Our audit committee is composed of directors who are able to read and
understand fundamental financial statements. In addition, we must certify that
the committee has, and will continue to have, at least one member who has past
employment experience in finance or accounting, requisite professional
certification in accounting, or other comparable experience or
52
background that results in the individual's financial sophistication, the
"financial expert" of the audit committee. We expect the third person who we
plan to add to the Audit Committee will be a "financial expert."
COMPENSATION COMMITTEE. In May 2004, we established a compensation
committee of the board of directors, which consists of Mr. Tebbe and Mr. Sim,
each of whom is an independent director. The compensation committee reviews and
approves our salary and benefits policies, including compensation of executive
officers. The compensation committee also administers our stock option plan, and
recommends and approves grants of stock options under that plan.
NOMINATIONS AND GOVERNANCE COMMITTEE. In May 2004, we established a
nominations and governance committee of the board of directors, which consists
of Mr. Tebbe and Mr. Sim, each of whom is an independent director. The purpose
of the nominations and governance committee is to select, or recommend for our
entire board's selection, the individuals to stand for election as directors at
the annual meeting of stockholders and to oversee the selection and composition
of committees of our board. The nominations and governance committee's duties,
which are specified in our Nominating/Corporate Governance Committee Charter,
include, but are not limited to:
o establish criteria for the selection of new directors;
o considering stockholder proposals of director nominations;
o committee selection and composition;
o considering the adequacy of our corporate governance;
o oversee and approve management continuity planning process; and
o and report regularly to the board with respect to the committee's
duties.
CODE OF ETHICS
In May 2004, we adopted a Code of Ethics and Business Conduct that
applies to all of our executive officers, directors and employees. The Code of
Ethics and Business Conduct codifies the business and ethical priciples that
govern all aspects of our business.
EMPLOYMENT AGREEMENTS
Mr. Rosenschein is employed as our CEO and President pursuant to a
five-year employment agreement that commenced on January 1, 2002 and was amended
and restated as of January 8, 2004. The amended agreement provides for an annual
base salary of $180,000 with 10% annual increases and an annual bonus to be
determined at the discretion of our Board of Directors. If we terminate Mr.
Rosenschein for any reason other than cause, we are required to pay him a lump
sum of $150,000 regardless of how much time remains in the term of his
employment agreement less the severance pay portion of his Manager's Insurance
Policy (the "Policy"). If the Policy is greater than $150,000, then Mr.
Rosenschein will be entitled to the entire amount payable under the Policy. At
the time Mr. Rosenschein's employment agreement was amended and restated,
241,964 options were granted to Mr. Rosenschein under the 2003 Stock Option
Plan. In the event of a change in control, we will accelerate the vesting of 50%
of any options granted to Mr. Rosenschein that have not vested as of the
effective date of the
53
change of control. If, within 12 months after such change in control, Mr.
Rosenschein is terminated without cause, any unvested options that were granted
to Mr. Rosenschein will vest immediately upon the effective date of the
termination. Mr. Rosenschein has agreed to refrain from competing with us for a
period of two years following the termination of his employment.
Mr. Steinberg is employed as our Chief Financial Officer pursuant to an
employment agreement that commenced on April 1, 2004. The agreement provides for
a base annual salary of $111,924. We or Mr. Steinberg may terminate the
employment agreement by providing three months written notice. If we terminate
Mr. Steinberg without cause, we shall extend the period during which Mr.
Steinberg may exercise his options granted after the date of his employment
agreement by one year from the effective date of Mr. Steinberg's termination. In
the event of a change in control, we will accelerate the vesting of 50% of any
options granted to Mr. Steinberg that have not vested as of the effective date
of the change of control. If, within 12 months after such change in control, Mr.
Steinberg is terminated without cause, Mr. Steinberg is entitled to four months
written notice and any unvested options that were granted to Mr. Steinberg will
vest immediately upon the effective date of the termination. Mr. Steinberg has
agreed to refrain from competing with us for a period of twelve months following
the termination of his employment.
Mr. Schneiderman is employed as our Chief Technical Officer pursuant to
an employment agreement that commenced on April 1, 2004. The agreement provides
for a base annual salary of $98,724. We or Mr. Schneiderman may terminate the
employment agreement by providing three months written notice. If we terminate
Mr. Schneiderman without cause, we shall extend the period during which Mr.
Schneiderman may exercise his options granted after the date of his employment
agreement by one year from the effective date of Mr. Schneiderman's termination.
In the event of a change in control, we will accelerate the vesting of 50% of
any options granted to Mr. Schneiderman subsequent to his employment agreement
that have not vested as of the effective date of the change of control. If,
within 12 months after such change in control, Mr. Schneiderman is terminated
without cause, Mr. Schneiderman is entitled to four months written notice and
any unvested options that were granted to Mr. Schneiderman subsequent to the
date of his employment agreement will vest immediately upon the effective date
of the termination. Mr. Schneiderman has agreed to refrain from competing with
us for a period of twelve months following the termination of his employment.
EXECUTIVE COMPENSATION
The table below summarizes the compensation earned for services rendered
to us in all capacities for the fiscal year ended December 31, 2003 by our Chief
Executive Officer and any other officer whose 2003 compensation exceeded
$100,000. No other individuals employed by us received a salary and bonus in
excess of $100,000 during 2003.
54
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------------------------------------------
AWARDS PAYOUTS
----------------------------------------------
SECURITIES
UNDERLYING LTIP ALL OTHER SALARIED
FISCAL SALARY BONUS OPTIONS/ PAYOUTS COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR ($) ($) SARS(#) ($) ($)
---------------------------------------------------------------------------------------------------------------
Robert Rosenschein 2003 149,103 -- -- -- 94,523(2)
Chief Executive Officer, 2002 154,044 -- -- -- 37,249
President and Chairman of 2001 157,961 -- -- -- 31,912
the Board
Steven Steinberg 2003 72,875 -- -- -- 27,650
Chief Financial Officer 2002 5,555 -- -- -- 2,173
Jeff Schneiderman 2003 91,058 -- -- -- 30,959
Chief Technical Officer 2002 111,696 -- -- -- 33,362
2001 132,601 -- -- -- 35,370
(1) Includes payments made for social security, pension and disability
insurance premiums, payments made in lieu of statutory severance and
payments to continuing education plans.
(2) Includes $60,875 of deferred compensation recorded, but not paid.
Our named officers routinely receive other benefits from us that are
customary to similarly situated companies. We have concluded, after reasonable
inquiry, that the aggregate amount of these benefits in each of the years
indicated did not exceed the lesser of $50,000 or 10% of the compensation of any
named officer.
STOCK OPTIONS
We provide for direct grants or sales of common stock, and common stock
options to employees and non-employees through stock option plans. Stock options
are granted at an exercise price as determined by the board at the time the
option is granted and shall not be less than the par value of such shares of
common stock. Stock options generally vest over four years with 25% vesting
after the first year and the remaining 75% vesting in equal monthly amounts over
the following thirty-six month period. Each option has a term of ten years.
In 1999 and 2000, we adopted the 1999 Stock Option Plan and the 2000
Stock Option Plan. Options to purchase 453,275 shares of common stock were
granted under the 1999 Stock Option Plan and options to purchase 586,542 shares
of common stock were granted under the 2000 Stock Option Plan. As of December
31, 2003, the 1999 Stock Option Plan and the 2000 Stock Option Plan were closed
for future grants.
In 2003, we adopted the 2003 Stock Option Plan, which authorized options
to purchase 629,057 shares of common stock. As of December 31, 2003, options to
purchase 244,367 shares of common stock were granted and options to purchase
85,385 shares of common stock
55
remained available for grant. In January 2004, we increased the number of
options available for grant under the 2003 Stock Option Plan by 299,305 options
and simultaneously granted these options to Mr. Rosenschein (241,964 options)
and Mr. Tebbe and Mr. Sim (57,342 options).
In January 2004, our board adopted the 2004 Stock Option Plan, which
authorized options to purchase 866,000 shares of common stock. As of April 30,
2004, options to purchase 14,000 shares of common stock were granted and options
to purchase 852,000 shares of common stock remain available for grant. Following
the adoption of the 2004 Stock Option Plan, no further grants can be made under
the 2003 Stock Option Plan and the remaining shares authorized, but not granted,
under that plan were cancelled.
OPTIONS GRANTED IN FISCAL YEAR 2003
The following table sets forth the number of stock options granted to
the named executive officers in fiscal year 2003. We granted a total of 244,367
options during the fiscal year ended December 31, 2003.
Number of % of Total
Shares Options
Underlying Date of Granted to
Options Option Employees in Exercise Expiration
Name Granted Grant Fiscal Year Price Date
-------------------------- ------------ ------------ -------------- ---------- --------------
Jeff Schneiderman 32,581 3/20/2003 13.3% $.69 3/20/2013
Steven Steinberg 21,721 10/22/2003 24.0% $2.76 10/22/2013
26,065 3/20/2003 $0.69 3/20/2013
10,861 1/14/2003 $11.51 1/14/2013
2003 FISCAL YEAR END OPTION VALUES
The following table sets forth the value of unexercised "in-the-money"
options held that represents the positive difference between the exercise price
and the estimated market price of $4.60 at December 31, 2003. No named executive
officer exercised any options during 2003.
Number of Value of Unexercised
Unexercised Options in-the-money
Name at Fiscal Year End Option Fiscal Year end
------------------- ----------------------
Steven Steinberg 58,647 $142,072
Jeff Schneiderman 62,124 $167,058
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information at December 31, 2003
with respect to our equity compensation plans that provide for the issuance of
options, warrants or rights to purchase our securities.
56
-------------------------------------------- ----------------------- ---------------------- --------------------------
Number of securities
remaining available for
Number of Securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
-------------------------------------------- ----------------------- ---------------------- --------------------------
(a) (b) (c)
-------------------------------------------- ----------------------- ---------------------- --------------------------
Equity compensation plans 427,236 $4.343 85,385
approved by security holders
-------------------------------------------- ----------------------- ---------------------- --------------------------
Equity compensation plans not 0 $0.00 0
approved by security holders
-------------------------------------------- ----------------------- ---------------------- --------------------------
Total 427,236 $4.343 85,385
-------------------------------------------- ----------------------- ---------------------- --------------------------
57
PRINCIPAL STOCKHOLDERS
The table and accompanying footnotes set forth certain information as of
April 30, 2004 with respect to the ownership of our common stock by:
o each person or group who beneficially owns more than 5% of our
common stock;
o each of our directors;
o our chief executive officer and other executive officers whose total
compensation exceeded $100,000 during the year ended December 31,
2003; and
o all of our directors and officers as a group.
A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the record date upon the exercise of options and
warrants. Accordingly, common stock issuable upon exercise of options and
warrants that are currently exercisable or exercisable within 60 days of April
30, 2004 have been included in the table with respect to the beneficial
ownership of the person owning the options and the warrants, but not with
respect to any other persons.
Applicable percentage of ownership for each holder is based on
1,727,373 shares of common stock outstanding on April 30, 2004 and 3,601,271
shares of common stock outstanding after the offering, plus any presently
exercisable stock options held by each such holder, and options held by each
such holder that will become exercisable within 60 days after the date of this
prospectus.
PERCENTAGE OF COMMON STOCK
-------------------------------------
SHARES PRIOR
BENEFICIALLY TO THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED OFFERING OFFERING
------------------------------------------ -------------- ---------- -----------
Robert S. Rosenschein 321,460(2) 18.6% 8.9%
------------------------------------------ -------------- ---------- -----------
Steven Steinberg 18,961(3) 1.1% 0.5%
------------------------------------------ -------------- ---------- -----------
Jeff Schneiderman 54,160(4) 3.0% 1.5%
------------------------------------------ -------------- ---------- -----------
Mark A. Tebbe 25,337(5) 1.5% 0.7%
------------------------------------------ -------------- ---------- -----------
Edward G. Sim 166,599(6) 9.6% 4.6%
------------------------------------------ -------------- ---------- -----------
All directors and executive officers 586,517(7) 33.8% 16.2%
as a group (5 individuals)
------------------------------------------ -------------- ---------- -----------
Morton Meyerson 148,316 8.6% 4.1%
3401 Armstrong Avenue,
Dallas, TX 75205-3949
------------------------------------------ -------------- ---------- -----------
58
------------------------------------------ -------------- ---------- -----------
Dawntreader Fund I L.P. 121,310 7.0% 3.4%
520 Madison Avenue, 9th Floor,
New York, NY 10022
------------------------------------------ -------------- ---------- -----------
Israel Seed III L.P. 157,227 9.1% 4.4%
2 Beitar Street,
Jerusalem 93386 Israel
------------------------------------------ -------------- ---------- -----------
Highland Capital Partners V
Limited Partnership 265,798 15.4% 7.4%
92 Hayden Avenue,
Lexington, Massachusetts 02421
------------------------------------------ -------------- ---------- -----------
--------------------
(1) Unless otherwise indicated, the business address of each of the following
is GuruNet Corporation, Jerusalem Technology Park, Building 98, Jerusalem
91481 Israel.
(2) Excludes 241,964 shares of common stock issuable upon exercise of options
that are not exercisable within 60 days of the date of this prospectus.
(3) Includes 18,961 shares of common stock issuable upon exercise of currently
exercisable options. Excludes 39,686 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days of the date of
this prospectus.
(4) Includes 54,160 shares of common stock issuable upon exercise of currently
exercisable options. Excludes 7,964 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days of the date of
this prospectus.
(5) Includes 3,617 shares of common stock issuable upon exercise of currently
exercisable options. Excludes 28,671 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days of the date of
this prospectus.
(6) Includes 121,310 shares of common stock owned by Dawntreader Fund I L.P.,
and beneficially owned by Mr. Sim as Managing Director of the Dawntreader
Group and Dawntreader Funds. Also includes 45,289 shares of common stock
owned by WIT VC Fund and beneficially owned by Mr. Sim as Managing
Director. Excludes 28,671 shares of common stock issuable upon exercise of
options that are not exercisable within 60 days from the date of this
prospectus.
(7) Includes an aggregate of 76,783 shares of common stock that Messrs.
Rosenschein, Steinberg, Schneiderman, Tebbe and Sim have the right to
acquire upon the exercise of outstanding options.
Unless otherwise indicated, we believe that all persons named in the
table have sole voting and investment power with respect to all shares of common
stock beneficially owned by them.
59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 2004, Mark Tebbe, one of the members of our board of directors
and as agent on our behalf, purchased the Internet domain name,
"www.Answers.com," from an unrelated third party for $80,200. Immediately
following such purchase, Mr. Tebbe transferred the Internet domain name to us
and was reimbursed $80,200.
Other than the aforementioned, there have been no transactions during
the last two years, or proposed transactions, to which we were or will be a
party, in which any director, executive officer, beneficial owner of more than
5% of our common stock or any member of the immediate family (including spouse,
parents, children, siblings and in-laws) of any of these persons, had or is to
have a direct or indirect material interest.
60
DESCRIPTION OF SECURITIES
Our certificate of incorporation authorizes us to issue 30,000,000
shares of common stock, par value $.001, and 1,000,000 shares of preferred
stock, par value $.01. As of the date of this prospectus, 1,727,373 shares of
common stock are outstanding, held by 72 record holders. No shares of preferred
stock are currently outstanding.
COMMON STOCK
Each share of common stock has one vote. Except as otherwise provided by
law or by the resolution or resolutions adopted by our board of directors
designating the rights, powers and preferences of any series of preferred stock,
the common stock shall have the exclusive right to vote for the election of
directors and for all other purposes, and holders of preferred stock shall not
be entitled to receive notice of any meeting of stockholders at which they are
not entitled to vote. The number of authorized shares of preferred stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding common stock, without a vote of the holders of the preferred stock,
or of any series, unless a vote of any such holders is required pursuant to any
preferred stock designation.
PREFERRED STOCK
In January 2004, all of our outstanding shares of preferred stock were
converted into 1,372,048 shares of common stock. Our certificate of
incorporation authorizes the issuance of blank check preferred stock with such
designations, rights and preferences as may be determined from time to time by
our board of directors. No shares of preferred stock are being issued or
registered in this offering. Accordingly, our board of directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of common stock. We may issue some
or all of the preferred stock to effect a business combination. In addition, the
preferred stock could be utilized as a method of discouraging, delaying or
preventing a change in control of us. Although we do not currently intend to
issue any shares of preferred stock, we cannot assure you that we will not do so
in the future.
WARRANTS
WARRANTS OFFERED IN THIS OFFERING. Each warrant offered in this offering
entitles the registered holder to purchase one share of our common stock at a
price of $7.20 per share, subject to adjustment as discussed below, at any time
commencing one year from the date of this prospectus and expiring five years
from the date of this prospectus.
We may redeem the outstanding warrants beginning one year from the date
of this prospectus,
o in whole and not in part;
o at a price of $.01 per warrant;
61
o upon a minimum of 30 days' prior written notice of redemption to
each warrantholder; and
o if the last sale price of the common stock equals or exceeds $10.80
per share for any 20 out of 30 consecutive trading days ending
within three trading days before notice is given.
The warrants will be issued in registered form under a warrant agreement
between American Stock Transfer & Trust Company, as warrant agent, and us.
Reference is made to the warrant agreement, which has been filed as an exhibit
to the registration statement of which this prospectus is a part, for a complete
description of the terms and conditions applicable to the warrants.
The exercise price and number of shares of common stock issuable on
exercise of the warrants may be adjusted in certain circumstances including in
the event of a stock dividend, or our recapitalization, reorganization, merger
or consolidation. However, the warrants will not be adjusted for issuances of
common stock at a price below their respective exercise prices.
The warrants may be exercised upon surrender of the warrant certificate
on or prior to the expiration date at the offices of the warrant agent, with the
exercise form on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price, by
certified check payable to us, for the number of warrants being exercised. The
warrantholders do not have the rights or privileges of holders of common stock
nor any voting rights until they exercise their warrants and receive shares of
common stock. After the issuance of shares of common stock upon exercise of the
warrants, each holder will be entitled to one vote for each share held of record
on all matters to be voted on by stockholders.
No warrants will be exercisable unless, at the time of exercise, a
prospectus relating to common stock issuable upon exercise of the warrants is
current and the common stock has been registered or qualified or deemed to be
exempt under the securities laws of the state of residence of the holder of the
warrants. Under the terms of the warrant agreement, we have agreed to meet these
conditions and to maintain a current prospectus relating to common stock
issuable upon exercise of the warrants until the expiration of the warrants.
However, we cannot assure you that we will be able to do so. The warrants may be
deprived of any value and the market for the warrants may be limited if the
prospectus relating to the common stock issuable upon the exercise of the
warrants is not current or if the common stock is not qualified or exempt from
qualification in the jurisdictions in which the holders of the warrants reside.
No fractional shares will be issued upon exercise of the warrants.
However, if a warrantholder exercises all warrants then owned of record, we will
pay to the warrantholder, in lieu of the issuance of any fractional share which
is otherwise issuable to the warrantholder, an amount in cash based on the
market value of the common stock on the last trading day prior to the exercise
date.
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OTHER OUTSTANDING SECURITIES
BRIDGE NOTES
In January and February 2004, we completed our bridge financing,
consisting of $5 million aggregate principal amount of bridge notes bearing
interest at an annual rate of 8%. The aggregate principal amount of the bridge
notes includes $200,000 previously advanced to us by investors that was
converted into bridge notes in connection with the bridge financing. The bridge
notes are due on the earlier to occur of January or February 2005 and the
consummation of this offering. Up to $2.5 million principal amount of the bridge
notes, plus accrued interest of $82,573 through June 30, 2004 will be repaid
from the proceeds of this offering and a minimum of $2.5 million (and up to the
entire $5 million at the election of each holder of the bridge notes) of the
principal amount of the bridge notes, plus accrued interest of $82,573 through
June 30, 2004 will be converted into shares of common stock at a conversion
price of $4.50. The bridge notes are secured by substantially all of our assets,
other than the stock of our subsidiary, which will be pledged upon receipt of
all third party consents required for such pledge.
BRIDGE WARRANTS
In connection with the issuance of the bridge notes, we also issued
bridge warrants to purchase an aggregate of 1,700,013 shares of common stock
exercisable at $7.20 per share. On the completion of this offering, the bridge
warrants automatically will be converted into an equal number of warrants
identical in all respects to the warrants included in the offering and will be
exercisable beginning one year from the date of this prospectus. Each holder of
the bridge notes received one warrant for every $3.00 funded through the bridge
notes, except for the noteholders who funded us via receipts on account of
shares in 2003. Such note holders received one warrant for every $2.00 funded.
We also issued a warrant to the lead purchaser in the financing to purchase
252,778 shares of common stock at a weighted average exercise price of $4.50.
We received net proceeds of $4,450,000 from the bridge financing, all of
which was used for general corporate purposes.
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 3,601,271 shares of common stock
outstanding, or 3,796,271 shares if the underwriters' over-allotment option is
exercised in full. Of these shares, the 1,300,000 shares sold in this offering,
or 1,495,000 shares if the over-allotment option is exercised, will be freely
tradable without restriction or further registration under the Securities Act,
except for any shares purchased by holders subject to lock-up agreements or by
any of our affiliates within the meaning of Rule 144 under the Securities Act,
which generally includes officers, directors or 10% stockholders. Of the
3,601,271 shares of our common stock to be outstanding on the closing date of
the offering, 2,021,363 shares will be restricted as a result of securities laws
and lock-up agreements that holders have signed that restrict their ability to
transfer our stock for either 12 or 18 months after the date of this prospectus.
All of the remaining 279,908 shares are restricted securities under Rule 144, in
that they were issued in private transactions not involving a public offering.
Those shares are currently eligible for sale under Rule 144.
63
In connection with our bridge financing, our officers, directors and
stockholders owning 1% or more of our outstanding shares of common stock entered
into lock-up agreements under which the stockholders have agreed not to sell or
otherwise dispose of their shares of common stock for 18 months with respect to
our officers and directors and 12 months with respect to our stockholders owning
1% or more of our outstanding shares of common stock. The shares subject to the
12 month lock-up agreements with respect to our stockholders owning 1% or more,
will be available for sale after the 180th day after the date of this prospectus
or afterwards and will be sold at prices of no less than $9.00 per share. In
addition, holders of bridge notes and bridge warrants entered into lock-up
agreements under which they have agreed not to sell or otherwise dispose of
their shares of common stock underlying their notes and warrants without the
consent of the underwriter except as follows: sales of the shares underlying the
bridge notes and bridge warrants made following the date of this prospectus
through 180 days after the date of this prospectus may be made at per share
prices of no less than $9.00; sales of the shares underlying the bridge notes
and bridge warrants made following the 180th day after the date of this
prospectus through the first anniversary of the date of this prospectus may be
made at per share prices of no less than $6.00; and sales made at any time
following the effective date of this prospectus at prices of no less than $2.50
per warrant.
In addition, we cannot assure you that the underwriters will not remove
these lock-up restrictions prior to 180 days following the offering without
prior notice.
RULE 144
In general, under Rule 144 as currently in effect, a person who has
owned restricted shares of common stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of the then average weekly trading volume or 1% of the
total number of outstanding shares of the same class. Sales under Rule 144 are
also subject to manner of sale provisions, notice requirements and the
availability of current public information about us. A person who has not been
one of our affiliates for at least the three months immediately preceding the
sale and who has beneficially owned shares of common stock for at least two
years is entitled to sell the shares under Rule 144 without regard to any of the
limitations described above.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at the time of or at any time during the three months preceding a
sale, and who has beneficially owned the restricted shares proposed to be sold
for at least two years, including the holding period of any prior owner other
than an affiliate, is entitled to sell their shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
DIVIDEND POLICY
To date, we have not paid any dividends on our common stock. Any payment
of dividends in the future is within the discretion of our board of directors
and will depend on our earnings, if any, our capital requirements and financial
condition and other relevant factors. Our
64
board of directors does not intend to declare any cash or other dividends in the
foreseeable future, but intends instead to retain earnings, if any, for use in
our business operations.
NASDAQ SMALLCAP MARKET LISTING
There is presently no public market for our common stock or warrants. We
anticipate that our common stock and warrants will be quoted on the NASDAQ
SmallCap Market under the proposed symbols GURU and GURUW, respectively, on or
promptly after the date of this prospectus.
OUR TRANSFER AGENT AND WARRANT AGENT
The transfer agent for our securities and warrant agent for our warrants
is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New
York, New York 10038.
65
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, our
underwriters are committed to take and pay for all of our securities being
offered, if any are taken, other than the securities covered by the
over-allotment option described below unless and until this option is exercised.
The underwriters have qualified their obligations under the underwriting
agreement to the approval of legal matters by counsel and various other
conditions. Subject to these conditions, they are obligated to purchase all of
the securities offered by this prospectus other than the securities covered by
the over-allotment option described below. A copy of the underwriting agreement
has been filed as an exhibit to the registration statement of which this
prospectus forms a part.
We have agreed to indemnify the underwriters against some liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in this respect.
PRICING OF SECURITIES
We have been advised by the representative that the underwriters propose
to offer the securities to the public at the initial offering price set forth on
the cover page of this prospectus. They may allow some dealers concessions not
in excess of $[__] per share and $[__] per warrant and the dealers may reallow a
concession not in excess of $[__] per share and $[__] per warrant to other
dealers. Upon completion of this offering, the offering price, the concession to
selected dealers and the reallowance to other dealers may be changed by the
underwriters.
Prior to this offering, there has been no public market for any of our
securities, and we cannot assure you that an active trading market will develop.
The offering price of our common stock and the offering price, exercise price
and other terms of the warrants were negotiated between us and the
representative. Factors considered in determining the prices and terms of the
securities include:
o the history of and prospects for the industry in which we operate;
o the stage of development of our business;
o estimates of our business potential;
o an assessment of our management;
o the general condition of the securities market; and
o the demand for similar securities of comparable companies and other
factors deemed relevant.
However, although these factors were considered, the determination of
our offering price is more arbitrary than the pricing of securities for an
operating company in a particular industry since the underwriters are unable to
compare our financial results and prospects with those of public companies
operating in the same industry.
66
OVER-ALLOTMENT OPTION
We have also granted to the underwriters an option, exercisable during
the 45-day period commencing on the date of this prospectus, to purchase from us
at the offering price, less underwriting discounts and the non-accountable
expense allowance, up to an aggregate of 195,000 additional shares of common
stock and/or warrants to purchase an additional 195,000 shares of common stock
for the sole purpose of covering over-allotments, if any. The over- allotment
option only will be used to cover the net syndicate short position resulting
from the initial distribution. The underwriters may exercise that option if they
sell more securities than the total number set forth in the table below. If any
securities underlying the option are purchased, the underwriters will severally
purchase shares in approximately the same proportion as set forth in the table
below.
COMMISSIONS AND DISCOUNTS
The following table shows the public offering price, underwriting
discount to be paid by us to the underwriters and the proceeds to us, before
expenses. This information assumes either no exercise or full exercise by the
underwriters of their over-allotment option.
Per Without With
Security option option
-------- ---------- ----------
Public offering price per share of
common stock $5.90 $7,670,000 $8,820,500
Public offering price per warrant $0.10 $ 130,000 $ 149,500
Discount $0.60 $ 780,000 $ 897,000
Non accountable expense allowance $0.18 $ 234,000 $ 234,000
Proceeds before expenses (1) $5.22 $6,786,000 $7,839,000
--------------------
(1) The offering expenses are estimated at $710,000.
REPRESENTATIVE'S PURCHASE OPTION
We have agreed to sell to the representative, for $100, an option to
purchase up to a total of 130,000 shares of common stock and/or warrants to
purchase 130,000 shares of common stock. The securities issuable upon exercise
of this option are identical to those offered by this prospectus. This option is
exercisable at $9.90 (165% of the per share and warrant offering price to
investors) one year from the date of this prospectus and expires five years from
the date of this prospectus. The option may not be sold, transferred, assigned,
pledged or hypothecated for one year following the date of this prospectus.
However, the option may be transferred to any underwriter and selected dealer
participating in the offering and their bona fide officers or partners. The
option grants to holders demand and "piggy back" rights for periods of five and
seven years, respectively, from the date of this prospectus with respect to the
registration under the Securities Act of the securities directly and indirectly
issuable upon exercise of the option. We will bear all fees and expenses
attendant to registering the securities, other than underwriting commissions
that will be paid for by the holders themselves. The exercise price and number
of securities issuable upon exercise of the option may be adjusted in certain
circumstances
67
including in the event of a stock dividend, or our recapitalization,
reorganization, merger or consolidation. However, the option will not be
adjusted for issuances of common stock at a price below its exercise price.
WARRANT SOLICITATION FEE
We have engaged EarlyBirdCapital, Inc., the representative of the
underwriters, on a non-exclusive basis, as our agent for the solicitation of the
exercise of the warrants. To the extent not inconsistent with the guidelines of
the NASD and the rules and regulations of the SEC, we have agreed to pay the
representative for bona fide services rendered a commission equal to 5% of the
exercise price for each warrant exercised more than one year after the date of
this prospectus if the exercise was solicited by the underwriters. In addition
to soliciting, either orally or in writing, the exercise of the warrants, the
representative's services also may include disseminating information, either
orally or in writing, to warrantholders about us or the market for our
securities, and assisting in the processing of the exercise of warrants. No
compensation will be paid to the representative upon the exercise of the
warrants if:
o the market price of the underlying shares of common stock is
lower than the exercise price;
o the holder of the warrants has not confirmed in writing that the
representative solicited the exercise;
o the warrants are held in a discretionary account;
o the warrants are exercised in an unsolicited transaction; or
o the arrangement to pay the commission is not disclosed in the
prospectus provided to warrant holders at the time of exercise.
REGULATORY RESTRICTIONS ON PURCHASE OF SECURITIES
SEC Rules may limit the ability of the underwriters to bid for or
purchase our securities before the distribution of the securities is completed.
However, the underwriters may engage in the following activities in accordance
with the rules:
o STABILIZING TRANSACTIONS. The underwriters may make bids or
purchases for the purpose of pegging, fixing or maintaining the
price of our securities, so long as stabilizing bids do not exceed a
specified maximum.
o OVER-ALLOTMENTS AND SYNDICATE COVERAGE TRANSACTIONS. The
underwriters may create a short position in our securities by
selling more of our securities than are set forth on the cover page
of this prospectus. If the underwriters create a short position
during the offering, the representative may engage in syndicate
covering transactions by purchasing our securities in the open
market. The representative also may elect to reduce any short
position by exercising all or part of the over-allotment option.
o PENALTY BIDS. The representative may reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
68
Stabilization and syndicate covering transactions may cause the price of
the securities to be higher than they would be in the absence of these
transactions. The imposition of a penalty bid might also have an effect on the
prices of the securities if it discourages resales of the securities.
Neither we nor the underwriters make any representation or prediction as
to the effect that the transactions described above may have on the prices of
the securities. These transactions may occur on the Nasdaq SmallCap Market or on
any trading market. If any of these transactions are commenced, they may be
discontinued without notice at any time.
OTHER TERMS
We have granted the representative the right to have its designee serve
as a member of our board of directors for a period of five years from the date
of this prospectus. This designee will be entitled to the same rights and
compensation as our other non-employee directors.
EarlyBirdCapital, Inc., the representative of the underwriters in the
offering, acted as a finder in connection with the bridge financing and received
commissions and a non-accountable expense allowance in the aggregate amount of
$424,664 or 8.5% of the $5,000,000 raised.
CONDITIONS IN ISRAEL
GENERAL
Our operating subsidiary is incorporated under the laws of the State of
Israel, and the our research and development, manufacturing and executive
facilities are located in Israel. Accordingly, we are directly affected by
political, economic and military conditions in Israel. Our operations could be
materially adversely affected if major hostilities involving Israel occur or if
trade between Israel and its present trading partners is curtailed or
interrupted.
Political Conditions
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Additionally, Israel is currently
experiencing intense violence and terrorism and from time to time in the past,
Israel has experienced civil unrest, primarily in the West Bank and in the Gaza
Strip administered by Israel since 1967. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and
Palestinian representatives have been signed, pursuant to which certain
territories in the West Bank and Gaza Strip were handed over to the Palestinian
administration, known as the Palestinian Authority. The implementation of these
agreements with the Palestinian representatives has been subject to difficulties
and delays and a resolution of the differences between the parties remains
uncertain. Recently, the political conflict with the Palestinians has worsened,
which has resulted in terror attacks against Israeli targets and citizens both
in Israel and in the areas administered by the Palestinian Authority. Since
October 2000, there has been a significant increase in violence primarily in the
West Bank and Gaza Strip, as well as in Israel
69
itself, which intensified during 2001 and 2002. Negotiations between the parties
have almost entirely ceased.
As of the date of this prospectus, Israel has not entered into any peace
agreement with Syria or Lebanon.
We cannot predict whether any other agreements will be entered into
between Israel and its neighboring countries, whether a final resolution of the
area's problems will be achieved, the nature of any resolution of this kind, or
whether the current violence will continue and the extent to which this violence
will have an adverse impact on Israel's economic development, on our operations
in the future or what other effects it may have upon us.
Despite the progress towards peace between Israel and its Arab
neighbors, there are certain countries, companies and organizations that
continue to participate in a boycott of Israeli firms and others doing business
with Israel or with Israeli companies. Although we are restricted from marketing
our products in these countries, we do not believe that the boycott has had a
material adverse effect on our business. However, a prolonged continuation of
the increased hostilities in the region could lead to increased boycotts and
further restrictive laws, policies or practices directed towards Israel or
Israeli businesses, and these could have a material adverse impact on our
business.
Our key employees and executive officers all reside in Israel. Many of
our executive officers and employees in Israel are obligated, currently until
age 45, and at the end of 2004 generally up to age 40, to perform up to 36 days
of annual military reserve duty. The term of their reserve service depends on
their rank and position. Further, these individuals are subject to being called
for active duty under emergency circumstances for extended periods of time. Our
operations could be disrupted by the absence for a significant period of one or
more of our directors, officers or key employees due to military service. Any
such disruption could adversely affect our business, results and financial
condition.
The September 11, 2001, terror attacks on the U.S. and the military
response by the U.S. and its international allies in Afghanistan, have created
uncertainty regarding the state of the U.S. and world economy. In addition, the
U.S. military operation against Iraq increased interest in fighting terrorist
activities in the Middle East and around the world, and the effects of the
military operation against Iraq on the State of Israel could directly affect our
business.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has intervened in various sectors of
the economy, employing fiscal and monetary policies, import duties, foreign
currency restrictions and controls of wages, prices and foreign currency
exchange rates. The Israeli government has periodically changed its policies in
all of these areas.
70
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development and the
International Finance Corporation. Israel is also a signatory to the General
Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade
barriers among its members. In addition, Israel has been granted preferences
under the Generalized System of Preferences from the United Nations, Australia,
Canada and Japan. These preferences allow Israel to export the products covered
by such programs either duty-free or at reduced tariffs. Israel and the European
Economic Community, known now as the European Union, concluded a free trade
agreement in July 1975, which confers various advantages on Israeli exports to
most European countries and obligates Israel to lower its tariffs on imports
from these countries over a number of years. In November 1995, Israel entered
into a new agreement with the European Union, which includes redefinition of
rules of origin and other improvements, including providing for Israel to become
a member of the research and technology programs of the European Union. In 1985,
Israel and the United States entered into an agreement to establish a free trade
area. The free trade area has eliminated all tariff and specified non-tariff
barriers on most trade between the two countries. On January 1, 1993, Israel and
the European Free Trade Association entered into an agreement establishing a
free-trade zone between Israel and the European Free Trade Association. In
recent years, Israel has established commercial and trade relations with a
number of the other nations, including Russia, China, Turkey, India and other
nations in Eastern Europe and Asia.
LEGAL MATTERS
The validity of the securities offered in this prospectus are being
passed upon for us by our counsel, Greenberg Traurig, LLP, New York, New York.
Greenberg Traurig, LLP will be relying on special Israeli counsel with respect
to certain matters of Israeli law. As of the date of this prospectus, a
shareholder of Greenberg Traurig, LLP holds a bridge note in the principal
amount of $50,000 and a bridge warrant to purchase 16,667 shares of our common
stock. The shareholder intends to convert the bridge note into shares of our
common stock upon the consummation of this offering. Graubard Miller, New York,
New York is acting as counsel for the underwriters in this offering.
EXPERTS
The consolidated financial statements of GuruNet Corporation as of
December 31, 2003 and 2002 and for the years then ended have been included
herein and in the registration statement in reliance upon the reports of Somekh
Chaikin, a member firm of KPMG International, independent accountants, appearing
elsewhere herein and upon the authority of said firm as experts in auditing and
accounting.
The audit report covering December 31, 2003 and 2002 consolidated
financial statements contains an explanatory paragraph that states that our
recurring losses from operations, negative cash flows from operations and a net
capital deficiency raise substantial doubt about our ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
71
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
CONTENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
and Comprehensive Income (Loss) F-5
Consolidated Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT AUDITORS' TO
THE STOCKHOLDERS OF GURUNET CORPORATION
(FORMERLY ATOMICA CORPORATION) (A DEVELOPMENT STAGE ENTERPRISE):
We have audited the accompanying consolidated balance sheets of GuruNet
Corporation, formerly Atomica Corporation, (a Development Stage Enterprise), and
Subsidiary (collectively referred to as "the Company") as of December 31, 2003
and 2002, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and comprehensive income (loss), and cash flows
for the years then ended, and the period from December 22, 1998 (inception) to
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2003 and 2002, and the results of their operations, changes in
stockholders' equity (deficit) and comprehensive income (loss), and their cash
flows for the years then ended and for the period from December 22, 1998
(inception) to December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, negative cash flows from operations, and has a net capital
deficiency, that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
A member firm of KPMG International
May 11, 2004
F-2
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
DECEMBER 31 DECEMBER 31
2003 2002
----------- -----------
$ $
----------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 3) 123,752 1,438,180
Receivables (Note 2 e) 11,934 382,922
Prepaid expenses 20,481 22,150
Deferred charges (Note 4) 155,116 --
----------- ----------
TOTAL CURRENT ASSETS 311,283 1,843,252
LONG-TERM DEPOSITS (RESTRICTED) (Note 5) 165,449 177,990
DEPOSITS IN RESPECT OF EMPLOYEE SEVERANCE
OBLIGATIONS (Note 7) 339,651 231,780
PROPERTY AND EQUIPMENT, NET (Note 6) 206,408 425,980
DEFERRED TAX ASSET, LONG-TERM (Note 9) 20,501 --
----------- ----------
TOTAL ASSETS 1,043,292 2,679,002
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 215,684 35,271
Accrued expenses 326,186 358,771
Accrued compensation 293,113 231,679
Advances on account of shares and
stock warrants (Note 8 g) 200,000 --
Deferred revenues, short-term (Note 2 g) 29,234 12,000
----------- ----------
TOTAL CURRENT LIABILITIES 1,064,217 637,721
----------- ----------
LONG-TERM LIABILITIES:
Liability in respect of employee
severance obligations (Note 7) 431,025 329,645
Deferred tax liability, long-term (Note 9) 55,092 --
Deferred revenues, long-term (Note 2 g) 537,404 --
----------- ----------
TOTAL LONG-TERM LIABILITIES 1,023,521 329,645
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 8):
Convertible preferred stock:
Series A; $0.01 par value; 130,325
shares authorized, issued, and
outstanding as of December 31, 2003
and 2002; aggregate liquidation
preference of $300,000 1,303 1,303
Series B; $0.01 par value; 217,203
shares authorized; 181,112 shares
issued and outstanding as of
December 31, 2003 and 2002;
aggregate liquidation preference of
$1,350,000 1,811 1,811
Series C; $0.01 par value; 260,643
shares authorized; 238,119 shares
issued and outstanding as of
December 31, 2003 and 2002;
aggregate liquidation preference of
$2,750,000 2,381 2,381
Series D; $0.01 par value; 824,646
shares authorized as voting stock
and 21,721 shares authorized as
non-voting stock; 807,468 shares of
voting stock and 15,024 shares of
non-voting stock issued and
outstanding as of December 31, 2003
and 2002; aggregate liquidation
preference of $28,400,000 8,225 8,225
Common stock; $0.001 par value;
2,856,937 shares authorized as of
December 31, 2003 and 2002; 355,325
and 353,876 shares issued and
outstanding as of December 31, 2003
and 2002, respectively 355 354
Additional paid-in capital 33,100,368 32,958,424
Deferred compensation (125,873) --
Accumulated other comprehensive loss (27,418) (64,047)
Deficit accumulated during development stage (34,005,598) (31,196,815)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,044,446) 1,711,636
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) 1,043,292 2,679,002
=========== ==========
See accompanying notes to the consolidated financial statements.
F-3
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FROM
DECEMBER 22, 1998
YEARS ENDED DECEMBER 31 (INCEPTION)
------------------------ THROUGH
2003 2002 DECEMBER 31, 2003
---------- ---------- -----------------
$ $ $
---------- ---------- -----------------
REVENUE 28,725 1,113,381 1,228,514
Cost of revenue 723,349 1,584,200 2,904,713
---------- ---------- -----------
GROSS MARGIN (694,624) (470,819) (1,676,199)
---------- ---------- -----------
OPERATING EXPENSES:
Research and development 910,114 2,659,966 17,545,589
Sales and marketing 478,942 2,428,939 8,648,587
General and administrative 678,645 940,841 6,389,721
Loss on disposal of assets -- 780,475 780,475
---------- ---------- -----------
TOTAL OPERATING EXPENSES 2,067,701 6,810,221 33,364,372
---------- ---------- -----------
OPERATING LOSS (2,762,325) (7,281,040) (35,040,571)
---------- ---------- -----------
Other (expense) income, net (11,867) (268,671) 1,069,564
---------- ---------- -----------
LOSS BEFORE INCOME TAXES (2,774,192) (7,549,711) (33,971,007)
Income taxes (Note 9) (34,591) -- (34,591)
---------- ---------- -----------
NET LOSS (2,808,783) (7,549,711) (34,005,598)
========== ========== ===========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE (7.93) (21.33) (82.38)
`
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 354,112 353,871 412,797
========== ========== ===========
PRO-FORMA NET LOSS PER COMMON SHARE* (1.63)
==========
WEIGHTED AVERAGE SHARES USED IN
COMPUTING PRO-FORMA NET LOSS
PER COMMON SHARE * 1,726,160
==========
* Reflects conversion of preferred stock into common stock as described in
Note 12 (c).
See accompanying notes to the consolidated financial statements.
F-4
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
ADDITIONAL
CONVERTIBLE PAID-IN DEFERRED
PREFERRED STOCK COMMON STOCK CAPITAL COMPENSATION
----------------------- --------------------- ---------- ------------
SHARES AMOUNT SHARES AMOUNT $ $
--------- ------- ------- ------ ---------- ------------
BALANCE AS OF JANUARY 1, 2002 1,372,048 $13,720 353,876 $354 33,021,908 (96,732)
Issuance of warrants in connection
with obtaining a line of credit -- -- -- -- 63,401 --
Revaluation of options issued to
non-employees for services rendered -- -- -- -- (126,885) 84,096
Amortization of deferred compensation -- -- -- -- -- 12,636
Loss on foreign currency translation -- -- -- -- -- --
Net loss for year -- -- -- -- -- --
--------- ------- ------- ------ ---------- --------
BALANCE AS OF DECEMBER 31, 2002 1,372,048 13,720 353,876 354 32,958,424 --
Issuance of stock options to a
non-employee for services rendered -- -- -- -- 1,225 (1,225)
Issuance of stock options to employees -- -- -- -- 139,720 (139,720)
Amortization of deferred compensation -- -- -- -- -- 15,072
Exercise of common stock options -- -- 1,449 1 999 --
Loss on foreign currency translation -- -- -- -- -- --
Net loss for year -- -- -- -- -- --
--------- ------- ------- ------ ---------- --------
BALANCE AS OF DECEMBER 31, 2003 1,372,048 13,720 355,325 355 33,100,368 (125,873)
========= ======= ======= ====== ========== ========
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
STOCKHOLDERS' OTHER DURING STOCKHOLDERS'
NOTES COMPREHENSIVE DEVELOPMENT EQUITY COMPREHENSIVE
RECEIVABLE LOSS STAGE (DEFICIT) INCOME (LOSS)
------------ ------------- ----------- ------------ -------------
$ $ $ $ $
------------ ------------- ----------- ------------ -------------
BALANCE AS OF JANUARY 1, 2002 -- (41,549) (23,647,104) 9,250,597 (23,688,653)
Issuance of warrants in connection
with obtaining a line of credit -- -- -- 63,401
Revaluation of options issued to
non-employees for services rendered -- -- -- (42,789)
Amortization of deferred compensation -- -- -- 12,636
Loss on foreign currency translation -- (22,498) -- (22,498) (22,498)
Net loss for year -- -- (7,549,711) (7,549,711) (7,549,711)
------- ------- ----------- ---------- -----------
BALANCE AS OF DECEMBER 31, 2002 -- (64,047) (31,196,815) 1,711,636 (31,260,862)
Issuance of stock options to a
non-employee for services rendered -- -- -- --
Issuance of stock options to employees -- -- -- --
Amortization of deferred compensation -- -- -- 15,072
Exercise of common stock options -- -- -- 1,000
Loss on foreign currency translation -- 36,629 -- 36,629 36,629
Net loss for year -- -- (2,808,783) (2,808,783) (2,808,783)
------- ------- ----------- ---------- -----------
BALANCE AS OF DECEMBER 31, 2003 -- (27,418) (34,005,598) (1,044,446) (34,033,016)
======= ======= =========== ========== ===========
See accompanying notes to the consolidated financial statements.
F-5
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS) (CONT'D)
ADDITIONAL
CONVERTIBLE PAID-IN DEFERRED
PREFERRED STOCK COMMON STOCK CAPITAL COMPENSATION
----------------------- --------------------- ---------- ------------
SHARES AMOUNT SHARES AMOUNT $ $
--------- ------- ------- ------ ---------- ------------
DECEMBER 1998 - Issuance of common stock
to founders at $0.023 per share, upon
the Company's inception (no issuance costs) -- $ -- 325,805 $326 7,174 --
APRIL 1999 - Issuance of common stock
in lieu of loan repayment -- -- 5,649 5 6,495 --
AUGUST 1999 - Issuance of common stock
upon exercise of stock options -- -- 21,721 22 49,978 --
AUGUST 1999 - Issuance of common stock
at $2.30 per share, for acquisition of
domain name -- -- 652 1 1,499 --
DECEMBER 1998 AND JANUARY 1999 - Issuance
of Series A convertible preferred
stock at $2.30 per share, net of
issuance costs of $7,982 130,325 1,303 -- -- 290,715 --
APRIL 1999 - Issuance of Series B
convertible preferred stock at $7.45 per
share, net of issuance costs of $38,678 181,112 1,811 -- -- 1,309,511 --
SEPTEMBER 1999 - Issuance of series C
convertible preferred stock at $11 55 per
share, net of issuance costs of $79,678 238,119 2,381 -- -- 2,667,941 --
FEBRUARY 2000 AND JUNE 2000 - Issuance
of Series D convertible preferred stock
at $34.53 per share, net of issuance
costs of $4,359 822,492 8,225 -- -- 28,387,416 --
Exercise of common stock options from
inception through December 31, 2003 -- -- 268,353 268 1,843,633 --
Repurchase of stockholders' common stock
and cancellation of note receivable
from inception through December 31, 2003 -- -- (266,855) (267) (1,842,633) --
Issuance of stock options and warrants
to non-employees for services rendered
from inception through December 31, 2003 -- -- -- -- 434,675 (228,642)
Revaluation of options issued to
non-employees for services rendered from
inception through December 31, 2003 -- -- -- -- (126,885) 84,096
Forfeiture of stock options granted for
services rendered from inception through
December 31, 2003 -- -- -- -- (68,871) 68,871
Issuance of stock options to employees
from inception through December 31, 2003 -- -- -- -- 139,720 (139,720)
Amortization of deferred compensation
from inception through December 31, 2003 -- -- -- -- -- 89,522
Loss on foreign currency translation
from inception through December 31, 2003 -- -- -- -- -- --
Net loss from inception through
December 31, 2003 -- -- -- -- -- --
----------- -------- --------- ------ ----------- ----------
BALANCE AS OF DECEMBER 31, 2003 1,372,048 13,720 355,325 355 33,100,368 (125,873)
=========== ======== ========= ====== =========== ==========
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
STOCKHOLDERS' OTHER DURING STOCKHOLDERS'
NOTES COMPREHENSIVE DEVELOPMENT EQUITY COMPREHENSIVE
RECEIVABLE LOSS STAGE (DEFICIT) INCOME (LOSS)
------------ ------------- ----------- ------------ -------------
$ $ $ $ $
------------ ------------- ----------- ------------ -------------
DECEMBER 1998 - Issuance of common stock
to founders at $0.023 per share, upon
the Company's inception (no issuance costs) -- -- -- 7,500
APRIL 1999 - Issuance of common stock
in lieu of loan repayment -- -- -- 6,500
AUGUST 1999 - Issuance of common stock
upon exercise of stock options -- -- -- 50,000
AUGUST 1999 - Issuance of common stock
at $2.30 per share, for acquisition of
domain name -- -- -- 1,500
DECEMBER 1998 AND JANUARY 1999 - Issuance
of Series A convertible preferred
stock at $2.30 per share, net of
issuance costs of $7,982 -- -- -- 292,018
APRIL 1999 - Issuance of Series B
convertible preferred stock at $7.45 per
share, net of issuance costs of $38,678 -- -- -- 1,311,322
SEPTEMBER 1999 - Issuance of series C
convertible preferred stock at $11 55 per
share, net of issuance costs of $79,678 -- -- -- 2,670,322
FEBRUARY 2000 AND JUNE 2000 - Issuance
of Series D convertible preferred stock
at $34.53 per share, net of issuance
costs of $4,359 -- -- -- 28,395,641
Exercise of common stock options from
inception through December 31, 2003 (1,842,900) -- -- 1,001
Repurchase of stockholders' common stock
and cancellation of note receivable
from inception through December 31, 2003 1,842,900 -- -- --
Issuance of stock options and warrants
to non-employees for services rendered
from inception through December 31, 2003 -- -- -- 206,033
Revaluation of options issued to
non-employees for services rendered from
inception through December 31, 2003 -- -- -- (42,789)
Forfeiture of stock options granted for
services rendered from inception through
December 31, 2003 -- -- -- --
Issuance of stock options to employees
from inception through December 31, 2003 -- -- -- --
Amortization of deferred compensation
from inception through December 31, 2003 -- -- -- 89,522
Loss on foreign currency translation
from inception through December 31, 2003 -- (27,418) -- (27,418) (27,418)
Net loss from inception through
December 31, 2003 -- -- (34,005,598) (34,005,598) (34,005,598)
----------- --------- ----------- ------------ ------------
BALANCE AS OF DECEMBER 31, 2003 -- (27,418) (34,005,598) (1,044,446) (34,033,016)
=========== ========= =========== ============ ============
See accompanying notes to the consolidated financial statements.
F-6
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FROM
DECEMBER 22, 1998
(INCEPTION)
THROUGH
YEARS ENDED DECEMBER 31 DECEMBER 31,
2003 2002 2003
----------- ---------- -----------
$ $ $
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS (2,808,783) (7,549,711) (34,005,598)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization 268,026 586,423 2,092,929
Deposits in respect of employee severance obligations (107,871) 80,616 (339,651)
Loss on sale and write off of property and equipment -- 780,475 1,330,277
Reorganization costs -- 225,589 225,589
Increase in liability in respect of employee severance obligations 101,380 15,769 431,025
Deferred income taxes 34,591 -- 34,591
Stock issued for domain name -- -- 1,500
Issuance of stock options and warrants to non-employees for -- 63,401 206,033
services rendered
Revaluation of options issued to non-employees for services rendered -- (42,789) (42,789)
Amortization of deferred compensation 15,072 12,636 89,522
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable and other current assets 372,657 (130,874) (30,859)
Increase (decrease) in accounts payable 180,413 (578,611) 215,684
Increase in accrued expenses and other current liabilities 28,849 320,243 630,983
Increase in deferred revenues 17,234 12,000 29,234
Increase in long-term deferred revenues 537,404 -- 537,404
----------- ---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,361,028) (6,204,833) (28,594,126)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (48,454) (51,040) (3,903,026)
Proceeds from sale of property and equipment -- 14,535 54,415
Decrease (increase) in long-term deposits 12,541 -- (674,604)
----------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (35,913) (36,505) (4,523,215)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan -- -- (20,000)
Long-term deposits -- 975,473 516,022
Proceeds from loan -- -- 6,500
Proceeds from issuance of convertible preferred stock, net -- -- 32,800,000
Proceeds from issuance of common stock -- -- 57,500
Advances on account of shares 200,000 -- 200,000
Exercise of common stock options 1,000 -- 1,000
Deferred charges (155,116) -- (155,116)
Issuance costs -- -- (130,697)
----------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 45,884 975,473 33,275,209
----------- ---------- -----------
Effect of exchange rate changes on cash and cash equivalents 36,629 (22,498) (34,116)
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,314,428) (5,288,363) 123,752
Cash and cash equivalents at beginning of year/period 1,438,180 6,726,543 --
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD 123,752 1,438,180 123,752
=========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid 7,661 6,800 48,732
=========== ========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for domain name -- -- 1,500
Issuance of common stock in lieu of loan repayments -- -- 6,500
Common stock issued in exchange for notes receivable -- -- 1,842,900
Repurchase of stockholders' common stock and cancellation of notes receivable -- -- (1,842,900)
See accompanying notes to the consolidated financial statements.
F-7
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 1 - BUSINESS
GuruNet Corporation ("the Parent"), formerly Atomica Corporation, (a
Development Stage Enterprise), was founded as a Texas corporation on
December 22, 1998, and reorganized as a Delaware corporation in April
1999. On December 27, 1998 the Parent formed a subsidiary ("the
Subsidiary") based in Israel, primarily for the purpose of providing
research and development services to the Parent. GuruNet Corporation and
the Subsidiary are collectively referred to as "the Company".
The Company develops, markets and sells technology that intelligently and
automatically integrates and retrieves information from disparate sources
and delivers the result in a single consolidated view. Prior to 2003, the
Company focused primarily on enterprise systems for corporate customers
and large organizations. Beginning in 2003, the Company's primary product
has been its consumer product, which is being marketed to individual
consumers and organizations purchasing multiple-user licenses.
The Company incurred approximately $34 million and $28.6 million of net
losses and negative cash flows from operations, respectively, during its
initial period of operations through December 31, 2003. The Company had
$123,752 in cash and cash equivalents at December 31, 2003. The Company's
working capital deficiency at December 31, 2003 was $752,934. Although
the Company did receive funding in January 2004, those funds were granted
through convertible promissory notes that are due on the earlier of
January 2005 or the consummation of an initial public offering ("IPO").
Further, beginning July 2004, the Company will be required to start
making interest payments on the aforesaid promissory notes (see Note 12
for further details). Since it cannot be said with certainty that an IPO
will successfully transpire, there is uncertainty as to whether the
Company's future working capital will be sufficient to fund the Company's
future activities. These factors raise substantial doubt as to the
ability of the Company to continue as a going concern. The financial
statements include no adjustments to the values or classifications of the
assets and liabilities, which may be necessary should the Company be
unable to continue to operate as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of GuruNet Corporation and the Subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) FOREIGN CURRENCY TRANSLATION
The financial statements for the Subsidiary are measured using the local
currency as the functional currency. Assets and liabilities of foreign
operations are translated at the rate of exchange as of the balance sheet
date. Expenses are translated using average exchange rates for the year.
Stockholders' equity is translated using the historical exchange rates
applicable for each line item. Foreign currency translation gains and
losses are included as a component of other comprehensive income or loss.
F-8
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(c) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported results of operations during the
reporting periods. Actual results could differ from those estimates.
(d) CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
(e) ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the invoiced amount and do not bear
interest. If necessary, the Company records an allowance for doubtful
accounts to reflect the Company's best estimate of the amount of probable
credit losses in the Company's existing accounts receivable, computed on
a specific basis. No such allowance was deemed necessary as of the
balance sheet dates. The Company does not have any off-balance-sheet
credit exposure related to its customers.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Annual depreciation
rates are as follows:
%
---------
Computer equipment 33
Furniture and fixtures 7 - 15
Leasehold improvements are amortized over the shorter of the estimated
useful life or the expected life of the lease.
(g) REVENUE RECOGNITION
Revenues from subscription services are recognized over the life of the
subscription, in accordance with Standard Operating Procedure (SOP) No.
97-2, "SOFTWARE REVENUE RECOGNITION", issued by the American Institute of
Certified Public Accountants (AICPA). Sales that do not yet meet the
criteria for revenue recognition, are classified as "Deferred Revenues"
on the balance sheet.
During 2003, most of the Company's sales were in the form of perpetual
licenses of the Company's consumer product, which included both a
software license and content provided by the Company in consideration for
one-time fees. Since the obligation to continue serving content has no
defined termination date and the Company cannot estimate the time period
over which the service will be provided, the Company has not recognized
revenue from those sales. The Company records its cost of providing these
products and services as incurred. At such time, if any, that users who
purchased lifetime licenses cede their licenses in return for a
subscription, or the Company is able to estimate the time period over
which the service is provided, the Company will recognize the revenue,
which had been deferred, over the life of the new subscription.
F-9
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(h) RESEARCH AND DEVELOPMENT
Statement of Financial Accounting Standards (SFAS) No. 86, "ACCOUNTING
FOR THE COST OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE
MARKETED", requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. The Company does not
incur material costs between the establishment of technological
feasibility of its products and the point at which the products are ready
for general release. Therefore, research and development costs are
charged to the statement of operations as incurred.
(i) ACCOUNTING FOR STOCK-BASED COMPENSATION
As allowed by Statement of Financial Accounting Standards (SFAS) No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION", the Company utilizes the
intrinsic-value method of accounting prescribed by the Accounting
Principles Board (APB) Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES", and related interpretations, to account for stock option
plans for employees and directors. Compensation cost for stock options,
if any, would be measured as the excess of the estimated market price of
the Company's stock at the date of grant over the amount an employee must
pay to acquire the stock.
The Company has adopted the disclosure requirements of SFAS No. 123 and
SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND
DISCLOSURE", for awards to its directors and employees. For disclosure
purposes only, the fair value of options granted to employees is
estimated on the date of grant using the minimum-value method with the
following weighted average assumptions: no dividend yield; risk-free
interest rates of 2.18% to 6.68%; and an expected life of three to five
years.
The following illustrates the effect on net loss and net loss per share
if the Company had applied the fair value method of SFAS No. 123, for
accounting purposes:
CUMULATIVE FROM
INCEPTION
YEARS ENDED DECEMBER 31 THROUGH DECEMBER
----------------------------- 31,
2003 2002 2003
----------- ----------- ----------------
$ $ $
----------- ----------- ----------------
Net loss, as reported (2,808,783) (7,549,711) (34,005,598)
Add:
Stock-based compensation expense to employees
included in reported net loss, net of related tax effects 14,995 -- 14,995
Deduct:
Stock-based compensation expense to employees and
directors determined under fair value based method for
all awards, net of related tax effects (34,407) (25,953) (150,354)
----------- ----------- ----------------
(2,828,195) (7,575,664) (34,140,957)
=========== =========== ================
Net loss per common share, basic and diluted:
As reported (7.93) (21.33) (82.38)
=========== =========== ================
Pro-forma (7.99) (21.41) (82.71)
=========== =========== ================
F-10
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(j) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation allowance is
provided for the amount of deferred tax assets that, based on available
evidence, are not expected to be realized.
(k) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment in accordance
with SFAS No.144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS", whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of the asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets.
(l) NET LOSS PER SHARE DATA
Basic and diluted net loss per common share are presented in conformity
with the SFAS No. 128, "EARNINGS PER SHARE". Diluted net loss per share
is the same as basic net loss per share as the inclusion of 1,799,284
common stock equivalents would be anti-dilutive. Share and per-share data
presented throughout the financial statements and notes reflect a
1-for-23 reverse stock split that the Company declared in January 2004.
Pro forma loss per share reflects the conversion of 1,372,048 preferred
stock in January 2004, as described in Note 12.
(m) RECENTLY ISSUED ACCOUNTING STANDARDS
On May 15, 2003, the Financial Accounting Standards Board issued SFAS No.
150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY". This Statement establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This Statement is effective for
financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. It is to be implemented by reporting
the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement
and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company has applied SFAS 150 to a
financial instrument entered into during the second half of 2003 (see
Note 8 g(iii) ).
F-11
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(m) RECENTLY ISSUED ACCOUNTING STANDARDS (CONT'D)
In January 2003, the FASB issued FASB Interpretation No. 46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES" ("FIN 46"). FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements ("ARB 51"), to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without an additional subordinated
financial support from other parties. ARB 51 requires that an
enterprise's consolidated financial statements include subsidiaries in
which the enterprise has a controlling financial interest. That
requirement usually has been applied to subsidiaries in which an
enterprise has a majority voting interest. The voting interest approach
is not effective in identifying controlling financial interests in
entities that are not controllable through voting interest or in which
the equity investors do not bear the residual economic risk. FIN 46
explains how to identify variable interest entities and how an enterprise
assesses its interests in a variable interest entity to decide whether it
is its primary beneficiary and therefore is required to consolidate that
entity. FIN 46 also addresses the initial valuation of the assets and
liabilities to be consolidated, the treatment of any gain or loss
resulting from the initial measurement and disclosures requirements for
the primary beneficiary. All entities with variable interest in variable
interest entities created after January 31, 2003 shall apply the
provisions of FIN 46 immediately. Public entities with a variable
interest in variable interest entities created before February 1, 2003
shall apply the provisions of this Interpretation no later than the first
interim or annual reporting period beginning after December 15, 2003. On
December 24, 2003, the FASB issued an Interpretation which clarified and
modified FASB Interpretation No. 46 (FIN 46R). FIN 46R is not expected to
have any significant impact on the Company's financial condition or
results of operations.
(n) RECLASSIFICATIONS
Certain prior year balances have been reclassified in order to conform to
the current year presentation.
NOTE 3 - CASH AND CASH EQUIVALENTS
2003 2002
----------- ----------
$ $
----------- ----------
In US dollars 68,045 1,349,685
In New Israeli Shekels 55,707 88,495
----------- ----------
123,752 1,438,180
=========== ==========
F-12
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 4 - DEFERRED CHARGES
Costs incurred in 2003 in connection with obtaining the promissory notes
and warrants (see Note 12) were recorded as deferred charges on the
accompanying balance sheet. The charges will begin to be amortized upon
issuance in 2004 over the life of the notes.
NOTE 5 - LONG-TERM DEPOSITS
Long-term deposits are comprised of restricted deposits with banks to
secure a bank guarantee and credit card debt, and restricted deposits
with the Company's merchant bank. The aforesaid deposits with banks are
comprised by a deposit which bears interest at a rate of the London
Inter-Bank Bid Rate (LIBID) less 0.69% and is automatically renewed on a
monthly basis, and a money market account. The merchant bank deposit is
non-interest bearing and may be held until such time that the Company
terminates its relationship with the merchant bank.
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment as of December 31, 2003 and 2002 consisted of the
following:
The balances of property and equipment include the effect of foreign
currency translation.
NOTE 7 - DEPOSITS AND LIABILITY IN RESPECT OF EMPLOYEE SEVERANCE OBLIGATIONS
Under Israeli law, employers are required to make severance payments to
dismissed employees and employees leaving employment in certain other
circumstances, on the basis of the latest monthly salary for each year of
service. This liability is provided for by payments of premiums to
insurance companies under approved plans and by a provision in these
financial statements.
The Company's employees are entitled to notice periods generally ranging
from thirty to ninety days in the event they are terminated. The above
liability does not include a provision for such notice periods.
F-13
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT)
As of December 31, 2003, the Company's share capital was comprised of
common stock and four separate classes of convertible preferred stock. On
January 2004, the preferred stockholders, as a class, agreed to convert
all of the 1,372,048 shares of the Company's issued and outstanding
preferred stock into common stock (see Note 12(c) ). This note describes
the composition of the preferred stock as of December 31, 2003 and 2002,
and the rights and preferences of such shares prior to such conversion.
(a) GENERAL
The Company's share capital at December 31, 2003 and 2002 is comprised as
follows:
ISSUED ISSUED
AUTHORIZED AND FULLY PAID AUTHORIZED AND FULLY PAID
---------- -------------- ---------- --------------
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------------------- -----------------------------
NUMBER OF SHARES NUMBER OF SHARES
----------------------------- -----------------------------
Series A convertible preferred stock
of $0.01 par value 130,325 130,325 130,325 130,325
Series B convertible preferred stock
of $0.01 par value 217,203 181,112 217,203 181,112
Series C convertible preferred stock
of $0.01 par value 260,643 238,119 260,643 238,119
Series D convertible preferred stock
of $0.01 par value 824,646 807,468 824,646 807,468
Series D convertible preferred
non-voting stock of $0.01 par value 21,721 15,024 21,721 15,024
Common stock of $0.001 par value 2,856,937 355,325 2,856,937 353,876
---------- ---------- ---------- ----------
4,311,475 1,727,373 4,311,475 1,725,924
========== ========== ========== ==========
The outstanding Series D convertible preferred non-voting shares were
identical in all other respects to Series D convertible preferred voting
shares.
F-14
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONT'D)
(b) PREFERENCES
The rights, preferences, and privileges of the Series A, B, C, and D
convertible preferred stock were as follows:
o DIVIDEND DISTRIBUTIONS - The holders of Series A, B, C, and D
preferred stock were entitled to non-cumulative annual dividends
of $0.138, $0.437, $0.691, and $2.072 per share, respectively, if
and when declared by the Company's board of directors. No such
dividends were declared.
o LIQUIDATION PREFERENCES - Holders of Series A, B, C, and D
preferred stock had a liquidation preference of $2.30, $7.45,
$11.55, and $34.53 per share, respectively, plus any declared and
unpaid dividends. Upon liquidation, the Company's assets remaining
after payments to the Series A, B, C, and D of preferred stock
were to be distributed among the holders of common stock, pro rata
in proportion to the number of shares of common stock held by each
stockholder. In the event of a liquidation, whereby the amount of
the distribution to the holders of Series D preferred stock would
be less than $86.33 per share, the holders of Series D preferred
stock were to be entitled to receive, prior and in preference to
any distribution to the holders of other preferred and common
stock, the original Series D issue price plus declared but unpaid
dividends.
o CONVERSION RIGHTS - Each share of preferred stock was convertible
at the option of the holder into shares of the Company's common
stock. The number of shares was to be determined by dividing the
original Series A, B, C, and D issue price by the conversion price
for each respective series of preferred stock. Initially the
conversion price for each series of preferred stock was to be the
same as their original issue price; however, the conversion price
was subject to adjustment for various anti-dilution events.
Each share of preferred stock was to be automatically converted to
common stock at the applicable conversion price upon the earlier
of an initial public offering (IPO) in which the offering price
would not be less than $115 per share and net proceeds to the
Company would be in excess of $30 million, or the date specified,
by written consent of the holders of at least two-thirds of the
then outstanding shares of preferred stock.
o VOTING RIGHTS AND BOARD REPRESENTATION - Each holder of Series A,
B, C, and D preferred stock, excluding the non-voting Series D
preferred stock, had voting rights equal to common stock on an "as
if converted" basis. Holders of Series C and D preferred stock,
together, had been granted the right to hold one position on the
board of directors of the Company. Holders of Series A preferred
stock had been granted the right to appoint one of the members of
the board of directors.
F-15
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONT'D)
(c) STOCK OPTION PLANS
The Company provides for direct grants or sales of common stock, and
common stock options to employees and non-employees through stock option
plans. In 1999, 2000 and 2003, the Company adopted the 1999 Stock Option
Plan (the 1999 Plan), the 2000 Stock Option Plan (the 2000 Plan) and the
2003 Stock Option Plan (the 2003 Plan), respectively (thereafter "Prior
Option Plans").
As of December 31, 2003, 85,385 options were available for grant under
the 2003 plan. The 1999 and 2000 option plans were closed for future
grants. In January 2004, the Company increased the number of options
available for grant under the 2003 Plan by 299,305 options and
simultaneously granted these options to the Company's CEO and two
directors.
In January 2004, the Company adopted the 2004 Stock Option Plan (the 2004
Plan), authorizing 866,000 options for future grants. As a result, no
further grants can be made under the 2003 Option Plan and the remaining
shares reserved under this plan were canceled. The exercise or purchase
price for common stock granted or sold to employees under the Plans was
equal to or greater than the fair market value per share on the date of
grant.
Under all option plans, options generally vest 25%, with respect to the
number granted, upon the first anniversary date of the option grant, and
the remainder vest in equal monthly installments over the 36 months
thereafter. Options are exercisable immediately. Shares issued upon
exercise of unvested stock options are subject to the Company's right to
repurchase at the original exercise price. The Company's right to
repurchase lapses in accordance with the vesting schedule for the stock
options.
(d) OTHER STOCK OPTIONS
During 1999, the Company issued 68,233 options to purchase common stock
to non-employees. These options were issued outside of the Company's
stock option plans as compensation for services rendered. All options
vested upon issuance, expire 10 years from the date of issuance and have
exercise prices ranging from $1.15 to $2.30 per share. The fair value of
the options granted to non-employees was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield; volatility of 75%; risk-free interest
rates of 5% to 6%; and an expected life of five years. The fair value of
the non-employee options was determined to be $127,212, and was recorded
within research and development and general and administrative expense
for the year ended December 31, 1999.
F-16
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONT'D)
(e) OPTION GRANT INFORMATION
A summary of the status of the 1999, 2000 and 2003 plans, and of the
other options, follows:
OPTIONS WEIGHTED
AVAILABLE FOR OPTIONS AVERAGE EXERCISE
GRANT OUTSTANDING PRICE
------------- ----------- ----------------
$
----------------
Balance as of December 31, 2001 192,018 336,860 9.90
Granted (6,299) 6,299 11.51
Exercised -- -- --
Expired 87,843 (92,040) 11.28
------------ -----------
Balance as of December 31, 2002 273,562 251,119 9.90
Granted (244,367) 244,367 1.84
Exercised -- (1,449) 0.69
Expired 56,190 (66,801) 10.13
------------ -----------
Balance as of December 31, 2003 85,385 427,236 4.37
============ ===========
The following table summarizes information about stock options
outstanding as of December 31, 2003:
OPTIONS OUTSTANDING
----------------------------- OPTIONS VESTED
WEIGHTED ------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
----------------------- ------------- ------------ ------------ ----------- ----------
$0.69-1.15 169,576 8.92 $0.69 103,488 $0.69
2.30-2.76 131,011 7.99 2.53 50,425 2.53
6.91 8,693 6.28 6.91 7,969 6.91
9.21-11.51 117,956 4.81 11.28 95,737 11.28
------------- -----------
427,236 7.44 4.37 257,619 5.06
============= ===========
F-17
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONT'D)
(f) STOCK-BASED COMPENSATION COSTS
In accounting for its stock based compensation arrangements for
employees, the Company utilizes the intrinsic-value method of accounting
prescribed by APB Opinion No. 25 under which Compensation cost for stock
option was measured as the excess of the estimated market price of the
Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. In accounting for its stock based compensation
arrangements for non-employees, the Company uses the Black-Scholes
option-pricing model to calculate fair value, with the following
weighted-average assumptions: no dividend yield; volatility of 75% to
100%; risk-free interest rate of 2.33 to 6.5%; and expected lives of 3 to
5 years.
(g) ADVANCES ON ACCOUNT OF SHARES AND STOCK WARRANTS
(i) During 2000, the Company issued its landlord 8,689 common stock
warrants at an exercise price of $4.60, in connection with an
operating lease for offices. The warrants, which expired in
January 2003, were immediately exercisable. The fair value of the
warrants was estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions: no dividend
yield; volatility of 95%; risk-free interest rate of 6.5%; and an
expected life of five years. The fair value of the warrants was
determined to be $24,218 which was recorded as deferred expense
and was amortized over the lease term ending December 31, 2002.
(ii) In connection with obtaining a line of credit from a bank in 2002,
the Company issued warrants to the bank to purchase 2,173 shares
of Series D preferred stock for $34.53 per share. The warrants are
exercisable immediately and expire in April 2009. The fair value
of these warrants was determined to be $63,401 and estimated using
the Black-Scholes option-pricing model with the following
assumptions: no dividend yield; volatility of 100%; risk free
interest rate of 5.2%; and an expected life of five years. The
fair value was recognized as interest expense in 2002. In January
2004, these warrants converted to common stock warrants.
(iii) During 2003, four investors, in aggregate, advanced the Company
$200,000 on account of shares and warrants to purchase shares of
the Company. The advances would convert to securities of the
Company of the same class and type that were to be issued to
investors in future equity financings, plus warrants equal to 50%
of the amount advanced. The warrants exercise price was to equal
the purchase price per share that the Investors in future equity
financings would pay for such shares.
In January and February 2004, the said investors agreed to convert
such advances into 8% Convertible Promissory Notes and warrants,
as described further in Note 12.
In accordance with SFAS No. 150, advances on account of shares and
stock warrants was classified in the liabilities section of the
accompanying balance sheet.
F-18
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 9 - INCOME TAXES
The income tax expense for the years ended December 31, 2003 and 2002,
differed from the amounts computed by applying the U.S. federal income
tax rate of 34% to pretax income as a result of the following:
CUMULATIVE FROM
INCEPTION
YEARS ENDED DECEMBER 31 THROUGH DECEMBER 31,
2003 2002 2003
------------ ------------- ----------------
$ $ $
------------ ------------- ----------------
Computed "expected" tax benefit 943,225 2,566,902 11,550,142
Effect of State taxes 260,922 681,123 3,164,617
Effect of foreign income 24,739 58,212 813,922
Non-deductible expenses (55) (6,456) (13,794)
Change in valuation allowance (1,263,422) (3,299,781) (15,332,038)
------------ ------------ -------------
(34,591) -- (34,591)
============ ============ ============
The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are set out below:
YEARS ENDED DECEMBER 31
--------------------------------
2003 2002
------------- --------------
$ $
------------- --------------
Deferred tax asset:
Miscellaneous accrued expenses 29,017 8,804
Property and equipment 419,958 377,118
Deferred compensation 303,803 303,803
Shutdown costs -- 113,846
Capitalized start-up costs 3,535,073 4,651,413
Foreign deferred tax assets 20,501 --
Net operating loss 11,044,187 8,613,632
------------- --------------
Total gross deferred tax asset 15,352,539 14,068,616
Less: Valuation allowance (15,332,038) (14,068,616)
------------- --------------
Net deferred tax asset 20,501 --
Total gross deferred tax liability (55,092) --
------------- --------------
Net deferred tax liability (34,591) --
============= ==============
F-19
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 9 - INCOME TAXES (CONT'D)
Because of the Company's lack of earnings history, as of December 31,
2003 and 2002, the U.S. deferred tax assets have been fully offset by a
valuation allowance. The net change in the total valuation allowance for
the years ended December 31, 2003 and 2002 was an increase of $1,263,422
and $3,299,781, respectively.
As of December 31, 2003 and 2002, the Company has net operating loss
carryforwards for federal and state income tax purposes of approximately
$26 million and $20.1 million, respectively. The federal net operating
losses will expire if not utilized on various dates from 2019 through
2023. The California net operating losses will expire if not utilized on
various dates from 2009 through 2013. The Israeli Subsidiary has capital
loss carryforwards of approximately $604,000 that can be applied to
future capital gains for an unlimited period of time under current tax
rules.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
ownership change of a corporation. Accordingly, the Company's ability to
utilize net operating losses and credit carryforwards may be limited as
the result of such an ownership change, as defined in the Internal
Revenue Code, Section 382. The issuance of the promissory notes and the
offering contemplated, as described in Note 12, are likely to result in a
change in control as defined under the Internal Revenue Code, Section
382.
During the year 2000, the Subsidiary was granted "Approved Enterprise"
status under the Israeli Law for the Encouragement of Capital Investments
- 1959 under the "alternative benefits" path. As an "Approved Enterprise"
the Israeli Subsidiary is entitled to receive future tax benefits, which
are limited to a period of ten years from the first year that taxable
income is generated from the approved assets. In addition, the benefits
must be utilized within: the earlier of 12 years of the year operation
(as defined) of the investment program begins or 14 years of the year
that approval is granted.
Under its "Approved Enterprise" status, income arising from the
subsidiary's approved activities is subject to zero tax under the
"alternative benefit" path for a period of ten years. In the event of
distribution by the subsidiary of a cash dividend out of retained
earnings which were tax exempt due to the "Approved Enterprise" status,
the subsidiary would have to pay a 10% corporate tax on the amount
distributed, and the recipient would have to pay a 15% tax (to be
withheld at source) on the amounts of such distribution received. Should
the subsidiary derive income from sources other than the Approved
Enterprise during the relevant period of benefits, such income would be
taxable at the tax rate in effect at that time (currently 36%). Deferred
tax assets and liabilities in the financial statements result from the
tax amounts that would result if the Subsidiary distributed its retained
earnings to its Parent.
During 2003, the Subsidiary filed a final status report on its investment
program. Final approval of the program was received from the Investment
Center in March 2004. The approval has yet to be upheld by
F-20
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
the Israeli income tax authorities. In addition, subsequent to balance
sheet date, the Subsidiary applied for a second (expansion) investment
program based on terms similar to the first investment program. Formal
approval of the application in respect of the second program has not yet
been received.
F-21
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 9 - INCOME TAXES (CONT'D)
Under its Approved Enterprise status, the Subsidiary must maintain
certain conditions and submit periodic reports. Failure to comply with
the conditions of the Approved Enterprise status could cause the
Subsidiary to lose previously accumulated tax benefits. The Subsidiary
began claiming benefits in the 2000 tax year. Cumulative benefits
received under the Subsidiary's approved enterprise status amount to
approximately $560,000 at December 31, 2003. As of balance sheet date the
Company believes that it is in compliance with the stipulated conditions.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(a) Future minimum lease payments under non-cancelable operating
leases as of December 31, 2003 are as follows:
Rental expense for operating leases for the years ended December
31, 2003 and 2002 was $212,680 and $887,459, respectively.
(b) As security for future rental commitments the Subsidiary provided
a bank guarantee in the amount of approximately $113,000.
(c) All of the Subsidiary's obligations to its bank, including the
bank guarantee that such bank made to the Subsidiary's landlord,
are secured by a lien on all of the Subsidiary's deposits at such
bank. As of December 31, 2003, deposits at such bank amounted to
$158,396 , including a long-term deposit of $101,210 as mentioned
in Note 5.
(d) In the ordinary course of business, the Company enters into
various arrangements with vendors and other business partners,
principally for content, web-hosting and marketing arrangements.
There are no material commitments for these arrangements extending
beyond 2004.
F-22
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONT'D)
(e) In December 2002, the Company implemented a reorganization (the
"December 2002 Reorganization ") which substantially reduced the
Company's expenditures. The December 2002 Reorganization included
staff reductions of fifteen persons, or approximately 52% of the
Company's work force, including senior management, professional
services, sales and marketing, research and development and
administrative staff. The December 2002 Reorganization also
included the shutdown of the Company's California office and
resulted in a loss on the disposal of fixed assets. In total, the
Company incurred a loss of approximately $1,048,000 in connection
with the December 2002 Reorganization, of which $780,000 related
to the disposal of fixed assets. The accompanying balance sheet,
as of December 31, 2002, includes accrued expenses of
approximately $265,000 in connection with the December 2002
Reorganization, of which $218,000 was paid during 2003 and $47,000
remains outstanding as of December 31, 2003 and relates to an
identified liability.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at December 31, 2003 and 2002
consisted of cash and cash equivalents, accounts receivables,
prepaid expenses, deposits in respect of employee severance
obligations, security deposits in respect of the Subsidiary's
office lease and the Company's merchant bank, accounts payable,
accrued expenses, accrued compensation and related liabilities,
liability in respect of employee severance obligations and
deferred revenues.
The carrying amounts of all the financial instruments noted above,
except for liability in respect of employee severance obligations,
approximate fair value due to the relatively short maturity of
these instruments. The carrying amount of the liability in respect
of employee severance obligations reflects the approximate fair
value inclusive of future salary adjustments.
F-23
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 12 - SUBSEQUENT EVENTS
(a) On January 30, 2004, and February 17, 2004, the Company issued, in
aggregate, $5 million of 8% Convertible Promissory Notes (the
"Notes"). The aggregate principal amount of the Notes includes
$200,000 previously advanced to the Company by investors that was
converted into Notes in conjunction with the $5 million funding.
The Notes are due on the earlier of one year after their issuance
or the consummation of an initial public offering (an "IPO"). Upon
consummation of an IPO, a minimum of 50% (and up to 100% at the
election of each note holder) of the principal amount of the Notes
will be converted into shares of Common Stock at a conversion
price equal to 75% of the offering price of the IPO (the "Unit
Offering Price"). The Notes are secured by substantially all of
the assets of the Company, other than the stock of the Subsidiary,
which will be pledged upon receipt of all third party consents
required for such pledge. In connection with the issuance of the
Notes, the Company also issued warrants to acquire an aggregate
1,700,013 shares of Common Stock at an exercise price per share
equal to 120% multiplied by the greater of (1) $6.00, and (2) the
Unit Offering Price (the "Warrants"). Each note holder received
one warrant for every $3 funded through the Notes, with the
exception of the note holders who funded the Company via receipts
on account of shares and warrants, in 2003, who received one
warrant for every $2 funded. The warrants will become exercisable
upon the earlier to occur of (a) the termination of an IPO or (b)
December 31, 2004. Further, the Company also issued a warrant to
the lead purchaser in the financing, to purchase 252,778 shares of
common stock at an exercise price of $4.50 per share.
(b) The terms of the Notes are also subject to various restrictions,
including limitations on the Company's ability to merge with
another business entity, using proceeds solely for working capital
purposes, selling a substantial portion of assets not in the
ordinary course of business, incurring indebtedness greater than
$100,000, paying dividends and entering into transactions that
result in a change of control. Further, the Notes also provide
that upon an event of default, including the Company's bankruptcy,
or the Company's failure to make any cash payment required under
any of the documents executed in connection with the issuance of
the Notes, termination of the Company's planned initial public
offering or violation of any of the restrictions noted above, the
Note holders can require the Company to repurchase the Notes at
115% of the outstanding principal amount, plus accrued interest.
In the event an IPO is not consummated within 180 days of the
Notes issue dates ("IPO Due Date"), the Company is obligated to
file with the Securities & Exchange Commission a "shelf"
registration which will cover the resale of all the shares of
common stock issuable upon conversion of the Promissory Notes, and
upon exercise of the Warrants for an offering to be made on a
continuous basis pursuant to Rule 415.
In addition, the Company may be liable to pay the note holders
liquidated damages in the amount of 1% or 1.5% of the aggregate
purchase price of the Notes for each month subsequent to the
uncured occurrence of certain events, as defined in the Securities
Purchase Agreement, including if the IPO has not occurred on or
prior to the IPO Due Date or a shelf registration is not filed on
or prior to the fifth day following the IPO Due Date or is not
declared effective.
F-24
GuruNet Corporation (Formerly Atomica Corporation)
and Subsidiary
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003
NOTE 12 - SUBSEQUENT EVENTS (CONT'D)
(c) In connection with and as a condition to the issuance of the
Notes, all of the Company's issued and outstanding preferred
shares were converted by the holders thereof into 1,372,048 shares
of common stock.
(d) The Company has entered into a letter of intent with an
underwriter to pursue an IPO of 1,300,000 units, consisting of a
share of the Company's common stock and a warrant to purchase a
share of common stock, at a proposed Unit Offering Price of $6.00.
(e) The costs incurred in 2003 in connection with obtaining the
promissory notes and warrants were recorded as deferred charges on
the accompanying balance sheet. The charges will begin to be
amortized in 2004 over the life of the notes.
(f) In January 2004, the Company adopted the 2004 Stock Option Plan
(the 2004 Plan). In conjunction therewith, all shares reserved
under the Prior Option Plans were canceled.
(g) On January 30, 2004, the Company changed its name from Atomica
Corporation back to GuruNet Corporation.
(h) Beginning January 2004 the financial statements of the Subsidiary
will be measured using the U.S. dollar as its functional currency,
due to significant changes in economic facts and circumstances.
(i) During the first quarter of 2004 the Company granted in aggregate,
321,564 stock options to directors, officers, employees and
non-employees.
F-25
No dealer, salesman or any other person has been authorized in connection
with this offering to give any information or to make any representations other
than those contained In this Prospectus. This prospectus does not constitute an
offer or a solicitation in any jurisdiction to any person to whom it is unlawful
to make such an offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the circumstances of the Company or
the facts herein set forth since the date hereof.
Until , 2004, 25 days after the date of this offering, all
dealers that effect transactions in our shares, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
PAGE
Where You Can Find More Information...............4
Prospectus Summary................................5
The Offering .....................................7
Selected Summary Financial Data...................9
Risk Factors.....................................11
Use of Proceeds..................................22
Dilution.........................................23
Capitalization...................................25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................27
Business.........................................37
Management.......................................50
Principal Stockholders...........................58
Certain Relationships and Related Transactions...60
Description of Securities........................61
Underwriting.....................................66
Conditions in Israel.............................69
Legal Matters....................................71
Experts..........................................71
Index to Financial Statements....................72
=======================================================
[LOGO OMITTED]
1,300,000 Shares of Common Stock
1,300,000 Redeemable Common Stock Warrants
PROSPECTUS
___________, 2004
EarlyBirdCapital, Inc.
ALTERNATE
SUBJECT TO COMPLETION DATED MAY 12, 2004
PROSPECTUS
GURUNET CORPORATION
3,102,772 SHARES OF COMMON STOCK
This prospectus relates to 3,102,772 shares of the common stock, par
value $0.001 per share of GuruNet Corporation (the "Company") for the sale from
time to time by the certain selling stockholders of our securities, or by their
pledgees, donees, transferees or other successors in interests. Of the shares,
1,147,809 will be issuable to certain of the selling securityholders upon
conversion of 8% Convertible Promissory Notes purchased in our bridge financing
completed in January and February 2004. Of the remaining shares offered hereby,
1,954,963 are issuable upon the exercise of outstanding warrants issued in the
bridge financing. See "Description of Securities - Other Outstanding
Securities."
The distribution of securities offered hereby may be effected in one or
more transactions that may take place on the Nasdaq SmallCap Market, including
ordinary brokers' transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such securities as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the selling
securityholders.
The selling securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered hereby, and any profits realized or commissions received may
be deemed underwriting compensation. We have agreed to indemnify the selling
securityholders against certain liabilities, including liabilities under the
Securities Act.
On May 12, 2004, a registration statement under the Securities Act
with respect to a public offering by us underwritten by EarlyBirdCapital, Inc.
(the "Underwriter") of 1,300,000 shares of common stock and redeemable common
stock warrants, was declared effective by the Securities and Exchange Commission
(the "Commission"). We will receive approximately $6,076,000 net proceeds from
the offering (assuming no exercise of the Underwriter's over-allotment option)
after payment of underwriting discounts and commissions and estimated expenses
of the offering.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ,_____________ 2004
ALTERNATE
SELLING SECURITYHOLDERS
An aggregate of up to 3,102,772 shares may be offered by certain
security holders who received bridge notes and bridge warrants in connection
with the bridge financing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources"
and "Description of Securities- Other Outstanding Securities."
The following table sets forth certain information with respect to each
selling securityholder for whom we are registering shares for resale to the
public. No material relationships exist between any of the selling
securityholders and us nor have any such material relationships existed within
the past three years.
Number of Shares
Beneficially Owned
and Maximum
Selling Securityholder Number to be Sold
---------------------- -----------------
Miriam Koryn 36,481
Robert H. Cohen 28,148
Arthur Steinberg 28,148
Craig Effron 28,148
Seed Management Associates Ltd. 18,241
Israel Seed III Annex Fund, L.P. 126,667
Stanoff Corporation 112,593
Martin Rosenman 56,297
Andrew Rosen 112,593
Eli Rothman 56,297
Blum & Fink, Inc. 112,593
David Thalheim 168,889
William Castor 16,889
WEC Partners LLC 56,297
Brian Daly 14,075
Omicron Master Trust 140,741
Bruce Bernstein 14,075
Vertical Ventures LLC 422,222
Steven Landman 14,075
Woodland Partners 56,297
Woodland Venture Fund 56,297
Seneca Ventures 56,297
Marc Rachesky 112,593
Ajax Partners 56,297
Scot Jason Cohen 25,333
Smithfield Fiduciary LLC 281,482
Lloyd Goldman 112,593
Marc Friedman 56,297
Morton H. Meyerson 197,856
Chris Conway 28,111
Ted Struhl Family Partnership 56,223
Salvador Abady 28,111
Petrocelli Industries, Inc. 28,111
Steven and Adam Sprung 28,111
Eric Stein 24,457
Morton H. Meyerson 6,998
Dr. Joseph Vardi 72,889
---------
TOTAL.......................................... 3,102,772
=========
The sale of the selling securityholders bridge notes and bridge
warrants may be effected from time to time in transactions (which may include
block transactions by or for the account of the selling securityholders) in the
Nasdaq SmallCap Market or in negotiated transactions, a combination of such
methods of sale or otherwise. Sales may be made at fixed prices which may be
changed, at market prices prevailing at the time of sale, or at negotiated
prices.
Selling securityholders may effect such transactions by selling their
bridge notes and bridge warrants directly to purchasers, through broker-dealers
acting as agents for the selling securityholders or to broker-dealers who may
purchase bridge notes and bridge warrants as principals and thereafter sell the
bridge notes and bridge warrants from time to time in the Nasdaq SmallCap Market
in negotiated transactions or otherwise. Such broker-dealers, if any, may
receive compensation in the form of discounts, concessions or commissions from
the selling securityholders and/or the purchasers for whom such broker-dealers
may act as agents or to whom they may sell as principals or otherwise (which
compensation as to a particular broker-dealer may exceed customary commissions).
The selling securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them any profit on the resale of the warrants might be deemed to be underwriting
discounts and commissions under the Securities Act.
CONCURRENT OFFERING
On the date of this prospectus, a Registration Statement was declared
effective under the Securities Act with respect to an underwritten offering of
1,300,000 shares of common stock and redeemable common stock warrants. The
warrants may not be sold for a period of 180 days from the date of this
prospectus without the prior consent of EarlyBirdCapital, Inc. Sales of the
bridge notes and bridge warrants or the common stock underlying the bridge notes
and bridge warrants by the selling securityholders after such dates, or the
potential of such sales, could have an adverse effect on the market price of the
common stock and warrants and/or on the common stock purchasable upon the
exercise of the warrants.
ALTERNATE
======================================================
============================================================
No dealer, salesman or any other person has
been authorized in connection with this offering to
give any information or to make any representations
other than those contained in this prospectus. This
prospectus does not constitute an offer or a [GURUNET LOGO]
solicitation in any jurisdiction to any person to
whom it is unlawful to make such an offer or
solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there
has been no change in the circumstances of the
Company or the facts herein set forth since the date
hereof.
3,102,772 Shares of Common Stock
---------------
TABLE OF CONTENTS
PAGE
Where You Can Find More Information...............4
Prospectus Summary................................5
The Offering .....................................7
Selected Summary Financial Data...................9
Risk Factors.....................................11
Use of Proceeds..................................22
Dilution.........................................23
Capitalization...................................25 PROSPECTUS
----------
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................27
Business.........................................37
Management.......................................50
Principal Stockholders...........................58
Certain Relationships and Related Transactions...60
Description of Securities........................61
Underwriting.....................................66
Conditions in Israel.............................69
Legal Matters....................................71
Experts..........................................71
Index to Financial Statements....................72 ___________, 2004
Until ____, 2004 (25 days after the effective EarlyBirdCapital, Inc.
date of the Registration Statement), all dealers
effecting transactions in the registered securities,
whether or not participating in distributions, may be
required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their
unsold allotments or subscriptions.
======================================================= =============================================================
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Our certificate of incorporation provides that all directors, officers,
employees and agents of the registrant shall be entitled to be indemnified by us
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
Section 145. Indemnification of officers, directors, employees and
agents; insurance.
(a) A corporation shall have power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
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(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
present or former director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct set
forth in subsections (a) and (b) of this section. Such determination shall be
made, with respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the corporation would have the
power to indemnify such person against such liability under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director,
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officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this section
with respect to the resulting or surviving corporation as such person would have
with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation that
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive
jurisdiction to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement, vote
of stockholders or disinterested directors, or otherwise. The Court of Chancery
may summarily determine a corporation's obligation to advance expenses
(including attorneys' fees)."
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment of expenses incurred or paid by a director, officer or controlling
person in a successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to the court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Article Twelve of our certificate of incorporation provides:
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and other agents of the Corporation (and any
other persons to which Delaware law permits the Corporation to provide
indemnification), through Bylaw provisions, agreements with any such director,
officer, employee or other agent or other person, vote of stockholders or
disinterested directors, or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the DGCL, subject only to
limits created by applicable Delaware law (statutory or
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nonstatutory), with respect to actions for breach of duty to a corporation, its
stockholders and others.
Pursuant to the Underwriting Agreement to be filed as Exhibit 1.1 to
this Registration Statement, we have agreed to indemnify the Underwriter and the
Underwriter has agreed to indemnify us against certain civil liabilities that
may be incurred in connection with this offering, including certain liabilities
under the Securities Act.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by us in connection with the offering
described in this registration statement (other than the underwriting discount
and commissions and the Underwriters' non-accountable expense allowance) will be
as follows:
SEC Registration Fee $ 5,448.14
NASD filing fee 1,397.00
Nasdaq SmallCap Market filing and listing fee 5,000.00
Printing and engraving expenses 100,000.00
Accounting fees and expenses 120,000.00
Legal fees and expenses (including blue sky services and expenses) 410,000.00
Miscellaneous 68,209.22
-----------
Total $710,000.00
Item 26. Recent Sales of Unregistered Securities.
BRIDGE FINANCING
In January and February 2004, we completed our bridge financing,
consisting of $5 million aggregate principal amount of bridge notes bearing
interest at an annual rate of 8%. The bridge notes are due on the earlier to
occur of January or February 2005 and the consummation of this offering. Up to
$2.5 million principal amount of the bridge notes, plus accrued interest through
June 30, 2004 will be repaid from the proceeds of the offering and a minimum of
$2.5 million (and up to the entire $5 million at the election of each holder of
the bridge notes) of the principal amount of the bridge notes, plus accrued
interest through June 30, 2004 will be converted into shares of common stock at
a conversion price of $4.50.
BRIDGE WARRANTS
In connection with the issuance of the bridge notes, we also issued
bridge warrants to purchase an aggregate of 1,700,013 shares of common stock
exercisable at $7.20 per share. On the completion of the offering, the bridge
warrants automatically will convert into an equal number of warrants identical
in all respects to the warrants included in the offering and will be exercisable
beginning one year from the date of this prospectus. We also issued a warrant to
the lead purchaser in the bridge financing to purchase 252,778 shares of common
stock at an exercise price of $4.50.
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COMERICA WARRANT
A warrant was issued to Comerica Bank- California ("Comerica") in
connection with a Loan and Security Agreement dated as of April 1, 2002. The
warrant entitles Comerica to purchase 2,172 shares of our common stock at a
price of $34.53 per share. The Comerica Warrant will expire April 1, 2009, at
which time, if the Comerica has not been exercised, it shall be deemed to have
been automatically exercised on the expiration date by "cashless" conversion.
Item 27. The following exhibits are filed as part of this Registration
Statement:
Exhibit No. Description
------------ ----------------------------------------------------------------
1.1 Form of Underwriting Agreement.*
1.2 Form of Selected Dealers Agreement.*
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated By-laws.
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Warrant Certificate.*
4.3 Form of Purchase Option to be granted to Underwriters.*
4.4 Form of Warrant Agreement between American Stock Transfer &
Trust Company and the Registrant.*
5.1 Form of Opinion of Greenberg Traurig, LLP.*
10.1 2003 Stock Option Plan
10.2 2004 Stock Option Plan
10.3 Securities Purchase Agreement dated January 30, 2004 and
February 17, 2004, respectively.
10.4 Form of 8% Senior Secured Convertible Note of the Company.
10.5 Form of Warrants issued in connection with the Bridge
Financing.
10.6 Robert S. Rosenschein Employment Agreement
10.7 Steven Steinberg Employment Agreement.
10.8 Jeff Schneiderman Employment Agreement.
14.1 Code of Ethics and Business Conduct.
21.1 List of Subsidiaries.
23.1 Consent of KPMG Somekh Chaikin.
23.2 Consent of Greenberg Traurig, LLP (included in Exhibit 5.1).*
99 Audit Committee Charter.
--------------------
* To be filed by amendment.
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
II-5
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
iii. To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Jerusalem, Israel, on
the 12 day of May, 2004.
By: /s/ ROBERT S. ROSENSCHEIN
--------------------------------------
Robert S. Rosenschein
Chief Executive Officer, President and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert S. Rosenschein his true and lawful
attorney-in-fact, with full power of substitution and resubstitution for him and
in his name, place and stead, in any and all capacities to sign any and all
amendments including post-effective amendments to this registration statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute, each
acting alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Robert S. Rosenschein Chief Executive Officer, President May 12, 2004
-------------------------- and Chairman of the Board
Robert S. Rosenschein (principal executive officer)
/s/ Steven Steinberg Chief Financial Officer May 12, 2004
-------------------------- (principal financial officer)
Steven Steinberg
/s/ Mark A. Tebbe Director May 12, 2004
--------------------------
Mark A. Tebbe
/s/ Edward G. Sim Director May 12, 2004
--------------------------
Edward G. Sim
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EXHIBITS INDEX
Exhibit No. Description
------------ ----------------------------------------------------------------
1.1 Form of Underwriting Agreement.*
1.2 Form of Selected Dealers Agreement.*
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated By-laws.
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Warrant Certificate.*
4.3 Form of Purchase Option to be granted to Underwriters.*
4.4 Form of Warrant Agreement between American Stock Transfer &
Trust Company and the Registrant.*
5.1 Form of Opinion of Greenberg Traurig, LLP.*
10.1 2003 Stock Option Plan
10.2 2004 Stock Option Plan
10.3 Securities Purchase Agreement dated January 30, 2004 and
February 17, 2004, respectively.
10.4 Form of 8% Senior Secured Convertible Note of the Company.
10.5 Form of Warrants issued in connection with the Bridge
Financing.
10.6 Robert S. Rosenschein Employment Agreement.
10.7 Steven Steinberg Employment Agreement.
10.8 Jeff Schneiderman Employment Agreement.
14.1 Code of Ethics and Business Conduct.
21.1 List of Subsidiaries.
23.1 Consent of KPMG Somekh Chaikin.
23.2 Consent of Greenberg Traurig, LLP (included in Exhibit 5.1).*
99 Audit Committee Charter
--------------------
* To be filed by amendment.
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Exhibit 3.1
STATE OF DELAWARE,
SECRETARY OF STATE
DIVISION OF CORPORATIONS
DELIVERED 03:30 PM 01/30/2004
FILED 03:27 PH 01/30/2004
SRV 040067084 -- 3015056 FILE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ATOMICA CORPORATION
A DELAWARE CORPORATION
The following Amended and Restated Certificate of Incorporation of
GuruNet Corporation (the "Corporation") (1) amends and restates the provisions
of the Certificate of Incorporation of the Corporation originally filed with the
Secretary of State of the State of Delaware on March 10, 1999 and amended on
April 26, 1999, August 27, 1999, October 26, 1999, February 28, 2000, November
6, 2000, March 28, 2002, and October 27, 2003 and (ii) supersedes the original
Certificate of Incorporation and all prior amendments and restatements thereto
in their entirety pursuant to Sections 242 and 245 of the General Corporation
Law of the State of Delaware (the "DGCL").
ARTICLE I
The name of this corporation is GuruNet Corporation.
ARTICLE II
The address of its registered office in the Stale of Delaware is
Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New
Castle, Delaware 19081. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the DGCL.
ARTICLE IV
A. CLASSES OF STOCK. This Corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Corporation is authorized to issue
is thirty-one million (31,000,000) shares. Thirty million shares shall be Common
Stock, par value $0.001 per share, and one million (1,000,000) shares shall be
Preferred Stock, par value $0.01 per share
B. PREFERRED STOCK.
The Preferred Stock may be issued from time to time in one or more
series. The board of directors of the Corporation (the "Board of Directors") is
hereby authorized to provide
for the issuance of shares of Preferred Stock in series and, by filing a
certificate pursuant to the DGCL (a "Preferred Stock Designation"), to establish
from time to time the number of shares to be included in each such series, and
to fix the designation, powers, privileges, preferences and rights of the shares
of each such series and the qualifications, limitations and restrictions
thereof. The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
a. the designation of the series, which may be by
distinguishing number, letter or title;
b. the number of shares of the series, which number the Board
of Directors may thereafter (except where otherwise provided in the Preferred
Stock Designation) increase or decrease (but not below the number of shares
thereof then outstanding);
c. the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends shall be paid and the date or dates or the method for
determining the date or dates upon which such dividends shall be payable;
d. whether dividends, if any, shall be cumulative or
noncumulative, and, in the case of shares of any series having cumulative
dividend rights, the date or dates or method of determining the date or dates
from which dividends on the shares of such series shall be cumulative;
e. the price or prices (or method of determining such price or
prices) at which, the form of payment of such price or prices (which may be
cash, property or rights, including securities of the same or another
corporation or other entity) for which, the period or periods within which and
the terms and conditions upon which the shares of such series may be redeemed,
in whole or in part, at the option of the Corporation or at the option of the
holder or holders thereof or upon the happening of a specified event or events,
if any;
f. the obligation, if any, of the Corporation to purchase or
redeem shares of such series pursuant to a sinking fund or otherwise and the
price or prices at which, the form of payment of such price or prices (which may
be cash, property or rights, including securities of the same or another
corporation or other entity) for which, the period or periods within which and
the terms and conditions upon which the shares of such series shall be redeemed
or purchased., in whole or in part, pursuant to such obligation;
g. the amount payable out of the assets of the Corporation to
the holders of shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation;
h. provisions, if any, for the conversion or exchange of the
shares of such series, at any time or times at the option of the holder or
holders thereof or at the option of the Corporation or upon the happening of a
specified event or events, into shares of any other class or classes or any
other series of the same or any other class or classes of stock, or any other
security, of the Corporation, or any other corporation or other entity, and the
price or prices or
2
rate or rates of conversion or exchange and any adjustments applicable thereto,
and all other terms and conditions upon which such conversion or exchange may be
made;
i. restrictions on the issuance of shares of the saint series
or of any other class or series, if any; and
j. the voting rights, if any, of the holders of shares of the
series.
C. COMMON STOCK.
1. The Common Stock shall be subject to the express terms of the
Preferred Stock, if any, and any series thereof. The holders of shares of Common
Stock shall be entitled to one vote for each such share upon all proposals
presented to the stockholders on which the holders of Common Stock are entitled
to vote. Except as otherwise provided by law or by the resolution or resolutions
adopted by the Board of Directors designating the rights, powers and preferences
of any series of Preferred Stock, the Common Stock shall have the exclusive
right to vote for the election of directors and for all other purposes, and
holders of Preferred Stock shall not be entitled to receive notice of any
meeting of stockholders at which they are not entitled to vote. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the outstanding Common Stock, without a vote of the
holders of the Preferred Stock, or of any series thereof, unless a vote of any
such holders is required pursuant to any Preferred Stock Designation.
2. The Corporation shall be entitled to treat the person in whose
name any share of its stock is registered as the owner thereof for all purposes
and shall not be bound to recognize any equitable or other claim to, or interest
in, such sham on the part of any other person, whether or not the Corporation
shall have notice thereof, except as expressly provided by applicable law.
As of the date of the filing of this Amended and Restated
Certificate of Incorporation (the "Effective Date"), each 23.02 shares of common
stock, par value $0.00! per share, issued and outstanding immediately prior to
the Effective Date (the "Old Common Stock"), will be automatically reclassified
as and combined into one share of common stock, par value $0.00! per share. Any
stock certificate, immediately prior to the Effective Date, representing shares
of the Old Common. Stock (or preferred stock that has been previously converted
into Old Common Stock) will, from and after the Effective Date, automatically
and without the necessity of surrendering the same for exchange, represent the
number of whole shares of common stock, par value $0.00l per share, as equals
the quotient obtained by dividing the number of shares of Old Common Stock
represented by such certificate immediately prior to the Effective Date by
23.02, rounded to the nearest whole share.
ARTICLE V
The Corporation is to have perpetual existence.
3
ARTICLE VI
Except as otherwise provided in this Certificate of Incorporation, the
Board of Directors may make, repeal, alter, amend or rescind any or all of the
Bylaws of the Corporation.
ARTICLE VII
The number of directors which constitute the whole Board of Directors
shall be not less than five and not more than nine, with the exact number to be
fixed from time to time by resolution of the Board of Directors.
Subject to the rights, if any, of the holders of any series of
Preferred Stock to elect directors pursuant to the provisions of a Preferred
Stock Designation (which directors shall not be classified pursuant to this
sentence (unless so provided in the Preferred Stock Designation)), the directors
of the Corporation shall be classified with respect to the time for which they
severally hold office into three classes, as nearly equal in number as possible:
one class ("Class F'), the initial term of which shall expire at the first
annual meeting of stockholders following the time of effectiveness of this
Amended and Restated Certificate of Incorporation (the "Effective Time"); a
second class ("Class II"), the initial term of which shall expire at the second
annual meeting of stockholders following the Effective Time; and a third class
("Class III"), the initial term of which shall expire at the third annual
meeting of stockholders following the Effective Time, with each class to hold
office until its successors are elected and qualified. At each annual meeting of
stockholders of the Corporation, the successors of the members of the class of
directors whose term expires at that meeting shall be elected to hold office for
a term expiring at the third succeeding annual meeting of stockholders.
ARTICLE VIII
Except as may be provided in a resolution or resolutions providing for
any class or series of Preferred Stock, any action required or permitted to be
taken by the stockholders of the Corporation must be effected at a duly called
annual or special meeting of such holders and may not be effected by any written
consent in lieu of a meeting by such holders. Subject to the rights. of the
holders of any series of Preferred Stock, special meetings of stockholders of
the Corporation may be called only by the Chairman of the Board or by the
President upon direction of the Board of Directors pursuant to a resolution
adopted by a majority of the members of the Board of Directors then in office.
Elections of directors need not be by written ballot, unless otherwise provided
in the By-Laws. For purposes of all meetings of stockholders, a quorum shall
consist of a majority of the shares entitled to vote at such meeting of
stockholders, unless otherwise required by law.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
4
ARTICLE X
The Corporation may amend, alter, change or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute. All rights conferred on stockholders herein are granted
subject to this reservation.
ARTICLE XI
To the fullest extent permitted under Delaware law, as the same may be
amended from time to time, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. If the DGCL is hereafter amended to authorize,
with or without the approval of a corporation's stockholders, further reductions
in the liability of the corporation's directors for breach of fiduciary duty,
then a director of the Corporation shall not be liable for any such breach to
the fullest extent permitted by the DGCL as so amended.
Any repeal or modification of the foregoing provisions of this Article
XI, by amendment of this Article XI or by operation of law, shall not adversely
affect any right or protection of a director of the Corporation with respect to
any acts or omissions of such director occurring prior to such repeal or
modification.
ARTICLE XII
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and other agents of the Corporation (and any
other persons to which Delaware law permits the Corporation to provide
indemnification), through Bylaw provisions, agreements with any such director,
officer, employee or other agent or other person, vote of stockholders or
disinterested directors, or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the DGCL, subject only to
limits created by applicable Delaware law (statutory or nonstatutory), with
respect to actions for breach of duty to a corporation, its stockholders and
others.
Any repeal or modification of any of the foregoing provisions of this
Article XII, by amendment of this Article XII or by operation of law, shall not
adversely affect any right or protection of a director, OFFICER, employee or
other agent or other person existing at the time of, or increase the liability
of any director of the Corporation with respect to any acts or omissions of such
director, officer or agent occurring prior to such repeal or modification.
ARTICLE XIII
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between, this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of
5
Title 8 of the Delaware Code, order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
6
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed by its President as of this
30th day of January 2004.
ATOMICA CORPORATION
/s/ Robezt S. Rosenschein
---------------------------------------------
By: Robert S. Rosenschein, President
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
GURUNET CORPORATION
ARTICLE 1
STOCKHOLDERS
1.1 ANNUAL MEETINGS
An annual meeting of stockholders shall be held for the election of
directors at such date, time and place, either within or without the State of
Delaware, as may be designated by resolution of the Board of Directors from time
to time. Any other proper business may be transacted at the annual meeting.
1.2 SPECIAL MEETINGS
Subject to the rights of the holders of any series of Preferred Stock,
special meetings of stockholders of the Corporation may be called only by the
Chairman of the Board or by the President upon direction of the Board of
Directors pursuant to a resolution adopted by a majority of the members of the
Board of Directors then in office.
1.3 NOTICE OF MEETINGS
Whenever stockholders are required or permitted to take any action at a
meeting, a written notice of the meeting shall be given which shall state the
place, date and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. Unless otherwise provided
by law, the certificate of incorporation or these by-laws, the written notice of
any meeting shall be given not less than ten nor more than sixty days before the
date of the meeting to each stockholder entitled to vote at such meeting. If
mailed, such notice shall be deemed to be given when deposited in the mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.4 ADJOURNMENTS
Any meeting of stockholders, annual or special, may adjourn from time
to time to reconvene at the same or some other place, and notice need not be
given of any such adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken. At the adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
1.5 QUORUM
Except as otherwise provided by law, the certificate of incorporation
or these by-laws, at each meeting of stockholders the presence in person or by
proxy of the holders of shares of stock
having a majority of the votes which could be cast by the holders of all
outstanding shares of stock entitled to vote at the meeting shall be necessary
and sufficient to constitute a quorum. In the absence of a quorum, the
stockholders so present may, by majority vote, adjourn the meeting from time to
time in the manner provided in Section 1.4 of these by-laws until a quorum shall
attend. Shares of its own stock belonging to the corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held, directly or indirectly, by the
corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
1.6 ORGANIZATION
Meetings of stockholders shall be presided over by the Chairman of the
Board, if any, or in his absence by the Vice Chairman of the Board, if any, or
in his absence by the President, or in his absence by a Vice President, or in
the absence of the foregoing persons by a chairman designated by the Board of
Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary shall act as secretary of the meeting, but in his absence
the chairman of the meeting may appoint any person to act as secretary of the
meeting.
1.7 VOTING; PROXIES
Except as otherwise provided by the certificate of incorporation, each
stockholder entitled to vote at any meeting of stockholders shall be entitled to
one vote for each share of stock held by him which has voting power upon the
matter in question. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him by proxy,
but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the corporation. Voting at meetings of stockholders need not be by written
ballot and need not be conducted by inspectors of election unless so determined
by the holders of shares of stock having a majority of the votes which could be
cast by the holders of all outstanding shares of stock entitled to vote thereon
which are present in person or by proxy at such meeting. At all meetings of
stockholders for the election of directors a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by law, the certificate of incorporation or these by-laws, be
decided by the vote of the holders of shares of stock having a majority of the
votes which could be cast by the holders of all shares of stock entitled to vote
thereon which are present in person or represented by proxy at the meeting.
1.8 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or
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other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors and which record
date: (1) in the case of determination of stockholders entitled to vote at any
meeting of stockholders or adjournment thereof, shall, unless otherwise required
by law, not be more than sixty nor less than ten days before the date of such
meeting; (2) in the case of determination of stockholders entitled to express
consent to corporate action in writing without a meeting, shall not be more than
ten days from the date upon which the resolution fixing the record date is
adopted by the Board of Directors; and (3) in the case of any other action,
shall not be more than sixty days prior to such other action. If no record date
is fixed: (1) the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no prior action of
the Board of Directors is required by law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action; and (3) the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
1.9 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The Secretary shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present. Upon the willful neglect or refusal of the directors to produce such a
list at any meeting for the election of directors, they shall be ineligible for
election to any office at such meeting. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list of stockholders or the books of the corporation, or to vote in person
or by proxy at any meeting of stockholders.
1.10 INTRODUCTION OF BUSINESS AT A MEETING OF STOCKHOLDERS
At an annual or special meeting of stockholders, only such business
shall be conducted, and only such proposals shall be acted upon, as shall have
been properly brought before such
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meeting. To be properly brought before a meeting of stockholders, business must
be (a) specified in the notice of meeting (or any supplement thereto) given by
or at the direction of the Board of Directors, (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (c), in
the case of an annual meeting, otherwise properly brought before the meeting by
a stockholder. For business to be properly brought before an annual meeting of
stockholders by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 75 days nor more
than 90 days prior to the date of the meeting; provided, however, that if less
than 75 days' notice or prior public disclosure (inclusion in any press release
issued by the Corporation in accordance with its usual procedures, whether or
not carried by any wire service, or inclusion in any document filed with the
United States Securities and Exchange Commission, or inclusion in any mailing to
the Corporation's stockholders being deemed to constitute prior public
disclosure) of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so delivered or received not later than
the close of business on the 10th day following the earlier of (1) the day on
which such notice of the date of the meeting was mailed or (2) the day on which
such public disclosure was made. Notwithstanding the aforesaid, the Board of
Directors may by notice to stockholders given not less than twelve months prior
to the meeting date indicated by the Board of Directors the latest date for
stockholders to give notice as aforesaid to the Secretary in order that timely
notice can then be given to the stockholders in the notice of such meeting. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before a meeting of stockholders (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business and any other stockholders known by such stockholder to be supporting
such proposal, (c) the class and number of shares of the Corporation which are
beneficially owned by such stockholder on the date of such stockholder's notice
and by any other stockholders known by such stockholder to be supporting such
proposal on the date of such stockholder's notice, and (d) any material interest
of the stockholder in such proposal.
Notwithstanding anything in the By-Laws to the contrary, no business
shall be conducted at a meeting of stockholders except in accordance with the
procedures set forth in this Section 1.10. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that the business was
not properly brought before the meeting in accordance with the procedures
prescribed by the By-Laws, and if he should so determine, he shall so declare to
the meeting and any such business not properly brought before the meeting shall
not be transacted.
1.11 NO ACTION BY CONSENT OF STOCKHOLDERS
No action that is required or permitted to be taken by the stockholders
of the Corporation at any annual or special meeting of stockholders may be
effected by written consent of stockholders in lieu of a meeting of
stockholders.
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ARTICLE 2
BOARD OF DIRECTORS
2.1 NUMBER AND CLASSIFICATION
Subject to the rights of holders of preferred stock having a preference
over the common stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, if any, the number of the directors of
the Corporation shall be as set forth in the Company's Amended and Restated
Certificate of Incorporation. The directors, other than those who may be elected
by the holders of any class or series of stock having a preference over the
common stock as to dividends or upon liquidation, shall be classified, with
respect to the time for which they severally hold office, into three classes
denominated Class I, Class II and Class III, Class I directors to be originally
elected for a term expiring at the annual meeting of stockholders to be held in
2004, Class II directors to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 2005, and Class III directors to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 2006, with each class to hold office until its successor is duly
elected and qualified. At each succeeding annual meeting of stockholders,
directors elected to succeed those directors whose terms then expire shall be
elected for a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until such
person's successor shall have been duly elected and qualified.
2.2 VACANCIES. All vacancies occurring in the Board of Directors,
whether caused by death, resignation or otherwise, shall be
filled by the Board of Directors and the person so chosen
shall hold office for the unexpired term of his predecessor
and until a successor is elected and qualified.
2.3 REMOVAL OF DIRECTORS. Subject to the rights of any class or
series of stock having a preference over the common stock as
to dividends or upon liquidation to elect directors under
specified circumstances, any director may be removed from
office only for cause and only by either (i) the affirmative
vote of the holders of at least 80% of the voting power of all
shares of the Corporation entitled to vote generally in the
election of directors (the "Voting Stock") then outstanding,
voting together as a single class, or (ii) a resolution
adopted by a majority of the entire Board of Directors and
approved by the affirmative vote of the holders of at least a
majority of the Voting Stock then outstanding, voting together
as a single class.
2.4 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held at such places
within or without the State of Delaware and at such times as the Board of
Directors may from time to time determine, and if so determined notices thereof
need not be given.
2.5 SPECIAL MEETINGS
Special meetings of the Board of Directors may be held at any time or
place within or without the State of Delaware whenever called by the President,
the Chief Executive Officer or by any member of the Board of Directors. Notice
of a special meeting of the Board of Directors shall be given by the person or
persons calling the meeting at least twenty-four hours before the special
meeting.
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2.6 TELEPHONIC MEETINGS PERMITTED
Members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting thereof by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this by-law shall constitute presence in person at such meeting.
2.7 QUORUM; VOTE REQUIRED FOR ACTION
At all meetings of the Board of Directors a majority of the whole Board
of Directors, shall constitute a quorum for the transaction of business. Except
in cases in which the certificate of incorporation or these by-laws otherwise
provide, the vote of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
2.8 ORGANIZATION
Meetings of the Board of Directors shall be presided over by the
Chairman of the Board, if any, or in his absence by the Vice Chairman of the
Board, if any, or in his absence the Chief Executive Officer (if not the
President), or in his absence by the President, or in their absence by a
chairman chosen at the meeting. The Secretary shall act as secretary of the
meeting, but in his absence the chairman of the meeting may appoint any person
to act as secretary of the meeting.
ARTICLE 3
COMMITTEES
3.1 COMMITTEES
The Board of Directors may, by resolution passed by a majority of the
whole Board of Directors, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of the committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in place of any
such absent or disqualified member. Any such committee, to the extent permitted
by law and to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it.
3.2 COMMITTEE RULES
Unless the Board of Directors otherwise provides, each committee
designated by the Board of Directors may make, alter and repeal rules for the
conduct of its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board of Directors conducts its
business pursuant to Article 2 of these by-laws.
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ARTICLE 4
OFFICERS
4.1 EXECUTIVE OFFICERS; ELECTION; QUALFICATIONS; TERM OFOFFICE;
RESIGNATION; REMOVAL; VACANCIES
All officers of the corporation shall be appointed by the Board of
Directors. The Board of Directors may remove any officer with or without cause
at any time, but such removal shall be without prejudice to the contractual
rights of such officer, if any, with the corporation. Any number of offices may
be held by the same person. Any vacancy occurring in any office of the
corporation by death, resignation, removal or otherwise may be filled for the
unexpired portion of the term by the Board of Directors at any regular or
special meeting or upon written consent of the Board of Directors.
4.2 POWERS AND DUTIES OF OFFICERS
The officers of the corporation shall have such powers and duties in
the management of the corporation as may be prescribed by the Board of Directors
and, to the extent not so provided, as generally pertain to their respective
offices, subject to the control of the Board of Directors. The Board of
Directors may require any officer, agent or employee to give security for the
faithful performance of his duties.
4.3 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS
No officer shall take any action, enter into any agreement, make any
representation or, by purposeful inaction, effect any of the actions or
decisions which the Board of Directors is prohibited or restricted from enacting
pursuant to this Section 4 hereof or any other section of these Bylaws and their
further amendments or the certificate of incorporation.
ARTICLE 5
STOCK
5.1 CERTIFICATES
Every holder of stock shall be entitled to have a certificate signed by
or in the name of the corporation by the Chairman or Vice Chairman of the Board
of Directors, if any, or the Chief Executive Officer (if not the President) if
any, or the President or Vice President, and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary, of the corporation,
certifying the number of shares owned by him in the corporation. Any of or all
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue. No certificates may be issued without the
written consent of the Board of Directors.
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5.2 LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF
NEW CERTIFICATES
The corporation may issue a new certificate of stock in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
ARTICLE 6
INDEMNIFICATION
6.1 RIGHT TO INDEMNIFICATION
The corporation shall indemnify and hold harmless, to the fullest
extent permitted by applicable law as presently exists or may hereafter be
amended, any person who was or is made or is threatened to be made a party or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding") by reason of the fact that he,
or a person for whom he is the legal representative, is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or non-profit
entity, including service with respect to employee benefit plans, against all
liability and loss suffered and expenses reasonably incurred by such person. The
corporation shall be required to indemnify a person in connection with a
proceeding initiated by such person only if the proceeding was authorized by the
Board of Directors of the corporation.
6.2 PREPAYMENT OF EXPENSES
The corporation shall pay the expenses incurred in defending any
proceeding in advance of its final disposition, provided, however, that the
payment of expenses incurred by a director or officer in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the director or officer to repay all amounts advanced if it should be
ultimately determined that the director or officer is not entitled to be
indemnified under this Article or otherwise.
6.3 CLAIMS
If a claim for indemnification or payment of expenses under this
Article is not paid in full within sixty days after a written claim therefor has
been received by the corporation the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification or payment of expenses under
applicable law.
6.4 NON-EXCLUSIVITY OF RIGHTS
The rights conferred on any person by this Article 6 shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the certificate of incorporation, these by-laws,
agreement, vote of stockholders or disinterested directors or otherwise.
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6.5 OTHER INDEMNIFICATION
The corporation's obligation, if any, to indemnify any person who was
or is serving at its request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, enterprise or non-profit
entity shall be reduced by any amount such person may collect as indemnification
from such other corporation, partnership, joint venture, trust, enterprise or
non-profit enterprise.
6.6 AMENDMENT OR REPEAL
Any repeal or modification of the foregoing. provisions of this Article
6 shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
ARTICLE 7
MISCELLANEOUS
7.1 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
7.2 DESIGNATION OF AUDITORS
The corporate accountants/auditors of the corporation shall be
determined from time to time by the Board of Directors.
7.3 FINANCIAL STATEMENTS
The Corporation shall provide to the Board of Directors such financial
statements and such further information in such detail and with such frequency
as the Board of Directors shall determine.
7.4 SEAL
The corporate seal shall have the name of the corporation inscribed
thereon and shall be in such form as may be approved from time to time by the
Board of Directors.
7.5 WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS
AND COMMITTEES
Any written waiver of notice, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of any regular or special meeting
of the stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice.
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7.6 INTERESTED DIRECTORS; QUORUM
No contract or transaction between the corporation and one or more of
its directors or officers, or between the corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if: (1) the
material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (2) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (3) the contract or
transaction is fair as to the corporation as of the time it is authorized,
approved or ratified, by the Board of Directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
7.7 FORM OF RECORDS
Any records maintained by the corporation in the regular course of its
business, including its stock ledger, books of account, and minute books, may be
kept on, or be in the form of, punch cards, magnetic tape, photographs,
microphotographs, or any other information storage device, provided that the
records so kept can be converted into clearly legible form within a reasonable
time. The corporation shall so convert any records so kept upon the request of
any person entitled to inspect the same and any record shall at any time be made
available to the Board of Directors or an individual appointed by the Board of
Directors.
7.8 AMENDMENT OF BY-LAWS
These by-laws may be altered or repealed, and new by-laws made, by the
Board of Directors or stockholders.
7.9 NOTICE
All notices and other communications required or permitted hereunder
shall be in writing, shall be effective when given, and shall in any event be
deemed to be given (a) ten (10) days after deposit with the U.S. Postal Service
or other applicable postal service, if delivered by first class mail, postage
prepaid, (b) upon delivery, if delivered by hand, (c) two (2) business days
after the business day of deposit with Federal Express or similar overnight
courier, freight prepaid, or (d) one business day after the business day of
delivery by facsimile transmission with copy by first class mail, postage
prepaid, and shall be addressed, if to a director or stockholder, to the
director or stockholder's address as it appears on the records of the
Corporation, and, if to the Corporation, at the address of its principal
corporate offices (attention: Secretary) or at such other address as designated
by the addressee.
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Exhibit 10.1
ATOMICA CORPORATION
2003 STOCK PLAN
ADOPTED ON AUGUST 5, 2003
TABLE OF CONTENTS
PAGE
SECTION 1. ESTABLISHMENT AND PURPOSE ..........................................1
SECTION 2. ADMINISTRATION .....................................................1
(a) Committees of the Board of Directors ................................1
(b) Authority of the Board of Directors .................................1
SECTION 3. ELIGIBILITY ........................................................1
(a) General Rule ........................................................1
(b) Ten-Percent Stockholders ............................................1
SECTION 4. STOCK SUBJECT TO PLAN ..............................................2
(a) Basic Limitation ....................................................2
(b) Additional Shares ...................................................2
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES ............................2
(a) Stock Purchase Agreement ............................................2
(b) Duration of Offers and Nontransferability of Rights .................2
(c) Purchase Price ......................................................2
(d) Withholding Taxes ...................................................2
(e) Restrictions on Transfer of Shares and Minimum Vesting ..............2
(f) Accelerated Vesting .................................................3
SECTION 6. TERMS AND CONDITIONS OF OPTIONS ....................................3
(a) Stock Option Agreement ..............................................3
(b) Number of Shares ....................................................3
(c) Exercise Price ......................................................3
(d) Withholding Taxes ...................................................3
(e) Exercisability ......................................................4
(f) Accelerated Exercisability ..........................................4
(g) Basic Term ..........................................................4
(h) Transferability .....................................................4
(i) Termination of Service (Except by Death) ............................4
(j) Leaves of Absence ...................................................5
(k) Death of Optionee ...................................................5
(l) No Rights as a Stockholder ..........................................5
(m) Modification, Extension and Assumption of Options ...................5
(n) Restrictions On Transfer of Shares and Minimum Vesting ..............5
(o) Accelerated Vesting .................................................6
SECTION 7. PAYMENT FOR SHARES .................................................6
(a) General Rule ........................................................6
(b) Surrender of Stock ..................................................6
(c) Services Rendered ...................................................6
(d) Promissory Note .....................................................6
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(e) Exercise/Sale .......................................................7
(f) Exercise/Pledge .....................................................7
SECTION 8. ADJUSTMENT OF SHARES ...............................................7
(a) General .............................................................7
(b) Mergers and Consolidations ..........................................7
(c) Reservation of Rights ...............................................7
SECTION 9. SECURITIES LAW REQUIREMENTS ........................................8
(a) General .............................................................8
(b) Financial Reports ...................................................8
SECTION 10. NO RETENTION RIGHTS ...............................................8
SECTION 11. DURATION AND AMENDMENTS ...........................................8
(a) Term of the Plan ....................................................8
(b) Right to Amend or Terminate the Plan ................................8
(c) Effect of Amendment or Termination ..................................9
SECTION 12. SPECIAL PROVISIONS FOR ISRAELI RESIDENTS ..........................9
(a) Scope ...............................................................9
(b) Grants Under Israeli Law ............................................9
(c) Exercise ............................................................9
(d) Transfer ............................................................9
(e) Applicable Law ......................................................9
(f) Tax Consequences ....................................................9
SECTION 13. DEFINITIONS ......................................................11
ii
Exhibit 10.1
ATOMICA CORPORATION 2003 STOCK PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE.
The purpose of the Plan is to offer selected persons an opportunity
to acquire a proprietary interest in the success of the Company, or to increase
such interest, by purchasing Shares of the Company's Stock. The Plan provides
both for the direct award or sale of Shares and for the grant of Options to
purchase Shares. Options granted under the Plan may be Nonstatutory Options
(including the Options described in Section 12) or ISOs intended to qualify
under Section 422 of the Code.
Capitalized terms are defined in Section 13.
SECTION 2. ADMINISTRATION.
(a) COMMITTEES OF THE BOARD OF DIRECTORS. The Plan may be
administered by one or more Committees. Each Committee shall consist of one or
more members of the Board of Directors who have been appointed by the Board of
Directors. Each Committee shall have such authority and be responsible for such
functions as the Board of Directors has assigned to it. If no Committee has been
appointed, the entire Board of Directors shall administer the Plan. Any
reference to the Board of Directors in the Plan shall be construed as a
reference to the Committee (if any) to whom the Board of Directors has assigned
a particular function.
(b) AUTHORITY OF THE BOARD OF DIRECTORS. Subject to the provisions of
the Plan, the Board of Directors shall have full authority and discretion to
take any actions it deems necessary or advisable for the administration of the
Plan. All decisions, interpretations and other actions of the Board of Directors
shall be final and binding on all Purchasers, all Optionees and all persons
deriving their rights from a Purchaser or Optionee.
SECTION 3. ELIGIBILITY.
(a) GENERAL RULE. Only Employees, Outside Directors and Consultants
shall be eligible for the grant of Options or the direct award or sale of
Shares. Only Employees shall be eligible for the grant of ISOs.
(b) TEN-PERCENT STOCKHOLDERS. A person who owns more than 10% of the
total combined voting power of all classes of outstanding stock of the Company,
its Parent or any of its Subsidiaries shall not be eligible for designation as
an Optionee or Purchaser unless (i) the Exercise Price is at least 110% of the
Fair Market Value of a Share on the date of grant, (ii) the Purchase Price (if
any) is at least 100% of the Fair Market Value of a Share and (iii) in the case
of an ISO, such ISO by its terms is not exercisable after the expiration of five
years from the date of grant. For purposes of this Subsection (b), in
determining stock ownership, the attribution rules of Section 424(d) of the Code
shall be applied.
SECTION 4. STOCK SUBJECT TO PLAN.
(a) BASIC LIMITATION. Shares offered under the Plan may be authorized
but unissued Shares or treasury Shares. The aggregate number of Shares that may
be issued under the Plan (upon exercise of Options or other rights to acquire
Shares) shall not exceed 9,615,350 Shares,(1) subject to adjustment pursuant to
Section 8. The number of Shares that are subject to Options or other rights
outstanding at any time under the Plan shall not exceed the number of Shares
that then remain available for issuance under the Plan. The Company, during the
term of the Plan, shall at all times reserve and keep available sufficient
Shares to satisfy the requirements of the Plan.
(b) ADDITIONAL SHARES. In the event that any outstanding Option or
other right for any reason expires or is canceled or otherwise terminated, the
Shares allocable to the unexercised portion of such Option or other right shall
again be available for the purposes of the Plan. In the event that Shares issued
under the Plan are reacquired by the Company pursuant to any forfeiture
provision, right of repurchase or right of first refusal, such Shares shall
again be available for the purposes of the Plan, except that the aggregate
number of Shares which may be issued upon the exercise of ISOs shall in no event
exceed 9,615,350 Shares (subject to adjustment pursuant to Section 8).
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES.
(a) STOCK PURCHASE AGREEMENT. Each award or sale of Shares under the
Plan (other than upon exercise of an Option) shall be evidenced by a Stock
Purchase Agreement between the Purchaser and the Company. Such award or sale
shall be subject to all applicable terms and conditions of the Plan and may be
subject to any other terms and conditions which are not inconsistent with the
Plan and which the Board of Directors deems appropriate for inclusion in a Stock
Purchase Agreement. The provisions of the various Stock Purchase Agreements
entered into under the Plan need not be identical.
(b) DURATION OF OFFERS AND NONTRANSFERABILITY OF RIGHTS. Any right to
acquire Shares under the Plan (other than an Option) shall automatically expire
if not exercised by the Purchaser within 30 days after the grant of such right
was communicated to the Purchaser by the Company. Such right shall not be
transferable and shall be exercisable only by the Purchaser to whom such right
was granted.
(c) PURCHASE PRICE. The Purchase Price of Shares to be offered under
the Plan shall not be less than 85% of the Fair Market Value of such Shares, and
a higher percentage may be required by Section 3(b). Subject to the preceding
sentence, the Board of Directors shall determine the Purchase Price at its sole
discretion. The Purchase Price shall be payable in a form described in Section
7.
(d) WITHHOLDING TAXES. As a condition to the purchase of Shares, the
Purchaser shall make such arrangements as the Board of Directors may require for
the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with such purchase.
(e) RESTRICTIONS ON TRANSFER OF SHARES AND MINIMUM VESTING. Any
Shares awarded or sold under the Plan shall be subject to such special
forfeiture conditions, rights of repurchase, rights of
(1) Reflects increase from 1,615,350 to 9,615,350 Shares approved by the Board
of Directors on August 24, 2000.
2
first refusal and other transfer restrictions as the Board of Directors may
determine. Such restrictions shall be set forth in the applicable Stock Purchase
Agreement and shall apply in addition to any restrictions that may apply to
holders of Shares generally. In the case of a Purchaser who is not an officer of
the Company, an Outside Director or a Consultant, any right to repurchase the
Purchaser's Shares at the original Purchase Price (if any) upon termination of
the Purchaser's Service shall lapse at least as rapidly as 20% per year over the
five-year period commencing on the date of the award or sale of the Shares. Any
such right may be exercised only within 90 days after the termination of the
Purchaser's Service for cash or for cancellation of indebtedness incurred in
purchasing the Shares.
(f) ACCELERATED VESTING. Unless the applicable Stock Purchase
Agreement provides otherwise, any right to repurchase a Purchaser's Shares at
the original Purchase Price (if any) upon termination of the Purchaser's Service
shall lapse and all of such Shares shall become vested if (i) the Company is
subject to a Change in Control before the Purchaser's Service terminates and
(ii) the repurchase right is not assigned to the entity that employs the
Purchaser immediately after the Change in Control or to its parent or
subsidiary.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Board of Directors deems appropriate
for inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical.
(b) NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 8. The Stock Option
Agreement shall also specify whether the Option is an ISO, a Nonstatutory
Option, or a an Option described in Section 12.
(c) EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the
Fair Market Value of a Share on the date of grant, and a higher percentage may
be required by Section 3(b). The Exercise Price of a Nonstatutory Option shall
not be less than 85% of the Fair Market Value of a Share on the date of grant,
and a higher percentage may be required by Section 3(b). Subject to the
preceding two sentences, the Exercise Price under any Option shall be determined
by the Board of Directors at its sole discretion. The Exercise Price shall be
payable in a form described in Section 7.
(d) WITHHOLDING TAXES. As a condition to the exercise of an Option,
the Optionee shall make such arrangements as the Board of Directors may require
for the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with such exercise. The Optionee shall
also make such arrangements as the Board of Directors may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with the disposition of Shares acquired by
exercising an Option.
3
(e) EXERCISABILITY. Each Stock Option Agreement shall specify the
date when all or any installment of the Option is to become exercisable. In the
case of an Optionee who is not an officer of the Company, an Outside Director or
a Consultant, an Option shall become exercisable at least as rapidly as 20% per
year over the five-year period commencing on the date of grant. Subject to the
preceding sentence, the Board of Directors shall determine the exercisability
provisions of any Stock Option Agreement at its sole discretion.
(f) ACCELERATED EXERCISABILITY. Unless the applicable Stock Option
Agreement provides otherwise, all of an Optionee's Options shall become
exercisable in full if (i) the Company is subject to a Change in Control before
the Optionee's Service terminates, (ii) such Options do not remain outstanding,
(iii) such Options are not assumed by the surviving corporation or its parent
and (iv) the surviving corporation or its parent does not substitute options
with substantially the same terms for such Options.
(g) BASIC TERM. The Stock Option Agreement shall specify the term of
the Option. The term shall not exceed 10 years from the date of grant, and a
shorter term may be required by Section 3(b). Subject to the preceding sentence,
the Board of Directors at its sole discretion shall determine when an Option is
to expire.
(h) TRANSFERABILITY. An Option shall be transferable by the Optionee
only by (i) a beneficiary designation, (ii) a will or (iii) the laws of descent
and distribution, except as provided in the next sentence. If the applicable
Stock Option Agreement so provides, an NSO shall also be transferable by the
Optionee by (i) a gift to a member of the Optionee's Immediate Family or (ii) a
gift to an inter vivos or testamentary trust in which members of the Optionee' s
Immediate Family have a beneficial interest of more than 50% and which provides
that such NSO is to be transferred to the beneficiaries upon the Optionee's
death. An ISO may be exercised during the lifetime of the Optionee only by the
Optionee or by the Optionee's guardian or legal representative.
(i) TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's
Service terminates for any reason other than the Optionee' s death, then the
Optionee' s Options shall expire on the earliest of the following occasions:
(i) The expiration date determined pursuant to Subsection (g)
above;
(ii) The date three months after the termination of the
Optionee' s Service for any reason other than Disability, or such later date as
the Board of Directors may determine; or
(iii) The date six months after the termination of the
Optionee's Service by reason of Disability, or such later date as the Board of
Directors may determine.
The Optionee may exercise all or part of the Optionee' s Options at any time
before the expiration of such Options under the preceding sentence, but only to
the extent that such Options had become exercisable before the Optionee's
Service terminated (or became exercisable as a result of the termination) and
the underlying Shares had vested before the Optionee' s Service terminated (or
vested as a result of the termination). The balance of such Options shall lapse
when the Optionee's Service terminates. In the event that the Optionee dies
after the termination
4
of the Optionee's Service but before the expiration of the Optionee's Options,
all or part of such Options may be exercised (prior to expiration) by the
executors or administrators of the Optionee's estate or by any person who has
acquired such Options directly from the Optionee by beneficiary designation,
bequest or inheritance, but only to the extent that such Options had become
exercisable before the Optionee's Service terminated (or became exercisable as a
result of the termination) and the underlying Shares had vested before the
Optionee's Service terminated (or vested as a result of the termination).
(j) LEAVES OF ABSENCE. For purposes of Subsection (i) above, Service
shall be deemed to continue while the Optionee is on a bona fide leave of
absence, if such leave was approved by the Company in writing and if continued
crediting of Service for this purpose is expressly required by the terms of such
leave or by applicable law (as determined by the Company).
(k) DEATH OF OPTIONEE. If an Optionee dies while the Optionee is in
Service, then the Optionee's Options shall expire on the earlier of the
following dates:
(i) The expiration date determined pursuant to Subsection (g)
above; or
(ii) The date 12 months after the Optionee's death.
All or part of the Optionee's Options may be exercised at any time before the
expiration of such Options under the preceding sentence by the executors or
administrators of the Optionee's estate or by any person who has acquired such
Options directly from the Optionee by beneficiary designation, bequest or
inheritance, but only to the extent that such Options had become exercisable
before the Optionee's death or became exercisable as a result of the death. The
balance of such Options shall lapse when the Optionee dies.
(l) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by the Optionee' s Option until such person becomes entitled to receive
such Shares by filing a notice of exercise and paying the Exercise Price
pursuant to the terms of such Option.
(m) MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within the
limitations of the Plan, the Board of Directors may modify, extend or assume
outstanding Options or may accept the cancellation of outstanding Options
(whether granted by the Company or another issuer) in return for the grant of
new Options for the same or a different number of Shares and at the same or a
different Exercise Price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, impair the Optionee' s rights
or increase the Optionee' s obligations under such Option.
(n) RESTRICTIONS ON TRANSFER OF SHARES AND MINIMUM VESTING. Any
Shares issued upon exercise of an Option shall be subject to such special
forfeiture conditions, rights of repurchase, rights of first refusal and other
transfer restrictions as the Board of Directors may determine. Such restrictions
shall be set forth in the applicable Stock Option Agreement and shall apply in
addition to any restrictions that may apply to holders of Shares generally. In
the case of an Optionee who is not an officer of the Company, an Outside
Director or a Consultant:
5
(i) Any right to repurchase the Optionee's Shares at the
original Exercise Price upon termination of the Optionee's Service shall lapse
at least as rapidly as 20% per year over the five-year period commencing on the
date of the option grant;
(ii) Any such right may be exercised only for cash or for
cancellation of indebtedness incurred in purchasing the Shares; and
(iii) Any such right may be exercised only within 90 days after
the later of (A) the termination of the Optionee's Service or (B) the date of
the option exercise.
(o) ACCELERATED VESTING. Unless the applicable Stock Option Agreement
provides otherwise, any right to repurchase an Optionee's Shares at the original
Exercise Price upon termination of the Optionee' s Service shall lapse and all
of such Shares shall become vested if (i) the Company is subject to a Change in
Control before the Optionee's Service terminates and (ii) the repurchase right
is not assigned to the entity that employs the Optionee immediately after the
Change in Control or to its parent or subsidiary.
SECTION 7. PAYMENT FOR SHARES.
(a) GENERAL RULE. The entire Purchase Price or Exercise Price of
Shares issued under the Plan shall be payable in cash or cash equivalents at the
time when such Shares are purchased, except as otherwise provided in this
Section 7.
(b) SURRENDER OF STOCK. To the extent that a Stock Option Agreement
so provides, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, Shares that are already owned by the Optionee.
Such Shares shall be surrendered to the Company in good form for transfer and
shall be valued at their Fair Market Value on the date when the Option is
exercised. The Optionee shall not surrender, or attest to the ownership of,
Shares in payment of the Exercise Price if such action would cause the Company
to recognize compensation expense (or additional compensation expense) with
respect to the Option for financial reporting purposes.
(c) SERVICES RENDERED. At the discretion of the Board of Directors,
Shares may be awarded under the Plan in consideration of services rendered to
the Company, a Parent or a Subsidiary prior to the award.
(d) PROMISSORY NOTE. To the extent that a Stock Option Agreement or
Stock Purchase Agreement so provides, all or a portion of the Exercise Price or
Purchase Price (as the case may be) of Shares issued under the Plan may be paid
with a full-recourse promissory note. However, the par value of the Shares, if
newly issued, shall be paid in cash or cash equivalents. The Shares shall be
pledged as security for payment of the principal amount of the promissory note
and interest thereon. The interest rate payable under the terms of the
promissory note shall not be less than the minimum rate (if any) required to
avoid the imputation of additional interest under the Code. Subject to the
foregoing, the Board of Directors (at its sole discretion) shall specify the
term, interest rate, amortization requirements (if any) and other provisions of
such note.
[For Israel this may not be allowed]
6
(e) EXERCISE/SALE. To the extent that a Stock Option Agreement so
provides, and if Stock is publicly traded, payment may be made all or in part by
the delivery (on a form prescribed by the Company) of an irrevocable direction
to a securities broker approved by the Company to sell Shares and to deliver all
or part of the sales proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.
(f) EXERCISE/PLEDGE. To the extent that a Stock Option Agreement so
provides, and if Stock is publicly traded, payment may be made all or in part by
the delivery (on a form prescribed by the Company) of an irrevocable direction
to pledge Shares to a securities broker or lender approved by the Company, as
security for a loan, and to deliver all or part of the loan proceeds to the
Company in payment of all or part of the Exercise Price and any withholding
taxes.
SECTION 8. ADJUSTMENT OF SHARES.
(a) GENERAL. In the event of a subdivision of the outstanding Stock,
a declaration of a dividend payable in Shares, a declaration of an extraordinary
dividend payable in a form other than Shares in an amount that has a material
effect on the Fair Market Value of the Stock, a combination or consolidation of
the outstanding Stock into a lesser number of Shares, a recapitalization, a
spin-off, a reclassification or a similar occurrence, the Board of Directors
shall make appropriate adjustments in one or more of (i) the number of Shares
available for future grants under Section 4, (ii) the number of Shares covered
by each outstanding Option or (iii) the Exercise Price under each outstanding
Option.
(b) MERGERS AND CONSOLIDATIONS. In the event that the Company is a
party to a merger or consolidation, outstanding Options shall be subject to the
agreement of merger or consolidation. Such agreement shall provide for:
(i) The continuation of such outstanding Options by the Company
(if the Company is the surviving corporation);
(ii) The assumption of the Plan and such outstanding Options by
the surviving corporation or its parent;
(iii) The substitution by the surviving corporation or its
parent of options with substantially the same terms for such outstanding
Options;
(iv) The full exercisability of such outstanding Options and
full vesting of the Shares subject to such Options, followed by the cancellation
of such Options; or
(v) The settlement of the full value of such outstanding Options
(whether or not then exercisable) in cash or cash equivalents, followed by the
cancellation of such Options.
(c) RESERVATION OF RIGHTS. Except as provided in this Section 8, an
Optionee or Purchaser shall have no rights by reason of (i) any subdivision or
consolidation of shares of stock of any class, (ii) the payment of any dividend
or (iii) any other increase or decrease in the number of shares of stock of any
7
class. Any issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
SECTION 9. SECURITIES LAW REQUIREMENTS.
(a) GENERAL. Shares shall not be issued under the Plan unless the
issuance and delivery of such Shares comply with (or are exempt from) all
applicable requirements of law, including (without limitation) the Securities
Act of 1933, as amended, the rules and regulations promulgated thereunder, state
securities laws and regulations, and the regulations of any stock exchange or
other securities market on which the Company's securities may then be traded.
(b) FINANCIAL REPORTS. The Company each year shall furnish to
Optionees, Purchasers and stockholders who have received Stock under the Plan
its balance sheet and income statement, unless such Optionees, Purchasers or
stockholders are key Employees whose duties with the Company assure them access
to equivalent information. Such balance sheet and income statement need not be
audited.
SECTION 10. NO RETENTION RIGHTS.
Nothing in the Plan or in any right or Option granted under the Plan
shall confer upon the Purchaser or Optionee any right to continue in Service for
any period of specific duration or interfere with or otherwise restrict in any
way the rights of the Company (or any Parent or Subsidiary employing or
retaining the Purchaser or Optionee) or of the Purchaser or Optionee, which
rights are hereby expressly reserved by each, to terminate his or her Service at
any time and for any reason, with or without cause.
SECTION 11. DURATION AND AMENDMENTS.
(a) TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on the date of its adoption by the Board of Directors, subject to the
approval of the Company's stockholders. If the stockholders fail to approve the
Plan (or the most recent increase in the number of Shares reserved under Section
4) within 12 months after its adoption by the Board of Directors, then any
grants of Options or sales or awards of Shares that have already occurred under
the Plan (or in reliance on such increase) shall be rescinded, and no additional
grants, sales or awards shall be made thereafter under the Plan. The Plan shall
terminate automatically 10 years after the later of (i) its adoption by the
Board of Directors or (ii) the most recent increase in the number of Shares
reserved under Section 4 that was approved by the Company's stockholders. The
Plan may be terminated on any earlier date pursuant to Subsection (b) below.
(b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board of Directors may
amend, suspend or terminate the Plan at any time and for any reason; provided,
however, that any amendment of the Plan which increases the number of Shares
available for issuance under the Plan (except as provided in Section 8), or
which materially changes the class of persons who
8
are eligible for the grant of ISOs, shall be subject to the approval of the
Company's stockholders. Stockholder approval shall not be required for any other
amendment of the Plan.
(c) EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued or
sold under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under the Plan.
SECTION 12. SPECIAL PROVISIONS FOR ISRAELI RESIDENTS.
(a) SCOPE. This Section 12 shall apply only to Optionees who are
residents of the State of Israel.
(b) GRANTS UNDER ISRAELI LAW. Any other provision of the Plan
notwithstanding, the Plan may also be administered pursuant to the provisions of
Section 102 or Section 3(9) ("Section 3(9)") of the Israeli Income Tax Ordinance
(New Version), 1961, the rules promulgated thereunder and the Israeli Companies
Law 5759-1999 with respect to Employees and officers of the Company who are
Israeli residents.
(c) EXERCISE. At the discretion of the Board of Directors, for
purposes of simplicity and in order to ensure compliance with Israel's tax
regulations, the exercise of the Options granted under the Plan may be executed
by the Company or a Subsidiary, as appropriate.
(d) TRANSFER. No Option granted hereunder shall be transferable by
the Optionee other than by will or by the laws of descent and distribution.
(e) APPLICABLE LAW. With respect to Optionees who are Israeli
residents, the Plan and all instruments issued thereunder or in connection
therewith shall be governed by, and interpreted in accordance with, the laws of
the State of Israel.
(f) TAX CONSEQUENCES. Any tax consequences arising from the grant or
exercise of an Option, from the payment for Shares covered thereby or from any
other event or act under the Plan (whether of an Optionee or of the Company or a
Subsidiary) shall be borne solely by the Optionee. Furthermore, the Optionee
shall agree to indemnify the Company or the Subsidiary that employs the Optionee
and trustee appointed under the Plan, if applicable, and hold them harmless
against and from any and all liability for any tax or interest or penalty
thereon, including (without limitation) liabilities relating to the necessity to
withhold, or to have withheld, any tax from any payment made to the Optionee.
TRUSTEE STOCK OPTIONS
(a) It is clarified, that, with regard to Trustee Stock Options (as
defined in Section 13 below), although this Plan enables the Company to grant
both types of Trustee Stock Options during its term (as set forth in Section 6
above), the Company must choose between granting 102 Capital Gain Stock Options
and 102 Ordinary Income Stock Options (the "Election") at a given time during
the term (as set forth in Section 6 above). The Company can change such Election
only after the passage of at least 12 months from the end of the year in which
the first grant was made in accordance with the previous Election. Until the
Election is
9
changed ALL Trustee Stock Options shall be issued either as 102 Capital Gain
Stock Option or as 102 Ordinary Income Stock Option in accordance with the
Election.
(b) Anything herein to the contrary notwithstanding, all Trustee
Stock Options granted under this Plan shall be granted by the Company to a
Trustee designated by the Committee and the Trustee shall hold each such Options
and any Shares issued upon exercise thereof in trust for the benefit of the
Optionee in respect of whom such Option was granted. All certificates
representing Shares issued to the Trustee under the Plan shall be deposited with
the Trustee, and shall be held by the Trustee until such time that such Shares
are released from the trust.
(c) With regard to 102 Capital Gain Stock Options and 102 Ordinary
Income Stock Options, the Option or the Shares issued upon their exercise and
all rights related to them, including bonus shares, will be held by the Trustee
for a period of at least 24 months and 12 months, respectively, from the end of
the tax year in which the Options were allocated to the Trustee, or a shorter
period as approved by the tax authorities (the "Lock-up Period"), under the
terms set in Section 102.
(d) In accordance with Section 102, the Optionee is prohibited from
selling the Trustee Stock Options or the Shares received upon exercise of such
Options, until the end of the Lockup Period. The meaning of this Section for
purposes of income tax is that if the Employee or officer of the Company
voluntarily sells the Options or the Shares before the end of the Lock-up
Period, the provision of Section 102, relating to non-compliance, with the
Lockup Period, will apply.
(e) Anything to the contrary notwithstanding, the Trustee shall not
release any Options which were not already exercised into Shares by the Optionee
nor release any Shares issued upon exercise of the Options, prior to the full
payment of the Exercise Price and Optionee's tax liability arising from Trustee
Stock Options which were granted to him and/or Shares issued upon exercise of
such Trustee Stock Options. Prior to receipt of the Option, the Optionee will
sign an undertaking to release the Trustee from any liability in respect of any
action or decision duly taken and bona fide executed in relation with the Plan,
or any Option granted or Share issued to him thereunder.
NON TRUSTEE 102 STOCK OPTIONS
(a) Options granted pursuant to this Section are intended to
constitute Non Trustee 102 Stock Options and shall be subject to the general
terms and conditions specified in the Plan, except for said provisions of the
Plan applying to Options under a different tax law or regulations.
(b) Non Trustee 102 Stock Options may only be granted to Employees or
officers of the Company and members of the Board of Directors.
(c) The Non Trustee 102 Stock Options which shall be granted pursuant
to the Plan may be issued to a trustee appointed by the Committee.
(d) If the Optionee's employment with the Company is terminated for
any
10
reason, the Optionee will be obligated to provide the Company, to its
satisfaction and subject to its sole discretion, with a security or guarantee to
cover any future tax obligation resulting from the disposition of the Shares
received upon exercise of the Non Trustee 102 Stock Options.
3(9) STOCK OPTIONS
(a) Options granted pursuant to this Section are intended to
constitute 3(9) Stock Options and shall be subject to the general terms and
conditions specified in the Plan, except for said provisions of the Plan
applying to Options under a different tax law or regulations.
(b) 3(9) Options may not be granted to Employees or members of the
Board of Directors.
(c) The 3(9) Stock Options which shall be granted pursuant to the
Plan may be issued to a trustee appointed by the Committee.
(d) The Company may elect to enter into an agreement with a trustee
concerning the administration of the exercise of Options, the purchase and sale
of Shares, and the arrangements for payment of or withholding of taxes due in
connection with such exercise, purchase and sale. The trust agreement may
provide that the Company will issue the Shares to such trustee for the benefit
of the Optionees.
SECTION 13. DEFINITIONS.
(a) "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Company, as constituted from time to time.
(b) "CHANGE IN CONTROL" shall mean:
(i) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization, if persons
who were not stockholders of the Company immediately prior to such merger,
consolidation or other reorganization own immediately after such merger,
consolidation or other reorganization 50% or more of the voting power of the
outstanding securities of each of (A) the continuing or surviving entity and (B)
any direct or indirect parent corporation of such continuing or surviving
entity; or
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" shall mean a committee of the Board of Directors, as
11
described in Section 2(a).
(e) "COMPANY" shall mean Atomica Corporation, a Delaware corporation.
(f) "CONSULTANT" shall mean a person who performs bona fide services
for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding
Employees and Outside Directors.
(g) "DISABILITY" shall mean that the Optionee is unable to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment.
(h) "EMPLOYEE" shall mean any individual who is a common-law employee
of the Company, a Parent or a Subsidiary, and with regard to Trustee Stock
Options and Non Trustee Stock Options only provided that such person is not a
"controlling party", as defined in section 32 (9) of the Ordinance, prior to and
after the issuance of the Options.
(i) "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Board of Directors in
the applicable Stock Option Agreement.
(j) "FAIR MARKET VALUE" shall mean the fair market value of a Share,
as determined by the Board of Directors in good faith. Such determination shall
be conclusive and binding on all persons.
(k) "IMMEDIATE FAMILY" shall mean any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include
adoptive relationships.
(l) "ISO" shall mean an employee incentive stock option described in
Section 422(b) of the Code.
(m) "NONSTATUTORY OPTION" shall mean a stock option not described in
Sections 422(b) or 423(b) of the Code (including a stock option described in
Section 12).
(n) "OPTION" shall mean an ISO or Nonstatutory Option granted under
the Plan and entitling the holder to purchase Shares and for Israeli residents
shall mean the following types of options granted under the Plan: (i) stock
options without a trustee pursuant and subject to the provisions of Section 102
of the Israeli Income Tax Ordinance (New Version) 1961 (the "ORDINANCE"), as
amended and any regulations, rules, orders or procedures promulgated thereunder,
including tax rules (Preferential Tax Treatment regarding Issuance of Shares to
Employees, 2003) ("Section 102") (such options, "NON TRUSTEE 102 STOCK
OPTIONS"); (ii) STOCK options allocated to a Trustee (as defined below) under
the capital gain track pursuant and subject to the provisions of Section 102
(such options, "102 CAPITAL GAIN STOCK OPTIONS"); (iii) stock options allocated
to a Trustee (as defined below) under the ordinary income track pursuant and
subject to the provisions of Section 102 (such options, "102 ORDINARY INCOME
STOCK OPTIONS") and (vi) stock options pursuant to Section 3(9) of the Ordinance
("3(9) STOCK OPTIONS").
12
(o) "OPTIONEE" shall mean a person who holds an Option.
(p) "OUTSIDE DIRECTOR" shall mean a member of the Board of Directors
who is not an Employee.
(q) "PARENT" shall mean any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
(r) "PLAN" shall mean this Atomica Corporation 2003 Stock Plan.
(s) "PURCHASE PRICE" shall mean the consideration for which one Share
may be acquired under the Plan (other than upon exercise of an Option), as
specified by the Board of Directors.
(t) "PURCHASER" shall mean a person to whom the Board of Directors
has offered the right to acquire Shares under the Plan (other than upon exercise
of an Option).
(u) "SERVICE" shall mean service as an Employee, Outside Director or
Consultant.
(v) "SHARE" shall mean one share of Stock, as adjusted in accordance
with Section 8 (if applicable).
(w) "STOCK" shall mean the Common Stock of the Company, with a par
value of $0.001 per Share.
(x) "STOCK OPTION AGREEMENT" shall mean the agreement between the
Company and an Optionee that contains the terms, conditions and restrictions
pertaining to the Optionee's Option.
(y) "STOCK PURCHASE AGREEMENT" shall mean the agreement between the
Company and a Purchaser who acquires Shares under the Plan that contains the
terms, conditions and restrictions pertaining to the acquisition of such Shares.
(z) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
(aa) "TRUSTEE" means a person or entity appointed by the Board or the
Committee and approved by the Income Tax Officer to hold Trustee Stock Options
on behalf of the Optionee according to the conditions set forth in Section 102.
13
(bb) "TRUSTEE STOCK OPTIONS" means all 102 Capital Gain Stock Options
and 102 Ordinary Income Stock Options.
14
FIRM LETTERHEAD
ATOMICA CORPORATION.
2003 STOCK OPTION PLAN
102 CAPITAL GAIN STOCK OPTION AGREEMENT
made and entered into on the -- day of______, 2003
By and between
ATOMICA CORPORATION
(hereinafter: the "COMPANY")
and
(hereinafter: the "OPTIONEE")
WHEREAS: The Optionee is an Employee as defined in the Plan; and
WHEREAS: The Company desires to grant the Optionee options to purchase
Shares in the Company, and the Optionee is interested in
receiving the aforesaid options, all in accordance with and
subject to the Company's Stock Option Plan (2003) (the "PLAN")
and the provisions of this Stock Option Agreement, and their
intention is that the provisions of Section 102 of the Israeli
Income Tax Ordinance (New Version) 1961 (the "ORDINANCE"), as
amended and any regulations, rules, orders or procedures
promulgated there under, including tax rules (Preferential Tax
Treatment regarding Issuance of Shares to Employees, 2003)
("SECTION 102"), relating to the allocation of options in the
capital gain track, shall apply to the options granted; and
WHEREAS: The Optionee has read all of the provisions and the terms of
the Plan and this Stock Option Agreement and wishes to be
bound by them and desires that they apply to the options which
shall be granted to him hereunder.
NOW THEREFORE IT IS AGREED AS FOLLOWS:
1. PREAMBLE AND DEFINITIONS
1.1 The Preamble to this Stock Option Agreement constitutes an
integral part hereof.
1.2 Unless the context otherwise requires, terms used herein this
Stock Option Agreement shall have the same meaning as in the
Plan.
2. APPLICATION OF THE PROVISIONS OF THE PLAN
2.1 The Optionee hereby declares that he has carefully read the
Plan and that he acknowledges and agrees to all of the
provisions, conditions, limitations, authorizations,
declarations and commitments included therein.
2.2 The Optionee declares and agrees that this Stock Option
Agreement and the Plan prevail over any previous agreement,
arrangement and/or understanding, whether written or oral
between the Optionee and the Company and/or any Subsidiary, or
the officers and/or directors and/or the shareholders thereof
with respect to the matters herein included, and with respect
to options to purchase shares in the Company which have not
yet been actually issued or granted, (with the exception of
options that are planned to be granted under another approved
stock option plan which was adopted by the Company), and that
any agreement, arrangement and/or understanding as aforesaid
are null and void and of no further force or effect.
2.3 All of the provisions, conditions, limitations and
declarations included and specified in the Plan, as the same
shall be amended from time to time, are hereby incorporated
herein by reference and constitute an integral part of this
Stock Option Agreement and of the Optionee's commitments
hereunder. Except and to the extent otherwise expressly
provided herein, nothing in this Stock Option Agreement or in
the provisions hereof shall derogate from anything contained
in the Plan.
2.4 The Optionee declares, covenants and agrees that the
provisions of Section 102, as the same shall be amended from
time to time and the agreement that was signed between the
Company and the Trustee ("Trust Agreement") are fully binding
on the Optionee, and shall prevail in case of contradiction,
over any other provision in the Stock Option Agreement or in
the Plan. Further, the Optionee agrees to execute any and all
documents which the Company or the Trustee may reasonably
determine to be necessary in order to comply with the
Ordinance and, particularly, the rules. ~
2.5 The Optionee declares and agrees that he is obligated not to
make any disposition of the Options or the Shares received
upon exercise of such Options until the end of the Lock-up
Period. The meaning of this declaration for purposes of income
tax is that if the Employee voluntarily sells the Options or
the Shares issued upon their exercise before the end of the
Lock-up Period, the provision of Section 102, relating to
noncompliance with the Lock-up Period, shall apply.
2
2.6 A copy of the Plan is attached hereto and constitutes an
integral part hereof.
3. GRANT OF OPTIONS
3.1 The Company hereby grants the Optionee_______ 102 Capital Gain
Stock Options to purchase _______Shares of common stock, par
value USD _______, all subject to the conditions of the Plan,
at an Exercise Price of USD ________, (the "EXERCISE PRICE").
3.2 The Options have been issued to the Trustee on behalf of the
Optionee.
3.3 The Optionee is aware that the Company intends to issue
additional Shares in the future to various entities and
individuals, as the Company in its sole discretion shall
determine.
4. TRANSFER OF OPTIONS
The transfer of these Options is limited as set forth in the Plan.
5. EXERCISE PRICE
Each Option may be exercised in consideration of the payment in cash
(or by any other mean as specified in the Plan) of the Exercise Price
indicated above.
6. VESTING OF OPTIONS
The Options shall vest over a period of four years from the date the
Option were allocated to the Trustee, as follows:
One fourth (25%) of the Options shall vest on _________, 2004;
with the remaining three-fourths of the Options to vest in
equal monthly amounts over the following thirty-six month
period (2.08333% per month); in all cases, provided that at
the time of vesting, the Optionee shall still be an Employee
of the Company or any Subsidiary.
7. METHOD OF EXERCISE
7.1 The Options, or any part thereof, shall be exercised by the
Optionee by signing and returning to the Company and the
Trustee (if such Options are held by the Trustee), at their
principal offices, a notice of exercise in such form as may be
prescribed by the Company from time to time (the "NOTICE OF
EXERCISE"), together with full payment of the Exercise Price.
7.2 In order to issue Shares upon the exercise of any of the
Options, the Optionee hereby agrees to sign any and all
documents required by the Company's management and/or the
Trustee and/or any law and/or the Company's Articles of
Association.
3
7.3 After a Notice of Exercise has been delivered to the Company
(and/or the Trustee if relevant), it may not be rescinded or
revised by the Optionee. Subsequent to the Company's receipt
of a Notice of Exercise, together with the payment of the
Exercise Price and certification that the taxes referred to in
Section 9 below, have been or will be paid by the Optionee,
the Shares issuable upon the exercise of the Options shall be
issued to the Optionee, or the Trustee pursuant the provision
of Section 102.
7.4 The Trustee will transfer the Shares to the Optionee upon
demand, subject to the Plan and this Stock Option Agreement,
but in no event before all taxes due, if any, have been fully
paid. By signing this Stock Option Agreement, the Optionee
authorizes the Trustee not to transfer any Shares issued upon
the exercise of the Options prior to the full payment of all
applicable taxes.
8. TERMS AND EXPIRATION
These Options, unless terminated earlier under the provisions of
Section 6 of the Plan, shall expire upon the tenth (1 0th) anniversary
of the Plan adoption by the Board of Directors.
9. TAXES
9.1 The aforementioned Options and Shares issued upon their
exercise will be held by the Trustee in trust on behalf of the
Optionee for a period of at least 24 months from the end of
the year on which such Options are allocated to the Trustee or
a shorter period as approved by the tax authorities (the
"LOCK-UP PERIOD"), under the terms set in Section 102.
9.2 All rights related to the Options or the Shares issued upon
their exercise will be held by the Trustee until the end of
the Lock-up Period, including bonus shares, and will be
subject to the provisions of Section 102 regarding the 102
Capital Gain Track.
9.3 Any and all taxes, fees and other liabilities (as may apply
from time to time) in connection with the grant and/or
exercise of the Options and the sale of Shares issued upon the
exercise of the Options, will be borne by the Optionee and he
will be solely liable for all such taxes, fees and other
liabilities. Furthermore, the Optionee shall agree to
indemnify the Company and the Trustee and hold them harmless
against and from any and all liability for any such tax or
interest or penalty thereon.
9.4 The Optionee acknowledges that the receipt of the Options and
the acquisition of the Shares to be issued upon the exercise
of the Options may result in tax consequences. The description
set forth in the Plan relating to the payment of tax does not
purport to be a full and complete description of the
Optionee's tax obligations under the law.
9.5 In the event that the Company or the Trustee determines that
it is required to
4
withhold any tax as a result of the exercise of these Options,
the Optionee, as a condition to the exercise of these Options,
shall make arrangements satisfactory to the Company or the
Trustee to enable them to satisfy all withholding
requirements. The Optionee shall also make arrangements
satisfactory to the Company to enable it to satisfy any
withholding requirements that may arise in connection with the
vesting or disposition of Shares purchased by exercising these
Options.
10. MISCELLANEOUS PROVISIONS
10.1 Each party to this Stock Option Agreement agrees to perform
any and all further acts and to execute and deliver any
documents that may reasonably be necessary to carry out the
provisions of this Stock Option Agreement.
10.2 The Optionee agrees and acknowledges that the terms and
conditions of this Stock Option Agreement, including without
limitation the number of Shares for which Options have been
granted, are confidential. The Optionee agrees that he will
not disclose these terms and conditions to any third party,
except to the Optionee's financial or legal advisors, or
family members, unless such disclosure is required by law.
10.3 Any notice or other communication under this Stock Option
Agreement must be in writing and shall be effective upon
delivery by hand, or three (3) business days after deposit in
the mail, postage prepaid, certified or registered, and
addressed to the Company or to the Optionee at the
corresponding address as written in the preamble to this Stock
Option Agreement; provided, however, that any Notice of
Exercise or payment to the Company under Section 7 of this
Stock Option Agreement shall be effective only upon actual
receipt by the Company at the address above. Each party shall
be obligated to notify the other in writing of any change in
that party's address. Notice of change of address shall be
effective only when done in accordance with this Subsection.
10.4 The Company may, but shall not be obligated to register the
sale of Shares issued upon the exercise of the Options under
the any Applicable Law.
10.5 The Company shall not be obligated to take any affirmative
action in order to cause the sale of Shares issued upon the
exercise of the Options under this Stock Option Agreement to
comply with any law.
5
IN WITNESS WHEREOF the parties have signed and delivered this
Stock Option Agreement as of the date first hereinabove set forth.
The Company Optionee
6
Exhibit 10.2
GURUNET CORPORATION
2004 STOCK PLAN
ADOPTED ON DECEMBER [ ], 2003
1
TABLE OF CONTENTS
PAGES
SECTION 1. ESTABLISHMENT AND PURPOSE..........................................1
SECTION 2. ADMINISTRATION.....................................................1
(a) Committees of the Board of Directors...............................1
(b) Authority of the Board of Directors................................1
SECTION 3. ELIGIBILITY........................................................1
(a) General Rule.......................................................1
(b) Ten-Percent Stockholders...........................................1
SECTION 4. STOCK SUBJECT TO PLAN..............................................2
(a) Basic Limitation...................................................2
(b) Additional Shares..................................................2
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES............................2
(a) Stock Purchase Agreement...........................................2
(b) Duration of Offers and Nontransferability of Rights................2
(c) Purchase Price.....................................................2
(d) Withholding Taxes..................................................3
(e) Restrictions on Transfer of Shares and Minimum Vesting.............3
(f) Accelerated Vesting................................................3
SECTION 6. TERMS AND CONDITIONS OF OPTIONS....................................3
(a) Stock Option Agreement.............................................3
(b) Number of Shares...................................................3
(c) Exercise Price.....................................................3
(d) Withholding Taxes..................................................4
(e) Exercisability.....................................................4
(f) Accelerated Exercisability.........................................4
(g) Basic Term.........................................................4
(h) Transferability....................................................4
(i) Termination of Service (Except by Death) .............................5
(j) Leaves of Absence.....................................................5
(k) Death of Optionee..................................................5
(l) No Rights as a Stockholder............................................6
(m) Modification, Extension and Assumption of Options..................6
(n) Restrictions on Transfer of Shares and Minimum Vesting.............6
(o) Accelerated Vesting................................................6
(p) Director Grants....................................................6
SECTION 7. PAYMENT FOR SHARES.................................................7
(a) General Rule.......................................................7
(b) Surrender of Stock.................................................7
(c) Services Rendered..................................................7
i
(d) Promissory Note....................................................7
(e) Exercise/Sale......................................................8
(f) Exercise/Pledge....................................................8
SECTION 8. ADJUSTMENT OF SHARES...............................................8
(a) General............................................................8
(b) Mergers and Consolidations.........................................8
(c) Reservation of Rights..............................................9
SECTION 9. SECURITIES LAW REQUIREMENTS........................................9
(a) General............................................................9
(b) Financial Reports..................................................9
SECTION 10. NO RETENTION RIGHTS...............................................9
SECTION 11. DURATION AND AMENDMENTS...........................................9
(a) Term of the Plan...................................................9
(b) Right to Amend or Terminate the Plan..............................10
(c) Effect of Amendment or Termination................................10
SECTION 12. SPECIAL PROVISIONS FOR ISRAELI RESIDENTS.........................10
(a) Scope.............................................................10
(b) Grants Under Israeli Law..........................................10
(c) Exercise..........................................................10
(d) Transfer..........................................................10
(e) Applicable Law....................................................10
(f) Tax Consequences..................................................10
SECTION 13. DEFINITIONS......................................................12
ii
GURUNET CORPORATION 2004 STOCK PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE.
The purpose .of the Plan is to offer selected persons an opportunity to
acquire a proprietary interest in the success of the Company, or to increase
such interest, by purchasing Shares of the Company's Stock. The Plan provides
both for the direct award, or sale of Shares and for the grant of Options to
purchase Shares. Options granted under the Plan may be NSOs (including the
Options described in Section 12) or ISOs intended to qualify under Section 422
of the Code.
Capitalized terms are defined in Section 13.
SECTION 2. ADMINISTRATION.
(a) COMMITTEES OF THE BOARD OF DIRECTORS. The Plan may be
administered by one or more Committees. Each Committee shall consist of one or
more members of the Board of Directors who have been appointed by the Board of
Directors, PROVIDED HOWEVER, that during any period in which the Company has
outstanding any class of common equity securities required to be registered
under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Plan shall be administered by a Committee consisting of two
or more individuals who are (i) "outside directors" (as defined in applicable
regulations under Section 162(m) of the Code) and (ii) "non-employee directors"
as defined in Rule 16b-3 promulgated under the Exchange Act, or any successor
provision ("Rule 16b-3"). Each Committee shall have such authority and be
responsible for such functions as the Board of Directors has assigned to it. If
no Committee has been appointed, the entire Board of Directors shall administer
the Plan. Any reference to the Board of Directors in the Plan shall be construed
as a reference to the Committee (if any) to whom the Board of Directors has
assigned a particular function.
(b) AUTHORITY OF THE BOARD OF DIRECTORS. Subject to the provisions
of the Plan and Section 2(a), the Board of Directors shall have full authority
and discretion to take any actions it deems necessary or advisable for the
administration of the Plan. All decisions, interpretations and other actions of
the Board of Directors shall be final and binding on all Purchasers, all
Optionees and all persons deriving their rights from a Purchaser or Optionee.
SECTION 3. ELIGIBILITY.
(a) GENERAL RULE. Only Employees, Outside Directors, and Consultants
shall be eligible for the grant of Options or the direct award or sale of
Shares. Only Employees shall be eligible for the grant of ISOs.
(b) TEN-PERCENT STOCKHOLDERS. A person who owns more than 10% of the
total combined voting power of all classes of outstanding stock of the Company,
its
1
Parent or any of its Subsidiaries shall not be eligible for designation as an
Optionee or Purchaser unless (i) the Exercise Price is at least 110% of the Fair
Market Value of a Share on the date of grant, (ii) the Purchase Price (if any)
is at least 100% of the Fair Market Value of a Share, and (iii) in the case of
an ISO, such ISO by its terms is not exercisable after the expiration of five
years from the date of grant. For purposes of this Subsection (b), in
determining stock ownership, the attribution rules of Section 424(d) of the Code
shall be applied.
SECTION 4. STOCK SUBJECT TO PLAN.
(a) BASIC LIMITATION. Shares offered under the Plan may be
authorized but unissued Shares or treasury Shares. The number of Shares that may
be issued under the Plan (upon exercise of Options or other rights to acquire
Shares) shall not exceed 866,000 in the aggregate, or 866,000 per person,
subject to adjustment pursuant to Section 8. The number of Shares that are
subject to Options or other rights outstanding at any time under the Plan shall
not exceed the number of Shares that then remain available for issuance under
the Plan. The Company, during the term of the Plan, shall at all times reserve
and keep available sufficient Shares to satisfy the requirements of the Plan.
(b) ADDITIONAL SHARES. In the event that any outstanding Option or
other right for any reason expires or is canceled or otherwise terminated, the
Shares allocable to the unexercised portion of such Option or other right shall
again be available for the purposes of the Plan. In the event that Shares issued
under the Plan are reacquired by the Company pursuant to any forfeiture
provision, right of repurchase or right of first refusal, such Shares shall
again be available for the purposes of the Plan, except that the aggregate
number of Shares which may be issued upon the exercise of ISOs shall in no event
exceed [ ] Shares (subject to adjustment pursuant to Section 8).
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES.
(a) STOCK PURCHASE AGREEMENT. Each award or sale of Shares under the
Plan (other than upon exercise of an Option) shall be evidenced by a Stock
Purchase Agreement between the Purchaser and the Company. Such award or sale
shall be subject to all applicable terms and conditions of the Plan and may be
subject to any other terms and conditions which are not inconsistent with the
Plan and which the Board of Directors deems appropriate for inclusion in a Stock
Purchase Agreement. The provisions of the various Stock Purchase Agreements
entered into under the Plan need not be identical.
(b) DURATION OF OFFERS AND NONTRANSFERABILITY OF RIGHTS. Any right
to acquire Shares under the Plan (other than an Option) shall automatically
expire if not exercised by the Purchaser within 30 days after the grant of such
right was communicated to the Purchaser by the Company. Such right shall not be
transferable and shall be exercisable only by the Purchaser to whom such right
was granted.
(c) PURCHASE PRICE. The Purchase Price of Shares to be offered under
the Plan shall not be less than 85% of the Fair Market Value of such Shares, and
a higher
2
percentage may be required by Section (b). Subject to the preceding sentence,
the Board of Directors shall determine the Purchase Price at its sole
discretion. The Purchase Price shall be payable in a form described in Section
7.
(d) WITHHOLDING TAXES. As a condition to the purchase of Shares, the
Purchaser shall make such arrangements as the Board of Directors may require for
the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with such purchase.
(e) RESTRICTIONS ON TRANSFER OF SHARES AND MINIMUM VESTING. Any
Shares awarded or sold under the Plan shall be subject to such special
forfeiture conditions, rights of repurchase, rights of first refusal and other
transfer restrictions as the Board of Directors may determine. Such restrictions
shall be set forth in the applicable Stock Purchase Agreement and shall apply in
addition to any restrictions that may apply to holders of Shares generally. In
the case of a Purchaser who is not an officer of the Company, an Outside
Director or a Consultant, any right to repurchase the Purchaser's Shares at the
original Purchase Price (if any) upon termination of the Purchaser's Service
shall lapse at least as rapidly as 20% per year over the five-year period
commencing on the date of the award or sale of the Shares. Any such right may be
exercised only within 90 days after the termination of the Purchaser's Service
for cash or for cancellation of indebtedness incurred in purchasing the Shares.
(f) ACCELERATED VESTING. Unless the applicable Stock Purchase
Agreement provides otherwise, any right to repurchase a Purchaser's Shares at
the original Purchase Price (if any) upon termination of the Purchaser's Service
shall lapse and all of such Shares shall become vested if (i) the Company is
subject to a Change in Control before the Purchaser's Service terminates, and
(ii) the repurchase right is not assigned to the entity that employs the
Purchaser immediately after the Change in Control or to its parent or subsidiary
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Board of Directors deems appropriate
for inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical.
(b) NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 8. The Stock Option
Agreement shall also specify whether the Option is an ISO, an NSO, or an Option
described in Section 12.
(c) EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the
Fair
3
Market Value of a Share on the date of grant, and a higher percentage may be
required by Section 3(b). The Exercise Price of an NSO shall not be less than
85% of the Fair Market Value of a Share on the date of grant. Subject to the
preceding two sentences, the Exercise Price under any Option shall be determined
by the Board of Directors at its sole discretion. The Exercise Price shall be
payable in a form described in Section 7.
(d) WITHHOLDING TAXES. As a condition to the exercise of an Option,
the Optionee shall make such arrangements as the Board of Directors may require
for the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with such exercise. The Optionee shall
also make such arrangements as the Board of Directors may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with the disposition of Shares acquired by
exercising an Option.
(e) EXERCISABILITY. Each Stock Option Agreement shall specify the
date when all or any installment of the Option is to become exercisable. In the
case of an Optionee who is not, an officer of, the Company, an Outside Director
or a Consultant, an Option shall become exercisable at least as rapidly as 20%
per year over the five-year period commencing on the date of grant. Subject to
the preceding sentence, the Board of Directors shall determine the
exercisability provisions of any Stock Option Agreement at its sole discretion.
(f) ACCELERATED EXERCISABILITY. Unless the applicable Stock Option
Agreement provides otherwise, all of an Optionee's Options shall become
exercisable in full if (i) the Company is subject to a Change in Control before
the Optionee's Service terminates, (ii) such Options do not remain outstanding,
(iii) such Options are not assumed by the surviving corporation or its parent
and (iv) the surviving corporation or its parent does not substitute options
with substantially the same terms for such Options.
(g) BASIC TERM. The Stock Option Agreement shall specify the tern of
the Option. The term shall end 10 years from the date of grant, and a shorter
term may be required by Section 3(b). Subject to the preceding sentence, the
Board of Directors at its sole discretion shall determine when an Option is to
expire.
(h) TRANSFERABILITY. An Option shall be transferable by the Optionee
only by (i) a beneficiary designation, (ii) a will or (iii) the laws of descent
and distribution, except as provided in the next sentence. If the applicable
Stock Option Agreement so provides, an NSO shall also be transferable by the
Optionee by (i) a gift to a member of the Optionee's Immediate Family or (ii) a
gift to an inter virus or testamentary trust in which members of the Optionee's
Immediate Family have a beneficial interest of more than 50% and which provides
that such NSO is to be transferred to the beneficiaries upon the Optionee's
death. An ISO may be exercised during the lifetime of the Optionee only by the
Optionee or by the Optionee's guardian or legal representative.
4
(i) TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's
Service terminates for any reason other than the Optionee's death, then the
Optionee's Options shall expire on the earlier of the following occasions:
(i) The expiration date determined pursuant to Subsection (g)
above;
(ii) The date three months after the termination of the
Optionee's Service for any reason other than Disability, or such later
date as the Board of Directors may determine; or
(iii) The date six months after the termination of the
Optionee's Service by reason of Disability, or such later date as the
Board of Directors may determine.
The Optionee may exercise all or part of the Optionee's Options at any time
before the expiration of such Options under the preceding sentence, but only to
the extent that such Options had become exercisable before the Optionee's
Service terminated (or became exercisable as a result of the termination) and
the underlying Shares had vested before the Optionee's Service terminated (or
vested as a result of the termination). The balance of such Options shall lapse
when the Optionee's Service terminates. In the event that the Optionee dies
after the termination of the Optionee's Service but before the expiration of the
Optionee's Options, all or part of such Options may be exercised (prior to
expiration) by the executors or administrators of the Optionee's estate or by
any person who has acquired such Options directly from the Optionee by
beneficiary designation, bequest or inheritance, but only to the extent that
such Options had become exercisable before the Optionee's Service terminated (or
became exercisable as a result of the termination) and the underlying Shares had
vested before the Optionee's Service terminated (or vested as a result of the
termination).
(j) LEAVES OF ABSENCE. For purposes of Subsection (i) above, Service
shall be deemed to continue while the Optionee is on a bona fide leave of
absence, if such leave was approved by the Company in writing and if continued
crediting of Service for this purpose is expressly required by the terms of such
leave or by applicable law (as determined by the Company).
(k) DEATH OF OPTIONEE. if an Optionee dies while the Optionee is in
Service, then the Optionee's Options shall expire on the earlier of the
following dates:
(i) The expiration date determined pursuant to Subsection (g)
above; or
(ii) The date 12 months after the Optionee's death.
All or part of the Optionee's Options may be exercised at any time before the
expiration of such Options under the preceding sentence by the executors or
administrators of the Optionee's estate or by any person who has acquired such
Options directly from the Optionee by beneficiary designation, bequest or
inheritance, but only to the extent
5
that such Options had become exercisable before the Optionee's death or became
exercisable as a result of the death. The balance of such Options shall lapse
when the Optionee dies.
(l) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by the Optionee's Option until such person becomes entitled to receive
such Shares by filing a notice of exercise and paying the Exercise Price
pursuant to the terms of such Option.
(m) MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within the
limitations of the Plan, the Board of Directors may modify, extend or assume
outstanding Options or may accept the cancellation of outstanding Options
(whether granted by the Company or another issuer) in return for the grant of
new Options for the same or a different number of Shares and at the same or a
different Exercise Price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, impair the Optionee's rights
or increase the Optionee's obligations under such Option.
(n) RESTRICTIONS ON TRANSFER OF SHARES AND MINIMUM VESTING. Any
Shares issued upon exercise of an Option shall be subject to such special
forfeiture conditions, rights of repurchase, rights of first refusal and other
transfer restrictions as the Board of Directors may determine. Such restrictions
shall be set forth in the applicable Stock Option Agreement and shall apply in
addition to any restrictions that may apply to holders of Shares generally. In
the case of an Optionee who is not an officer of the Company, an Outside
Director or a Consultant:
(i) Any right to repurchase the Optionee's Shares at the
original Exercise Price upon termination of the Optionee's Service
shall lapse at least as rapidly as 20% per year over the five-year
period commencing on the date of the option grant;
(ii) Any such right may be exercised only for cash, or for
cancellation of indebtedness incurred in purchasing the Shares; and
(iii) Any such right may be exercised only within 90 days
after the later of (A) the termination of the Optionee's Service or (B)
the date of the option exercise.
(o) ACCELERATED VESTING. Unless the applicable Stock Option
Agreement provides otherwise, any right to repurchase an Optionee's Shares at
the original Exercise Price upon termination of the Optionee's Service shall
lapse and all of such Shares shall become vested if (i) the Company is subject
to a Change in Control before the Optionee's Service terminates and (ii) the
repurchase right is not assigned to the entity that employs the Optionee
immediately after the Change in Control or to its parent or subsidiary.
(p) DIRECTOR GRANTS. Outside Directors shall receive ______ Options
(the "Initial Director Options") to on the date such persons are first elected
or appointed, and will automatically receive Options ("Automatic Director
Options" and together with
6
the Initial Director Options, the "Director Options") immediately following the
date of each annual meeting of the Company's shareholders, provided, however,
that such persons did not receive Initial Director Options since the most recent
grant of Automatic Director Options and continue to serve as directors of the
Company's Board of Directors. The exercise price for each share subject to a
Director Option shall be equal to the fair market value of the Company's Common
Stock on the date of grant. Each Director Option granted under the Plan shall be
exercisable either in full or in installments at such time or times and during
such period as shall be set forth in the option agreement evidencing such
Director Option, subject to the provisions of the Plan. No Director Option
granted to a reporting person for purposes of the Exchange Act, however, shall
be exercisable during the first six (6) months after the date of grant. Director
Options shall expire the earlier often (10) years after the date of grant or
ninety (90) days after the termination of the director's service on the Board of
Directors unless such Director Options are ISOs in which case such Director
Options shall be subject to the additional terms and conditions set forth
elsewhere herein.
SECTION 7. PAYMENT FOR SHARES.
(a) GENERAL RULE. The entire Purchase Price or Exercise Price of
Shares issued under the Plan shall be payable in cash or cash equivalents at the
time when such Shares are purchased, except as otherwise provided in this
Section 7.
(b) SURRENDER OF STOCK. To the extent that a Stock Option Agreement
so provides, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, Shares that are already owned by the Optionee.
Such Shares shall be surrendered to the Company in good form for transfer and
shall be valued at their Fair Market Value on the date when the Option is
exercised. The Optionee shall not surrender, or attest to the ownership of,
Shares in payment of the Exercise Price if such action would cause the Company
to recognize compensation expense (or additional compensation expense) with
respect to the Option for financial reporting purposes.
(c) SERVICES RENDERED. At the discretion of the Board of Directors,
Shares may be awarded under the Plan in consideration of services rendered to
the Company, a Parent or a Subsidiary prior to the award.
(d) PROMISSORY NOTE. To the extent that a Stock Option Agreement or
Stock Purchase Agreement so provides, and unless prohibited by Section 13 of the
Securities Exchange Ac of 1934 as amended by the Sarbanes-Oxley Act, all or a
portion of the Exercise Price or Purchase Price (as the case may be) of Shares
issued under the Plan may be paid with a full-recourse promissory note. However,
the par value of the Shares, if newly issued, shall be paid in cash or cash
equivalents. The Shares shall be pledged as security for payment of the
principal amount of the promissory note and interest thereon. The interest rate
payable under the terms of the promissory note shall not be less than the
minimum rate (if any) required to avoid the imputation of additional interest
under the Code. Subject to the foregoing, the Board of Directors (at its sole
discretion) shall specify the term, interest rate, amortization requirements (if
any) and other provisions of such note.
7
(e) EXERCISE/SALE. To the extent that a Stock Option Agreement so
provides, and if Stock is publicly traded, payment may be made all or in part by
the delivery (on a form prescribed by the Company) of an irrevocable direction
to a securities broker approved by the Company to sell Shares and to deliver all
or part of the sales proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.
(f) EXERCISE/PLEDGE. To the extent that a Stock Option Agreement so
provides, and if Stock is publicly traded, payment may be made all or in part by
the delivery (on a form prescribed by the Company) of an irrevocable direction
to pledge Shares to a securities broker or lender approved by the Company, as
security for a loan, and to deliver all or part of the loan proceeds to the
Company in payment of all or part of the Exercise Price and any withholding
taxes.
SECTION 8. ADJUSTMENT OF SHARES.
(a) GENERAL. In the event of a subdivision of the outstanding Stock,
a declaration of a dividend payable in Shares, a declaration of an extraordinary
dividend payable in a form other than Shares in an amount that has a material
effect on the Fair Market Value of the Stock, a combination or consolidation of
the outstanding Stock into a lesser number of Shares, a recapitalization, a
spin-off, a reclassification or a similar occurrence, the Board of Directors
shall make appropriate adjustments in one or more of (i) the number of Shares
available for future grants under Section 4, (ii) the number of Shares covered
by each outstanding Option or iii) the Exercise Price under each outstanding
Option.
(b) MERGERS AND CONSOLIDATIONS. In the event that the Company is a
party to a merger or consolidation, outstanding Options shall be subject to the
agreement of merger or consolidation. Such agreement shall provide for:
(i) The continuation of such outstanding Options by the
Company (if the Company is the surviving corporation);
(ii) The assumption of the Plan and such outstanding Options
by the surviving corporation or its parent;
(iii) The substitution by the surviving corporation or its
parent of options with substantially the same terms for such
outstanding Options;
(iv) The full exercisability of such outstanding Options and
full vesting of the Shares subject to such Options, followed by the
cancellation of such Options; or
(v) The settlement of the full value of such outstanding
Options (whether or not then exercisable) in cash or cash equivalents,
followed by the cancellation of such Options.
8
(c) RESERVATION OF RIGHTS. Except as provided in this Section 8, an
Optionee or Purchaser shall have no rights by reason of (i) any subdivision or
consolidation of shares of stock of any class, (ii) the payment of any dividend
or (iii) any other increase or decrease in the number of shares of stock of any
class. Any issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
SECTION 9. SECURITIES LAW REQUIREMENTS.
(a) GENERAL. Shares shall not be issued under the Plan unless the
issuance and delivery of such Shares comply with (or are exempt from) all
applicable requirements of law, including (without limitation) the Securities
Act of 1933, as amended, the rules and regulations promulgated thereunder, state
securities laws and regulations, and the regulations of any stock exchange or
other securities market on which the Company's securities may then be traded.
(b) FINANCIAL REPORTS. The Company each year shall furnish to
Optionees, Purchasers and stockholders who have received Stock under the Plan
its balance sheet and income statement, unless such Optionees, Purchasers or
stockholders are key Employees whose duties with the Company assure them access
to equivalent information. Such balance sheet and income statement need not be
audited.
SECTION 10. NO RETENTION RIGHTS.
Nothing in the Plan or in any right or Option granted under the Plan
shall confer upon the Purchaser or Optionee any right to continue in Service for
any period of specific duration or interfere with or otherwise restrict in any
way the rights of the Company (or any Parent or Subsidiary employing or
retaining the Purchaser or Optionee) or of the Purchaser or Optionee, which
rights are hereby expressly reserved by each, ~o terminate his or her Service at
any time and for any reason, with or without cause.
SECTION 11. DURATION AND AMENDMENTS.
(a) TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on the date of its adoption by the Board of Directors, subject to the
approval of the Company's stockholders. If the stockholders fail to approve the
Plan (or the most recent increase in the number of Shares reserved under Section
4) within 12 months after its adoption by the Board of Directors, then any
grants of Options or sales or awards of Shares that have already occurred under
the Plan (or in reliance on such increase) shall be rescinded, and no additional
grants, sales or awards shall be made thereafter under the Plan. The Plan shall
terminate automatically 10 years after the later of (1) its adoption by the
Board of Directors or (ii) the most recent increase in the number of Shares
reserved
9
under Section 4 that was approved by the Company's stockholders. The Plan may be
terminated on any earlier date pursuant to Subsection (b) below.
(b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board of Directors may
amend, suspend or terminate the Plan at any time and for any reason; provided,
however, that any amendment of the Plan which increases the number of Shares
available for issuance under the Plan (except as provided in Section, or which
materially changes the class of persons who are eligible for the grant of ISOs,
shall be subject to the approval of the Company's stockholders. Stockholder
approval shall not be required for any other amendment of the Plan.
(c) EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued or
sold under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under the Plan.
SECTION 12. SPECIAL PROVISIONS FOR ISRAELI RESIDENTS.
(a) SCOPE. This Section 12 shall apply only to Optionees who are
residents of the State of Israel.
(b) GRANTS UNDER ISRAELI LAW. Any other provision of the Plan
notwithstanding, the Plan may also be administered pursuant to the provisions of
Section 102 or Section 3(9) ("Section 3(9)") of the Israeli Income Tax Ordinance
(New Version), 1961, the rules promulgated thereunder and the Israeli Companies
Law 5759-1999 with respect to Employees and officers of the Company who are
Israeli residents.
(c) EXERCISE. At the discretion of the Board of Directors, for
purposes of simplicity and in order to ensure compliance with Israel's tax
regulations, the exercise of the Options granted under the Plan may be executed
by the Company or a Subsidiary, as appropriate.
(d) TRANSFER. No Option granted hereunder shall be transferable by
the Optionee other than by will or by the laws of descent and distribution.
(e) APPLICABLE LAW. With respect to Optionees who are Israeli
residents, the Plan and all instruments issued thereunder or in connection
therewith shall be governed by, and interpreted in accordance with, the laws, of
the State of Israel.
(f) TAX CONSEQUENCES. Any tax consequences arising from the grant or
exercise of an Option, from the payment for Shares covered thereby or from any
other event or act under the Plan (whether of an Optionee or of the Company or a
Subsidiary) shall be borne solely by the Optionee. Furthermore, the Optionee
shall agree to indemnify the Company or the Subsidiary that employs the Optionee
and trustee appointed under the Plan, if applicable, and hold them harmless
against and from any and all liability for any tax or interest or penalty
thereon, including (without limitation)
10
liabilities relating to the necessity to withhold, or to have withheld, any tax
from any payment made to the Optionee.
TRUSTEE STOCK OPTIONS
(a) It is clarified, that, with regard to Trustee Stock Options (as defined
in Section 13 below), although this Plan enables the Company to grant
both types of Trustee Stock Options during its term (as set forth in
Section 6 above), the Company must choose between granting 102 Capital
Gain Stock Options and 102 Ordinary Income Stock Options (the
"Election") at a given time during the term (as set forth in Section 6
above). The Company can change such Election only after the passage of
at least 12 months from the end of the year in which the first grant
was made in accordance with the previous Election. Until the Election
is changed all Trustee Stock Options shall be issued either as 102
Capital Gain Stock Option or as 102 Ordinary Income Stock Option in
accordance with the Election.
(b) Anything herein to the contrary notwithstanding, all Trustee Stock
Options granted under this Plan shall be granted by the Company to a
Trustee designated by the Committee and the Trustee shall hold each
such Options and any Shares issued upon exercise thereof in trust for
the benefit of the Optionee in respect of whom such Option was granted.
All certificates representing Shares issued to the Trustee under the
Plan shall be deposited with the Trustee, and shall be held by the
Trustee until such time that such Shares are released from the trust.
(c) With regard to 102 Capital Gain Stock Options and 102 Ordinary Income
Stock Options, the Option or the Shares issued upon their exercise and
all rights related to them, including bonus shares, will be held by the
Trustee for a period of at least 24 months and 12 months, respectively,
from the end of the tax year in which the Options were allocated to the
Trustee, or a shorter period as approved by the tax authorities (the
"Lock-up Period"), under the teens set in Section 102.
(d) In accordance with Section 102, the Optionee is prohibited from selling
the Trustee Stock Options or the Shares received upon exercise of such
Options, until the end of the Lockup Period. The meaning of this
Section for purposes of income tax is that if the Employee or officer
of the Company voluntarily sells the Options or the Shares before the
end of the Lock-up Period, the provision of Section 102, relating to
`non-compliance with the Lockup Period, will apply.
(e) Anything to the contrary notwithstanding, the Trustee shall not release
any Options which were not already exercised into Shares by the
Optionee nor release any Shares issued upon exercise of the Options,
prior to the full payment of the Exercise Price and Optionee's tax
liability arising from Trustee Stock Options which were granted to him
and/or Shares issued upon exercise of such Trustee `Stock Options.
Prior to receipt of the Option, the Optionee will sign an undertaking
to release the Trustee from any liability in respect of any action or
decision duly taken and bona fide executed in relation with the `Plan,
or any Option granted or Share issued to him thereunder.
11
NON TRUSTEE 102 STOCK OPTIONS
(a) Options granted pursuant to this Section are intended to constitute Non
Trustee 102 Stock Options and shall be subject to the general terms and
conditions specified in the Plan, except for said provisions of the
Plan applying to Options under a different tax law or regulations.
(b) Non Trustee 102 Stock Options may only be granted to Employees or
officers of the Company and members of the Board of Directors.
(c) The Non Trustee 102 Stock Options which shall be granted pursuant to
the Plan may be issued to a trustee appointed by the Committee.
(d) If the Optionee's employment with the Company is terminated for any
reason, the Optionee will be obligated to provide the Company, to its
satisfaction and subject to its sole discretion, with a security or
guarantee to cover any future tax obligation resulting from the
disposition of the Shares received upon exercise of the Non Trustee 102
Stock Options.
3(9) STOCK OPTIONS
(a) Options granted pursuant to this Section are intended to constitute
3(9) Stock Options and shall be subject to the general terms and
conditions specified in the Plan, except for said provisions of the
Plan applying to Options under a different tax law or regulations.
(b) 3(9) Options may not be granted to Employees or members of the Board of
Directors.
(c) The 3(9) Stock Options which shall be ranted pursuant to the Plan may
be issued to a trustee appointed by the Committee.
(d) The Company may elect to enter into an agreement with a trustee
concerning the administration of the exercise of Options, the purchase
and sale of Shares, and the arrangements for payment of or withholding
of taxes due in connection with such exercise, purchase and sale. The
trust agreement may provide that the Company will issue the Shares to
such trustee for the benefit of the Optionees.
SECTION 13. DEFINITIONS.
(a) BOARD OF DIRECTORS shall mean the Board of Directors of the
Company, as constituted from time to time.
(b) CHANGE IN CONTROL SHALL MEAN:
(i) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if persons who were not stockholders of the Company
immediately prior to such merger, consolidation or other reorganization
own immediately after. such merger, consolidation or other
reorganization 50% or more of the voting power of the outstanding
securities
12
of each of (A) the continuing or surviving entity and (B) any direct or
indirect parent corporation of such continuing or surviving entity; or
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
(c) CODE shall mean the Internal Revenue Code of 1986, as amended.
(d) COMMITTEE shall mean a committee of the Board of Directors, as
described in Section 2(a).
(e) COMPANY shall mean GuruNet Corporation, a Delaware corporation.
(f) CONSULTANT shall mean a person who performs bona fide services
for the Company, a Parent or a Subsidiary as a consultant or advisor, excluding
Employees and Outside Directors.
(g) DISABILITY shall mean that the Optionee is unable to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment.
(h) EMPLOYEE shall mean any individual who is a common-law employee
of the Company, a Parent or a Subsidiary, and with regard to Trustee Stock
Options and Non Trustee Stock Options only provided that such person is not a
"controlling party", as defined in section 32(9) of the Ordinance, prior to and
after the issuance of the Options.
(i) EXERCISE PRICE shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Board of Directors in
the applicable Stock Option Agreement.
(j) FAIR MARKET VALUE shall mean the fair market value of a Share,
as determined by the Board of Directors in good faith. Such determination shall
be conclusive and binding on all persons.
(k) IMMEDIATE FAMILY shall mean any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include
adoptive relationships.
(l) ISO shall mean an employee incentive stock option described in
Section 422(b) of the Code.
13
(m) NONSTATUTORY OPTION or NSO shall mean a stock option not
described in Sections 422(b) or 423(b) of the Code (including a stock option
described in Section 12).
(n) OPTION shall mean an ISO or Nonstatutory Option granted under
the Plan and entitling the holder to purchase Shares and for Israeli residents
shall mean the following types of options granted under the Plan: (i) stock
options without a trustee pursuant and subject to the provisions of Section 102
of the Israeli Income Tax Ordinance (New Version)( 1961 (the "ORDINANCE"), as
amended and any regulations, rules, orders or procedures promulgated thereunder,
including tax rules (Preferential Tax Treatment regarding Issuance of Shares to
Employees, 2003) )("SECTION 102") (such options, "NON TRUSTEE 102 STOCK
OPTIONS"); (ii) stock options allocated to a Trustee (as defined below) under
the capital gain track pursuant and subject to the provisions of Section 102
(such options, "102 CAPITAL GAIN STOCK OPTIONS"); (iii) stock options allocated
to a Trustee (as defined below) under the ordinary income track pursuant and
subject to the provisions of Section 102 (such options, "102 ORDINARY INCOME
STOCK OPTIONS") and (vi) stock options pursuant to Section 3(9) of the Ordinance
("3(9) STOCK OPTIONS").
(o) OPTIONEE shall mean a person who holds an Option.
(p) OUTSIDE DIRECTOR shall mean a member of the Board of Directors
who is not an Employee.
(q) PARENT shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
(r) PLAN shall mean this GuruNetCorporation 2004 Stock Plan.
(s) PURCHASE PRICE shall mean the consideration for which one Share
may be acquired under the Plan (other than upon exercise of an Option), as
specified by the Board of Directors.
(t) PURCHASER shall mean, a person to whom the Board of Directors
has offered the right to acquire Shares under the Plan (other than upon exercise
of an Option).
(u) SERVICE shall mean service as an Employee, Outside Director or
Consultant.
(v) SHARE shall mean one share of Stock, as adjusted in accordance
with Section 8 (if applicable).
(w) STOCK shall mean the Common Stock of the Company, with a par
value of $0.001 per Share.
14
(x) STOCK OPTION AGREEMENT shall mean the agreement between the
Company and an Optionee that contains the terms, conditions and restrictions
pertaining to the Optionee's Option.
(y) STOCK PURCHASE AGREEMENT shall mean the agreement between the
Company and a Purchaser who acquires Shares under the Plan that contains the
terms, conditions and restrictions pertaining to the acquisition of such Shares.
(z) SUBSIDIARY means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
(aa) TRUSTEE means a person or entity appointed `by the Board or the
Committee and approved by the Income Tax Officer to hold Trustee Stock Options
on behalf of the Optionee according to the conditions set forth in Section 102..
(bb) TRUSTEE STOCK OPTIONS means all 102 Capital Gain Stock Options
and 102 Ordinary Income Stock Options.
Exhibit 10.3
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "AGREEMENT") is dated as of
January 23, 2004 by and among GuruNet Corporation, a Delaware corporation (the
"COMPANY"), and each purchaser identified on the signature pages hereto (each, a
"PURCHASER" and collectively, the "PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as
amended, the Company desires to issue and sell to each Purchaser, and each
Purchaser, severally and not jointly, desires to purchase from the Company,
certain securities of the Company as more fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each of the
Purchasers agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. In addition to the terms defined elsewhere in this
Agreement, the following terms have the meanings indicated:
"ACTUAL MINIMUM" means, as of any date, the maximum aggregate
number of shares of Common Stock then issued or potentially issuable in
the future pursuant to the Transaction Documents, including any
Underlying Shares, ignoring any limits on the number of shares of
Common Stock that may be owned by a Purchaser at any one time and
assuming that (a) any previously unconverted Notes are held until the
one-year anniversary of the Closing Date or, if earlier, until
maturity, and all interest on the Notes is paid in shares of Common
Stock, (b) the maximum number of Underlying Shares is issued pursuant
to the Warrants, and (c) the Conversion Price (as defined in the Notes)
at all times on and after the date of determination equals 100% of the
actual Conversion Price on the Business Day immediately prior to the
date of determination.
"AFFILIATE" means any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and
construed under Rule 144. With respect to a Purchaser, any investment
fund or managed account that is managed on a discretionary basis by the
same investment manager as such Purchaser will be deemed to be an
Affiliate of such Purchaser.
"BANKRUPTCY EVENT" means any of the following events: (a) the
Company or any Subsidiary commences a case or other proceeding under
any bankruptcy, reorganization, arrangement, adjustment of debt, relief
of debtors, dissolution, insolvency or liquidation or similar law of
any jurisdiction relating to the Company or any Subsidiary thereof; (b)
there is commenced against the Company or any Subsidiary any such case
or proceeding that is not dismissed within 60 days after commencement;
(c) the Company or
any Subsidiary is adjudicated insolvent or bankrupt or any order of
relief or other order approving any such case or proceeding is entered;
(d) the Company or any Subsidiary suffers any appointment of any
custodian or the like for it or any substantial part of its property
that is not discharged or stayed within 60 days; (e) the Company or any
Subsidiary makes a general assignment for the benefit of creditors; (f)
the Company or any Subsidiary fails to pay, or states that it is unable
to pay or is unable to pay, its debts generally as they become due; or
(g) the Company or any Subsidiary, by any act or failure to act,
expressly indicates its consent to, approval of or acquiescence in any
of the foregoing or takes any corporate or other action for the purpose
of effecting any of the foregoing.
"BUSINESS DAY" means any day other than Saturday, Sunday or
other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
"CHANGE OF CONTROL" means the occurrence of any of the
following in one or a series of related transactions: (i) an
acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) under the Exchange Act) of
more than one-third of the voting rights or equity interests in the
Company; (ii) a replacement of more than one-third of the members of
the Company's board of directors that is not approved by those
individuals who are members of the board of directors on the date
hereof (or other directors previously approved by such individuals);
(iii) a merger or consolidation of the Company or any Subsidiary or a
sale of more than one-third of the assets of the Company in one or a
series of related transactions, unless following such transaction or
series of transactions, the holders of the Company's securities prior
to the first such transaction continue to hold at least two-thirds of
the voting rights and equity interests in of the surviving entity or
acquirer of such assets; (iv) a recapitalization, reorganization or
other transaction involving the Company or any Subsidiary that
constitutes or results in a transfer of more than one-third of the
voting rights or equity interests in the Company; (v) consummation of a
"Rule 13e-3 transaction" as defined in Rule 13e-3 under the Exchange
Act with respect to the Company, or (vi) the execution by the Company
or its controlling stockholders of an agreement providing for or
reasonably likely to result in any of the foregoing events.
"CLOSING" means the closing of the purchase and sale of the
Notes and the Warrants pursuant to Section 2.1.
"CLOSING DATE" means the date of the Closing.
"CLOSING PRICE" means, for any date, the price determined by
the first of the following clauses that applies: (a) if the Common
Stock is then listed or quoted on an Eligible Market or any other
national securities exchange, the closing bid price per share of the
Common Stock for such date (or the nearest preceding date) on the
primary Eligible Market or exchange on which the Common Stock is then
listed or quoted; (b) if prices for the Common Stock are then quoted on
the OTC Bulletin Board, the closing bid price per share of the Common
Stock for such date (or the nearest preceding date) so quoted; (c) if
prices for the Common Stock are then reported in the "Pink Sheets"
2
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting
prices), the most recent closing bid price per share of the Common
Stock so reported; or (d) in all other cases, the fair market value of
a share of Common Stock as determined by an independent appraiser
selected in good faith by the Company and the Lead Purchaser.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Company, par
value $0.001 per share, and any securities into which such common stock
may hereafter be reclassified.
"COMMON STOCK EQUIVALENTS" means, collectively, Options and
Convertible Securities.
"COMPANY COUNSEL" means Morrison Cohen Singer & Weinstein,
LLP.
"CONVERTIBLE SECURITIES" means any stock or securities (other
than Options) convertible into or exercisable or exchangeable for
Common Stock.
"EFFECTIVE DATE" means the date that the Registration
Statement filed pursuant to Section 6.1 is first declared effective by
the Commission.
"ELIGIBLE MARKET" means any of the New York Stock Exchange,
the American Stock Exchange, the Nasdaq National Market, the Nasdaq
Small Cap Market or the OTC Bulletin Board.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXCLUDED STOCK" means (a) the issuance of Common Stock upon
exercise or conversion of any options or other securities described in
SCHEDULE 3.1(F) (provided that such exercise or conversion occurs in
accordance with the terms thereof, without amendment or modification,
and that the applicable exercise or conversion price or ratio is
described in such schedule), (b) any options granted to directors,
officers, employees or other service providers of the Company pursuant
to any Company option plan then in effect and any shares of Common
Stock or other securities issuable in connection with the exercise of
any such options, or (c) any Common Stock or Common Stock Equivalents
issued by the Company in connection with a bona fide acquisition of a
Person or any assets thereof, as approved by the Company's Board of
Directors and not for the principal purpose of raising cash.
"FILING DATE" means the fifth day following the IPO Event Due
Date.
"IPO EVENT" means the occurrence of an initial public offering
of the Company's Common Stock (including all of the Registrable
Securities for resale) with a recognized underwriter (it being agreed
that EarlyBird Capital, Inc. is a recognized underwriter).
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"IPO EVENT DUE DATE" means the later to occur of the 180 day
anniversary of the date of the Closing and June 30, 2004.
"LEAD PURCHASER" means Vertical Ventures, LLC or its successor
or assign.
"LIEN" means any lien, charge, claim, security interest,
encumbrance, right of first refusal or other restriction.
"LOSSES" means any and all losses, claims, damages,
liabilities, settlement costs and expenses, including, without
limitation, costs of preparation and reasonable attorneys' fees.
"NOTES" means $[_______] in aggregate principal amount of 8%
senior secured convertible notes due January___, 2005 issued by the
Company to the Purchasers hereunder substantially in the form of
EXHIBIT B hereto.
"OPTIONS" means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.
"PERSON" means any individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an
agency or subdivision thereof) or any court or other federal, state,
local or other governmental authority or other entity of any kind.
"PLEDGE AGREEMENT" means the Pledge Agreement to be entered
into among the Company, Vertical Ventures, as agent, and the Purchasers
substantially in the form of EXHIBIT H.
"POST-EFFECTIVE AMENDMENT" means a post-effective amendment to
the Registration Statement.
"POST-EFFECTIVE AMENDMENT FILING DEADLINE" means the fifth
Business Day after the Registration Statement ceases to be effective
pursuant to applicable securities laws due to the passage of time or
the occurrence of an event requiring the Company to file a
Post-Effective Amendment.
"PREFERRED STOCK" means each of the Company's Series A
Preferred Stock, par value $0.01 per share, Series B Preferred Stock,
par value $0.01 per share, Series C Preferred Stock, par value $0.01
per share and Series D Preferred Stock, par value $0.01 per share.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes
any information previously omitted from a prospectus filed as part of
an effective registration statement in reliance
4
upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of
the offering of any portion of the Registrable Securities covered by
the Registration Statement, and all other amendments and supplements to
the Prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"REGISTRABLE SECURITIES" means any Common Stock (including
Underlying Shares) issued or issuable pursuant to the Transaction
Documents, together with any securities issued or issuable upon any
stock split, dividend or other distribution, recapitalization or
similar event with respect to the foregoing.
"REGISTRATION STATEMENT" means the registration statement
filed relating to the IPO Event or required to be filed under Section
6.1, including (in each case) the Prospectus, amendments and
supplements to such registration statement or Prospectus, including
pre- and post-effective amendments, all exhibits thereto, and all
material incorporated by reference or deemed to be incorporated by
reference in such registration statement.
"REQUIRED EFFECTIVENESS DATE" means the IPO Event Due Date.
"REQUIRED MINIMUM" means, as of any date, the maximum
aggregate number of shares of Common Stock then issued or potentially
issuable in the future pursuant to the Transaction Documents, including
any Underlying Shares, ignoring any limits on the number of shares of
Common Stock that may be owned by a Purchaser at any one time and
assuming that: (a) any previously unconverted Notes are held until the
one-year anniversary of the Closing Date or, if earlier, until
maturity, and all interest on the Notes is paid in shares of Common
Stock, (b) the maximum number of Underlying Shares is issued pursuant
to the Warrants and (c) the Conversion Price (as defined in the Notes)
at all times on and after the date of determination equals 50% of the
actual Conversion Price (as defined in the Notes) on the Business Day
immediately prior to the date of determination.
"RESTRICTED PERSONS" means any directors and officers of the
Company and any Person that is or shall become, after giving effect to
any or all of the transactions contemplated hereby including, without
limitation, the IPO Event, a "beneficial owner" (as determined pursuant
to Rule 13d-3 under the Exchange Act) of 1% or more of the capital
stock of the Company and any immediate family member or Affiliate of
any of the foregoing Persons.
"RULE 144," "RULE 415," and "RULE 424" means Rule 144, Rule
415 and Rule 424, respectively, promulgated by the Commission pursuant
to the Securities Act, as such Rules may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission
having substantially the same effect as such Rule.
"SECURITIES" means the Notes, the Warrants and the Underlying
Shares.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
5
"SECURITY AGREEMENT" means the Security Agreement dated as of
the Closing Date, among the Company, Vertical Ventures, LLC, as agent,
and the Purchasers substantially in the form of EXHIBIT I.
"SUBSIDIARY" means any Person in which the Company, directly
or indirectly, owns capital stock or holds an equity or similar
interest that are required to be listed in Schedule 3.1(a).
"TRADING MARKET" means the OTC Bulletin Board or any other
Eligible Market on which the Common Stock is then listed or quoted.
"TRANSACTION DOCUMENTS" means this Agreement, the Notes, the
Warrants, the Transfer Agent Instructions and any other documents or
agreements executed or delivered in connection with the transactions
contemplated hereunder.
"TRANSFER AGENT" means any transfer agent selected by the
Company.
"TRANSFER AGENT INSTRUCTIONS" means the Irrevocable Transfer
Agent Instructions, in the form of EXHIBIT E, executed by the Company
and delivered to and acknowledged in writing by the Transfer Agent.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of the Notes, upon exercise of the Warrants, and any
securities issued in exchange for or in respect of such shares.
"WARRANTS" means, (i) collectively, the Common Stock purchase
warrants issued and sold under this Agreement, in the form of EXHIBIT
A-1, and any replacement warrants issued upon partial exercise of such
warrants, and (ii) with respect to the Lead Purchaser, the Common Stock
purchase warrant issued and sold under this Agreement to the Lead
Purchaser, in the form of EXHIBIT A-2, and any replacement warrants
issued upon partial exercise of such warrant.
ARTICLE II
PURCHASE AND SALE
2.1 CLOSING. Subject to the terms and conditions set forth in this
Agreement, at the Closing the Company shall issue and sell to each Purchaser,
and each Purchaser shall, severally and not jointly, purchase from the Company,
the Notes and a Warrant to purchase such number of Underlying Shares, each as
indicated below such Purchaser's name on the signature page of this Agreement,
for an aggregate purchase price for such Purchaser as indicated below such
Purchaser's name on the signature page of this Agreement. The Closing shall take
place at the offices of Proskauer Rose LLP immediately following the execution
hereof, or at such other location or time as the parties may agree.
2.2 CLOSING DELIVERIES.
(a) At the Closing, the Company shall deliver or cause to be
delivered to each Purchaser the following:
6
(i) a Note in the aggregate principal amount indicated below
such Purchaser's name on the signature page of this Agreement,
registered in the name of such Purchaser;
(ii) a Warrant, registered in the name of such Purchaser,
pursuant to which such Purchaser shall have the right to acquire the
number of Underlying Shares indicated below such Purchaser's name on
the signature page of this Agreement, on the terms set forth therein;
(iii) with respect to the Lead Purchaser, a Warrant,
registered in the name of the Lead Purchaser, pursuant to which the
Lead Purchaser shall have the right to acquire the number of Underlying
Shares indicated below Lead Purchaser's name on the signature page of
this Agreement, on the terms set forth therein;
(iv) a lock-up letter in the form of EXHIBIT F-1 executed by
each Restricted Person;
(v) the Security Agreement executed by the parties thereto;
(vi) copies of the Uniform Commercial Code financing
statements and other documents or agreements required by the Security
Agreement or Pledge Agreement with respect to the security or pledge
granted thereby, and evidence of the filing of such financing
statement, documents or agreements;
(vii) the Company has obtained key man life insurance on
Robert S. Rosenschein, its chief executive officer in an amount no less
than $1,000,000;
(viii) the Company has entered into an employment agreement
with Robert S. Rosenschein, its chief executive officer, in form and
substance reasonably acceptable to EarlyBirdCapital, Inc. and the Lead
Purchaser;
(ix) a legal opinion of Company Counsel, in the form of
EXHIBIT C, executed by such counsel and delivered to the Purchasers;
and
(x) duly executed Transfer Agent Instructions acknowledged by
the Transfer Agent.
(b) At the Closing, each Purchaser shall deliver or cause to
be delivered to the Company the following:
(i) the purchase price indicated below such Purchaser's name
on the signature page of this Agreement, in United States dollars and
in immediately available funds, by wire transfer to an account
designated in writing by the Company for such purpose;
(ii) a lock-up letter in the form of Exhibit F-2 executed by
such Purchaser (the "PURCHASER LOCK-UP Letter"); and
7
(iii) a complete, executed copy of the NASD Questionnaire in
the form of Exhibit J.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each of the Purchasers as follows:
(a) Subsidiaries. The Company has no direct or indirect
Subsidiaries other than those listed in Schedule 3.1(a). Except as disclosed in
Schedule 3.1(a), the Company owns, directly or indirectly, all of the capital
stock or comparable equity interests of each Subsidiary free and clear of any
Lien, and all the issued and outstanding shares of capital stock or comparable
equity interests of each Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights.
(b) ORGANIZATION AND QUALIFICATION. Each of the Company and
the Subsidiaries is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. Each of the Company and the Subsidiaries is
duly qualified to do business and is in good standing as a foreign corporation
or other entity in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate, (i) adversely affect the legality,
validity or enforceability of any Transaction Document, (ii) have or result in a
material adverse effect on the results of operations, assets, business or
condition (financial or otherwise) of the Company and the Subsidiaries, taken as
a whole, or (iii) adversely impair the Company's ability to perform fully on a
timely basis its obligations under any of the Transaction Documents (any of (i),
(ii) or (iii), a "MATERIAL ADVERSE EFFECT").
(c) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further consent or action is
required by the Company, its Board of Directors or its stockholders. Each of the
Transaction Documents has been (or upon delivery will be) duly executed by the
Company and is, or when delivered in accordance with the terms hereof, will
constitute, the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity
relating to enforceability.
8
(d) NO CONFLICTS. Except as set forth on Schedule 3.1(d), the
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and
thereby do not and will not (i) conflict with or violate any provision of the
Company's or any Subsidiary's certificate or articles of incorporation, bylaws
or other organizational or charter documents, (ii) conflict with, or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, except to the extent that such conflict,
default or termination right could not reasonably be expected to have a Material
Adverse Effect, or (iii) assuming the accuracy of the representations and
warranties of each Purchaser set forth in Section 3.2, result in a violation of
any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations and the rules and regulations of any self-regulatory organization to
which the Company or its securities are subject), or by which any property or
asset of the Company or a Subsidiary is bound or affected.
(e) ISSUANCE OF THE SECURITIES. Except as disclosed in
Schedule 3.1(e), the Securities (including the Underlying Shares) are duly
authorized and, when issued and paid for in accordance with the Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens (other than any Lien created by the Purchaser) and shall
not be subject to preemptive rights or similar rights of stockholders. The
Company has reserved from its duly authorized capital stock the maximum number
of shares of Common Stock issuable upon exercise of the Warrants.
(f) CAPITALIZATION. The number of shares and type of all
authorized, issued and outstanding capital stock, options and other securities
of the Company (whether or not presently convertible into or exercisable or
exchangeable for shares of capital stock of the Company) is set forth in
Schedule 3.1(f). All outstanding shares of capital stock are duly authorized,
validly issued, fully paid and nonassessable and have been issued in compliance
with all applicable securities laws. Except as disclosed in Schedule 3.1(f),
there are no outstanding options, warrants, script rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares of Common
Stock. Except as disclosed in Schedule 3.1(f), there are no anti-dilution or
price adjustment provisions contained in any security issued by the Company (or
in any agreement providing rights to security holders) and the issue and sale of
the Securities (including the Underlying Shares) will not obligate the Company
to issue shares of Common Stock or other securities to any Person (other than
the Purchasers) and will not result in a right of any holder of Company
securities to adjust the exercise, conversion, exchange or reset price under
such securities.
9
(g) FINANCIAL STATEMENTS. The Company has delivered to the
Purchasers true and complete copies of (i) the audited consolidated balance
sheets of the Company and its Subsidiary as of December 31, 2002, December 31,
2001 and December 31, 2000 and the related consolidated statements of operation,
stockholders' equity and comprehensive income (loss) and cash flow, together
with the notes thereto, of the Company and its Subsidiary for the years then
ended, together with the report of KPMG, in the case of the years ended December
31, 2000 and 2001, and the report of Somekh Chaikin, a member of KPMG
International, thereon, in the case of the year ended December 31, 2002 (the
"AUDITED FINANCIAL STATEMENTS"), and (ii) the unaudited consolidated balance
sheets of the Company and its Subsidiary as of September 30, 2003 and the
related consolidated statements of income and cash flow, without notes, of the
Company and its Subsidiary for the nine month period ended September 30, 2003
(the "UNAUDITED FINANCIAL STATEMENTS"). The Audited Financial Statements have
been prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis during the periods involved ("GAAP"),
except as may be otherwise specified in such financial statements or the notes
thereto, and fairly present in all material respects the financial position of
the Company and its consolidated Subsidiaries as of and for the dates thereof
and the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial, year-end
audit adjustments. To the Company's knowledge, the Unaudited Financial
Statements have been prepared in accordance with GAAP, except as may be
otherwise specified in such Schedule 3.1(g), and fairly present in all material
respects the financial position of the Company and its consolidated Subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject to normal, immaterial, year-end audit
adjustments.
(h) MATERIAL CONTRACTS AND OTHER COMMITMENTS. Except as
disclosed in the Schedule 3.1(h), the Company and the Subsidiary do not have any
contract, agreement, lease, or other commitment, written or oral, absolute or
contingent, other than (i) contracts for the purchase of supplies and services
that were entered into the ordinary course of business and that do not, as of
the date hereof, involve more than $100,000 each; (ii) contracts for the
distribution, marketing or co-branding of the Company's services or contracts
for the licensing of content incorporated into the Company's services, in each
case, entered into the ordinary course of business; and (iii) contracts
terminable at will by the Company or the Subsidiary on no more than sixty (60)
days notice without cost or liability to the Company or the Subsidiary.
(i )MATERIAL CHANGES. Since September 30, 2003, except as
specifically disclosed in Schedule 3.1(i), (i) there has been no event,
occurrence or development that, individually or in the aggregate, has had or
that could reasonably be expected to result in a Material Adverse Effect, (ii)
the Company has not incurred any liabilities (contingent or otherwise) other
than (A) trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required to be
reflected in the Company's financial statements pursuant to GAAP or required to
be disclosed in filings made with the Commission, (iii) the Company has not
altered its method of accounting or the identity of its auditors, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock, and (v) the Company has not
issued any
10
equity securities to any officer, director or Affiliate, except pursuant to
existing Company stock option plans.
(j) ABSENCE OF LITIGATION. Except as set forth in Schedule
3.1(j), there is no action, suit, claim, proceeding, inquiry or investigation
before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries that could
reasonably be expected to, individually or in the aggregate, have a Material
Adverse Effect. Schedule 3.1(j) contains a complete list and summary description
of any pending or, to the knowledge of the Company, threatened proceeding
against or affecting the Company or any of its Subsidiaries that could
reasonably be expected to, individually or in the aggregate, have a Material
Adverse Effect.
(k) COMPLIANCE. Except as set forth in Schedule 3.1(k),
neither the Company nor any Subsidiary (i) is in default under or in violation
of (and no event has occurred that has not been waived that, with notice or
lapse of time or both, would result in a default by the Company or any
Subsidiary under), nor has the Company or any Subsidiary received notice of a
claim that it is in default under or that it is in violation of, any indenture,
loan or credit agreement or any other material agreement or instrument to which
it is a party or by which it or any of its properties is bound (whether or not
such default or violation has been waived), (ii) is in violation of any order of
any court, arbitrator or governmental body, or (iii) is or has been in violation
of any statute, rule or regulation of any governmental authority, including
without limitation all foreign, federal, state and local laws relating to taxes,
environmental protection, occupational health and safety, product quality and
safety and employment and labor matters, except in the case of clauses (i) -
(iii) as could not reasonably be expected to, individually or in the aggregate,
have or result in a Material Adverse Effect.
(l) TITLE TO ASSETS. The Company and the Subsidiaries have
good and marketable title in fee simple to all real property owned by them that
is material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries. Any real property and
facilities held under lease by the Company and the Subsidiaries are held by them
under valid, subsisting and enforceable leases of which the Company and the
Subsidiaries are in material compliance.
(m) CERTAIN FEES. Except as described in Schedule 3.1(m), all
of which are payable to registered broker-dealers, no brokerage or finder's fees
or commissions are or will be payable by the Company to any broker, financial
advisor or consultant, finder, placement agent, investment banker, bank or other
Person with respect to the transactions contemplated by this Agreement, and the
Company has not taken any action that would cause any Purchaser to be liable for
any such fees or commissions.
(n) PRIVATE PLACEMENT. Neither the Company nor any Person
acting on the Company's behalf has sold or offered to sell or solicited any
offer to buy the Securities by means of any form of general solicitation or
advertising. Neither the Company nor any of its
11
Affiliates nor any Person acting on the Company's behalf has, directly or
indirectly, at any time within the past six months, made any offer or sale of
any security or solicitation of any offer to buy any security under
circumstances that would (i) eliminate the availability of the exemption from
registration under Regulation D under the Securities Act in connection with the
offer and sale of the Securities as contemplated hereby or (ii) cause the
offering of the Securities pursuant to the Transaction Documents to be
integrated with prior offerings by the Company for purposes of any applicable
law or regulation. The Company is not, and is not an Affiliate of, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. The Company is not a United States real property holding corporation
within the meaning of the Foreign Investment in Real Property Tax Act of 1980.
(o) FORM SB-2 ELIGIBILITY. The Company is eligible to register
its Common Stock for resale by the Purchasers using Form SB-2 promulgated under
the Securities Act.
(p) REGISTRATION RIGHTS. Except as described in Schedule
3.1(p), the Company has not granted or agreed to grant to any Person any rights
(including "piggy-back" registration rights) to have any securities of the
Company registered with the Commission or any other governmental authority that
have not been satisfied.
(q) APPLICATION OF TAKEOVER PROTECTIONS. There is no control
share acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar anti-takeover provision under the
Company's charter documents that is or could become applicable to any of the
Purchasers as a result of the Purchasers and the Company fulfilling their
obligations or exercising their rights under the Transaction Documents,
including, without limitation, as a result of the Company's issuance of the
Securities and the Purchasers' ownership of the Securities.
(r) DISCLOSURE. The Company understands and confirms that each
of the Purchasers will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosure provided to the
Purchasers regarding the Company, its business and the transactions contemplated
hereby, including the Schedules to this Agreement, furnished by or on behalf of
the Company are true and correct and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. The Company acknowledges and agrees that no Purchaser
makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
Section 3.2.
(s) ACKNOWLEDGMENT REGARDING PURCHASERS' PURCHASE OF
SECURITIES. The Company acknowledges and agrees that each of the Purchasers is
acting solely in the capacity of an arm's length purchaser with respect to this
Agreement and the transactions contemplated hereby. The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company or any other Purchaser (or in any similar capacity) with respect to
this Agreement and the transactions contemplated hereby and any advice given by
any Purchaser or any of their respective representatives or agents in connection
with this Agreement and the transactions contemplated hereby is merely
incidental to such Purchaser's purchase of the Securities. The Company further
represents to each Purchaser that the
12
Company's decision to enter into this Agreement has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.
(t) PATENTS AND TRADEMARKS. The Company and the Subsidiaries
have, or have rights to use, all patents, patent applications, trademarks,
trademark applications, service marks, trade names, copyrights, licenses and
other similar rights that are necessary or material for use in connection with
their respective businesses as currently being operated, except where failure to
so have could reasonably be expected to have a Material Adverse Effect
(collectively, the "INTELLECTUAL PROPERTY RIGHTS"). Schedule 3.1(t) sets forth a
complete and true list of the Company's Intellectual Property Rights. Neither
the Company nor any Subsidiary has received a written notice that the
Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. To the knowledge of the Company, all
such Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.
(u) INSURANCE. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which the
Company and the Subsidiaries are engaged. Except as disclosed on Schedule
3.1(u), neither the Company nor any Subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business without a significant increase in cost.
(v) REGULATORY PERMITS. The Company and the Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to conduct
their respective businesses as currently being operated, except where the
failure to possess such permits could not, individually or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect ("MATERIAL
PERMITS"), and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.
(w) TRANSACTIONS WITH AFFILIATES AND EMPLOYEES. Except as set
forth in Schedule 3.1(w), none of the officers or directors of the Company and,
to the knowledge of the Company, none of the employees of the Company is
presently a party to any transaction with the Company or any Subsidiary (other
than for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
(x) SOLVENCY. Based on the financial condition of the Company
as of the Closing Date (after taking into account the proceeds received or to be
received by the Company from the sale of the Securities), (i) the Company's fair
saleable value of its assets exceeds the amount that will be required to be paid
on or in respect of the Company's existing debts and other liabilities
(including known contingent liabilities) as they mature; (ii) the Company's
assets do not constitute unreasonably small capital to carry on its business for
the
13
current fiscal year as now conducted and as proposed to be conducted including
its capital needs taking into account the particular capital requirements of the
business conducted by the Company, and projected capital requirements and
capital availability thereof; and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate all
of its assets, after taking into account all anticipated uses of the cash, would
be sufficient to pay all amounts on or in respect of its debt when such amounts
are required to be paid. The Company does not intend to incur debts beyond its
ability to pay such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt).
(y) GOING CONCERN. The Company and the Subsidiaries have no
knowledge (after taking into account the proceeds received or to be received by
the Company from the sale of the Securities) that Somekh Chaikin, the Company's
independent public accountants, will issue an audit letter containing a "going
concern" opinion in connection with the Company's annual report for the period
ended December 31, 2003 or otherwise.
(z) SENIORITY. As of the date of this Agreement, no
indebtedness of the Company is or will be senior to or pari passu with the Notes
in right of payment, whether with respect to interest or upon liquidation or
dissolution, or otherwise.
(aa) INTERNAL ACCOUNTING CONTROLS. The Company and the
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby, as to itself only and for no other Purchaser, represents and warrants to
the Company as follows:
(a) ORGANIZATION; AUTHORITY. If the Purchaser is a
corporation, limited liability company or partnership, such Purchaser is an
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization with the requisite corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. If the Purchaser is an individual, such
Purchaser has the requisite power and authority to enter into and to consummate
the transactions contemplated by each of the Transaction Documents to which he
is a party and otherwise to carry out his obligations hereunder and thereunder.
The purchase by such Purchaser of the Notes and the Warrants hereunder has been
duly authorized by all necessary action on the part of such Purchaser. This
Agreement has been duly executed and delivered by such Purchaser and constitutes
the valid and binding obligation of such Purchaser, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency or other similar
14
laws affecting the enforcement of creditors' rights generally and by general
principles of equity relating to enforceability.
(b) INVESTMENT INTENT Such Purchaser is acquiring the
Securities as principal for its own account for investment purposes only and not
with a view to or for distributing or reselling such Securities or any part
thereof, without prejudice, however, to such Purchaser's right, subject to the
provisions of this Agreement, at all times to sell or otherwise dispose of all
or any part of such Securities pursuant to an effective registration statement
under the Securities Act or under an exemption from such registration and in
compliance with applicable federal, state and foreign securities laws. Nothing
contained herein shall be deemed a representation or warranty by such Purchaser
to hold Securities for any period of time.
(c) PURCHASER STATUS. At the time such Purchaser was offered
the Notes and the Warrants, it was, and at the date hereof it is, an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
(d) EXPERIENCE OF SUCH PURCHASER. Such Purchaser, either alone
or together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment. Such Purchaser is able to
bear the economic risk of an investment in the Securities and, at the present
time, is able to afford a complete loss of such investment.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
4.1 TRANSFER RESTRICTIONS.
(a) Securities may only be disposed of pursuant to an
effective registration statement under the Securities Act or pursuant to an
available exemption from the registration requirements of the Securities Act,
and in compliance with any applicable state securities laws. In connection with
any transfer of Securities other than pursuant to an effective registration
statement or to the Company or pursuant to Rule 144(k), except as otherwise set
forth herein, the Company may require the transferor to provide to the Company
an opinion of counsel selected by the transferor, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration under the Securities Act or any
applicable state securities laws. Notwithstanding the foregoing, the Company
hereby consents to and agrees to register on the books of the Company and with
its Transfer Agent, without any such legal opinion, any transfer of Securities
by a Purchaser to an Affiliate of such Purchaser, provided that the transferee
certifies to the Company that it is an "accredited investor" as defined in Rule
501(a) under the Securities Act.
(b) The Purchasers agree to the imprinting, so long as is
required by this SECTION 4.1(B), of the following legend on any certificate
evidencing Securities:
15
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH
THESE SECURITIES ARE EXERCISABLE] HAVE [NOT] BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
[IF THE IPO EVENT HAS OCCURRED, THE SHARES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY NOT BE
SOLD, EXCHANGED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND
CONDITIONS OF A CERTAIN LOCK-UP AGREEMENT DATED AS OF JANUARY __, 2004
(AS THE SAME MAY BE AMENDED OR MODIFIED FROM TIME TO TIME), A COPY OF
WHICH THE COMPANY WILL FURNISH TO THE HOLDER OF THIS CERTIFICATE UPON
REQUEST AND WITHOUT CHARGE.]
NOTWITHSTANDING THE FOREGOING, THESE SECURITIES [AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES] MAY BE PLEDGED
IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY SUCH SECURITIES, PROVIDED THAT ANY
EXERCISE OF ANY RIGHTS BY ANY SECURED PARTY SHALL COMPLY WITH THESE
LEGEND REQUIREMENTS.
Certificates evidencing Securities shall not be required to contain
such legend or any other legend (i) while a Registration Statement covering the
resale of such Securities is effective under the Securities Act (unless a stop
order is then in effect), or (ii) following any sale of such Securities pursuant
to Rule 144, or (iii) if such Securities are eligible for sale under Rule
144(k), or (iv) if such legend is not required under applicable requirements of
the Securities Act (including judicial interpretations and pronouncements issued
by the Staff of the Commission); PROVIDED, HOWEVER, that such certificates shall
retain the legend relating to the Purchaser Lock-up Letter to the extent still
applicable. The Company shall cause its counsel to issue the legal opinion
included in the Transfer Agent Instructions to the Transfer Agent on the
Effective Date. Following the Effective Date or at such earlier time as a legend
is no longer required for certain Securities, the Company will no later than
five Business Days following the delivery by a Purchaser to the Company or the
Transfer Agent of a legended certificate representing such Securities, deliver
or cause to be delivered to such Purchaser a certificate representing such
Securities that is free from all restrictive and other legends; PROVIDED,
HOWEVER, that such certificates shall retain the legend relating to the
Purchaser Lock-up Letter to the extent still
16
applicable. Following the Effective Date and upon the delivery to any Purchaser
of any certificate representing Securities that is free from all restrictive
legends, such Purchaser agrees that any sale of such Securities shall be made
pursuant to the Registration Statement and in accordance with the plan of
distribution described therein, and such Purchaser shall comply with the
prospectus delivery requirements of the Securities Act as applicable to it in
connection with sales of Registrable Securities pursuant to the Registration
Statement. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section.
(c) The Purchaser may from time to time pledge or grant a
security interest in some or all of the Securities in connection with a bona
fide margin agreement or other loan or financing arrangement secured by the
Securities and, if required under the terms of such agreement, loan or
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties; provided, that such pledgee or secured party agrees
to take the Securities subject to the Purchaser Lock-up Letter. Such a pledge or
transfer would not be subject to approval of the Company and no legal opinion of
the pledgee, secured party or pledgor shall be required in connection therewith.
Further, no notice shall be required of such pledge. At the appropriate
Purchaser's expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably request
in connection with a pledge or transfer of the Securities, including, following
the Effective Date, the preparation and filing of any required prospectus
supplement under Rule 424(b)(3) of the Securities Act or other applicable
provision of the Securities Act to appropriately amend the list of selling
stockholders thereunder.
4.2 FURNISHING OF INFORMATION. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the IPO Event or the Effective Date, as the case may be,
pursuant to the Exchange Act. Upon the request of any Purchaser, the Company
shall deliver to such Purchaser a written certification of a duly authorized
officer as to whether it has complied with the preceding sentence. As long as
any Purchaser owns Securities, if the Company is not required to file reports
pursuant to such laws, it will prepare and furnish to the Purchasers and make
publicly available in accordance with paragraph (c) of Rule 144 such information
as is required for the Purchasers to sell the Securities under Rule 144. The
Company further covenants that it will take such further action as any holder of
Securities may reasonably request to satisfy the provisions of Rule 144
applicable to the issuer of securities relating to transactions for the sale of
securities pursuant to Rule 144.
4.3 INTEGRATION. The Company and its Subsidiaries shall not, and shall use
its best efforts to ensure that no Affiliate of the Company or its Subsidiaries
shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in
respect of any security (as defined in Section 2 of the Securities Act) that
would be integrated with the offer or sale of the Securities in a manner that
would require the registration under the Securities Act of the sale of the
Securities to the Purchasers.
17
4.4 RESERVATION AND LISTING OF SECURITIES.
(a) The Company shall maintain a reserve from its duly
authorized shares of Common Stock for issuance pursuant to the Transaction
Documents in such amount as may be required to fulfill its obligations in full
under the Transaction Documents.
(b) If, on any date, the number of authorized but unissued
(and otherwise unreserved) shares of Common Stock (the "REMAINING AUTHORIZED
SHARES") is less than 125% of (i) the Actual Minimum on such date, minus (ii)
the number of shares of Common Stock previously issued pursuant to the
Transaction Documents, then the Board of Directors of the Company shall use its
best efforts to amend the Company's certificate or articles of incorporation to
increase the number of authorized but unissued shares of Common Stock to at
least the Required Minimum at such time (minus the number of shares of Common
Stock previously issued pursuant to the Transaction Documents), as soon as
possible and in any event not later than the 60th day after such date; provided
that the Company will not be required at any time to authorize a number of
shares of Common Stock greater than the maximum remaining number of shares of
Common Stock that could possibly be issued after such time pursuant to the
Transaction Documents.
(c) If, at the time any Purchaser requests an exercise or
conversion of any Securities, the Actual Minimum minus the number of shares of
Common Stock previously issued pursuant to the Transaction Documents exceeds the
Remaining Authorized Shares, then the Company shall issue to the Purchaser
requesting such exercise or conversion a number of Underlying Shares not
exceeding such Purchaser's pro-rata portion of the Remaining Authorized Shares
(based on such Purchaser's share of the aggregate purchase price paid hereunder
and considering any Underlying Shares previously issued to such Purchaser), and
the remainder of the Underlying Shares issuable in connection with such exercise
or conversion (if any) shall constitute "EXCESS SHARES" pursuant to Section
4.4(f) below.
(d) The Company shall, following the Effective Date (i) in the
time and manner required by the Trading Market, prepare and file with such
Trading Market an additional shares listing application covering a number of
shares of Common Stock at least equal to the greater of (A) the Required Minimum
on the Closing Date and (B) the Required Minimum on the date of such
application, (ii) take all steps necessary to cause such shares of Common Stock
to be approved for listing on each Trading Market as soon as possible
thereafter, (iii) provide to the Lead Purchaser evidence of such listing, and
(iv) maintain the listing of such Common Stock on such Trading Market or another
Eligible Market.
(e) If, on any date, the number of shares of Common Stock
previously listed on a Trading Market is less than 125% of the Actual Minimum on
such date, then the Company shall take the necessary actions to list on such
Trading Market, as soon as reasonably possible, a number of shares of Common
Stock at least equal to the Required Minimum on such date; provided that the
Company will not be required at any time to list a number of shares of Common
Stock greater than the maximum number of shares of Common Stock that could
possibly be issued pursuant to the Transaction Documents.
18
(f) Any Purchaser whose receipt of Excess Shares upon exercise
or conversion of Securities is restricted based on the number of Remaining
Authorized Shares shall have the option, by notice to the Company, to require
the Company to either: (i) use its best efforts to obtain the required
shareholder approval necessary to permit the issuance of such Excess Shares as
soon as is possible, but in any event not later than the 60th day after such
notice, or (ii) within five Business Days after such notice, pay cash to such
Purchaser, as liquidated damages and not as a penalty, in an amount equal to the
number of Excess Shares times 115% of the average Closing Price over the five
Business Days immediately prior to the date of such notice or, if greater, the
five Business Days immediately prior to the date of payment (the "CASH AMOUNT").
If the exercising or converting Purchaser elects the first option under the
preceding sentence and the Company fails to obtain the required shareholder
approval on or prior to the 60th day after such notice, then within three
Business Days after such 60th day, the Company shall pay the Cash Amount to such
Purchaser, as liquidated damages and not as penalty.
4.5 SUBSEQUENT PLACEMENTS.
(a) From the date hereof until the earlier to occur of (x) IPO
Event or (y) the Effective Date (the "BLOCKOUT PERIOD"), the Company will not,
directly or indirectly, offer, sell, grant any option to purchase, or otherwise
dispose of (or announce any offer, sale, grant or any option to purchase or
other disposition of) any of its or the Subsidiaries' equity or equity
equivalent securities, including without limitation any debt, preferred stock or
other instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for Common Stock
or Common Stock Equivalents (any such offer, sale, grant, disposition or
announcement being referred to as a "SUBSEQUENT PLACEMENT").
(b) The Blockout Period set forth in the preceding paragraph
(a) shall be extended for the number of Business Days following the Effective
Date in which (i) the Registration Statement is not effective, or (ii) the
prospectus included in the Registration Statement may not be used by the
Purchasers for the resale of Registrable Securities thereunder.
(c) From the end of the Blockout Period until the earlier to
occur of (x) the IPO Event or (y) the two year anniversary of the Effective
Date, the Company will not, directly or indirectly, effect any Subsequent
Placement unless the Company shall have first complied with this Section 4.5(c).
(i) The Company shall deliver to each Purchaser a written
notice (the "OFFER") of any proposed or intended issuance or sale or
exchange of the securities being offered (the "OFFERED SECURITIES") in
a Subsequent Placement, which Offer shall (w) identify and describe the
Offered Securities, (x) describe the price and other terms upon which
they are to be issued, sold or exchanged, and the number or amount of
the Offered Securities to be issued, sold or exchanged, (y) identify
the Persons or entities to which or with which the Offered Securities
are to be offered, issued, sold or exchanged and (z) offer to issue and
sell to or exchange with each Purchaser a pro rata portion of the
Offered Securities, based on such Purchaser's pro rata portion of the
aggregate purchase
19
price paid by the Purchasers for all of the Notes purchased hereunder
(the "BASIC AMOUNT"), and with respect to each Purchaser that elects to
purchase its Basic Amount, any additional portion of the Offered
Securities attributable to the Basic Amounts of other Purchasers as
such Purchaser shall indicate it will purchase or acquire should the
other Purchasers subscribe for less than their Basic Amounts (the
"UNDERSUBSCRIPTION AMOUNT").
(ii) To accept an Offer, in whole or in part, a Purchaser
must deliver a written notice to the Company prior to the end of the
ten (10) Business Day period of the Offer, setting forth the portion of
the Purchaser's Basic Amount that such Purchaser elects to purchase
and, if such Purchaser shall elect to purchase all of its Basic Amount,
the Undersubscription Amount, if any, that such Purchaser elects to
purchase (in either case, the "NOTICE OF ACCEPTANCE"). If the Basic
Amounts subscribed for by all Purchasers are less than the total of all
of the Basic Amounts, then each Purchaser who has set forth an
Undersubcription Amount in its Notice of Acceptance shall be entitled
to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; PROVIDED, HOWEVER,
that if the Undersubscription Amounts subscribed for exceed the
difference between the total of all the Basic Amounts and the Basic
Amounts subscribed for (the "AVAILABLE UNDERSUBSCRIPTION AMOUNT"), each
Purchaser who has subscribed for any Undersubscription Amount shall be
entitled to purchase on that portion of the Available Undersubscription
Amount as the Basic Amount of such Purchaser bears to the total Basic
Amounts of all Purchasers that have subscribed for Undersubscription
Amounts, subject to rounding by the Board of Directors to the extent
its deems reasonably necessary.
(iii) The Company shall have five (5) Business Days from
the expiration of the period set forth in Section 4.5(c)(ii) above to
issue, sell or exchange all or any part of such Offered Securities as
to which a Notice of Acceptance has not been given by the Purchasers
(the "REFUSED SECURITIES"), but only to the offerees described in the
Offer and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable
to the acquiring Person or Persons or less favorable to the Company
than those set forth in the Offer.
(iv) In the event the Company shall propose to sell less
than all the Refused Securities (any such sale to be in the manner and
on the terms specified in Section 4.5(c)(iii) above), then each
Purchaser may, at its sole option and in its sole discretion, reduce
the number or amount of the Offered Securities specified in its Notice
of Acceptance to an amount that shall be not less than the number or
amount of the Offered Securities that the Purchaser elected to purchase
pursuant to Section 4.5(c)(ii) above multiplied by a fraction, (i) the
numerator of which shall be the number or amount of Offered Securities
the Company actually proposes to issue, sell or exchange (including
Offered Securities to be issued or sold to Purchasers pursuant to
Section 4.5(c)(ii) above prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered
Securities. In the event that any Purchaser so elects to reduce the
number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue, sell or exchange more than the
reduced number or amount of the Offered Securities
20
unless and until such securities have again been offered to the
Purchasers in accordance with Section 4.5(c)(i) above.
(v) Upon the closing of the issuance, sale or exchange of
all or less than all of the Refused Securities, the Purchasers shall
acquire from the Company, and the Company shall issue to the
Purchasers, the number or amount of Offered Securities specified in the
Notices of Acceptance, as reduced pursuant to Section 4.5(c)(iv) above
if the Purchasers have so elected, upon the terms and conditions
specified in the Offer. The purchase by the Purchasers of any Offered
Securities is subject in all cases to the preparation, execution and
delivery by the Company and the Purchasers of a purchase agreement
relating to such Offered Securities reasonably satisfactory in form and
substance to the Purchasers and their respective counsel.
(vi) Any Offered Securities not acquired by the Purchasers
or other Persons in accordance with Section 4.5(c)(iii) above may not
be issued, sold or exchanged until they are again offered to the
Purchasers under the procedures specified in this Agreement.
(d) The restrictions contained in paragraphs (a) and (c) of
this Section shall not apply to (x) Excluded Stock, (y) the issuance of Common
Stock in connection with the IPO Event, or (z) any bona-fide underwritten public
offering with a nationally recognized underwriter that will result in proceeds
to the Company equal to or in excess of $5,000,000. In addition, the
restrictions contained in paragraph (a) of this Section shall not apply (x) if
the Company obtains the Lead Purchaser's consent or (y) to any Subsequent
Placement made for the purpose of, and from which the proceeds are used for
repayment of the Notes in full, provided, however, that the then-current holders
of the Notes shall have a right of first refusal as described in Section 4.5(c)
above with respect to any such Subsequent Placement described in this clause
(y).
4.6 SECURITIES LAWS DISCLOSURE; PUBLICITY. The Company and the Lead
Purchaser shall consult with each other in issuing any press releases or
otherwise making public statements or filings and other communications with any
regulatory agency or Trading Market with respect to the transactions
contemplated hereby, and neither party shall issue any such press release or
otherwise make any such public statement, filing or other communication without
the prior consent of the other, except if such disclosure is required by law, in
which case the disclosing party shall promptly provide the other party with
prior notice of such public statement, filing or other communication.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Purchaser, or include the name of any Purchaser in any filing with the
Commission (except for the Registration Statement) or any regulatory agency or
Trading Market, without the prior written consent of such Purchaser, except to
the extent such disclosure (but not any disclosure as to the controlling Persons
thereof) is required by law or Trading Market regulations, in which case the
Company shall provide the Purchasers with prior notice of such disclosure.
Notwithstanding any other provision contained in this Agreement, the Company
(and each employee, representative or other agent of the Company) may disclose
to any and all Persons the tax treatment and tax structure (as such terms are
used in Sections 6011, 6111 and 6112 of the U.S. Code and the Treasury
Regulations promulgated thereunder) of the transactions contemplated by this
Agreement and all materials of any kind (including opinions and tax
21
analyses) that are provided relating to such tax treatment and tax structure.
The Company shall not, and shall cause each of its Subsidiaries and its and each
of their respective officers, directors, employees and agents not to, provide
any Purchaser with any material nonpublic information regarding the Company or
any of its Subsidiaries from and after the Effective Date without the express
written consent of such Purchaser. Subject to the foregoing, neither the Company
nor any Purchaser shall issue any press releases or any other public statements,
other than in the Registration Statement or as otherwise required by law, with
respect to the transactions contemplated hereby. Each press release disseminated
during the 12 months preceding the date of this Agreement did not at the time of
release contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
4.7 USE OF PROCEEDS. The Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company's debt (other than payment of trade
payables and accrued expenses in the ordinary course of the Company's business
and consistent with prior practices), to redeem any Company equity or
equity-equivalent securities or to settle any outstanding litigation.
4.8 REIMBURSEMENT. If any Purchaser or any of its Affiliates or any
officer, director, partner, controlling Person, employee or agent of a Purchaser
or any of its Affiliates (a "RELATED PERSON") becomes involved in any capacity
in any Proceeding brought by or against any Person in connection with or as a
result of the transactions contemplated by the Transaction Documents, the
Company will indemnify and hold harmless such Purchaser or Related Person for
its reasonable legal and other expenses (including the costs of any
investigation, preparation and travel) and for any Losses incurred in connection
therewith, as such expenses or Losses are incurred, excluding only Losses that
result directly from such Purchaser's or Related Person's gross negligence or
willful misconduct or any breach of any representation, warranty or covenant of
such Purchaser in the Transaction Documents. In addition, the Company shall
indemnify and hold harmless each Purchaser and Related Person from and against
any and all Losses, as incurred, arising out of or relating to any breach by the
Company of any of the representations, warranties or covenants made by the
Company in this Agreement or any other Transaction Document, or any allegation
by a third party that, if true, would constitute such a breach. The conduct of
any Proceedings for which indemnification is available under this paragraph
shall be governed by Section 6.4(c) below. The indemnification obligations of
the Company under this paragraph shall be in addition to any liability that the
Company may otherwise have and shall be binding upon and inure to the benefit of
any successors, assigns, heirs and personal representatives of the Purchasers
and any such Related Persons. The Company also agrees that neither the
Purchasers nor any Related Persons shall have any liability to the Company or
any Person asserting claims on behalf of or in right of the Company in
connection with or as a result of the transactions contemplated by the
Transaction Documents, except to the extent that any Losses incurred by the
Company result from the gross negligence or willful misconduct of the applicable
Purchaser or Related Person in connection with such transactions, or any breach
of any representation, warranty or covenant of such Purchaser in the Transaction
Documents. If the Company breaches its obligations under any Transaction
Document, then, in addition to any other liabilities the Company may have under
any Transaction Document or applicable law, the Company shall pay or reimburse
the Purchasers on demand for all costs of collection and
22
enforcement (including reasonable attorneys fees and expenses). Without limiting
the generality of the foregoing, the Company specifically agrees to reimburse
the Purchasers on demand for all costs of enforcing the indemnification
obligations in this paragraph. Each Purchaser hereby agrees to indemnify the
Company for any Losses it suffers (including reasonable attorney's fees and
expenses as well as costs of enforcement of the indemnification described
herein) directly arising out of (a) the failure of such Purchaser to deliver the
original Note to the Company at the time of conversion, other than an Automatic
Conversion (as defined in the Note), and (b) the failure of such Purchaser to
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.
4.9 FUNDAMENTAL CHANGES In addition to any other rights provided by law or
set forth herein, from and after the date of this Agreement and until the
earlier of (x) the date of the IPO Event, and (y) the Effective Date, the
Company shall not without first obtaining the written approval of the Lead
Purchaser:
(a) acquire or merge with any other business entity;
(b) sell a substantial portion of assets not in the ordinary
course of business;
(c) enter into a transaction that results in or cause a
Change of Control;
(d) amend the company's charter or by-laws;
(e) purchase, redeem (other than pursuant to equity incentive
agreements with non-officer employees giving the Company the right to repurchase
shares upon the termination of services) or set aside any sums for the purchase
or redemption of, or declare or pay any dividend (including a dividend payable
in stock of the Company) or make any other distribution with respect to, any
shares of capital stock or any other securities that are convertible into or
exercisable for such stock;
(f) increase the number of shares issuable pursuant to any
stock option or other equity incentive plan;
(g) change the nature of the Company's business to any
business which is fundamentally distinct and separate from the business
currently conducted by the Company;
(h) create, incur, assume or suffer to exist indebtedness
greater than $100,000 in aggregate;
(i) create or suffer to exist any Lien or transfer upon or
against any of its property or assets now owned or hereafter acquired, except
for indebtedness less than $100,000 in aggregate; or
(j) cause or permit any Subsidiary of the Company directly or
indirectly to take any actions described in clauses (a) through (j) above, other
than issuing securities to the Company.
23
4.10 SHAREHOLDERS RIGHTS PLAN. No claim will be made or enforced by the
Company or any other Person that any Purchaser is an "Acquiring Person" under
any shareholders rights plan or similar plan or arrangement in effect or
hereafter adopted by the Company, or that any Purchaser could be deemed to
trigger the provisions of any such plan or arrangement, by virtue of receiving
Underlying Shares under the Transaction Documents or under any other agreement
between the Company and the Purchasers.
4.11 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the issuance
of the Securities (including the Underlying Shares) will result in dilution of
the outstanding shares of Common Stock, which dilution may be substantial under
certain market conditions. The Company further acknowledges that its obligations
under the Transaction Documents, including without limitation its obligation to
issue the Securities (including the Underlying Shares) in accordance with the
Transaction Documents, are unconditional and absolute and not subject to any
right of set off, counterclaim, delay or reduction, regardless of the effect of
any such dilution or any claim that the Company may have against any Purchaser.
4.12 SENIORITY. For so long as the Notes are outstanding, (i) no
indebtedness of the Company is or will be senior to or pari passu with this Note
in right of payment, whether with respect of interest, damages or upon
liquidation or dissolution or otherwise and (ii) the Company will not, and will
not permit any Subsidiary to, directly or indirectly, enter into, create, incur,
assume or suffer to exist any indebtedness for borrowed money of any kind, on or
with respect to any of its property or assets now owned or hereafter acquired or
any interest therein or any income or profits therefrom, that is senior or pari
passu in any respect to the Company's obligations under the Notes, whether with
respect to interest or upon liquidation or dissolution, or otherwise; provided,
however, that the Company may incur any such indebtedness if the proceeds
received in respect thereof are used for repayment of the Notes in full.
4.13 CONVERSION AND EXERCISE PROCEDURES. The form of Exercise Notice
included in the Warrants and the form of Holder Conversion Notice included in
the Notes set forth the totality of the procedures required by the Purchasers in
order to exercise the Warrants or convert the Notes. No additional legal opinion
or other information or instructions shall be necessary to enable the Purchasers
to exercise their Warrants or convert their Notes. The Company shall honor
exercises of the Warrants and conversions of the Notes and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.
4.14 IPO EVENT.
(a) The Company shall use commercially reasonable efforts to
cause the IPO Event to be consummated.
(b) In connection with the filing of a Registration Statement
relating to the IPO Event, the Company shall provide Lead Purchaser written
notice of such filing.
(c) In addition to providing the Purchasers with the
information set forth under Section 6.2 herein, the Company shall promptly (but
in no event later than 3 Business Days) provide the Lead Purchaser with the name
of the underwriter, the pricing terms, the timing of the IPO Event and such
other information as the Lead Purchaser shall reasonably
24
request from time to time relating to the IPO Event and its status, to the
extent available and to the extent such disclosure is not prohibited by
applicable law.
(d) Each Purchaser agrees on behalf of itself that if the
National Association of Securities Dealers, Inc. determines that any Notes or
Warrants received by such Purchaser are "underwriter's compensation", then the
Purchaser shall either (a) surrender such Warrant to the Company without
consideration therefor, if such Warrant is deemed to constitute "underwriter's
compensation" or (b) surrender such Note to the Company for prepayment, if the
Note is deemed to constitute "underwriter's compensation."
4.15 PLEDGE AGREEMENT. The Company shall deliver an executed Pledge
Agreement within 60 days following the Closing Date; provided, however, that if
after using its best efforts to obtain the consents described on Schedule 3.1(d)
herein that are required for the Pledge Agreement, the Company fails to obtain
such consents from the appropriate governmental authority, then the Company
shall not be in breach of this Section 4.15 if it fails to deliver the Pledge
Agreement. Notwithstanding anything to the contrary, the Company hereby agrees
that it shall not transfer, pledge, assign, hypothecate or sell any of its
assets to any Subsidiary, other than in the ordinary course of business and
consistent with prior practice.
ARTICLE V
CONDITIONS
5.1 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PURCHASERS. The
obligation of each Purchaser to acquire Securities at the Closing is subject to
the satisfaction or waiver by such Purchaser, at or before the Closing, of each
of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained herein shall be true and correct in all
material respects as of the date when made and as of the Closing as though made
on and as of such date;
(b) PERFORMANCE. The Company and each other Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by it at or prior to the Closing,
including the conditions set forth in Section 2.2(a); and
(c) CONVERSION. Each of the Company's Preferred Stock shall
have been converted into Common Stock in accordance with Schedule 5.1(c).
5.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY. The obligation
of the Company to sell Securities at the Closing is subject to the satisfaction
or waiver by the Company, at or before the Closing, of each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Purchasers contained herein shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made on and as of such date;
(b) PERFORMANCE. The Purchasers shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the
25
Transaction Documents to be performed, satisfied or complied with by the
Purchasers at or prior to the Closing; and
(c)GROSS PROCEEDS. The gross proceeds to the Company from the sale of the
Securities shall be not less than $2,000,000 and not more than $5,000,000.
ARTICLE VI
REGISTRATION RIGHTS
6.1 REGISTRATION.
(a) In the event the IPO Event does not occur on or prior to
the IPO Event Due Date or less than all the Registrable Securities are included
in the Registration Statement filed relating to the IPO Event, then as promptly
as possible, and in any event on or prior to the Filing Date, the Company shall
prepare and file with the Commission a "Shelf" Registration Statement covering
the resale of all Registrable Securities for an offering to be made on a
continuous basis pursuant to Rule 415. The Registration Statement shall be on
Form SB-2 (except if the Company is not then eligible to register for resale the
Registrable Securities on Form SB-2, in which case such registration shall be on
another appropriate form in accordance herewith as the Purchasers may consent)
and shall contain (except if otherwise directed by the Purchasers or otherwise
required pursuant to written comments received from the Commission upon a review
of such Registration Statement) the "Plan of Distribution" attached hereto as
Exhibit D.
(b) The Company shall use its commercially reasonable efforts
to cause the Registration Statement filed pursuant to Section 6.1(a) to be
declared effective by the Commission as promptly as possible after the filing
thereof, but in any event prior to the Required Effectiveness Date, and shall
use its best efforts to keep the Registration Statement continuously effective
under the Securities Act (subject to Section 6.5 hereof) until the fifth
anniversary of the Effective Date or such earlier date when all Registrable
Securities covered by such Registration Statement have been sold (the
"EFFECTIVENESS PERIOD").
(c) The Company shall notify each Purchaser in writing
promptly (and in any event within one Business Day) after receiving notification
from the Commission that the Registration Statement has been declared effective.
(d) As promptly as possible, and in any event no later than
the Post-Effective Amendment Filing Deadline, the Company shall prepare and file
with the Commission a Post-Effective Amendment. The Company shall use its best
efforts to cause the Post-Effective Amendment to be declared effective by the
Commission as promptly as possible after the filing thereof, but in any event
prior to twenty Business Day after the Post-Effective Amendment Filing Deadline.
The Company shall notify each Purchaser in writing promptly (and in any event
within one business day) after receiving notification from the Commission that
the Post-Effective Amendment has been declared effective.
(e) Upon the occurrence of any Event (as defined below) and on
every monthly anniversary thereof until the applicable Event is cured, as
partial relief for the damages suffered therefrom by the Purchasers (which
remedy shall not be exclusive of any
26
other remedies available under this Agreement, at law or in equity), the Company
shall pay to each Purchaser an amount in cash, as liquidated damages and not as
a penalty, equal to 1% of the aggregate purchase price paid by such Purchaser
hereunder for the first month and 1.5% for each month thereafter. The payments
to which a Purchaser shall be entitled pursuant to this Section 6.1(e) are
referred to herein as "EVENT PAYMENTS". Any Event Payments payable pursuant to
the terms hereof shall apply on a pro-rata basis for any portion of a month
prior to the cure of an Event. In the event the Company fails to make Event
Payments in a timely manner, such Event Payments shall bear interest at the rate
of 1.5% per month (prorated for partial months) until paid in full.
For such purposes, each of the following shall constitute an "EVENT":
(i) the IPO Event has not occurred on or prior to the IPO
Event Due Date;
(ii)the Registration Statement is not filed on or prior to
the Filing Date or is not declared effective on or prior to the
Required Effectiveness Date;
(iii) after the Effective Date, a Purchaser is not
permitted to sell Registrable Securities under the Registration
Statement (or a subsequent Registration Statement filed in replacement
thereof) or Rule 144 for any reason for twenty or more Business Days
(whether or not consecutive);
(iv)a Post-Effective Amendment is not filed on or prior to
the Post-Effective Amendment Filing Deadline or is not declared
effective on or prior to the 20th Business Day after the Post-Effective
Amendment Filing Deadline;
(v) the Company fails for any reason to deliver a
certificate evidencing any Securities to a Purchaser within (x) if
prior to the IPO Event, three (3) Business Days, or (y) if on or
following the IPO Event, ten (10) Business Days after delivery of such
certificate is required pursuant to any Transaction Document or the
exercise rights of the Purchasers pursuant to the Transaction Documents
are otherwise suspended for any reason; or
(vi)the Company fails to have available a sufficient
number of authorized but unissued and otherwise unreserved shares of
Common Stock available to issue Underlying Shares upon any exercise of
the Warrants.
(f) If (i) any Event occurs and remains uncured for 60 days;
(ii) the Company fails to make any cash payment required under the Transaction
Documents and such failure is not cured within five days after notice of such
default is first given to the Company by a Purchaser; or (iii) the Company
breaches Section 4.9, then at any time or times thereafter any Purchaser may
deliver to the Company a notice (a "REPURCHASE NOTICE") requiring the Company to
repurchase all or any portion of (x) the outstanding principal amount of the
Notes held by such Purchaser, at a repurchase price equal to 115% of such
outstanding principal amount, plus all accrued but unpaid interest thereon
through the date of payment, and (y) any Underlying Shares issued to such
Purchaser upon the conversion or exercise of any Securities, at a repurchase
price per share equal to 115% of either (A) if the Common Stock is not then
27
listed or quoted on an Eligible Market, the fair market value of such Underlying
Shares as determined by an independent investment bank selected by both the
Company and the Lead Purchaser as of either (I) the date of delivery of such
Repurchase Notice or (II) the date on which the applicable repurchase price for
such Underlying Shares (together with any other payments, expenses and
liquidated damages then due and payable under the Transaction Documents) is paid
in full, whichever is greater, or (B), if the Common Stock is then listed or
quoted on an Eligible Market, the average of the Closing Prices for the five
Business Days preceding either (I) the date of delivery of such Repurchase
Notice or (II) the date on which the applicable repurchase price for such
Underlying Shares (together with any other payments, expenses and liquidated
damages then due and payable under the Transaction Documents) is paid in full,
whichever is greater (each such applicable repurchase price, collectively, the
"REPURCHASE PRICE"). Notwithstanding anything to the contrary, a Purchaser may
not deliver a Repurchase Notice with respect to clauses (i), (ii) or (iii) above
in this Section 6.1(f), until the one year anniversary of the date hereof. If a
Purchaser delivers a Repurchase Notice pursuant to this Section, the Company
shall pay the aggregate Repurchase Price (together with any other payments,
expenses and liquidated damages then due and payable pursuant to the Transaction
Documents) to such Purchaser no later than the fifth Business Day following the
date of delivery of the Repurchase Notice, and upon receipt thereof such
Purchaser shall deliver original certificates evidencing the Securities so
repurchased to the Company (to the extent such certificates have been delivered
to such Purchaser). Notwithstanding the foregoing, immediately upon the
occurrence of a Bankruptcy Event, each Purchaser will automatically be deemed to
have delivered a Repurchase Notice pursuant to this paragraph and will be
entitled to receive the corresponding Repurchase Price without any further
action or notice to the Company. Notwithstanding anything to the contrary
contained herein, except for clause (v) of Section 6.1(e), the provisions of
Section 6.1(e) and 6.1(f) shall not apply following an IPO Event.
(g) Except for the Registration Statement relating to the IPO
Event, the Company shall not, prior to the Effective Date, prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities.
6.2 REGISTRATION PROCEDURES. In connection with the Company's registration
obligations hereunder (including those related to the IPO Event), the Company
shall:
(a) Not less than three Business Days prior to the filing of a
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall (i) furnish to the Lead
Purchaser and its counsel, Proskauer Rose LLP (the "LEAD PURCHASER COUNSEL")
copies of all such documents proposed to be filed, which documents (other than
those incorporated or deemed to be incorporated by reference) will be subject to
the review of the Lead Purchaser and Lead Purchaser Counsel, and (ii) cause its
officers and directors, counsel and independent certified public accountants to
respond to such inquiries as shall be necessary, in the reasonable opinion of
the Lead Purchaser Counsel, to conduct a reasonable investigation within the
meaning of the Securities Act. The Company shall not file a Registration
Statement or any such Prospectus or any amendments or supplements thereto to
Lead Purchaser shall reasonably object.
28
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424; (iii)
respond as promptly as reasonably possible, and in any event within ten days, to
any comments received from the Commission with respect to the Registration
Statement or any amendment thereto and as promptly as reasonably possible
provide the Purchasers true and complete copies of all correspondence from and
to the Commission relating to the Registration Statement; and (iv) comply in all
material respects with the provisions of the Securities Act and the Exchange Act
with respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Purchasers thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented
(c) Notify Lead Purchaser of Registrable Securities to be sold
and Lead Purchaser Counsel as promptly as reasonably possible, and (if requested
by any such Person) confirm such notice in writing no later than three Business
Day thereafter, of any of the following events: (i) the Commission notifies the
Company whether there will be a "review" of any Registration Statement; (ii) the
Commission comments in writing on any Registration Statement (in which case the
Company shall deliver to Lead Purchaser a copy of such comments and of all
written responses thereto except to the extent prohibited under Section 4.6
hereof); (iii) any Registration Statement or any post-effective amendment is
declared effective; (iv) the Commission or any other Federal or state
governmental authority requests any amendment or supplement to any Registration
Statement or Prospectus or requests additional information related thereto; (v)
the Commission issues any stop order suspending the effectiveness of any
Registration Statement or initiates any Proceedings for that purpose; (vi) the
Company receives notice of any suspension of the qualification or exemption from
qualification of any Registrable Securities for sale in any jurisdiction, or the
initiation or threat of any Proceeding for such purpose; (vii) the financial
statements included in any Registration Statement become ineligible for
inclusion therein or any statement made in any Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference is untrue in any material respect or any revision to a Registration
Statement, Prospectus or other document is required so that it will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or
(viii) when the continued effectiveness of the Registration Statement would
require the Company to disclose a material financing, acquisition or other
corporate transaction, which disclosure the Company shall have determined in
good faith is not in the best interests of the Company and its stockholders at
that time.
(d) Use its commercially reasonable efforts to avoid the
issuance of or, if issued, obtain the withdrawal of (i) any order suspending the
effectiveness of any Registration
29
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e) Furnish to Lead Purchaser and Lead Purchaser Counsel,
without charge, at least one conformed copy of each Registration Statement and
each amendment thereto, including financial statements and schedules, all
documents incorporated or deemed to be incorporated therein by reference, and
all exhibits to the extent requested by such Person (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission.
(f) Promptly deliver to each Purchaser and Lead Purchaser
Counsel, without charge, not more than five copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request. Subject to Section
6.5, the Company hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the selling Purchasers in connection
with the offering and sale of the Registrable Securities covered by such
Prospectus and any amendment or supplement thereto.
(g) Except for the IPO Event, prior to any public offering of
Registrable Securities, use its commercially reasonable efforts to register or
qualify or cooperate with the selling Purchasers and Lead Purchaser Counsel in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Registrable Securities for offer and sale
under the securities or blue sky laws of such jurisdictions within the United
States as any Purchaser reasonably requests in writing, to keep each such
registration or qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things reasonably
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; PROVIDED, HOWEVER,
that the Company shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation or as a dealer in securities
in any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise subject.
(h) Cooperate with the Purchasers to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be delivered to a transferee pursuant to a Registration Statement, which
certificates shall be free, to the extent permitted by this Agreement, of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such Purchasers may request.
(i) Upon the occurrence of any event described in Section
6.2(c)(vii), as promptly as reasonably possible, prepare a supplement or
amendment, including a post-effective amendment, to the Registration Statement
or a supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
30
(j) The Company may require each selling Purchaser to furnish
in writing to the Company a selling security holder questionnaire in the form
attached hereto as Exhibit G (a "SELLING HOLDER QUESTIONNAIRE").
(k) The Company shall not be required to include the
Registrable Securities of any Purchaser in the Registration Statement and shall
not be required to pay any liquidated or other damages under clause (i) of
Section 6.1(e) to the extent it relates to failure to file the Registration
Statement or become effective (nor shall any such Purchaser be entitled to
exercise this rights in clause (i) of Section 6.1(f) to the extent it relates to
failure to file the Registration Statement or become effective) to any Purchaser
hereof who fails to furnish to the Company a fully completed Selling Holder
Questionnaire at least five (5) Business Days prior to the Filing Date (to the
extent requested in writing by the Company) or any other information that the
Commission's staff may require from a Purchaser as a condition to allowing such
Registration Statement to be declared effective under the Securities Act (as
evidenced by written comments made by the Commission in its review of such
Registration Statement and delivered to Lead Purchaser).
(l) Cooperate with any due diligence investigation undertaken
by the Purchasers in connection with the sale of Registrable Securities,
including without limitation by making available any material documents and
information; provided that the Company will not deliver or make available to any
Purchaser material, nonpublic information.
(m) Except for the IPO Event, if holders of a majority of the
Registrable Securities being offered pursuant to a Registration Statement select
underwriters for the offering, the Company shall enter into and perform its
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, by providing customary legal opinions, comfort
letters and indemnification and contribution obligations. Such holders shall be
responsible for any underwriting discounts relating to such offering.
(n) Comply with all applicable rules and regulations of the
Commission.
6.3 REGISTRATION EXPENSES. The Company shall pay (or reimburse the
Purchasers for) all fees and expenses incident to the performance of or
compliance with this Agreement by the Company, including without limitation (a)
all registration and filing fees and e
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