the conduct
of the Company's business and, with respect to registered patents and
trademarks, contains a list of all jurisdictions in which such trademarks are
registered and all registration numbers; (b) all licenses, permits and other
agreements relating thereto; and (c) all agreements relating to technology,
know-how or processes used in or necessary for the conduct of the business of
the Company which the Company is licensed or authorized to use by others
(including, without limitation, licenses for the use of software of all types)
with the exception of such agreements relating to the technology, know-how or
processes that are used in the day-to-day internal business operations of the
Company. To the knowledge of the Company, such patents, trademarks (registered
or unregistered), copyrights, licenses and permits are (i) enforceable, and (ii)
duly recorded in the names of the persons or entities set forth in
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37
Schedule 3.15. Except as set forth in Schedule 3.15 and to the knowledge of the
Company, the Company has the sole and exclusive right to use the patents,
trademarks (registered or unregistered), copyrights and applications therefor,
the trade names, assumed names, technology, know-how, inventions, works and
processes referred to in such lists and all trade secrets required for or
incident to the conduct of the Company's business in the jurisdictions in which
the Company's business is conducted, and the consummation of the transactions
contemplated hereby will not alter or impair any such rights. To the knowledge
of the Company, (i) no claims have been asserted and are pending by any person
against the Company with respect to the ownership, validity, enforceability,
misappropriation or use of any product or service of the Company's business or
such patents, trademarks (registered or unregistered, or of any confusingly
similar or dilative trademarks), trade names, assumed names, copyrights,
applications therefor, technology, know-how, processes or trade secrets or
challenging or questioning the validity or effectiveness of any such license,
permits or agreement, (ii) there is no valid basis for any such claim, and (iii)
the use or other exploitation of any such product or service of the Company's
business or patents, trademarks (registered or unregistered), trade names,
assumed names, copyrights, applications therefor, technology, know-how,
processes and trade secrets by the Company does not infringe the rights of any
person; and, to the knowledge of the Company, no other person is infringing the
rights of the Company with respect to such patents, trademarks (registered or
unregistered), trade names, assumed names, copyrights, and applications
therefor, technology, know-how, inventions, works, processes or trade secrets.
Except as set forth on Schedule 3.15 and to the knowledge of the Company, the
conduct of the Company's business does not infringe or otherwise conflict with
any rights of any Person in respect of any intellectual property.
3.16 EMPLOYEES.
3.16.1 To the knowledge of the Company, no employee of the
Company is in violation of any term of any employment contract, patent
disclosure agreement, non competition agreement or any other contract
or agreement relating to the relationship of any such employee with the
Company and any other party as a result of the nature of the business
presently conducted or proposed to be conducted by the Company. The
Company does not have any collective bargaining agreement covering any
of its employees. The Company has provided or made available to
Purchaser copies of all employment contracts, consulting contracts,
independent contractor agreements and all benefits plans and personnel
manuals. Except as set forth on Schedule 3.16 attached hereto, the
Company has no formal written employee benefit plans presently in force
with respect to profit sharing, pensions, stock options, equity rights,
bonus, retainer, consulting or incentive plan, deferred compensation or
other similar benefits, including all plans, programs, agreements,
arrangements and methods of contribution or compensation (including all
amendments to and components of same (i) providing any remuneration or
benefits, other than current cash compensation to any current or former
employee of the Company or to any other person who provides services to
the Company, whether such plan or plans, programs, agreements,
arrangements and methods of compensation are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or whether
they are qualified under the Internal Revenue Code of 1986, as amended
(the "CODE") or any written employment agreements. To the knowledge of
the Company, the Company has complied and is presently complying in all
material respects
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38
with all applicable Laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours, and
is not engaged in any unfair labor practice or unlawful employment
practice. To the knowledge of the Company, any employee plans are now,
and have always been in accordance with all applicable laws (including,
but not limited to ERISA and the Code) and all regulations and
interpretations thereunder and in accordance with the underlying plan
documents. There is no open and unresolved charge or complaint for
which the Company has received service of process or other appropriate
notice or, to the knowledge of the Company, which is being considered
or threatened against the Company before the Equal Employment
Opportunity Commission or any state, local, federal or foreign agency
responsible for the prevention of unlawful employment practices. The
Company has not received notice of the intent of any federal, state,
local or foreign agency responsible for the enforcement of labor or
employment laws to conduct an investigation of or relating to the
Company, and, to the knowledge of the Company, no such investigation is
in progress. There are no citations against the Company from the
Occupational Safety and Health Administration for which the Company has
been provided service of process or other appropriate notice, and, to
the knowledge of the Company, no such citations are pending.
3.16.2 Except as provided in Schedule 3.16, no employee of
the Company has been granted the right to continued employment by the
Company or to any material compensation following termination of
employment with the Company. To the Company's knowledge, no employee of
the Company, nor any consultant with whom the Company has contracted,
is in violation of any term of any employment contract, proprietary
information agreement or any other agreement relating to the right of
any such individual to be employed by, or to contract with, the Company
because of the nature of the business to be conducted by the Company;
and the continued employment by the Company of its present employees,
and the performance of the Company's contracts with its independent
contractors, will not result in any such violation. The Company has not
received any written or, to the Company's knowledge, oral notice
alleging that any such violation has occurred. To the Company's
knowledge, no officer or key employee, or any group of key employees,
intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any
officer, key employee or group of key employees. Except as provided in
Schedule 3.16, each former and current employee, officer and consultant
of the Company who has access to confidential or proprietary
information of the Company has executed a confidentiality and
assignment of rights agreement. No current employee, officer or
consultant of the Company has excluded works or inventions made prior
to his or her employment with the Company from his or her assignment of
rights pursuant to such employee, officer or consultant's
confidentiality and assignment of rights agreement.
3.17 COMPLIANCE WITH LAWS. Except as provided in Schedule 3.17
attached hereto, the Company is in material compliance with all Laws applicable
to the Company's business. The Company has not received written notification
from any governmental or regulatory authority within the past five years of any
asserted present or past failure to so comply, which failure has not been
appropriately and completely resolved. The Company has not been notified by any
governmental or regulatory authority that the Company is in violation or alleged
violation of any Law applicable to the Company's business which violation has
not been appropriately and
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39
completely resolved, or that any governmental or regulatory authority
contemplates any investigation or proceeding with respect to any such violation
or alleged violation which has not been appropriately and completely resolved.
3.18 PERMITS. To the knowledge of the Company, the Company has all
material licenses, permits and authorizations issued by any federal, state,
local or foreign governmental authority ("PERMITS") necessary for the ownership
or leasing of its properties and the conduct of the Company's business as now
being conducted and all such Permits are in full force and effect. No violations
exist or, to the knowledge of the Company, have been reported in respect of such
Permits. No notice of any proceeding has been served or otherwise given to the
Company or, to the knowledge of the Company, is pending (without service or
other notice) or threatened seeking the revocation or limitation of any of such
Permits. Schedule 3.18 attached hereto contains a true and correct list of all
governmental, environmental or municipal licenses, permits, authorizations,
contracts, franchises or certificates which are (i) held by the Company, and
(ii) are required for operation of the business as it is now being conducted
(collectively, the "LICENSES AND PERMITS"). Except as set forth on Schedule 3.18
attached hereto, all of such Licenses and Permits are in full force and effect.
Except as set forth on Schedule 3.18 attached hereto, the Company is in
compliance with all conditions or requirements imposed by or in connection with
such Licenses and Permits and with respect to its operation of its business, and
no written or oral notice has been received from any government or licensing
authority that any governmental or licensing authority intends to cancel,
terminate or modify any of such licenses or permits and the Company knows of no
valid grounds for any such cancellation, termination or modification.
3.19 TAXES. Except as set forth on Schedule 3.19 attached hereto:
3.19.1 the Company has filed all tax returns, if any, that
are required to have been filed on or before the date hereof with
appropriate federal, state, county and local governmental agencies or
instrumentalities, within the time prescribed by law (including
extensions of time approved by the appropriate taxing authority);
3.19.2 the Company has not been advised (i) that any of its
returns, federal, state or other, have been or are being audited as of
the date hereof, or (ii) of any deficiency in assessment or proposed
adjustment to its federal, state or other taxes;
3.19.3 the tax returns so filed are complete, correct and
accurate representations of the tax liabilities of the Company and such
tax returns accurately set forth all items to the extent required to be
reflected or included in such returns in all material respects; and
3.19.4 to the knowledge of the Company, the Company has
withheld and paid all taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, creditor,
independent contractor, or other person.
The Company has delivered or made available to the Purchaser correct and
complete copies of all tax returns filed by the Company for the tax years ended
December 31,1998 and 1999, all examination reports, and any statements of
deficiencies assessed against or agreed to by the Company.
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3.20 TITLE TO PROPERTIES AND ASSETS. The Company owns no real
property, and the Company has good, valid and marketable title to all other
properties owned by the Company, including, without limitation, those assets set
forth on the June 2001 Balance Sheet, free and clear of mortgages, pledges,
security interests, liens, charges and other encumbrances, except (a) as
described on Schedule 3.20 attached hereto, (b) liens for current taxes not yet
due and (c) minor imperfections of title, if any, not material in amount and not
materially detracting from the value or impairing the use of the property or
asset subject thereto or impairing the operations or proposed operations of the
Company.
3.21 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule
3.21 attached hereto, since June 30, 2001, the Company has not:
(a) suffered any Material Adverse Effect and there has
not been any event (whether occurring before or after June 30, 2001)
that could reasonably be expected to have a Material Adverse Effect on
the Company; or
(b) experienced any material decrease in the book value
of the Company's assets from the amounts reflected on the June 2001
Balance Sheet, other than decreases resulting from depreciation in
accordance with accounting practices in effect at all times since
January 1, 2001; or
(c) incurred any liabilities or obligations of any nature
(whether absolute, accrued, contingent or otherwise and whether due or
to become due), except liabilities or obligations for items incurred in
the ordinary course of business of the Company and consistent with past
practice, none of which other items exceeds $100,000 (considering
liabilities or obligations arising from one transaction or a series of
similar transactions, and all periodic installments or payments under
any lease or other agreement providing for periodic installments or
payments, as a single obligation or liability); or
(d) increased (other than increases resulting from the
calculation of reserves in the ordinary course of business and in a
manner consistent with past practice), or experienced any change in any
assumptions underlying or methods of calculating, any bad debt,
contingency or other reserves; or
(e) paid, discharged or satisfied any claims,
encumbrances, liabilities or obligations (whether absolute, accrued,
contingent or otherwise and whether due or to become due) other than
the payment, discharge or satisfaction in the ordinary course of
business and consistent with past practice of liabilities and
obligations reflected or reserved against in the June 2001 Balance
Sheet or incurred in the ordinary course of business and consistent
with past practice since the date thereof; or
determined as collectible any notes or accounts receivable or
any portion thereof which were previously considered uncollectible, or
written off as uncollectible any notes or accounts receivable or any
portion thereof, except for write-downs in the ordinary course of
business, consistent with past practice; or
canceled any material amount of indebtedness or waived any
material claims or rights; or
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41
sold, transferred or otherwise disposed of any material
portion of the Company's assets except in the ordinary course of
business and consistent with past practice; or
to the knowledge of the Company and to the extent that
nondisclosure and confidentiality agreements have not been entered
into, disposed of or permitted to lapse any right to the use of any
patent, trademark, assumed name, service mark, trade name, copyright,
license or application therefor or disposed of or disclosed to any
Company, association, partnership, organization, business, individual,
government or political subdivision thereof or government agency other
than the Purchaser and their representatives any trade secret, formula,
process or know-how not theretofore a matter of public knowledge; or
granted any increase in the salary, compensation, rate of
compensation, commissions or bonuses payable to or to become payable by
the Company to any officer director or employee of the Company
(including, without limitation, any increase or change pursuant to any
bonus, pension, profit-sharing, retirement or other plan or commitment)
except in the ordinary course of business and consistent with GAAP
practice and procedures; or
except for transactions, agreements or arrangements made in
the ordinary course of business and consistent with past practice,
paid, loaned or advanced any amount to any officer, director, employee
or shareholder of the Company or sold, transferred or leased any
Company's assets to, or entered into any agreement (other than this
Agreement) or arrangement with, any officer, director, employee or
shareholder of the Company; or
made any single capital expenditure or commitment in excess of
$100,000 for additions to property, plant, equipment or for any other
purpose or made aggregate capital expenditures or commitments in excess
of $100,000 for additions to property, plant, equipment or for any
other purpose (whether such purchase was capitalized or expensed); or
made any change in any method of accounting or accounting
practice or policy; or
suffered any casualty loss in excess of $100,000 (whether or
not insured against) or suffered aggregate casualty losses in excess of
$100,000 (whether or not insured against); or
declared, paid or set apart for payment dividends on, or made
other distributions or payments in respect of, the capital stock of the
Company; or
taken any other action not either in the ordinary course of
business and consistent with past practice or provided for in this
Agreement; or
entered into or agreed to any transaction not in the ordinary
course of business; or
agreed, whether in writing or otherwise, to take any of the
actions set forth in this Section 3.21.
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3.22 CERTAIN TRANSACTIONS. Except as set forth on Schedule 3.22
attached hereto, immediately following the Closing, the Company will not be
indebted, directly or indirectly, to any of its officers, directors or
shareholders that beneficially hold 5% or more of the Company's capital stock,
in any amount whatsoever, with respect to accrued salaries and related employee
compensation and expenses incurred outside of the ordinary course of business;
and none of such officers, directors or 5% shareholders will be indebted to the
Company in any amount whatsoever.
3.23 REGISTRATION RIGHTS. Except as set forth in the Registration
Rights Agreement and as set forth in Schedule 3.23 attached hereto, the Company
is not under any contractual obligation to register any of its presently
outstanding securities which may hereafter be issued.
3.24 PROFESSIONAL SERVICE PROVIDERS. Schedule 3.24 attached hereto
contains a list of all persons and entities who provide professional services to
the Company and which the Company has paid more than $50,000 within the twelve
(12) months prior to the date hereof (other than employees of the Company), the
amount of fees owed to such persons and entities as of June 30, 2001, and the
estimated amount of fees to be owed to such persons and entities on the Closing
Date.
3.25 OFFERING. Subject to the accuracy of the Purchaser's
representations and warranties in Section 4 hereof, the offer, sale and issuance
of the Note and the Warrant to the Purchaser in conformity with the terms of
this Agreement and the issuance to the Purchaser of the Reserved Shares issuable
upon conversion thereof, constitute (and will constitute) transactions exempt
from the registration requirements of Section 5 of the Securities Act, and any
applicable state securities laws.
3.26 CERTAIN TRANSACTIONS. Except as set forth in Schedule 3.26
attached hereto and to the knowledge of the Company, there are no existing or
pending transactions or relationships that are required to be disclosed in the
SEC Documents pursuant to Items 403 and 404 of Regulation S-K that have not been
so disclosed nor will be required to be disclosed in the Company's Form 10-Q
that will include the June Interim Statements.
3.27 ACCOUNTS RECEIVABLE. Schedule 3.27 attached hereto sets forth
(a) an accurate list, as of the June 2001 Balance Sheet Date, of all accounts
and notes receivable of the Company, and (b) an aging of all such accounts and
notes receivable showing amounts due in 30-day aging categories. The Company has
not received any notices or knows of any counterclaim or set-off with respect to
any accounts or notes receivable, or any facts or circumstances that would be
the basis for any such counterclaim or set-off, which is not reflected or taken
into account in the contractual allowance or bad debt reserves set forth in the
June 2001 Balance Sheet.
3.28 NO BROKER. The Company has not retained any agent, finder or
broker in connection with the transactions contemplated by this Agreement. The
Company shall indemnify, hold harmless and defend Purchaser for all commissions,
finder's and other fees and expenses of any such persons retained or purportedly
retained by the Company.
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3.29 ILLEGAL PAYMENTS. Neither the Company, nor any other person,
to the knowledge of the Company, directly or indirectly on behalf of or with
respect to the Company, engaged in any transaction or made or received any
payment which was not properly recorded in the books and records of the Company,
including any unrecorded or misrecorded payment to any insurance agent, adjustor
or other such third party which could reasonably be construed to be an unlawful
kickback, referral fee or similar payment.
3.30 SUBSIDIARIES; INVESTMENTS. The Company does not own, directly
or indirectly, shares of capital stock of any other Company or any equity
interest in any partnership, association, limited liability company or any other
entity or business, nor does the Company control, directly or indirectly, any
other Company, association or business organization other than as set forth on
Schedule 3.30 attached hereto.
3.31 ANTI-DILUTION AGREEMENTS. Except as contained in that certain
Anti-Dilution Agreement dated December 19, 2000, by and between the Company and
Silicon Valley Bank and as set forth in Schedule 3.31 attached hereto, the
Company has not entered into any anti-dilution agreement or otherwise granted
anti-dilution protection with respect to any of its securities.
4. PURCHASER REPRESENTATIONS
Purchaser represents and warrants to the Company as follows:
4.1 INVESTMENT. Purchaser is acquiring the Note and the Series C
Preferred Stock issuable upon conversion thereof (the "NOTE SECURITIES") for its
own account, not as a nominee or agent, and not with a view to, or for sale in
connection with, any distribution thereof. Purchaser understands that the Note
Securities have not been and may not be, registered under the federal Securities
Act of 1933, as amended (the "SECURITIES ACT"), or any state securities laws, by
reason of specific exemptions from the registration provisions of the Securities
Act and such laws that may depend upon, among other things, the bona fide nature
of Purchaser's investment intent as expressed herein. Purchaser understands that
the Company will register the Common Stock issuable upon conversion of the
Series C Preferred Stock and exercise of the Warrant. Purchaser is an
"accredited investor" within the meaning of Regulation D promulgated by the SEC
under the Securities Act.
4.2 POWER AND AUTHORIZATION. Purchaser has all requisite power and
authority to enter into this Agreement and to carry out and perform Purchaser's
obligations under the terms of this Agreement. All action on the part of
Purchaser necessary for the authorization, execution, delivery and performance
of all obligations of Purchaser under this Agreement, and any document
contemplated hereby, has been (or will be) taken prior to the Closing. This
Agreement constitutes the valid and binding obligation of Purchaser and is
enforceable against Purchaser in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency or other laws affecting
the enforcement of creditors' rights generally, and except that the availability
of the remedy of specific performance or other equitable relief is subject to
the discretion of the court before which any proceeding therefor may be brought.
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4.3 EXPERIENCE. Purchaser is experienced in evaluating and
investing in companies such as the Company. Purchaser has substantial experience
in investing in and evaluating private placement transactions of securities in
companies similar to the Company and is capable of evaluating the risks and
merits of its investment in the Company and has the capacity to protect its own
interests.
4.4 RESTRICTED SECURITIES. Purchaser acknowledges that, because
the Note Securities have not been registered under the Securities Act, the Note
Securities must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available. Purchaser is
familiar with the provisions of Rule 144 promulgated under the Securities Act
and the resale limitation imposed thereby and by the Securities Act. Purchaser
understands that no public market now exists for the Note Securities and that no
public market is expected to ever exist for the Note Securities.
5. CONDITIONS TO CLOSING OF PURCHASER
The obligation of Purchaser to purchase and pay for the Note at the
Closing is subject to the fulfillment to Purchaser's satisfaction on or prior to
the Closing Date of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations
and warranties made by the Company in Article 3 hereof shall be true and correct
in all material respects when made and shall be true and correct on the Closing
Date with the same force and effect as if they had been made on and as of said
date.
5.2 PERFORMANCE. All covenants, agreements and conditions
contained in this Agreement to be performed or complied with by the Company on
or prior to the Closing Date shall have been performed or complied with in all
material respects.
5.3 CORPORATE PROCEEDINGS; CONSENTS; ETC. Except as waived by
Purchaser and except as provided in Section 7.2, all corporate and other
proceedings to be taken by the Company, its officers, directors and shareholders
and all waivers and consents to be obtained by the Company in connection with
the transactions contemplated by this Agreement and the Registration Rights
Agreement shall have been taken or obtained.
5.4 COMPLETION OF DUE DILIGENCE. Purchaser shall have completed
its due diligence review of the Company to the Purchaser's satisfaction in its
sole determination.
5.5 BLUE SKY MATTERS. All consents, approvals, qualifications
and/or registrations required to be obtained or effected by the Company and
Purchaser under any applicable state securities or "blue-sky" laws in connection
with the issuance of the Note and the Warrant shall have been obtained or
effected.
5.6 NOTE. The Company shall have executed and delivered the Note.
5.7 COLLATERAL DOCUMENTS. The Security Agreement, the Warrant and
the Registration Rights Agreement shall have been executed and delivered by the
Company and each of the other parties thereto (other than the Purchaser).
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45
5.8 AMENDMENT OF ARTICLES OF INCORPORATION. The Company shall have
filed the Charter Amendment.
5.9 COMPLIANCE CERTIFICATE. The Company shall have delivered to
the Purchaser at the Closing an Officer's Certificate to the effect that the
representations and warranties of the Company continue to be true and accurate
in all material respects on the Closing Date, and that all conditions specified
in Sections 5.1 to 5.3 hereof, have been fulfilled and that there has been no
materially adverse change in the business, affairs, operations or financial
condition of the Company since the June 2001 Balance Sheet Date.
5.10 SECRETARY'S CERTIFICATE. The Company will deliver (i) copies
of the resolutions of the Board of Directors of the Company authorizing and
approving this Agreement and all of the transactions and agreements contemplated
hereby and thereby, (ii) the Bylaws of the Company, (iii) the Articles of
Incorporation of the Company, and (iv) the names of the officer or officers of
the Company authorized to execute this Agreement and any and all documents,
agreements and instruments contemplated herein, all certified by the Company to
be true, correct, complete and in full force and effect and unmodified except as
contemplated herein as of the Closing Date.
5.11 CONSENT OF HOLDERS OF SERIES A AND SERIES B PREFERRED STOCK.
The Company shall have obtained the necessary consent of the holders of Series A
and Series B Preferred Stock to the transactions contemplated by this Agreement
and the approval for the amendment of the Certificates of Designation for the
Series A Preferred Stock and the Series B Preferred Stock in substantially the
form attached hereto as EXHIBITS G AND H, respectively.
5.12 AMENDMENT OF BROCK NOTE. Brock shall have executed the Amended
and Restated Promissory Note attached hereto as EXHIBIT I.
6. CONDITION TO CLOSING OF THE COMPANY
The obligation of the Company to issue the Note at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions:
6.1 REPRESENTATIONS. The representations made by the Purchaser in
Article 4 hereof shall be true and correct in all material respects when made
and shall be true and correct on the Closing Date with the same force and effect
as if they had been made on and as of said date.
6.2 PERFORMANCE. All covenants, agreements and conditions
contained in this Agreement to be performed by or complied with by Purchaser on
or prior to the Closing Date shall have been performed or complied with in all
material respects.
6.3 SECURITY AGREEMENT. The Purchaser shall have executed and
delivered the Security Agreement.
6.4 PURCHASE PRICE. The Company shall have received full payment
from Purchaser for the Note.
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7. COVENANTS OF THE COMPANY
7.1 INFORMATION AND ACCESS. For so long as Purchaser holds the
Note or at least fifty percent (50%) of the Series C Preferred Stock issued to
Purchaser upon conversion of the Note (or of the Common Stock into which such
amount of Series C Preferred Stock was converted):
7.1.1 As soon as practicable after the end of each fiscal
year, and in any event within ninety (90) days after each fiscal year,
the Company shall furnish Purchaser audited consolidated balance sheets
of the Company and its subsidiaries, if any, as of the end of such
fiscal year and audited consolidated statements of income and cash flow
of the Company and its subsidiaries, if any, for such fiscal year,
prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in each case in comparative form
the figures for the previous fiscal year, all in reasonable detail and
certified by the Company's regularly engaged accounting firm.
7.1.2 As soon as practicable after the end of each fiscal
quarter, and in any event within forty-five (45) days thereafter, the
Company shall furnish to Purchaser unaudited consolidated balance
sheets of the Company and its subsidiaries, if any, as of the end of
such quarter, and unaudited consolidated statements of income and cash
flow of the Company and its subsidiaries, if any, for such quarter and
for the current fiscal year to date, prepared in accordance with
generally accepted accounting principles consistently applied, with
such statements certified by the principal financial officer of the
Company as having been prepared in accordance with generally accepted
accounting principles consistently applied.
7.1.3 The Company shall permit Purchaser to send one
non-voting representative in an observer capacity to all meetings of
the Board of Directors of the Company, with respect to which reasonable
notice shall be provided to Purchaser including notice of all written
consents taken in lieu of a meeting of the Board of Directors of the
Company prior to the effectiveness of any such consents; provided that
Purchaser shall maintain the confidentiality of any proprietary and
confidential information of the Company thereby obtained. The Company
shall reimburse such representative for all reasonable travel costs and
expenses incurred by the representative in attending such meetings.
7.1.4 For so long as (but only so long as) the Company
remains subject to the requirements of the Securities Exchange Act of
1934, as amended, the Company may satisfy the requirements of Sections
7.1.1 and 7.1.2 by delivering to Purchaser a copy of the Company's
Annual Report on Form 10-K, in the case of Section 7.1.1, or a copy of
the Company's Quarterly Report on Form 10-Q, in the case of Section
7.1.2, in both cases promptly following the filing thereof with the SEC
(or any governmental body or agency succeeding to the functions of the
SEC).
7.2 SHAREHOLDER APPROVAL. The Company will use its commercially
reasonable efforts and take all action necessary to obtain shareholder approval
for (i) the issuance of the Series C Preferred Stock and the Warrant to
Purchaser as provided herein, (ii) the issuance of shares of Series C Preferred
Stock to Brock as contemplated hereby, and (iii) the amendment of the
Certificates of Designation for the Series A Preferred Stock and the Series B
Preferred Stock
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47
in substantially the form attached hereto as EXHIBITS G AND H, respectively, by
October 31, 2001, including, without limitation, preparing, filing with the SEC
and mailing to its shareholders a proxy statement or statements with respect
thereto, and duly calling, giving notice of, convening and holding a meeting or
meetings of its shareholders for such purpose.
7.3 LINE OF CREDIT. The Company agrees that through October 31,
2001, the Company will not borrow any monies under the Company's line of credit
with Silicon Valley Bank. After October 31, 2001, if the Company has not
received the approval of its shareholders of the transactions contemplated in
this Agreement, then Company may borrow monies under such line of credit only if
it has either (i) repaid in full all amounts due and owing under the Note or
(ii) received Silicon Valley Bank's subordination of all amounts borrowed
pursuant to such credit line to all amounts owed under the Note.
7.4 PRIVATE PLACEMENT. The Company agrees that it will use its
commercially reasonable efforts to raise an additional $750,000 by September 30,
2001 through a private offering of shares of Series C Preferred Stock.
7.5 INSIDER TRANSACTIONS. For so long as Purchaser holds the Note
or at least fifty percent (50%) of the Series C Preferred Stock issued to
Purchaser upon conversion of the Note (or of the Common Stock into which such
amount of Series C Preferred Stock was converted), the Company agrees that it
will not enter into any transaction, other than in the ordinary course of
business, with any officer or shareholder of the Company who beneficially owns
greater than 5% of the outstanding Common Stock without the approval of
Purchaser, excluding the salary and bonus for Brock in amounts determined by the
Board of Directors of the Company.
7.6 LITIGATION. The Company, promptly upon becoming aware thereof,
shall notify Purchaser in writing of any actual or threatened litigation or
governmental proceeding in which the Purchaser is involved and which would, if
determined adversely, have a Material Adverse Effect on the Corporation.
7.7 PROTECTIVE PROVISION. For so long as Purchaser holds at least
fifty percent (50%) of the Series C Preferred Stock issued to Purchaser upon
conversion of the Note (or of the Common Stock into which such amount of Series
C Preferred Stock was converted), the Company shall not to agree to a sale,
merger or similar business combination of the Company that does not result in
consideration to the Purchaser of at least $2.00 per share, determined on an
as-converted-to-Common Stock basis, without the prior approval of Purchaser,
such approval not to be unreasonably withheld.
7.8 CERTIFICATES OF DESIGNATION FOR SERIES A AND B PREFERRED
STOCK. Upon receipt of the shareholder approval set forth in Section 7.2 above,
the Company shall promptly file an amendment to its articles of incorporation to
amend the Certificates of Designation for the Series A Preferred Stock and the
Series B Preferred Stock in substantially the form attached hereto as EXHIBITS G
AND H, respectively.
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8. INDEMNIFICATION
8.1 EXPENSES; INDEMNITY; DAMAGE WAIVER.
8.1.1 The Company shall pay all reasonable out-of-pocket
expenses incurred by Purchaser and its affiliates in connection with
the preparation, negotiation, execution and delivery of this Agreement
or any amendments, modifications or waivers of the provisions hereof;
provided, however, the Company's maximum obligation pursuant to this
Section 8.1.1. shall not exceed $20,000.
8.1.2 Subject to the limitations set forth in this Article
8, each party hereto shall indemnify and hold the other party harmless
from and against any and all losses, claims, damages, expenses or
liabilities (including, without limitation, the costs of any
investigation or suit and counsel fees related thereto) asserted
against, imposed upon or incurred by such other party resulting from a
breach by the indemnifying party of any of its representations,
warranties or covenants made in this Agreement or from any
misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished pursuant to this Agreement.
Promptly after receipt by an indemnitee (hereinafter an "INDEMNITEE")
of notice of any complaint or the commencement of any action or
proceeding with respect to which indemnification is being sought
hereunder, the Indemnitee will notify the Company in writing of such
complaint or of the commencement of such action or proceeding, but
failure so to notify the Company will not relieve the Company from any
liability which the Company may have hereunder or otherwise, except to
the extent that such failure materially prejudices the Company's
rights. If the Company so elects or is requested by the Indemnitee, the
Company will assume the defense of such action or proceeding, including
the employment of counsel reasonably satisfactory to the Indemnitee and
the payment of the fees and disbursements of such counsel, and in such
event the Indemnitee will cooperate in connection therewith as
reasonably requested by the Company (subject to the expenses of the
Indemnitee being reimbursed by the Company as provided above). In the
event, however, the Indemnitee reasonably determines that having common
counsel would present such counsel with a conflict of interest or if
the Company fails to assume the defense of the action or proceeding in
a timely manner, then the Indemnitee may employ separate counsel to
represent or defend it in any such action or proceeding and the Company
will pay the reasonable fees and disbursements of such counsel. In any
action or proceeding the defense of which the Company assumes, the
Indemnitee will have the right to participate in such litigation and to
retain its own counsel at the Indemnitee's own expense. Notwithstanding
anything contained in this Agreement to the contrary, the Company's
maximum obligation under this Section 8.1.2, shall not exceed the
Purchase Price.
8.1.3 All amounts due under this Section 8.1 shall be
payable at closing (to the extent requested by the Purchaser) and
promptly thereafter upon demand.
9. MISCELLANEOUS
9.1 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Georgia without reference to any
principles of conflicts of laws.
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9.2 ARBITRATION; ATTORNEY'S FEES.
(a) Controversy or Disputes. In the event that a
controversy or dispute (a "DISPUTE") arises out of or results from this
Agreement or any of the transactions or documents contemplated herein
or therein, and such controversy or dispute (a "TRANSACTION DISPUTE")
cannot be settled through negotiations between the parties to this
Agreement, then the parties hereto covenant and agree to attempt in
good faith to settle such dispute by binding arbitration administered
by the American Arbitration Association (the "AAA") in Atlanta, Georgia
under the AAA's commercial arbitration rules, and any judgment on the
award rendered by the arbitrator(s) shall be final and binding may be
entered in any court having jurisdiction thereof. In the event any
dispute involves a claim for $1,000,000 or more, arbitration shall be
conducted by a panel of three (3) arbitrators, as selected and
administered by the AAA.
(b) Mediation. The parties hereto may, upon mutual
written agreement, agree to attempt in good faith to settle any
Transaction Dispute by mediation administered by the AAA in Atlanta,
Georgia under the Commercial Mediation Rules prior to resorting to any
other remedies available at law or equity or any other dispute
resolution procedure.
(c) Remedies. The parties hereto covenant and agree that
the remedies and procedures set forth in this Section shall be the sole
and exclusive remedies available in the event of a Transaction Dispute.
Notwithstanding the foregoing, if any party to this Agreement, as part
of a Transaction Dispute, seeks injunctive relief or any other remedy
requiring specific enforcement, then solely with respect to such
equitable relief such party shall be permitted to seek relief in any
federal or state court of competent jurisdiction.
(d) Fees and Expenses. In any action or proceeding with
respect to any Transaction Dispute, arbitrator(s) or court(s) (in the
case of a request for equitable relief) may award the prevailing party
such prevailing party's reasonable fees and expenses, including
attorneys' and accountants fees, associated with such Transaction
Dispute, if any, only if the arbitrator(s) or court(s) (in the case of
equitable relief), concludes that the nonprevailing party in such
Transaction Dispute lacked a reasonable basis for opposing the position
advanced by the prevailing party. Under no circumstances shall any
party hereunder be entitled to seek recovery of such party's fees and
expenses.
9.3 SURVIVAL. The representations made herein shall survive any
investigation made by Purchaser and the closings of the transactions
contemplated hereby for a period of two (2) years from the date hereof. The
warranties and agreements made herein shall survive as applicable.
9.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
in this Article 9, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, assigns, heirs, executors and
administrators of Purchaser. Neither the Company nor Purchaser may assign its
rights or any interest in this Agreement without the prior consent of the other
party.
9.5 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement among the
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50
parties with regard to the subjects hereof and thereof. Neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated orally, but
may be amended by a written instrument signed by the Purchaser and the Company.
9.6 NOTICES. All notices and other communications required or permitted
hereunder shall be given in writing and shall be deemed effectively given upon
personal delivery or three (3) business days following upon deposit with the
United States Postal Service, by certified mail, return receipt requested,
postage prepaid, or otherwise delivered by hand or by messenger, addressed (a)
if to Purchaser to:
Mercury Fund II, Ltd.
c/o Mercury Ventures, Ltd.
2707 Hibernia
Dallas, Texas 75204
Attention: Dan Goodwin
with a copy which shall not
constitute notice to:
Winstead Sechrest & Minick P.C.
1201 Elm Street
5400 Renaissance Tower
Dallas, Texas 75270
Attention: Ted S. Schweinfurth
Scott Christiansen
or (b) if to the Company at:
Firstwave Technologies, Inc. 2859 Paces Ferry Road, Suite 1000, Atlanta, Georgia 30339, Attention: Richard Brock, President and CEO
with a copy which shall not
constitute notice to:
Kilpatrick Stockton LLP
1100 Peachtree Street
Atlanta, Georgia 30309
Attention: W. Benjamin Barkley, Esq.
or at such other address as the Company shall have furnished to Purchaser and
each such other holder in writing.
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9.7 DELAYS OR OMISSIONS; REMEDIES CUMULATIVE. No delay or omission
to exercise any right, power or remedy accruing to Purchaser, upon any breach or
default under this Agreement, shall impair any such right, power or remedy of
Purchaser or be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. All
of a party's remedies, either under this Agreement, or by law or otherwise
afforded to such party, shall be cumulative and not alternative.
9.8 AGENT'S FEES. Each party (i) represents and warrants that it
has retained no finder or broker in connection with the transactions
contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold
the other parties harmless of and from any liability for commissions or
compensation in the nature of an agent's, finder's or broker's fee to any broker
or other person or firm (and the cost and expenses of defending against such
liability or asserted liability) for which said party is responsible.
9.9 CONSTRUCTION OF CERTAIN TERMS. The titles of the articles,
sections, and subsections of this Agreement are for convenience of reference
only and are not to be considered in construing this Agreement. Wherever the
words "INCLUDING," "INCLUDE" or "INCLUDES" are used in this Agreement, they
shall be deemed followed by the words "without limitation." References to any
gender shall be deemed to mean any gender. Wherever the word "MATERIAL" is used
in this Agreement, it shall mean, with respect to any manner, an obligation
involving an amount in excess of $50,000, or an amount of loss, cost, liability
or expense in excess of $50,000, as applicable.
9.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9.11 LEGENDS. In addition to any legends required by the Securities
Act or any applicable state securities laws, the Company shall place the
following legend on the front or back of the Note:
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") OR STATE SECURITIES LAWS AND NO
TRANSFER OF THESE SECURITIES MAY BE MADE EXCEPT (A) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR (B) PURSUANT TO AN
EXEMPTION THEREFROM WITH RESPECT TO WHICH THE COMPANY MAY, UPON
REQUEST, REQUIRE A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT
SUCH TRANSFER IS EXEMPT FROM THE REQUIREMENTS OF THE ACT.
The Company shall place legends on each certificate evidencing ownership of
shares of Series C Preferred Stock and the shares of the Company's Common Stock
into which such shares are convertible similar to those initially placed on the
Note relating to the Securities Act and all applicable state securities laws and
as specified above.
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9.12 TIMELY PERFORMANCE. Time is of the essence as to the
performance of the obligations required of the respective parties under this
Agreement.
9.13 FURTHER ASSURANCES. The Company shall duly execute and
deliver, or cause to be duly executed and delivered, at its own cost and
expense, such further instruments and documents and to take all such action, in
each case as may be necessary or proper in the reasonable judgment of Purchaser
to carry out the provisions and purposes of this Agreement.
9.14 SEVERABILITY. It is the desire and intent of the parties that
the provisions of this Agreement be enforced to the fullest extent permissible
under the Laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
9.15 CONFIDENTIALITY. Each party acknowledges that it may have
access to various items or proprietary and confidential information of the other
in the course of investigations and negotiations prior to Closing. Each party
agrees that any such confidential information received from the other party
shall be kept confidential and shall not be used for any purpose other than to
facilitate the arrangement of financing for and the consummation of the
transactions contemplated herein. Confidential information shall include any
business or other information which is delivered by one party to the other,
unless such information (a) is already public knowledge, (b) becomes public
knowledge through no fault, action or inaction of the receiving party, or (c)
was known by the receiving party, or any of its directors, officers, employees,
representatives, agents or advisors prior to the disclosure of such information
by the disclosing party to the receiving party. No party, nor its respective
officers, directors, employees, accountants, attorneys or agents, shall
intentionally disclose the existence or nature of, or any of the terms and
conditions relating to, the employees of the Company and other parties with whom
the Company may contract in the course of operating the business, provided,
however, that such information may be disclosed in applications or requests
required to be made to obtain licenses, permits, approvals or consents needed to
consummate the transactions contemplated herein or in filings under applicable
securities laws.
(Signature Page to Follow)
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[SIGNATURES TO CONVERTIBLE NOTE PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the Company and Purchaser have executed and
delivered this Agreement as of the day and year first above written.
COMPANY:
FIRSTWAVE TECHNOLOGIES, INC.
By:
-------------------------------------------
Name:
-----------------------------------------
Its:
-----------------------------------------
PURCHASER:
MERCURY FUND II, LTD.
By: MERCURY VENTURES, LTD.,
its General Partner
By: MERCURY MANAGEMENT LLC,
its General Partner
By:
----------------------------------
BROCK:
RICHARD T. BROCK
----------------------------------------------
54
EXHIBIT A
FORM OF NOTE
55
EXHIBIT B
FORM OF SECURITY AGREEMENT
56
EXHIBIT C
FORM OF AMENDMENT TO ARTICLES OF INCORPORATION
FOR SERIES C PREFERRED STOCK
57
EXHIBIT D
FORM OF WARRANT
58
EXHIBIT F
FORM OF REGISTRATION RIGHTS AGREEMENT
59
EXHIBIT G
FORM OF AMENDMENT TO ARTICLES OF INCORPORATION
FOR SERIES A PREFERRED STOCK
60
EXHIBIT H
FORM OF AMENDMENT TO ARTICLES OF INCORPORATION
FOR SERIES B PREFERRED STOCK
61
EXHIBIT I
FORM OF AMENDED AND RESTATED PROMISSORY NOTE
62
EXHIBIT B
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR STATE SECURITIES LAWS AND NO TRANSFER OF
THESE SECURITIES MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, OR (B) PURSUANT TO AN EXEMPTION THEREFROM WITH RESPECT
TO WHICH THE COMPANY MAY, UPON REQUEST, REQUIRE A SATISFACTORY OPINION OF
COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE REQUIREMENTS OF THE
ACT.
FIRSTWAVE TECHNOLOGIES, INC.
SECURED CONVERTIBLE
SUBORDINATED PROMISSORY NOTE
$500,025 JULY 18, 2001
ATLANTA, GEORGIA
FOR VALUE RECEIVED, the undersigned, FIRSTWAVE TECHNOLOGIES, INC., a
Georgia corporation (the "Company" or "Payor"), hereby promises to pay to the
order of MERCURY FUND II, LTD. ("Payee"), at 2707 Hibernia, Dallas, Texas 75204
(or at such other address as Payee shall hereafter direct by notice in writing
to Payor), the principal sum of Five Hundred Thousand Twenty Five Dollars
($500,025), or such lesser amount as is then currently outstanding, plus
interest on the unpaid principal amount at the rate of nine percent (9%) per
annum (the "Note Rate"). Such principal amount, together with accrued interest,
shall be due and payable on the Maturity Date, unless converted prior to the
Maturity Date in which case only the interest shall be payable as set forth in
Section 3.1.
1. LOAN, INTEREST RATE AND PAYMENT PROVISIONS; SUBORDINATION; SECURITY
AGREEMENT.
1.1 The principal amount of this Note outstanding from time to
time shall bear interest from the date hereof through the Maturity Date (as
hereinafter defined), at the Note Rate. Interest on this Note shall be computed
on the basis of a 365/366-day year and actual days elapsed. All unpaid interest
and principal on this Note shall be paid in full on the Maturity Date, unless
converted prior to the Maturity Date in which case only the interest shall be
payable as set forth in Section 3.1.
1.2 All payments made by the Payor on this Note shall be applied
first to the payment of accrued, but unpaid interest on this Note and then to
the reduction of the unpaid principal balance of this Note.
1.3 Unless previously converted pursuant to Section 3.1 herein, if
payment of the principal amount of this Note, together with accrued unpaid
interest thereon at the Note Rate, is not paid on the Maturity Date, then
interest shall accrue on such unpaid amount at eighteen
63
percent (18%) per annum from and after such date of default until the date upon
which such unpaid amount is paid in full.
1.4 In no event shall Payee be entitled to receive interest at an
effective rate in excess of the maximum rate permitted by applicable law.
1.5 In the event the date for the payment of any amount payable
under this Note falls due on a Saturday, Sunday or public holiday under the laws
of the State of Georgia, the time for payment of such amount shall be extended
to the next succeeding business day and interest at the Note Rate shall continue
to accrue on any principal amount so effected until the payment thereof on such
extended due date.
1.6 For purposes of this Note, the following terms shall have the
following meanings:
1.6.1 "Conversion Event" means the Company's receipt of the
approval of its shareholders for each of the transactions contemplated by that
certain Convertible Note Purchase Agreement by and among the Company, Richard
Brock and Payee dated of even date herewith;
1.6.2 "Note" means this Convertible Promissory Note and any
Convertible Promissory Note issued in substitution or replacement therefor;
1.6.3 "Maturity Date" means the earlier to occur of (i)
October 31, 2001 and (ii) the occurrence of the Conversion Event;
1.7 Agreement to Subordinate. The Company agrees, and the holder
hereof by accepting this Note agrees, that the indebtedness evidenced by this
Note is subordinated in right of payment, to the extent and in the manner
provided herein, to the prior payment in full of all of the Company's
obligations, now existing or hereinafter created, of any nature whatsoever, to
Silicon Valley Bank, and that the subordination is for the benefit of Silicon
Valley Bank. At the request of Silicon Valley Bank, the Company and such holder
shall execute and deliver a subordination agreement to Silicon Valley Bank in
form and substance reasonably required by Silicon Valley Bank.
1.8 Subordination of Existing Debt. The Company agrees that the
indebtedness evidenced by that certain promissory note dated February 12, 2001
in favor ofMr. Richard T. Brock, is subordinated in right of payment, to the extent
and in the manner provided herein, to the prior payment in full of the Company's
obligations, now existingon or hereinafter created, of any nature whatsoever, to
Payee, and that the subordination is for the benefit of Payee.
1.9 Security Agreement. This Note is issued in connection with the
execution, and entitled to the benefits, of that certain Security Agreement by
and between the Company and Payee dated as of even date herewith (the "Security
Agreement"), the terms and conditions of which are made a part hereof to the
same extent and with the same effect as if fully set forth herein. Capitalized
terms not defined in this Note shall have the respective meanings assigned to
them in the Security Agreement. This Note is secured by the Security Agreement
and the Collateral, and is entitled to the benefit of the rights and security
provided thereby.
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2. REPLACEMENT OF NOTE. In case this Note is mutilated, destroyed, lost or
stolen, Payor shall, at its expense, execute and deliver a new Note, in
exchange and substitution for this Note. In the case of destruction,
loss or theft, Payee shall furnish to Payor indemnity reasonably
satisfactory to Payor, and in any such case, and in the case of
mutilation, Payee shall also furnish to Payor evidence to its
reasonable satisfaction of the mutilation, destruction, loss or theft
of this Note and of the ownership thereof. Any replacement Note so
issued shall be in the same outstanding principal amount as this Note
and dated the date to which interest shall have been paid on this Note
or, if no interest shall have yet been paid, dated the date of this
Note.
3. CONVERSION; NO PREPAYMENT.
3.1 Automatic Conversion. If the Conversion Event occurs prior to October 31, 2001, then the principal amount of this Note shall be automatically
converted into 6,667 shares of the Company's Series C Convertible Preferred
Stock (the "Note Securities") and all accrued and unpaid interest thereon shall
be paid in cash to the holder hereof within 5 business days of the occurrence of
the Conversion Event. As soon as practicable following (i) the occurrence of the
Conversion Event and (ii) the Company's receipt of this Note from Payee,December 1, 2003.
The proxy or proxies designated by the Company will issuehave discretionary authority to vote on any matter properly presented by a certificateshareholder for consideration at the Annual Meeting of Shareholders to Payee evidencingbe held in 2004 but not submitted for inclusion in the Note Securities.
3.2 No Prepayment. The principal amount of this Note may not be
prepaid.
4. EVENTS OF DEFAULT. If anyproxy materials for such meeting unless notice of the following events (each an "Event of
Default") shall occur:
4.1 Payor shall fail to pay on the due date therefor, the
principal of, and interest on, or any other amount payable under, this Note, and
such failure shall continue uncured for a period of five (5) days, or
4.2 Payor shall default in the due observance or performance of
any covenant, condition or agreement on the part of Payor to be observed or
performed pursuant to the terms of this Note or the Convertible Note Purchase
Agreement and such default shall continue uncured for a period of fifteen (15)
days after notice thereof shall have been given to Payor by Payee; or
4.3 Any representation or warranty of Payor in the Convertible
Note Purchase Agreementmatter is false and remains uncured for a period of fifteen
(15) days after notice thereof shall have been given to Payor by Payee; or
4.4 Payor shall commit any material breach of the terms of this
Note or the Convertible Note Purchase Agreement and remains uncured for a period
of fifteen (15) days after notice thereof shall have been given to Payor by
Payee; or
4.5 The dissolution of Payor or any vote in favor thereofreceived by the board of directors and shareholders of Payor, as the case may be; or
4.6 Payor shall become insolvent or make an assignment for the
benefit of creditors, or file with a court of competent jurisdiction an
application for appointment of a receiver or
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65
similar official with respect to it or any substantial part of its assets or
there shall be filed by Payor a petition seeking relief under any provision of
the Federal Bankruptcy Code or any other federal or state statute now or
hereafter in effect affording relief to debtors, or there shall be filed against
Payor any such application or petition, which application or petition is not
dismissed or withdrawn within 120 days from the date of filing thereof; or
4.7 Payor shall admit in writing its inability to pay its debts as
they mature;
then, upon the occurrence of any such Event of Default and at any time
thereafter, Payee shall have the right to declare the principal of, accrued
unpaid interest on, and all other amounts payable under this Note to be
forthwith due and payable, whereupon all such amounts shall be immediately due
and payable to Payee, without presentment, demand, protest or other notice of
any kind, including, but not limited to, all rights of notice and a hearing
prior to the holder hereof taking possession or control of, or the holder
hereof's replevy, attachment or levy upon, the Collateral or any bond or
security that might be required by any court prior to allowing the holder hereof
to exercise any of its remedies, all of which are hereby expressly waived;
provided, however, in case of the occurrence of an Event of Default under
Section 4.5, 4.6 or 4.7, such amounts shall become immediately due and payable
without any such declaration by Payee.
5. SUITS FOR ENFORCEMENT AND REMEDIES. If any one or more Events of
Default shall occur and be continuing, the Payee may proceed to (i)
protect and enforce Payee's rights either by suit in equity or by
action at law, or both, whether for the specific performance of any
covenant, condition or agreement contained in this Note or in any
agreement or document referred to herein or in aid of the exercise of
any power granted in this Note or in any agreement or document referred
to herein, (ii) enforce the payment of this Note, or (iii) enforce any
other legal or equitable right of the holder of this Note. No right or
remedy herein or in any other agreement or instrument conferred upon
the holder of this Note is intended to be exclusive of any other right
or remedy, and each and every such right or remedy shall be cumulative
and shall be in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or by
statute or otherwise.
6. SECURITIES REPRESENTATIONS. By acceptance of this Note each holder
hereof represents and warrants without duplication that:
(A) such holder has been advised that:
(1) the offer and sale of this Note is intended
to be a transaction by an issuer not involving any public offering and thereby
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof and Regulation D promulgated thereunder;
(2) neither this Note nor any Note Securities
may be transferred without (i) registration under the Securities Act or a valid
exemption there from and from any applicable state securities laws and (ii)
compliance with the restrictions contained in this Agreement; and
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66
(3) there is no established market for this Note
or the Note Securities and no assurance has been provided that any public market
will develop.
(B) Such holder acknowledges that such holder has been
advised that if such holder proposes to offer, sell or otherwise transfer,
pledge or hypothecate all or any part of the Note Securities (other than
pursuant to an effective registration statement under the Securities Act) such
holder must deliver to the Payor a written opinion of counsel, reasonably
satisfactory in form and substance to the Payor, that an exemption from the
registration requirements of the Securities Act is available.
(C) Such holder represents and warrants to the Company
that such holder:
(1) has such knowledge and experience in
financial and business matters, including investments of the type represented by
this Note and the Note Securities, as to be capable of evaluating the merits of
investment in the Payor and can bear the economic risk of an investment in the
Note Securities;
(2) has not been furnished with or relied upon
any oral representation, warranty or information in connection with the offering
of this Note or the Note Securities;
(3) is an "Accredited Investor" as such term is
defined in Rule 501 of the Rules; and
(4) is acquiring this Note and any Note
Securities for investment purposes only, for its own account and not with a view
to, or for resale in connection with, the distribution or other disposition
thereof in contravention of the Securities Act or any state securities law,
without prejudice, however, to such holder's right at all times to sell or
otherwise dispose of all or any part of the Note Securities pursuant to an
effective registration statement under the Securities Act and applicable state
securities laws, or under an exemption from such registration available under
the Securities Act and other applicable state securities laws.
7. UNCONDITIONAL OBLIGATION; FEES, WAIVERS, ETC.
7.1 The obligations to make the payments provided for in this Note
are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment or adjustment whatsoever.
7.2 If Payee shall seek to enforce the collection of any amount of
principal of and/or interest on this Note, there shall be immediately due and
payable from Payor, in addition to the then unpaid principal of, and accrued
unpaid interest on, this Note, all costs and expenses incurred by Payee in
connection therewith, including, without limitation, reasonable attorneys' fees
and disbursements.
7.3 No forbearance, indulgence, delay or failure to exercise any
right or remedy with respect to this Note shall operate as a waiver, nor as an
acquiescence in any default, nor shall any
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67
single or partial exercise of any right or remedy preclude any other or further
exercise thereof or the exercise of any other right or remedy.
7.4 Any term, covenant, agreement or condition of this Note may,
with the consent of the Payor and Payee, be amended or compliance therewith may
be waived (either generally or in a particular instance and either retroactively
or prospectively).
7.5 Payor hereby expressly waives demand and presentment for
payment, notice of nonpayment, notice of dishonor, protest, notice of protest,
bringing of suit, and diligence in taking any action to collect amounts called
for hereunder, and shall be directly and primarily liable for the payment of all
sums owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission with respect to the collection of any amount called
for hereunder or in connection with any right, lien, interest or property at any
and all times which Payee had or is existing as security for any amount called
for hereunder, except as specifically provided herein.
8. RESTRICTION ON TRANSFER. Neither this Note nor the Note Securities,
have been registered under the securities laws of the United States of America
or any state thereof. This Note has been acquired for investment, accordingly,
no interest in this Note, nor the Note Securities, may be offered for sale, sold
or transferred in the absence of registration and qualification of this Note
under applicable federal and state securities laws or an opinion of counsel of
Payee reasonably satisfactory to Payor that such registration and qualification
are not required.
9. MISCELLANEOUS.
9.1 The headings of the various paragraphs of this Note are for
convenience of reference only and shall in no way modify any of the terms or
provisions of this Note.
9.2 All notices required or permitted to be given hereunder shall
be in writing and shall be deemed to have been duly given when personally
delivered or three days after being sent by registered or certified mail, return
receipt requested, postage prepaid, or one day after being sent by overnight
courier, to the address of the intended recipient set forth in the first
paragraph of this Note or at such other address as the intended recipient shall
have hereafter given to the other party hereto pursuant to the provisions
hereof.
9.3 This Note and the obligations of Payor and the rights of Payee
shall be governed by and construed in accordance with the internal substantive
laws of the State of Georgia without giving effect to the choice of laws rules
thereof.
This Note shall bind the Company and its successors and assigns.
FIRSTWAVE TECHNOLOGIES, INC.
a Georgia corporation
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
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EXHIBIT C
CERTIFICATE OF DESIGNATION
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
FIRSTWAVE TECHNOLOGIES, INC.,
A GEORGIA CORPORATION (THE "CORPORATION")
---------------------------------------------------------
26,667 shares of the Corporation's Preferred Stock, no par value per
share, designated as "Series C Convertible Preferred Stock" ("Series C Preferred
Stock"), are authorized for issuance with the voting powers, preferences and
other special rights, qualifications, limitations and restrictions thereof set
forth below:
1. Dividends. Each holder of shares of Series C Preferred Stock
shall be entitled to receive, with respect to each share of Series C Preferred
Stock registered in his, her or its name on the stock transfer books of the
Corporation, cumulative dividends at a rate of nine percent (9%) per annum
calculated on the original issue price of $75.00 per share (the "Original Issue
Price") (such amount to be appropriately adjusted from time to time for any
stock splits, dividend, combinations or the like with respect to such shares).
Dividends on Series C Preferred Stock shall be paid monthly on the final
business day of each month (commencing November 30, 2001) to holders of record
as of such date, shall accrue on each share beginning on the date of issuance,
and shall be cumulative. Dividends payable on the Series C Preferred Stock shall
be paid in cash. Any payment made by the Corporation on unpaid cumulative
dividends, if less than the total amount of such dividends, shall be applied
first to those dividends which have been accrued for the longest time. No
dividend or other distribution shall be paid on or declared or set apart for
payment on any shares of the Common Stock of the Corporation or any shares of
any other class or series or issue of preferred stock that is junior to Series C
Preferred Stock as long as any accrued dividends on the Series C Preferred Stock
remain unpaid.
2. Liquidation. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the shares
of Series C Preferred Stock shall be entitled, prior to and in preference of any
distribution or payment made upon the Common Stock, Series A Preferred Stock and
Series B Preferred Stock or upon any other class or series or issue of preferred
stock of the Corporation that is junior to the Series C Preferred Stock, to be
paid an amount equal to $75 (seventy-five dollars) per share of Series C
Preferred Stock (such amount to be appropriately adjusted from time to time for
any stock splits, dividend, combinations or the like with respect to such
shares), plus all accrued but unpaid dividends (such amounts being herein
sometimes referred to as the "Liquidation Payments"). Thereafter, the holders of
the Series C Preferred Stock shall not be entitled to any further payment. If
upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed to the holders of the
Series C Preferred Stock are insufficient to permit payment to the holders of
Series C Preferred Stock of the full amount of the Liquidation Payments, then
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69
entire assets of the Corporation to be distributed shall be distributed ratably
per share among the holders of Series C Preferred Stock. Upon any such
liquidation, dissolution or winding up of the Corporation, after the holders of
the Series C Preferred Stock have been paid in full the amounts to which they
are entitled, the remaining assets of the Corporation shall be distributed
ratably to the remaining holders of the Corporation's capital stock in
accordance with their respective rights and preferences under the Corporation's
Articles of Incorporation. The Corporation must give written notice of such
liquidation, dissolution or winding up (stating a payment date, the amount of
the Liquidation Payment and the place where said sums shall be payable) by first
class mail, postage prepaid, not less than 30 or more than 60 days prior to the
payment date stated therein, to the holders of record of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and the Common Stock,
such notice to be addressed to each shareholder at its mailing address as shown
by the records of the Corporation.
3. Conversion.
3.1 Right to Convert. Subject to the terms and
conditions of this Section 3, the holder of any share or shares of
Series C Preferred Stock shall have the right, at such holder's option
at any time to convert all or any part of such shares of Series C
Preferred Stock (except that upon any liquidation, dissolution or
winding up of the Corporation the right of conversion shall terminate
at the close of business on the last full business day preceding the
date fixed for payment of the Liquidation Payments) into such number of
fully paid and nonassessable whole shares of Common Stock at a price
determined by dividing the Original Issue Price by the Conversion Price
in effect at the time of the conversion (the "Conversion Rate"). The
"Conversion Price" shall initially be equal to $__________________ [THE
LESSER OF (I) $0.75 OR (II) THE PRODUCT OF (X) 0.75 MULTIPLIED BY (Y)
THE AVERAGE CLOSING PRICE OF COMMON STOCK AS REPORTED BY THE NASDAQ
STOCK MARKET, INC. (OR IF NOT LISTED ON THE NASDAQ NATIONAL MARKET ON
SUCH OTHER PRINCIPAL SECURITIES MARKET OR AUTOMATED QUOTATION SYSTEM ON
WHICH THE COMPANY'S COMMON STOCK IS THEN TRADED OR LISTED) FOR THE
TWENTY (20) CONSECUTIVE TRADING DAYS ENDING ON THE DATE ON WHICH THE
CORPORATION'S SHAREHOLDERS APPROVED THE ISSUANCE OF THE SERIES C
PREFERRED STOCK] and shall be subject to adjustment as provided herein;
provided, however, the Conversion Price shall not initially be less
than $0.50. Such right of conversion may be exercised by the holder
thereof by giving written notice to the Corporation that the holder
elects to convert a stated number of shares of Series C Preferred Stock
into Common Stock and by surrender of a certificate or certificates for
the shares so to be converted to the Corporation at its principal executive office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holder or holders
of the Series C Preferred Stock) at any time during its usual business
hours on the date set forth in such notice, together with a statement
of the name or names (with address), subject to compliance with
applicable laws to the extent such designation shall involve a
transfer, in which the certificate or certificates for shares of Common
Stock are to be issued.
3.2 Adjustments to Conversion Price.
(a) Adjustment for Combinations or
Consolidations of Common Stock. In the event the Corporation
at any time or from time to time after the effective
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date of a written agreement by the Corporation for the initial
sale of Series C Preferred Stock (hereinafter referred to as
the "Original Issue Date") effects a subdivision or
combination of its outstanding Common Stock into a greater or
lesser number of shares without a proportionate and
corresponding subdivision or combination of its outstanding
Series C Preferred Stock, then and in each such event the
number of shares of Common Stock issuable upon conversion of
the Series C Preferred Stock shall be proportionately
increased in the case of a subdivision or decreased in the
case of a combination, effective in either case at the close
of business on the date when such subdivision or combination
shall become effective.
(b) Adjustment for Dividends, Distributions and
Common Stock Equivalents. In the event the Corporation at any
time after the Original Issue Date takes a record of the
holders of its Common Stock for the purpose of entitling them
to receive a dividend or other distribution payable in
additional shares of Common Stock or in other securities or
rights (herein referred to as "Common Stock Equivalents")
convertible into or exchangeable for, or otherwise entitling
the holder thereof to receive, additional shares of Common
Stock without payment of any consideration by such holder for
such Common Stock, the maximum number of shares of Common
Stock (as set forth in the instrument relating thereto without
regard to any provisions contained therein for a subsequent
adjustment of such number) issuable in payment of such
dividends or distribution, or on conversion of or in exchange
for or exercise of such Common Stock Equivalents, shall be
deemed to have been issued and to be outstanding as of such
record date (or if there is no record date, then as of the
date of issuance of the additional shares of Common Stock),
and the number of additional shares of Common Stock into which
the Series C Preferred Stock may be converted shall be
increased in proportion to the increase of the number of
outstanding shares of Common Stock resulting therefrom by
multiplying the Conversion Price by a fraction,
(i) the numerator of which shall be the
total number of shares of Common Stock issued and
outstanding or deemed to be issued and outstanding
immediately prior to the time of such issuance or the
close of business on such record date; and
(ii) the denominator of which shall be
the total number of shares of Common Stock issued and
outstanding or deemed to be issued and outstanding
immediately prior to the time of such issuance or the
close of business on such record date plus the number
of shares of Common Stock issuable in payment of such
dividend or distribution or upon conversion or
exercise of such Common Stock Equivalents;
provided, however, (A) if such record date shall have been
fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the
Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the
Conversion Price shall be adjusted
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pursuant to this Subparagraph 3.2(b) as of the time of actual
payment of such dividends or distributions; (B) if such Common
Stock Equivalents provide, with the passage of time or
otherwise, for any decrease in the number of shares of Common
Stock issuable upon conversion or exercise thereof (or upon
the occurrence of a record date with respect thereto), and any
subsequent adjustment based thereon, the Conversion Price
shall, upon any such decrease becoming effective, be
recomputed to reflect such decrease insofar as it affects the
rights of conversion or exercise of the Common Stock
Equivalents then outstanding; (C) upon the expiration of any
rights of conversion or exercise under any unexercised Common
Stock Equivalents, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent computation
based thereon, shall, upon such expiration, be recomputed as
if the only additional shares of Common Stock issued were the
shares of stock, if any, actually issued upon the conversion
or exercise of such Common Stock Equivalents; and (D) in the
case of Common Stock Equivalents which expire by their terms
not morelater than sixty (60) days after the date of issuance
thereof, no adjustment in the Conversion Price shall be made
until the expiration or exercise of all such Common Stock
Equivalents, whereupon such adjustment shall be made in the
manner provided in Clause (C) above.
(c) Adjustment of Conversion Rate for Diluting
Issues. Except as otherwise provided in this Subparagraph
3.2(c), if at any time after the Original Issue Date the
Corporation sells or issues any Common Stock or Common Stock
Equivalents at a per share consideration (as defined below)
less than the Conversion Price for the Series C Preferred
Stock then in effect, then the Conversion Price then in effect
shall be adjusted as provided in this Subparagraph 3.2(c). For
the purposes of the foregoing, the "per share consideration"
with respect to the sale or issuance of Common Stock shall be
the price per share received by the Corporation, prior to the
payment of any expenses, commissions, discounts and other
applicable costs. With respect to the sale or issuance of
Common Stock Equivalents which are convertible into or
exchangeable for Common Stock without further consideration,
the per share consideration shall be determined by dividing
the maximum number of shares of Common Stock issuable with
respect to such Common Stock Equivalents (as set forth in the
instrument relating thereto without regard to any provisions
contained therein for subsequent adjustment of such number)
into the aggregate consideration received by the Corporation
upon the sale or issuance of such Common Stock Equivalents.
With respect to the issuance of other Common Stock
Equivalents, the per share consideration shall be determined
by dividing the maximum number of shares of Common Stock
issuable with respect to such Common Stock Equivalents into
the total aggregate consideration received by the Corporation
upon the sale or issuance of such Common Stock Equivalents
plus the minimum aggregate amount of additional consideration
receivable by the Corporation upon the conversion or exercise
of such Common Stock Equivalents. The issuance of Common Stock
or Common Stock Equivalents for no consideration shall be
deemed to be an issuance at a per share consideration of
$0.01. In connection with the sale or issuance of Common Stock
and/or Common Stock Equivalents for non-cash
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consideration, the amount of consideration shall be determined
by the Board of Directors of the Corporation.
As used herein, "Additional Shares of Common
Stock" shall mean either shares of Common Stock issued
subsequent to the Original Issue Date or, with respect to the
issuance of Common Stock Equivalents, the maximum number of
shares of Common Stock issuable in exchange for, upon
conversion of, or upon exercise of such Common Stock
Equivalents.
(i) Upon each issuance of Additional
Shares of Common Stock for a per share consideration
less than the Conversion Price in effect on the date
of such issuance, the Conversion Price of the Series
C Preferred Stock in effect on such date will be
adjusted by multiplying it by a fraction:
(x) the numerator of which
shall be equal to the number of shares of Common
Stock actually outstanding immediately prior to such
issue plus the number of shares of Common Stock which
the aggregate consideration received by the
Corporation for the total number of Additional Shares
of Common Stock so issued would purchase at such
Conversion Price; and
(y) the denominator of which
shall be equal to the number of shares of Common
Stock actually outstanding immediately prior to such
issue plus the number of such Additional Shares of
Common Stock so issued.
(ii) Upon each issuance of Common Stock
Equivalents, exchangeable without further
consideration into Common Stock, for a per share
consideration less than the Conversion Price in
effect on the date of such issuance, the Conversion
Price of the Series C Preferred Stock in effect on
such date will be adjusted as in Subparagraph
3.2(c)(i) immediately above on the basis that the
related Additional Shares of Common Stock are to be
treated as having been issued on the date of issuance
of the Common Stock Equivalents, and the aggregate
consideration received by the Corporation for such
Common Stock Equivalents shall be deemed to have been
received for such Additional Shares of Common Stock.
(iii) Upon each issuance of Common Stock
Equivalents other than those described in
Subparagraph 3.2(c)(ii) immediately above, for a per
share consideration less than the Conversion Price in
effect on the date of such issuance, the Conversion
Price of the Series C Preferred Stock in effect on
such date will be adjusted as in Subparagraph
3.2(c)(i) immediately above on the basis that the
related Additional Shares of Common Stock are to be
treated as having been issued on the date of issuance
of such Common Stock Equivalents, and the aggregate
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consideration received and that are receivable by the
Corporation on conversion or exercise of such Common
Stock Equivalents shall be deemed to have been
received for such Additional Shares of Common Stock.
(iv) Once any Additional Shares of
Common Stock have been treated as having been issued
for the purpose of this Subparagraph 3.2(c), they
shall be treated as issued and outstanding shares of
Common Stock whenever any subsequent calculations
must be made pursuant hereto; provided that on the
expiration of any options, warrants or rights to
purchase Additional Shares of Common Stock, the
termination of any rights to convert or exchange for
Additional Shares of Common Stock, or the expiration
of any options or rights related to such convertible
or exchangeable securities on account of which an
adjustment in the Conversion Price has been made
previously pursuant to this Subparagraph 3.2(c), the
Conversion Price shall forthwith be readjusted to
such Conversion Price as would have been obtained had
the adjustment made upon the issuance of such
options, rights, securities or options or rights
related to such securities been made upon the basis
of the issuance of only the number of shares of
Common Stock actually issued upon the exercise of
such options or rights, upon the conversion or
exchange of such securities or upon the exercise of
the options or rights related to such securities.
(v) The foregoing notwithstanding, no
adjustment of the Conversion Price shall be made as a
result of the issuance of:
-- shares of Common Stock
issuable to employees, officers, outside directors
and consultants upon the exercise of options to
purchase shares of Common Stock granted by the
Corporation pursuant to a stock option plan, stock
purchase plan or other similar plan adopted by the
Board of Directors of the Corporation;
-- any shares of Common Stock
issued or issuable by reason of a dividend, stock
split, split-up or other distribution on shares of
Common Stock;
-- any shares of Common Stock
issued or issuable upon the exercise or conversion of
any rights, options, warrants or other securities
convertible into Common Stock outstanding as of the
date of hereof;
-- any shares of Common Stock
issuable upon the exercise of that certain warrant to
purchase up to 125,006 shares of Common Stock to be
issued to Mercury Fund II, Ltd.;
-- up to 10,000 shares of
Series C Preferred Stock (and Common Stock issued in
conversion thereof) issued upon conversion of
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not more than $750,000 of principal amount of
outstanding indebtedness of the Corporation;
-- up to 10,000 additional
shares of Series C Preferred Stock (and Common Stock
issued upon conversion thereof) issued for cash for a
purchase price of not less than $75.00 per share;
-- any shares of Common Stock
pursuant to the exchange, conversion, or exercise of
any Common Stock Equivalents which have previously
been incorporated into computations hereunder on the
date when such Common Stock Equivalents were issued;
or
-- any shares of Common Stock
upon the conversion of any of the Series A Preferred
Stock, Series B Preferred Stock, or Series C
Preferred Stock.
(d) Minimum Adjustment. No adjustment in the
Conversion Price need be made if such adjustment would result
in a change in the Conversion Price of less than $0.01. Any
adjustment of less than $0.01 which is not made shall be
carried forward and shall be made at the time of and together
with any subsequent adjustment which, on a cumulative basis,
amounts to an adjustment of $0.01 or more in the Conversion
Price.
3.3 Issuance of Certificates; Time Conversion
Effected. Within five (5) business days after the receipt by the
Corporation of the written notice referred to in Subsection 3.1 and
the certificate or certificates for the share or shares of the Series
C Preferred Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder,
registered in such name or names as such holder may direct, subject
to compliance with applicable laws to the extent such designation
shall involve a transfer, a certificate or certificates for the
number of whole shares of Common Stock issuable upon the conversion
of such share or shares of Series C Preferred Stock. To the extent
permitted by law, such conversion shall be deemed to have been
effected as of the close of business on the date on which the
Corporation receives such written notice and the certificate or
certificates for such share or shares shall have been surrendered as
aforesaid, and at such time the rights of the holder of such share or
shares of Series C Preferred Stock shall cease (with respect to the
shares of Series C Preferred Stock), and the person or persons in
whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed
to have become the holder or holders of record of the shares
represented thereby.
3.4 Fractional Shares; Dividends; Partial
Conversion.
(a) No fractional shares shall be issued upon
conversion of the Series C Preferred Stock into Common Stock
and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share, and no payment or
adjustment shall be made upon any conversion on account of any
cash dividends on the Series C Preferred Stock so converted or
the Common Stock issued upon
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such conversion. In case the number of shares of Series C
Preferred Stock represented by the certificate or certificates
surrendered pursuant to Subsection 3.1 exceeds the number of
shares converted, the Corporation shall, upon such conversion,
execute and deliver to the holder thereof, at the expense of
the Corporation, a new certificate or certificates for the
number of shares of Series C Preferred Stock, represented by
the certificate or certificates surrendered which are not to
be converted.
(b) Upon conversion of any shares of Series C
Preferred Stock, the holder of the shares of Series C
Preferred Stock so converted shall be entitled to receive any
dividends accrued but unpaid with respect to such shares of
Series C Preferred Stock. No payment or adjustment shall be
made on account of dividends declared and payable to holders
of Common Stock of record on a date prior to the date of
conversion.
3.5 Other Notices. If at any time:
(a) the Corporation declares any dividend upon
its Common Stock payable in cash or stock or makes any other
distribution to the holders of the Common Stock;
(b) the Corporation offers for subscription pro
rata to the holders of its Common Stock any additional shares
of stock of any class or other rights;
(c) there is any reclassification of the capital
stock of the Corporation, or a consolidation or merger of the
Corporation with, or a sale of all or substantially all its
assets to, another corporation; or
(d) there is a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then the Corporation shall give, by first class mail, postage prepaid, addressed
to each holder of any shares of Series C Preferred Stock at the address of such
holder as shown on the books of the Corporation, (a) at leastFebruary 15, days' prior
written notice of the date on which the books of the Corporation shall close or
a record shall be taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least 15
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause (a) shall also specify, in the
case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (b) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
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3.6 Stock to be Reserved. The Corporation must
at all times reserve and keep available out of its authorized but unissued
Common Stock, solely for the purpose of issuance upon the conversion of the
Series C Preferred Stock as herein provided, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding shares of
Series C Preferred Stock. All shares of Common Stock which shall be so issued
shall be duly and validly issued and fully paid and nonassessable and free from
all taxes, liens and charges arising out of or by reason of the issue thereof,
and, without limiting the generality of the foregoing, the Corporation covenants
that it will from time to time take all such action as may be required to assure
that the par value per share of the Common Stock is at all times equal to or
less than the effective Conversion Price. The Corporation will take all such
action within its control as may be necessary on its part to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange
upon which the Common Stock of the Corporation may be listed. If at any time the
number of authorized but unissued shares of Common Stock are insufficient to
effect the conversion of all of the then outstanding shares of Series C
Preferred Stock, the Corporation shall take such corporate actions as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes.
3.7 No Reissuance of Series C Preferred Stock.
Shares of Series C Preferred Stock that are converted into shares of Common
Stock as provided herein shall not be reissued.
3.8 Issue Tax. The issuance of certificates for
shares of Common Stock upon conversion of the Series C Preferred Stock shall be
made without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Series C Preferred Stock which is being converted.
3.9 Closing of Books. The Corporation will at no
time close its transfer books against the transfer of any Series C Preferred
Stock or of any shares of Common Stock issued or issuable upon the conversion of
any shares of Series C Preferred Stock in any manner which interferes with the
timely conversion of such Series C Preferred Stock.
3.10 Definition of Common Stock. As used in this
Section 3, the term "Common Stock" means and includes the Corporation's
authorized Common Stock as constituted on the date of filing of this Certificate
of Designation and shall also include any capital stock of any class of the
Corporation thereafter authorized that shall not be limited to a fixed sum in
respect of the rights of the holders thereof to participate in dividends or in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided, however, that such term,
when used to describe the securities receivable upon conversion of shares of the
Series C Preferred Stock of the Corporation, shall include only shares
designated as Common Stock of the Corporation on the date of filing of this
Certificate of Designation.
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4. Voting. Except as otherwise provided by law and herein, the
holders of Series C Preferred Stock shall vote together with the holders of
Common Stock, Series A Preferred Stock and Series B Preferred Stock on all
matters to be voted on by the shareholders of the Corporation except as
hereinafter provided or as required by law, and each holder of Series C
Preferred Stock shall be entitled to one vote for each share of Common Stock
that would be issuable to such holder upon the conversion of all the shares of
Series C Preferred Stock held by such holder on the record date for the
determination of shareholders entitled to vote.
5. Restrictions. At any time when at least 50% of the originally
issued shares of Series C Preferred Stock are outstanding, and in addition to
any other vote of shareholders required by law or by the Corporation's Articles
of Incorporation, the prior consent of the holders of 66% of the outstanding
Series C Preferred Stock, given in person or by proxy, either in writing
evidenced by a written consent of such requisite holders, or at an annual
meeting or at a special meeting called for that purpose, at which meeting the
holders of the shares of such Series C Preferred Stock shall vote together as a
class on such matters, is required for:
(a) any amendment or change to the Company's
Articles of Incorporation or Bylaws that adversely affects the
rights, preferences, privileges or powers of, or the
restrictions provided for the benefit of, the Series C
Preferred Stock;
(b) any action that authorizes, creates or
issues shares of any class of stock having preferences
superior to or on a parity with the Series C Preferred Stock
with respect to dividends or liquidation preferences;
(c) any action that reclassifies any outstanding
shares into shares having preferences or priority as to
dividends or assets senior to or on a parity with the
preference of the Series C Preferred Stock; or
(d) the liquidation or dissolution of the
Company.
6. Redemption.
6.1 Call for Redemption. So long as dividends
for all past dividend periods shall have been paid on all outstanding
shares of Series C Preferred Stock prior to any notice of redemption
being given and the full dividends thereon for the then current
dividend period shall have been paid or declared and amounts sufficient
for the payment thereof set aside, commencing July 18, 2004 and at any
time thereafter the Corporation, at the option of the Board of
Directors, may redeem in whole or in part the shares of Series C
Preferred Stock at the time outstanding, at any time or from time to
time, upon notice given as hereinafter specified, at a redemption price
of $75 per share (as appropriately adjusted from time to time in
respect to stock dividends, splits, combination and the like with
respect to such shares). In case of any redemption of only a part of
the shares of Series C Preferred Stock at the time outstanding, the
redemption shall be pro rata.
6.2 Notice. Notice of redemption of shares of
Series C Preferred Stock shall be mailed by certified mail, postage
prepaid, addressed to the holders of record of
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the shares to be redeemed at their respective last addresses as they
shall appear on the books of the Corporation. Such mailing shall be at
least 60 days prior to the date fixed for redemption. Any notice which
is mailed in the manner herein provided shall be conclusively presumed
to have been duly given, whether or not the stockholder receives such
notice, but failure duly to give such notice by mail, or any defect in
such notice or in the mailing thereof, to any holder of shares of
Series C Preferred Stock designated for redemption shall not affect the
validity of the proceedings for the redemption of anycertain other shares of
Series C Preferred Stock.
6.3 Procedure. If such notice of redemption
shall have been duly given or if the Corporation shall have given to
the bank or trust company hereinafter referred to irrevocable
authorization promptly to give such notice, and if on or before the
redemption date specified therein all funds necessary for such
redemption shall have been set aside by the Corporation, separate and
apart from its other funds, in trust for the pro rata benefit of the
holders of the shares called for redemption, so as to be and continue
to be available therefor, or, at the option of the Corporation,
deposited by the Corporation with such bank or trust company in trust
for the pro rata benefit of the holders of the shares called for
redemption, then, notwithstanding that any certificate for shares so
called for redemption shall not have been surrendered for cancellation,
on and after such redemption date, all shares so called for redemption,
not theretofore converted and outstanding on the redemption date, shall
no longer be deemed to be outstanding and all rights with respect to
such shares shall forthwith on such redemption date cease and
terminate, except only the right of the holders thereof to receive the
amount payable on redemption thereof, without interest. The aforesaid
bank or trust company shall be organized and in good standing under the
laws of the United States of America or of the State of Georgia, shall
be doing business in Georgia, and shall be identified in the notice of
redemption. Any interest accrued on such funds shall be paid to the
Corporation from time to time. Any funds so deposited and unclaimed at
the end of three years from the redemption date shall, to the extent
permitted by law, be released or repaid to the Corporation, after which
time the holders of the shares so called for redemption shall look only
to the Corporation for payment thereof. Any funds so deposited or set
aside by the Corporation which shall not be required for such
redemption because of the exercise of any right of conversion pursuant
to Section 3 hereof, which right of conversion may be exercised at any
time prior to the date fixed for redemption, shall be released or
repaid to the Corporation forthwith.
7. Ranking of Series C Preferred Stock in Relation to Other
Stock. The Series C Preferred Stock shall be deemed to rank prior to the shares
of Series A Preferred Stock, prior to the shares of Series B Preferred Stock,
prior to the shares of Common Stock, and prior to any shares of Preferred Stock
of any other series authorized, designated, or issued after this date, except as
shall be set forth and provided in the resolution or resolutions of the Board of
Directors providing for the authorization, designation or issuance of shares of
any other series of the Preferred Stock which may not be on parity with or
senior to the Series C Preferred Stock without the approval of holders of at
least 66% of the outstanding shares of Series C Preferred Stock as provided in
Section 5 hereof.
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EXHIBIT D
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") is made and entered into as
of July 18, 2001 between MERCURY FUND II, LTD., a Texas limited partnership
("Lender") and FIRSTWAVE TECHNOLOGIES, INC., a Georgia corporation ("Borrower").
The parties agree as follows:
1. ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be
construed following GAAP. Calculations and determinations must be made following
GAAP. The term "financial statements" includes the notes and schedules. The
terms "including" and "includes" always mean "including (or includes) without
limitation" in this or any Loan Document. Capitalized terms in this Agreement
shall have the meanings set forth in Section 13.
2. LOAN AND TERMS OF PAYMENT
Lender has contemporaneously herewith extended a loan to
Borrower in the original principal amount of $500,025 (the "Loan"), which is
evidenced by that certain Secured Convertible Subordinated Promissory Note of
Borrower dated of even date herewith (the "Note"). The terms and conditions of
the Loan are contained in the Note, a form of which is attached hereto as
Exhibit A and the Convertible Note Purchase Agreement dated of even date
herewith (the "Convertible Note Purchase Agreement"), a form of which is
attached hereto as Exhibit B.
3. CREATION OF SECURITY INTEREST
To secure the full and prompt payment of the Obligations as
well as to secure the full and prompt performance of each of Borrower's duties
and agreements under the Note, and also regardless of whether such Obligations
are from time to time reduced and thereafter increased or entirely extinguished
and thereafter reincurred, Borrower shall contemporaneously herewith, execute
and deliver to the Lender, in form and substance satisfactory to the Lender,
such instruments (including, but not by way of limitation, security agreement(s)
pursuant to the Uniform Commercial Code of the State of Georgia and financing
statement(s) pursuant to the Uniform Commercial Code of the State of Georgia),
documents, certificates, agreements, letters, representations and other writings
which may be necessary or desirable, in the opinion of the Lender, to provide
the Lender satisfactory security for such Obligations. Except for Permitted
Liens, the security interest granted hereby will be and remain a first priority
security interest in the Collateral, which is listed on Exhibit A attached
hereto. If this Agreement is terminated, Lender's lien and security interest in
the Collateral will continue until Borrower fully satisfies all of the
Obligations.
4. AFFIRMATIVE COVENANTS
Borrower will do all of the following:
80
4.1 GOVERNMENT COMPLIANCE. Borrower will maintain its
corporate existence and good standing in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
would have a material adverse effect on Borrower's business or operations.
Borrower will comply with all laws, ordinances and regulations to which it is
subject, noncompliance with which would have a material adverse effect on
Borrower's business or operations;
4.2 TAXES. Borrower will make timely payment of all
material federal, state, and local taxes or assessments and will deliver to
Lender, on demand, appropriate certificates attesting to the payment; and
4.3 FURTHER ASSURANCES. Borrower will execute any further
instruments and take further action as Lender requests to perfect or continue
Lender's security interest in the Collateral or to effect the purposes of this
Agreement.
5. EVENTS OF DEFAULT
Any one of the following is an Event of Default:
5.1 Borrower shall fail to pay on the due date therefore,
the principal of, and interest on, or any other amount payable under, the Note,
and such failure shall continue uncured for a period of five (5) business days,
or
5.2 Borrower shall default in the due observance or
performance of any covenant, condition or agreement on the part of Borrower to
be observed or performed pursuant to the terms of the Note or the Convertible
Note Purchase Agreement and such default shall continue uncured for a period of
fifteen (15) days after notice thereof shall have been given to Borrower by
Lender; or
5.3 Any representation or warranty of Borrower in the
Convertible Note Purchase Agreement is false in a material respect and remains
uncured for a period of fifteen (15) days after notice thereof shall have been
given to Borrower by Lender; or
5.4 Borrower shall commit any material breach of the
terms of the Convertible Note Purchase Agreement; or
5.5 The dissolution of Borrower or any vote in favor
thereof by the board of directors and shareholders of Borrower, as the case may
be; or
5.6 Borrower shall become insolvent or make an assignment
for the benefit of creditors, or file with a court of competent jurisdiction an
application for appointment of a receiver or similar official with respect to it
or any substantial part of its assets or there shall be filed by Borrower a
petition seeking relief under any provision of the Federal Bankruptcy Code or
any other federal or state statute now or hereafter in effect affording relief
to debtors, or there shall be filed against Borrower any such application or
petition, which application or petition is not dismissed or withdrawn within 120
days from the date of filing thereof; or
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5.7 Borrower is unable to pay its debts as they come due.
6. LENDER'S RIGHTS AND REMEDIES
6.1 RIGHTS AND REMEDIES. When an Event of Default occurs
and continues Lender may, without notice or demand, do any or all of the
following:
(a) Declare all Obligations immediately due and payable
(but if an Event of Default described in Section 5.5, 5.6 or 5.7 occurs all
Obligations are immediately due and payable without any action by Lender);
(b) Settle or adjust disputes and claims directly with
account debtors for amounts, on terms and in any order that Lender considers
advisable;
(c) Make any payments and do any acts it considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower will assemble the Collateral if Lender requests and make it available
as Lender designates. Lender may enter premises where the Collateral is located,
take and maintain possession of any part of the Collateral, and pay, purchase,
contest, or compromise any Lien which appears to be prior or superior to its
security interest and pay all expenses incurred. Borrower grants Lender a
license to enter and occupy any of its premises, without charge, to exercise any
of Lender's rights or remedies;
(d) Apply to the Obligations any amount held by Lender
owing to or for the credit or the account of Borrower;
(e) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell the Collateral in
accordance with the law; and
(f) Dispose of the Collateral according to the Code.
6.2 POWER OF ATTORNEY. When an Event of Default occurs
and continues, Borrower irrevocably appoints Lender as its lawful attorney to:
(i) endorse Borrower's name on any checks or other forms of payment or security;
(ii) sign Borrower's name on any invoice or bill of lading for any Account or
drafts against account debtors, (iii) make, settle, and adjust all claims under
Borrower's insurance policies; (iv) settle and adjust disputes and claims about
the Accounts directly with account debtors, for amounts and on terms Lender
determines reasonable; and (v) transfer the Collateral into the name of Lender
or a third party as the Code permits. Lender may exercise the power of attorney
to sign Borrower's name on any documents necessary to perfect or continue the
perfection of any security interest regardless of whether an Event of Default
has occurred. Lender's appointment as Borrower's attorney in fact, and all of
Lender's rights and powers, coupled with an interest, are irrevocable until all
Obligations have been fully repaid and performed.
6.3 ACCOUNTS COLLECTION. When an Event of Default occurs
and continues, Lender may notify any Person owing Lender money of Lender's
security interest in the funds and verify the amount of the Account. Borrower
must collect all payments in trust for Lender
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and, if requested by Lender, immediately deliver the payments to Lender in the
form received from the account debtor, with proper endorsements for deposit.
6.4 LENDER'S LIABILITY FOR COLLATERAL. Lender is not
liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss
or damage to the Collateral; (c) any diminution in the value of the Collateral;
or (d) any act or default of any carrier, warehouseman, bailee, or other person.
Borrower bears all risk of loss, damage or destruction of the Collateral.
6.5 REMEDIES CUMULATIVE. Lender's rights and remedies
under this Agreement, the Loan Documents, and all other agreements are
cumulative. Lender has all rights and remedies provided under the Code, by law,
or in equity. Lender's exercise of one right or remedy is not an election, and
Lender's waiver of any Event of Default is not a continuing waiver. Lender's
delay is not a waiver, election, or acquiescence. No waiver is effective unless
signed by Lender and then is only effective for the specific instance and
purpose for which it was given.
6.6 DEMAND WAIVER. Except as may be expressly required in
this Agreement, Borrower waives demand, notice of default or dishonor, notice of
payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guaranties held by Lender on which Borrower is
liable.
7. NOTICES
All notices or demands by any party to this Agreement or any
other related agreement must be in writing and be personally delivered or sent
by an overnight delivery service, by certified mail, postage prepaid, return
receipt requested, at the addresses listed below:
Borrower: Lender:
-------- ------
Firstwave Technologies, Inc. Mercury Fund II, Ltd.
2859 Paces Ferry Road c/o Mercury Ventures Ltd.
Suite 1000 2707 Hibernia
Atlanta, Georgia 30339 Dallas, Texas 75204
Attn: Richard Brock Attn: Dan Goodwin
with a copy which shall not constitute notice to:
For Borrower: For Lender:
Kilpatrick Stockton LLP Winstead Sechrest & Minick P.C.
1100 Peachtree Street 1201 Elm Street
Suite 2800 5400 Renaissance Tower
Atlanta, Georgia 30309-4530 Dallas, Texas 75270
Attn: W. Benjamin Barkley, Esq. Attn: Ted S. Schweinfurth, Esq.
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A party to this Agreement may change its notice address by
giving the other party written notice thereof.
8. CHOICE OF LAW
Georgia law governs the Loan Documents without regard to principles of conflicts
of law.
9. GENERAL PROVISIONS
9.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is
for the benefit of the successors and permitted assigns of each party. Borrower
may not assign this Agreement or any rights or Obligations under it without
Lender's prior written consent which may be granted or withheld in Lender's
discretion. Lender has the right, without the consent of or notice to Borrower,
to sell, transfer, negotiate, or grant participation in all or any part of, or
any interest in, Lender's obligations, rights and benefits under this Agreement,
the Loan Documents or any related agreement.
9.2 INDEMNIFICATION. Borrower will indemnify, defend and
hold harmless Lender and its officers, employees and agents against all
obligations, demands, claims, and liabilities asserted by any other party in
connection with the transactions contemplated by the Loan Documents, except for
losses caused by Lender's gross negligence or willful misconduct.
9.3 TIME OF ESSENCE. Time is of the essence for the
performance of all Obligations in this Agreement.
9.4 SEVERABILITY OF PROVISION. Each provision of this
Agreement is severable from every other provision in determining the
enforceability of any provision.
9.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to
this Agreement must be in writing signed by both Lender and Borrower. This
Agreement and the Loan Documents represent the entire agreement about this
subject matter, and supersede prior or contemporaneous negotiations or
agreements. All prior or contemporaneous agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement and the Loan Documents merge into this
Agreement and the Loan Documents.
9.6 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, is an original, and all taken together,
are one Agreement.
9.7 SURVIVAL. All covenants, representations and
warranties made in this Agreement continue in full force while any Obligations
remain outstanding.
9.8 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or
proceeding between Borrower and Lender arising out of the Loan Documents, the
prevailing party will be
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entitled to recover its reasonable attorneys' fees and other reasonable costs
and expenses incurred, in addition to any other relief to which it may be
entitled.
9.9 TERMINATION. This Agreement and the Security Interest
granted hereby shall terminate upon the first to occur of (i) the payment in
full of all Obligations, or (ii) the conversion of the entire amount of the Note
into shares of Borrower's Series C Convertible Preferred Stock.
10. DEFINITIONS
10.1 DEFINITIONS.
"ACCOUNTS" are all existing and later arising accounts,
contract rights, and other obligations owed Borrower in connection with its sale
or lease of goods (including licensing software and other technology) or
provision of services, all credit insurance, guaranties, other security and all
merchandise returned or reclaimed by Borrower and Borrower's Books relating to
any of the foregoing.
"AFFILIATE" of a Person is a Person that owns or controls
directly or indirectly the Person, any Person that controls or is controlled by
or is under common control with the Person, and each of that Person's senior
executive officers, directors, partners and, for any Person that is a limited
liability company, that Person's managers and members.
"BORROWER'S BOOKS" are all Borrower's books and records
including ledgers, records regarding Borrower's assets or liabilities, the
Collateral, business operations or financial condition and all computer programs
or discs or any equipment containing the information.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a
day on which national banks are closed.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the Georgia Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
"CONTINGENT OBLIGATION" is, for any Person, any direct or
indirect liability, contingent or not, of that Person for (i) any indebtedness,
lease, dividend, letter of credit or other obligation of another such as an
obligation directly or indirectly guaranteed, endorsed, co-made, discounted or
sold with recourse by that Person, or for which that Person is directly or
indirectly liable; (ii) any obligations for undrawn letters of credit for the
account of that Person; and (iii) all obligations from any interest rate,
currency or commodity swap agreement, interest rate cap or collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices; but
"Contingent Obligation" does not include endorsements in the
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ordinary course of business. The amount of a Contingent Obligation is the stated
or determined amount of the primary obligation for which the Contingent
Obligation is made or, if not determinable, the maximum reasonably anticipated
liability for it determined by the Person in good faith; but the amount may not
exceed the maximum of the obligations under the guarantee or other support
arrangement.
"COPYRIGHTS" are all copyright rights, applications or
registrations and like protections in each work or authorship or derivative
work, whether published or not (whether or not it is a trade secret) now or
later existing, created, acquired or held.
"EQUIPMENT" is all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the
deferred price of property or services, such as reimbursement and other
obligations for surety bonds and letters of credit, (b) obligations evidenced by
notes, bonds, debentures or similar instruments, (c) capital lease obligations
and (d) Contingent Obligations.
"INSOLVENCY PROCEEDING" is any proceeding by or against any
Person under the United States Bankruptcy Code, or any other bankruptcy or
insolvency law, including assignments for the benefit of creditors,
compositions, extensions generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"INTELLECTUAL PROPERTY" is:
(a) Copyrights, Trademarks, Patents, and Mask Works
including amendments, renewals, extensions, variations and derivatives thereof,
and all licenses or other rights to use and all license fees and royalties from
the use;
(b) Any trade secrets and any rights to Intellectual
Property Rights in computer software and computer software products now or later
existing, created, acquired or held;
(c) All design rights which may be available to Borrower
now or later created, acquired or held;
(d) Any claims for damages (past, present or future) for
infringement of any of the rights above, with the right, but not the obligation,
to sue and collect damages for use or infringement of the intellectual property
rights above; and
(e) All proceeds and products of the foregoing, including
all insurance, indemnity or warranty payments.
"INVENTORY" is present and future inventory in which Borrower
has any
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interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, the Note
and the Convertible Note Purchase Agreement, as each may be amended, extended or
restated.
"MASK WORKS" are all mask works or similar rights available
for the protection of semiconductor chips, now owned or later acquired.
"OBLIGATIONS" are debts, principal, interest, and other
amounts Borrower owes Lender in connection with this Agreement, including
interest accruing after Insolvency Proceedings begin.
"PATENTS" are patents, patent applications and like
protections, including improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date or arising under
this Agreement or the Loan Documents;
(b) Liens for taxes, fees, assessments or other
government charges or levies, either not delinquent or being contested in good
faith and for which Borrower maintains adequate reserves on Borrower's Books;
(c) Purchase money Liens (i) on Equipment acquired or
held by Borrower or its Subsidiaries incurred for financing the acquisition of
the Equipment, or (ii) existing on equipment when acquired, if the Lien is
confined to the property and improvements and the proceeds of the Equipment;
(d) Leases or subleases and licenses or sublicenses
granted in the ordinary course of Borrower's business; and
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(e) Liens incurred in the extension, renewal or
refinancing of the indebtedness secured by Liens described in (a) through (c),
but any extension, renewal or replacement Lien must be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness may
not increase.
"PERSON" is any individual, sole proprietorship, partnership,
limited liability company, joint venture, company, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer,
the President, and any Senior Vice President of Borrower.
"TRADEMARKS" are trademark and service mark rights, registered
or not, applications to register and registrations and like protections, and the
entire goodwill of the business of the assignor connected with the trademarks.
(Signature page to follow)
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
BORROWER:
FIRSTWAVE TECHNOLOGIES, INC.
By:
------------------------------------------
Name:
-----------------------------------
Its:
------------------------------------
LENDER:
MERCURY FUND II, LTD.
By: Mercury Ventures, Ltd.,
General Partner
By: Mercury Management LLC
General Partner
By:
--------------------------------
Name:
---------------------------
Its:
-----------------------------
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EXHIBIT A
Form of Note
90
EXHIBIT B
Form of Convertible Note Purchase Agreement
91
EXHIBIT C
This Security Agreement covers the following items of property of
Borrower, including, without limitation, all proceeds of any insurance policies
covering all or any part of such property:
(i) All goods, equipment, inventory, contract rights,
general intangibles, accounts, documents, instruments, chattel paper, cash,
deposit accounts, fixtures, letters of credit, investment property, and
financial assets, whether now owned or hereafter acquired, wherever located; and
(ii) All of the general intangibles of Borrower
(including, without limitation, all books and records, things in action,
contractual rights, tax returns and refunds, goodwill (including all goodwill of
Borrower's business symbolized by, and associated with, any and all trademarks,
trade names, copyrights, and/or service marks, literary rights, rights to
performance, copyrights, trademarks, and patents)), both now owned or
hereinafter acquired, including any and all variations and derivatives thereof,
and
(iii) All Borrower's Books relating to the foregoing and
any and all claims, rights and interests in any of the above and all
substitutions for, additions, attachments, accessories, accessions and
improvements to and replacements, products, proceeds and insurance proceeds of
any or all of the foregoing.
Proceeds and products of the collateral are also covered.
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EXHIBIT E
FIRSTWAVE TECHNOLOGIES, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of the 18th day of July, 2001, by and among FIRSTWAVE
TECHNOLOGIES, INC., a Georgia corporation (the "Company"), MERCURY FUND NO. 1,
LTD., a Texas limited partnership ("Mercury I"), and MERCURY FUND II, LTD., a
Texas limited partnership ("Mercury II" and collectively with Mercury I, the
"Investors").
WITNESSETH:
WHEREAS, contemporaneously herewith Mercury II is advancing $500,025 to
the Company that will be evidenced by a Secured Convertible Subordinated
Promissory Note (the "Note");
WHEREAS, the Note may be converted into a certain number of shares of
the Company's proposed Series C Convertible Preferred Stock (the "Series C
Stock");
WHEREAS, the Series C Stock may be converted into a certain number of
shares (the "Converted Shares") of the Company's common stock (the "Common
Stock");
WHEREAS, in connection with the issuance of the Note, the Company has
agreed to issue a warrant to Mercury II to purchase up to 125,006 shares of
Common Stock (the "Warrant Shares") upon the occurrence of certain events;
WHEREAS, Mercury I previously purchased 500,000 shares of Common Stock
(the "Mercury I Shares"); and
WHEREAS, the Company wishes to grant the Investors certain registration
rights in respect of the Converted Shares, the Warrant Shares and the Mercury I
Shares, as set forth herein.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1
REGISTRATION RIGHTS
1.1 Registration Rights.
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THE COMPANY AGREES TO FILE NO LATER THAN THE EARLIER OF (I) 15 DAYS
AFTER SHAREHOLDER APPROVAL OF THE ISSUANCE OF THE SERIES C STOCK TO MERCURY II
AND (II) NOVEMBER 30, 2001 (THE "Target Filing Date"), ONE OR MORE "SHELF"
REGISTRATION STATEMENTS WITH RESPECT TO ALL OF THE REGISTRABLE SECURITIES ON ANY
APPROPRIATE FORM PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND/OR ANY SIMILAR RULE THAT MAY BE ADOPTED BY
THE COMMISSION (THE "Shelf Registration"). THE COMPANY AGREES TO USE ITS
COMMERCIALLY REASONABLE EFFORTS TO HAVE THE SHELF REGISTRATION DECLARED
EFFECTIVE NO LATER THAN ONE HUNDRED TWENTY (120) DAYS AFTER THE TARGET FILING
DATE AND TO KEEP THE SHELF REGISTRATION WITH RESPECT TO THE REGISTRABLE
SECURITIES CONTINUOUSLY EFFECTIVE FOR A PERIOD OF THIRTY (30) MONTHS FOLLOWING
THE DATE ON WHICH THE SHELF REGISTRATION IS DECLARED EFFECTIVE; PROVIDED,
HOWEVER, THAT IF FOR ANY REASON THE EFFECTIVENESS OF THE SHELF REGISTRATION IS
SUSPENDED, SUCH PERIOD SHALL BE EXTENDED BY THE AGGREGATE NUMBER OF DAYS OF EACH
SUCH SUSPENSION PERIOD AND THE COMPANY SHALL PROVIDE EACH INVESTOR NOT LESS THAN
TWENTY-FOUR (24) HOURS PRIOR NOTICE OF SUCH SUSPENSION, PROVIDED, FURTHER, THAT
IF SUCH SUSPENSION IS BASED ON THE COMPANY'S ENGAGEMENT IN A PUBLIC OFFERING,
THE COMPANY SHALL PROVIDE EACH INVESTOR NOT LESS THAN THIRTY (30) DAYS PRIOR
NOTICE OF SUCH SUSPENSION; AND PROVIDED, FURTHER, THAT THE EFFECTIVENESS OF THE
SHELF REGISTRATION MAY BE TERMINATED EARLIER WITH RESPECT TO ANY REGISTRABLE
SECURITIES IN ACCORDANCE WITH THE TERMS HEREOF AND PROVIDED, FURTHER, THAT THE
EFFECTIVENESS OF THE SHELF REGISTRATION MAY BE SUSPENDED IF THE MANAGING
UNDERWRITER OF A PUBLIC OFFERING BY THE COMPANY, IF ANY, SHALL BE OF THE
OPINION, WHICH SHALL BE COMMITTED IN WRITING, THAT THE SHELF REGISTRATION WILL
INTERFERE WITH THE SUCCESSFUL MARKETING OF SUCH PUBLIC OFFERING OF THE COMPANY'S
SECURITIES. THE COMPANY FURTHER AGREES, IF NECESSARY, TO SUPPLEMENT OR AMEND ANY
SHELF REGISTRATION, AS REQUIRED BY THE REGISTRATION FORM UTILIZED BY THE COMPANY
OR BY THE INSTRUCTIONS APPLICABLE TO SUCH REGISTRATION FORM OR BY THE SECURITIES
ACT OR THE RULES AND REGULATIONS THEREUNDER AND THE COMPANY AGREES TO FURNISH TO
THE INVESTORS COPIES OF ANY SUCH SUPPLEMENT OR AMENDMENT PRIOR TO ITS BEING USED
AND/OR FILED WITH THE COMMISSION.
AS USED IN THIS AGREEMENT "REGISTRABLE SECURITIES" AS OF ANY
PARTICULAR TIME SHALL MEAN, TO THE EXTENT THE SAME HAVE NOT BEEN SOLD TO THE
PUBLIC, (I) THE CONVERTED SHARES; (II) THE WARRANT SHARES, (III) THE MERCURY I
SHARES OR (IV) STOCK ISSUED IN RESPECT OF STOCK REFERRED TO IN CLAUSES (I)
THROUGH (III) ABOVE IN ANY REORGANIZATION; OR (V) STOCK ISSUED IN RESPECT OF THE
STOCK REFERRED TO IN CLAUSES (I) THROUGH (III) AS A RESULT OF A STOCK SPLIT,
STOCK DIVIDEND, RECAPITALIZATION OR COMBINATION; PROVIDED, HOWEVER, THAT NO
SHARES SHALL BE INCLUDED IN ANY REGISTRATION UNDER THIS AGREEMENT UNLESS
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SUCH SHARES SHALL HAVE BEEN FIRST CONVERTED TO COMMON STOCK, PROVIDED FURTHER
THAT SUCH SHARES SHALL CEASE TO BE REGISTRABLE SECURITIES AT SUCH TIME AS THEY
ARE SOLD BY A PERSON IN A TRANSACTION IN WHICH HIS RIGHTS UNDER THIS AGREEMENT
ARE NOT PROPERLY ASSIGNED; PROVIDED FURTHER THAT SUCH SHARES SHALL CEASE TO BE
REGISTRABLE SECURITIES WHEN SUCH SHARES BECOME ELIGIBLE FOR SALE PURSUANT TO
RULE 144(K).
(b) Incidental Registration. If the Company at any time
proposes to register any of its Common Stock under the Securities Act for sale
to the public for its own account (except with respect to registration
statements on Form S-8 or S-4 or another form not available for registering the
Registrable Securities for sale to the public), each such time it will give
written notice to each of the Investors of its intention to do so. Upon the
written request of the Investors, given within ten (10) days after receipt of
any such notice, to register any of Investor's Registrable Securities (which
request must state the intended method of disposition thereof), the Company will
use its commercially reasonable efforts (as set forth in Section 1.1(c)) to
cause the Registrable Securities as to which registration has 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 Investors (in accordance with its written
request) of such Registrable Securities so registered; provided, however, that
the Company is not required to include Registrable Securities in the securities
to be registered pursuant to a registration statement on Form SB-1 (or any other
form which limits the amount of securities which may be registered by the issuer
and/or selling security holders) if, and to the extent, that such inclusion
would make the use of such form unavailable, so long as no other shares are to
be included in the securities to be registered pursuant to the registration
statement for the account of any person other than the Company. If any
registration pursuant to this Section 1.1 is, in whole or in part, an
underwritten public offering of Common Stock, any request by an Investor
pursuant to this Section 1.1 to register Registrable Securities must specify
that such Registrable Securities are to be included in the underwriting on the
same terms and conditions as the shares of Common Stock otherwise being sold
through underwriters under such registration. Notwithstanding anything to the
contrary contained in this Section 1.1, if there is a firm commitment
underwritten offering of securities of the Company pursuant to a registration
statement covering Registrable Securities and an Investor does not elect to sell
its Registrable Securities to the underwriters of securities in connection with
such offering, the Investor will refrain from selling such Registrable
Securities during the period of distribution of the Company's securities by such
underwriters and the period in which the underwriting syndicate participates in
the after market; provided, however, that the Investors, in any event, shall be
entitled to sell its Registrable Securities commencing on the 180th day after
the effective date of such registration statement.
(c) Registration Procedures and Expenses. If and whenever
the Company is required by the provisions of Section 1.1(a) or (b) hereof to use
its commercially reasonable
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95
efforts to effect the registration of any of Registrable Securities under the
Securities Act, the Company will, as expeditiously as possible:
(i) prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to such
securities and use its commercially reasonable efforts to cause such
registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as hereinafter provided);
(ii) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for the period specified in paragraph (a) above and to comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement in accordance with
the Investors' intended method of disposition set forth in such registration
statement for such period;
(iii) furnish to each Investor and to each underwriter such
number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons may reasonably
request in order to facilitate the public sale or other disposition of the
Registrable Securities covered by such registration statement;
(iv) use its commercially reasonable efforts to register
or qualify the Registrable Securities covered by such registration statement
under the securities or blue sky laws of such jurisdictions as the Investors or,
in the case of an underwritten public offering, the managing underwriter, may
reasonably request;
(v) immediately notify each Investor and each
underwriter, at any time when a prospectus relating thereto is required to be
delivered under the Securities Act, of the happening of any event as a result of
which the prospectus contained in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;
(vi) use its commercially reasonable efforts (if the
offering is underwritten) to furnish, at the request of an Investor, on the date
that Registrable Securities are delivered to the underwriters for sale pursuant
to such registration: (A) an opinion, dated as of such date, of counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, stating that such registration statement has become effective
under the Securities Act and that (i) to the best knowledge of such counsel, no
stop order suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or contemplated
under the Securities Act, (ii) the registration statement, the related
prospectus, and each amendment or supplement thereof, comply as to form in all
material respects with the requirements of the Securities Act and the applicable
rules and
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regulations of the Commission thereunder and that such counsel does not believe
that any such registration statement, prospectus, amendment or supplement
contains a misstatement of a material fact or an omission to state a material
fact required to be stated therein or necessary to make the statements made
therein not misleading (except that such counsel need express no opinion as to
financial statements or financial or statistical data contained therein) and
(iii) to such other effects as may reasonably be requested by counsel for the
underwriters, and (B) a letter dated such date from the independent public
accountants retained by the Company, addressed to the underwriters, stating that
they are independent public accountants within the meaning of the Securities Act
and that, in the opinion of such accountants, the Company's financial statements
included in the registration statement or the prospectus, or any amendment or
supplement thereof, comply as to form in all material respects with the
applicable accounting requirements of the Securities Act, and such letter will
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to the registration in respect of which such letter is being given
as such underwriters may reasonably request; and
(vii) make available for inspection by the Investors, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by an Investor
or such underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably requested by an
Investor or such underwriter, attorney, accountant or agent in connection with
such registration statement.
The Company may delay or suspend the filing or effectiveness of any
registration statement for a period of up to 90 days after the date of a request
for registration pursuant to Section 1.1(a) if at the time of such request (A)
the Company is engaged, or has fixed plans to engage within 90 days of the time
of such request, in a public offering of Common Stock in which the Investors may
include Registrable Shares pursuant Section 1.1(b) or (B) the Company shall
furnish to each Investor a certificate signed by the President of the Company
stating that in the good-faith judgment of the Board of Directors of the Company
it would be detrimental to the Company and its shareholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement.
For purposes of paragraphs (i) and (ii) above, the period of
distribution of Registrable Securities in a firm commitment underwritten public
offering is deemed to extend until each underwriter has completed the
distribution of all securities purchased by it, and the period of distribution
of Registrable Securities in any other registration is deemed to extend until
the earlier of the sale of all Registrable Securities covered thereby or three
months after the effective date thereof.
In connection with each registration hereunder, each Investor will
furnish to the Company in writing such information with respect to itself and
the proposed distribution by it as may be reasonably necessary in order to
assure compliance with federal and applicable
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state securities laws. Reasonable compliance with the obligation to furnish such
information is a condition to the rights afforded to Investor hereunder.
If any registration statement is an underwritten public offering, the
right of each Investor to registration pursuant to this Agreement shall be
conditioned upon such Investor participating in such reasonable underwriting
arrangements as the Company shall make regarding the offering, and the inclusion
of Registrable Securities in the underwriting shall be limited to the extent
provided herein. The Investors and all other shareholders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other shareholders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Agreement, if the managing
underwriter concludes in its reasonable judgment that the number of shares to be
registered for selling shareholders (including the Investors) would materially
adversely effect such offering, the number of Registrable Securities to be
registered, together with the number of shares of Common Stock or other
securities held by other shareholders proposed to be registered in such
offering, shall be reduced on a pro rata basis based on the number of
Registrable Securities proposed to be sold by an Investor as compared to the
number of shares proposed to be sold by all shareholders electing to participate
therein (including any other Investor), prior to reducing in any way the amount
of the Company's securities being sold for its own account. If an Investor
disapproves of the terms of any such underwriting, it may elect to withdraw
therefrom by written notice to the Company and the managing underwriter,
delivered not less than 10 days before the effective date. The Registrable
Securities excluded by the managing underwriter or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to 180 days after the effective date
of the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
The Company shall have the right to terminate or withdraw any
registration initiated by it under Section 1.1(b) this Agreement prior to the
effectiveness of such registration whether or not an Investor has elected to
include securities in such registration.
(d) Expenses. All expenses incurred by the Company in
complying with Section 1.1(a) or 1.1(b) hereof, including, without limitation,
all registration and filing fees for shares being registered for sale by the
Company, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and disbursements of counsel for the
Company in connection with registration under state securities laws, fees of the
Nasdaq Stock Market, Inc., transfer taxes, fees of transfer agents and
registrars, and costs of insurance (if any), shall be borne by the Company.
Notwithstanding anything contained in this Agreement to the contrary, the
Company shall not be required to pay any underwriting fees, discounts or selling
commissions applicable to the sale of Registrable Securities.
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(e) Changes in Common Stock. If, and as often as, there
are any changes in the Registrable Securities by way of stock split, stock
dividend, combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment will be made in the provisions hereof, as may be required, so that
the rights and privileges granted hereby will continue with respect to the
Registrable Securities as so changed.
ARTICLE 2
INDEMNIFICATION
2.1 Indemnification by Company. To the extent permitted
by law, the Company will indemnify each Investor, each of their officers and
directors and partners, and each person controlling Investor within the meaning
of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
to the extent such expenses, claims, losses, damages or liabilities arise out of
or are based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other similar document, or any amendment or supplement thereto, incident to any
such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of the
Securities Act or any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each Investor, each
of their officers and directors and partners, and each person controlling and
Investor, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action; provided, however, that the indemnity contained
herein shall not apply to amounts paid in settlement of any claim, loss, damage,
liability or expense if settlement is effected without the consent of the
Company (which consent shall not unreasonably be withheld); provided, further,
that the Company will not be liable in any such case to the extent that any such
claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission or alleged untrue statement or omission, made in
reliance upon and in conformity with written information furnished to the
Company by a holder of Registrable Securities, such controlling person or such
underwriter specifically for use therein; provided, further, that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on an Investor's failure
to provide a prospective transferee with a current copy of the registration
statement or prospectus and such registration statement or prospectus would have
cured to the defect giving rise to such claim, loss, damage, liability or
expense. Notwithstanding the foregoing, insofar as the foregoing indemnity
relates to any such untrue statement (or alleged
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untrue statement) or omission (or alleged omission) made in the preliminary
prospectus but eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement becomes effective or in the
final prospectus filed with the Commission pursuant to the applicable rules of the Commission or in any supplement or addendum thereto, the indemnity agreement
herein shall not inureSEC are satisfied.
The Company's 2002 Annual Report to Shareholders is being mailed to the benefitCompany's shareholders with this Proxy Statement.
April 1, 2003
Atlanta, Georgia
21
FIRSTWAVE TECHNOLOGIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF FIRSTWAVE TECHNOLOGIES, INC.
The undersigned shareholder (s) of any underwriter ifFirstwave Technologies, Inc., a copyGeorgia Corporation (the "Company"), hereby acknowledges receipt of the final
prospectus filed pursuant to such rules, togetherNotice of Annual Meeting of Shareholders and Proxy Statement, each dated April 1, 2003, and hereby appoints Richard T. Brock or Judith A. Vitale proxies and attorneys-in-fact, with all supplementsfull power of substitution, on behalf and
addenda thereto, was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is required
by the Securities Act.
2.2 Indemnification by Investors. To the extent permitted
by law, each Investor will, if securities held by such Investor are included in the securities as to which such registration, qualification or compliance is
being effected pursuant to terms hereof, indemnify the Company, each of its
directors and officers, each underwriter, if any,same name of the Company's securities
covered by such a registration statement, each person who controlsundersigned, to represent the Company
or such underwriter within the meaning of Section 15 of the Securities Act, and
each other person selling the Company's securities covered by such registration
statement, each of such person's officers and directors and each person
controlling such persons within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or such Investor's
failure to provide a prospective transferee with a current copy of the
registration statement or prospectus and such registration statement or
prospectus would have cured to the defect giving rise to such claim, loss,
damage, liability or expense, or any violation by a holder of Registrable
Securities of any rule or regulation promulgated under the Securities Act
applicable to such Investor and relating to action or inaction required of such
Investor in connection with any such registration, qualification or compliance,
and will reimburse the Company, such other persons, such directors, officers,
persons, underwriters or control persons for any legal or other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by such Investor
specifically for use therein; provided, however, that the indemnity contained
herein shall not apply to amounts paid in settlement of any claim, loss, damage,
liability or expense if settlement is effected without the Investor's consent
(which consent shall not be unreasonably withheld). Notwithstanding the
foregoing, each Investor's liability under this subsection (b) shall be limited
in an amount equal to the net proceeds from the sale of the shares sold by the
Investor, unless such liability arises out of or is based on willful conduct by
the Investor. In addition, insofar as the foregoing indemnity relates to any
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) made in the preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the Commissionundersigned at the time the registration
statement becomes
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effective or in the final prospectus filed pursuant to applicable rules2003 Annual Meeting of the
Commission or in any supplement or addendum thereto, the indemnity agreement
herein shall not inure to the benefitShareholders of the Company any underwriter if a copy
of the final prospectus filed pursuant to such rules, together with all
supplements and addenda thereto, was not furnished to the person or entity
asserting the loss, liability, claim or damagebe held at or prior to the time such
furnishing is required by the Securities Act.
2.3 Indemnification Procedures. Notwithstanding the
foregoing Sections 2.1 and 2.2, each party entitled to indemnification under
this Section (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or as
to which the Indemnifying Party is asserting separate or different defenses,
which defenses are inconsistent with the defenses of the Indemnified Party. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. No
Indemnified Party shall consent to entry of any judgment or enter into any
settlement without the consent of each Indemnifying Party.
2.4 Contribution. If the indemnification provided for in
this Article 2 is unavailable to or insufficient to hold harmless the
Indemnified Party in respect of any losses, claims, damages or liabilities
referred to therein, then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company2:00 p.m. on the one hand and all shareholders offering securities in the
offering (the "Selling Security Holders") on the other from the offering of the
Company's securities, or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and the Selling Security Holders
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Selling Security Holders on the other shall be the net proceeds
from the offering (before deducting expenses) received by the Company
-9-
101
on the one hand and the Selling Security Holders on the other. The relative
fault of the Company on the one hand and the Selling Security Holders on the
other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Selling Security Holders and the parties' relevant intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Selling Security Holders agree that it would not
be just and equitable if contribution pursuant to this Section were based solely
upon the number of entities from whom contribution was requested or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this Section. The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages and liabilities referred to
above in this Section shall be deemed to include any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim, subject to the provisions hereof.
Notwithstanding the provisions of this Article, no Selling Security Holder shall
be required to contribute any amount or make any other payments under this
Agreement which in the aggregate exceed the proceeds received by such Selling
Shareholder. No person guilty of fraudulent misrepresentation (within the
meaning of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
ARTICLE 3
MISCELLANEOUS
3.1 Notices. Any offer or notice made or given pursuant to this
Agreement shall be deemed sufficiently made or given upon delivery in person
addressed to the recipient thereof or upon the expiration of seven days after
the date of posting, if mailed by registered or certified first class mail,
postage prepaid, return receipt requested, to the partiesThursday, May 1, 2003, at the following
addresses:
To the Company:Corporate Offices of Firstwave Technologies Inc.
Attn: President, 2859 Paces Ferry Road, Suite 1000, Atlanta, Georgia, 30339, With a copy which shall
Not constitute notice to: Kilpatrick Stockton LLP
1100 Peachtree Street
Atlanta, Georgia 30309
Attn: W. Benjamin Barkley, Esq.
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102
To Investors: Mercury Fund II, Ltd.
c/o Mercury Ventures Ltd.
Attn: Dan Goodwin
2707 Hibernia
Dallas, Texas 75204
Mercury Fund II, Ltd.
c/o Mercury Ventures Ltd.
Attn: Dan Goodwin
2707 Hibernia
Dallas, Texas 75204
With a copy which shall
Not constitute notice to: Winstead Sechrest & Minick P.C.
1201 Elm Street
5400 Renaissance Tower
Dallas, Texas 75270
Attn: Ted S. Schweinfurth, Esq.
Any party hereto may change its address for purposes of this Agreement by giving
notice to the other partiesand at the address and in the manner provided above.
3.2 Governing Law. This Agreement has been executed and delivered
in the State of Georgia, and the validity and effect of this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Georgia.
3.3 Partial Invalidity. All rights and restrictions contained
herein may be exercised and shall be applicable and binding only to the extent
that they do not violate any applicable laws and are intended to be limited to
the extent necessary so that they will not render this Agreement illegal,
invalidadjournment (s) or unenforceable. If any term of this Agreement shall be held to be
illegal, invalid or unenforceable, it is the intention of the parties that the
remaining terms hereof shall constitute their agreement with respect to the
subject matter hereof and all such remaining terms shall remain in full force
and effect. To the extent legally permissible, any illegal, invalid or
unenforceable provision of this Agreement shall be replaced by a valid provision
that will implement the commercial purpose of the illegal, invalid or
unenforceable provision.
3.4 Waiver. No failure on the part of any party hereto to
exercise, and no delay in exercising, any right, power, or remedy hereunder
shall operate as a waiverpostponement(s) thereof, nor shall any single or partial exercise of
any right, power or remedy by any such party preclude any other or further
exercise thereof or the exercise of any other right, power or remedy. No express
waiver or assent by any party hereto to any breach of or default in any term or
condition of this Agreement shall constitute a waiver of or an assent to any
succeeding breach of or default in the same or any other term or condition
hereof.
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103
3.5. Amendment. This Agreement may, except as otherwise expressly
provided herein, be modified or amended by an instrument in writing signed by or
on behalf of the Company and the holders of a majority of the Registrable
Securities as of that date.
3.6 Further Documents and Actions. The parties shall take such
further actions and execute and deliver such further documents as may be
necessary or convenient from time to time to more effectively carry out the
intent and purposes of this Agreement and to establish and protect the rights
and remedies created or intended to be created hereunder.
3.7 Headings. The headings as to the contents of particular
sections of this Agreement are inserted only for convenience and shall not be
construed as a part of this Agreement nor as a limitation on the scope of any of
the terms or provisions of this Agreement.
3.8 Gender. Where the context requires, the use of the singular
form herein shall include the plural, the use of the plural shall include the
singular, and the use of any gender shall include any andvote all genders.
3.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
3.10 Entire Agreement. This Agreement supersedes all prior
discussions and agreements between the parties with respect to the subject
matter hereof, and any such agreements are hereby terminated. This Agreement
contains the sole and entire agreement between the parties with respect to the
matters covered hereby.
(Signature page to follow)
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104
IN WITNESS WHEREOF, the parties have executed or caused this
Registration Rights Agreement to be executed under seal as of the day and year
first above written.
FIRSTWAVE TECHNOLOGIES, INC.
[CORPORATE SEAL]
By:
-----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
MERCURY FUND I, LTD.
By: Mercury Ventures, Ltd.,
General Partner
By: Mercury Management LLC,
General Partner
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
MERCURY FUND II, LTD.
By: Mercury Ventures, Ltd.,
General Partner
By: Mercury Management LLC,
General Partner
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
-13-
105
EXHIBIT F
THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE
SECURITIES LAWS OF ANY STATE (THE "STATE ACTS"). THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER THE ACT AND/OR THE STATE ACTS OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER
THE ACT AND/OR THE STATE ACTS
COMMON STOCK WARRANT
OF
FIRSTWAVE TECHNOLOGIES, INC.
July 18, 2001
Void after November 1, 2004
THIS CERTIFIES THAT, for value received, MERCURY FUND II, LTD., a Texas
limited partnership (together with any permitted assigns, the "Warrantholder"),
is entitled to purchase from FIRSTWAVE TECHNOLOGIES, INC., a Georgia corporation
(the "COMPANY"), (i) if the Company does not receive shareholder approval for
the transactions contemplated in that certain Convertible Note Purchase
Agreement by and among the Company, Warrantholder and Richard T. Brock of even
date herewith (the "AGREEMENT") on or before October 31, 2001, an amount equal
to 125,006 shares of the Company's common stock, no par value per share (the
"COMMON STOCK") at an exercise price, unless adjusted in accordance with the
provisions hereof (the "EXERCISE PRICE") equal to $1.00 per share, or (ii) if
the Company does receive shareholder approval for the transactions contemplated
in the Agreement on or before October 31, 2001, and the initial Conversion Price
(as defined in the Certificate of Designation for the Series C Preferred Stock)
is less than the $0.50 per share minimum established therein but for such
limitation (the "CONVERSION PRICE TRIGGERING EVENT"), an amount equal to 125,006
shares of Common Stock at an Exercise Price equal to the average closing price
of the Common Stock as reported by the Nasdaq Stock Market, Inc. (or if not
listed on the Nasdaq National Market on such other principal securities market
or automated quotation system on which the Common Stock is then traded or
listed) for the twenty (20) consecutive trading days ending on the date on which
the Company's shareholders approve the issuance of the Series C Preferred Stock
to the Warrantholder. Notwithstanding anything contained in this Warrant or the
Agreement to the contrary, this Warrant shall be null and void and be of no
legal force and effect whatsoever if a Conversion Price Triggering Event has not
occurred.
106
Upon delivery of this Warrant, together with payment of the applicable
Exercise Price multiplied by the total number of shares of Common Stock thereby
purchased (the "Aggregate Exercise Price"), at the principal office of the
Company or at such other office or agency as the Company may designate by notice
in writing to the holder hereof, the holder of this Warrant shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased. The date at which the Company receives (i) this Warrant and (ii)
payment for the shares of Common Stock, either by payment by check or wire
transfer, shall be referred to herein as the "Exercise Date". All shares of Common Stock which maythe undersigned would be issued upon the exercise of this Warrant ("Warrant
Shares") shall, upon issuance, be fully paid, validly issuedentitled to vote if then and non-assessable,
free from all taxes, liens and charges.
This Warrant is subject to the following terms and conditions:
1. Exercise of Warrant.
1.1 Time of Exercise.
(a) This Warrant may be exercised in whole or in part
commencingthere personally present, on the date hereof until November 1, 2004.
(b) The issuancematters set forth below:
- (1)
- Election of
certificates for shares upon exercise of this Warrant shall be made without charge to the holder thereof for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuanceDirectors
| oFOR all nominees listed below (except as indicated otherwise below) | oWITHHOLD AUTHORITYto vote for all nominees listed below | |
NOMINEES:Roger A. Babb, Richard T. Brock, Richard D. Jackson, John F. Keane, and Alan I. Rothenberg | ||
INSTRUCTIONS:To withhold authority for any individual nominee, mark "FOR" above and write the name of the nominee for whom you wish to withhold authority in the space provided below: | ||
- (2)
- Amendment of the
shares. (c) The Company shall not close its books against the transfer of this Warrant or of any shares issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. (d) The Company shall at all times reserve and keep available out of its authorized but unissued CommonCompany's 1993 Stocksolely for the purpose of issuance upon the exercise of this Warrant, the maximum number of shares issuable upon the exercise of this Warrant. 1.2 Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 1.1, the Warrantholder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (a) the surrender of the Warrant at the principal office of the Company; and (b) the paymentOption Plan tothe Company by wire transfer or check of the Aggregate Exercise Price for all shares of Common Stock purchased. -2-107 1.3 Certificates for Shares. The Company shall, promptly after the Exercise Date, prepare a certificate for the shares of Common Stock purchased in the name of the holder of this Warrant, or as such holder may direct (subject to the restrictions upon transfer contained herein and upon payment by such holder hereof of any applicable transfer taxes). In case the Warrantholder shall exercise this Warrant with respect to less than all of the shares of Common Stock that may be purchased under this Warrant, the Company shall execute a new warrant in the form of this Warrant for the balance of such shares and deliver such new warrant to the Warrantholder. 1.4 Warrant Register. The Company shall maintain at its principal executive offices books for the registration and the registration of transfer of Warrants. The Company may deem and treat the Warrantholder as the absolute owner hereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for all purposes and shall not be affected by any notice to the contrary. 2. Certain Adjustments. 2.1 Exercise Price; Adjustment of Number of Shares. The Exercise Price set forth in Section 1 hereof andincrease the number of sharespurchasable hereunder shall be subjectreserved for future grants under the plan from 516,667 toadjustment from time816,667.
oFOR oAGAINST oABSTAIN
- (3)
- In their discretion, to
time as hereinafter provided. 2.2 Stock Splits, Stock Dividends and Reverse Stock Splits. In case attransact such matter or matters which may properly come before the meeting or anytime the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, or shall declare and pay any stock dividend with respect to its outstanding stock that has the effect of increasing the number of outstanding shares of Common Stock, the Exercise Price in effect immediately prior to such subdivision or stock dividend shall be proportionately reduced and the number of Warrant Shares purchasable pursuant to this Warrant immediately prior to such subdivision or stock dividend shall be proportionately increased, and conversely, in case at any time the Company shall combine its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of Warrant Shares purchasable upon the exercise of this Warrant immediately prior to such combination shall be proportionately reduced. 3. Representations and Warranties of Warrantholder. Warrantholder hereby represents and warrants that: 3.1 Purchase Entirely for Own Account.adjournment(s) thereof.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY. This Warrant and the Common
Stock issuable upon exercise hereof (collectively, the "Securities")Proxy, when properly executed, will be acquired for investment for Warrantholder's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and Warrantholder has no present intention of selling, granting any
participation in, or otherwise distributing the same. As of the date hereof,
Warrantholder does not have any contract, undertaking, agreement or arrangement
with any
-3-
108
person to sell, transfer or grant participation to any person with respect to
any of the Securities. Warrantholder represents that it has full power and
authority to enter into this Warrant.
3.2 Investment Experience. Warrantholder acknowledges that it is
able to protect its own economic interests, 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 the investment
in the investment in this Warrant. Warrantholder also represents it has not been
organized for the purpose of acquiring this Warrant.
3.3 Accredited Investor. Warrantholder is an "accredited investor"
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act of 1933 (the "Act").
3.4 Restricted Securities. Warrantholder understands that the
Securities are characterized as "restricted securities" under the Act inasmuch
as they are being acquired from the Company in a transaction not involving a
public offering, and that under the Act such securities may be resold without
registration under the Act only in certain limited circumstances. In this
connection, Warrantholder represents that it is familiar with Rule 144
promulgated under the Act and understands the resale limitations imposed thereby
and by the Act 3.5 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, Warrantholder further agrees not
to make any disposition of all or any portion of the Securities unless and
until:
(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)(i) such Warrantholder 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 (ii) if
requested by the Company, such Warrantholder shall have furnished the Company
with an opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration under the Act.
4. Miscellaneous.
4.1 Successors and Assigns. Warrantholder may assign this Warrant
in accordance with Section 3.5(b) above. The terms of this Warrant shall be
binding upon and shall inure to the benefit of any successors or assigns of the
Company and of the holder hereof and of the Common Stock issued upon the
exercise hereof.
-4-
109
4.2 No Rights as Shareholder. No Warrantholder, as such, shall be
entitled to vote or receive dividends or be deemed to be a shareholder of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder of this Warrant, as such, any rights of a
shareholder of the Company or any right to vote, give or withhold consent to any
corporate action, receive notice of meetings, receive dividends or subscription
rights, or otherwise.
4.3 No Fractional Shares. No fractional share shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay Warrantholder a sum in cash equal to the fair market value of such
fraction on the date of exercise.
4.4 Replacement. Upon receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction, upon delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company,
or in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Company will execute and deliver, in lieu thereof, a new Warrant of
like data and tenor.
4.5 Business Days. If the last or appointed day for the taking of
any action or the expiration of any right required or granted herein shall be a
Saturday or Sunday or shall be a legal holiday, then such action may be taken or
such right may be exercised on the next succeeding day not a legal holiday.
4.6 Governing Law. This Warrant shall be governed by the internal
laws of the State of Georgia, as applied to contracts between residents of
Georgia and to be performed entirely within Georgia, without regard to the
application of conflict of law rules.
4.7 Agreement by Warrantholder. Receipt of this Warrant by the
Warrantholder hereof shall constitute acceptance of and agreement to the
foregoing terms and conditions.
4.8 Amendment. Any term of this Warrant may be amended and the
observance of any term of this Warrant may be waived (either generally or in a
particular instance and either retroactively or prospectively) with the written
consent of the Company and the holder hereof.
4.9. Stock Certificate Legends. Each certificate representing
shares of Common Stock issued pursuant to this Warrant shall bear the following
legends:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS AND
-5-
110
UNTIL REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS, OR UNLESS SUCH OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION,
TRANSFER OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR IS
OTHERWISE IN COMPLIANCE WITH THE ACT, AND SUCH LAWS, AS THE SAME MAY BE
AMENDED FROM TIME TO TIME.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
FIRSTWAVE TECHNOLOGIES, INC.
By:
----------------------------------
Name:
-------------------------------
Its:
--------------------------------
-6-
111
EXHIBIT G
ARTICLES OF AMENDMENT
OF
FIRSTWAVE TECHNOLOGIES, INC.
1.
The name of the corporation is Firstwave Technologies, Inc.
2.
The Corporation hereby amends Article II of its Amended and Restated
Articles of Incorporation by amending and restating in their entirety Sections 1
and 2 of the designation of the Company's Series A Convertible Preferred Stock
as follows:
1. Dividends. Each holder of shares of Series A Preferred Stock
shall be entitled to receive, with respect to each share of
Series A Preferred Stock registered in his, her or its name on
the stock transfer books of the Corporation, cumulative
dividends at a rate of $9 per annum. For all periods prior to
December 31, 2001, dividends on Series A Preferred Stock shall
be paid annually on December 31 of each year to holders of
record as of December 15 of such year (except that any holder
that converts such holder's shares of Series A Preferred Stock
pursuant to Section 3 hereof shall be paid, on the date of
conversion, cumulative dividends dating only through the last
full fiscal quarter prior to the date of conversion), shall
accrue on each share beginning on the date of issuance, and
shall be cumulative. All dividends accruing on or after
January 1, 2002 shall be paid monthly (on the last business
day of such month) to the holders of record as of the 15th day
of such month (except that any holder that converts such
holder's shares of Series A Preferred Stock pursuant to
Section 3 hereof shall be paid, on the date of conversion,
cumulative dividends dating only through the last full month
prior to the date of conversion). Dividends payable on the
Series A Preferred Stock shall be paid in cash or, at the
election of the Corporation, in shares of the common stock, no
par value per share (the "Common Stock") of the Corporation.
If the Corporation elects to pay a dividend in shares of
Common Stock, the number of shares of Common Stock to be paid
for each such dividend shall equal the number of shares that
could be purchased by an equivalent cash dividend at a price
per share equal to the average closing prices for the Common
Stock for the last 20 trading days preceding the record date
on the principal trading market for the Common Stock. If there
is no trading market for the Common Stock, the shares shall be
valued for this
112
purpose in good faith by the Board of Directors of the
Corporation whose determination thereof shall be conclusive
and binding on the holders of Series A Preferred Stock. Any
payment made by the Corporation on unpaid cumulative
dividends, if less than the total amount of such dividends,
shall be applied first to those dividends which have been
accrued for the longest time. No dividend or other
distribution shall be paid on or declared or set apart for
payment on any shares of the Common Stock of the Corporation
or any shares of any other class or series or issue of
preferred stock that is junior to Series A Preferred Stock as
long as any accrued dividends on the Series A Preferred Stock
remain unpaid.
2. Liquidation. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the
holders of the shares of Series A Preferred Stock shall be
entitled, before any distribution or payment is made upon the
Common Stock or upon any other class or series or issue of
preferred stock of the Corporation that is junior to the
Series A Preferred Stock, to be paid an amount equal to $100
per share of Series A Preferred Stock, plus all accrued but
unpaid dividends (such amounts being herein sometimes referred
to as the "Liquidation Payments"). Thereafter, the holders of
the Series A Preferred Stock shall not be entitled to any
further payment. If upon such liquidation, dissolution or
winding up of the Corporation, whether voluntary or
involuntary, the assets to be distributed to the holders of
the Series A Preferred Stock are insufficient to permit
payment to the holders of Series A Preferred Stock of the full
amount of the Liquidation Payments, then the entire assets of
the Corporation to be distributed shall be distributed ratably
per share among the holders of Series A Preferred Stock. Upon
any such liquidation, dissolution or winding up of the
Corporation, after the holders of the Series A Preferred Stock
have been paid in full the amounts to which they are entitled,
the remaining assets of the Corporation shall be distributed
ratably to the remaining holders of the Corporation's capital
stock in accordance with their respective rights and
preferences under the Corporation's Articles of Incorporation.
The Corporation must give written notice of such liquidation,
dissolution or winding up (stating a payment date, the amount
of the Liquidation Payment and the place where said sums shall
be payable) by first class mail, postage prepaid, not less
than 30 or more than 60 days prior to the payment date stated
therein, to the holders of record of the Series A Preferred
Stock and the Common Stock, such notice to be addressed to
each shareholder at its mailing address as shown by the
records of the Corporation."
113
3.
The Corporation hereby amends Article II of its Amended and Restated
Articles of Incorporation by amending and restating in their entirety Sections 1
and 2 of the designation of the Company's Series B Convertible Preferred Stock
as follows:
3. Each holder of shares of Series B Preferred Stock shall be
entitled to receive, with respect to each share of Series B
Preferred Stock registered in his, her or its name on the
stock transfer books of the Corporation, cumulative dividends
at a rate of $9.00 (nine dollars) per annum. For all periods
prior to December 31, 2001, dividends on Series B Preferred
Stock shall be paid annually on December 31 of each year
(commencing December 31, 2001) to holders of record as of
December 15 of such year, shall accrue on each share beginning
on the date of issuance, and shall be cumulative. All
dividends accruing on or after January 1, 2002 shall be paid
monthly (at the rate of $0.75 per month and on the last
business day of such month) to the holders of record as of the
15th day of such month (except that any holder that converts
such holder's shares of Series B Preferred Stock pursuant to
Section 3 hereof shall be paid, on the date of conversion,
cumulative dividends dating only through the last full month
prior to the date of conversion). Dividends payable on the
Series B Preferred Stock shall be paid in cash or, at the
election of the Corporation, in shares of the common stock, no
par value per share (the "Common Stock") of the Corporation.
If the Corporation elects to pay a dividend in shares of
Common Stock, the number of shares of Common Stock to be paid
for each such dividend shall equal the number of shares that
could be purchased by an equivalent cash dividend at a price
per share equal to the average weighted closing prices for the
Common Stock for the last 20 trading days preceding the record
date on the principal trading market for the Common Stock. If
there is no trading market for the Common Stock, the shares
shall be valued for this purpose in good faith by the Board of
Directors of the Corporation whose determination thereof shall
be conclusive and binding on the holders of Preferred Stock.
Any payment made by the Corporation on unpaid cumulative
dividends, if less than the total amount of such dividends,
shall be applied first to those dividends which have been
accrued for the longest time. No dividend or other
distribution shall be paid on or declared or set apart for
payment on any shares of the Common Stock of the Corporation
or any shares of any other class or series or issue of
preferred stock that is junior to Series B Preferred Stock as
long as any accrued dividends on the Series B Preferred Stock
remain unpaid.
2. Liquidation. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the
holders of the shares of
114
Series B Preferred Stock shall be entitled, after any
liquidation payment due to the holders of the Company's Series
A Preferred Stock and before any distribution or payment is
made upon the Common Stock or upon any other class or series
or issue of preferred stock of the Corporation that is junior
to the Series B Preferred Stock, to be paid an amount equal to
$100 (one hundred dollars) per share of Series B Preferred
Stock, plus all accrued but unpaid dividends (such amounts
being herein sometimes referred to as the "Liquidation
Payments"). Thereafter, the holders of the Series B Preferred
Stock shall not be entitled to any further payment. If upon
such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to
be distributed to the holders of the Series B Preferred Stock
are insufficient to permit payment to the holders of Series B
Preferred Stock of the full amount of the Liquidation
Payments, then, after giving effect to any distributions made
to the holders of the Corporation's Series A Preferred Stock,
the entire assets of the Corporation to be distributed shall
be distributed ratably per share among the holders of Series B
Preferred Stock. Upon any such liquidation, dissolution or
winding up of the Corporation, after the holders of the Series
A and Series B Preferred Stock have been paid in full the
amounts to which they are entitled, the remaining assets of
the Corporation shall be distributed ratably to the remaining
holders of the Corporation's capital stock in accordance with
their respective rights and preferences under the
Corporation's Articles of Incorporation. The Corporation must
give written notice of such liquidation, dissolution or
winding up (stating a payment date, the amount of the
Liquidation Payment and the place where said sums shall be
payable) by first class mail, postage prepaid, not less than
30 or more than 60 days prior to the payment date stated
therein, to the holders of record of the Series A Preferred
Stock, Series B Preferred Stock, and the Common Stock, such
notice to be addressed to each shareholder at its mailing
address as shown by the records of the Corporation.
4.
These Articles of Amendment were duly adopted at a meeting of the Board
of Directors which occurred on July 13, 2001. These Articles of Amendment were
duly adopted at a special meeting of the shareholders which occurred on August
29, 2001.
115
IN WITNESS WHEREOF, the undersigned. being the President of the
Corporation, has executed these Articles of Amendment to the Amended and
Restated Articles of Incorporation of Firstwave Technologies, Inc. on this ___
day of ______, 2001.
FIRSTWAVE TECHNOLOGIES, INC.
By:
--------------------------------------
Richard T. Brock, President and CEO
116
EXHIBIT H
ARTICLES OF AMENDMENT
TO THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FIRSTWAVE TECHNOLOGIES, INC.
Pursuant to the provisions of Section 14-2-1003 of the Georgia Business
Corporation Code, the undersigned, Firstwave Technologies, Inc., a Georgia
corporation (the "Corporation"), adopts the following Articles of Amendment to
its Amended and Restated Articles of Incorporation:
I.
The name of the Corporation is: Firstwave Technologies, Inc.
II.
Article Two of the Corporation's Amended and Restated Certificate of
Incorporation is hereby amended as follows:
By adding as a second sentence to the first paragraph of Article Two, the
following:
Simultaneously with the effective date of this Articles of Amendment (the
"Effective Date") all issued and outstanding shares of Common Stock ("Existing
Common Stock") shall be and hereby are automatically combined and reclassified
(the "Reverse Split") as follows: each ____ shares of Existing Common Stock
shall be combined and reclassified (the "Reverse Split") as one share of issued
and outstanding Common Stock ("New Common Stock"). The Corporation shall not
issue fractional shares on account of the Reverse Split. Any fractional share
resulting from such change shall be rounded upward to the nearest whole share.
Share interests due to rounding are given solely to save expense and
inconvenience of issuing fractional shares and do not represent bargained for
consideration.
The Corporation shall, through its transfer agent, provide certificates
representing New Common Stock to holders of Existing Common Stock in exchange
for certificates representing Existing Common Stock. From and after the
Effective Date, certificates representing shares of Existing Common Stock are
hereby canceled and shall represent only the right of holders thereof to receive
New Common Stock.
From and after the Effective Date, the term "New Common Stock" as used in this
Article Two shall mean Common Stock as provided in the Amended and Restated
Articles of Incorporation.
III.
117
The foregoing amendment was duly approved and adoptedvoted in accordance with the provisions of Section 14-2-1003 of the Georgia Business Corporation
Code and the Bylaws of the Corporation at a meeting of the Board of Directors of
the Corporation on August 29, 2001 at which a quorum was present and acting
throughout. The Board of Directors previously declared the advisability of the
amendment and directed that the amendment be submitted to the shareholders of
the Corporation for approval.
IV.
At a special meeting of the shareholders of the Corporation held on
August 29, 2001, a majority of the shares of outstanding Common Stock entitled
to vote thereon was voted in favor of the amendment in accordance with Section
14-2-1003 of the Georgia Business Corporation Code.
V.
This amendment shall be effective on the date this Articles of
Amendment is filed and accepteddirections given by the Secretaryundersigned shareholder(s). If no direction is made, it will be voted FOR the items listed (1) and (2) and as the proxies deem advisable on such other matters as may come before the meeting.
| Dated | , 2003 | |||||
Signature | ||||||
Signature (if held jointly) Title of authority (if applicable) | ||||||
NOTE: Please sign exactly as name appears hereon. If shares are registered in more than one name, the signature of State ofall persons is required. A corporation should sign its full corporate name by a duly authorized officer, stating his or her title. Trustees, guardians, executors and administrators should sign in their official capacity, giving their full title as such. If a partnership, please sign in the State of
Georgia.
IN WITNESS WHEREOF, the undersigned has executed this Articles of
Amendment to the Amended and Restated Certificate of Incorporation of Firstwave
Technologies, Inc. this 29 day of August, 2001.partnership name by an authorized person.
PROXY STATEMENT
SHARES ENTITLED TO VOTE AND RELATED MATTERS
PROPOSAL 1—ELECTION OF DIRECTORS
BENEFICIAL OWNERSHIP OF COMMON STOCK
EXECUTIVE COMPENSATION
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG FIRSTWAVE TECHNOLOGIES, INC.