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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Schedule 13D
Under the Securities Exchange Act of 1934
(Amendment No. __)
SC&T International, Inc.
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(Name of Issuer)
Common Stock, $.01 par value share
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(Title of Class of Securities)
783975 10 5
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(CUSIP Number)
Stephen T. Burdumy, Esq.
Todd L. Silverberg, Esq.
Klehr, Harrison, Harvey, Branzburg & Ellers
1401 Walnut Street
Philadelphia, PA 19102
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(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
July 25, 1996
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(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box / /.
Check the following box if a fee is being paid with the statement /X/. (A fee is
not required only if the reporting person: (1) has a previous statement on file
reporting beneficial ownership of more than five percent of the class of
securities described in Item 1; and (2) has filed no amendment subsequent
thereto reporting beneficial ownership of five percent or less of such class.)
(See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits, should be filed with
the Commission. See Rule 13d-1(a) for other parties to whom copies are to be
sent.
(Continued on following page(s))
Page 1 of 7
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CUSIP No. 783975 10 5 Page 2 of 7 Pages
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1 NAME OF REPORTING PERSONS
S.S OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
Capital Ventures International
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [ ]
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3 SEC USE ONLY
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4 SOURCE OF FUNDS*
WC
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5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) OR 2(e) [ ]
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
Cayman Islands
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NUMBER OF | 7 | SOLE VOTING POWER
SHARES | | 1,170,912
BENEFICIALLY | |
OWNED BY | 8 | SHARED VOTING POWER
EACH | | N/A
REPORTING | 9 | SOLE DISPOSITIVE POWER
PERSON WITH | | 1,170,912
| 10 | SHARED DISPOSITIVE POWER
| | N/A
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11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,170,912
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12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* [ ]
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13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
18.8%**
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14 TYPE OF REPORTING PERSON*
CO
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*SEE INSTRUCTIONS BEFORE FILLING OUT
** Does not take into account 11,135,373 shares of common stock of the issuer
beneficially owned by other purchasers of Series A Preferred Stock. If such
shares were included in this calculation, the percentage beneficial ownership
reported in Row 11 would be 6.7%. See Items 3 and 4 for a further discussion
with respect to such other purchasers.
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CUSIP No. 783975 10 5 Page 3 of 7 Pages
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Statement of
Reporting Persons (as defined below)
Pursuant to Section 13(d) of the
Securities Exchange Act of 1934
in respect of
SC&T INTERNATIONAL, INC.
This Report filed by Capital Ventures International ("CVI") is
its initial filing on Schedule 13D with respect to the common stock, $.01 par
value per share (the "Common Stock"), of SC&T International, Inc. (the
"Company").
The descriptions contained in this Report of certain
agreements and documents are qualified in their entirety by reference to the
completed text of such agreements and documents filed as Exhibits hereto.
Item 1. Security and Issuer
The class of equity securities to which this statement relates
is the Common Stock of the Company. The principal executive office of the
Company is located at 3837 East Lasalle Street, Phoenix, AZ 85040.
Item 2. Identity and Background
CVI is an unlimited liability company organized under the laws
of the Cayman Islands, with its principal place of business and principal office
located at One Capital Place, P.O. Box 1787GT, Grand Cayman, Cayman Islands,
BWI.
CVI is a company engaged in the purchase of securities for
investment.
The entire share capital of CVI is owned by the following
entities in the stated percentages.
Mu Trading, Inc. ("Mu Trading") owns 44% of CVI and is a
Delaware corporation which does not conduct business other than as a holding
company for subsidiary operating companies engaged in the securities business.
Mu Trading's principal place of business and principal office are located at 42
Reads Way, New Castle, DE 19720. Mu Trading is owned 100% by Jeffrey Yass, a
U.S. citizen and an investor with a business address of 401 City Line Avenue,
Suite 220, Bala Cynwyd, PA 19004. Mr. Yass is the sole director and executive
officer of Mu Trading.
Rattan, Inc. ("Rattan") owns 14% of CVI and is a Delaware
corporation which does not conduct business other than as a holding company for
subsidiary operating companies engaged in the securities business. Rattan's
principal place of business and principal office are located at 42 Reads Way,
New Castle, DE 19720. Rattan is owned 100% by Eric Brooks, a U.S. citizen and an
investor with a business address of 401 City Line Avenue, Suite 220, Bala
Cynwyd, PA 19004. Mr. Brooks is the sole director and executive officer of
Rattan.
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CUSIP No. 783975 10 5 Page 4 of 7 Pages
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Lobby, Inc. ("Lobby") owns 14% of CVI and is a Delaware
corporation which does not conduct business other than as a holding company for
subsidiary operating companies engaged in the securities business. Lobby's
principal place of business and principal office are located at 42 Reads Way,
New Castle, DE 19720. Lobby is owned 100% by Arthur Dantchik, a U.S. citizen and
an investor with a business address of 401 City Line Avenue, Suite 220, Bala
Cynwyd, PA 19004. Mr. Dantchik is the sole director and executive officer of
Lobby.
East Bay, Inc. ("East Bay") owns 14% of CVI and is a Delaware
corporation which does not conduct business other than as a holding company for
subsidiary operating companies engaged in the securities business. East Bay's
principal place of business and principal office are located at 42 Reads Way,
New Castle, DE 19720. East Bay is owned 100% by Andrew Frost, a U.S. citizen and
an investor with a business address of 401 City Line Avenue, Suite 220, Bala
Cynwyd, PA 19004. Mr. Frost is the sole director and executive officer of East
Bay.
Selt, Inc. ("Selt") owns 14% of CVI and is a Delaware
corporation which does not conduct business other than as a holding company for
subsidiary operating companies engaged in the securities business. Selt's
principal place of business and principal office are located at 42 Reads Way,
New Castle, DE 19720. Selt is owned 100% by Joel Greenberg, a U.S. citizen and
an investor with a business address of 401 City Line Avenue, Suite 220, Bala
Cynwyd, PA 19004. Mr. Greenberg is the sole director and executive officer of
Selt.
Each of the individuals referred to above (the "Principals")
conducts his principal business activities through Susquehanna Investment Group
("SIG") and its related companies. SIG's principal place of business and
principal office are located at 401 City Line Avenue, Suite 220, Bala Cynwyd, PA
19004. CVI's directors are comprised solely of the Principals, except for
director Ian Wight, a U.K. Citizen and a trust accountant with a business
address of RHB Trust Company, Ltd, 1 Capital Place, Grand Cayman, Cayman
Islands, BWI. The executive officers of CVI are Richard Douglas, a U.K. Citizen
and a trust accountant, and Woodbourne Associates (Cayman) Ltd., a Nominee
Company located in the Cayman Islands.
During the last five years, neither CVI, nor to the best of
CVI's knowledge, any individual or entity named in this Item 2, has been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or has been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such civil
proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to, federal
or state securities laws or finding any violation with respect to such laws.
Item 3. Source and Amount of Funds and Other Consideration.
CVI is a party to a Securities Subscription Agreement with the
Company, dated as of June 17, 1996, pursuant to which CVI agreed to acquire for
purposes of investment 100 shares of Series A Preferred Stock of the Company,
$.01 par value per share (the "Preferred Shares"). The aggregate purchase price
of the Preferred Shares was $1,000,000. In addition, the Company received
$9,510,000 from other investors (the "Other Investors") who purchased an
aggregate of 951 shares of Series A Preferred Stock of the Company pursuant to
Securities Subscription Agreements by and between the Company and each of the
Other Investors.
The Preferred Shares, together with interest accrued thereon
(at a rate of 8% per annum), are convertible into Common Stock at a price per
share (the "Conversion Price") equal to the lesser of: (i) $7.75 (the "Fixed
Conversion Price") and (ii) 85% of the average of the closing bid prices for the
Common Stock on the NASDAQ Small Cap Market, or on the principal securities
exchange or other securities market on which the Common Stock is then being
traded, for the ten consecutive trading days ending one trading day prior to the
conversion date (subject to equitable adjustments for stock splits, stock
dividends, combinations, recapitalization, reclassifications or similar events).
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CUSIP No. 783975 10 5 Page 5 of 7 Pages
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CVI utilized its own working capital funds to consummate the
purchase of the Preferred Shares.
Item 4. Purpose of Transaction.
CVI is acquiring the Preferred Shares for investment purposes
for its own account. CVI does not currently have any plan or intention to
acquire additional securities of the Company other than its intention to acquire
the shares of Common Stock issuable upon conversion of the Preferred Shares.
Except as stated above, CVI has no plans or proposals that
relate or would result in any of the transactions referred to in sub-items (a)
through (j) of Item 4 of Schedule 13D.
Item 5. Interest in Securities of the Issuer.
Based on a Conversion Price equal to the closing bid price of
the Company's Common Stock on The NASDAQ Small Cap Market on October 1, 1996
($0.875), the total of number of shares of Common Stock that CVI beneficially
owns through the ownership of the Preferred Shares would be 1,170,912 shares of
Common Stock or 18.8% of the outstanding Common Stock. (If the 11,135,373 shares
of Common Stock beneficially owned by the Other Investors were included in such
calculation, however, CVI would beneficially own only 6.7% of the Company's
outstanding Common Stock).
The number of shares of Common Stock beneficially owned by CVI
will fluctuate depending on the Conversion Price from time to time in effect;
provided, however, except to the extent that shares are disposed of, the
beneficial ownership will never be less than the number of shares beneficially
owned based on the Fixed Conversion Price. To the extent the Conversion Price is
less than the Fixed Conversion Price, the number of shares beneficially owned by
CVI will increase without any action on the part of CVI. The number of shares
beneficially owned by CVI can be determined by dividing (A) the sum of (i) the
product of (a) 10,000, multiplied by (b) the number of Preferred Shares
outstanding plus (ii) accrued interest thereon by (B) the Conversion Price then
in effect.
To the best knowledge of CVI, none of the individuals listed
in Item 2 hereof beneficially owns any Common Stock other than through their
ownership interest in CVI. Neither CVI, nor to the best of CVI's knowledge, any
of the individuals listed in Item 2 hereof has effected any transactions in the
Common Stock during the past 60 days other than CVI's purchase of the Preferred
Shares.
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect
to Securities of the Issuer.
Simultaneously with the execution of the Securities
Subscription Agreement, the Company and CVI entered into a Registration Rights
Agreement, pursuant to which the Company agreed to register under the Securities
Act of 1933, as amended, the resale by CVI of the Common Stock underlying the
Preferred Shares.
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CUSIP No. 783975 10 5 Page 6 of 7 Pages
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Item 7. Material to be Filed as Exhibits.
Exhibit A - Securities Subscription Agreement (together with Certificate
of Designation of Series A Preferred Stock and Registration Rights
Agreement).
Exhibit B - Limited Power of Attorney.
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CUSIP No. 783975 10 5 Page 7 of 7 Pages
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
CAPITAL VENTURES INTERNATIONAL
By: Bala International, Inc. (f/k/a Arbit Inc.),
pursuant to a Limited Power of Attorney,
a copy of which is filed as an exhibit hereto
By: /s/ Arthur Dantchik
-------------------------
Arthur Dantchik, Director
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EXHIBIT A
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SC&T INTERNATIONAL, INC.
REGULATION S SECURITIES SUBSCRIPTION AGREEMENT
THE PREFERRED STOCK BEING SUBSCRIBED FOR HEREIN AND THE COMMON STOCK
ISSUABLE UPON CONVERSION OF THE PREFERRED STOCK HAVE NOT BEEN REGISTERED WITH
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ("COMMISSION") UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES
COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED
PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION S ("REGULATION S")
PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS SUCH TERM IS DEFINED IN
REGULATION S) UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE
STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. INVESTMENT IN SUCH SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN
MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF
THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND THE RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED, APPROVED OR DISAPPROVED BY
ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE,
THE FOREGOING AUTHORITIES HAVE NOT REVIEWED, PASSED UPON, CONFIRMED OR
DETERMINED THE ACCURACY OR ADEQUACY OF THIS DOCUMENT OR ANY INFORMATION PROVIDED
BY THE COMPANY TO POTENTIAL INVESTORS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This offshore Regulation S Securities Subscription Agreement (the
"Agreement") is executed by the undersigned (the "Subscriber") in connection
with the offer and purchase by the undersigned for Series A Preferred Stock,
$.01 par value (the "Preferred Stock"), of SC&T International, Inc., an Arizona
corporation (the "Company"). The Preferred Stock is being offered at a purchase
price of Ten Thousand Dollars ($10,000) per share, in minimum subscription
amounts of at least five (5) shares ($50,000), and increments of one (1) share
($10,000) in excess thereof, with a minimum offering amount of Six Hundred (600)
shares of Preferred Stock, or Six Million Dollars ($6,000,000) (the "Minimum
Amount"), and up to a maximum amount of One Thousand Fifty-one (1,051) shares of
Preferred Stock, or Ten Million Five Hundred Ten Thousand Dollars ($10,510,000)
(the "Maximum Amount") (collectively, the "Offering"). The terms of the
Preferred Stock, including the terms on which the Preferred Stock may be
converted into common stock, $.01 par value, of the Company (the "Common
Stock"), are set forth in the Certificate of Designation of Series A Preferred
Stock (the "Certificate of Designation"), substantially in the form attached
hereto as Exhibit A. The solicitation of this Subscription and, if accepted by
the Company, the offer and sale of the Preferred Stock and Common Stock issuable
upon conversion thereof are being made in reliance upon the provisions of
Regulation S ("Regulation S") promulgated under the Act. The Preferred Stock and
the Common Stock issuable upon conversion thereof (the "Conversion Shares") are
sometimes referred to herein collectively as the "Securities."
It is agreed as follows:
<PAGE>
1. Offering
1.1 Offer to Subscribe; Purchase Price and Closing; and Placement
Fees.
Subject to satisfaction of the conditions to closing set forth
in Section 1.2 below, the Subscriber hereby offers to
subscribe for and purchase Preferred Stock, for the aggregate
purchase price in the amount set forth in Section 19 of this
Agreement, in accordance with the terms and conditions of this
Agreement. Subscriber agrees that the Company, in its
discretion, may reduce the aggregate amount of Preferred Stock
subscribed for by Subscriber, if the Offering is
over-subscribed. Assuming that the Minimum Amount and
corresponding subscription agreements accepted by the Company
are received into the Company's designated escrow account for
this Offering (the "Escrow Account"), the closing of a sale
and purchase of Preferred Stock as to each Subscriber (the
"Closing") shall be deemed to occur when this Agreement has
been executed by both the Subscriber and the Company and full
payment shall have been made by the Subscriber, by wire
transfer to the Company's designated escrow account as set
forth in Section 17, for payment in consideration for the
Company's delivery of certificates representing the Preferred
Stock subscribed for.
The parties hereto acknowledge that Swartz Investments, LLC is
acting as placement agent ("Placement Agent") for this
Offering and will be compensated by the Company in cash and
warrants to purchase Common Stock of the Company. Placement
Agent has acted solely as placement agent in connection with
the Offering by the Company of the Preferred Stock pursuant to
this Agreement. The information and data contained in the
Disclosure Documents (as defined in Section 2.2) have not been
subjected to independent verification by Placement Agent, and
no representation or warranty is made by Placement Agent as to
the accuracy or completeness of the information contained in
the Disclosure Documents.
The Company and each of the Subscribers acknowledge that the
Matthew Fund, N.V. (the "Fund"), which is managed by
affiliates of the Placement Agent, may subscribe for
securities in the Offering. The parties acknowledge that
neither the Placement Agent nor any of its affiliates shall be
under any obligation to advise the Company or the Subscribers
of the activities of the Fund with respect to such securities
following the consummation of the Offering. Such
acknowledgment shall not act as a waiver of any obligation
required by law or written agreement of which the Fund is a
party. It is understood that the Fund will act independently
of the Placement Agent and may take action with respect to
such investment which may be inconsistent or contrary to any
action or interest of the Placement Agent, the Company or any
of the Subscribers.
1.2 Conditions to Subscriber's Obligations. The Subscriber's
obligations hereunder are conditioned upon all of the
following:
(a) the following documents have been deposited with the
Company's escrow agent for this Offering ("Escrow Agent"): the
Registration Rights Agreement, substantially in the form
attached hereto as Exhibit B (executed by the Company), the
Opinion of Counsel,
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substantially in the form attached hereto as Exhibit C (signed
by Company's counsel), Irrevocable Instructions to Transfer
Agent, substantially in the form attached hereto as Exhibit D
(executed by Company and transfer agent) and the Certificate
of Designation, substantially in the form attached hereto as
Exhibit A (together with evidence showing that it has been
filed with the Arizona Corporation Commission);
(b) the Conversion Shares are currently being actively traded
on the Nasdaq Small Cap Market;
(c) there have been no material adverse changes in the
Company's business prospects or financial condition since the
date of the last balance sheet included in the Disclosure
Documents (defined below in Section 2.2), including but not
limited to incurring material liabilities;
(d) the representations and warranties of the Company are true
and correct in all material respects on the Closing date as if
made on such date, and the Company shall deliver a
certificate, signed by an officer of the Company, to such
effect to the Escrow Agent;
(e) the Minimum Amount and corresponding subscription
agreements accepted by the Company have been received by the
Escrow Agent; and
(f) the Company shall have reserved for issuance upon
conversion of the Preferred Stock a sufficient number of
shares of Common Stock which number of shares shall initially
be equal to Three Million (3,000,000) shares.
2. Subscriber's Representations and Covenants; Access to Information;
Independent Information; and Independent Investigation.
Subscriber hereby makes the following representations and warranties to
the Company (which shall be true at the signing of this Agreement, as of
Closing, and as of any such later date as contemplated hereunder) and agrees
with the Company that:
2.1 Offshore Transaction. Subscriber represents and warrants to
the Company that (i) the Subscriber is not a U.S. Person
("U.S. Person") as that term is defined in Rule 902(o) of
Regulation S (a copy of which definition is attached as
Exhibit E) including, without limitation, if a business
organization, such as a corporation or partnership, (a) it is
organized under the laws of a jurisdiction other than the
United States and (b) if organized by a "U.S. Person"
principally for the purpose of investing in securities not
registered under the Act, it was organized or incorporated and
is owned by accredited investors (as defined in Rule 501(a) of
Regulation D under the Act) who are not natural persons,
estates or trusts; (ii) the Securities were not offered to the
Subscriber in the United States and at the time of execution
of this Subscription Agreement and the time of any offer to
the Subscriber to purchase the Securities hereunder, the
Subscriber was physically outside the United States; (iii) the
Subscriber is purchasing the Securities for its own account
and not on behalf of or for the benefit of any U.S. Person and
the sale and resale of the Securities have not been
prearranged with any U.S. Person or buyer in the United
States; (iv) the Subscriber agrees, and to the knowledge of
the Subscriber, without any independent investigation, each
distributor, if any, participating in the offering of the
Securities, has agreed, that all offers and sales of the
Securities prior to the expiration of a period commencing on
the date of the last closing of a sale and purchase of
Preferred Stock (the "Last Closing") and ending forty (40)
days thereafter (the "Restricted Period") shall not be made to
U.S. Persons or for the account or
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benefit of U.S. Persons and shall otherwise be made in
compliance with the provisions of Regulation S; (v) Subscriber
is not an underwriter, dealer or other person who participates
pursuant to a contractual arrangement in the distribution of
the Securities offered or sold in reliance on Regulation S;
and (vi) Subscriber is not an underwriter of the Securities
within the meaning of Section 2(11) of the Act. During the
Restricted Period, Subscriber shall not engage in any activity
for the purpose of, or which could reasonably be expected to
have the effect of, conditioning the market in the U.S. for
the Securities.
2.2 Subscriber's Independent Investigation; Review of Disclosure
Documents. Subscriber, in offering to subscribe for the
Securities hereunder, has relied solely upon (i) an
independent investigation made by it and its representatives,
if any, and (ii) the representations, warranties and
disclosure statements of the Company set forth herein and in
the Disclosure Documents (as defined below). The Subscriber,
prior to the date hereof, has had access to and the
opportunity to examine all material contracts and documents of
the Company which have been filed as exhibits to the Company's
filings made under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") through publicly available means.
Subscriber further acknowledges that the analyst report dated
June 3, 1996 sent to Subscriber by Placement Agent was not
prepared by the Company, and the Company makes no
representations or warranties with regard to the accuracy or
completeness of the information, including without limitation
any forward looking statements contained therein. In making
its investment decision to purchase the Preferred Stock, the
Subscriber is not relying on any oral or written
representations or assurances from the Company or any other
representative or Agent of the Company or Placement Agent
other than as set forth in this Agreement (including, without
limitation, statements made in the analyst report dated June
3, 1996 sent to Subscriber by Placement Agent), or on any
information other than that contained or incorporated by
reference in the Company's (i) Prospectus dated December 14,
1995; (ii) Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1996; (iii) Risk Factors, attached hereto as
Exhibit F; (iv) Capitalization Schedule, attached hereto as
Exhibit G; and (v) Use of Proceeds, attached hereto as Exhibit
H ( (i), (ii), (iii), (iv) and (v) are hereinafter
collectively referred to as the "Disclosure Documents").
Subscriber further represents he, she or it has reviewed all
of the Disclosure Documents listed herein prior to subscribing
for the Preferred Stock. Subscriber has such experience in
business and financial matters that it is capable of
evaluating the merits and risk of its investment and
determining the suitability of its investment. The Subscriber
is an accredited investor as defined in Rule 501 of Regulation
D, a copy of which definition is attached hereto as Exhibit I.
Subscriber believes, without any independent investigation,
that neither the Company nor Placement Agent has offered the
Debentures to any Subscribers in the U.S. or to any U.S.
person, unless such U.S. person is a professional fiduciary of
a non-U.S. person (as defined in Sections (o)(2) through
(o)(4) of Rule 902 of Regulation S).
2.3 Subscriber's Economic Risk. Subscriber understands and
acknowledges that an investment in the Securities involves a
high degree of risk. Subscriber acknowledges that there are
limitations on the liquidity of the Securities and there is no
public market for the Preferred Stock. The Subscriber
represents that the Subscriber is able to bear the economic
risk of an investment in the Securities, including a possible
total loss of investment. In making this statement the
Subscriber hereby represents and warrants to the Company that
the Subscriber has adequate means of providing for the
Subscriber's current needs and contingencies; the Subscriber
is able to afford to hold the Securities for an indefinite
period. Further, the
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Subscriber represents, as of the date of signing this
Agreement, that the Subscriber has no present need for
liquidity in the Securities and the Subscriber is willing to
accept such investment risks.
2.4 No Government Recommendation or Approval. Subscriber
understands that no United States federal or state agency, or
similar agency of any other country, has reviewed, approved,
passed upon or made any recommendation or endorsement of the
Company, the Offering or the subscription for the Securities.
2.5 No Directed Selling Efforts in Regard to this Transaction. To
the knowledge of the Subscriber, without any independent
investigation, neither the Company, nor Placement Agent, nor
any distributor participating in the Offering, nor any person
acting for the Company or any such distributor, has conducted
any "directed selling efforts" in the United States as the
term "directed selling efforts" is defined in Rule 902 of
Regulation S, which, in general, means any activity undertaken
for the purpose of, or that could reasonably be expected to
have the effect of, conditioning the market in the United
States for any of the Securities being offered. Such activity
includes, without limitation, the mailing of printed material
to investors residing in the United States, the holding of
promotional seminars in the United States, and the placement
of advertisements with radio or television stations
broadcasting in the United States or in publications with a
general circulation in the United States, which discuss the
offering of the Securities.
2.6 Company's Reliance on Representations of Subscribers. This
Agreement is made by the Company with each Subscriber in
reliance upon such Subscriber's representations and covenants
made in this Section 2, which reliance Subscriber by execution
of this Agreement hereby confirms and acknowledges.
2.7 Securities Not Registered Under Securities Act. Subscriber
understands that the Preferred Stock and the Conversion Shares
have not been registered under the Act or any state securities
laws ("State Acts") and are being offered and sold pursuant to
Regulation S based in part upon the representations of
Subscriber contained herein. The Common Stock does, however,
carry certain registration rights as set forth in the
Registration Rights Agreement (substantially in the form of
Exhibit B).
2.8 No Public Solicitation. Subscriber knows of no public
solicitation or advertisement of an offer in the United States
in connection with the proposed issuance and sale of the
Securities.
2.9 Investment Intent (Including No Present Intent to Sell
Securities at a Predetermined Time). Subscriber is acquiring
the Preferred Stock to be issued and sold hereunder (and the
Conversion Shares issuable upon conversion of the Preferred
Stock) for his, her or its own account (or a trust account if
such Subscriber is a trustee) for investment and not as a
nominee and not with a present view to the distribution
thereof. Subscriber understands and agrees that Subscriber
must bear the economic risk of this investment indefinitely
unless such Preferred Stock or such Conversion Shares are
registered pursuant to the Act and any applicable State Acts,
or an exemption from such registration is available, and that
the Company has no present intention of registering any such
sale of the Preferred Stock or such Conversion Shares other
than as contemplated by the Registration Rights Agreement.
Subscriber represents and warrants to the Company, as of the
date of this Agreement, that
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Subscriber has no present plan or intention to sell the
Preferred Stock or the Conversion Shares in the United States
or to a U.S. Person at any predetermined time, and has made no
predetermined arrangements to sell the Preferred Stock or the
Conversion Shares. Subscriber covenants that neither
Subscriber nor its affiliates nor any person acting on its or
their behalf has entered into, has the intention of entering
into, or will enter into any put option, short position or
other similar instrument or position in the U.S. with respect
to the Preferred Stock or Common Stock of the Company any time
after receipt of the term sheet concerning this Regulation S
Offering (or earlier if Subscriber had prior knowledge of this
Offering) until the end of the Restricted Period or for the
intended purpose of lowering the price at which the Preferred
Stock is convertible into Conversion Shares.
2.10 Subscriber Not to Sell or Transfer Securities in Violation of
the Securities Laws. Subscriber covenants that he, she or it
will not knowingly make any sale, transfer or other
disposition of the Preferred Stock or the Conversion Shares in
violation of (1) the Act (including Regulation S), the
Exchange Act, any applicable State Acts or the rules and
regulations of the Securities and Exchange Commission (the
"Commission") or of any state securities commissions or
similar state authorities promulgated under any of the
foregoing, or (2) any applicable securities law of
jurisdictions outside the United States and the rules and
regulations thereunder, or (3) the terms of this Agreement.
2.11 Subscriber's Power and Authority. Subscriber has the full
power and authority to execute, deliver and perform this
Agreement. This Agreement, when executed and delivered by
Subscriber, will constitute a valid and legally binding
obligation of Subscriber, enforceable in accordance with its
terms.
2.12 Signatory's Representation. Subscriber represents and warrants
that at the time of signing this Agreement the signatory to
this Agreement is either:
(a) not a U.S. Person (as defined in Regulation S), and is
not located in the U.S., or
(b) a professional fiduciary of Subscriber (as described in
Section (o)(2) through (o)(4) of Rule 902 of Regulation
S), acting solely in its capacity as holder of such
account, as a fiduciary, executor or trustee, and has
completed and signed the accompanying Certificate
(Exhibit J) and forwarded it to Placement Agent.
2.13 No Tax Advice From Company. Subscriber has reviewed with his,
her or its own tax advisors the foreign, U.S. federal, state
and local tax consequences of this investment, and the
transactions contemplated by this Agreement. Subscriber is
relying solely on such advisors with respect to tax advice and
not on any statements or representations of the Company, or
any of their agents and understands that Subscriber (and not
the Company) shall be responsible for the Subscriber's own tax
liability that may arise as a result of this investment or the
transactions contemplated by this Agreement.
2.14 No Legal Advice from Company. Subscriber acknowledges that he,
she, or it has had the opportunity to review this Agreement
and the transactions contemplated by this Agreement with his,
or her or its own legal counsel. Subscriber is relying solely
on such counsel with respect to legal advice and not on any
statements or representations of the Company, Placement Agent
or any of their agents for legal advice with respect to this
investment or the
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transactions contemplated by this Agreement, except for the
representations, warranties and covenants set forth herein and
in the opinion provided for in paragraph 7.3 herein.
2.15 Offering Material Statements. Subscriber acknowledges that all
offering materials and documents received by it in connection
with the offers and sales of the Securities included
statements to the effect of those contained in the first full
capitalized paragraph of this Agreement.
2.16 No Scheme to Evade Registration. Subscriber's acquisition of
the Securities is not a transaction (or any element of a
series of transactions) that is part of a plan or scheme by
Subscriber to evade the registration provisions of the Act.
2.17 Accredited Investor. Subscriber hereby represents and warrants
to the Company that it is an accredited investor, as defined
in Rule 501 of Regulation D, and has checked the applicable
box set forth in Section 20 of this Agreement.
3. Resales of Securities by Subscriber
Subscriber acknowledges, covenants and agrees that the Securities may
and will only be resold by it (a) in compliance with Regulation S and applicable
State Acts, if any; or (b) pursuant to an exemption from registration under the
Act other than Regulation S; or (c) pursuant to an effective and current
Registration Statement under the Act. In addition, in connection with any resale
of the Preferred Stock in accordance with clause (a) or (b), above, the
Subscriber shall deliver to the Company and will cause the purchaser to deliver
to the Company the following documents:
3.1. Documents to be Delivered for Offshore Regulation S Resales of
Preferred Stock. If the Preferred Stock is being resold
offshore in compliance with Regulation S:
1. Sales Agreement, executed by Subscriber and Purchaser
(substantially in the form of Exhibit K);
2. Seller Representation Letter to Offshore Purchaser
(substantially in the form of Exhibit L);
3. Purchaser Representation Letter (substantially in the
form of Exhibit M);
4. Assignment Separate from Certificate (substantially in
the form of Exhibit N) (or endorsed Certificates); and
5. Seller's Instruction Letter (substantially in the form
of Exhibit O).
3.2 Documents to be Delivered for Resales of Preferred Stock Sold
Into the United States. If the Preferred Stock is being resold
into the United States pursuant to an exemption from
registration under the Act other than Regulation S:
1. Sales Agreement, executed by both Subscriber and
Purchaser (substantially in the form of Exhibit K);
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2. Seller Representation Letter to U.S. Purchaser
(substantially in the form of Exhibit P);
3. Purchaser Representation Letter (substantially in the
form of Exhibit M);
4. Assignment Separate from Certificate (substantially in
the form of Exhibit N) (or endorsed Certificates); and
5. Seller's Instruction Letter (substantially in the form
of Exhibit O).
Upon receipt of the executed documents listed above, the
Company will effect the transfer of the Preferred Stock on the
Company's books and will issue and deliver new Preferred Stock
in the purchaser's name (in the case of a resale under Section
3.2, following the Restricted Period, free of any restrictive
legend) within three (3) business days of such receipt. The
provisions of this Section 3 shall not apply to subsequent
resales of Preferred Stock that have previously been sold by
Subscriber in compliance with this Section 3, and the Company
shall or shall cause the Transfer Agent to remove the legend
on any such subsequent resale.
4. Legends; Subsequent Sale of Securities
4.1 Preferred Stock Legend. The certificates representing the
Preferred Stock shall bear a legend substantially in the form
of the first legend set forth on the first page of this
Agreement and any other legend or legends as reasonably
required to comply with the state, U.S. federal or foreign
law.
4.2 Legend Removal for Margin Purposes or Upon Pledge. Upon the
submission, at any time after the forty (40) day Restricted
Period, by Subscriber of a written request for legend removal
for the purpose of a bona fide pledge or deposit of shares of
Preferred Stock with a margin account, together with the
certificate(s) representing the Preferred Stock for which
restrictive legend removal is being requested and a
Certificate substantially in the form of Exhibit Q, the
Company shall immediately re-issue the Preferred Stock
certificate without any restrictive legend restricting
transfer under the Act, and the Company shall instruct its
transfer agent (the "Transfer Agent") to do so, assuming that
there are no changes in the material facts set forth in
Section 2 of this Agreement (other than subsections which by
their terms would be inapplicable at such time) or applicable
law from the date hereof until the date of such submission,
other than changes that are not relevant or material.
Except for the requirements otherwise set forth in this
Agreement, and assuming there are no changes after the date
hereof in the material facts set forth in Sections 2 of this
Agreement (other than subsections which by their terms would
be inapplicable at such time) or applicable law, other than
changes that are not relevant or material, no action other
than as set forth in this Section 4.2 shall be required by the
Subscriber to remove the restrictive legend (unless such
pledge or deposit would constitute a violation of securities
law).
4.3 The Shares Obtained Upon Conversion.
(a) No Restrictive Legend. Assuming that there are no
changes in the material facts set forth in Section 2 of
this Agreement (other than subsections which by their
terms
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would be inapplicable at such time) or applicable law
from the date hereof until the Date of Conversion (as
that term is defined in the Certificate of Designation)
of the Preferred Stock by Subscriber, the Conversion
Shares so obtained shall not bear any restrictive
legend, nor shall any stop order be placed on the books
of the Transfer Agent, provided that the Subscriber
delivers to the Company a Notice of Conversion and
Resale, substantially in the form attached hereto as
Exhibit R (the "Notice of Conversion").
(b) Subscriber's Rights in the Event Shares Issued with a
Restrictive Legend. In the event that the Company issues
Conversion Shares with a restrictive legend upon
Conversion by the Subscriber and there have been no
changes in the material facts set forth in Section 2 of
this Agreement (other than subsections which by their
terms would be inapplicable at such time) or applicable
law from the date hereof until the Date of Conversion,
then Subscriber, at its option, may require the Company
immediately to either (i) redeem the Preferred Stock
submitted for conversion at the redemption price
determined under Section 6(a)(i) of the Certificate of
Designation or (ii) demand (without any other
Subscriber's participation) that the Company file a
registration statement under the Act covering the
registration of the Common Stock which has been issued
with such restrictive legend and the Common Stock
issuable upon conversion of such Subscriber's remaining
Preferred Stock then outstanding pursuant to the terms
of the Registration Rights Agreement; provided, however,
that nothing hereunder shall affect any other
Subscriber's rights under the terms of the Registration
Rights Agreement.
(c) Issuance of Additional Shares. In the event that the
applicable Conversion Price, as that term is defined in
the Certificate of Designation (the "Resubmission
Conversion Price") for (i) the date that such
registration statement demanded under Section 4.3(b)
above becomes effective, or (ii) the date that the
Company re-issues and delivers to Subscriber such
Conversion Shares without restrictive legend, whichever
is earlier (the "Resubmission Date"), is less than the
applicable Conversion Price on the date that the
Subscriber initially submitted such Preferred Stock for
conversion, then the Company shall issue additional
shares of Common Stock to Subscriber equal in number to
the difference between the number of Conversion Shares
initially issued upon conversion and the number of
shares to which the Subscriber would have been entitled
had the Resubmission Conversion Price been in effect on
such Resubmission Date.
(d) Payments for Failure to Register. The Company shall pay
to a Subscriber who has demanded registration under
Section 4.3(b) an amount equal to five percent (5%) per
month of the Original Series A Issue Price (as defined
in the Certificate of Designation) of such Subscriber's
shares of Preferred Stock which were outstanding
immediately prior to the delivery of the Notice of
Conversion contemplated under Section 4.3(a), compounded
monthly and accruing daily, payable in cash by the fifth
(5th) day of the month following such demand and the
fifth (5th) day of each month thereafter (i) if a
registration statement demanded under Section 4.3(b) is
not effective, or (ii) if the Company has not re-issued
and delivered to Subscriber Conversion Shares without a
restrictive legend, whichever is earlier.
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4.4 Irrevocable Instructions to Transfer Agent. The Company will
issue to its Transfer Agent an irrevocable instruction letter
("Irrevocable Instructions to Transfer Agent") (substantially
in the form of Exhibit D) to convert the Subscriber's
Preferred Stock to Common Stock (in accordance with the
Certificate of Designation and, so long as Section 4.3 is
complied with, free of any restriction legend) upon receipt of
a valid Notice of Conversion from a Subscriber and the
certificates representing the Preferred Stock duly endorsed
for transfer, and such other documents as may be required by
this Agreement or the Certificate of Designation. The Company
covenants and agrees that, in the event the Company's agency
relationship with its Transfer Agent should be terminated for
any reason prior to a date which is three (3) years after the
Last Closing, the Company shall immediately appoint a new
transfer agent and shall require that such transfer agent
execute and agree to be bound by the terms of the same
Irrevocable Instructions to Transfer Agent.
5. Capital Raising Limitations; Rights of First Refusal.
5.1 Capital Raising Limitations. The Company shall not issue any
equity securities or any debt exercisable into equity
securities for cash in private capital raising transactions
("Future Offerings") for a period beginning on the date hereof
and ending one hundred twenty (120) days after the Last
Closing without obtaining the prior written approval of
Subscribers holding a majority of the Preferred Stock then
outstanding.
5.2 Subscriber's 180 Day Right of First Refusal. The Company will
not conduct any Future Offerings for a period beginning on the
date hereof and ending one hundred eighty (180) days after the
Last Closing without delivering to the Subscriber, at least
seven (7) days prior to the closing of such issuance, written
notice describing the proposed issuance and the terms upon
which such securities are being issued, and providing the
Subscriber the option during such seven (7) day period to
purchase the securities being offered in the Future Offerings
on the same terms as contemplated by such Future Offerings and
in the amount set forth below (the limitations referred to in
this and the immediately preceding subsection are collectively
referred to as the "Capital Raising Limitation").
5.3 Amount of Subscriber's Right of First Refusal. The amount of
securities which a Subscriber is entitled to purchase in such
a Future Offering shall be a number obtained by multiplying
the aggregate amount of securities being offered in the Future
Offering by a fraction, the numerator of which is the purchase
price of the Preferred Stock purchased by the Subscriber
pursuant to this Agreement and the denominator of which is the
aggregate dollar amount of Preferred Stock placed in this
Offering.
5.4 Exceptions to the Capital Raising Limitation. The Capital
Raising Limitation shall not apply to any transaction
involving the Company's commercial banking arrangements or
issuances of securities in connection with a merger,
consolidation or purchase or sale of assets, or in connection
with or as part of the same transaction as a joint venture or
other acquisition or disposition of a business, a product or a
license by the Company or exercise of options by employees,
consultants or directors or any transaction with a strategic
corporate partner. The Capital Raising Limitation also shall
not apply to the issuance of securities upon exercise or
conversion of the Company's options, warrants or other
convertible securities outstanding as of the date of the Last
Closing or to the grant of additional options or warrants, or
the issuance of additional securities, under any Company stock
option, or restricted stock plan.
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Additionally, the Capital Raising Limitation shall not apply
to any registered public offerings undertaken by the Company.
6. Representations and Warranties of Company.
The Company hereby makes the following representations and warranties
to the Subscribers (which shall be true at the signing of this Agreement, as of
Closing, and as of any such later date as contemplated hereunder) and agrees
with the Subscribers that:
6.1 Organization, Good Standing, and Qualification. The Company is
a corporation validly existing and in good standing under the
laws of the State of Arizona, USA and has all requisite
corporate power and authority to carry on its business as now
conducted and as proposed to be conducted. The Company is duly
qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a
material adverse effect on the business or properties of the
Company and its subsidiaries taken as a whole. The Company is
not the subject of any material pending or, to its knowledge,
threatened investigation or administrative or legal proceeding
by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, or the Securities and Exchange
Commission which have not been disclosed in the Disclosure
Documents referred to in Section 2.2 above.
6.2 Corporate Condition. The Company's condition was, in all
material respects, as described in the Disclosure Documents,
including without limitation the reports filed pursuant to the
Exchange Act and described in Section 2.2 as of the dates of
such reports, including Company's stated risk factors ("Risk
Factors"). There have been no material adverse changes to the
Company's business, financial condition, or prospects since
the date of such reports. The Disclosure Documents are true
and correct in all material respects, and the financial
statements contained in the Disclosure Documents (except as
otherwise permitted by Regulation S-X of the Exchange Act)
have been prepared in accordance with generally accepted
accounting principles, consistently applied, and fairly
present the consolidated financial condition of the Company as
of the dates of the balance sheets included therein and the
consolidated results of its operations and cash flows for the
period then ended. Without limiting the foregoing, there are
no material liabilities, contingent or actual, that are not
disclosed in the Disclosure Documents (other than liabilities
incurred by the Company in the ordinary course of its
business, consistent with its past practice, after the period
covered by the Disclosure Documents). The Company has paid all
material taxes which are due, except for taxes which it
reasonably disputes. There is no material claim, litigation,
or administrative proceeding pending or, to the best of the
Company's knowledge, threatened against the Company, except as
disclosed in the Disclosure Documents. This Agreement and the
Disclosure Documents do not contain any untrue statement of a
material fact and do not omit to state any material fact
required to be stated therein or herein necessary to make the
statements contained therein or herein not misleading in the
light of the circumstances under which they were made.
6.3 Authorization. All corporate action on the part of the Company
by its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder and
the authorization, issuance and delivery of the Preferred
Stock being sold hereunder and issuance (and reservation for
issuance) of the Common Stock obtainable on conversion of the
Preferred Stock have been
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taken, and this Agreement, the Certificate of Designation, the
Irrevocable Instructions to Transfer Agent and the
Registration Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance
with their terms. Company has obtained all consents and
approvals required for it to execute, deliver and perform this
Agreement.
Company is not in violation of, or default under, any
provisions of its Articles of Incorporation or Bylaws as
amended and in effect on and as of the date of this Agreement,
or of any material provision of any written instrument or
contract to which it is a party or by which it is bound or of
any material provision of any federal or state judgment, writ,
decree, order, statute, rule or governmental regulation
applicable to the Company, except when such violation would
not have a material effect on the Company or on the
transaction contemplated hereby.
The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will
not result in any material violation or be in conflict with or
constitute, with or without the passage of time and giving of
notice, either a material default under any such provision,
instrument or contract or an event which results in the
creation of any lien, charge or encumbrance upon any assets of
the Company.
6.4 Valid Issuance of Preferred Stock and Common Stock. The
Preferred Stock, when issued, sold and delivered in accordance
with the terms hereof, for the consideration expressed herein,
will be validly issued, fully paid and nonassessable and,
based in part upon the representations of the Subscriber in
this Agreement, will be issued in compliance with all
applicable U.S. federal and state securities laws. The Common
Stock issuable upon conversion of the Preferred Stock when
issued in accordance with the terms of the Certificate of
Designation shall be duly and validly issued and outstanding,
fully paid and nonassessable, and based in part on the
representations and warranties of Subscriber of the Preferred
Stock, will be issued in compliance with all applicable U.S.
federal and state securities laws. The Preferred Stock and the
Conversion Shares will be issued free of any preemptive
rights. The Company currently has Three Million (3,000,000)
Conversion Shares reserved for issuance upon conversion of the
Preferred Stock.
6.5 Current Public Information; Company's Eligibility to Use Form
S-1 or Form SB-1. The Company represents and warrants to the
Subscriber that the Company is a "Reporting Issuer" as defined
in Rule 902(l) of Regulation S and it has a class of
securities registered under Section 12(b) or 12(g) of the
Exchange Act or is required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act, and has filed all the
materials required to be filed as reports pursuant to the
Exchange Act for a period of at least twelve (12) months
preceding the date hereof (or for such shorter period as the
Company was required by law to file such material), and all
such filings have been made on a timely basis. The Company
undertakes to furnish the Subscriber with copies of such
publicly disclosable information as may be reasonably
requested by the Subscriber prior to consummation of this
Offering and thereafter as long as the Subscriber holds the
Securities. The Company is eligible to use Form S-1 or Form
SB-2 for the registration of the resale of the Common Stock
obtainable upon conversion of the Preferred Stock and agrees
to use its best efforts to maintain such eligibility.
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6.6 No Securities Offered in U.S. or to any U.S. Person. Based, in
part, upon the representations and warranties of the
Subscribers in their respective Subscription Agreements, the
Company represents that it has not offered the Preferred Stock
to the Subscriber in the U.S., or to any person in the United
States, or any U.S. Person (as defined in Regulation S).
6.7 No Directed Selling Efforts in Regard to this Transaction.
Neither the Company nor, to the best knowledge of the Company,
any distributor participating in the Offering, nor any person
acting for the Company or any such distributor, has conducted
any "directed selling efforts" in the United States as the
term "directed selling efforts" is defined in Rule 902 of
Regulation S, which in general, means any activity undertaken
for the purpose of, or that could reasonably be expected to
have the effect of, conditioning the market in the United
States for any of the Securities being offered. Such activity
includes, without limitation, the mailing of printed material
to investors residing in the United States, the holding of
promotional seminars in the United States, and the placement
of advertisements with radio or television stations
broadcasting in the United States or in publications with a
general circulation in the United States, which discuss the
offering of the Securities.
6.8 Capitalization Structure of the Company. The capitalization of
Company, as of the date of the Closing, after giving effect to
the issuance of the Preferred Stock, is as set forth in
Exhibit G.
6.9 Termination Date of Offering. In no event shall the Last
Closing of a sale of a Preferred Stock occur later than June
30, 1996, which date can be extended by up to ten (10) days
upon written approval by the Company and Placement Agent.
6.10 Use of Proceeds. As of the date hereof, the Company expects to
use the proceeds from this Offering (less fees and expenses)
for the purposes and in the approximate amounts set forth in
Exhibit H hereto. These purposes and amounts are estimates and
are subject to change.
6.11 Intellectual Property. The Company has valid patents,
trademarks, trademark registration applications, trade names,
copyrights, know-how, technology and other intellectual
property necessary to the conduct of its business, as set
forth in Schedule IP-1. The Company also has trade secrets
necessary to the conduct of its business which are necessarily
secret and cannot be disclosed to Subscribers.
The Company has been granted licenses or has been assigned or
has otherwise had transferred to it from other persons or
entities the use of patents, trademarks, trademarks
registrations, trade names, copyrights, know-how, technology
and/or other intellectual property necessary to the conduct of
its business as set forth in Schedule IP-2.
To the best of the Company's knowledge, the Company is not
infringing on the intellectual property rights of any third
party, nor is any third party infringing on the Company's
intellectual property rights except Maxi Switch, Inc. and its
affiliates Silitek Corporation and Lite-On Peripheral, Inc.
and Data Share Interex; and there are no restrictions in any
agreements, licenses, franchises, or other instruments that
are necessary for the conduct of the Company's business as
presently conducted or as planned to be conducted in the
future.
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6.12 Underwriter's Fees and Rights of First Refusal. The Company is
not obligated to pay any compensation or other fees, costs or
related expenditures in cash or securities to any underwriter,
broker, agent or other representative other than the Placement
Agent in connection with this Offering. The Company is not
obligated to offer the securities offered hereunder on a right
of first refusal basis or otherwise to any third parties
including, but not limited to, current or former shareholders
of the Company, underwriters, brokers, agents or other third
parties.
7. Covenants of Company.
7.1 Independent Auditors. The Company shall, until at least three
(3) years after the date of the Last Closing, maintain as its
independent auditors an accounting firm authorized to practice
before the SEC.
7.2 Corporate Existence and Taxes. The Company shall, until at
least the earlier of the date that is three (3) years or the
conversion or redemption of the Preferred Stock purchased
pursuant to this Agreement, maintain its corporate existence
in good standing (provided, however, that the foregoing
covenant shall not prevent the Company from entering into any
merger or corporate reorganization as long as the surviving
entity in such transaction, if not the Company, assumes the
Company's obligations with respect to the Preferred Stock and
has Common Stock listed for trading on a stock exchange or on
NASDAQ and is a "Reporting Issuer" assuming that the Company
met those requirements on the date of such merger or
reorganization) and shall pay all its taxes when due except
for taxes which the Company disputes.
7.3 Opinion of Counsel. Subscriber shall, upon purchase of the
Preferred Stock, receive an opinion letter from outside
counsel to the Company, substantially in the form attached
hereto as Exhibit C, to the effect that (i) the Company is
validly existing under the laws of Arizona; (ii) this
Agreement, the Certificate of Designation, the Irrevocable
Instructions to Transfer Agent, the Escrow Agreement, the
Registration Rights Agreement, the issuance of the Preferred
Stock, and the issuance of the Common Stock upon conversion of
the Preferred Stock (and the reservation of a sufficient
number of shares of Common Stock into which the Preferred
Stock can be converted) have been duly authorized by all
required corporate action, and that all such Conversion
Shares, upon delivery, shall be validly issued and
outstanding, fully paid and nonassessable; (iii) this
Agreement, the Certificate of Designation, the Irrevocable
Instructions to Transfer Agent, the Escrow Agreement and the
Registration Rights Agreement constitute valid and binding
obligations of the Company, enforceable in accordance with
their terms, except as enforceability of any indemnification
provisions may be limited by principles of public policy, and
subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of laws
governing specific performance and other equitable remedies;
(iv) based upon the representations and warranties of the
Subscribers contained in the Regulation S Subscription
Agreements entered into in connection with the Offering, the
issuance of the Preferred Stock has been effected in
compliance with Regulation S, and the issuance of the
Conversion Shares upon conversion of the Preferred Stock in
accordance with their terms by the Holders of the Preferred
Stock (assuming that no commission or other remuneration is
paid or given, directly or indirectly, for soliciting such
conversion) will not be subject to the registration provisions
of the Act; and (v) the execution, delivery and performance of
this Agreement, the Irrevocable Instructions
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to Transfer Agent, the Escrow Agreement and the Registration
Rights Agreement do not conflict with or result in a breach of
the Company's articles, charter, by-laws or to the best of
Counsel's knowledge to any agreement to which the Company is a
party or by which its property is bound or any judgment or
decree to which it is subject.
7.4 Registration Rights. The Company will grant Subscriber the
registration rights covering the Common Stock issuable on
conversion of the Preferred Stock on the terms of the
Registration Rights Agreement (substantially in the form of
Exhibit B). On or before August 31, 1996, the Company shall
file a registration statement ("Registration Statement") on
Form S-1 or Form SB-2 (or other suitable form, at the
Company's discretion but subject to the reasonable approval of
the Subscribers), covering the resale of all shares of the
Common Stock obtainable upon the conversion of the Preferred
Stock. The Company shall use its best efforts to have the
Registration Statement declared effective by October 31, 1996.
Notwithstanding the above, Subscriber shall be entitled to
convert its Preferred Stock into unlegended Common Stock in
accordance with the terms hereof and of the Certificate of
Designation and to sell the Common Stock prior to the
effectiveness of the Registration Statement.
7.5 Notification of Final Closing Date & Restricted Period by
Company. Within five (5) business days after the Last Closing,
the Company shall notify the Subscriber in writing that the
Last Closing has occurred, the date of the Last Closing, the
date upon which the forty (40) day Restricted Period will
terminate with respect to the Securities, the dates that the
subscribers are entitled to convert the respective portions of
their Preferred Stock, the value of the Fixed Conversion
Price, as that term is defined in the Certificate of
Designation, and the name and telephone number of an
administrative contact person at the Company whom the
Subscriber may contact regarding information related to
conversion of the Preferred Stock and/or advance notice of
redemption as contemplated by the Certificate of Designation.
7.6 Payments for Late Conversion or Failure to Reserve Authorized
but Unissued Common Stock.
(a) Payments for Late Conversion. As set forth in the
Certificate of Designation, the Company, no later than
the close of business on the second (2nd) business day
after the Subscriber has fulfilled all conditions and
submitted all necessary documents, duly executed and in
proper form, required for conversion (the "Deadline")
(including original certificates), shall use its best
efforts to issue and surrender to a common courier for
either overnight or (if delivery is outside the United
States) two (2) day delivery to the holder of Series A
Preferred Stock ("Holder") at the address of the Holder
on the books of the Company, a certificate or
certificates for the number of Conversion Shares to
which the Holder shall be entitled upon submission of a
notice of conversion. The Company understands that a
delay in the issuance of the Conversion Shares beyond
the Deadline could result in economic loss to the
Holder. As compensation to the Holder for such loss, the
Company agrees to pay Holder for late issuance of
Conversion Shares upon Conversion in accordance with the
following schedule (where "No. Business Days Late" is
defined as the number of business days beyond five (5)
business days from the date of receipt by the Company of
a notice of conversion and the Transfer Agent of all
necessary documentation duly executed and in proper form
required for conversion, including the original
certificate representing the Preferred Stock to be
converted, all in
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<PAGE>
accordance with the subscription documents and the
requirements of the Transfer Agent):
Late Payment
For Each Preferred
No. Business Days Late Share Being Converted
---------------------- ---------------------
1 $50
2 $100
3 $150
4 $200
5 $250
6 $300
7 $350
8 $400
9 $450
10 $500
>10 $500 + $50 for each
Business Day Late beyond 10 days
The Company shall pay any late payments to Holder
incurred under this Section by check within seven (7)
business days from the date of issuance of Conversion
Shares. Nothing herein shall limit the Holder's right to
pursue actual damages for the Company's failure to issue
and deliver shares of Common Stock to the Subscriber in
accordance with the terms of the Certificate of
Designation.
(b) Payments for Failure to Reserve Authorized but Unissued
Common Stock. If, at any time a Holder of Preferred
Stock submits a Notice of Conversion (as defined in the
Certificate of Designation) and the Company does not
have sufficient authorized but unissued shares of Common
Stock available to effect, in full, a conversion of the
Series A Preferred Stock under Section 5 of the
Certificate of Designation (a "Conversion Default", the
date of such default being referred to herein as the
"Conversion Default Date"), the Company shall issue to
the Holder all of the shares of Common Stock which are
available, and the Notice of Conversion as to any shares
of Series A Preferred Stock requested to be converted
but not converted (the "Unconverted Preferred Shares")
shall become null and void. The Company shall provide
notice of such Conversion Default ("Notice of Conversion
Default") to all Holders of outstanding Preferred Stock,
by facsimile, within one (1) business day of such
default (with the original delivered by overnight or two
(2) day courier). No Holder may submit a Notice of
Conversion after receipt of a Notice of Conversion
Default until the date additional shares of Common Stock
are authorized by the Company.
The Company agrees to pay to all Holders of outstanding
Preferred Stock payment ("Conversion Default Payments")
for a Conversion Default in the amount of (N/365) X .24
X the initial issuance price of the outstanding
Preferred Stock held by each Holder where N = the number
of days from the Conversion Default Date to the date
(the "Authorization Date") that the Company authorizes a
sufficient number of shares
16
<PAGE>
of Common Stock to effect conversion of all remaining
shares of Preferred Stock. The Company shall send notice
("Authorization Notice") via facsimile, with a copy by
overnight or two (2) day courier, to all Holders of
outstanding Preferred Stock that additional shares of
Common Stock have been authorized, the Authorization
Date and the amount of Holder's accrued Conversion
Default Payments. The accrued Conversion Default
Payments for each calendar month shall be paid in cash
or shall be convertible into Common Stock at the
Conversion Rate, at the Holder's option, payable as
follows: (i) in the event Holder elects to take such
payment in cash, cash payments shall be made to each
Holder of outstanding Preferred Stock by the seventh
(7th) day of the following calendar month or (ii) in the
event Holder elects to take such payment in stock, the
Holder may convert such payment amount into Common Stock
at the Conversion Rate at any time after the seventh
(7th) day of the calendar month following the month the
Authorization Notice was received, until the automatic
conversion date set forth in the Certificate of
Designation. The Company will use its best efforts to
increase the number of authorized shares as soon as
practicable following the Conversion Default.
Nothing herein shall limit Holder's right to pursue
actual damages for the Company's failure to maintain a
sufficient number of authorized shares of Common Stock.
7.7 Listing. The Company shall use its best efforts to maintain
the listing of the shares of Common Stock on NASDAQ-Small Cap
Market or National Market System or another national
securities exchange or quotation system.
8. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Arizona, U.S.A., applicable to agreements made in and
wholly to be performed in that jurisdiction, except for matters arising under
the Act or the Exchange Act which matters shall be construed and interpreted in
accordance with such laws. Any action brought to enforce, or otherwise arising
out of, this Agreement shall be heard and determined only in either a federal or
state court sitting in the County of Maricopa in the State of Arizona, U.S.A.
9. Entire Agreement; Written Amendments Required.
This Agreement, the Certificate of Designation, the Irrevocable
Instructions to Transfer Agent, the Preferred Stock certificates, the
Registration Rights Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof, and no party shall be liable or
bound to any other party in any manner by any warranties, representations or
covenants except as specifically set forth herein or therein. Except as
expressly provided herein, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
10. Written Notices, Etc.
17
<PAGE>
Any notice, demand or request required or permitted to be given by the
Company or the Subscriber pursuant to the terms of this Agreement shall be in
writing and shall be deemed given when delivered personally, or by facsimile
(with a hard copy to follow by two (2) day courier), addressed to the parties at
the addresses and/or facsimile telephone number of the parties set forth at the
end of this Agreement or such other address as a party may request by notifying
the other in writing.
11. Execution in Counterparts Permitted.
This Agreement may be executed in any number of counterparts, each of
which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one (1) instrument.
12. Representations and Warranties Survive the Closing; Agreement is
Severable.
The Subscriber's and the Company's representations and warranties shall
survive the closing of the transaction notwithstanding any due diligence
investigation made by or on behalf of the party seeking to rely thereon. In the
event that any provision of this Agreement becomes or is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision; provided that no
such severability shall be effective if it materially changes the economic
benefit of this Agreement to any party.
13. Titles and Subtitles; Gender.
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement. The use in this Agreement of a masculine, feminine or neither pronoun
shall be deemed to include a reference to the others.
14. Exact Registered Name of Security Holder; Offshore Delivery
Instructions.
Subscriber agrees to provide Company with the exact name in which he,
she or it wishes the Securities to be registered by providing that information
on the accompanying signature page of this Agreement. Additionally, Subscriber
also agrees to provide Company with detailed delivery instructions to an
offshore addressee and will also provide that information on the accompanying
signature page of this Agreement.
15. Subscriber to Forward Original Signed Subscription Agreement to
Company.
Subscriber agrees to courier to Company his, her or its original inked
signed Subscription Agreement within two (2) days after faxing said signed
agreement to Placement Agent.
16. Limitations of Assignment.
Neither party to this Agreement may assign this Agreement without the
written consent of the other (which may be withheld for any reason); provided,
however, that Subscriber may assign its rights to any accredited investor who is
a non-U.S. person controlled by, controlling or under common control with the
Subscriber or to any other accredited investor who is a non-U.S. person to which
it transfers Securities. Further, this provision does not limit the Subscriber's
right to transfer the Securities pursuant to the terms of the Certificate of
Designation and this Agreement.
18
<PAGE>
17. Subscription and Wiring Instructions; Irrevocability.
(a) Subscriber shall send its signed Subscription Agreement by
facsimile to Placement Agent at (770) 640-7150, and send its
subscription funds by wire transfer, to the Escrow Agent as
follows:
First Union National Bank of Georgia
Attn: Rick Schaal
Corporate Trust Administration
999 Peachtree Street, N.E., Suite 1100
Atlanta, Georgia 30309
Fax: 404-827-7305
ABA Number: 053000219
Account Number: 465946
Attn: Claire Moore
REFERENCE:
ACCT NAME: SC&T International, Inc./Swartz Investments, LLC
ACCT: 3072233194
CONTACT: Nicole Stefanini
Telephone: 404-827-7326
SWIFT Code: FUNBUS33
(b) The Subscriber hereby acknowledges and agrees, subject to the
provisions of any applicable laws providing for the refund of
subscription amounts submitted by the Subscriber, that this
Agreement is irrevocable and that the Subscriber is not
entitled to cancel, terminate or revoke this Agreement;
provided, however, that if the conditions to Closing are not
satisfied or if the Disclosure Documents are discovered prior
to Closing to contain statements which are materially
inaccurate, or omit statements of material fact, the
Subscriber may revoke or cancel this Agreement.
(c) This Agreement shall be accepted by the Company when the
Company countersigns this Agreement. The Subscriber hereby
confirms that the Company has full right in its sole
discretion to accept or reject the subscription of the
Subscriber, in whole or in part, provided that, if the Company
decides to reject such subscription, the Company must do so
promptly and in writing. In the case of rejection, the Company
will promptly return any rejected payments and (if rejected in
whole) copies of all executed subscription documents
(including without limitation this Agreement) to Subscriber
(with any earned interest).
18. Indemnification.
The Company agrees to indemnify and hold harmless Subscriber and
Placement Agent and each of their officers, directors, employees and agents, and
each person who controls Subscriber or Placement Agent within the meaning of the
Act or the Exchange Act (each, a "Subscriber Indemnified Party") against any
losses, claims, damages or liabilities, joint or several, to which it, they or
any of them, may become subject and not otherwise reimbursed arising from or due
to any untrue statement of a material fact or the omission to state any material
fact required to be stated in order to make the statements not misleading in any
representation or
19
<PAGE>
warranty made by the Company contained in this Agreement or in any statements
contained in the Disclosure Documents.
The Subscriber agrees to indemnify and hold harmless Company and each
of its officers, directors, employees and agents, and each person who controls
Company within the meaning of the Act or the Exchange Act (each, a "Company
Indemnified Party") (a Subscriber Indemnified Party or a Company Indemnified
Party may be hereinafter referred to singularly as "Indemnified Party") against
any losses, claims, damages or liabilities, joint or several, to which it, they
or any of them, may become subject and not otherwise reimbursed arising from or
due to any untrue statement of a material fact or the omission to state any
material fact required to be stated in order to make the statements not
misleading in any representation or warranty made by the Subscriber contained in
this Agreement.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 18, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 18, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 18 to the extent it is prejudicial.
[Intentionally Left Blank]
20
<PAGE>
19. Amount. The undersigned hereby subscribes for 100 shares of
Preferred Stock, (at $10,000 per share) and pays herewith funds in the amount
of One Million U.S Dollars ($1,000,000 U.S.).
20. Accredited Investor. The Subscriber is (check applicable box):
(a) [X] a corporation, business trust, or partnership not formed for
the specific purpose of acquiring the securities offered, with total assets in
excess of $5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person who has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of the prospective investment.
(c) [ ] an individual, who
[ ] is a director, executive officer or general partner of the
issuer of the securities being offered or sold or a director, executive officer
or general partner of a general partner of that issuer.
[ ] has an individual net worth, or joint net worth with that
person's spouse, at the time of his purchase exceeding $1,000,000.
[ ] had an individual income in excess of $200,000 in each of
the two most recent years or joint income with that person's spouse in excess of
$300,000 in each of those years and has a reasonable expectation of reaching the
same income level in the current year.
[ ] none of the above.
(d) [ ] an entity each equity owner of which is an entity described in
a - b above or is an individual who could check one (1) of the first three (3)
boxes under subparagraph (c) above.
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<PAGE>
The undersigned acknowledges that this Agreement and the subscription
represented hereby shall not be effective unless accepted by the Company as
indicated below.
Dated this 14th day of June, 1996.
/s/ CAPITAL VENTURES INTERNATIONAL
- ----------------------------------- --------------------------------
Your Signature EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
(Please Print Exact Registered Name)
Johann H. Koehne OFFSHORE DELIVERY INSTRUCTIONS:
- ----------------------------------- --------------------------------
Name: Please Print Please type or print address where
your security is to be delivered
Managing Director ATTN.: Merrill Lynch International
- ----------------------------------- --------------------------------
Title/Representative Capacity
(if applicable)
Susquehanna Securities Trading GmbH 25 Ropemaker Street
- ----------------------------------- --------------------------------
Name of Company You Represent Street Address
(if applicable)
Frankfurt/Main Germany London England
- ----------------------------------- --------------------------------
Place of Execution of this Agreement City, State or Province,
Country, Offshore Postal Code
44-171-867-2376
--------------------------------
Phone Number (For Federal
Express) and Fax Number (re:
Notice)
THIS SUBSCRIPTION IS ACCEPTED BY THE COMPANY ON THE 17TH DAY OF JUNE,
1996.
SC&T INTERNATIONAL, INC.
By: /s/
---------------------------------------
Name: Timothy J. Stocker
Title: Vice President of Finance
22
<PAGE>
CERTIFICATE OF DESIGNATION OF
SERIES A PREFERRED STOCK
OF
SC&T International, Inc.
It is hereby certified that:
1. The name of the Company (hereinafter called the "Company") is SC&T
International, Inc., an Arizona corporation.
2. The certificate of incorporation of the Company authorize the
issuance of Five Million (5,000,000) shares of preferred stock, $.01 par value
per share, and expressly vests in the Board of Directors of the Company the
authority provided therein to issue any or all of said shares in one (1) or more
series and by resolution or resolutions to establish the designation and number
and to fix the relative rights and preferences of each series to be issued.
3. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has duly adopted as of June 10, 1996, the
following resolutions creating a Series A issue of Preferred Stock:
RESOLVED, that One Thousand Fifty-one (1,051) of the Five Million
(5,000,000) authorized shares of Preferred Stock of the Company shall be
designated Series A Preferred Stock, $.01 par value per share, and shall possess
the rights and preferences set forth below:
Section 1. Designation and Amount. The shares of such series shall have
a par value of $.01 per share and shall be designated as Series A Preferred
Stock (the "Series A Preferred Stock") and the number of shares constituting the
Series A Preferred Stock shall be One Thousand Fifty-one (1,051). The Series A
Preferred Stock shall be offered at a purchase price of Ten Thousand Dollars
($10,000) per share (the "Original Series A Issue Price"), with an eight percent
(8%) per annum accretion rate as set forth herein.
Section 2. Rank. The Series A Preferred Stock shall rank: (i) junior to
any other class or series of capital stock of the Company hereafter created
specifically ranking by its terms senior to the Series A Preferred Stock
(collectively, the "Senior Securities"); (ii) prior to all of the Company's
Common Stock, $.01 par value per share ("Common Stock"); (iii) prior to any
class or series of capital stock of the Company hereafter created not
specifically ranking by its terms senior to or on parity with any Series A
Preferred Stock of whatever subdivision (collectively, with the Common Stock,
"Junior Securities"); and (iv) on parity with any class or series of capital
stock of the Company hereafter created specifically ranking by its terms on
parity with the Series A Preferred Stock ("Parity Securities") in each case as
to distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (all such distributions being referred
to collectively as "Distributions").
Section 3. Dividends. The Series A Preferred Stock will bear no
dividends, and the holders of the Series A Preferred Stock ("Holders") shall not
be entitled to receive dividends on the Series A Preferred Stock.
<PAGE>
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Company, either voluntary or involuntary, the Holders of shares of Series
A Preferred Stock shall be entitled to receive, immediately after any
distributions to Senior Securities required by the Company's Certificate of
Incorporation or any certificate of designation, and prior in preference to any
distribution to Junior Securities but in parity with any distribution to Parity
Securities, an amount per share equal to the sum of (i) the Original Series A
Issue Price for each outstanding share of Series A Preferred Stock and (ii) an
amount equal to eight percent (8%) of the Original Series A Issue Price per
annum for the period that has passed since the date that, in connection with the
consummation of the purchase by Holder of shares of Series A Preferred Stock
from the Company, the escrow agent first had in its possession funds
representing full payment for the shares of Series A Preferred Stock (such
amount being referred to herein as the "Premium"). If upon the occurrence of
such event, and after payment in full of the preferential amounts with respect
to the Senior Securities, the assets and funds available to be distributed among
the Holders of the Series A Preferred Stock and Parity Securities shall be
insufficient to permit the payment to such Holders of the full preferential
amounts due to the Holders of the Series A Preferred Stock and the Parity
Securities, respectively, then the entire assets and funds of the Company
legally available for distribution shall be distributed among the Holders of the
Series A Preferred Stock and the Parity Securities, pro rata, based on the
respective liquidation amounts to which each such series of stock is entitled by
the Company's Certificate of Incorporation and any certificate(s) of designation
relating thereto.
(b) Upon the completion of the distribution required by
subsection 4(a), if assets remain in this Company, they shall be distributed to
holders of Junior Securities in accordance with the Company's Certificate of
Incorporation including any duly adopted certificate(s) of designation.
(c) At each Holder's option, a sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Company is disposed of shall
be deemed to be a liquidation, dissolution or winding up within the meaning of
this Section 4; provided further that an event described in the prior clause
that the Holder does not elect to treat as a liquidation and a consolidation,
merger, acquisition, or other business combination of the Company with or into
any other company or companies shall not be treated as a liquidation,
dissolution or winding up within the meaning of this Section 4, but instead
shall be treated pursuant to Section 5(f) hereof.
(d) In the event that, immediately prior to the closing of a
transaction described in Section 4(c) which would constitute a liquidation
event, the cash distributions required by Section 4(a) or Section 6 have not
been made, the Company shall either: (i) cause such closing to be postponed
until such cash distributions have been made, or (ii) cancel such transaction,
in which event the rights of the Holders of Series A Preferred Stock shall be
the same as existing immediately prior to such proposed transaction.
Section 5. Conversion. The record Holders of this Series A Preferred
Stock shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each record Holder of Series A Preferred
Stock shall be entitled (at the times and in the amounts set forth below) and
subject to the Company's right of redemption set forth in Section 6(a), at the
office of the Company or any transfer agent for the Series A Preferred Stock
(the "Transfer Agent"), to convert (in multiples of one (1) share of Preferred
Stock) as follows: (x) up to one-third (1/3) of the shares of Series A Preferred
Stock initially issued to such Holder at any time beginning sixty (60)
2
<PAGE>
days following the date of the last closing of a purchase and sale of Series A
Preferred Stock that occurs pursuant to the offering of the Series A Preferred
Stock by the Company (the "Last Closing Date") and at any time thereafter, (y)
up to an additional one-third (1/3) of the shares of Series A Preferred Stock
initially issued to such Holder at any time beginning ninety (90) days following
the Last Closing Date and at any time thereafter, and (z) all remaining Series A
Preferred Stock held by such Holder at any time beginning one hundred twenty
(120) days following the Last Closing Date (each of the time periods referenced
in subclauses (x), (y) and (z) is hereinafter referred to singularly as a
"Conversion Gate") at the office of the Company or any Transfer Agent for the
Series A Preferred Stock, into that number of fully-paid and non-assessable
shares of Common Stock of the Company calculated in accordance with the
following formula (the "Conversion Rate"):
Number of shares issued upon conversion of one (1) share of Series A
Preferred Stock =
(.08) (N/365) (10,000) + 10,000
-------------------------------
Conversion Price
where,
o N = the number of days between (i) the date that, in connection with
the consummation of the initial purchase by Holder of shares of Series
A Preferred Stock from the Company, the escrow agent first had in its
possession funds representing full payment for the shares of Series A
Preferred Stock for which conversion is being elected, and (ii) the
applicable Date of Conversion (as defined in Section 5(c)(iv) below)
for the shares of Series A Preferred Stock for which conversion is
being elected, and
o Conversion Price = the lesser of (x) $ 7.75 (the "Fixed Conversion
Price"), or (y) 85% of the average Closing Bid Price, as that term is
defined below, of the Company's Common Stock for the ten (10) trading
days immediately preceding the Date of Conversion, as defined below
(the "Variable Conversion Price").
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price on the Nasdaq Small Cap Market, or if no longer traded on the
Nasdaq Small Cap Market, the closing bid price on the principal national
securities exchange or the National Market System on which the Common Stock is
so traded and if not available, the mean of the high and low prices on the
principal national securities exchange or the National Market System on which
the Common Stock is so traded.
(b) Mechanics of Conversion. In order to convert Series A
Preferred Stock into full shares of Common Stock, the Holder shall (i) fax, on
or prior to 11:59 p.m., Phoenix, Arizona time (the "Conversion Notice Deadline")
on the date of conversion, a copy of the fully executed notice of conversion
("Notice of Conversion") to the Company at the office of the Company or its
designated transfer agent (the "Transfer Agent") for the Series A Preferred
Stock stating that the Holder elects to convert, which notice shall specify the
date of conversion, the number of shares of Series A Preferred Stock to be
converted, the applicable conversion price and a calculation of the number of
shares of Common Stock issuable upon such conversion (together with a copy of
the front page of each certificate to be converted) and (ii) surrender to a
common courier for delivery to the office of the Transfer Agent, the original
certificates representing the Series A Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed for transfer; provided, however,
that the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Transfer Agent as provided above, or the
Holder notifies the Company or its Transfer Agent that such certificates have
been lost, stolen or destroyed (subject to the requirements of subparagraph (i)
below). Upon
3
<PAGE>
receipt by Company of a facsimile copy of a Notice of Conversion, Company shall
immediately send, via facsimile, a confirmation of receipt of the Notice of
Conversion to Holder which shall specify that the Notice of Conversion has been
received and the name and telephone number of a contact person at the Company
whom the Holder should contact regarding information related to the Conversion.
In the case of a dispute as to the calculation of the Conversion Rate, the
Company shall promptly issue to the Holder the number of Shares that are not
disputed and shall submit the disputed calculations to its outside accountant
via facsimile within three (3) days of receipt of Holder's Notice of Conversion.
The Company shall cause the accountant to perform the calculations and notify
Company and Holder of the results no later than ninety-six (96) hours from the
time it receives the disputed calculations. Accountant's calculation shall be
deemed conclusive absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the
Company of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series A Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Company, and upon surrender and cancellation of
the Preferred Stock Certificate(s), if mutilated, the Company shall execute and
deliver new Preferred Stock Certificate(s) of like tenor and date. However,
Company shall not be obligated to re-issue such lost or stolen Preferred Stock
Certificates if Holder contemporaneously requests Company to convert such Series
A Preferred Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion.
Subject to paragraph 5(b) hereof, no later than the close of business on the
second (2nd) business day (the "Deadline") after receipt by the Company or the
Transfer Agent of a facsimile copy of a Notice of Conversion and receipt by
Company or the Transfer Agent of all necessary documentation duly executed and
in proper form required for conversion, including the receipt by the Transfer
Agent of the original Preferred Stock Certificates to be converted (or after
provision for security or indemnification in the case of lost or destroyed
certificates, if required), the Company shall or shall cause the Transfer Agent
to (as applicable) issue and surrender to a common courier for either overnight
or (if delivery is outside the United States) two (2) day delivery to the Holder
at the address of the Holder as shown on the stock records of the Company a
certificate for the number of shares of Common Stock to which the Holder shall
be entitled as aforesaid.
(iii) No Fractional Shares. If any conversion of the
Series A Preferred Stock would create a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional share shall
be disregarded and the number of shares of Common Stock issuable upon
conversion, in the aggregate, shall be the next lower number of shares.
(iv) Date of Conversion. The date on which conversion
occurs (the "Date of Conversion") shall be deemed to be the date set forth in
such Notice of Conversion, provided (i) that the advance copy of the Notice of
Conversion is faxed to the Company before 11:59 p.m., Phoenix, Arizona time, on
the Date of Conversion, and (ii) that the original Preferred Stock Certificates
representing the shares of Series A Preferred Stock to be converted are
surrendered by depositing such certificates with a common courier, as provided
above, and received by the Transfer Agent within five (5) business days after
the Date of Conversion. The person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record Holder or Holders of such shares of Common Stock on the Date of
Conversion. If the original Preferred Stock Certificates representing the Series
A Preferred Stock to be converted are not received by the Transfer Agent within
five (5) business days after the Date of Conversion or if the facsimile of the
Notice of Conversion is not received by the Company or its designated Transfer
Agent prior to the Conversion Notice Deadline, the Notice of Conversion, at the
Company's option, may be declared null and void.
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<PAGE>
(c) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the Series A Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all then outstanding
Series A Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of Series A Preferred Stock, the Company will
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
(d) Automatic Conversion. Subject to the Company's right of
redemption set forth in Section 6 hereof, each share of Series A Preferred Stock
outstanding on the date which is three (3) years after the Last Closing Date
automatically shall be converted into Common Stock on such date at the
Conversion Rate then in effect (calculated in accordance with the formula in
Section 5(a) above), and the date which is three (3) years after the Last
Closing Date shall be deemed the Date of Conversion with respect to such
conversion.
(e) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock
Split, Stock Dividend, Etc. If, prior to the conversion of all of the Series A
Preferred Stock, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, or other similar event, the Fixed Conversion
Price shall be proportionately reduced, or if the number of outstanding shares
of Common Stock is decreased by a combination or reclassification of shares, or
other similar event, the Fixed Conversion Price shall be proportionately
increased.
(ii) Adjustment to Variable Conversion Price. If, at
any time when any shares of the Series A Preferred Stock are issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, or other similar event, which event
shall have taken place during the reference period for determination of the
Conversion Price for any conversion of the Series A Preferred Stock, then the
Variable Conversion Price shall be calculated giving appropriate effect to the
stock split, stock dividend, combination, reclassification or other similar
event for all five (5) trading days immediately preceding the Date of
Conversion.
(iii) Adjustment Due to Merger, Consolidation, Etc.
If, prior to the conversion of all Series A Preferred Stock, there shall be any
merger, consolidation, exchange of shares, recapitalization, reorganization, or
other similar event, as a result of which shares of Common Stock of the Company
shall be changed into the same or a different number of shares of the same or
another class or classes of stock or securities of the Company or another entity
or there is a sale of all or substantially all the Company's assets or there is
a change of control transaction not deemed to be a liquidation pursuant to
section 4(c), then the Holders of Series A Preferred Stock shall thereafter have
the right to receive upon conversion of Series A Preferred Stock, upon the basis
and upon the terms and conditions specified herein and in lieu of the shares of
Common Stock immediately theretofore issuable upon conversion, such stock,
securities and/or other assets which the Holder would have been entitled to
receive in such transaction had the Series A Preferred Stock been converted
immediately prior to such transaction, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holders
of the Series A Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for the adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the Series A
Preferred Stock) shall thereafter be applicable, as nearly as may be practicable
in relation to any securities thereafter deliverable upon the exercise hereof.
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The Company shall not effect any transaction described in this subsection
5(e)(iii) unless (a) it first gives thirty (30) business days prior notice of
such merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event (during which time the Holder shall be
entitled to convert its shares of Series A Preferred Stock into Common Stock)
and (b) the resulting successor or acquiring entity (if not the Company) assumes
by written instrument the obligations of the Company under this Certificate of
Designation including this subsection 5(e)(iii).
(iv) No Fractional Shares. If any adjustment under
this Section 5(e) would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next lower number of shares.
Section 6. Redemption by Company.
(a) Company's Right to Redeem Upon Receipt of Notice of
Conversion. If the Conversion Price of the Company's Common Stock is less than
the Fixed Conversion Price (as defined in Section 5(a)), at the time of receipt
of a Notice of Conversion pursuant to Section 5, the Company shall have the
right, in its sole discretion, to redeem in whole or in part any Series A
Preferred Stock submitted for conversion, immediately prior to and in lieu of
conversion ("Redemption Upon Receipt of Notice of Conversion"). If the Company
elects to redeem some, but not all, of the Series A Preferred Stock submitted
for conversion, the Company shall redeem from among the Series A Preferred Stock
submitted by the various Holders for conversion on the applicable date, a
pro-rata amount from each such Holder so submitting Series A Preferred Stock for
conversion.
(i) Redemption Price Upon Receipt of a Notice of
Conversion. The redemption price per share of Series A Preferred Stock under
this Section 6(a) shall be calculated in accordance with the following formula
("Redemption Rate"):
[[(.08)(N/365) (10,000)] + 10,000] x Closing Bid Price on Date of Conversion
---------------------------------------
Conversion Price
where,
"N", "Date of Conversion", "Closing Bid Price" and "Conversion Price"
shall have the same meanings as defined in Section 5.
(ii) Mechanics of Redemption Upon Receipt of Notice
of Conversion. The Company shall effect each such redemption by giving notice of
its election to redeem, by facsimile, by 5:00 p.m. New York City time the next
business day following receipt of a Notice of Conversion from a Holder, and the
Company shall provide a copy of such redemption notice by overnight or two (2)
day courier, to (A) the Holder of the Series A Preferred Stock submitted for
conversion at the address and facsimile number of such Holder appearing in the
Company's register for the Series A Preferred Stock and (B) the Company's
Transfer Agent. Such redemption notice shall indicate whether the Company will
redeem all or part of the Series A Preferred Stock submitted for conversion and
the applicable redemption price.
(b) Company's Right to Redeem at its Election. At any time,
commencing twelve (12) months and one (1) day after the Last Closing Date, the
Company shall have the right, in its sole discretion, to redeem ("Redemption at
Company's Election"), from time to time, any or all of the Series A Preferred
Stock;
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provided (i) Company shall first provide thirty (30) business days advance
written notice as provided in subparagraph 6(b)(ii) below (which can be given
beginning thirty (30) business days prior to the date which is twelve (12)
months and one (1) day after the Last Closing Date), and (ii) that the Company
shall only be entitled to redeem Series A Preferred Stock having an aggregate
Stated Value (as defined below) of at least One Million Five Hundred Thousand
Dollars ($1,500,000). If the Company elects to redeem some, but not all, of the
Series A Preferred Stock, the Company shall redeem a pro-rata amount from each
Holder of the Series A Preferred Stock.
(i) Redemption Price At Company's Election. The
"Redemption Price At Company's Election" shall be calculated as a percentage of
Stated Value, as that term is defined below, of the Series A Preferred Stock
redeemed pursuant to this Section 6(b), which percentage shall vary depending on
the date of Redemption at Company's Election (as defined below), and shall be
determined as follows:
Date of Notice of Redemption at Company's Election % of Stated Value
- -------------------------------------------------- -----------------
12 months and 1 day to 18 months following Last Closing Date 130%
18 months and 1 day to 24 months following Last Closing Date 125%
24 months and 1 day to 30 months following Last Closing Date 120%
30 months and 1 day to 36 months following Last Closing Date 115%
For purposes hereof, "Stated Value" shall mean the Original Series A
Issue Price (as defined in Section 4(a)) of the shares of Series A Preferred
Stock being redeemed pursuant to this Section 6(b), together with the accrued
but unpaid Premium (as defined in Section 4(a)).
(ii) Mechanics of Redemption at Company's Election.
The Company shall effect each such redemption by giving at least thirty (30)
business days prior written notice ("Notice of Redemption At Company's
Election") to (A) the Holders of the Series A Preferred Stock selected for
redemption, at the address and facsimile number of such Holder appearing in the
Company's Series A Preferred stock register and (B) the Transfer Agent, which
Notice of Redemption At Company's Election shall be deemed to have been
delivered three (3) business days after the Company's mailing (by overnight or
two (2) day courier, with a copy by facsimile) of such Notice of Redemption At
Company's Election. Such Notice of Redemption At Company's Election shall
indicate (i) the number of shares of Series A Preferred Stock that have been
selected for redemption, (ii) the date which such redemption is to become
effective (the "Date of Redemption At Company's Election") and (iii) the
applicable Redemption Price At Company's Election, as defined in subsection
(b)(i) above. Notwithstanding the above, Holder may convert into Common Stock
pursuant to section 5, prior to the close of business on the Date of Redemption
at Company's Election, any Series A Preferred Stock which it is otherwise
entitled to convert, including Series A Preferred Stock that has been selected
for redemption at Company's election pursuant to this subsection 6(b); provided,
however, that the Company shall still be entitled to exercise its right to
redeem upon receipt of a Notice of Conversion pursuant to section 6(a).
(c) Company Must Have Immediately Available Funds or Credit
Facilities. The Company shall not be entitled to send any Redemption Notice and
begin the redemption procedure under Sections 6(a) and 6(b) unless it has:
(i) the full amount of the redemption price in cash,
available in a demand or other immediately available account in a bank or
similar financial institution; or
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(ii) immediately available credit facilities, in the
full amount of the redemption price with a bank or similar financial
institution; or
(iii) an agreement with a standby underwriter willing
to purchase from the Company a sufficient number of shares of stock to provide
proceeds necessary to redeem any stock that is not converted prior to
redemption; or
(iv) a combination of the items set forth in (i),
(ii) and (iii) above, aggregating the full amount of the redemption price.
(d) Payment of Redemption Price.
(i) Each Holder submitting Preferred Stock being
redeemed under this Section 6 shall send their Series A Preferred Stock
Certificates so redeemed to the Company or its Transfer Agent, and the Company
shall pay the applicable redemption price to that Holder within ten (10)
business days of the Date of Redemption at Company's Election. The Company shall
not be obligated to deliver the redemption price unless the Preferred Stock
Certificates so redeemed are delivered to the Company or its Transfer Agent, or,
in the event one (1) or more certificates have been lost, stolen, mutilated or
destroyed, unless the Holder has complied with Section 5(b)(i).
(ii) If Company elects to redeem pursuant to Section
6(a) hereof, and Company fails to pay Holder the redemption price within the
time frame as required by this Section 6(d), then Company shall issue shares of
Common Stock to any such Holder who has submitted a Notice of Conversion in
compliance with Section 5(b) hereof. The shares to be issued to Holder pursuant
to this provision shall be the number of shares determined using a Conversion
Price that equals the lesser of (i) the Conversion Price on the date Holder
sends its Notice of Conversion to Company or Transfer Agent via facsimile or
(ii) the Conversion Price on the date the Transfer Agent issues Common Stock
pursuant to this Section 6(d)(ii).
(iii) Notwithstanding the foregoing, in the event
that the certificates evidencing the Series A Preferred Stock redeemed are not
delivered to the Transfer Agent as provided herein, the redemption of the Series
A Preferred Stock pursuant to this Section 6 shall still be deemed effective as
of the Date of Redemption.
(e) Blackout Period. Notwithstanding the foregoing, the
Company may not either send out a redemption notice or effect a redemption
pursuant to Section 6(b) above during a Blackout Period (defined as a period
during which the Company's officers or directors would not be entitled to buy or
sell stock because of their holding of material non-public information), unless
the Company shall first disclose the non-public information that resulted in the
Blackout Period; provided, however, that no redemption shall be effected until
at least ten (10) days after the Company shall have given the Holder written
notice that the Blackout Period has been lifted.
Section 7. Advance Notice of Redemption.
(a) Holder's Right to Elect to Receive Notice of Cash
Redemption by the Company. Holder shall have the right to require Company to
provide advance notice stating whether the Company will elect to redeem Holder's
shares of Series A Preferred Stock in cash, pursuant to the Company's redemption
rights discussed in Section 6(a).
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<PAGE>
(b) Mechanics of Holder's Election Notice. Holder shall send
notice ("Election Notice") to the Company and such other person(s) as the
Company may designate, via facsimile, stating Holder's intention to require
Company to disclose that if Holder were to exercise his, her or its right of
conversion (pursuant to Section 5) whether Company would elect to redeem a
specific number of shares of Holder's Series A Preferred Stock for cash in lieu
of issuing Common Stock. Company is required to disclose to Holder what action
Company would take over the subsequent twenty (20) business day period,
including the date of such Election Notice, as further discussed in subsection
7(c).
(c) Company's Response. Upon receipt by the Company of a
facsimile copy of an Election Notice, Company shall immediately send, via
facsimile, a confirmation of receipt of the Election Notice to Holder, which
shall specify that the Election Notice has been received and the name and
telephone number of a contact person at the Company whom the Holder should
contact regarding information related to the requested advance notice.
Thereafter, the Company must respond by the close of business on the next
business day following receipt of Holder's Election Notice (1) via facsimile and
(2) by depositing such response with an overnight or two (2) day courier. The
Company's response must state whether it would redeem the shares, in whole or in
part, or allow conversion into shares of Common Stock without redemption. If
Company does not respond to Holder within one (1) business day via facsimile and
overnight or two (2) day courier, Company shall be required to issue to Holder
Common Stock upon Holder's conversion within the subsequent twenty (20) business
day period of Holder's Election Notice. However, if the Company's Common Stock
price decreases so that under the Conversion Rate Company would be required to
issue more than an additional ten percent (10% ) of shares of Common Stock than
Holder was entitled to receive at the time Holder sent Company its Election
Notice and if the Conversion Price is below the Fixed Conversion Price, then
Company shall no longer be bound to convert Holder's Preferred Stock into Common
Stock but may elect to redeem for cash.
Section 8. Voting Rights. The Holders of the Series A Preferred Stock
shall have no voting power whatsoever, except as otherwise provided by the
Arizona Business Corporation Act ("Arizona Law"), and no Holder of Series A
Preferred Stock shall vote or otherwise participate in any proceeding in which
actions shall be taken by the Company or the shareholders thereof or be entitled
to notification as to any meeting of the shareholders.
Notwithstanding the above, Company shall provide Holder with
notification of any meeting of the shareholders regarding any major corporate
events affecting the Company. In the event of any taking by the Company of a
record of its shareholders for the purpose of determining shareholders who are
entitled to receive payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire any share of any class or any other
securities or property (including by way of merger, consolidation or
reorganization), or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Company, or any proposed liquidation, dissolution or winding up of the
Company, the Company shall mail a notice to Holder, at least ten (10) days prior
to the board meeting scheduled for the purpose of voting on such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time.
To the extent that under Arizona Law the vote of the Holders of the
Series A Preferred Stock, voting separately as a class, is required to authorize
a given action of the Company, the affirmative vote or consent of the Holders of
at least a majority of the shares of the Series A Preferred Stock represented at
a duly held meeting at which a quorum is present or by written consent of a
majority of the shares of Series A Preferred Stock (except as otherwise may be
required under Arizona Law) shall constitute the approval of such action
9
<PAGE>
by the class. To the extent that under Arizona Law the Holders of the Series A
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one (1) class, each share of Series A Preferred Stock shall
be entitled to a number of votes equal to the number of shares of Common Stock
into which it is then convertible using the record date for the taking of such
vote of stockholders as the date as of which the Conversion Price is calculated.
Holders of the Series A Preferred Stock also shall be entitled to notice of all
shareholder meetings or written consents with respect to which they would be
entitled to vote, which notice would be provided pursuant to the Company's
by-laws and applicable statutes.
Section 9. Protective Provision. So long as shares of Series A
Preferred Stock are outstanding, the Company shall not without first obtaining
the approval (by vote or written consent, as provided by Arizona Law) of the
Holders of at least sixty-six and two-thirds percent (66 2/3%) of the then
outstanding shares of Series A Preferred Stock, and at least sixty-six and
two-thirds percent (66 2/3%) of the then outstanding Holders:
(a) alter or change the rights, preferences or privileges of
the Series A Preferred Stock or any Senior Securities so as to affect adversely
the Series A Preferred Stock; provided, however, that no such change may be
approved at any time on or prior to the fortieth (40th) day following the Last
Closing Date unless such change is unanimously approved by all Holders;
(b) create any new class or series of stock having a
preference over or on parity with the Series A Preferred Stock with respect to
Distributions (as defined in Section 2 above) or increase the size of the
authorized number of Series A Preferred; or
(c) do any act or thing not authorized or contemplated by this
Designation which would result in taxation of the holders of shares of the
Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986,
as amended (or any comparable provision of the Internal Revenue Code as
hereafter from time to time amended).
In the event Holders of at least sixty-six and two-thirds percent (66
2/3%) of the then outstanding shares of Series A Preferred Stock and at least
sixty-six and two-thirds percent (66 2/3%) of the then outstanding Holders agree
to allow the Company to alter or change the rights, preferences or privileges of
the shares of Series A Preferred Stock, pursuant to subsection (a) above, so as
to affect the Series A Preferred Stock, then the Company will deliver notice of
such approved change to the Holders of the Series A Preferred Stock that did not
agree to such alteration or change (the "Dissenting Holders") and Dissenting
Holders shall have the right for a period of thirty (30) business days to
convert pursuant to the terms of this Certificate of Designation as they exist
prior to such alteration or change (notwithstanding the sixty (60) day, ninety
(90) day, and one hundred twenty (120) day holding requirements set forth in
Section 5(a) hereof), or continue to hold their shares of Series A Preferred
Stock provided, however, that the Dissenting Holders may not convert anytime on
or before the fortieth (40th) day following the Last Closing Date.
Section 10. Status of Converted or Redeemed Stock. In the event any
shares of Series A Preferred Stock shall be converted or redeemed pursuant to
Section 5 or Section 6 hereof, the shares so converted or redeemed shall be
canceled, shall return to the status of authorized but unissued Preferred Stock
of no designated series, and shall not be issuable by the Company as Series A
Preferred Stock.
Section 11. Preference Rights. Nothing contained herein shall be
construed to prevent the Board of Directors of the Company from issuing one (1)
or more series of Preferred Stock with dividend and/or liquidation preferences
junior to the dividend and liquidation preferences of the Series A Preferred
Stock.
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The undersigned, under penalties of perjury, acknowledge that the Certificate is
his or her act and deed or the act and deed of the Company and that the facts
stated in the Certificate are true.
Signed on June 14, 1996
Signature: /s/ James L. Copland
---------------------
Name: James L. Copland
Title: President
Attest:
/s/ Timothy J. Stocker
----------------------
Timothy J. Stocker, Secretary
11
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SC&T INTERNATIONAL, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
June 17, 1996, by and among SC&T INTERNATIONAL, INC., an Arizona corporation
("Company"), and the subscribers ("Subscribers") to the Company's offering
("Offering") of up to Ten Million Five Hundred Ten Thousand Dollars
($10,510,000) of Series A Preferred Stock ("Preferred Stock") pursuant to the
Regulation S Subscription Agreement between the Company and the Subscribers of
even date herewith ("Subscription Agreement").
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933 (the
"Act"), and pursuant to Rule 415 under the Act or any successor rule, and the
declaration or ordering of effectiveness of such registration statement or
document;
(b) For purposes of the Required Registration under Section 2
hereof, the term "Registrable Securities" means the Company's Common Stock
(together with any capital stock issued as a dividend on, in replacement of, in
exchange for, or otherwise in respect of such Common Stock or issued pursuant to
Section 17 hereof, the "Common Stock") issuable or issued upon conversion of the
Preferred Stock issued to Subscribers in the Offering. For purposes of a Demand
Registration under Section 3 hereof or a Piggyback Registration under Section 4
hereof, the term "Registrable Securities" means the Company's Common Stock
issuable or issued upon conversion of the Preferred Stock issued to Subscribers
in the Offering; provided, however, that after the expiration of the Restricted
Period (as defined in the Subscription Agreement), shares of Common Stock
obtainable on conversion of the Preferred Stock (in whole or in part), shall not
constitute Registrable Securities, if those shares of Common Stock may be sold
or transferred in the U.S. free of any restrictive legend, including without
limitation under Rule 144, unless such inability to sell or transfer free of
restriction is due (i) with respect to the initial Holder, solely to a material
breach or material inaccuracy of any of the representations and warranties
contained in the Subscription Agreement (including any exhibits) of the Holder
in question (including the representation that Holder is not an "underwriter" as
defined in the Act), and (ii) with respect to a transferee from the initial
Holder, to any material action or omission of such transferee that renders such
securities not transferrable free of restriction. The Company shall have no
obligation to register the Preferred Stock. In the event that there is a
disagreement as to whether Common Stock may be sold or transferred free of
restrictive legend, if counsel for the Company provides an opinion, satisfactory
to the transfer agent and which results in the sale or transfer in question
being completed, then the shares covered by that opinion shall not constitute
"Registrable Securities"; but in the absence of such opinion, the shares shall
constitute Registrable Securities and the Company's obligations to register
those shares stated herein shall be in full force and effect;
<PAGE>
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock which
have been issued or are issuable upon conversion of the Preferred Stock at the
time of such determination;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any permitted assignee thereof.
2. Required Registration.
(a) On or before August 31, 1996, the Company shall file a
registration statement ("Registration Statement") on Form S-1 or Form SB-2 (or
other suitable form), covering the resale of all shares of Registrable
Securities then outstanding.
(b) The Registration Statement shall be done as a "shelf"
registration statement under Rule 415, and the Company shall use its best
efforts to maintain effective until the earlier of (i) the date the distribution
described in the Registration Statement is completed; (ii) the date the Company
is eligible to and has filed an alternate registration statement which is
effective and which the Company will use its best efforts to maintain until the
distribution described therein is completed; (iii) the date all Registrable
Securities otherwise have been sold; or (iv) the date this Agreement has been
terminated pursuant to Section 15 hereof. The Company shall use its best efforts
to have the Registration Statement declared effective by October 31, 1996.
(c) The Holders have the right to convert the Preferred Stock
into Common Stock pursuant to the terms of the Subscription Agreement and the
Certificate of Designation of Series A Preferred Stock of the Company and sell
the Common Stock under Regulation S and applicable exemptions until such time
that the Registration Statement becomes effective.
(d) Notwithstanding anything to the contrary contained herein,
any Holder (together with any assignee of its rights) (collectively referred to
as "Excluded Holders") shall be entitled, by written notice to the Company
delivered at any time prior to the filing of the Registration Statement
contemplated by this Section 2, to elect to have the Registrable Securities
issued or issuable to it excluded from the Registration Statement. In the event
a Holder elects not have its Registrable Securities included in the Registration
Statement, the Holder shall, nonetheless, and notwithstanding anything herein to
the contrary, have the right (i) upon written notice to the Company from Holders
of at least twenty-five (25%) of the Registrable Securities not subject to
another registration statement then on file with the Securities and Exchange
Commission, at any time following October 31, 1996, to cause the Company to
effect a Demand Registration (as defined in Section 3) registering the
Registrable Securities held by such Holders on Form S-1 or Form SB-2 if prior to
December 14, 1996 or on Form S-3 if thereafter (or other suitable form, subject
to the approval of such Holders), and (ii) at any time following November 30, to
have its shares included in any Piggyback Registration (as defined in Section
4), in each case in accordance with the provisions of Sections 3 and 4 hereof.
In connection with a Demand Registration initiated by the Excluded Holders under
this Subsection 2(d), the Company shall pay all costs and expenses of
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<PAGE>
Demand Registration in accordance with Section 9. The Excluded Holders rights to
include their Registrable Securities in a Piggyback Registration or a Demand
Registration shall be limited to those instances in which their Registrable
Securities are not otherwise immediately transferable pursuant to Rule 144 or
another available exemption under the Act.
3. Demand Registration.
(a) At any time beginning after the end of the Restricted
Period (as defined in the Subscription Agreement), the Holders of Registrable
Securities obtained or obtainable upon conversion of at least twenty-five
percent (25%) of the shares of the Preferred Stock outstanding may notify the
Company in writing that they demand that the Company file a registration
statement under the Act covering the registration of all of the Registrable
Securities then outstanding. Upon receipt of such notice, the Company shall,
within ten (10) days, give written notice of such request to all Holders and
shall, subject to the limitations of subsection 3(b), effect as soon as
practicable, and in any event within forty-five (45) days of the receipt of such
request, the registration under the Act of all Registrable Securities which the
Holders request, by notice given to the Company within ten (10) days of receipt
of the Company's notice, to be registered as expeditiously as reasonably
possible after the mailing of such notice by the Company (a "Demand
Registration").
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 3 and the
Company shall include such information in the written notice referred to in
subsection 3(a). In such event, the right of any Holder to include his
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
7(f)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders, and reasonably acceptable to the Company;
provided that no Holder shall be required to make any representations other than
with respect to its ownership of Registered Securities and its intended method
of distribution.
(c) In the event of a non-underwritten registration under (b)
above, the Company agrees to include all Registrable Securities held by all
Holders in such Registration Statement without cutback or reduction. In the
event the Company breaches its obligation of the preceding sentences, any
Holders of the Registrable Securities which were not included in such
Registration Statement shall be entitled to additional Demand Registrations for
such excluded securities on the same terms as the Demand Registration described
in this Agreement; provided, however, that the Company shall not be obligated to
effect more than one (1) Demand Registration in any six (6) month period.
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(d) The Company is not obligated to effect a demand
registration under this Section 2 if in the written opinion of counsel to the
Company reasonably acceptable to the person or persons from whom written request
for registration has been received (and satisfactory to the Company's transfer
agent to permit the transfer) that registration under the Act is not required
for the immediate transfer of the Registrable Securities pursuant to Rule 144 or
other applicable provision.
(e) The Company represents that it is eligible to effect the
registration contemplated hereby on Form S-1 or Form SB-2 and will continue to
take such actions as are necessary to maintain such eligibility. The Company
further represents that it will be eligible to effect the registration
contemplated hereby on Form S-3 after December 14, 1996 and thereafter will take
such actions as will be necessary to maintain such eligibility.
(f) Except as provided in paragraph (c) above, the Company
shall not be obligated to effect more than one (1) Demand Registration.
(g) In the event that the Demand Registration statement is on
Form S-3 (or any successor form thereto), each Holder shall give the Company one
(1) business day's prior written notice of any proposed sale of Shares under
that registration statement, and shall not make such sale unless (i) one (1)
business day lapses without response from the Company, or (ii) the Company
notifies the Holder in writing that the registration statement requires a
post-effective amendment or supplement to be current. In the event of (ii)
above, and subject to Section 5(b) below, the Company shall have seven (7)
business days to file a complete and accurate post-effective amendment or
supplement with the SEC and provide copies to the Holders to enable them to sell
the Registrable Securities in accordance with applicable law and regulations.
The time period for which the Company is required to keep the registration
statement current under Section 7(c) shall be extended by the length of any
period or periods, beginning from the date(s) when the Company has notified
Holders that the registration statement is not accurate and ending on the
date(s) when the required post-effective amendment or prospectus supplements
have been declared effective by the SEC and delivered to the Holders.
4. Piggyback Registration. If, after the end of the Restricted
Period (but without any obligation to do so), the Company proposes to register
(including for this purpose a registration effected by the Company for
shareholders other than the Holders) any of its Common Stock under the Act in
connection with the public offering of such securities (other than a
registration relating solely to the sale of securities to participants in a
Company stock plan or a registration on Form S-4 promulgated under the Act or
any successor or similar form registering stock issuable upon a
reclassification, upon a business combination involving an exchange of
securities or upon an exchange offer for securities of the issuer or another
entity), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given by
fax within ten (10) days after mailing of such notice by the Company, which
request shall state the intended method of disposition of such shares by such
Holder, the Company shall cause to be registered under the Act all of the
Registrable Securities that each such Holder has requested to be registered (a
"Piggyback Registration").
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5. Limitation on Obligations to Register.
(a) In the case of a Piggyback Registration on an underwritten
public offering by the Company, if the managing underwriter determines and
advises in writing that the inclusion in the registration statement of all
Registrable Securities proposed to be included would interfere with the
successful marketing of the securities proposed to be registered by the Company,
then the number of such Registrable Securities to be included in the
registration statement shall be allocated among all Holders who had requested
Piggyback Registration, in the proportion that the number of Registrable
Securities which each such Holder seeks to register bears to the total number of
Registrable Securities sought to be included by all Holders; provided that in no
event shall the number of Registrable Securities be less than fifteen percent
(15%) pro-rata of the total number of shares included in such registration.
(b) Notwithstanding anything to the contrary herein, the
Company shall have the right (i) to defer the initial filing or request for
acceleration of effectiveness of any Demand Registration or Piggyback
Registration or (ii) after effectiveness, to suspend effectiveness of any such
registration statement, if, in the good faith judgment of the board of directors
of the Company and upon the advice of counsel of the managing underwriter (if
any) of the offering, such delay in filing or requesting acceleration of
effectiveness or such suspension of effectiveness is necessary in light of the
existence of material non-public information (financial or otherwise) concerning
the Company disclosure of which at the time is not, in the opinion of the board
of directors of the Company upon the advice of counsel, (A) otherwise required
and (B) in the best interests of the Company; provided however that the Company
will use its best efforts to terminate such delay or suspension as soon as
practicable and, in any event will not delay effectiveness of such registration
for more than two (2) months from the date of the demand or suspend
effectiveness for more than twenty (20) days, unless it is then engaged in an
acquisition that would make such registration impracticable, in which case it
will use its best efforts to eliminate such impracticability as soon as
possible.
6. Obligations to Increase Available Shares. In the event that
the number of shares available under a registration statement filed pursuant to
Section 3 is insufficient to cover all of the Registrable Securities then
outstanding, the Company shall amend that registration statement, or file a new
registration statement, or both, so as to cover all shares of Registrable
Securities then outstanding. The Company shall effect such amendment or new
registration within sixty (60) days of the date the registration statement filed
under Section 3 is insufficient to cover all the shares of Registrable
Securities then outstanding. Any Registration Statement filed hereunder shall,
to the extent permissible by the Rules of the Securities and Exchange Commission
("SEC"), state that, in accordance with Rule 416 under the Act, such
Registration Statement also covers such indeterminate numbers of additional
shares of Common Stock as may become issuable upon conversion of the Preferred
Stock to prevent dilution resulting from stock changes or by reason of changes
in the conversion price in accordance with the terms thereof.
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<PAGE>
7. Obligations of the Company. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) With respect to any Demand Registration, use best efforts
to keep such registration statement effective until the Holders of Registrable
Securities covered by such registration statement have completed the
distribution described in the registration statement but any event for a period
no longer than one hundred eighty (180) days.
(d) Furnish to the Holders (i) such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them
and (ii) copies of all correspondence to or with the SEC. Swartz Investments,
LLC, as a representative of the Holders, shall be furnished with copies of
drafts, or all filings prior to filing and given sufficient time to provide
comments thereon.
(e) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders of the Registrable Securities covered by such registration statement,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(f) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(g) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act upon the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
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<PAGE>
(h) Furnish, at the request of any Holder whose shares are
being registered pursuant to this Agreement, on the date that such Registrable
Securities are delivered to the underwriters for sale in connection with a
registration pursuant to this Agreement, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
(i) Use its reasonable best efforts to maintain the listing of
the Common Stock on NASDAQ Small Cap Market, NASDAQ National Market System or a
National Securities Exchange.
8. Furnish Information. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Agreement
that the selling Holders shall timely furnish to the Company such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities as shall be required to effect the
registration of their Registrable Securities or to determine that registration
is not required pursuant to Rule 144 or other applicable provision of the Act,
as well as to execute any agreements as may be reasonably requested by the
Company in connection therewith.
9. Expenses of Required or Demand Registration. All expenses
other than underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Sections 2 or 3, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and
including the reasonable fees and disbursements incurred of only one counsel for
the selling Holders not to exceed $5,000, shall be borne by the Company;
provided, however, that the Company shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Sections 2 or 3 if the
registration request is subsequently withdrawn at the request of the Holders of
a majority of the Registrable Securities to be registered (in which case all
Holders who had requested such registration shall bear such expenses); provided
further, however, that if at the time of such withdrawal, the Holders have
learned of a material adverse change in the condition, business, or prospects of
the Company from that known to the Holders at the time of their request, then
the Holders shall not be required to pay any of such expenses and shall retain
their rights pursuant to Sections 2 and 3.
10. Expenses of Company Registration. The Company shall bear
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 4 for each Holder, including (without limitation)
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<PAGE>
all registration, filing, and qualification fees, printers and accounting fees
relating or apportionable thereto (and including the reasonable fees and
disbursements incurred of only one counsel for the selling Holders selected by
them not to exceed $5,000), but excluding underwriting discounts and commissions
relating to Registrable Securities.
11. Indemnification. In the event any Registrable Securities
are included in a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each "Holder Indemnified Persons" (defined for purposes of
this Section 11 as each Holder, the officers and directors of each Holder acting
in their capacity as such, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the Securities Exchange Act of 1934, as amended (the
"1934 Act")), against any losses, claims, damages, expenses, or liabilities
(joint or several) (hereinafter referred to singularly as "Loss" and
collectively as "Losses") to which they may become subject under the Act, the
1934 Act or other federal or state law, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
of a material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, (ii) the omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation by the Company of the Act, the 1934 Act, any
state securities law or any rule or regulation promulgated under the Act, the
1934 Act or any state securities law; and the Company will reimburse each such
Holder Indemnified Person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such Loss or action;
provided, however, that the indemnity agreement contained in this subsection
11(a) shall not apply to amounts paid in settlement of any such Loss or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such Loss or action to the extent that it arises out of or is based
upon a Violation which occurs in either (i) reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder Indemnified Person or (ii) based upon a
prospectus which included a Violation after the Company has advised the Holder
not to sell pursuant to such prospectus, and has made available an amended or
supplemental prospectus that corrects such Violation or (iii) the failure of
such Holder Indemnified Person to deliver a copy of the registration statement
or prospectus, or any amendment or supplement thereto.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the "Company Indemnified Persons" (defined for the
purpose of this Section 11 as the Company, each of its directors in their
capacity as such, each of its officers who have signed the registration
statement in their capacity as such, each person, if any, who controls the
Company within the meaning of the Act in their capacity as such, any underwriter
and any other Holder Indemnified Person selling securities in such registration
statement), against any Loss (joint or several) to which the Company or any such
director, officer, controlling person, or underwriter or controlling person,
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<PAGE>
or other such Holder Indemnified Person may become subject, under the Act, the
1934 Act or other federal or state law, insofar as such Loss (or actions in
respect thereto) arises out of or is based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the Company and any
such Company Indemnified Person in connection with investigating or defending
any such Loss or action; provided, however, that the indemnity agreement
contained in this subsection 11(b) shall not apply to amounts paid in settlement
of any such Loss or action if such settlement is effected without the consent of
the Holder, which consent shall not be unreasonably withheld; provided, that, in
no event shall any indemnity under this subsection 11(b) exceed the gross
proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 11 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 11, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonably incurred fees and
expenses to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section 11, but the omission
so to deliver written notice to the indemnifying party will not relieve it of
any liability that it may have to any indemnified party otherwise than under
this Section 11 to the extent it is prejudicial.
(d) The obligations of the Company and Holders under this
Section 11 shall survive the redemption and conversion, if any, of the Preferred
Stock, the completion of any offering of Registrable Securities in a
registration statement under this Agreement, and otherwise.
12. Reports Under Securities Exchange Act of 1934. With a view
to making available to the Holders the benefits of Rule 144 promulgated under
the Act and any other rule or regulation of the SEC that may at any time permit
a Holder to sell securities of the Company to the public without registration,
the Company agrees to:
(a) use its reasonable best efforts to make and keep public
information available, as those terms are understood and defined in SEC Rule
144, at all times;
(b) use its reasonable best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company under the
Act and the 1934 Act; and
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<PAGE>
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company, if true, that it has complied with the reporting requirements of SEC
Rule 144 (at any time after ninety (90) days after the effective date of the
first registration statement filed by the Company), the Act and the 1934 Act,
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule or
regulation of the SEC which permits the selling of any such securities without
registration.
13. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, the holders of at
least sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities
then outstanding and at least sixty-six and two-thirds percent (66 2/3%) of the
holders of Registrable Securities then outstanding; provided, however, that no
amendment of Section 2(d) or other provisions of this Agreement may be made if
such amendment would adversely affect the rights of the Excluded Holders without
the written consent of all the Excluded Holders.
14. Notices. All notices required or permitted under this
Agreement shall be made in writing signed by the party making the same, shall
specify the section under this Agreement pursuant to which it is given, and
shall be addressed if to (i) the Company at: Chief Financial Officer, 3837 East
LaSalle Street, Phoenix, AZ 85040; Telephone No. (602) 470-1334; Telecopy No.
(602) 470-1507 and (ii) the Holders at their respective last address as the
party shall have furnished in writing as a new address to be entered on such
register. Any notice, except as otherwise provided in this Agreement, shall be
made by fax and shall be deemed given at the time of transmission of the fax.
15. Termination. This Agreement shall terminate on the later
to occur of (a) the date that is three (3) years from the date of this Agreement
and (b) the date that is ninety (90) days after the date on which all Preferred
Stock has been converted into Common Stock; but without prejudice to (i) the
parties' rights and obligations arising from breaches of this Agreement
occurring prior to such termination or (ii) other indemnification obligations
under this Agreement.
16. Assignment. No assignment, transfer or delegation, whether
by operation of law or otherwise, of any rights or obligations under this
Agreement by the Company or any Holder, respectively, shall be made without the
prior written consent of the majority in interest of the Holders or the Company,
respectively; provided that the rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee shall provide to the Company, together with or prior to such
transferee's request to have such Registrable Shares included in a Demand
Registration or Piggyback Registration, a writing executed by such transferee
agreeing to be bound as a Holder by the terms of this Agreement); and provided
further that the Company may transfer its rights and obligations under this
Agreement to a purchaser of all or a substantial portion of its business if the
obligations of the Company under this Agreement are assumed in connection
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<PAGE>
with such transfer, either by merger or other operation of law (which may
include without limitation a transaction whereby the Registrable Shares are
converted into securities of the successor in interest) or by specific
assumption executed by the transferee.
17. Payments for Failure to Register or Failure to List. If
the Registration Statement required under Section 2 hereof is not effective on
or prior to October 31, 1996, and the Company unreasonably fails to respond to
any request for information from the SEC related to such Registration Statement
within twenty (20) business days of such request, then the Company shall pay to
all Holders of outstanding Preferred Stock an aggregate amount equal to
three-fourths percent (3/4 percent) per month of the aggregate amount of
Preferred Stock sold in the Offering, compounded monthly, and accruing daily,
payable in Common Stock, which Common Stock shall also be deemed "Registrable
Securities" hereunder; provided, however, that such additional amounts shall not
be payable for so long as any delay in the effectiveness of the Registration
Statement is due, in whole or in part, directly, to causes beyond the control of
the Company. If, subsequent to December 16, 1996, the Company is not eligible to
effect a Registration under Form S-3, or other appropriate registration
statement, at the time of a Demand Registration under the terms of this
agreement solely through the act or failure to act by the Company, and not due
to a change in statute or regulation or other fact circumstance not under the
Company's control, then the Company shall pay to all Holders of outstanding
Preferred Stock an aggregate penalty equal to the amount of the Conversion
Default Penalty ("Conversion Default Penalty") set forth in Section 7.6(a) of
the Regulation S Subscription Agreement between the Company and the Subscribers
("Subscription Agreement") for each day beyond sixty (60) days of the receipt of
a request for a Demand Registration until such registration is complete.
18. Governing Law. This Registration Rights Agreement shall be
governed by and construed in accordance with the laws of the state of Arizona
applicable to agreements made in and wholly to be performed in that
jurisdiction, except for matters arising under the Act or the Securities
Exchange Act of 1934, which matters shall be construed and interpreted in
accordance with such laws. Any action brought to enforce, or otherwise arising
out of, this Agreement shall be heard and determined only in either a federal or
province court sitting in the State of Arizona, Maricopa County.
[INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned have executed this Registration
Rights Agreement as of the date first above written.
SC&T INTERNATIONAL, INC.
By: /s/ Timothy J. Stocker
----------------------
Name: Timothy J. Stocker
Title: Vice President of Finance
Address: 3837 East LaSalle Street
Phoenix, AZ 85040
INVESTOR(S)
Capital Ventures International
By: /s/ Johann Koehne
-------------------------------
(Signature)
Address: ____________________________________
____________________________________
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EXHIBIT B
LIMITED POWER OF ATTORNEY
THIS LIMITED POWER OF ATTORNEY given on the 11th day of October, 1993 by CAPITAL
VENTURES INTERNATIONAL, (hereinafter called "the Company") whose Registered
Office is situated at Third Floor, One Regis Place, P.O. Box 1787, Grand Cayman,
Cayman Islands, B.W.I.
WHEREAS, by agreement dated August 28, 1989 by and between the Company and Arbit
Inc., the Company expressly authorized Arbit Inc. to enter into transactions in
certain designated areas as defined in the Agreement attached hereto marked
"Appendix 1".
NOW THIS DEED WITNESSETH that Ian A.N. Wight (Director) and Woodbourne
Associates (Cayman) Limited (Secretary) of the Company, hereby appoint on behalf
of the Company the firm of ARBIT INC. which through its officers, directors and
employees is hereby formally granted limited power of attorney for the purpose
of entering into transactions on behalf of and for the account of the Company
and to take any actions on behalf of the Company as may be necessary to
consummate such transactions, including but not limited to instructing the
transfer of funds where necessary and executing required documentation.
IN WITNESS WHEREOF, the Company has caused its common seal to be hereunto
affixed the day and year above written.
THE COMMON SEAL OF /s/ Ian A.N. Wight
CAPITAL VENTURES INTERNATIONAL -------------------------
was hereunto affixed in the presence of: Ian A.N. Wight
(Director)
/s/
-------------------------
/s/ Woodbourne Associates
-------------------------
Woodbourne Associates
(Cayman) Limited
(Secretary)
13
