Securities Purchase Agreement - Netgateway Inc. and King William LLC
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of July 31, 2000, is entered
into by and between NETGATEWAY, INC., a Delaware corporation, with headquarters
located at 300 Oceangate, 5th Floor, Long Beach, CA 90802 (the "Company"), and
the King William, LLC (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, INTER ALIA, by Rule 506 under Regulation D ("Regulation
D") as promulgated by the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "Securities Act"),
and/or Section 4(2) of the Securities Act;
WHEREAS, in consideration of the foregoing, the Buyer desires to purchase,
upon the terms and subject to the conditions of this Agreement, that certain 8%
Convertible Debenture, in the principal amount of $4,500,000, issued by the
Company (the "Debenture"), the form of which is attached hereto as ANNEX I,
which will be convertible into shares of Common Stock, par value $.001 per share
of the Company (the "Common Stock"), together with the Common Stock Purchase
Warrants described herein (the "Warrants"), upon the terms and subject to the
conditions of such Debenture, and subject to acceptance of this Agreement by the
Company;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. PURCHASE PRICE; CERTAIN DEFINITIONS. (i) The Buyer hereby agrees to
purchase from the Company the Debenture upon the terms and conditions set forth
herein and in the Debenture. The form of Debenture is attached hereto as ANNEX
I. The purchase price for the Debenture shall be payable in two tranches, the
first tranche (the "First Tranche") of $2,500,000 shall be payable on the
Closing Date (as defined in Section 7(i) below). Subject to the satisfaction of
the closing conditions set forth in paragraphs 9(c), (e) and (f) hereof, the
second tranche (the "Second Tranche") of $2,000,000 shall be paid to Escrow
Agent (as defined in Section 2 below) on the date (the "Second Closing Date")
which is three (3) business days after Escrow Agent's receipt of (i) written
notice from the Company that the registration statement (the "Registration
Statement") filed with the Securities and Exchange Commission ("SEC") pursuant
to the Registration Rights Agreement (as defined in Section 3(d) below), has
been
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declared effective, (ii) an original certification from the chief financial
officer of the Company that, as of the date of the delivery of the
certification, (A) it is then in compliance with all of the covenants and
agreements contained herein (assuming that the Second Tranche has been funded)
and (B) that, as of the date of the delivery of the certification, the Company
would be able to honor a conversion of the entire balance of the Debenture
(including the Second Tranche) and an exercise of all of the Warrants, without
violating the "Cap Regulations" referred to in Section 4(j) below and (iii)
delivery of Warrants as set forth in Section 4(i) below. If the SEC refuses to
clear the Registration Statement for effectiveness as a result of the inclusion
of the funding of the Second Tranche in the Debenture, the Company and Buyer
hereby agree to amend the Debenture to remove the funding of the Second Tranche
thereunder (thereby reducing the principal balance of the Debenture to
$2,500,000) and, within five (5) business days of the effectiveness of the
Registration Statement, the Buyer hereby agrees to purchase (and the Company
hereby agrees to issue) a new 8% Convertible Debenture for a purchase price of
$2,000,000 upon the same terms and conditions as contained herein, except that
said debenture would not have a second tranche and Buyer shall not be entitled
to additional Warrants in connection with the purchase thereof.
(ii) As used herein, the term "Securities" means the Debenture, the
Warrants and the Common Stock issuable upon conversion of the Debenture and the
exercise of the Warrants.
b. FORM OF PAYMENT. The Buyer shall pay the Purchase Price for the
Debenture by delivering immediately available good funds in United States
Dollars to the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as ANNEX II (the "Joint Escrow Instructions"). No
later than the Closing Date (as defined below), the Company shall deliver the
original Debenture duly executed on behalf of the Company to the Escrow Agent.
By signing this Agreement, the Buyer and the Company, and subject to acceptance
by the Escrow Agent, each agrees to all of the terms and conditions of, and
becomes a party to, the Joint Escrow Instructions, all of the provisions of
which are incorporated herein by this reference as if set forth in full.
c. METHOD OF PAYMENT. Payment into escrow of the Purchase Price for the
Debenture shall be made by wire transfer of funds to the account set forth in
the Joint Escrow Instructions, not later than 1:00 p.m., PST time, on the date
which is one (1) New York Stock Exchange trading day after the Company shall
have accepted this Agreement and returned a signed counterpart of this Agreement
to the Escrow Agent by facsimile, Buyer shall deposit with the Escrow Agent the
purchase price for the Debenture being acquired by it, in immediately available
funds. Time is of the essence with respect to such payment, and failure by the
Buyer to make such payment shall allow the Company to cancel this Agreement.
d. ESCROW PROPERTY. The Purchase Price, the Debenture and the Warrants
delivered to the Escrow Agent as contemplated herein are sometimes referred to
as the "Escrow Property."
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2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Without limiting Buyer's right to sell the Common Stock pursuant to
the Registration Statement (as that term is defined below), the Buyer is
purchasing the Debenture and will be acquiring the shares of Common Stock
issuable upon conversion of the Debenture or the exercise of the Warrant (the
"Converted Shares") for its own account for investment, and not with a view
towards the public sale or distribution thereof and not with a view to or for
sale in connection with any distribution thereof.
b. The Buyer and each of its Members is (i) an "accredited investor" as
that term is defined in Rule 501 of the General Rules and Regulations under the
Securities Act by reason of Rule 501(a)(3), (ii) experienced in making
investments of the kind described in this Agreement and the related documents,
(iii) able, by reason of the business and financial experience of its officers
(if an entity) and professional advisors (who are not affiliated with or
compensated in any way by the Company or any of its affiliates or selling
agents), to protect its own interests in connection with the transactions
described in this Agreement, and the related documents, and (iv) able to afford
the entire loss of its investment in the Securities.
c. All subsequent offers and sales of the Debenture and the shares of
Common Stock representing the Converted Shares (such Common Stock sometimes
referred to as the "Shares") by the Buyer shall be made pursuant to registration
of the Shares under the Securities Act or pursuant to an exemption from
registration.
d. The Buyer understands that the Debenture is being offered and sold to
it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying
upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of the Buyer to acquire the Debenture.
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e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Debenture and the offer of the
Shares which have been requested by the Buyer. The Buyer and its advisors, if
any, have been afforded the opportunity to ask questions of the Company and have
received complete and satisfactory answers to any such inquiries. Without
limiting the generality of the foregoing, the Buyer has also had the opportunity
to obtain and to review the (i) Registration Statement on Form S-1A dated
November 18, 1999; (ii) Prospectus filed pursuant to Rule 424 on November 19,
1999; (iii) S-8 Registration Statement January 21, 2000; (iv) S-8 POS
Registration Statement February 11, 2000; (v) Quarterly Report on Form 10Q dated
February 15, 2000; (vi) Current Report on Form 8-K dated March 21, 2000; (vii)
Definitive Proxy Statement dated April 26, 2000; (viii) Quarterly Report on Form
10Q dated May 15, 2000; (ix) Definitive Proxy Statement dated May 24, 2000; (x)
Amendment No. 1 to Registration Statement on Form S-4 dated May 24, 2000; and
(xi) Current Report on Form 8-K dated June 29, 2000;]
f. The Buyer understands that its investment in the Securities involves a
high degree of risk.
g. The Buyer understands that no United States federal or state agency or
any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities.
h. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally. The Buyer
is a limited liability company duly organized, validly existing and in good
standing under the laws of the Cayman Islands and has requisite corporate power
to own its properties and to carry on its business as now being conducted.
i. Notwithstanding the provisions hereof or of the Debenture, in no event
(except with respect to an automatic conversion of the Debenture as provided
therein) shall Buyer be entitled to convert any Debenture to the extent that,
after such conversion, the sum of (1) the number of shares of Common Stock
beneficially owned by Buyer and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Debenture), and (2) the number of shares of Common
Stock issuable upon the conversion of the Debenture with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by Buyer and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Any
issuance by the Company to the Buyer in excess of the limit contained in this
Paragraph 2.i. shall be null and void, AB INITIO, and upon notice of such
invalid issuance, the Company shall correct its books and
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cause its transfer agent's books to be corrected forthwith to reflect that the
Buyer's ownership of Common Stock is within the limit set forth herein. Buyer
shall immediately deliver any certificates for invalidly issued Common Stock to
the Company's transfer agent. The Company further agrees to (i) immediately
reissue certificates for Common Stock to the extent that a portion of the Common
Stock represented by said certificates have been validly issued and (ii)
immediately reissue all or a portion of those shares which were deemed invalidly
issued (at a price set forth in the original conversion notices applicable to
such shares) upon notice from the Buyer that the reissuance of such shares would
not cause such Buyer to have a beneficial ownership interest in excess of 4.99%.
The Company hereby indemnifies and holds Buyer free and harmless in connection
with any and all liabilities, losses, costs and expenses, including, without
limitation, attorneys' fees and costs arising from or relating to claims made by
any third parties alleging that Buyer has violated Sections 13(d) and/or 16, to
the extent such violation is premised on the fact that, notwithstanding this
Section 2.i., the Buyer is the beneficial owner of all of the shares of Common
Stock which would be issuable, from time to time, if Buyer converted the entire
principal and interest balance of the Debenture.
j. Buyer represents that it neither is nor will be obligated for any
finders' fee or commission nor is it aware of any such fee or commission payable
in connection with this transaction other than as set forth on the Joint Escrow
Instructions (attached hereto as Annex II). Buyer agrees to indemnify and to
hold harmless the Company from any liability for any commission or compensation
in the nature of a finders' fee (and the costs and expenses of defending against
such liability or asserted liability) for which such Buyer or any of its
officers, partners, employees, or representatives is responsible.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants and hereby covenants and agrees with
Buyer that:
a. CONCERNING THE DEBENTURE AND THE SHARES. The Debenture has been duly
authorized and, when issued, will be duly and validly issued, fully paid and
non-assessable and will not subject the holder thereof to personal liability by
reason of being such holder. There are no preemptive rights of any stockholder
of the Company, as such, to acquire the Securities.
b. REPORTING COMPANY STATUS. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power to own its properties and to carry on its
business as now being conducted. The Company is duly qualified as a foreign
corporation to do business and is in good standing in each jurisdiction where
the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the business, operations
or prospects or condition (financial or otherwise) of the Company and its
subsidiaries, taken as a whole. The Company has registered its Common Stock
pursuant to Section 12 of the 1934 Act, and the
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Common Stock is listed and traded on the "NASDAQ/National Market System. The
Company has received no notice, either oral or written, with respect to the
continued eligibility of the Common Stock for such listing, and the Company has
maintained all requirements for the continuation of such listing.
c. AUTHORIZED SHARES. The Company has at June 30, 2000, 21,638,031 shares
of Common Stock issued and outstanding, and has sufficient authorized and
unissued Shares as may be reasonably necessary to effect the conversion of the
Debenture (assuming all future conversions occurred are based upon an average
5-day closing bid of the Common Stock, as reported by Bloomberg, LP which was
one-half (1/2) of the closing bid price of the Common Stock on the Closing Date
(the "Closing Date Bid") and exercise of the Warrants (as defined in Section
4.k.) at the Closing Date Bid. The Common Stock has been duly authorized and,
when issued upon conversion of the Debenture in accordance with its terms, will
be duly and validly issued, fully paid and non-assessable and will not subject
the holder thereof to personal liability by reason of being such holder.
d. SECURITIES PURCHASE AGREEMENT; REGISTRATION RIGHTS AGREEMENT AND
DEBENTURE. This Agreement, the Debenture, the Registration Rights Agreement, the
form of which is attached hereto as ANNEX IV (the "Registration Rights
Agreement") and the transactions contemplated hereby and thereby, have been duly
and validly authorized by the Company, this Agreement has been duly executed and
delivered by the Company and this Agreement is, and the Debenture and the
Registration Rights Agreement, when executed and delivered by or on behalf of
the Company, will be, valid and binding agreements of the Company enforceable in
accordance with their respective terms, subject, as to enforceability, to
general principles of equity and to bankruptcy, insolvency, moratorium, and
other similar laws affecting the enforcement of creditors' rights generally.
e. NON-CONTRAVENTION. The execution and delivery of this Agreement, the
Debenture and the Registration Rights Agreement by the Company, the issuance of
the Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Debenture and the Registration Rights
Agreement do not and will not conflict with or result in a breach by the Company
of any of the terms or provisions of, or constitute a default under (i) the
articles of incorporation or by-laws of the Company, each as currently in
effect, (ii) except as disclosed in ANNEX V, any indenture, mortgage, deed of
trust, or other material agreement or instrument to which the Company is a party
or by which it or any of its properties or assets are bound, including any
listing agreement for the Common Stock (except as herein set forth), (iii) to
its knowledge, any existing applicable law, rule, or regulation or any
applicable decree, judgment, or order of any court, United States federal or
state regulatory body, administrative agency, or other governmental body having
jurisdiction over the Company or any of its properties or assets, or (iv) any
listing agreement for its Common Stock, except such conflict, breach or default
which would not have a material adverse effect on the transactions contemplated
herein.
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f. APPROVALS. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
g. SEC FILINGS. To the best of the Company's knowledge, none of the
Company's SEC Reports filed since November 1999 contained, at the time they were
filed, 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 made
therein in light of the circumstances under which they were made, not
misleading, except as corrected by an amended filing made prior to the date
hereof. The Company has since November 1999 filed all requisite forms, reports
and exhibits thereto with the SEC.
h. ABSENCE OF CERTAIN CHANGES. Since March 31, 2000, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or otherwise), or results of
operations of the Company and its subsidiaries, taken as a whole, except as
disclosed in ANNEX V or in the Company's SEC Reports. Except as disclosed in
ANNEX V or in the Company's SEC Reports, since March 31, 2000 , the Company has
not (i) incurred or become subject to any material liabilities (absolute or
contingent) except liabilities incurred in the ordinary course of business
consistent with past practices; (ii) discharged or satisfied any material lien
or encumbrance or paid any material obligation or liability (absolute or
contingent), other than current liabilities paid in the ordinary course of
business consistent with past practices; (iii) declared or made any payment or
distribution of cash or other property to stockholders with respect to its
capital stock, or purchased or redeemed, or made any agreements to purchase or
redeem, any shares of its capital stock; (iv) sold, assigned or transferred any
other tangible assets, or canceled any debts or claims, except in the ordinary
course of business consistent with past practices; (v) suffered any substantial
losses or waived any rights of material value, whether or not in the ordinary
course of business, or suffered the loss of any material amount of existing
business; (vi) made any changes in employee compensation, except in the ordinary
course of business consistent with past practices; or (vii) experienced any
material problems with labor or management in connection with the terms and
conditions of their employment.
i. FULL DISCLOSURE. There is no fact known to the Company (other than
general economic conditions known to the public generally or as disclosed in the
Company's SEC Reports), that has not been disclosed in writing to the Buyer that
(i) would reasonably be expected to have a material adverse effect on the
business or financial condition of the Company or (ii) would reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement or any of the agreements
contemplated hereby (collectively, including this Agreement, the "Transaction
Agreements").
j. ABSENCE OF LITIGATION. Except as disclosed in ANNEX V or in the
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Company's SEC Reports There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or, to the
knowledge of the Company, threatened against or affecting the Company, wherein
an unfavorable decision, ruling or finding would have a material adverse effect
on the properties, business or financial condition. results of operation or
prospects of the Company and its subsidiaries taken as a whole or the
transactions contemplated by any of the Transaction Agreements or which would
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, any of the Transaction
Agreements.
k. ABSENCE OF EVENTS OF DEFAULT. Except as set forth in ANNEX V hereto or
in the Company's SEC Reports, no Event of Default (or its equivalent term), as
defined in the respective agreement to which the Company is a party, and no
event which, with the giving of notice or the passage of time or both, would
become an Event of Default (or its equivalent term) (as so defined in such
agreement), has occurred and is continuing, which would have a material adverse
effect on the Company's financial condition or results of operations or its
assets or properties.
l. PRIOR ISSUES. Except as set forth in ANNEX V hereto or in the
Company's SEC Reports, during the twelve (12) months preceding the date hereof,
the Company has not issued any Common Stock or convertible securities in capital
transactions which have not been fully disclosed in the Company's filings with
the SEC. Except as set forth in ANNEX V hereto or in the Company's SEC Reports,
all such issuances (except for issuances to Buyer) have been fully converted
into shares of common stock and there are no outstanding unconverted debt or
convertible securities from those transactions.
m. NO UNDISCLOSED LIABILITIES OR EVENTS. Except as set forth in ANNEX V,
the Company has no liabilities or obligations other than those disclosed in the
Company's SEC Reports or those incurred in the ordinary course of the Company's
business since March 31, 2000, and which, individually or in the aggregate, do
not or would not have a material adverse effect on the properties, business,
condition (financial or otherwise), results of operations or prospects of the
Company and its subsidiaries, taken as a whole. No event or circumstances has
occurred or exists with respect to the Company or its properties, business,
condition (financial or otherwise), results of operations or prospects, which,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed.
n. Intentionally deleted.
o. EXEMPT OFFERING. Neither the Company nor any of its affiliates nor any
person acting on its or their behalf has, directly or indirectly, made any offer
or sales of any security or solicited any offers to buy any security under
circumstances that would eliminate the availability of the exemption from
registration under Regulation D or Section 4(2) of the
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Securities Act in connection with the offer and sale of the Securities as
contemplated hereby.
p. DILUTION. The number of Shares issuable upon conversion of the
Debenture may increase substantially in certain circumstances, including, but
not necessarily limited to, the circumstance wherein the trading price of the
Common Stock declines prior to the conversion of the Debenture. The Company's
executive officers and directors fully understand the nature of the Securities
being sold hereby and recognize that they have a potential dilutive effect. The
board of directors of the Company has concluded that, in its good faith business
judgment, such issuance is in the best interests of the Company. The Company
specifically acknowledges that its obligation to issue the Shares upon
conversion of the Debenture is binding upon the Company and enforceable
regardless of the dilution such issuance may have on the ownership interests of
other shareholders of the Company.
q. ACKNOWLEDGMENT BY COMPANY. Company represents and warrants that
neither the Buyer, nor any persons or entities representing or purporting to
represent the Buyer have made any representation or warranty which is not
contained expressly in this Agreement or any other agreements referred to
herein. Without limiting the foregoing, Company specifically acknowledges that
the Buyer has made no representations that it is a "long term" investor in the
Company, or that it intends to hold the Debenture or shares of stock in the
Company (obtained by conversions of the Debenture) for any period beyond that
which is required under the Securities Act. Company further acknowledges that
the Buyer may hedge the shares of stock in the Company prior to or after the
conversions of the Debenture, provided that such hedging is done in compliance
with the Securities Act, the 1934 Act, any rules applicable to securities traded
on the NASD/National Market System and the express terms of this Agreement, the
Debenture, the Warrants and the Registration Rights Agreement.
r. BROKERS FEE. The Company represents that it neither is nor will be
obligated for any finders' fee or commission nor is it aware of any such fee or
commission payable in connection with this transaction other than as set forth
on the Joint Escrow Instructions (attached hereto as Annex II). The Company
agrees to indemnify and to hold harmless the Buyer from any liability for any
commission or compensation in the nature of a finders' fee (and the costs and
expenses of defending against such liability or asserted liability) for which
the Company or any of its officers, partners, employees, or representatives is
responsible.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. TRANSFER RESTRICTIONS. Buyer acknowledges that (1) the Debenture has
not been and is not being registered under the provisions of the Securities Act
and, except as provided in the Registration Rights Agreement, the Shares have
not been and are not being registered under the Securities Act, and may not be
transferred unless (A) subsequently registered thereunder or (B) the Buyer shall
have delivered to the Company an opinion of counsel, reasonably satisfactory in
form, scope and substance to the Company, to the effect that the Securities to
be sold or transferred may be sold or transferred pursuant to an exemption from
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such registration; (2) any sale of the Securities made in reliance on Rule 144
promulgated under the Securities Act may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
such Securities under circumstances in which the seller, or the person through
whom the sale is made, may be deemed to be an underwriter, as that term is used
in the Securities Act, may require compliance with some other exemption under
the Securities Act or the rules and regulations of the SEC thereunder; and (3)
neither the Company nor any other person is under any obligation to register the
Securities (other than pursuant to the Registration Rights Agreement) under the
Securities Act or to comply with the terms and conditions of any exemption
thereunder.
b. RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that the
Debenture and, until such time as the Common Stock has been registered under the
Securities Act as contemplated by the Registration Rights Agreement and sold
pursuant to an effective Registration Statement, certificates and other
instruments representing any of the Securities shall bear a restrictive legend
in substantially the following form (and a stop-transfer order may be placed
against transfer of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER
EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS
NOT REQUIRED.
c. REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter into
the Registration Rights Agreement on or before the Closing Date.
d. FILINGS. The Company undertakes and agrees to make all necessary
filings in connection with the sale of the Debenture to the Buyer under any
United States laws and regulations, or by any domestic securities exchange or
trading market, and to provide a copy thereof to the Buyer promptly after such
filing.
e. REPORTING STATUS. So long as Buyer beneficially holds the Debenture,
the Company shall file all reports required to be filed with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934
Act or the rules and regulations thereunder would permit such termination.
f. USE OF PROCEEDS. The Company will use the proceeds from the sale of
the Debenture (excluding amounts paid by the Company for legal fees, finder's
fees and escrow agent fees in connection with the sale of the Debenture) for
general capital purposes and, without
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limiting the foregoing, shall not, directly or indirectly, use any of such
proceeds for investment in any other affiliate.
g. CERTAIN AGREEMENTS. (i) The Company covenants and agrees that it will
not, without the prior written consent of the Buyer, enter into any subsequent
or further offer or sale of Common Stock or securities convertible into Common
Stock with any third party until one hundred eighty (180) days after the
Effective Date (as defined below).
(ii) The provisions of subparagraph 4.g.i.(i) will not apply to (A) Common
Stock issued as "restricted stock" as defined in SEC Rule 144, provided the
holder thereof holds such Common Stock for at least one year from the date of
issuance; (B) a secondary public offering of shares of Common Stock at market;
(C) an offering of convertible securities at market or above; (D) the issuance
of securities (other than for cash) in connection with a merger, consolidation,
sale of assets, disposition or the exchange of the capital stock for assets,
stock or other joint venture interests or strategic relationships; (E) the grant
or exercise of employee stock options and other employment compensation; (F) the
conversion of securities or the exercise of warrants referenced in Schedule 5(b)
of the Registration Rights Agreement and (G) any issuance of Common Stock in any
future transaction with Buyer; provided with regard to (A) through (D) above,
such securities would not be included in the Registration Statement relating to
the Shares and a registration statement in respect of such stock shall not be
filed prior to sixty (60) days after the Effective Date.
(iii) The term "Effective Date" means the effective date of the
Registration Statement covering the Registrable Securities (as defined in the
Registration Rights Agreement).
(iv) In the event the Company breaches the provisions of this Paragraph
4.G.i., the Conversion Price shall be amended to equal the conversion formula
set forth in Section 4.A. of the Debenture and Buyer may, within thirty (30)
days after it receives written notice of such breach from the Company, require
the Company to immediately redeem the Debenture held by it in accordance with
Section 6(y) of the Debenture.
h. AVAILABLE SHARES. The Company shall have at all times authorized and
reserved for issuance, free from preemptive rights, shares of Common Stock equal
to two hundred percent (200%) of the number of shares of Common Stock issuable
upon conversion of the Debenture, and the exercise of the Warrants.
i. WARRANTS. The Company agrees to issue to Buyer at the Closing,
Warrants for 231,000 shares of Common Stock. Such Warrants shall bear an
exercise price equal to $1.625 and shall be transferable divisible warrants
(with cashless exercise provisions), exercisable immediately upon issuance, and
for a period of five (5) years thereafter, in the form annexed hereto as ANNEX
VI, together with piggy-back registration rights, and demand registration rights
set forth under the Registration Rights Agreement. The Company agrees to
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<PAGE>
issue to Buyer on the Second Closing Date (and as a condition thereof), Warrants
for shares of Common Stock, equal to (A) the principal amount of the Second
Traunch, divided by the closing bid price of the Common Stock (as reported by
Bloomberg) at the close of the immediately preceding trading day (the "Second
Closing Bid Price"), (B) multiplied by fifteen percent (15%). Such Warrants
shall bear an exercise price equal to Second Closing Bid Price and shall be
transferable divisible warrants (with cashless exercise provisions), exercisable
immediately upon issuance, and for a period of five (5) years thereafter, in the
form annexed hereto as ANNEX VI, together with piggy-back registration rights,
and demand registration rights set forth under the Registration Rights
Agreement.
j. LIMITATION ON ISSUANCE OF SHARES. The Debenture shall provide that the
Company shall take all steps reasonably necessary to be in a position to issue
shares of Common Stock on conversion of the Debenture without violating the "Cap
Regulations". If despite taking such steps, the Company is limited in the number
of shares of Common Stock it may issue by the "Cap Regulations," to the extent
that the Company cannot issue such shares of Common Stock, due upon a Notice of
Conversion, without violating the Cap Regulations, the Company shall immediately
notify Buyer the principal amount of its Debenture which is not convertible as a
result of said Cap Regulations (the "Debenture Balance") and the Buyer, shall
have the option, exercisable in its sole and absolute discretion, to elect any
of the remedies in Section 6 of the Debenture.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the aggregate purchase
price for the Debenture in accordance with Section 1(c) hereof, the Company will
irrevocably instruct its transfer agent to issue Common Stock from time to time
upon conversion of the Debenture in such amounts as specified from time to time
by the Company to the transfer agent, bearing the restrictive legend specified
in Section 4(b) of this Agreement prior to registration of the Shares under the
Securities Act, registered in the name of the Buyer or its nominee and in such
denominations to be specified by Buyer in connection with each conversion of its
Debenture. The Company warrants that no instruction other than such instructions
referred to in this Section 5 and stop transfer instructions to give effect to
Section 4(a) hereof prior to registration and sale of the Shares under the
Securities Act will be given by the Company to the transfer agent and that the
Shares shall otherwise be freely transferable on the books and records of the
Company as and to the extent provided in this Agreement, the Registration Rights
Agreement, and applicable law. Nothing in this Section shall affect in any way
the Buyer's obligations and agreement to comply with all applicable securities
laws upon resale of the Securities. If the Buyer provides the Company with an
opinion of counsel reasonably satisfactory to the Company that registration of a
resale by the Buyer of any of the Securities in accordance with clause (1)(B) of
Section 4(a) of this Agreement is not required under the Securities Act, the
Company shall (except as provided in clause (2) of Section 4(a) of this
Agreement) permit the transfer of the Securities and, in the case of the Shares,
promptly instruct
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<PAGE>
the Company's transfer agent to issue one or more certificates for Common Stock
without legend in such name and in such denominations as specified by the Buyer.
b. (i) The Company will permit Buyer to exercise its right to convert its
Debenture by telecopying an executed and completed Notice of Conversion (as
defined in the Debenture) to the Company and delivering within three (3)
business days thereafter, the original Notice of Conversion, together with the
original Debenture, by express courier.
(ii) The term "Conversion Date" means, with respect to any conversion
elected by the holder of the Debenture after the Effective Date, the date
specified in the Notice of Conversion, provided the copy of the Notice of
Conversion is telecopied to or otherwise delivered to the Company in accordance
with the provisions hereof so that is received by the Company on or before such
specified date. The Conversion Date for any mandatory conversion at maturity
shall be the Maturity Date of the Debenture.
(iii) The Company shall, at its expense, take all actions and use all
means necessary and diligent to cause its transfer agent to transmit the
certificates representing the Shares issuable upon conversion of the Debenture
to the Buyer via express courier, by electronic transfer or otherwise, within
three (3) business days after receipt by the Company of the later of (i) receipt
by the Company of the copy of the original Notice of Conversion (and the
original Debenture upon the final conversion) and (ii) the Conversion Date (the
"Delivery Date").
c. The Company understands that a delay in the issuance of the Shares of
Common Stock beyond the Delivery Date could result in economic loss to the
Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments to the Buyer in the event that due entirely to the Company's
failure to issue and deliver the Shares upon Conversion in accordance with the
following schedule (where "No. Business Days Late" is defined as the number of
business days beyond three (3) business days from Delivery Date):
LATE PAYMENT FOR EACH $10,000
OF PRINCIPAL AND INTEREST OF DEBENTURE
NO. BUSINESS DAYS LATE BEING CONVERTED
---------------------- --------------------------------------
1 $100
2 $200
3 $300
4 $400
5 $500
>5 $500 +$200 for each
Business
Day Late beyond 5 days from
The Delivery Date
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<PAGE>
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit Buyer's
right to pursue actual damages or to cause the Company to redeem the Debenture
as provided below for the Company's actions or inactions resulting in the
transfer agent's failure to issue and deliver the Common Stock to the Buyer.
Furthermore, in addition to any other remedies which may be available to the
Buyer, in the event that the Company fails to deliver such shares of Common
Stock within three (3) business days after the Delivery Date, the Buyer will be
entitled to revoke the relevant Notice of Conversion by delivering a notice to
such effect to the Company whereupon the Company and the Buyer shall each be
restored to their respective positions immediately prior to delivery of such
Notice of Conversion. In the event the Company's actions or inactions result in
the transfer agent's failure to issue and deliver the Common Stock to the Buyer
within ten (10) days after the Delivery Date, Buyer may, at its option, require
the Company (without limiting its other remedies hereunder) to immediately
redeem the remaining interest and principal balance of its Debenture in
accordance with Section 6(y) of the Debenture.
d. If, by the relevant Delivery Date, the Company fails for any reason to
deliver the Shares to be issued upon conversion of the Debenture and after such
Delivery Date, the holder of the Debenture being converted (a "Converting
Holder") purchases, in an open market transaction or otherwise, shares of Common
Stock (the "Covering Shares") in order to make delivery in satisfaction of a
sale of Common Stock by the Converting Holder made after a Conversion Date (the
"Sold Shares"), which delivery such Converting Holder anticipated to make using
the Shares to be issued upon such conversion (a "Buy-In"), the Company shall pay
to the Converting Holder, in addition to all other amounts contemplated in other
provisions of the Transaction Agreements, and not in lieu thereof, the Buy-In
Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the
amount equal to the excess, if any, of (x) the Converting Holder's total
purchase price (including brokerage commissions, if any) for the Covering Shares
over (y) the net proceeds (after brokerage commissions, if any) received by the
Converting Holder from the sale of the Sold Shares. The Company shall pay the
Buy-In Adjustment Amount to the Buyer in immediately available funds immediately
upon demand by the Converting Holder. By way of illustration and not in
limitation of the foregoing, if the Converting Holder purchases shares of Common
Stock having a total purchase price (including brokerage commissions) of $11,000
to cover a Buy-In with respect to shares of Common Stock it sold for net
proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required
to pay to the Converting Holder will be $1,000. The remedies set forth in
paragraphs 5(c) and (d) shall be cumulative.
e. In lieu of delivering physical certificates representing the
unlegended securities issuable upon conversion, provided the Company's transfer
agent is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, upon request of the Buyer and its compliance with
the provisions contained in this paragraph, so long as the certificates therefor
do not bear a legend and the Buyer thereof is not obligated to return such
certificate for the placement of a legend thereon, the Company shall use its
best efforts to cause
14
<PAGE>
its transfer agent to electronically transmit the Common Stock issuable upon
conversion to the Buyer by crediting the account of Buyer's Prime Broker with
DTC through its Deposit Withdrawal Agent Commission system.
f. The original Debenture shall be delivered by the Buyer to the Company
simultaneous with the final Notice of Conversion.
6. DELIVERY INSTRUCTIONS.
The Debenture shall be delivered by the Company to the Escrow Agent
pursuant to Section 1(b) hereof, on a delivery against payment basis, no later
than on the Closing Date.
7. CLOSING DATE.
(i) The closing of the issuance and sale of the Debenture shall occur on
the date (the "Closing Date") which is the first NYSE trading day after the
fulfillment or waiver of all closing conditions pursuant to Sections 8 and 9
hereof or such other date and time as is mutually agreed upon by the Company and
the Buyer.
(ii) The closing of the purchase and issuance of Debenture shall occur on
the Closing Date, at the offices of the Escrow Agent and shall take place no
later than 12:00 Noon, PST, on such day or such other time as is mutually agreed
upon by the Company and the Buyer.
(iii) Notwithstanding anything to the contrary contained herein, the Escrow
Agent will be authorized to release the Escrow Property (as defined in the
Escrow Agreement) only upon satisfaction of the conditions set forth in Sections
8 and 9 hereof.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Debenture
on the Closing Date and to the Buyer pursuant to this Agreement is conditioned
upon:
a. The receipt and acceptance by the Buyer of this Agreement as evidenced
by execution of this Agreement by the Buyer for Four Million Five Hundred
Thousand Dollars ($4,500,000) in aggregate principal amount of the Debenture (or
such lesser amount as the Company, in its sole discretion, shall determine on
the Closing Date);
b. Delivery by the Buyer to the Escrow Agent of good funds as payment in
full of an amount equal to the Purchase Price for the Debenture in accordance
with Section 1(c) hereof;
c. The accuracy on the Closing Date of the representations and warranties
of the Buyer contained in this Agreement as if made on the Closing Date, and the
performance by
15
<PAGE>
the Buyer on or before the Closing Date of all covenants and agreements of the
Buyer required to be performed on or before the Closing Date;
d. There shall not be in effect any law, rule or regulation prohibiting
or restricting the transactions contemplated hereby, or requiring any consent or
approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Debenture on the Closing Date (and, as applicable, to remit the second tranche
on the Second Closing Date) is conditioned upon:
a. Acceptance by the Company of this Agreement for the sale of Debenture,
as indicated by execution of this Agreement;
b. Delivery by the Company to the Escrow Agent of the Debenture, in
accordance with this Agreement;
c. The accuracy in all material respects on the Closing Date (and, as
applicable, the Second Closing Date) of the representations and warranties of
the Company contained in this Agreement as if made on the Closing Date and the
performance of or compliance with all covenants and agreements of the Company
required to be performed or complied with on or before the Closing Date; and
d. On the Closing Date, Buyer having received (i) an opinion of counsel
for the Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX III attached hereto,
(ii) the Registration Rights Agreement, and (iii) the Warrants.
e. No statute, rule, regulation, executive order, decree, ruling or
injunction shall be enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits or adversely
effects any of the transactions contemplated by this Agreement or the
Transaction Documents, and no proceeding or investigation shall have been
commenced or threatened which may have the effect of prohibiting or adversely
effecting any of the transactions contemplated by this Agreement or the
Transaction Documents.
f. From and after the date hereof to and including the Closing Date (and,
as applicable, the Second Closing Date), the trading of the Common Stock shall
not have been suspended by the SEC, or the NASD and trading in securities
generally on the New York Stock Exchange, NASDAQ/National Market System, shall
not have been suspended or limited, nor shall minimum prices been established
for securities traded on NASDAQ/National Market System, nor shall there be any
outbreak or escalation of hostilities involving the United States or
16
<PAGE>
any material adverse change in any financial market that in either case in the
reasonable judgment of the Buyer makes it impracticable or inadvisable to
purchase the Debenture.
10. GOVERNING LAW; MISCELLANEOUS.
a. This Agreement and all agreements entered into in connection herewith
shall be governed by and interpreted in accordance with the laws of the State of
California for contracts to be wholly performed in such state and without giving
effect to the principles thereof regarding the conflict of laws. Any litigation
based thereon, or arising out of, under, or in connection with, this agreement
or any course of conduct, course of dealing, statements (whether oral or
written) or actions of the Company or Buyer shall be brought and maintained
exclusively in the state or Federal courts of the State of California, sitting
in the City of Los Angeles. The Company hereby expressly and irrevocably submits
to the jurisdiction of the state and federal Courts of the State of California
for the purpose of any such litigation as set forth above and irrevocably agrees
to be bound by any final judgment rendered thereby in connection with such
litigation. The Company further irrevocably consents to the service of process
by registered mail, postage prepaid, or by personal service within or without
the State of California. The Company hereby expressly and irrevocably waives, to
the fullest extent permitted by law, any objection which it may have or
hereafter may have to the laying of venue of any such litigation brought in any
such court referred to above and any claim that any such litigation has been
brought in any inconvenient forum. To the extent that the Company has or
hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) with respect to itself or its
property, the Company hereby irrevocably waives such immunity in respect of its
obligations under this Agreement and the related agreements entered into in
connection herewith.
b. A facsimile transmission of this signed Agreement shall be legal and
binding on all parties hereto.
c. This Agreement may be signed in one or more counterparts, each of
which shall be deemed an original.
d. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.
e. If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
f. This Agreement may be amended only by an instrument in writing signed
by the party to be charged with enforcement thereof.
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<PAGE>
g. This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof.
h. Except as otherwise set forth herein, all costs and expenses,
including reasonable attorneys' fees, incurred by the Buyer in the enforcement
of this Agreement or any agreements related thereto, shall be paid by the
Company upon demand.
11. NOTICES. Any notice or communication required or permitted by this
Agreement shall be given in writing addressed as follows:
COMPANY: NETGATEWAY, INC.
300 Oceangate, 5th Floor
Long Beach, CA 90802
ATTN: Craig Gatarz, General Counsel
Telephone No.: (562) 308-0010
Telecopier No.: (562) 308-0021
with a copy to:
Nida & Maloney
800 Anacapa St.
Santa Barbara, CA 93101
Attention: C. Thomas Hopkins, Esq.
Telephone: (805) 568-1151
Facsimile: (805) 568-1955
BUYER: At the address set forth on the signature page of this Agreement.
ESCROW AGENT: At the address set forth in the Joint Escrow Instruction
All notices shall be served personally by telecopy, by telex, by overnight
express mail service or other overnight courier, or by first class registered or
certified mail, postage prepaid, return receipt requested. If served personally,
or by telecopy, notice shall be deemed delivered upon receipt (provided that if
served by telecopy, sender has written confirmation of delivery); if served by
overnight express mail or overnight courier, notice shall be deemed delivered
forty-eight (48) hours after deposit; and if served by first class mail, notice
shall be deemed delivered seventy-two (72) hours after mailing. Any party may
give written notification to the other parties of any change of address for the
sending of notices, pursuant to any method provided for herein.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's
representations and warranties herein shall survive, for a period of two (2)
years the execution and delivery of this Agreement and the delivery of the
Debenture and the Purchase
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<PAGE>
Price, and shall inure to the benefit of the Buyer and its successors and
assigns.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
PURCHASE PRICE OF THE DEBENTURE: $4,500,000*
*As detailed below
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities Purchase
Agreement to be duly executed on its behalf as of this ____ day of July, 2000.
Printed Names of Buyers
By: SEE ANNEXED
-------------------------------------
(Signature of Authorized Person)
-------------------------------------
Printed Name and Title
As of the date set forth below, the undersigned hereby accepts this Agreement
and represents that the foregoing statements are true and correct and that it
has caused this Securities Purchase Agreement to be duly executed on its behalf.
NETGATEWAY, INC., a Delaware corporation
By: /s/ DONALD M. CORLISS, JR.
------------------------------------------------
Title: President and Chief Operating Officer
------------------------------------------------
Date: August 1, 2000
------------------------------------------------
<PAGE>
ANNEX TO SIGNATURE PAGE
PRINCIPAL AMOUNT
-----------------
$4,500,000 King William, LLC, a Cayman Islands limited
liability company
By:
-----------------------------------------
Manager
ADDRESS: King William, LLC
c/o Navigator Management
P.O. Box 972
Road Town
Tortola, British Virgin Islands
Telephone: (284) 494-4770
Facsimile: (284) 494-4771
<PAGE>
ANNEX I DEBENTURE
ANNEX II JOINT ESCROW INSTRUCTIONS
ANNEX III OPINION OF COUNSEL
ANNEX IV REGISTRATION RIGHTS AGREEMENT
ANNEX V COMPANY DISCLOSURE MATERIALS
ANNEX VI COMMON STOCK PURCHASE WARRANT
<PAGE>
ANNEX V
COMPANY DISCLOSURE
------------------
[TO BE SUPPLIED BY COMPANY]