<PAGE>
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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
MEDCARE TECHNOLOGIES INC
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(Name of Registrant as Specified In Its Charter)
MEDCARE TECHNOLOGIES INC
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
<PAGE>
MEDCARE TECHNOLOGIES, INC.
Suite 1210 - 1515 West 22nd Street
Oak Brook, IL 60523
Telephone: 630-472-5300
May __, 1999
Dear Stockholders:
You are cordially invited to attend the 1999 Annual Meeting of Stockholders of
Medcare Technologies, Inc. The meeting will be held at 9:00 a.m., local time, on
June 18, 1999 at The Drake Oak Brook Hotel, 2301 S. York Road, Oak Brook,
Illinois 60523. Enclosed are the official notice of this meeting, a proxy
statement and a form of proxy.
At this meeting you will be asked to elect directors to serve until the next
annual meeting, vote upon a proposal to issue shares of the Company's common
stock upon conversion of the Company's Series B Convertible Preferred Stock and
exercise of related warrants, ratify the selection of the Company's independent
auditors for 1999 and vote upon a proposal to adopt the Company's 2000 Stock
Option Plan and reserve 2,000,000 shares of common stock for issuance
thereunder.
Please note that attendance at the Annual Meeting will be limited to
stockholders of record at the close of business on May __, 1999, and to guests
of the Company. If your shares are registered in your name and you plan to
attend the Annual Meeting, please bring the enclosed ballot with you to the
meeting. If your shares are held by a broker, bank or other nominee and you plan
to attend the meeting, please contact the person responsible for your account
regarding your intention to attend the meeting so they will know how you intend
to vote your shares at that time. Stockholders who do not expect to attend the
Annual Meeting in person may submit their ballot to the Management of the
Company at Suite 1210, 1515 West 22nd Street, Oak Brook, IL 60523.
BY ORDER OF THE BOARD OF DIRECTORS
Jeffrey S. Aronin
President & Chief Executive Officer
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OF MEDCARE TECHNOLOGIES, INC. TO BE HELD JUNE 18, 1999
To the Stockholders of Medcare Technologies, Inc.:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders (the
"Annual Meeting") of Medcare Technologies, Inc., a Delaware corporation (the
"Company"), will be held at The Drake Oak Brook Hotel, 2301 S. York Road, Oak
Brook, Illinois 60523 on the 18th day of June, 1999, at 9:00 a.m. (local time)
for the following purposes:
1. To elect five directors to the Board of Directors to serve until the
next Annual Meeting of Stockholders or until their respective
successors are duly elected and have qualified;
2. To approve the issuance of shares of the Company's common stock, par
value $0.001 per share (the "Common Stock") upon conversion of the
Company's Series B Convertible Preferred Stock, par value $0.25 per
share (the "Series B Preferred"), and exercise of related warrants to
acquire shares of Common Stock, all on the terms and conditions set
forth in the Securities Purchase Agreement, dated as of May 18, 1999,
between the Company and certain investors;
3. To ratify the appointment of Arthur Andersen, L.L.P. as the Company's
independent auditor for the fiscal year ending December 31, 1999;
4. To consider and vote upon a proposal to adopt the Company's 2000 Stock
Option Plan and the reservation of 2,000,000 shares of Common Stock
for issuance thereunder; and
5. To transact any and all other business that may properly come before
the Annual Meeting or any adjournment(s) thereof.
Pursuant to the Company's Bylaws (the "Bylaws"), the record date (the
"Record Date") for the determination of stockholders entitled to notice of and
to vote at such meeting or any adjournment(s) thereof shall be the close of
business on May __, 1999. Only holders of record of the Company's Common Stock
at the close of business on the Record Date are entitled to notice of and to
vote at the Annual Meeting. Shares can be voted at the Annual Meeting only if
the holder is present or represented by proxy. The stock transfer books will not
be closed. A copy of the Company's 1998 Annual Report to Stockholders, in the
form of the 10-KSB filed with the Securities and Exchange Commission, which
includes audited financial statements, has previously been provided to the
Company's stockholders. A list of stockholders entitled to vote at the Annual
Meeting will be available for examination at the offices of the Company for ten
(10) days prior to the Annual Meeting.
You are cordially invited to attend the Annual Meeting; whether or not you
expect to attend the meeting in person, however, you are urged to mark, sign,
date, and mail the enclosed form of proxy promptly so that your shares of stock
may be represented and voted in accordance with your wishes and in order that
the presence of a quorum may be assured at the meeting. Your proxy will be
returned to you if you should be present at the Annual Meeting and should
request its return in the manner provided for revocation of proxies on the
initial page of the enclosed proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS
______________________________________________________
Jeffrey S. Aronin, President & Chief Executive Officer
Oak Brook, Illinois
May __, 1999
<PAGE>
MEDCARE TECHNOLOGIES, INC.
1515 WEST 22nd STREET, SUITE 1210
OAK BROOK, ILLINOIS 60523
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 18th, 1999
SOLICITATION AND REVOCABILITY OF PROXIES
The accompanying proxy is solicited by the Board of Directors on behalf of
Medcare Technologies, Inc., a Delaware corporation (the "Company"), to be voted
at the 1999 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
to be held on June 18, 1999 at the time and place and for the purposes set forth
in the accompanying Notice of Annual Stockholders (the "Notice") and at any
adjournment(s) thereof. When proxies in the accompanying form are properly
executed and received, the shares represented thereby will be voted at the
Annual Meeting in accordance with the directions noted thereon; if no direction
is indicated, such shares will be voted FOR the election of the nominees listed
thereon, FOR the issuance of the shares of Common Stock upon conversion of the
Series B Preferred and exercise of the related warrants, FOR the adoption of the
2000 Stock Option Plan and the reservation of shares for issuance thereunder,
FOR the ratification of the independent auditor, and in their discretion with
respect to any other matters that may properly come before the stockholders at
the Annual Meeting.
The executive offices of the Company are located at, and the mailing
address of the Company is, 1515 West 22nd Street, Suite 1210, Oak Brook,
Illinois 60523.
Management does not anticipate that any matters will be presented at the
Annual Meeting other than matters set forth in the Notice.
This proxy statement (the "Proxy Statement") and accompanying proxy are
being mailed on or about May __, 1999. The Company's Annual Report on Form
10-KSB (the "1998 Annual Report"), which serves as the Annual Report to
Stockholders, covering the Company's fiscal year ended December 31, 1998, has
previously been provided to the Company's stockholders.
Any stockholder of the Company giving a proxy has the right to revoke their
proxy at any time prior to the voting thereof by voting in person at the Annual
Meeting, by delivering a duly executed proxy bearing a later date or by giving
written notice of revocation to the Company addressed to Jeffrey S. Aronin,
President, 1515 West 22nd Street, Suite 1210, Oak Brook, Illinois 60523; no such
written notice shall be effective, however, until such notice of revocation has
been received by the Company at or prior to the Annual Meeting.
In addition to the solicitation of proxies by use of the mail, officers and
regular employees of the Company may solicit the return of proxies, either by
mail, telephone, telegraph or through personal contact. Such officers and
employees will not be additionally compensated but will be reimbursed for
out-of-pocket expenses. Brokerage houses and other custodians, nominees, and
fiduciaries will, in connection with shares of the Company's common stock,
$0.001 par value per share (the "Common Stock"), registered in their names, be
requested to forward solicitation material to the beneficial owners of such
shares of Common Stock.
The cost of preparing, printing, assembling, and mailing the 1998 Annual
Report, the Notice, this Proxy Statement, and the enclosed form of proxy, as
well as the cost of forwarding solicitation materials to the beneficial owners
of shares of Common Stock and other costs of solicitation, are to be borne by
the Company.
<PAGE>
QUORUM AND VOTING
The record date for the determination of stockholders entitled to notice of
and to vote at the Annual Meeting was the close of business on May __, 1999 (the
"Record Date"). On the Record Date, there were XXXXXXX shares of Common Stock
issued and outstanding.
Each share of Common Stock is entitled to one vote on all matters to be
acted upon at the Annual Meeting, and neither the Company's Certificate of
Incorporation (the "Certificate of Incorporation") nor its Bylaws allow for
cumulative voting rights. The presence, in person or by proxy, of the holders of
a majority of the issued and outstanding Common Stock entitled to vote at the
meeting is necessary to constitute a quorum to transact business. If a quorum is
not present or represented at the Annual Meeting, the stockholders entitled to
vote thereat, present in person or by proxy, may adjourn the Annual Meeting from
time to time without notice or other announcement until a quorum is present or
represented. Assuming the presence of a quorum, the affirmative vote of a
plurality of votes cast is required for the election of each of the nominees for
director. A majority of the votes represented and entitled to vote at the Annual
Meeting will be required for the approval of all other matters to be voted upon.
Abstentions and broker non-votes will each be counted towards the presence of a
quorum, but (i) will not be counted as votes cast and, accordingly, will have no
effect on the plurality vote required for the election of directors, and (ii)
will be counted as votes represented at the Annual Meeting and, accordingly,
will have the effect of a vote "against" all other matters to be acted upon.
Proxies in the accompanying form which are properly executed and returned
to the Company will be voted at the Annual Meeting in accordance with the
instructions contained in such proxies and, at the discretion of the proxy
holders, on such other matters as may properly come before the meeting. Where no
such instructions are given, the shares will be voted for the election of each
of the nominees for director, the issuance of the shares of Common Stock upon
conversion of the Series B Preferred and exercise of the related warrants, the
ratification of Arthur Andersen LLP as the independent auditor and the adoption
of the 2000 Stock Option Plan and reservation of 2,000,000 shares of Common
Stock for issuance thereunder.
A stockholder that intends to present a proposal at the 2000 Annual Meeting
of Stockholders for inclusion in the Company's proxy statement and form of proxy
relating to such meeting must submit such proposal by January 31, 2000. The
proposal must be mailed to the Company's offices at 1515 W. 22nd St., Oakbrook,
IL 60523.
<PAGE>
SUMMARY
Medcare Technologies, Inc. is the parent company of MedCare Technologies,
Corporation and Medcareonline.com and was originally incorporated in the state
of Utah in 1986. In 1996, a migratory merger was completed changing the
Company's domicile to Delaware. In 1995, the Company acquired the MedCare
Program and began offering the program to doctors in 1996. The Company did not
generate any revenues until 1997 and launched the program nationally in 1998.
The Company's 1998 Annual Report provides a review of the Company's operations
during the past year.
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. This summary is not intended to be complete and is
qualified in all respects by reference to the detailed information appearing
elsewhere in this Proxy Statement and the exhibit hereto.
The Meeting
Date, Time and Place of the Annual Meeting
The Annual Meeting of Medcare Technologies, Inc. is scheduled to be held on
June 18, 1999, at 9:00 a.m. (local time) at The Drake Oak Brook Hotel, 2301 S.
York Road, Oak Brook, Illinois 60523.
Record Date
Only holders of record of shares of Common Stock at the close of business
on May __, 1999 are entitled to receive notice of and to vote at the Annual
Meeting.
Vote Required
Assuming the presence of a quorum, the affirmative vote of a plurality of
votes cast is required for the election of each of the nominees for director. A
majority of the votes cast with a quorum present at the Annual Meeting will be
required for the approval of all other matters to be voted upon.
Accountants
Arthur Andersen LLP has been selected by the Company to act as its
independent auditor for 1999. Clancy and Co., P.L.L.C. have been the accountants
for the Company since August 21, 1995 and performed the audit for the fiscal
year ending December 31, 1998. It is not expected that the representatives of
Arthur Andersen LLP or Clancy and Co., P.L.L.C. will attend the Annual Meeting
or be available to answer questions from the stockholders.
Recommendations
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT THE
COMPANY'S STOCKHOLDERS VOTE FOR EACH OF THE NOMINEES FOR DIRECTOR ("PROPOSAL
1"), FOR THE ISSUANCE OF THE SHARES OF COMMON STOCK UPON CONVERSION OF THE
SERIES B PREFERRED AND EXERCISE OF THE RELATED WARRANTS ("PROPOSAL 2"), FOR THE
RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
INDEPENDENT AUDITOR FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999 ("PROPOSAL 3"),
AND FOR THE ADOPTION OF THE COMPANY'S 2000 STOCK OPTION PLAN AND THE RESERVATION
OF 2,000,000 SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER ("PROPOSAL 4").
<PAGE>
PROPOSAL NO. 1:
ELECTION OF BOARD MEMBERS
Nominees
The Company's Board of Directors is currently comprised of five directors.
Each of the nominees is presently a director of the Company. If so directed in
the enclosed proxy, the persons named in such proxy will vote the shares
represented by such proxy for the election of the following named nominees for
the office of director of the Company, to hold office until next annual meeting
of the stockholders or until their respective successors shall have been duly
elected and shall have qualified.
Information Concerning Nominees
- -------------------------------
<TABLE>
<CAPTION>
Name Age Position Director/Officer Since
<S> <C> <C> <C>
Harmel S. Rayat 37 Chairman & Director September 1995
Jeffrey S. Aronin 31 President, CEO & Director July 1997
Gregory Wujek 37 VP of Managed Care & Director August 1998
Dr. Michael M. Blue 54 Director August 1996
Alan P. Jagiello 33 CFO, Treasurer, Secretary & Director March 1999
</TABLE>
The Board of Directors does not contemplate that any of the above-named
nominees for director will refuse or be unable to accept election as a director
of the Company, or be unable to serve as a director of the Company. Should any
of them become unavailable for nomination or election or refuse to be nominated
or to accept election as a director of the Company, then the persons named in
the enclosed form of proxy intend to vote the shares represented in such proxy
for the election of such other person or persons as may be nominated or
designated by the Board of Directors. No nominee is related by blood, marriage,
or adoption to another nominee or to any executive officer of the Company or its
subsidiaries or affiliates.
Assuming the presence of a quorum, each of the nominees for director of the
Company requires for his election the approval of a plurality of the votes cast
by the shares of Common Stock entitled to vote at the Annual Meeting.
The Board of Directors regard all of the individuals being nominated to the
Board as extremely competent professionals with many years of experience in
different fields of endeavor, including sales and marketing, urology, teaching,
and corporate finance and development. The Board feels that this collective base
of experience and knowledge is crucial in the overall development of the
Company's business.
Information Concerning Current Officers and Directors
- -----------------------------------------------------
The following narrative describes the positions held by the Company's
current officers and directors. Except for Jeff Aronin, CEO and President, the
officers were appointed to their positions, and continue in such positions at
the discretion of the directors. Jeff Aronin has an employment contract with the
Company as described under the heading "Remuneration and Executive
Compensation". During 1998, the Board met four times and each board member
attended at least 75% of the board and committee meetings that were held while
they were in office. The Company has established both a compensation and audit
committee, each of which is comprised of the two non-employee directors (Harmel
S. Rayat and Dr. Michael M. Blue).
HARMEL S. RAYAT (Age 37) Chairman of the Board, Director. Mr. Rayat is one
of the co-developers of the MedCare Program. Mr. Rayat has been in the venture
capital industry since 1981 and since January 1993 has been the president of
Hartford Capital Corporation, a company which specializes in providing early
stage funding and investment banking services to emerging growth corporations.
From January 1989 through December 1992, Mr. Rayat was the President and CEO of
K.S. Rayat & Company, an investment banking and venture capital company, where
he was responsible for research, due diligence and investment strategy in early
stage, venture capital investments. Mr. Rayat has been a director of the Company
since September 1995, President from June 1996 until June 1997 and is currently
Chairman. Mr. Rayat also serves as a director of American Alliance Corporation
and Scottsdale Scientific, Inc.
<PAGE>
JEFFREY S. ARONIN (Age 31) President and Chief Executive Officer, Director.
Mr. Aronin has extensive experience in the health care industry, with particular
expertise in corporate development, sales management, health care marketing and
managed health care. Mr. Aronin joined Carter Wallace, a major pharmaceutical
firm, in May of 1989. At Carter Wallace, Mr. Aronin held many positions as he
advanced through management in sales, marketing and managed care. In September
1995, Mr. Aronin left Carter Wallace to join American Health Products
Corporation, where he ran the marketing division (focusing on marketing and
business development) and made significant contributions toward the growth of
its business. Mr. Aronin joined the Company as its President and Chief Operating
Officer in July 1997, at which time he also became a member of its Board of
Directors. He holds a bachelor's degree in marketing and finance as well as an
MBA.
ALAN P. JAGIELLO (Age 33) Chief Financial Officer, Secretary, Treasurer,
Director. Mr. Jagiello is a certified public accountant with over 10 years of
experience in public accounting at Arthur Andersen LLP. Prior to joining the
Company in December 1998, Mr. Jagiello worked in Arthur Andersen's U.S.
Professional Standards Group, where he consulted with clients and audit
engagement teams on technical matters of accounting and Securities and Exchange
Commission reporting. The Professional Standards Group sets, monitors and
disseminates policies on accounting and auditing standards for Arthur Andersen
worldwide and represents the firm before the Financial Accounting Standards
Board, the Securities and Exchange Commission, the American Institute of
Certified Public Accountants and the International Accounting Standards
Committee. Before joining this group, Mr. Jagiello assisted numerous clients
ranging from large, multinational corporations to closely held businesses, and
has provided due diligence services on acquisitions, performed benchmarking
projects and prepared internal control recommendations. Mr. Jagiello has
authored a number of publications regarding technical accounting issues and is a
member of the American Institute of Certified Public Accountants.
GREGORY WUJEK (Age 37) Vice President of Managed Care, Director. Mr. Wujek
joined the Company in November 1997 and brought with him over 10 years of
sales/marketing and management experience in the healthcare industry. Over the
course of seven years, Mr. Wujek worked at Forest Laboratories, an international
pharmaceutical concern, holding positions in sales/marketing and management and
his last two years as Director of the Managed Care Department. In his role, Mr.
Wujek directed and assisted in all industry-related areas such as sales,
marketing, contract negotiation, pricing, product launches, military and
government contracting and management. Prior to joining the Company, Mr. Wujek
held the position of Vice President of Sales at SMG Marketing Group, a
consulting firm to the healthcare industry. Mr. Wujek consulted for several
international pharmaceutical companies on the dynamics of marketing to the
managed care marketplace. Mr. Wujek is responsible for directing and assisting
with the day-to-day operations of both the sales and clinical departments, IS
functions, and marketing the Medcare Program to all areas of managed care.
MICHAEL M. BLUE, M.D. (Age 54) Director. Dr. Blue is a Board-certified
urologist who has practiced general urology for twenty years. He is a member of
the American Medical Association, Oklahoma State Medical Association, South
Central Urological Association and the American Urological Association. Dr. Blue
has been a sole practitioner in private practice for the past twenty years. Dr.
Blue joined the Board of Directors of the Company in August 1996 and is
responsible for supervising and continuing the development of all medical
aspects of the MedCare program, as well as interacting and answering questions
from other doctors utilizing the MedCare Program.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers and persons who own
more than 10 percent of a registered class of the Company's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("the Commission"). Directors, officers and greater than 10
percent beneficial owners are required by applicable regulations to furnish the
Company with copies of all forms they file with the Commission pursuant to
Section 16(a). Other than the Company's Chairman, the Company is not aware of
any beneficial owner of more than 10 percent of its registered Common Stock for
purposes of Section 16(a).
Based solely upon a review of the copies of the forms furnished to the
Company, the Company believes that during fiscal 1998 all filing requirements
applicable to its directors and executive officers were satisfied.
<PAGE>
Director Compensation
- ---------------------
The Company's employees receive no extra pay for serving as directors. Non-
employee directors are reimbursed for any out-of-pocket meeting expenses and are
compensated with stock options. In 1998, Dr. Michael Blue received 20,000
options to acquire Common Stock for an exercise price of $9.00 a share, which
options vest equally over four years.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE
INDIVIDUALS NOMINATED FOR ELECTION AS A DIRECTOR.
<PAGE>
PROPOSAL NO. 2:
APPROVAL OF ISSUANCE OF COMMON STOCK UPON CONVERSION
OF SERIES B PREFERRED AND EXERCISE OF RELATED WARRANTS
Stockholders are being asked to consider and vote upon the issuance (the
"Issuance") of shares of Common Stock upon the conversion of the Series B
Preferred and the exercise of the related warrants to acquire shares of Common
Stock (the "Warrants"). The Series B Preferred and Warrants have been or are to
be issued pursuant to the terms and conditions of the Securities Purchase
Agreement, dated as of May 18, 1999 (the "Securities Purchase Agreement"), among
the Company and certain investors (the "Investors"). Pursuant to the terms of
the Securities Purchase Agreement, on May 18, 1999, 400 shares of Series B
Preferred (the "Initial Preferred Shares") and 240,000 related Warrants (the
"Initial Warrants") were issued by the Company, and up to an additional 400
shares of Series B Preferred (the "Additional Preferred Shares") and up to
240,000 additional Warrants (the "Additional Warrants") may be issued by the
Company in the future, all on the terms and conditions described below. The
aggregate purchase price of each share of the Series B Preferred and the related
Warrants is $10,000. The initial gross proceeds of the Issuance will be
$4,000,000 before deducting expenses relating to the Issuance. The Company
intends to use the net proceeds of the Issuance for the expansion of its MedCare
Program to additional sites, working capital and potential acquisitions
(although the Company has not identified any specific acquisitions at this
time).
Though the issuance of the Series B Preferred and the Warrants does not
require stockholder approval under Delaware or any other applicable laws, the
corporate governance rules of the Nasdaq SmallCap Market ("Nasdaq"), on which
the Common Stock is listed and traded, require majority shareholder approval, in
certain circumstances, of the sale or issuance of common stock, or securities
convertible into, or exercisable for, common stock, equal to 20% or more of the
common stock or voting power outstanding immediately preceding such issuance
(the "Nasdaq 20% Rule"). The number of shares of Common Stock issuable upon
conversion of the Series B Preferred is calculated pursuant to a variable
conversion formula, and such issuance, together with the issuance of Common
Stock upon exercise of the Warrants, could (in the absence of the provision
described in the next sentence) result in the issuance of a number of shares of
Common Stock that represents more than 20% of the currently outstanding shares.
Pursuant to the provisions of the Certificate of Designations, Preferences and
Rights of Series B Convertible Preferred Stock (the "Certificate of
Designations"), the Company is not obligated to issue any shares of Common Stock
upon conversion of the Series B Preferred if such issuance would cause the
Company to breach the Nasdaq 20% Rule, although such limitation will not apply
if the Company obtains approval of its stockholders of such issuance. Therefore,
the Company seeks to obtain stockholder approval of the Issuance in order that
it may, without regard to such limitation, issue shares of Common Stock upon
conversion of the Series B Preferred and exercise of the Warrants and otherwise
comply with its obligations under the Securities Purchase Agreement and the
Certificate of Designations. As of May __, 1999, the number of shares of Common
Stock issuable upon conversion of the Initial Preferred Shares was __________,
or _____% of the Common Stock outstanding as of such date.
In the event that the Company fails to receive the affirmative vote of its
stockholders to approve the Issuance, each share of Series B Preferred shall
automatically be redeemed from the Investors (and each related Warrant shall be
extinguished) at a price per share (together with the related Warrants) equal to
$10,000, plus any and all accrued interest thereon. In the event that the
requisite stockholders of the Company approve this Proposal 2, the gross
proceeds of the issuance of the Series B Preferred and Warrants (which are
currently being held by American National Bank and Trust Company of Chicago, as
escrow agent) shall be immediately forwarded to the Company. The procedure for
such matters is governed by the Escrow Agreement, dated May 18, 1999, by and
between the Company, the Investors and the escrow agent.
The following discussion is an attempt to summarize the principal
components of the Issuance, but does not purport to be an exhaustive discussion
of all of the terms of the Issuance. The discussion contained in this Proxy
Statement is qualified in its entirety by reference to (i) the Securities
Purchase Agreement; (ii) the Certificate of Designations; (iii) the Registration
Rights Agreement dated as of May 18, 1999 by and among the Company and the
Investors (the "Registration Rights Agreement"), (iv) the Form of Warrant, and
(v) the Escrow Agreement, each of which is attached hereto as Exhibit A, B, C, D
and E, respectively (collectively referred to as the "Documents").
Principal Reasons for the Transactions
<PAGE>
The Board of Directors believes that the transactions contemplated by the
Documents, including the Issuance, are fair to, and in the best interests of,
the Company and its stockholders. Accordingly, the Board of Directors has
approved such transactions and recommends that the Company's stockholders vote
for approval of the Issuance. In reaching its determination, the Board
consulted with the Company's management, legal counsel and consultants and
considered a variety of factors, including the following:
1. The Board considered that the expansion of the MedCare Program to more
sites could significantly increase revenues, allowing the Company the
flexibility to pursue further expansions in the future.
2. The Board considered that, as a result of the Issuance and the
expansion of the MedCare Program, the Company will be a larger and financially
stronger company, which will facilitate additional attractive means of growth.
3. The Board investigated and considered other alternative sources of
financing and determined that the transactions contemplated by the Documents
offered the most favorable terms of any available means of financing for the
Company.
4. The Board considered that, as a result of the Issuance, the Company
would have the additional resources necessary to implement its business plans,
including any strategic acquisitions that the Company may consider in the
future.
Potential Risks Associated with the Transactions
The Board of Directors considered potentially negative factors that could
arise from the transactions contemplated by the Documents, including the
Issuance, including the following:
1. The Board considered that the remedies available to the Investors if
the Company fails to comply with the Documents for any reason, particularly the
Investors' redemption rights and other penalties associated with non-compliance,
could have a material adverse effect on the Company's financial condition.
2. The Board considered the possibility that the anticipated benefits of
the transactions might not be fully realized.
3. The Board considered that the amount of Common Stock issuable upon
conversion of the Series B Preferred and exercise of the Warrants will increase
in certain circumstances, and could result in significant dilution of current
stockholders' percentage ownership interest and effective voting power in the
Company, which could affect the market price for the Common Stock.
The Board did not believe that the negative factors were sufficient, either
individually or collectively, to outweigh the advantages of the transactions.
THE SECURITIES PURCHASE AGREEMENT
Issuance of Series B Preferred and Warrants
On May 18, 1999, the Company and the Investors executed the Securities
Purchase Agreement, pursuant to which the Company has agreed to issue up to 800
shares of the Series B Preferred and up to 480,000 Warrants as described below.
Pursuant to the terms of the Securities Purchase Agreement, 400 Initial
Preferred Shares and 240,000 Initial Warrants were issued to the Investors on
May 18, 1999 (the "Initial Closing Date"). In addition, at any time during the
period beginning on and including May 18, 2000 and ending on and including June
7, 2000, each Investor shall have the right to purchase a number of Additional
Preferred Shares (along with related Warrants) equal to up to the sum of (i) the
number of Initial Preferred Shares held by such Investor on May 18, 2000 and
(ii) the number of Initial Preferred Shares converted by such Investor before
May 18, 2000 at the Fixed Conversion Price (as defined below) of such Initial
Preferred Share as in effect on the date of conversion.
Representations and Warranties
The Securities Purchase Agreement contains customary representations and
warranties relating to the parties thereto and pertaining to the Series B
Preferred and the Warrants. These representations include, among others,
representations with respect to: (i) the organization, formation, corporate
structure and ownership of the Company and other corporate matters; (ii) the due
authorization, execution, delivery, performance and enforceability of the
Documents;
<PAGE>
(iii) the absence of conflicts in connection with the transactions
contemplated by the Documents; (iv) the absence of certain material adverse
events, changes or effects; (v) the absence of litigation threatened against or
affecting the Company; (vi) taxes, employment relations and intellectual
property rights; and (vii) financial statements and financial information and
reports and other documents filed with the Securities and Exchange Commission
(the "SEC") and other regulatory agencies.
Covenants
The Securities Purchase Agreement contains customary covenants by the
Company, including, among others, covenants relating to the timely filing of
required SEC reports and the provision of financial information to the
Investors.
Pursuant to the terms of the Securities Purchase Agreement, the Company has
made certain covenants restricting the Company's right to issue additional
equity securities. In particular, between May 18, 1999 and the earlier of (i)
the date which is 180 days after May 18, 1999 and (ii) the first date on which
the Company has satisfied certain conditions regarding the effectiveness of the
Registration Statement (as defined below), stockholder approval of the Issuance
and non-integration, the Company is to issue no equity securities or securities
convertible or exchangeable into equity securities (a "Future Offering") unless
it has the prior consent of at least two-thirds of the holders of the Series B
Preferred then outstanding. In addition, until May 18, 2000, the Company is to
make no Future Offering, other than a Variable Convertible Offering (as defined
below), without the prior approval of at least two-thirds of the holders of the
Series B Preferred, unless the Company first offers each Investor the option to
purchase a stated percentage of the shares to be issued in the Future Offering.
Further, at any time prior to the date which is 180 days after the date the
Registration Statement is declared effective, the Company shall not, without
prior written approval of at least two-thirds of the holders of the Series B
Preferred, issue any convertible securities which have a conversion price based
on the trading price of the Common Stock (a "Variable Convertible Offering"),
unless it offers the Investors the option to purchase a stated percentage of the
securities to be issued in such Variable Convertible Offering. These covenants
do not apply to certain traditional financing methods, such as commercial
financing with no equity component.
In addition, the Company has agreed to seek the approval of its
stockholders of the Issuance pursuant to this Proxy Statement. In the event
that the Company fails to hold a stockholders meeting seeking such approval by
July 31, 1999, or in the event that the Company fails to receive the requisite
majority approval of its stockholders for the Issuance, each share of Series B
Preferred shall automatically be redeemed from the Investors (and each related
Warrant shall be extinguished) at a price per share (together with the related
Warrants) equal to $10,000, plus any and all accrued interest thereon. In the
event that the requisite stockholders of the Company approve this Proposal 2,
the gross proceeds of the issuance of the Series B Preferred and Warrants (which
are currently being held by the escrow agent) shall be immediately forwarded to
the Company. Pursuant to the Escrow Agreement, until the earlier of the date
such amount is disbursed to the Company and August 2, 1999, the Investors are
not entitled to do any of the following: (a) exercise or transfer (including
without limitation by sale, exchange or hypothecation) all or any portion of
their respective rights, title and interest in and to the Warrants; (b) transfer
(including without limitation by sale, exchange or hypothecation) all or any
portion of their respective rights, title and interest in and to the Initial
Preferred Shares; (c) exercise their respective rights to convert all or any
portion of the Initial Preferred Shares into Common Stock; or (d) exercise their
respective rights to have the Company redeem all or any portion of the Initial
Preferred Shares.
The Company has agreed to provide registration rights with respect to the
Common Stock issuable upon conversion of the Series B Preferred and exercise of
the Warrants as described below under "REGISTRATION RIGHTS."
Indemnification
The Securities Purchase Agreement contains a customary indemnification
provision whereby the Company has agreed to indemnify the Investors and certain
related parties from losses relating to the breach by the Company of its
representations or warranties or any of its obligations under the Documents or
arising out of the Investors' execution, delivery, performance or enforcement of
the Documents.
Amendment and Waiver
The provisions of the Securities Purchase Agreement may be amended only by
a writing signed by the Company and the holders of at least two-thirds of the
shares of the Series B Preferred then outstanding. No provision of the
<PAGE>
Securities Purchase Agreement may be waived, except through a written instrument
signed by the party against whom enforcement is sought.
THE SERIES B PREFERRED
The following is a summary of the Certificate of Designations and of the
rights and preferences of the Series B Preferred.
Designation and Amount
The Series B Preferred has a par value per share equal to $0.25 per share,
and the number of shares issuable is 800.
Dividends
The holders of the Series B Preferred shall be entitled to receive a 6.0%
annual dividend, which shall be cumulative and which shall accrue daily from the
date of issuance and be payable, at the option of the Company, either (i) in
shares of Common Stock upon conversion of the Series B Preferred or (ii) in cash
on the first day of each of the calendar quarter, beginning on the first such
date immediately following the date of Initial Closing Date.
Voting Rights
Holders of the Series B Preferred are not entitled as such to voting rights
on any matter submitted to a vote of the stockholders of the Company, except as
required by law.
Rank
The Series B Preferred ranks senior to the Common Stock and pari passu with
the Company's Series A Preferred Stock in respect to dividend preferences and
payments upon liquidation and dissolution. The Company shall not issue any
additional or other capital stock that is senior to or pari passu with the
Series B Preferred without the prior written consent of the holders of at least
two-thirds of the Series B Preferred.
Conversion by Holders
Subject to the limitations discussed below, each share of Series B
Preferred is convertible into shares of Common Stock at a variable conversion
rate (the "Conversion Rate") equal to the Conversion Amount (as defined below)
divided by the applicable Conversion Price (defined as follows). The "Conversion
Price" is the lesser of (i) the fixed conversion price (the "Fixed Conversion
Price"), which is equal to 125% of the average of the closing bid prices for the
Common Stock during the five consecutive trading days immediately preceding the
issuance date of the applicable shares of the Series B Preferred, or (ii) the
variable conversion price (the "Variable Conversion Price"), which is the lower
of (a) the closing bid price on the day before the holder delivers the required
notice of its intention to convert to the Company or (b) the average of the ten
lowest closing bid prices in the 40 trading days immediately preceding the date
such notice is given. Both the Fixed Conversion Price and the Variable
Conversion Price are subject to adjustment, as described further under
"Adjustment of Conversion Price." The "Conversion Amount" is defined as $10,000,
plus any stock dividends that have accrued but have not been paid, plus any
default interest (equal to 15% per annum) for dividends which the Company has
elected to pay in cash but has failed to pay on a timely basis.
The Investors' right to convert the Series B Preferred is limited as
follows. From the date of issuance of the Series B Preferred through and
including the date which is 120 days after the date of issuance, no shares of
Series B Preferred may be converted. From the date which is 121 days after the
date of issuance through and including the date which is 150 days after the date
of issuance, the Investors may convert up to one-third of their shares. From the
date which is 151 days after the date of issuance through the date which is 180
days after the date of issuance, the Investors may convert up to two-thirds of
their shares. From and after the date which is 181 days following the date of
issuance, there are no such restrictions on conversion. The foregoing
restrictions do not apply if certain events occur, including the delisting or
suspension from trading of the Common Stock, the occurrence of a Major
Transaction or a Triggering Event (each as defined below), the conversion of the
Series B Preferred at the Fixed Conversion Price, the delivery by the Company of
a notice of its election to convert the shares (as described below under
"Conversion at the Company's
<PAGE>
Election"), or in the event that the average closing bid price of the Common
Stock for the 20 days immediately preceding the conversion date is less than
$3.00.
In addition, no Investor will be permitted to convert any shares of the
Series B Preferred in excess of the number of such shares which, upon giving
effect to such conversion, would cause the beneficial ownership of the Investor
to exceed 4.99% of the Common Stock then issued and outstanding.
Conversion of shares of Series B Preferred is also restricted during the
escrow period by the terms of the Escrow Agreement as described above under
"Covenants".
Adjustment of Conversion Price
The Variable Conversion Price and the Fixed Conversion Price of the Series
B Preferred both will be adjusted in the event that the Company fails to obtain
and/or maintain the effectiveness of a registration statement covering the
resale of all applicable securities pursuant to the Registration Rights
Agreement (the "Registration Statement"), and in the event that sales of such
securities cannot be made pursuant to the Registration Statement. The applicable
Conversion Price shall be reduced by 1.25% in the event that the Registration
Statement is not declared effective by the Effectiveness Deadline (as defined
below), and shall be further reduced by .05% for each additional day that the
Registration Statement continues to be ineffective or that sales are unable to
be made pursuant to the Registration Statement.
In addition, the Conversion Price of the Series B Preferred is subject to
customary anti-dilution provisions which take effect upon such events as the
issuance by the Company of Common Stock, options or other convertible
securities, the subdivision or combination of outstanding shares of Common Stock
of the Company, the recapitalization, merger or other reorganization of the
Company, or any other similar events. However, no such adjustment will be made
unless the adjustment would result in a cumulative increase or decrease of at
least 1% in the Conversion Price.
Maturity; Mandatory Conversion
The shares of Series B Preferred mature five years after they are issued,
and any shares of the Series B Preferred left outstanding on the applicable
maturity date automatically convert into shares of Common Stock.
Redemption at the Option of Investors
Each outstanding share of the Series B Preferred is redeemable, at the
option of the Investors, in the event of any of the following transactions (each
a "Major Transaction"): (i) the consolidation, merger or other business
combination of the Company, (ii) the sale or transfer of all or substantially
all of the Company's assets or (iii) a purchase, tender or exchange offer made
to and accepted by the holders of more than 50% of the outstanding shares of
Common Stock, provided that such Major Transaction shall have occurred or have
been the subject of a public announcement during the period beginning on the
date of issuance and ending on the later of (a) the first anniversary of the
date of issuance and (b) the date which is 270 days after the effective date of
the Registration Statement relating to the applicable shares. In the event of a
Major Transaction, the redemption price per share shall be the greater of (i)
115% of the Liquidation Amount (as defined below) and (ii) the product of (a)
the applicable Conversion Rate and (b) the closing bid price on the date of the
public announcement of the event.
In addition, in the event of the occurrence of certain events (the
"Triggering Events"), including the failure of the Registration Statement to be
declared effective within 180 days of the date of issuance, the delisting of the
Common Stock for a period of five consecutive days and the Company's breach of
any representations, warranties or covenants in the Documents, the Investors
have the right to require the Company to redeem all or a portion of such
Investor's Series B Preferred. The redemption price per share is the same as the
redemption price per share in the event of a Major Transaction.
Conversion at the Company's Election
The Company has the right to require conversion, at the applicable
Conversion Rate, of any or all of the outstanding shares of the Series B
Preferred in the event that the closing bid price of the Common Stock on each
trading day during any 30 consecutive-day period is at least 200% of the
applicable Fixed Conversion Price in effect on the first day of such 30-day
period. Among the conditions to the Company's ability to so convert the shares
are the following: (i) a Registration Statement covering the resale of at least
125% of the number of shares issued and issuable upon conversion
<PAGE>
of the Series B Preferred and exercise of the related Warrants has been
effective for at least 90 days; (ii) the Common Stock has been listed on a
national market or exchange for at least the 30 days prior to such conversion;
and (iii) the Company has, from the date of issuance through the date it
delivers the notice of its election to convert, timely delivered the shares of
Common Stock upon conversion of the Series B Preferred by the holders thereof.
Redemption in Lieu of Conversion
The Company may elect to redeem shares of Series B Preferred submitted for
conversion, provided that the Company has provided an appropriate notice to the
holders of the shares and provided that the Conversion Price for such shares is
less than a price equal to the market price on the Initial Issuance Date. The
redemption price per share in this case shall be equal to the product of the
applicable Conversion Rate and the closing bid price on the conversion date.
The Company may only elect to redeem in lieu of conversion if it has
provided proper notice to the holders of the Series B Preferred, specifying the
maximum number of shares to be so redeemed and confirming the time period during
which the Company may redeem the shares. If the Company fails to redeem the
shares in accordance with this provision, the Company is not permitted to submit
another notice of its election to redeem in lieu of conversion without the prior
written consent of the holders of at least two-thirds of the shares of Series B
Preferred then outstanding.
Redemption at the Company's Election
Provided certain conditions are satisfied, the Company has the right, from
the third anniversary of the effective date of the Registration Statement
through maturity of the Series B Preferred, to require that all outstanding
shares of the Series B Preferred be redeemed at a redemption price of 115% of
the Liquidation Amount.
The conditions to the Company's right to redeem the shares include, among
others: (i) a Registration Statement covering the resale of at least 125% of the
number of shares issued or issuable upon redemption of the Series B Preferred
and exercise of the related Warrants has been effective for at least 30 days;
(ii) the Common Stock has been listed on a national market or exchange for at
least the 30 days prior to such conversion; and (iii) the Company has, from the
date of issuance through the date it delivers the notice of its intention to
redeem, timely delivered the shares of Common Stock upon conversion of the
Series B Preferred by the holders thereof.
Reservation of Shares
To ensure that the Series B Preferred and the Warrants can at all times be
properly converted, while shares of the Series B Preferred are outstanding, the
Company is to reserve a number of shares of Common Stock equal to the sum of (i)
at least 200% of the number of shares of Common Stock for which the Series B
Preferred are convertible and (ii) at least 100% of the number of shares of
Common Stock for which the Warrants may be exercised.
Liquidation, Dissolution or Winding Up
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of outstanding shares of Series B
Preferred are entitled to receive out of the assets of the Company available for
distribution to its stockholders, an amount per share (the "Liquidation Amount")
equal to $10,000 plus any stock dividends that have accrued but have not been
paid out, plus any default interest (equal to 15% per annum) for dividends which
the Company has elected to pay in cash but has failed to pay on a timely basis.
Amendment
No change is to be made to the Certificate of Designations without the
affirmative vote of at least two-thirds of the holders of the outstanding shares
of Series B Preferred.
Restrictions on Transfer
There shall be no more than seven holders of the Series B Preferred at any
one time. Therefore, with one limited exception, shares of the Series B
Preferred may not be transferred, except to (i) an existing holder of the Series
B Preferred, or (ii) to any transferee who obtains all the shares of the
transferor.
THE WARRANTS
<PAGE>
General
Pursuant to the Securities Purchase Agreement, along with the Initial
Preferred Shares, the Company issued the Initial Warrants to the Investors. The
terms of the Additional Warrants, if any are issued, will be identical to the
Initial Warrants. The Warrants expire five years after issuance.
Vesting Schedule
The terms of the Warrants entitle the holders to 200 shares of Common Stock
for (i) each issued share of the Series B Preferred held on the applicable
vesting date and (ii) each share of the Series B Preferred converted prior to
the applicable vesting date at the Fixed Conversion Price. The vesting dates of
the Warrants are (a) the date which is 120 days after the date of issuance of
the applicable Series B Preferred, (b) the date which is 300 days after the date
of issuance of the applicable Series B Preferred and (c) the date which is 480
days after the date of issuance of the applicable Series B Preferred.
Exercise Price
The exercise price of each Warrant is 125% of the average of the closing
bid prices of the Common Stock for the five consecutive trading days immediately
preceding the applicable vesting date.
The exercise price of the Warrants is subject to customary anti-dilution
adjustments upon such events as the issuance of Common Stock by the Company for
a per-share price less than the exercise price in effect immediately prior to
such issuance, the subdivision or combination of the Common Stock, the
distribution by the Company of its assets to holders of Common Stock, and other
similar events.
Cashless Exercise Option
If the Common Stock to be issued in exchange for the Warrants is not
registered for resale in accordance with the Registration Rights Agreement, or
if a Triggering Event has occurred, the Warrant holders are entitled to a
"cashless exercise" option. This option entitles the Warrant holders to elect to
receive fewer shares of Common Stock (the number of shares to be determined by a
formula based on the total number of shares to which the Warrant holder is
entitled, the last reported sale price of the Common Stock and the applicable
exercise price of the Warrants) without paying the cash exercise price.
Covenants
The Company made certain customary covenants with respect to the Warrants,
including, among others: (i) the Warrants, and any Common Stock to be issued
upon exercise of the Warrants, are and will be duly authorized and validly
issued; (ii) the Company shall reserve at least 100% of the number of shares of
Common Stock issuable upon exercise of the Warrants; (iii) the Common Stock
issuable upon exercise of the Warrants shall be listed on each national
securities exchange or automated quotation system upon which the Company's
Common Stock is then issued; and (iv) the Company will act in good faith in
carrying out the provisions of the Warrants.
Amendment
The provisions of the Warrants may be amended only after the Company has
obtained the written consent of Warrant holders representing a majority of the
shares of Common Stock issuable upon exercise of the Warrants then outstanding.
However, the Company may not increase the exercise price of the Warrants or
decrease the amount of Common Stock issuable upon exercise of any Warrant
without the written consent of the holder of such Warrant.
REGISTRATION RIGHTS
The Registration Rights Agreement provides for mandatory registration
covering the resale of all shares issued or issuable upon conversion of the
Series B Preferred and the maximum number of share issuable upon exercise of the
Warrants (as issued or issuable, the "Registrable Securities") and grants
certain piggyback registration rights with respect to the Registrable
Securities. The Registration Rights Agreement contains customary covenants and
agreements of the respective parties concerning the registration of the Common
Stock, the provision of certain information and the
<PAGE>
incurrence of certain costs and expenses in connection with the obligations of
the parties thereunder, as well as the agreement of the parties to provide
customary indemnification from material misstatements or omissions in connection
with any registration of the Common Stock as required. In addition, the Company
is subject to certain penalties in the event that it fails to obtain (by the
Effectiveness Deadline) or maintain the effectiveness of the Registration
Statement, described above under "THE SERIES B PREFERRED--Adjustment of the
Conversion Price" and "--Redemption at the Option of Investors." The
"Effectiveness Deadline" is 90 days (or if the SEC reviews the applicable
Registration Statement, 120 days) after the issuance of the applicable Series B
Preferred and related Warrants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE ISSUANCE OF THE
SHARES OF COMMON STOCK UPON CONVERSION OF THE SERIES B PREFERRED AND EXERCISE OF
THE WARRANTS.
- ---------------------------
<PAGE>
PROPOSAL NO. 3:
The ratification of the appointment of Arthur Andersen LLP as the Company's
independent auditor
The Board of Directors has appointed Arthur Andersen LLP as independent
auditors for the Company for the fiscal year ending December 31, 1999.
Stockholders are being asked to ratify this selection at the Annual Meeting.
Arthur Andersen LLP is a global professional services firm and has been rated
the number one firm overall every year since 1981 in a national poll of
university accounting professors conducted by Public Accounting Report, an
independent news publication. As one of the "Big Five" accounting firms, Arthur
Andersen has more than 100,000 clients through 382 offices in 81 countries and
is the largest accounting firm in Chicago.
It is not expected that the representatives of Arthur Andersen LLP or
Clancy and Co., P.L.L.C. will attend the Annual Meeting.
Changes in and Disagreements with Accountants on Accounting and Financial
- -------------------------------------------------------------------------
Disclosure
- ----------
On May 10, 1999, the Company dismissed Clancy and Co., P.L.L.C., as its
independent public accountants.
Clancy and Co., P.L.L.C. were dismissed by the Company after the audit for
the fiscal year ending December 31, 1998. The dismissal was approved by the
Board of Directors. Clancy and Co., P.L.L.C. issued an unqualified audit opinion
on the 1998 year-end financial statements and modified their audit opinion on
the 1997 year-end financial statements to reflect the development stage status
of the Company at that time. During the course of their work, the Company and
Clancy and Co., P.L.L.C. have not had any disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
The Company has engaged Arthur Andersen LLP as its new independent public
accountants effective as of the date of the dismissal of its former accountants.
During the Company's two most recent fiscal years prior to the engagement, there
have been no consultations with the newly engaged accountants with regard to
either the application of accounting principle as to any specific transaction,
the type of audit opinion that would be rendered on the Company's financial
statements, or any matter of disagreements with the former accountants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT
OF ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT AUDITOR.
PROPOSAL NO. 4:
To adopt the Company's 2000 Stock Option Plan and reserve 2,000,000 shares
of Common Stock for issuance thereunder.
The Board of Directors views the issuance of stock options to directors,
consultants and employees as necessary in order to attract and maintain the
services of individuals essential to the Company's long-term success. The
purpose of the Plan is to encourage and enable the officers, employees,
directors, consultants and advisors of the Company and its affiliates, upon
whose judgment, initiative and efforts the Company largely depends for the
successful conduct of its business, to acquire a proprietary interest in the
Company. It is anticipated that providing such persons with a direct stake in
the Company's welfare will assure a closer identification of their interests
with those of the Company, thereby stimulating their efforts on the Company's
behalf and strengthening their desire to remain with the Company. A copy of the
Company's 2000 Stock Option Plan (the "Plan") is included with this Proxy
Statement as Exhibit F.
The Plan will be administered by the Board of Directors and is designed to
provide the Board of Directors with flexibility in the type of compensation
awards that can be issued. The Plan allows for the Board of Directors to issue
stock options, restricted share awards, performance share awards and share
appreciation rights, to select the persons to whom awards may be granted, to
determine the terms of each award, to interpret the provisions of the Plan and
to make all other determinations necessary or advisable for the administration
of the Plan. Please refer to Exhibit F for additional details.
The reservation of 2,000,000 shares for issuance under the plan is expected
to provide the Board of Directors with enough shares to adequately administer
the Plan for a number of years. By issuing a large enough number of shares to
extend over several years, the Company will save time and money by not having to
go through the process of creating a new plan every year. The benefits or
amounts, if any, that will be received by the executives and directors under
this Plan have not been determined at this time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE COMPANY'S 2000
STOCK OPTION PLAN AND RESERVATION OF 2,000,000 SHARES OF COMMON STOCK FOR
ISSUANCE THEREUNDER.
<PAGE>
Security Ownership of Management and Principal Stockholders
- -----------------------------------------------------------
The following table sets forth, as of May __, 1999, the beneficial
ownership of the Company's Common Stock by each nominee, director and executive
officer of the Company, each person known by the Company to beneficially own
more than 5% of the Company's Common Stock outstanding as of such date and the
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Person or Group Number of Shares Percent
- --------------- ---------------- -------
<S> <C> <C>
Harmel S. Rayat 2,000,000 25.5%
216-1628 West First Avenue
Vancouver, B.C. V6J 1G1 Canada
Jeffrey S. Aronin 401,000 4.9%
1515 West 22nd Street
Oak Brook, Illinois 60523
Gregory Wujek 67,500 0.8%
1515 West 22nd Street
Oak Brook, Illinois 60523
Alan P. Jagiello -0- N/A
1515 West 22nd Street
Oak Brook, Illinois 60523
Dr. Michael M. Blue 119,000 1.4%
500 E. Robinson St., Suite 700
Norman, Oklahoma 73071
Lyons Capital Corporation 600,000 7.4%
Brenda C. Pratt
President, Secretary, Treasurer
and sole shareholder
24 Reid Street
Hamilton, HM11
Bermuda
Matrix Capital Corp. 600,000 7.4%
Eric Smith, President and sole shareholder
P.O. Box 69, Front Street
Grand Turk, Turks & Caicos Islands
Directors and Executive Officers 2,587,500 30.7%
as a group (5 persons)
</TABLE>
Voting Intentions of Certain Beneficial Owners and Management.
- -------------------------------------------------------------
The Company's directors and officers have advised the Company that they
will vote the 2,001,000 shares owned or controlled by them FOR each of the
Proposals in this Proxy Statement. These shares represented 25.6% of the
outstanding Common Stock of the Company as of May __, 1999.
<PAGE>
Remuneration and Executive Compensation
- ---------------------------------------
The following table shows, for the three-year period ended December 31,
1998, the cash compensation paid by the Company, as well as certain other
compensation paid or accrued for such year, to the Company's Chief Executive
Officer and the Company's other most highly compensated executive officers.
Except as set forth on the following table, no executive officer of the Company
had a total annual salary and bonus for 1998 that exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Securities
Underlying
Name and Options All Other
Principal Position Year Salary Bonus Other Granted Compensation
- ------------------ ---- ------ ----- ----- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Harmel S. Rayat 1998 $ 25,000 $ 0 $0 0 $ 0
Chairman, (CEO 1997 $ 40,000 $ 0 $0 0 $ 0
until August, 1998) 1996 $ 0 $ 0 $0 160,000 $ 0
Jeff Aronin 1998 $118,750 $51,000 $0 100,000 $12,000
President, (CEO 1997 $ 46,433 $ 0 $0 500,000 $ 3,000
since August, 1998) 1996 $ 0 $ 0 $0 0 $ 0
Greg Wujek 1998 $ 95,000 $27,500 $0 155,000 $ 3,600
VP of Managed Care 1997 $ 12,050 $ 0 $0 0 $ 0
1996 $ 0 $ 0 $0 0 $ 0
</TABLE>
STOCK OPTION GRANTS IN 1998
Shown below is further information regarding employee stock options awarded
during 1998 to the named officers and directors:
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to Exercise Expiration
Name Options Employees Price Date
- ---- ------- --------- ----- ----
<S> <C> <C> <C> <C>
Harmel S. Rayat 0 0% N/A N/A
Jeff Aronin 100,000 24% $6.00 2009
Greg Wujek 155,000 38% $7.00 2005
</TABLE>
AGGREGATED OPTION EXERCISES DURING 1998 AND YEAR-END OPTION VALUES
The following table shows certain information about unexercised options at
year-end with respect to the named officers and directors:
<PAGE>
<TABLE>
<CAPTION>
Common Shares
Underlying Value of Unexercised
Unexercised Options In-The-Money Options
on 12/31/98 on 12/31/98
----------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Harmel S. Rayat 0 0 0 0
Jeff Aronin 400,000 200,000 $15,625 $0
Greg Wujek 67,500 87,500 $0 $0
</TABLE>
There were no options exercised by any of the officers listed above in
1998.
The value of the options is calculated using the fair market value of the
Company's Common Stock on December 31, 1998 ($6.16 per share) minus the exercise
price per share, of the in-the-money options, multiplied by the number of shares
subject to each option.
EMPLOYMENT CONTRACTS
On December 15, 1998, the Company entered into an employment agreement with
Jeff Aronin, CEO and President. The employment agreement is for two years from
December 9, 1998 and automatically extended for successive one-year periods
unless the Company or Mr. Aronin delivers to the other party written notice
specifying such party's intent not to extend or re-extend the term for an
additional one-year period. The employment agreement entitles Mr. Aronin to
receive an annual base salary of not less than $150,000; provided, however,
that, effective January 1, 1999, Mr. Aronin will receive an annual base salary
of not less than $200,000. In addition to the base salary, Mr. Aronin will be
eligible for an annual bonus for each fiscal year during the term based on such
performance standards as the Board or compensation committee designated by the
Board may establish. The Company also entered into a stock option agreement with
Mr. Aronin, which grants him an option to purchase 500,000 shares at $6.50 per
share (300,000 of which options are already vested) and an additional option to
purchase 100,000 shares at $6.00 (all of which options are vested). Upon any
change in control, all of the aforementioned options vest immediately.
Copies of Form 10-KSB
- ---------------------
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Proxy Statement has been
delivered, on the written request of any such person, a copy of the Company's
most recent Form 10-KSB. Written requests for such copies should be directed to
Alan P. Jagiello, the Secretary of the Company, at 1515 West 22nd Street, Suite
1210, Oak Brook, Illinois 60523.
<PAGE>
MEDCARE TECHNOLOGIES, INC.
1515 WEST 22nd STREET, SUITE 1210
OAK BROOK, ILLINOIS 60523
PROXY FOR 1999 ANNUAL MEETING OF STOCKHOLDERS
This proxy is solicited on behalf of the Board of Directors of Medcare
Technologies, Inc.
The undersigned, a stockholder of Medcare Technologies, Inc. (the
"Company") hereby constitutes and appoints each of Mr. Jeff Aronin and Mr. Alan
Jagiello the attorney, agent and proxy of the undersigned, with full power of
substitution, for and in the name, place and stead of the undersigned, to vote
and act with respect to all of shares of the Common Stock of the Company
standing in the name of the undersigned or in respect of which the undersigned
is entitled to vote, with all powers of the undersigned would process if
personally present at such meeting upon the following matters, and otherwise in
his discretion:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTION
--- ------- ----------
<S> <C> <C> <C> <C>
ITEM 1. To elect directors to serve until the next annual
meeting of stockholders or until their successors
are elected and have qualified.
Mr. Harmel S. Rayat [ ] [ ] [ ]
Mr. Jeff Aronin [ ] [ ] [ ]
Dr. Michael M. Blue [ ] [ ] [ ]
Mr. Greg Wujek [ ] [ ] [ ]
Mr. Alan Jagiello [ ] [ ] [ ]
ITEM 2. To issue shares of Common Stock upon [ ] [ ] [ ]
conversion of the Company's Series B
Preferred Stock and exercise of the related Warrants.
ITEM 3. To ratify the appointment of Arthur Andersen [ ] [ ] [ ]
LLP, as independent auditors of the Company
for the fiscal year ending December 31,1999.
ITEM 4. To approve the adoption of the 2000 Stock [ ] [ ] [ ]
Option Plan and the reservation of 2,000,000
shares of Common Stock for issuance thereunder.
ITEM 5. To transact any such other business as may properly
come before the meeting or an adjournment (s) thereof.
</TABLE>
If no direction is indicated, this proxy will be voted in the discretion of
the proxy holder. Please date, sign, and print your name on this proxy exactly
as your name appears on your stock certificate and return immediately to the
address printed below.
DATED: _________________________ SIGNATURE: __________________________
NO. OF SHARES: __________________ PRINT NAME:_________________________
<PAGE>
Exhibit A
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of May 18, 1999,
by and among Medcare Technologies, Inc., a Delaware corporation, with
headquarters located at 1515 West 22/nd/ Street, Suite 1210, Oak Brook, Illinois
60521 (the "COMPANY"), and the investors listed on the Schedule of Buyers
attached hereto (individually, a "Buyer" and collectively, the "Buyers").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("Regulation D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act");
B. The Company has authorized the following new series of its Preferred
Stock, par value $0.25 per share which shall be called the Company's Series B
Convertible Preferred Stock (the "Preferred Stock"), which shall be convertible
into shares of the Company's common stock, par value $0.001 per share (the
"Common Stock") (as converted, the "Conversion Shares"), in accordance with the
terms of the Company's Certificate of Designations, Preferences and Rights of
the Preferred Shares, substantially in the form attached hereto as Exhibit A
---------
(the "Certificate of Designations");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, initially (i) an aggregate of 400 shares of the Preferred Stock
(the "Initial Preferred Shares") in the respective amounts set forth opposite
each Buyer's name on the Schedule of Buyers attached hereto and (ii) warrants to
purchase up to 200 shares of Common Stock (as exercised collectively, the
"Warrant Shares") (1) for each Initial Preferred Share held by such Buyer on
each Warrant Vesting Date (as defined below) and (2) for each Initial Preferred
Share converted by such Buyer before each Warrant Vesting Date at a Conversion
Price (as defined in the Certificate of Designations) equal to the Fixed
Conversion Price (as defined in the Certificate of Designations) of such Initial
Preferred Shares as in effect on the date of conversion, such Warrants to be
substantially in the form attached as Exhibit E (the "Warrants");
---------
D. Subject to the terms and conditions set forth in this Agreement, each
Buyer shall have the right to purchase a number of additional shares of
Preferred Stock equal to up to the sum of (i) the number of Initial Preferred
Shares held by such Buyer on the date which is one year after the Initial
Closing Date and (ii) the number of Initial Preferred Shares converted by such
Buyer before the date which is one year after the Initial Closing Date at a
Conversion Price equal to the Fixed Conversion Price of such shares of Preferred
Stock as in effect on the date of conversion (collectively, the "Additional
Preferred Shares") and Warrants to purchase up to 200 shares of Common Stock (i)
for each Additional Preferred Share held by such Buyer on each Warrant Vesting
Date and (ii) for each Additional Preferred Share converted by such Buyer before
each Warrant Vesting Date at a Conversion Price equal to the Fixed Conversion
Price of such Additional Preferred Shares as in effect on the date of conversion
(the Initial Preferred Shares, and the Additional Preferred
<PAGE>
Shares collectively are referred to in this Agreement as the "Preferred
Shares");
E. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit B (the "Registration Rights
---------
Agreement") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
-------------------------------------
a. Purchase of Preferred Shares. Subject to satisfaction (or waiver)
----------------------------
of the conditions set forth in Sections 6(a) and 7(a), the Company shall issue
and sell to the Buyers and the Buyers severally shall purchase from the Company
an aggregate of 400 Initial Preferred Shares in the respective amounts set forth
opposite each Buyer's name on the Schedule of Buyers along with the related
Warrants (the "Initial Closing"). Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 1(c), 6(b) and 7(b), at the option of each
Buyer, the Company shall issue and sell to each such Buyer and each such Buyer
may purchase from the Company that number of Additional Preferred Shares equal
to up to the sum of (i) the number of Preferred Shares held by such Buyer on the
date which is one year after the Initial Closing Date and (ii) the number of
Preferred Shares converted by such Buyer, before the date which is one year
after the Initial Closing Date at a Conversion Price equal to the Fixed
Conversion Price of such Preferred Shares as in effect on the date of conversion
along with the related Warrants (the "Additional Closing" and together with the
Initial Closing, the "Closings"). The purchase price (the "Purchase Price") of
each Preferred Share and the related Warrant at each of the Closings shall be an
aggregate of $10,000. "Business Day" means any day other than Saturday, Sunday
or other day on which commercial banks in the city of New York are authorized or
required by law to remain closed.
b. The Initial Closing Date. The date and time of the Initial
------------------------
Closing (the "Initial Closing Date") shall be 10:00 a.m. Central Time, within
three (3) Business Days following the date hereof, subject to satisfaction (or
waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and
7(a) (or such later date as is mutually agreed to by the Company and the
Buyers). The Initial Closing shall occur on the Initial Closing Date at the
offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago,
Illinois 60661-3693.
c. The Additional Closing Date. The date and time of the Additional
---------------------------
Closing (the "Additional Closing Date") shall be 10:00 a.m. Central time, on the
date which is 25 days after the first anniversary of the Initial Closing Date,
subject to satisfaction (or waiver) of the conditions to the Additional Closing
set forth in Sections 6(b) and 7(b) and the conditions contained in this Section
1(c) (or such later date as is mutually agreed to by the Company and the
Buyers). At any time during the period beginning on and including the date
which is one year after the Initial Closing Date and ending on and including the
date which is 20 days after the first anniversary of the Initial Closing Date,
but subject to the requirements of Sections 6(b) and 7(b) and the conditions
contained in this Section 1(c); each Buyer may purchase, at such Buyer's option,
Additional Preferred Shares
2
<PAGE>
by delivering written notice to the Company (a "Additional Share Notice") at
least five Business Days (the "Additional Share Notice Date") prior to the
Additional Closing Date. The Additional Share Notice shall set forth (i) the
number of Additional Preferred Shares such Buyer will purchase (which number
shall not exceed the sum of (a) the number of Preferred Shares held by such
Buyer on the date which is one year after the Initial Closing Date and (b) the
number of Preferred Shares converted by such Buyer before the date which is one
year after the Initial Closing Date at a Conversion Price equal to the Fixed
Conversion Price of such Preferred Shares as in effect on the date of
conversion) along with the related Warrants and (ii) the aggregate Purchase
Price for the Additional Preferred Shares. A Buyer shall only be allowed to
deliver an Additional Share Notice on a day on which the Closing Bid Price (as
defined in the Certificate of Designations) of the Common Stock is greater than
the Fixed Conversion Price of the Initial Preferred Shares in effect on such
date. The Additional Closing shall occur on the Additional Closing Date at the
offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago,
Illinois 60661-3693. (The Initial Closing Date and the Additional Closing Dates
collectively are referred to in this Agreement as the "Closing Dates").
d. Warrant Vesting Dates. The "Warrant Vesting Dates" shall be (i)
---------------------
the date which is 120 days after the Issuance Date (as defined in the
Certificate of Designations) of the applicable Preferred Shares, (ii) the date
which is 300 days after the Issuance Date of the applicable Preferred Shares and
(iii) the date which is 480 days after the Issuance Date of the applicable
Preferred Shares.
e. Form of Payment. On the Initial Closing Date, (i) each Buyer
---------------
shall deposit the Purchase Price with the escrow agent (the "Escrow Agent")
identified in the Escrow Agreement, a form of which is attached hereto as
Exhibit F (the "Escrow Agreement"), for the Preferred Shares and the related
Warrants to be issued and sold to such Buyer at the Initial Closing, by wire
transfer of immediately available funds in accordance with the Escrow Agent's
written wire instructions, and (ii) the Company shall deliver to each Buyer
stock certificates (the "Stock Certificates") representing such number of the
Preferred Shares indicated opposite such Buyer's name on the Schedule of Buyers
along with the related Warrants, duly executed on behalf of the Company and
registered in the name of such Buyer. By signing this Agreement, the Company
and the Buyers agree to all of the terms and conditions of, and become parties
to, the Escrow Agreement, all of the provisions of which are incorporated herein
by this reference as if set forth in full. On the Additional Closing date (i)
each Buyer shall pay the Purchase Price to the Company for the Preferred Shares
and the related Warrants to be issued and sold to such Buyer by wire transfer of
immediately available funds in accordance with the Company's written wire
instructions, and (ii) the Company shall deliver to each Buyer Stock
Certificates representing such number of the Preferred Shares as is equal to the
number of Additional Preferred Shares being purchased by such Buyer along with
the related Warrants, duly executed on behalf of the Company and registered in
the name of such Buyer.
3
<PAGE>
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
--------------------------------------
Each Buyer represents and warrants with respect to only itself that:
a. Investment Purpose. Such Buyer (i) is acquiring the Preferred
------------------
Shares and the Warrants, (ii) upon conversion of the Preferred Shares, will
acquire the Conversion Shares then issuable and (iii) upon exercise of the
Warrants, will acquire the Warrant Shares issuable upon exercise thereof (the
Preferred Shares, the Warrants, the Conversion Shares and the Warrant Shares,
collectively are referred to herein as the "Securities"), for its own account
for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act. Such Buyer understands that it
must bear the economic risk of this investment indefinitely, unless the
Securities are registered pursuant to the 1933 Act and any applicable states
securities laws or an exemption from such registration is available, and that
the Company has no present intention of registering any such Securities other
than as contemplated by the Registration Rights Agreement.
b. Accredited Investor Status. Such Buyer is an "accredited
--------------------------
investor" as that term is defined in Rule 501(a) of Regulation D. By reason of
its business and financial experience and knowledge, such Buyer is capable of
evaluating the risks and merits of the investment made pursuant to this
Agreement.
c. Reliance on Exemptions. Such Buyer understands that the
----------------------
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such Securities.
d. Information. Such Buyer and its advisors, if any, have been
-----------
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer's right to rely on the Company's representations and
warranties contained in Sections 3 and 9(m) below. Such Buyer understands that
its investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.
e. No Governmental Review. Such Buyer understands that no United
----------------------
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in
4
<PAGE>
the Securities nor have such authorities passed upon or endorsed the merits of
the offering of the Securities.
f. Transfer or Resale. Such Buyer understands that except as
------------------
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a form reasonably satisfactory to the Company,
to the effect that such Securities to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration,
or (C) such Buyer provides the Company with reasonable assurance that such
Securities can be sold, assigned or transferred pursuant to Rule 144 promulgated
under the 1933 Act (or a successor rule thereto) ("Rule 144"); (ii) any sale of
the Securities made in reliance on Rule 144 may be made only in accordance with
the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
the Securities under circumstances in which the seller (or the person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under
the 1933 Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such Securities under the 1933 Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder.
g. Legends. Such Buyer understands that the certificates or other
-------
instruments representing the Preferred Shares and the Warrants and, until such
time as the sale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares and the
Warrant Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR
AN OPINION OF COUNSEL, IN A FORM REASONABLY SATISFACTORY TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if (i) such Securities are registered for sale under the 1933 Act, (ii)
in connection with a sale transaction, such holder provides the Company with an
opinion of counsel, in a form reasonably satisfactory to the Company, to the
effect that a public sale, assignment or transfer of such Securities may be made
without registration under
5
<PAGE>
the 1933 Act, or (iii) such holder provides the Company with reasonable
assurances that such Securities can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date that
can then be immediately sold. Each Buyer acknowledges, covenants and agrees to
sell the Securities represented by a certificate(s) from which the legend has
been removed, only pursuant to (i) a registration statement effective under the
1933 Act, or (ii) advice of counsel that such sale is exempt from registration
required by Section 5 of the 1933 Act.
h. Authorization; Enforcement. This Agreement, the Registration
--------------------------
Rights Agreement and the Escrow Agreement have been duly and validly authorized,
executed and delivered on behalf of such Buyer and are valid and binding
agreements of such Buyer enforceable against such Buyer in accordance with their
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
i. Residency. Such Buyer is a resident of that jurisdiction
---------
specified on the Schedule of Buyers.
j. No Conflicts. The execution, delivery and performance of this
------------
Agreement, the Registration Rights Agreement and the Escrow Agreement by such
Buyer and the consummation by such Buyer of the transactions contemplated hereby
and thereby will not (i) result in a violation of the organizational or
formation documents filed with each Buyer's jurisdiction of organization; or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which such Buyer is a party.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to each of the Buyers that:
a. Organization and Qualification. The Company and its
------------------------------
"Subsidiaries" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) (a complete list of which is set forth in Schedule 3(a)) are
-------------
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own their properties and to carry on their
business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect"
means any material adverse effect on the business, properties, assets,
operations, results of operations or financial condition of the Company and its
Subsidiaries taken as a whole or on the authority or ability of the Company to
perform its obligations under the Transaction Documents (as defined below) or
the Certificate of Designations.
6
<PAGE>
b. Authorization; Enforcement; Compliance with Other Instruments.
-------------------------------------------------------------
(i) The Company has the requisite corporate power and authority to enter into
and perform its obligations under this Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Irrevocable Transfer Agent Instructions
(as defined in Section 5), the Warrants and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively, the "Transaction Documents"), and
to issue the Securities in accordance with the terms hereof and thereof, (ii)
the execution and delivery of the Transaction Documents by the Company and the
execution and filing of the Certificate of Designations by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including without limitation the issuance of the Preferred Shares and the
Warrants and the reservation for issuance and the issuance of the Conversion
Shares and the Warrant Shares issuable upon conversion or exercise thereof, have
been duly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors or its
stockholders (except such stockholder approval as may be required by the Nasdaq
SmallCap Market for the issuance of a number of shares of Common Stock which is
greater than 20% of the number of shares outstanding on the Initial Closing
Date), (iii) this Agreement is and, when executed and delivered, the other
Transaction Documents will be duly executed and delivered by the Company, (iv)
this Agreement and, when executed and delivered, the other Transaction
Documents, constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of creditors' rights and
remedies, and (v) prior to each of the Closing Dates, the Certificate of
Designations will have been filed with the Secretary of State of the State of
Delaware and will be in full force and effect, enforceable against the Company
in accordance with its terms.
c. Capitalization. The authorized capital stock of the Company
--------------
consists of (i) 100,000,000 shares of Common Stock, of which as of the date
hereof 7,831,160 shares were issued and outstanding, 4,000,000 shares were
issuable and reserved for issuance pursuant to the Company's stock option and
purchase plans and 255,919 shares are issuable and reserved for issuance
pursuant to securities (other than the Preferred Shares and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock and
(ii) 1,000,000 shares of Preferred Stock, of which as of the date hereof, 50
shares of Series A Preferred Stock were issued and outstanding. All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable. Except as disclosed in Schedule 3(c), (i) no
-------------
shares of the Company's capital stock are subject to preemptive rights or any
other similar rights or any liens or encumbrances suffered or permitted by the
Company excluding any pledges by third parties to any financial or other lending
institution; (ii) there are no outstanding debt securities issued by the
Company; (iii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries; (iv) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act
7
<PAGE>
(except the Registration Rights Agreement); (v) there are no outstanding
securities of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vi) there are no securities or instruments containing anti-
dilution or similar provisions that will be triggered by the issuance of the
Securities as described in this Agreement; and (vii) the Company does not have
any stock appreciation rights or "phantom stock" plans or agreements or any
similar plan or agreement. The Company has furnished to the Buyers true and
correct copies of the Company's Certificate of Incorporation, as amended and as
in effect on the date hereof (the "Certificate of Incorporation"), and the
Company's By-laws, as in effect on the date hereof (the "By-laws"), and the
terms of all securities convertible into or exercisable for Common Stock and the
material rights of the holders thereof in respect thereto.
d. Issuance of Securities. The Preferred Shares are duly authorized
----------------------
and, upon issuance in accordance with the terms hereof, shall be (i) validly
issued, fully paid and non-assessable, (ii) free from all taxes, liens and
charges with respect to the issue thereof and (iii) entitled to the rights and
preferences set forth in the Certificate of Designations. At least 3,200,000
shares of Common Stock (subject to adjustment pursuant to the Company's covenant
set forth in Section 4(f) below) have been duly authorized and reserved for
issuance upon conversion of the Preferred Shares and exercise of the Warrants.
Upon conversion or exercise in accordance with the Certificate of Designations
or the Warrants, as the case may be, the Conversion Shares and the Warrant
Shares will be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, with the holders
being entitled to all rights accorded to a holder of Common Stock. Assuming the
truthfulness of the representations and warranties of the Buyers contained in
Section 2, the issuance by the Company of the Securities is exempt from
registration under the 1933 Act.
e. No Conflicts. Except as disclosed in Schedule 3(e), the
------------ -------------
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Certificate of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the reservation
for issuance and issuance of the Conversion Shares and the Warrant Shares) will
not (i) result in a violation of the Certificate of Incorporation, any
Certificate of Designations, Preferences and Rights of any outstanding series of
Preferred Stock of the Company or the By-laws; (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its Subsidiaries is a party; or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and regulations
of the principal market or exchange on which the Common Stock is traded or
listed) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or
affected. Except as disclosed in Schedule 3(e), neither the Company nor its
-------------
Subsidiaries is in violation of any term of (i) its Certificate of
Incorporation, any Certificate of Designations, Preferences and Rights of any
outstanding series of Preferred Stock or By-laws or their organizational charter
or by-laws, respectively, or (ii) any statute, rule or regulation applicable to
the Company or its Subsidiaries and neither the Company nor its Subsidiaries is
in default under any material contract, agreement,
8
<PAGE>
mortgage, indebtedness, indenture, instrument, judgment, decree or order, except
for defaults as would not have a Material Adverse Effect. The business of the
Company and its Subsidiaries is not being conducted, and shall not be conducted,
in violation of any law, ordinance or regulation of any governmental entity.
Except as specifically contemplated by this Agreement and as required under the
1933 Act and any applicable state securities laws and except such as have been
obtained as of the date hereof, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency or any regulatory or self-regulatory agency in
order for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents or the Certificate of Designations in
accordance with the terms hereof or thereof. Except as disclosed in Schedule
--------
3(e), all consents, authorizations, orders, filings and registrations which the
- ----
Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the date hereof. The Company and its
Subsidiaries are unaware of any facts or circumstances which might reasonably be
expected to give rise to any of the foregoing. The Company is not in violation
of the listing requirements of The Nasdaq SmallCap Market as in effect on the
date hereof and on each of the Closing Dates and has no actual knowledge of any
facts which would reasonably lead to delisting or suspension of the Common Stock
by The Nasdaq SmallCap Market in the foreseeable future.
f. SEC Documents; Financial Statements. Except as set forth on
-----------------------------------
Schedule 3(f), since December 31, 1997, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the 1934 Act, (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the "SEC Documents"). A
complete list of the Company's SEC Documents is set forth on Schedule 3(f). As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Except as set
forth on Schedule 3(f), as of their respective dates, the financial statements
of the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements of the SEC with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, and (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Neither the
Company nor any of its Subsidiaries or any of their officers, directors,
employees or agents have provided the Buyers with any material, nonpublic
information. The Company will meet the requirements for the use of Form S-3 for
registration of the resale of the Registrable Securities (as defined in the
Registration Rights Agreement) by the Buyers on and after June 1, 1999.
g. Absence of Certain Changes. Except as disclosed in Schedule 3(g),
-------------------------- -------------
since December 31, 1998 there has been no material adverse change and no
material adverse development
9
<PAGE>
in the business, properties, operations, financial condition, liabilities
results of operations of the Company or its Subsidiaries, taken as a whole. The
Company has not taken any steps, and does not currently expect to take any
steps, to seek protection pursuant to any bankruptcy law nor does the Company or
any of its Subsidiaries have any actual knowledge that its creditors intend to
initiate involuntary bankruptcy proceedings or any actual knowledge of any fact
which would reasonably lead a creditor to do so. Except as disclosed in Schedule
3(g), since December 31, 1998, the Company has not declared or paid any
dividends, sold any assets in excess of $25,000 outside of the ordinary course
of business or had capital expenditures in excess of $250,000.
h. Absence of Litigation. Except as disclosed in Schedule 3(h),
--------------------- -------------
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company or any of its Subsidiaries,
threatened against or affecting the Company, the Common Stock or any of the
Company's Subsidiaries or any of the Company's or the Company's Subsidiaries'
officers or directors in their capacities as such. Except as set forth in
Schedule 3(h), to the knowledge of the Company none of the directors or officers
of the Company have been involved in securities related litigation during the
past five years.
i. Acknowledgment Regarding Buyers' Purchase of Preferred Shares.
-------------------------------------------------------------
The Company acknowledges and agrees that each of the Buyers is acting solely in
the capacity of arm's length purchaser with respect to the Transaction Documents
and the Certificate of Designation and the transactions contemplated thereby.
The Company further acknowledges that each Buyer is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
the Transaction Documents and the Certificate of Designations and the
transactions contemplated thereby and any advice given by any of the Buyers or
any of their respective representatives or agents in connection with the
Transaction Documents and the Certificate of Designations and the transactions
contemplated thereby is merely incidental to such Buyer's purchase of the
Securities. The Company further represents to each Buyer that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
j. No Undisclosed Events, Liabilities, Developments or
---------------------------------------------------
Circumstances. Except for the issuance of the Preferred Stock and Warrants
- -------------
contemplated by this Agreement, no event, liability, development or circumstance
has occurred or exists with respect to the Company or its Subsidiaries or their
respective business, properties, operations or financial condition, that would
be required to be disclosed by the Company under applicable securities laws on a
registration statement (including by way of incorporation by reference) filed
with the SEC relating to an issuance and sale by the Company of its Common Stock
and which has not been publicly disclosed.
k. No General Solicitation. Neither the Company, nor any of its
-----------------------
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
l. No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any
10
<PAGE>
security or solicited any offers to buy any security, under circumstances that
would require registration of any of the Securities under the 1933 Act or cause
this offering of Securities to be integrated with prior offerings by the Company
for purposes of the 1933 Act or any applicable stockholder approval provisions,
including, without limitation, under the rules and regulations of The Nasdaq
Stock Market, Inc., nor will the Company or any of its Subsidiaries take any
action or steps that would require registration of the Securities under the 1933
Act or cause the offering of the Securities to be integrated with other
offerings.
m. Employee Relations. Neither the Company nor any of its
------------------
Subsidiaries is involved in any union labor dispute nor, to the actual knowledge
of the Company or any of its Subsidiaries, is any such dispute threatened.
Neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement. No executive officer (as defined in Rule 501(f) of the
1933 Act) has notified the Company's Board of Directors that such officer
intends to leave the Company or otherwise terminate such officer's employment
with the Company. No executive officer, to the actual knowledge of the Company
and its Subsidiaries, is in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement, non-
competition agreement, or any other contract or agreement or any restrictive
covenant, and to the actual knowledge of the Company and its Subsidiaries, the
continued employment of each such executive officer does not subject the Company
or any of its Subsidiaries to any liability with respect to any of the foregoing
matters.
n. Intellectual Property Rights. The Company and its Subsidiaries
----------------------------
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on Schedule 3(n), none of the
-------------
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights have expired or terminated, or are expected to expire or
terminate within two years from the date of this Agreement. The Company and its
Subsidiaries do not have any actual knowledge of any infringement by the Company
or its Subsidiaries of trademarks, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secrets or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, except as set forth on Schedule 3(n), no claim, action or proceeding
-------------
has been made or brought against, or to the Company's actual knowledge, has been
threatened against, the Company or its Subsidiaries regarding trademarks, trade
name rights, patents, patent rights, inventions, copyrights, licenses, service
names, service marks, service mark registrations, trade secrets or other
infringement; and the Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
o. Environmental Laws. Except such as would not have a Material
------------------
Adverse Effect, the Company and its Subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them
11
<PAGE>
under applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval.
p. Title. The Company and its Subsidiaries have good and marketable
-----
title in fee simple to all real property owned by them and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(p) or such
-------------
as do not interfere with the use made of such property by the Company or any of
its Subsidiaries. Any real property and facilities held under lease by the
Company or any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as not materially interfere with the use
made of such property and buildings by the Company and its Subsidiaries.
q. Insurance. The Company and each of its Subsidiaries maintain
---------
insurance of the types and in such amounts as management of the Company believes
to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its Subsidiaries, taken as a whole.
r. Regulatory Permits. Except the absence of which would not have a
------------------
Material Adverse Effect, the Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
s. Internal Accounting Controls. The Company and each of its
----------------------------
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
t. Tax Status. Except as set forth on Schedule 3(t), the Company and
---------- -------------
each of its Subsidiaries has made or filed all federal and state income and all
other tax returns, reports and declarations required by any jurisdiction to
which it is subject (unless and only to the extent that the Company and each of
its Subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and for which the Company has
12
<PAGE>
set aside on its books provision reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
u. Certain Transactions. Except as set forth on Schedule 3(u) or in
-------------------- -------------
the SEC Documents filed at least ten days prior to the date hereof and other
than the grant of stock options disclosed on Schedule 3(c), none of the
-------------
officers, directors, or "affiliates" or "associates" (as such terms are defined
in Rule 12b-2 under the 1934 Act) of the Company is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such affiliate or associate.
v. Dilutive Effect. The Company understands and acknowledges that
---------------
the number of Conversion Shares issuable upon conversion of the Preferred Shares
and Warrant Shares issued upon exercise of the Warrants will increase in certain
circumstances. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Preferred Shares in accordance with
this Agreement and the Certificate of Designations and its obligation to issue
the Warrant Shares in accordance with this Agreement and the Warrants is, in
each case, absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company.
w. No Other Agreements. The Company has not, directly or indirectly,
-------------------
made any agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents.
x. Application of Takeover Protections. The Company and its board of
-----------------------------------
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar anti-
takeover provision under the Certificate of Incorporation or the laws of the
state of its incorporation which is or could become applicable to the Buyers as
a result of the Buyers and the Company fulfilling their obligations under the
Transaction Documents and the Certificate of Designation, including, without
limitation, the Company's issuance of the Securities and the Buyer's ownership
of the Securities.
y. Rights Agreement. The Company has not adopted a shareholder
----------------
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.
z. Year 2000 Compliance. The Company has initiated a review and
--------------------
assessment of all areas within its and each Subsidiary's business and operations
that could be materially adversely affected by the "Year 2000 Problem" (that is,
the risk that computer applications used by the Company or any of the
Subsidiaries may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999). The Company currently does not expect remediation costs to be material
nor does it expect any
13
<PAGE>
significant interruption to its operations because of Year 2000 Problems. The
Company is in the process of contacting all third parties with which it has
significant relationships, to determine the extent to which the Company could be
vulnerable to failure by any of them to obtain Year 2000 compliance. Some of the
Company's major suppliers and financial institutions have confirmed that they
anticipate being Year 2000 complaint on or before December 31, 1999, although
many have only indicated that they have Year 2000 readiness programs. To date,
the Company is not aware of any significant third parties with a Year 2000 issue
that could materially impact the Company's operations, liquidity or capital
resources.
4. COVENANTS.
---------
a. Best Efforts. Each party shall use its best efforts timely to
------------
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. Form D. The Company agrees to file a Form D with respect to the
------
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before each of the
Closing Dates, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for, or obtain exemption for the Securities
for, sale to the Buyers at each of the Closings pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of any such action so taken to the Buyers on or prior to
the Closing Date. The Company shall make all filings and reports relating to the
offer and sale of the Securities required under applicable securities or "Blue
Sky" laws of the states of the United States following each of the Closing
Dates.
c. Reporting Status. Until the later of (i) the date which is one
----------------
year after the date on which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares and the
Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the
1933 Act (or successor thereto) and (ii) the date is three (3) years from the
last Closing Date to occur (the "Reporting Period"), the Company shall file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale
---------------
of the Preferred Shares for substantially the same purposes and in substantially
the same amounts as indicated in Schedule 4(d).
-------------
e. Financial Information. The Company agrees to send the following
---------------------
to each Investor (as defined in the Registration Rights Agreement) during the
Reporting Period: (i) within two (2) days after the filing thereof with the SEC,
a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q,
any Current Reports on Form 8-K and any registration statements (other than on
Form S-8) or amendments filed pursuant to the 1933 Act; (ii) on the same day as
the release thereof, facsimile copies of all press releases issued by the
Company or any of its Subsidiaries and (iii) copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
14
<PAGE>
f. Reservation of Shares. The Company shall take all action
---------------------
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 200% of the number of shares of Common Stock needed to
provide for the issuance of the Conversion Shares (without regard to any
limitations on conversions) and 100% of the number of shares of Common Stock
needed to provide for the issuance of the Warrant Shares.
g. Additional Financing; Right of First Refusal. Subject to the
--------------------------------------------
exceptions described below, the Company agrees that during the period beginning
on the date hereof and ending on the Additional Financing Restriction Date (as
defined below), neither the Company nor its Subsidiaries will, without the prior
written consent of the holders of the Preferred Shares representing at least
two-thirds (?) of the Preferred Shares then outstanding, negotiate or contract
with any party for any equity financing (including any debt financing with an
equity component) or issue any equity securities of the Company or any
Subsidiary or securities convertible or exchangeable into or for equity
securities of the Company or any Subsidiary (including debt securities with an
equity component) in any form ("Future Offerings"). Subject to the exceptions
described below, the Company agrees that during the period beginning on the
date hereof and ending on the date which is one year after the Initial Closing,
neither the Company nor its Subsidiaries will, without the prior written consent
of the holders of the Preferred Shares representing at least two-thirds (?) of
the Preferred Shares then outstanding, negotiate or contract with any party for
any Future Offering other than a Variable Convertible Offering, unless it shall
have first delivered to each Buyer or a designee appointed by such Buyer written
notice (the "Future Offering Notice") describing the proposed Future Offering,
including the terms and conditions thereof, and providing each Buyer an option
to purchase up to its Aggregate Percentage (as defined below), as of the date of
delivery of the Future Offering Notice, in the Future Offering on the same terms
and conditions set forth in the Future Offering Notice. The limitations referred
to in the preceding two sentences are collectively referred to as the "Capital
Raising Limitations". Subject to the exceptions described below, the Company
agrees that during the period beginning on the date hereof and ending on the
date which is 180 days after the Registration Statement is declared effective,
neither the Company nor its Subsidiaries will, without the prior written consent
of the holders of the Preferred Shares representing at least two-thirds (2/3) of
the Preferred Shares then outstanding, issue any securities of the Company or
any Subsidiary which are convertible into, exercisable or exchangeable for, or
carry the right to receive shares of Common Stock at any conversion, exercise or
exchange rate or other price that is based upon and/or varies with the trading
prices of or quotations for the Common Stock at any time after the initial
issuance of such security ("Variable Convertible Offerings"), unless it shall
have first delivered to each Buyer or a designee appointed by such Buyer written
notice (the "Variable Convertible Offering Notice") describing the proposed
Variable Convertible Offering, including the terms and conditions thereof, and
providing each Buyer an option to purchase up to its Aggregate Percentage (as
defined below), as of the date of delivery of the Variable Convertible Offering
Notice, in the Variable Convertible Offering on the same terms and conditions
set forth in the Variable Convertible Offering Notice. The limitations referred
to in the preceding sentence are collectively referred to as the "Variable
Convertible Limitations." For purposes of this Section 4(g), "Aggregate
Percentage" at any time with respect to any Buyer shall mean (I) in the case of
Future Offerings, 50% of, and (II) in the case of Variable Convertible
Offerings, (a) for the first two million dollars of such Variable Convertible
Offering 100% of, (b) for the next two million dollars of such Variable
Convertible Offering, 0% of, and for all amounts above the first four million
dollars of such Variable Convertible Offering, 50% of the percentage
15
<PAGE>
obtained by dividing (i) the aggregate number of Preferred Shares purchased by
such Buyer at the Closings by (ii) the aggregate number of Preferred Shares
purchased by all Buyers at the Closings. A Buyer can exercise its option to
participate in a Future Offering or a Variable Convertible Offering, as the case
may be, by delivering written notice thereof to participate to the Company
within ten (10) Business Days of receipt of a Future Offering Notice or Variable
Convertible Offering Notice, as the case may be, which notice shall state the
quantity of securities being offered in the Future Offering or the Variable
Convertible Offering, as the case may be, that such Buyer will purchase, up to
its Aggregate Percentage, and that number of securities it is willing to
purchase in excess of its Aggregate Percentage. In the event that one or more
Buyers fail to elect to purchase up to each such Buyer's Aggregate Percentage
then each Buyer which has indicated that it is willing to purchase a number of
securities in excess of its Aggregate Percentage shall be entitled to purchase
its pro rata portion (determined in the same manner as described in the
preceding sentence) of the securities in the Future Offering or the Variable
Convertible Offering, as the case may be, which one or more Buyers have not
elected to purchase. In the event the Buyers fail to elect to fully participate
in the Future Offering or the Variable Convertible Offering, as the case may be,
within the periods described in this Section 4(g), the Company shall have 30
days thereafter to sell the securities of the Future Offering or the Variable
Convertible Offering, as the case may be, for which such Buyers' rights were not
exercised, upon the same terms and conditions (including the amount thereof)
specified in the Future Offering Notice or the Variable Convertible Offering
Notice, as the case may be. In the event the Company has not sold such
securities of the Future Offering or the Variable Convertible Offering, as the
case may be, within such 30 day period, the Company shall not thereafter issue
or sell such securities without first offering such securities to the Buyers in
the manner provided in this Section 4(g). The Capital Raising Limitations and
the Variable Convertible Limitations shall not apply to (i) a loan from a
commercial bank without any equity component, (ii) any transaction involving the
Company's issuances of securities (A) as consideration in a merger or
consolidation, (B) in connection with any strategic partnership or joint venture
(the primary purpose of which is not to raise equity capital), or (C) as
consideration for the acquisition of a business, product or license or other
assets by the Company, (iii) the issuance of Common Stock in a firm commitment,
underwritten public offering with net proceeds of at least $15,000,000, (iv) the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof, or
(v) the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option plan, restricted stock plan or stock
purchase plan for the benefit of the Company's employees or directors. The
Buyers shall not be required to participate or exercise their right of first
refusal with respect to a particular Future Offering in order to exercise their
right of first refusal with respect to later Future Offerings. The "Additional
Financing Restriction Date" is the date which is the earlier of (A) the date
which is 180 days after the Initial Closing Date and (B) the first date on which
all of the following shall have occurred (x) the Registration Statement has been
declared effective by the SEC, (y) the Company has received shareholder approval
for the issuance of greater than 20% of the Common Stock outstanding on the
Issuance Date upon conversion of the Preferred Shares and exercise of Warrants
and (z) the Company delivers an opinion of counsel and an officer's certificate
representing that the Future Offering will not be integrated with the offering
of the Preferred Shares and the Warrants for purposes of the 1933 Act or any
applicable stockholder approval provision, including without limitation, under
the rules of The Nasdaq Stock Market, Inc.
16
<PAGE>
h. Listing. The Company shall promptly secure the listing of all of
-------
the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system (including
The Nasdaq SmallCap Market), if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents and the Certificate of Designations. The Company shall
maintain the Common Stock's authorization for listing on The Nasdaq SmallCap
Market, The Nasdaq National Market or NYSE. Neither the Company nor any of its
Subsidiaries shall take any action which may result in the delisting or
suspension of the Common Stock on The Nasdaq SmallCap Market, The Nasdaq
National Market or NYSE (other than to switch listings from The Nasdaq SmallCap
Market, The National Nasdaq Market or NYSE). The Company shall promptly provide
to each Buyer copies of any notices it receives from The Nasdaq SmallCap Market,
The Nasdaq National Market or NYSE regarding the continued eligibility of the
Common Stock for listing on such automated quotation system or securities
exchange. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 4(h).
i. Expenses. Subject to Section 9(l) below, following the Initial
--------
Closing, the Company shall reimburse the Buyers for the Buyers' expenses
(including attorneys' fees and expenses) in connection with negotiating and
preparing the Transaction Documents and consummating the transactions
contemplated thereby up to an aggregate of $40,000.
j. Transactions With Affiliates. So long as (i) any Preferred Shares
----------------------------
or Warrants are outstanding or (ii) any Buyer owns Conversion Shares or Warrant
Shares with a market value of $100,000 the Company shall not, and shall cause
each of its Subsidiaries not to, enter into, amend, modify or supplement, or
permit any Subsidiary to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any Subsidiary's
officers, directors, person who were officers or directors at any time during
the previous two years, stockholders who beneficially own 5% or more of the
Common Stock, or affiliates or with any individual related by blood, marriage or
adoption to any such individual or with any entity in which any such entity or
individual owns a 5% or more beneficial interest (each a "Related Party"),
except for (a) customary employment arrangements and benefit programs on
reasonable terms, (b) any agreement, transaction, commitment or arrangement on
an arms-length basis on terms no less favorable than terms which would have been
obtainable from a person other than such Related Party or (c) any agreement,
transaction, commitment or arrangement which is approved by a majority of the
disinterested directors of the Company. For purposes hereof, any director who is
also an officer of the Company or any Subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "Affiliate" for purposes hereof means, with respect
to any person or entity, another person or entity that, directly or indirectly,
(i) has a 5% or more equity interest in that person or entity, (ii) has 5% or
more common ownership with that person or entity, (iii) controls that person or
entity, or (iv) shares common control with that person or entity. "CONTROL" or
"CONTROLS" for purposes hereof means that a person or entity has the power,
direct or indirect, to conduct or govern the policies of another person or
entity.
k. Filing of Form 8-K. On or before the tenth Business Day following
------------------
the Initial Closing Date and on or before the third Business Day following the
Additional Closing Date and the
17
<PAGE>
Additional Share Notice Date the Company shall file a Form 8-K with the SEC
describing the terms of the transaction contemplated by the Transaction
Documents and consummated at such Closing, in each case in the form required by
the 1934 Act.
l. Proxy Statement. The Company shall provide each stockholder
---------------
entitled to vote at a meeting of stockholders of the Company, which meeting
shall occur on or before July 31, 1999 (the "Stockholder Meeting Deadline"), a
proxy statement, which has been previously reviewed by the Buyers and a counsel
of their choice, soliciting each such stockholder's affirmative vote at such
stockholder meeting for approval of the Company's issuance of all of the
Securities as described in this Agreement, and the Company shall use its best
efforts to solicit its stockholders' approval of such issuance of the Securities
and cause the Board of Directors of the Company to recommend to the stockholders
that they approve such proposal. Such proxy statement shall not seek approval of
any matters other than the approval described in the preceding sentence and the
election of directors. If the Company (I) fails to hold a meeting of its
stockholders by the Stockholder Meeting Deadline or (II) holds a meeting prior
to such time but fails to receive the affirmative vote of its stockholders to
approve the issuance of the Securities, then, each Buyer shall have the right,
at such Buyer's option, to require the Company to redeem all or a portion of
such Buyer's Preferred Shares at a price per Preferred Share equal to 100% of
the Purchase Price plus any accrued interest accumulated in the Escrow Account
(as defined in the Escrow Agreement between the Buyers and the Company, the
"Escrow Agreement") pursuant to the Escrow Agreement. In addition, if the
Company fails to hold a meeting of its stockholders by the Stockholder Meeting
Deadline (other than by reason of an SEC Fault (as defined below)) as partial
relief (which remedy shall not be exclusive of any other remedies available at
law or in equity), the Company shall pay to each holder of Preferred Shares for
each Preferred Share which has not been redeemed, an amount in cash per
Preferred Share equal to the product of (i) $10,000; multiplied by (ii) .02;
multiplied by (iii) the quotient of (x) the number of days after the Stockholder
Meeting Deadline that a meeting of the Company's stockholders is not held,
divided by (y) 30. The Company shall make the payments referred to in the
immediately preceding sentence within five days of the earlier of (I) the
holding of the meeting of the Company's stockholders, the failure of which
resulted in the requirement to make such payments, and (II) the last day of each
30-day period beginning on the Stockholder Meeting Deadline. In the event the
Company fails to make such payments in a timely manner, such payments shall bear
interest at the rate of 1.25% per month (pro rated for partial months) until
paid in full. The "Stockholder Trigger Date" means, the earlier of (A) the
Stockholder Meeting Deadline and (B) the date on which the Company holds a
meeting of its stockholders for the approval of the Company's issuance of all of
the Securities as described in this Agreement, but fails to receive the approval
of its stockholders for such proposal. An "Sec Fault" means that the Stockholder
Meeting Deadline is not met due to delays caused by the SEC's being unresponsive
to requests for delivery of comments on the proxy statement filed pursuant to
this Section 4(l) or the Company's inability otherwise to satisfy the SEC as to
such comments on a timely basis; provided however, that the Company shall have
(i) filed such proxy statement with the SEC on or before June 1, 1999, (ii) used
its best efforts to obtain such comments from the SEC, (iii) provided responses
to the SEC to such comments as soon as reasonably practicable after receipt of
such comments, and (iv) otherwise used its best efforts to have held the
stockholders meeting by the Stockholders Meeting Deadline.
18
<PAGE>
m. Capital Surplus. Upon the termination of the Escrow Agreement,
---------------
between the Buyers, the Company and American National Bank and Trust Company of
Chicago in accordance with Section 8 thereof, the amount to be represented in
the capital account for the Series B Convertible Preferred Stock at all times
for each outstanding Preferred Share shall not be less than an amount equal to
the product of (i) the Liquidation Preference (as defined in the Certificate of
Designations) and (ii) 115%.
n. Compliance with Section 9 of Securities Exchange Act. So long as
----------------------------------------------------
a Buyer holds any Preferred Shares, such Buyer will comply at all times with the
applicable provisions of Section 9 of the 1934 Act, and the rules promulgated
thereunder (including Regulation M), with respect to transactions involving the
securities of the Company.
o. Escrow. The Company and the Buyers shall comply with the terms of
------
the Escrow Agreement.
5. TRANSFER AGENT INSTRUCTIONS.
---------------------------
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
and the Warrant Shares in such amounts as specified from time to time by each
Buyer to the Company upon conversion of the Preferred Shares or exercise of the
Warrants (the "Irrevocable Transfer Agent Instructions"). Prior to registration
of the Conversion Shares and the Warrant Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(f) hereof (in the case of the
Conversion Shares and the Warrant Shares, prior to registration of the
Conversion Shares and the Warrant Shares under the 1933 Act) will be given by
the Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section 5 shall affect in any way each Buyer's obligations and agreements
set forth in Section 2(g) to comply with all applicable prospectus delivery
requirements, if any, upon resale of the Securities. If a Buyer provides the
Company with an opinion of counsel, in a form reasonable satisfactory to the
Company, that registration of a resale by such Buyer of any of such Securities
is not required under the 1933 Act, the Company shall permit the transfer, and,
in the case of the Conversion Shares and the Warrant Shares, promptly instruct
its transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Buyer and without any restrictive legends.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyers shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
19
<PAGE>
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
a. Initial Closing Date. The obligation of the Company hereunder to
--------------------
issue and sell the Initial Preferred Shares to each Buyer at the Initial Closing
is subject to the satisfaction, at or before the Initial Closing Date, of each
of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have executed each of the Transaction Documents
and delivered the same to the Company.
(ii) The Certificate of Designations shall have been filed with the
Secretary of State of the State of Delaware.
(iii) Such Buyer shall have delivered to the Company the Purchase
Price for the Preferred Shares and the related Warrants being purchased by
such Buyer at the Initial Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.
(iv) The representations and warranties of such Buyer contained
herein shall be true and correct as of the date when made and as of the
Initial Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and such
Buyer shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by such Buyer at or prior to the
Initial Closing Date.
b. Additional Closing Date. The obligation of the Company hereunder
-----------------------
to issue and sell the Additional Preferred Shares to each Buyer at the
Additional Closing is subject to the satisfaction, at or before the applicable
Additional Closing Date, of each of the following conditions, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion by providing each Buyer with prior
written notice thereof:
(i) Such Buyer shall have delivered to the Company the Purchase
Price for the Additional Preferred Shares and the related Warrants being
purchased by such Buyer at the Additional Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by
the Company.
(ii) The representations and warranties of such Buyer contained
herein shall be true and correct as of the date when made and as of the
Additional Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and such
Buyer shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by such Buyer at or prior to the
applicable Additional Closing Date.
20
<PAGE>
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
-------------------------------------------------
a. Initial Closing Date. The obligation of each Buyer hereunder to
--------------------
purchase the Initial Preferred Shares at the Initial Closing is subject to the
satisfaction, at or before the Initial Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion:
(i) The Company shall have executed each of the Transaction
Documents, and delivered the same to such Buyer.
(ii) The Certificate of Designations, shall have been filed with the
Secretary of State of the State of Delaware, and a copy thereof certified
by such Secretary of State shall have been delivered to such Buyer.
(iii) The Common Stock shall be designated for quotation on The Nasdaq
SmallCap Market, The Nasdaq National Market or listed on the NYSE, and
shall not have been suspended from trading on or delisted from such
exchanges nor shall delisting or suspension by such exchanges have been
threatened either (A) in writing by such exchanges or (B) by falling below
the minimum listing maintenance requirements of such exchanges and the
Company has complied with the listing requirements of the Nasdaq SmallCap
Market for the Conversion Shares and the Warrant Shares issuable upon
conversion or exercise of the Initial Preferred Shares and the related
Warrants, as the case may be.
(iv) The representations and warranties of the Company contained
herein shall be true and correct as of the date when made and as of the
Initial Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents or
Certificate of Designations to be performed, satisfied or complied with by
the Company at or prior to the Initial Closing Date. Such Buyer shall have
received a certificate, executed by the Chief Executive Officer of the
Company, dated as of the Initial Closing Date, to the foregoing effect
which also shall include an update as of the Initial Closing Date regarding
the representation contained in Section 3(c) above.
(v) Such Buyer shall have received the opinion of Barack Ferrazzano
Kirschbaum Perlman & Nagelberg dated as of the Initial Closing Date, in
substantially the form of Exhibit C attached hereto.
---------
(vi) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates for the Initial Preferred Shares and
the related Warrants being purchased by such Buyer at the Initial Closing.
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer (the "Resolutions").
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<PAGE>
(viii) As of the Initial Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares and exercise of
the Warrants, at least 3,200,000 shares of Common Stock.
(ix) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged in
---------
writing by the Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in such corporation's state of incorporation issued by the
Secretary of State of such state of incorporation as of a date within ten
days of the Initial Closing Date.
(xi) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (A) the Resolutions, (B) the Certificate of
Incorporation and (C) By-laws, each as in effect at the Initial Closing
Date.
(xii) The Company shall have delivered to such Buyer a certified copy
of its Certificate of Incorporation as certified by the Secretary of State
of the State of Delaware within ten days of the Initial Closing Date.
(xiii) The Company shall have delivered to such Buyer a letter from
the Company's transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five days of the Initial Closing
Date.
(xiv) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by the Transaction
Documents as such Buyer or its counsel may reasonably request.
b. Additional Closing Date. The obligation of each Buyer
-----------------------
hereunder to purchase the Additional Preferred Shares at the Additional Closing
is subject to the satisfaction, at or before each of the Additional Closing
Date, of each of the following conditions, provided that these conditions are
for each Buyer's sole benefit and may be waived by such Buyer at any time in its
sole discretion:
(i) The Certificate of Designations, shall be in full force and
effect and shall not have been amended, without the knowledge or consent of
the Buyers, since the Initial Closing Date, and a copy thereof certified by
the Secretary of State of the State of Delaware shall have been delivered
to such Buyer.
(ii) The Common Stock shall be designated for quotation on The
Nasdaq SmallCap Market or The Nasdaq National Market or listed on the NYSE,
and shall not have been suspended from trading on or delisted from such
exchanges nor shall delisting or suspension by such exchanges have been
threatened either (A) in writing by such exchanges or (B) by falling below
the minimum listing maintenance requirements of such exchanges
22
<PAGE>
and all of the Conversion Shares and the Warrant Shares issuable upon
conversion or exercise of the Additional Preferred Shares and the related
Warrant, as the case may be, to be sold at the Additional Closing shall be
listed upon The Nasdaq National Market or the NYSE.
(iii) The representations and warranties of the Company shall be true
and correct as of the date when made and as of the Additional Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed,
satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents or the Certificate of Designations to
be performed, satisfied or complied with by the Company at or prior to the
Additional Closing Date. Such Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the
Additional Closing Date, to the foregoing effect which also shall include
an update as of the Additional Closing Date regarding the representation
contained in Section 3(c) above.
(iv) Such Buyer shall have received the opinion of Barack Ferrazzano
Kirschbaum Perlman & Nagelberg dated as of the Additional Closing Date in
substantially the form of Exhibit C attached hereto.
---------
(v) The Company shall have executed and delivered to such Buyer the
Warrants and the Stock Certificates for the Additional Preferred Shares and
the related Warrants being purchased by such Buyer at the Additional
Closing.
(vi) The Board of Directors of the Company shall have adopted, and
shall not have amended, the Resolutions.
(vii) As of the Additional Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares, a number of
shares of Common Stock equal to at least 200% of the number of shares of
Common Stock which would be issuable upon conversion in full of the then
outstanding Preferred Shares (without regard to any limitations on
conversions) and 100% of the number of shares of Common Stock which would
be issuable upon conversion in full of the then outstanding Warrants,
including for such purposes the Additional Preferred Shares and related
Warrants to be issued at such Additional Closing.
(viii) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged
---------
in writing by the Company's transfer agent and Shall be in effect as of the
Additional Closing.
(ix) The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in the state of such corporation's state of incorporation issued
by the Secretary of State of such state of incorporation as of a date
within ten days of the Additional Closing Date.
23
<PAGE>
(x) The Company shall have delivered to such Buyer a certified copy
of its Certificate of Incorporation as certified by the Secretary of State
of the State of Delaware within ten days of the Additional Closing Date.
(xi) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (A) the Resolutions, (B) the Certificate of
Incorporation and (C) By-laws, each as in effect at the Additional Closing.
(xii) The Company shall have delivered to such Buyer a letter from
the Company's transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five days of the Additional Closing
Date.
(xiii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and
---------------
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents and the Certificate of Designations, the Company shall defend,
protect, indemnify and hold harmless each Buyer and all of their stockholders,
officers, directors, employees and direct or indirect investors and any of the
foregoing persons' agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "Indemnitees") from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(the "Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or the Certificate of Designations or any other
certificate, instrument or document contemplated hereby or thereby or (c) any
cause of action, suit or claim brought or made against such Indemnitee (other
than a cause of action, suit or claim which is (x) bought or made by the Company
and (y) is not a shareholder derivative suit) and arising out of or resulting
from (i) the execution, delivery, performance or enforcement by such Buyer of
the Transaction Documents or the Certificate of Designations or any other
certificate, instrument or document contemplated hereby or thereby. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 8 shall
be the same as those set forth in Sections 6(a) and (d) of the Registration
Rights Agreement, including, without limitation, those procedures with respect
to the settlement of claims and the Company's rights to assume the defense of
claims.
24
<PAGE>
9. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. Governing Law; Jurisdiction; Jury Trial. The corporate laws of
---------------------------------------
the State of Delaware shall govern all issues concerning the relative rights of
the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of Illinois, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of Illinois or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of Illinois. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting the City of Chicago, Illinois, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, that such suit, action or
proceeding is brought in an inconvenient forum or that the venue of such suit,
action or proceeding is improper. Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR
ANY TRANSACTION CONTEMPLATED HEREBY.
b. Counterparts. This Agreement may be executed in two or more
------------
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
c. Headings. The headings of this Agreement are for convenience of
--------
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be
------------
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all
----------------------------
other prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by
25
<PAGE>
the Company and the holders of at least two-thirds (?) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought. No
such amendment shall be effective to the extent that it applies to less than all
of the holders of the Preferred Shares then outstanding. No consideration shall
be offered or paid to any person to amend or consent to a waiver or modification
of any provision of any of the Transaction Documents or the Certificate of
Designations unless the same consideration also is offered to all of the parties
to the Transaction Documents or holders of the Preferred Shares, as the case may
be.
f. Notices. Any notices, consents, waivers or other communications
-------
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) Business Day after deposit
with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
Medcare Technologies, Inc.
1515 West 22/nd/ Street, Suite
1210
Oak Brook, Illinois 60521
Telephone: 888-479-7900
Facsimile: 630-472-5360
Attention: Jeffrey S. Aronin
With a copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Facsimile: 312-984-3193
Attention: Michael J. Legamaro, Esq.
If to the Transfer Agent:
Halladay Stock Transfer, Inc.
2939 67/th/ Place
Scottsdale, Arizona 85251
Telephone: 602-481-3940
Facsimile: 602-481-3941
Attention: Tom Laucks
If to a Buyer, to it at the address and facsimile number set forth on
the Schedule of Buyers, with copies to such Buyer's representatives as set forth
on the Schedule of Buyers, or at such other address and/or facsimile number
and/or to the attention of such other person as the recipient party
26
<PAGE>
has specified by written notice given to each other party five days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communications, (B)
mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a nationally recognized overnight
delivery service shall be rebuttable evidence of personal service, receipt by
facsimile or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.
g. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Preferred Shares. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least two-thirds (?) of the Preferred Shares then
outstanding including by merger or consolidation. The rights under this
Agreement shall not be assignable by any Buyers without prior written consent of
the Company. Notwithstanding the foregoing, the rights under this Agreement
shall be assignable by any Buyers, without the consent of the Company (i) upon
the transfer of all or any portion of Preferred Shares or Warrants to any
existing holder of the Preferred Shares and (ii) to any transferee, provided
that such Buyer transfers all of its Preferred Shares or Warrants and rights
hereunder to such transferee; provided, further, that any assignment shall not
release such Buyer from its obligations hereunder unless such obligations are
assumed by such assignee and the Company has consented to such assignment and
assumption, which consent shall not be unreasonably withheld. Notwithstanding
anything to the contrary contained in the Transaction Documents or the
Certificate of Designations, Buyer shall be entitled to pledge the Securities in
connection with a bona fide margin account. Notwithstanding the foregoing, the
Buyer, HFTP Investment L.L.C., shall have the right without the consent of the
Company, to transfer all or any portion of its Preferred Shares to a maximum of
one (1) Affiliated Transferee. An "Affiliated Transferee" shall mean (i) an
Affiliate of a Buyer, (ii) any holder of Preferred Shares and (iii) any
Affiliate of a holder of Preferred Shares.
h. No Third Party Beneficiaries. This Agreement is intended for the
----------------------------
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. Unless this Agreement is terminated under Section 9(l),
--------
the representations and warranties of the Company and the Buyers contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive each of
the Closings. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Buyer shall have the right to
---------
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions as is
required by applicable law and regulations (although each Buyer shall be
consulted
27
<PAGE>
by the Company in connection with any such press release or other public
disclosure prior to its release and shall be provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to
------------------
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Initial Closing shall not have
-----------
occurred with respect to a Buyer on or before three (3) Business Days from the
date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated by the
Buyers pursuant to this Section 9(l), the Company shall remain obligated to
reimburse the Buyers for expenses up to the amount described in Section 4(i)
above.
m. Placement Agent. The Company acknowledges that it has not engaged
---------------
any placement agent in connection with the sale of the Preferred Shares and the
related Warrants. The Company shall be responsible for the payment of any
placement agent's fees or brokers' commissions relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorneys' fees and out of pocket expenses) arising in connection with any such
claim.
n. No Strict Construction. The language used in this Agreement will
----------------------
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
o. Remedies. Each Buyer and each holder of the Securities shall have
--------
all rights and remedies set forth in the Transaction Documents and the
Certificate of Designations and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the
rights which such holders have under any law. Any person having any rights
under any provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
p. Payment Set Aside. To the extent that the Company makes a payment
-----------------
or payments to the Buyers hereunder or pursuant to the Registration Rights
Agreement, the Certificate of Designations or the Warrants or the Buyers enforce
or exercise their rights hereunder or thereunder, and such payment or payments
or the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any
28
<PAGE>
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
* * * * * *
29
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
COMPANY: BUYERS:
MEDCARE TECHNOLOGIES, INC. HFTP INVESTMENT L.L.C.
By: Promethean Asset Management L.L.C.
Its: Investment Manager
By:______________________________
Name: __________________________
Title: __________________________ By: ______________________________
Name: E. Kurt Kim
Its: Authorized Signatory
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: ______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By: ______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
<PAGE>
[Signature Page to Securities Purchase Agreement - p. 2 of 2]
AG SUPER FUND INTERNATIONAL PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By: ______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAPHAEL, L.P.
By: ______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By: ______________________________
Name: Michael L. Gordon
Its: Managing Officer
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Number Of
Initial
Investor Address Preferred Investor's Representatives' Address
Investor Name And Facsimile Number Shares And Facsimile Number
- ------------------------ ------------------------------------- --------- -----------------------------------
<S> <C> <C> <C>
HFTP Investment L.L.C. c/o Promethean Asset Management L.L.C. 200 Promethean Asset Management L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: E. Kurt Kim Attn: E. Kurt Kim
James F. O'Brien, Jr. James F. O'Brien, Jr.
Telephone: 212-698-0580 Telephone: 212-698-0580
Facsimile: 212-98-0505 Facsimile: 212-698-0505
Residence: New York
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Telephone: 312-902-5200
Facsimile: 312-902-1061
Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. 110 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: Cayman Islands
GAM Arbitrage Investments, c/o Angelo, Gordon & Co., L.P. 15 Angelo, Gordon & Co., L.P.
Inc. 245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: British Virgin Islands
AG Super Fund International c/o Angelo, Gordon & Co., L.P. 15 Angelo, Gordon & Co., L.P.
Partners, L.P. 245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: Cayman Islands
Raphael, L.P. c/o Angelo, Gordon & Co., L.P. 20 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: Cayman Islands
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Of
Initial
Investor Address Preferred Investor's Representatives' Address
Investor Name And Facsimile Number Shares And Facsimile Number
- ------------------------ ---------------------------------- --------- -----------------------------------
<S> <C> <C> <C>
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. 40 Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Residence: Bermuda
</TABLE>
<PAGE>
SCHEDULES
---------
Schedule of Buyers
Schedule 3(a) - Subsidiaries
Schedule 3(c) - Capitalization
Schedule 3(e) - Conflicts
Schedule 3(g) - Material Changes
Schedule 3(h) - Litigation
Schedule 3(n) - Intellectual Property
Schedule 3(p) - Liens
Schedule 3(u) - Tax Status
Schedule 3(v) - Certain Transactions
Schedule 4(d) - Use of Proceeds
EXHIBITS
--------
Exhibit A - Form of Certificate of Designations, Preferences and
Rights of the Preferred Shares
Exhibit B - Form of Registration Rights Agreement
Exhibit C - Form of Company Counsel Opinion
Exhibit D - Form of Irrevocable Transfer Agent Instructions
Exhibit E - Form of Warrant
Exhibit F - Escrow Agreement
<PAGE>
Exhibit B
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK
OF
MEDCARE TECHNOLOGIES, INC.
Medcare Technologies, Inc. (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that, pursuant to authority conferred upon the Board of Directors of the
Company by the Certificate of Incorporation, as amended, of the Company, and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
the Board of Directors of the Company at a meeting duly held adopted resolutions
(i) authorizing a series of the Company's previously authorized preferred stock,
par value $0.25 per share, and (ii) providing for the designations, preferences
and relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, of 1,000 shares of Series B Convertible
Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 800 shares of Series
B Convertible Preferred Stock (the "Preferred Shares"), par value $0.25 per
share, which shall have the following powers, designations, preferences and
other special rights:
(1) Dividends. The Preferred Shares shall bear dividends
---------
("Dividends") at a rate of 6.0% per annum, which shall be cumulative, accrue
daily from the Issuance Date (as defined below) and be payable either (i) in
shares of the Company's common stock, par value $0.001 per share, upon
conversion of the Preferred Shares or (ii) at the option of the Company, in cash
on the first day of each Calendar Quarter (as defined below) beginning on the
first day of the Calendar Quarter immediately following the Issuance Date (each
a "Dividend Date"). If a Dividend Date is not a Business Day (as defined below)
then the Dividend shall be due and payable on the Business Day immediately
following the Dividend Date. Dividends which accrue during any period shall be
payable in cash only if the Company provides written notice ("Dividend Election
Notice") to each holder of Preferred Shares at least 20 days prior to the
Dividend Date specifying the per share dividend amount to be paid (the "Cash
Dividend Amount"). The amount of any Dividend payable on the initial Dividend
Date or for any other period less than a full Calendar Quarter shall be prorated
and computed on the basis of a 365-day year and the actual number of days
elapsed. Any Dividends for which the Company has given a Dividend Election
Notice and which are not paid on the corresponding Dividend Date of such accrued
and unpaid Dividends' Dividend Date shall bear interest at the rate of 15.0% per
annum from such Dividend Date until the same is paid (the "Default
1
<PAGE>
Interest"). "Calendar Quarter" means each of the three-month periods ending on
March 31, June 30, September 30 and December 31, respectively.
(2) Holder's Conversion of Preferred Shares. A holder of Preferred
---------------------------------------
Shares shall have the right, at such holder's option, to convert the Preferred
Shares into shares of the common stock on the following terms and conditions:
(a) Conversion Right. Subject to Section 2(j), at any time or
----------------
times on or after the Issuance Date (as defined below), any holder of Preferred
Shares shall be entitled to convert any whole number of Preferred Shares into
fully paid and nonassessable shares (rounded to the nearest whole share in
accordance with Section 2(h)) of Common Stock, at the Conversion Rate (as
defined below); provided, however, that in no event shall any holder be entitled
to convert Preferred Shares in excess of that number of Preferred Shares which,
upon giving effect to such conversion, would cause the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates to
exceed 4.99% of the total outstanding shares of Common Stock following such
conversion. For purposes of the foregoing proviso, the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of the
Preferred Shares with respect to which the determination of such proviso is
being made, but shall exclude the number of shares of Common Stock which would
be issuable upon (i) conversion of the remaining, nonconverted Preferred Shares
beneficially owned by the holder and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company (including, without limitation, any warrants or convertible
preferred stock) subject to a limitation on conversion or exercise analogous to
the limitation contained herein beneficially owned by the holder and its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 2(a), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Section 2(a), in determining the number of outstanding shares Common
Stock a holder may rely on the number of outstanding shares of Common Stock as
reflected in (1) the Company's most recent Form 10-Q or Form 10-K, as the case
may be, (2) a more recent public announcement by the Company or (3) any other
notice by the Company or its transfer agent setting forth the number of shares
of Common Stock outstanding. Upon the written request of any holder, the Company
shall promptly, but in no event later than one (1) Business Day following the
receipt of such notice, confirm in writing to any such holder the number of
shares Common Stock then outstanding. In any case, the number of outstanding
shares Common Stock shall be determined after giving effect to conversions of
Preferred Shares and exercise of Warrants (as defined below) by such holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. Notwithstanding the foregoing, each holder of
Preferred Shares shall have the sole obligation to determine whether the
restrictions contained in this Section 2(a) apply to such holder.
(b) Conversion Rate. The number of shares of Common Stock
---------------
issuable upon conversion of each of the Preferred Shares pursuant to Sections
(2)(a) and 2(g) and Section 5 and for purposes of calculating the Redemption
Price of Company Redemption in Lieu of
2
<PAGE>
Conversion in Section 6(a) shall be determined according to the following
formula (the "Conversion Rate"):
Conversion Amount
-----------------
Conversion Price
For purposes of this Certificate of Designations, the following terms shall
have the following meanings:
(i) "Conversion Price" means, on a per share basis, as of the
Conversion Date (as defined below) or other date of determination of the
applicable Preferred Shares, the lesser of (A) the Variable Conversion Price (as
defined below) and (B) the Fixed Conversion Price (as defined below);
(ii) "Variable Conversion Price" means, as of any date of
determination, the product of the (A) Conversion Percentage (as defined below)
and (B) the Market Price (as defined below);
(iii) "Conversion Percentage" means, as of any date of
determination, 100%, subject to adjustment as provided herein;
(iv) "Market Price" means the lesser of (A) the average of the
ten lowest Closing Bid Prices of the Common Stock during the 40 consecutive
trading days immediately preceding a date of determination and (B) the Closing
Bid Price (as defined below) of the Common Stock on the date of determination;
(v) "Conversion Amount" means, on a per share basis, the sum
of (A) the Additional Amount (as defined below) and (B) $10,000;
(vi) "Additional Amount" means, on a per share basis, the
difference of (A) the sum of (I) unpaid Default Interest through the date of
determination plus (II) (.06) (N/365) ($10,000), minus (B) the sum of all Cash
Dividend Amounts paid in full prior to the date of determination;
(vii) "Fixed Conversion Price" means, 125% of the average of the
Closing Bid Prices for the Common Stock during the 5 consecutive trading days
immediately preceding the Issuance Date of such Preferred Share, subject to
adjustment as provided herein;
(viii) "N" means, the number of days from, but excluding, the
Issuance Date of the applicable Preferred Share through and including the
Conversion Date or the Maturity Date for the Preferred Shares for which
conversion and/or redemption is being elected, as the case may be;
3
<PAGE>
(ix) "Issuance Date" means, with respect to each Preferred
Share, the date of issuance of such Preferred Share;
(x) "Initial Issuance Date" means the first date on which
any Preferred Shares are issued by the Company;
(xi) "Business Day" means any day other than Saturday, Sunday
or other day on which commercial banks in the City of New York are authorized or
required by law to remain closed;
(xii) "Securities Purchase Agreement" means that certain
securities purchase agreement between the Company and the initial holders of the
Preferred Shares;
(xiii) "Registration Rights Agreement" means that certain
registration rights agreement between the Company and the initial holders of the
Preferred Shares relating to the filing of a registration statement covering the
resale of the Conversion Shares;
(xiv) "Conversion Shares" means shares of Common Stock issuable
upon conversion of Preferred Shares;
(xv) "Warrants" means the warrants to purchase shares of Common
Stock issued by the Company in accordance with the Securities Purchase
Agreement;
(xvi) "Closing Bid Price" means, for any security as of any
date, the last closing bid price for such security on The Nasdaq SmallCap Market
(as reported by Bloomberg Financial Markets ("Bloomberg")), or, if The Nasdaq
SmallCap Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded (as reported by
Bloomberg), or if the foregoing do not apply, the last closing bid price of such
security in the over-the-counter market on the electronic bulletin board (as
reported by Bloomberg) or if no closing bid price is reported by Bloomberg, the
last closing trade price of such security as reported by Bloomberg, or, if no
last closing trade price of such security is reported by Bloomberg, the average
of the bid prices of any market makers for such security as reported in the
"pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price
cannot be calculated for such security on such date on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the fair
market value as mutually determined by the Company and the holders of a majority
of the outstanding Preferred Shares (including for purposes of this
determination any Preferred Shares with respect to which the Closing Bid Price
is being determined). If the Company and the holders of Preferred Shares are
unable to agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 2(f)(iii). (All such
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period).
(c) Adjustment of Conversion Price for Failure to Obtain and Maintain
-----------------------------------------------------------------
Effectiveness of Registration Statement. If (i) the registration statement (the
- ---------------------------------------
"Registration
4
<PAGE>
Statement") covering the resale of all the applicable Registrable Securities (as
defined in the Registration Rights Agreement) and required to be filed by the
Company pursuant to the Registration Rights Agreement is not declared effective
by the Securities and Exchange Commission ("SEC") on or before the applicable
Effectiveness Deadline (as defined in the Registration Rights Agreement) or (ii)
on any day after the Registration Statement has been declared effective by the
SEC, sales of all the Registrable Securities required to be included in a
Registration Statement cannot be made (other than during any Allowable Grace
Period (as defined in Section 3(u) of the Registration Rights Agreement))
pursuant to the respective Registration Statement (whether because of a failure
to keep the Registration Statement effective, to disclose such information as is
necessary for sales to be made pursuant to the Registration Statement, to
register sufficient shares of Common Stock or otherwise but shall expressly
exclude the failure to make sales due to the absence of buyers for such
Registrable Securities) (a "Registration Default"), then, as relief for the
damages to any holder of Preferred Shares by reason of any such delay in or
reduction of its ability to sell the underlying shares of Common Stock (which
remedy shall not be exclusive of any other remedies available at law or in
equity), the Conversion Percentage and the Fixed Conversion Price shall be
adjusted as follows:
(I) Conversion Percentage. The Conversion Percentage
---------------------
in effect at such time shall be reduced by a number of percentage points
equal to the sum of (A) 1.25, if a Registration Statement is not declared
effective by its Effectiveness Deadline, plus (B) the product of (I) .05
multiplied by (II) the sum of (y) the number of days after such
Effectiveness Deadline that the relevant Registration Statement has not
been declared effective by the SEC and (z) the number of days during which
a Registration Default has occurred (such number of days in (y) and (z)
being collectively referred to as the "Registration Statement Default
Days"); and
(II) Fixed Conversion Price. The Fixed Conversion Price
----------------------
in effect at such time shall be reduced by an amount equal to the product
of (A) the Fixed Conversion Price in effect as of the Issuance Date
multiplied by (B) the sum of (I) .0125, if the Registration Statement is
not declared effective by the Effectiveness Deadline, plus (II) the product
of (x) .0005 multiplied by (y) the sum of the Registration Statement
Default Days.
(d) Adjustment to Conversion Price -- Dilution and Other Events. In
-----------------------------------------------------------
order to prevent dilution of the rights granted under this Certificate of
Designations, the Fixed Conversion Price, the Variable Conversion Price and the
Conversion Price will be subject to adjustment from time to time as provided in
this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon Issuance of Common
------------------------------------------------------------
Stock. Except as provided in Section 2(d)(iv), if during the period beginning
on the Initial Issuance Date and ending on the earlier of (A) the first
anniversary of the Initial Issuance Date or (B) the date which is 270 days after
the Initial Registration Statement is declared effective by the SEC (the
"Initial Adjustment Period"), the Company issues or sells, or is deemed to have
issued or sold, any shares of Common Stock (other than Preferred Shares or
shares of Common Stock issued upon
5
<PAGE>
conversion of Preferred Shares or deemed to have been issued by the Company in
connection with an Approved Stock Plan (as defined below) or Common Stock which
is an Excluded Security (as defined below)) for a consideration per share less
than a price equal to a Fixed Conversion Price in effect immediately prior to
such issuance or sale, then immediately after such issue or sale, the Fixed
Conversion Price then in effect shall be reduced to an amount equal to such
consideration per share received. Except as provided in Section 2(d)(iv), if and
whenever on or after the ending of the Initial Adjustment Period, or in the case
of an Excluded Security, if and whenever on or after the Initial Issuance Date,
the Company issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (other than Preferred Shares or shares of Common Stock issued upon
conversion of Preferred Shares or deemed to have been issued by the Company in
connection with an Approved Stock Plan (as defined below)) for a consideration
per share less than a price (the "Applicable Price") equal to the Fixed
Conversion Price in effect immediately prior to such issuance or sale, then
immediately after such issue or sale, the Fixed Conversion Price then in effect
shall be reduced to an amount equal to the product of (x) the Fixed Conversion
Price then in effect and (y) the quotient of (1) the sum of (I) the product of
the Applicable Price multiplied by the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale and (II)
the consideration, if any, received by the Company upon such issue or sale,
divided by (2) the product of (I) the Applicable Price multiplied by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such issue
or sale. For purposes of determining the adjusted Fixed Conversion Price under
this Section 2(d)(i), the following shall be applicable:
(A) Issuance of Options. If and whenever on or after the
-------------------
Initial Issuance Date, the Company in any manner grants any rights or
options to subscribe for or to purchase Common Stock (other than pursuant
to an Approved Stock Plan or upon conversion of the Preferred Shares) or
any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange
of such Convertible Securities is less than the Applicable Price, then the
total maximum number of shares of Common Stock issuable upon the exercise
of such Options or upon conversion or exchange of the total maximum amount
of such Convertible Securities issuable upon the exercise of such Options
at the time of issuance of such Options (without regard to limitations on
exercise, conversion or exchange) shall be deemed to be outstanding and to
have been issued and sold by the Company for such price per share. For
purposes of this Section 2(d)(i)(A), the "price per share for which Common
Stock is issuable upon exercise of such Options or upon conversion or
exchange of such Convertible Securities" is determined by dividing (I) the
total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise
of all such Options at the time of issuance of such Options (without regard
to limitations on exercise, conversion or exchange), plus in the case of
such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
issuance or sale of such Convertible Securities and the conversion or
exchange thereof, by (II) the total maximum number of
6
<PAGE>
shares of Common Stock issuable upon exercise of such Options at the time
of issuance of such Options (without regard to limitations on exercise,
conversion or exchange) or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. Except
as set forth in Section 2(d)(i)(C) below, no adjustment of the Fixed
Conversion Price shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If and whenever on
----------------------------------
or after the Initial Issuance Date, the Company in any manner issues or
sells any Convertible Securities and the price per share for which Common
Stock is issuable upon such conversion or exchange is less than the
Applicable Price, then the maximum number of shares of Common Stock
issuable upon conversion or exchange of such Convertible Securities at the
time of issuance of such Convertible Securities (without regard to
limitations on exercise, conversion or exchange) shall be deemed to be
outstanding and to have been issued and sold by the Company for such price
per share. For the purposes of this Section 2(d)(i)(B), the "price per
share for which Common Stock is issuable upon such conversion or exchange"
is determined by dividing (I) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the conversion or exchange thereof at
the time of issuance of such Convertible Securities (without regard to
limitations on exercise, conversion or exchange), by (II) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange
of all such Convertible Securities at the time of issuance of such
Convertible Securities (without regard to limitations on exercise,
conversion or exchange). Except as set forth in Section 2(d)(i)(C) below,
no adjustment of an Fixed Conversion Price shall be made upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is
made upon exercise of any Options for which adjustment of an Fixed
Conversion Price had been or are to be made pursuant to other provisions of
this Section 2(d)(i), no further adjustment of such Fixed Conversion Price
shall be made by reason of such issue or sale.
(C) Change in Option Price or Rate of Conversion. If the
---------------------------------------------
purchase price provided for in any Options, the additional consideration,
if any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Fixed
Conversion Price of any Preferred Shares in effect at the time of such
change shall be readjusted to the Fixed Conversion Price which would have
been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold; provided that no adjustment pursuant to
this Section 2(d)(i) shall be made if such adjustment would result in an
increase of such Fixed Conversion Price then in effect.
7
<PAGE>
(D) Certain Definitions. For purposes of determining the
-------------------
adjusted Fixed Conversion Price under this Section 2(d)(i), the following
terms have the meanings set forth below:
(I) "Approved Stock Plan" shall mean any stock option
or similar plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any
employee, officer or director.
(II) "Common Stock Deemed Outstanding" means, at any
given time, the number of shares of Common Stock actually outstanding at
such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(d)(i) hereof regardless of whether the
Options or Convertible Securities are actually exercisable at such time,
but excluding any shares of Common Stock owned or held by or for the
account of the Company or issuable upon conversion of the Preferred Shares
or exercise of the Warrants.
(III) "Options" means any rights, warrants or options
to subscribe for or purchase Common Stock or Convertible Securities.
(IV) "Convertible Securities" means any stock or
securities (other than Options) directly or indirectly convertible into or
exchangeable for Common Stock.
(V) "Excluded Securities" means any of the following
(i) shares of Common Stock or warrants for the purchase of Common Stock
issued by the Company for which (a) the aggregate purchase price for any
single transaction is less than $500,000, (b) the aggregate purchase price
for all transactions in the aggregate is less than $1,000,000 and (c) the
purchase price per share is not less than 85% of the Closing Bid Price of
the Common Stock on the trading day immediately preceding the issuance of
such Common Stock, provided that for the purpose of clauses (a) and (b)
above the aggregate purchase price of the transaction shall include the
value of any warrants issued and for the purpose of clause (c) above the
purchase price per share shall not include the value of any warrants issued
(the value of any warrants issued shall be calculated pursuant to the
Black-Scholes valuation method as of the date of issuance); (ii) warrants
issued by the Company to a public relations firm in connection with such
firm's performing services for the Company where (x) the Company is not
affiliated with such public relations firm, (y) the total compensation
received by such public relations firm (including the valuation of the
warrants as determined by Black-Scholes) is equivalent to the market price
for such services to be rendered, and (z) the strike or exercise price of
the warrants is not less than the Closing Bid Price of the Common Stock on
the day such warrants are issued; and (iii) any transaction involving the
Company's issuances of securities in connection with any strategic
partnership, joint venture or other strategic arrangement (where the
primary purpose of such transaction is not to raise equity capital).
8
<PAGE>
(E) Effect on Fixed Conversion Price of Certain Events. For
--------------------------------------------------
purposes of determining the adjusted Fixed Conversion Price under this
Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If any
-------------------------------------
Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. In case any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the average of the Closing Bid Prices of such securities
for the five consecutive trading days immediately preceding the date of
receipt. In case any Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion
of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the "Valuation Event"), the fair value of such
consideration will be determined within 48 hours of the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser
selected by the Company, which appraiser shall be reasonably acceptable to
two-thirds (2/3) of the holders of the Preferred Shares. The
determination of such appraiser shall be binding upon all parties absent
manifest error.
(II) Integrated Transactions. In case any Option is
-----------------------
issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for a consideration of $.01
and the aggregate consideration received by the Company in such integrated
transaction shall be included in the adjustment calculation in Section
2(d)(i) above.
(III) Treasury Shares. The number of shares of
---------------
Common Stock outstanding at any given time does not include shares owned or
held by or for the account of the Company, and the disposition of any
shares so owned or held will be considered an issue or sale of Common
Stock.
(IV) Record Date. If the Company takes a record of the
-----------
holders of Common Stock for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities, or (2) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such
9
<PAGE>
record date will be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the granting of such right of subscription or purchase, as the
case may be.
(ii) Adjustment of Fixed Conversion Price upon
-----------------------------------------
Subdivision or Combination of Common Stock. If the Company at any time
- ------------------------------------------
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, each Fixed Conversion Price in effect immediately prior to
such subdivision will be proportionately reduced. If the Company at any time
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, each
Fixed Conversion Price in effect immediately prior to such combination will be
proportionately increased. Any adjustment under this Section 2(d)(ii) shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
(iii) Reorganization, Reclassification, Consolidation,
------------------------------------------------
Merger or Sale. Any recapitalization, reorganization, reclassification,
- --------------
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person (as defined below) or other transaction in each case which is
effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock is referred to herein as
"Organic Change." Prior to the consummation of any Organic Change, the Company
will make appropriate provision (in form and substance satisfactory to the
holders of a majority of the Preferred Shares then outstanding) to insure that
each of the holders of the Preferred Shares will thereafter have the right to
acquire and receive in lieu of or in addition to (as the case may be) the shares
of Common Stock otherwise acquirable and receivable upon the conversion of such
holder's Preferred Shares, such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the conversion of such holder's Preferred Shares
had such Organic Change not taken place (without taking into account any
limitations or restrictions on the timing or amount of conversions). In any
such case, the Company will make appropriate provision (in form and substance
satisfactory to the holders of a majority of the Preferred Shares then
outstanding) with respect to such holders' rights and interests to insure that
the provisions of this Section 2(d) and Section 2(e) will thereafter be
applicable to the Preferred Shares (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is other than the Company, an immediate adjustment of each of the Fixed
Conversion Price to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, if the value so reflected is less than such
Fixed Conversion Price in effect immediately prior to such consolidation, merger
or sale and an immediate revision to the Fixed Conversion Price to reflect the
price of the common stock of the surviving entity and the market in which such
common stock is traded). The Company will not effect any such consolidation,
merger or sale, unless prior to the consummation thereof, the successor entity
(if other than the Company) resulting from consolidation or merger or the entity
purchasing such assets assumes, by written instrument (in form and substance
satisfactory to the holders of a majority of
10
<PAGE>
the Preferred Shares then outstanding), the obligation to deliver to each holder
of Preferred Shares such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to acquire. "Person"
shall mean an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a government
or any department or agency thereof.
(iv) Adjustment of Variable Conversion Price upon Issuance
-----------------------------------------------------
of Convertible Securities. If and whenever after the Issuance Date, the Company
- -------------------------
in any manner issues or sells Convertible Securities that are convertible into
or exercisable or exchangeable for Common Stock at a price which may vary with
the market price of the Common Stock (the formulation for such variable price
being herein referred to as, the "Variable Price") and such Variable Price is
not calculated using the same formula used to calculate the Variable Conversion
Price in effect immediately prior to the time of such issue or sale, the Company
shall provide written notice thereof via facsimile and overnight courier to each
holder of the Preferred Shares ("Variable Notice") on the date of issuance of
such Convertible Securities. If the holders of Preferred Shares representing at
least two-thirds (2/3) of the Preferred Shares then outstanding provide written
notice via facsimile and overnight courier (the "Variable Price Election
Notice") to the Company within five (5) Business Days of receiving a Variable
Notice that such holders desire to replace the Variable Conversion Price then in
effect with the Variable Price described in such Variable Notice, then from and
after the date of the Company's receipt of the Variable Price Election Notice
the Variable Conversion Price will automatically be replaced with the Variable
Price (together with such modifications to this Certificate of Designations as
may be required to give full effect to the substitution of the Variable Price
for the Variable Conversion Price), subject to further adjustments as provided
in this Certificate of Designations. A holder's delivery of a Variable Price
Election Notice shall serve as the consent required to amend this Certificate of
Designations pursuant to Section 15 below. In the event that a holder delivers a
Conversion Notice at any time after the Company's issuance of Convertible
Securities with a Variable Price but before such holder's receipt of the
Company's Variable Notice, then such holder shall have the option by written
notice to the Company to rescind such Conversion Notice or to have the
Conversion Price be equal to such Variable Price for the conversion effected by
such Conversion Notice.
(v) Certain Events. If any event occurs of the type
--------------
contemplated by the provisions of this Section 2(d) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Preferred
Shares; provided, however, that no such adjustment will increase the Conversion
Price as otherwise determined pursuant to this Section 2(d).
(vi) Adjustment of Fixed Conversion Price Upon Major
-----------------------------------------------
Corporate Event Announcement. In the event (A) the Company makes a public
- ----------------------------
announcement that it intends to consolidate or merge with or into another Person
or engage in a business combination involving the issuance or exchange of more
than 50% of the Company's outstanding Common Stock, (B) the Company makes a
public announcement that it intends to sell or transfer all or substantially all
of
11
<PAGE>
the Company's assets, or (C) any Person (including the Company) publicly
announces a purchase, tender or exchange offer for more than 50% of the
Company's outstanding Common Stock (the transactions described in clauses (A),
(B) and (C) above are hereinafter referred to as "Major Corporate Events" and
the date of the announcement referred to in clause (A), (B) or (C) is
hereinafter referred to as the "Announcement Date"), then the Fixed Conversion
Price, effective upon the Announcement Date and continuing through and including
the Adjusted Conversion Price Termination Date (as defined below), shall be
equal to the Conversion Price which would have been applicable for a conversion
by the holder on the Announcement Date. From and after the Adjusted Conversion
Price Termination Date, the Conversion Price shall be determined as set forth in
Section 2(b). For purposes hereof, "Adjusted Conversion Price Termination Date"
shall mean, with respect to any proposed Major Corporate Event for which a
public announcement as contemplated by this Section 2(c)(vi) has been made, the
date upon which the Company or other Person (in the case of clause (C) above)
consummates or publicly announces the termination or abandonment of the proposed
Major Corporate Event which was the subject of the previous public announcement.
(vii) Notices.
--------
(A) Promptly following, but in no event later than
one (1) Business Day after, any adjustment of the Conversion Price pursuant
to this Section 2(d), the Company will give written notice thereof to each
holder of the Preferred Shares, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(B) The Company will give written notice to each
holder of the Preferred Shares at least ten (10) days prior to the date on
which the Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II) with respect to
any pro rata subscription offer to holders of Common Stock, or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(C) The Company will also give written notice to each
holder of the Preferred Shares at least ten (10) days prior to the date on
which any Organic Change, dissolution or liquidation will take place and in
no event shall such notice be provided to such holder prior to such
information being made known to the public.
(viii) Minimum Adjustments; Calculations. No adjustment in
---------------------------------
the Conversion Price pursuant to Section 2(d)(i) shall be required unless
such adjustment would require a cumulative increase or decrease of at least
1% in such price; provided, however, that any adjustments that by reason of
this Section 2(d)(viii) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment until made.
All calculations under this Section 2(d)(viii) shall be made to the nearest
cent (with $.005 being rounded upward) or to the nearest one-tenth of a
share (with .05 of a share being rounded upward), as the case may be.
12
<PAGE>
(e) Purchase Rights. If at any time after the Initial
---------------
Issuance Date the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the "Purchase
Rights"), then the holders of the Preferred Shares will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete conversion of the Preferred
Shares (without taking into account any limitations or restrictions on the
timing or amount of conversions) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of the Common Stock are
to be determined for the grant, issue or sale of such Purchase Rights.
(f) Mechanics of Conversion. Subject to the Company's
-----------------------
inability to fully satisfy its obligations under a Conversion Notice (as defined
below) as provided for in Section 4:
(i) Holder's Delivery Requirements. To convert
------------------------------
Preferred Shares into full shares of Common Stock on any date (the "Conversion
Date"), the holder thereof shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m. Eastern Time, on such date, a
copy of a fully executed notice of conversion in the form attached hereto as
Exhibit I (the "Conversion Notice") to the Company or its designated transfer
- ---------
agent (the "Transfer Agent"), and (B) if required by Section 2(f)(vii),
surrender to a carrier, for overnight delivery to the Company as soon as
practicable following such date, the original certificate(s) representing the
Preferred Shares being converted (or an indemnification undertaking with respect
to such shares in the case of their loss, theft or destruction) (the "Preferred
Stock Certificate(s)"). Unless the shares issuable upon conversion are to be
issued in the same name as the name in which such Preferred Stock are
registered, each Preferred Stock Certificate surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to the Company duly
executed by the holder or such holder's duly authorized agent and pay an amount,
if any, sufficient to cover any applicable transfer or similar tax.
(ii) Company's Response. Upon receipt by the
------------------
Company of a facsimile copy of a Conversion Notice, the Company shall (A)
immediately send, via facsimile, a confirmation of receipt of such Conversion
Notice to such holder and (B) on the second Business Day following the date of
receipt, credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account with
The Depository Trust Company (the "DTC"); provided, however, if the DTC is
unable to credit the holder's account, then the Company shall, on or before the
second Business Day following receipt of the Conversion Notice issue and
surrender to a common carrier for overnight delivery to the address specified in
the Conversion Notice, a certificate, registered in the name of the holder or
its designee, for the number of shares of Common Stock to which the holder shall
be entitled pursuant to such request. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion is
greater than the number of Preferred Shares being converted, then the Company
shall, at its own expense, as soon as practicable and in no event later than
five (5) Business Days after the Company shall have received the applicable
Preferred Stock Certificate(s), issue and
13
<PAGE>
deliver to the holder a new Preferred Stock Certificate representing the number
of Preferred Shares not converted.
(iii) Dispute Resolution. In the case of a dispute
------------------
as to the determination of the Closing Bid Price or the arithmetic calculation
of the Conversion Rate, the Company shall promptly issue to the holder the
number of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via facsimile
within two (2) Business Days of receipt of such holder's Conversion Notice. If
such holder and the Company are unable to agree upon the determination of the
Closing Bid Price or arithmetic calculation of the Conversion Rate within two
(2) Business Days of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall within two (2) Business Day
submit via facsimile (A) the disputed determination of the Closing Bid Price to
an independent, reputable investment bank (which investment bank has been
approved by the holders of at least two-thirds (2/3) the Preferred Shares then
outstanding, which approval shall not be unreasonably withheld), or (B) the
disputed arithmetic calculation of the Conversion Rate to its independent,
outside accountant. The Company shall direct the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results as promptly as practicable,
but in no event later than four (4) Business Days from the time it receives the
disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all
parties absent manifest error.
(iv) Record Holder. The person or persons entitled
-------------
to receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within
-----------------------------------
five Business Days after the Company's or the Transfer Agent's (as applicable)
receipt of a facsimile copy of a Conversion Notice, the Company shall fail to
issue a certificate for the number of shares of Common Stock to which a holder
is entitled or to credit the holder's balance account with The Depository Trust
Company for such number of shares of Common Stock to which the holder is
entitled upon such holder's conversion of the Preferred Shares, pursuant to
Section 2(f)(ii), in addition to all other available remedies which such holder
may pursue hereunder and under the Securities Purchase Agreement (including
indemnification pursuant to Section 8 thereof), the Company shall pay additional
damages to such holder on each date after such fifth (5th) Business Day that
such conversion is not timely effected in an amount equal to 0.5% of the product
of (A) the sum of the number of shares of Common Stock not issued to the holder
on a timely basis pursuant to Section 2(f)(ii) and to which such holder is
entitled and (B) the Closing Bid Price of the Common Stock on the last possible
date which the Company could have issued such Common Stock to such holder
without violating Section 2(f)(ii).
(vi) Company's Failure to Issue Certificates. If
---------------------------------------
within ten (10) Business Days after the Company's receipt of the Preferred Stock
Certificates to be converted and the Conversion Notice the Company shall fail to
issue a new Preferred Stock Certificate representing
14
<PAGE>
the number of Preferred Shares to which such holder is entitled, pursuant to
Section 2(f)(ii), in addition to all other available remedies which such holder
may pursue hereunder and under the Securities Purchase Agreement (including
indemnification pursuant to Section 8 thereof), the Company shall pay additional
damages to such holder on each date after such tenth (10th) Business Day that
such delivery of such Preferred Stock Certificates is not timely effected in an
amount equal to 0 .5% of the product of (A) the number of shares of Common Stock
issuable upon conversion of the Preferred Shares represented by such Preferred
Stock Certificate as of the last possible date which the Company could have
issued such Preferred Stock Certificate to such holder without violating Section
2(f)(ii) and (B) the Closing Bid Price of the Common Stock on the last possible
date which the Company could have issued such Preferred Stock Certificate to
such holder without violating Section 2(f)(ii).
(vii) Book-Entry. Notwithstanding anything to the
----------
contrary set forth herein, upon conversion or redemption of Preferred Shares in
accordance with the terms hereof, the holder thereof shall not be required to
physically surrender the certificate representing the Preferred Shares to the
Company unless the full number of Preferred Shares represented by the
certificate are being converted or redeemed. The holder and the Company shall
maintain records showing the number of Preferred Shares so converted and the
dates of such conversions or shall use such other method, reasonably
satisfactory to the holder and the Company, so as not to require physical
surrender of the certificate representing the Preferred Shares upon each such
conversion. In the event of any dispute or discrepancy, such records of the
Company shall be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if Preferred Shares represented by a certificate
are converted as aforesaid, the holder may not transfer the certificate
representing the Preferred Shares unless the holder first physically surrenders
the certificate representing the Preferred Shares to the Company, whereupon the
Company will forthwith issue and deliver upon the order of the holder a new
certificate of like tenor, registered as the holder may request, representing in
the aggregate the remaining number of Preferred Shares represented by such
certificate. The holder and any assignee, by acceptance of a certificate,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of any Preferred Shares, the number of Preferred Shares
represented by such certificate may be less than the number of Preferred Shares
stated of the face thereof. Each certificate for Preferred Shares shall bear the
following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW
THE TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE PREFERRED SHARES REPRESENTED
BY THIS CERTIFICATE, INCLUDING SECTION 2(f)(vii) THEREOF.
THE NUMBER OF PREFERRED SHARES REPRESENTED BY THIS
CERTIFICATE MAY BE LESS THAN THE NUMBER OF PREFERRED SHARES
STATED ON THE FACE HEREOF PURSUANT TO SECTION 2(f)(vii) OF
THE CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS.
15
<PAGE>
(g) Mandatory Conversion. If any Preferred Shares
--------------------
remain outstanding on the Maturity Date (as defined below), then all such
Preferred Shares shall be converted into shares of Common Stock as of such date
in accordance with this Section 2 as if the holders of such Preferred Shares had
given the Conversion Notice on the Maturity Date; provided, however, that if a
Triggering Event has occurred and is continuing on the Maturity Date, then the
Company shall, within five Business Days following the Maturity Date (unless
otherwise notified in writing by the holder of such holder's request to have the
Preferred Shares converted into Common Stock), pay to each holder of Preferred
Shares then outstanding, in immediately available funds, an amount equal to the
Triggering Event Redemption Price (as defined below). All holders of Preferred
Shares shall, on the Maturity Date, surrender all Preferred Stock Certificates,
duly endorsed for cancellation, to the Company, provided that on such Maturity
Date the Company shall not currently be in violation of its obligations under
this Section 2(g) and Section 2(f) and the Company shall, promptly, but in no
event later than three (3) Business Days following the Maturity Date, credit the
aggregate number of shares of Common Stock to which each holder shall be
entitled to such holder's balance account at the Depository Trust Company,
unless the Company shall be otherwise directed by the holder in accordance with
the provisions of the Certificate of Designations. Notwithstanding the
foregoing, if the Common Stock is not designated for quotation on The Nasdaq
SmallCap Market or The Nasdaq National Market or listed on The New York Stock
Exchange, Inc. but such events do not constitute a Triggering Event, then the
Maturity Date shall be extended until the Common Stock is so designated or
listed. "Maturity Date" means the date which is five years after the applicable
Issuance Date, subject to extension as described in the immediately preceding
sentence.
(h) Fractional Shares. The Company shall not issue
-----------------
any fraction of a share of Common Stock upon any conversion. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a fraction of
a share of Common Stock. If, after the aforementioned aggregation, the issuance
would result in the issuance of a fraction of a share of Common Stock, the
Company shall round such fraction of a share of Common Stock up or down to the
nearest whole share.
(i) Taxes. The Company shall pay any and all taxes
-----
which may be imposed upon it with respect to the issuance and delivery of shares
of Common Stock upon the conversion of the Preferred Shares, provided, however,
that the Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issue or delivery of Common Stock or
other securities or property in a name other than that of the holders of the
Preferred Shares to be converted and such holder shall pay such amount, if any,
to cover any applicable transfer or similar tax.
(j) Conversion Restrictions. The right of a holder
-----------------------
of Preferred Shares to convert Preferred Shares pursuant to this Section 2 shall
be limited as set forth below. Without the prior consent of the Company, a
holder of Preferred Shares shall not be entitled to convert an aggregate number
of Preferred Shares from the Initial Issuance Date of such Preferred Shares
through the date of this determination in excess of the number of Preferred
Shares which when divided by the number of Preferred Shares purchased by such
holder on such Initial Issuance Date
16
<PAGE>
would exceed (i) 0.00 for the period beginning on the Initial Issuance Date and
ending on and including the date which is 120 days after the Initial Issuance
Date, (ii) 0.33 for the period beginning on and including the date which is 121
days after the Initial Issuance Date and ending on and including the date which
is 150 days after the Initial Issuance Date, (iii) 0.66 for the period beginning
on and including the date which is 151 days after the Initial Issuance Date and
ending on and including the date which is 180 days after the Initial Issuance
Date, and (iv) 1.00 for the period beginning on and including the date which is
181 days after the Initial Issuance Date and ending on and including the
Maturity Date. Notwithstanding the foregoing, the conversion restrictions set
forth in this Section 2(j) shall not apply (A) on and after any date on which
the Common Stock is not listed on The Nasdaq SmallCap Market, The Nasdaq
National Market or The New York Stock Exchange, Inc. or has been suspended from
trading (excluding suspensions of not more than one day resulting from business
announcements by the Company), or any such delisting or suspension is threatened
or pending (including, without limitation, the Company is not in compliance with
published listing requirements), (B) on or after any date on which there shall
have occurred an event constituting a Major Transaction (as defined in Section
3(c)), Triggering Event (as defined in Section 3(d) excluding a Triggering Event
pursuant to Section 3(d)(v)) or a Material Adverse Change (as defined below),
(C) on or after any date on which there shall have been a public announcement of
a pending Major Transaction, (D) on or after the date the Company delivers a
Notice of Conversion at Company's Election (as defined in Section 5), (E) with
respect to any conversion of Preferred Shares at a price equal to the Fixed
Conversion Price then in effect, or (F) on or after the first date on which the
average of the Closing Bid Prices of the Common Stock on the twenty (20)
consecutive trading days immediately preceding such date is less than $3.00
(subject to adjustment for stock splits, stock dividends, stock combinations and
other similar transactions). "Material Adverse Change" means any change, event,
result or happening not in the normal course of the Company's business or
operations involving, directly or indirectly, the Company or any of its
subsidiaries resulting in a material adverse effect on the business, properties,
assets, operations, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole.
(k) Adjustment of Conversion Restrictions upon
------------------------------------------
Issuance of Convertible Securities. If the Company in any manner issues or sells
- ----------------------------------
Convertible Securities that are convertible into Common Stock and are subject to
(i) restrictions on the amount of shares that can be converted, or (ii) no
restrictions on the amount of shares that can be converted (the restriction on
conversions or lack thereof being herein referred to as the "Conversion
Restriction"), and such Conversion Restriction is not formulated using the same
time periods and percentages used in Section 2(j), then the Company shall
provide written notice thereof via facsimile and overnight courier to each
holder of the Preferred Shares ("Conversion Restriction Notice") on the date of
issuance of such Convertible Securities. If the holders of Preferred Shares
representing at least two-thirds (2/3) of the Preferred Shares then outstanding
which remain subject to the restrictions in Section 2(j) provide written notice
via facsimile and overnight courier (the "Conversion Restriction Election
Notice") to the Company within five (5) Business Days of receiving a Conversion
Restriction Notice that such holders desire to replace the conversion
restrictions set forth in Section 2(j) then in effect with the Conversion
Restriction described in such Conversion Restriction Notice, then from and after
the date of the Company's receipt of the Conversion Restriction Election Notice
the conversion restrictions set forth in Section 2(j) automatically will be
replaced with the Conversion Restrictions (together
17
<PAGE>
with such modifications to this Certificate of Designations as may be required
to give full effect to the substitution of the Conversion Restrictions for the
conversion restrictions set forth in Section 2(j)). A holder's delivery of a
Conversion Restriction Election Notice shall serve as the consent required to
amend this Certificate of Designations pursuant to Section 15 below.
(3) Redemption at Option of Holders.
-------------------------------
(a) Redemption Option Upon Major Transaction. In addition to all
----------------------------------------
other rights of the holders of Preferred Shares contained herein, simultaneous
with or after the occurrence of a Major Transaction (as defined below),
provided, that the consummation or public announcement of such Major Transaction
shall have occurred during the period beginning on the Issuance Date of the
applicable Preferred Shares and ending on the later of (a) the first anniversary
of such Issuance Date and (b) the date which is 270 days after the date the
Registration Statement registering the applicable Registrable Securities is
declared effective by the SEC, each holder of Preferred Shares shall have the
right, at such holder's option, but solely in accordance with the provisions of
Section 3(e), to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to the greater of (i) 115%
of the Liquidation Value (as defined in Section 11); and (ii) the product of (A)
the Conversion Rate at such time, and (B) the Closing Bid Price on the date of
the public announcement of such Major Transaction or the next date on which the
exchange or market on which the Common Stock is traded is open if such public
announcement is made (X) after 12:00 p.m. Eastern Time, on such date or (Y) on a
date on which the exchange or market on which the Common Stock is traded is
closed (the "Major Transaction Redemption Price").
(b) Redemption Option Upon Triggering Event. In addition to all
---------------------------------------
other rights of the holders of Preferred Shares contained herein, simultaneous
with or after the occurrence of a Triggering Event (as defined below), each
holder of Preferred Shares shall have the right, at such holder's option, but
solely in accordance with the provisions of 3(f), to require the Company to
redeem all or a portion of such holder's Preferred Shares at a price per
Preferred Share equal to the greater of (X) 115% of the Liquidation Value and
(Y) the product of (A) the Conversion Rate at such time, and (B) the greater of
(I) the Closing Bid Price on the trading day immediately preceding such
Triggering Event or (II) the Closing Bid Price on the date of the holder's
delivery to the Company of a Notice of Redemption at Option of Buyer Upon
Triggering Event (as defined below) or, if such date of delivery is not a
trading day, the next date on which the exchange or market on which the Common
Stock is traded is open (the "Triggering Event Redemption Price" and,
collectively with the Major Transaction Redemption Price, the "Redemption
Price").
(c) "Major Transaction". A "Major Transaction" shall be deemed
-------------------
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business combination
of the Company with or into another Person (other than (A) a consolidation,
merger or other business combination in which holders of the Company's voting
power immediately prior to the transaction continue after the transaction to
hold, directly or indirectly, the voting power of the surviving entity
18
<PAGE>
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company);
(ii) the sale or transfer of all or substantially all of
the Company's assets; or
(iii) a purchase, tender or exchange offer made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock.
(d) "Triggering Event". A "Triggering Event" shall be deemed to
-----------------
have occurred at such time as any of the following events:
(i) the failure of the Registration Statement (as defined
in the Registration Rights Agreement) to be declared effective by the SEC on or
prior to the date that is 180 days after the applicable Issuance Date;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
a Registration Default continues for a period of ten consecutive trading days;
(iii) suspension from listing or delisting of the Common
Stock from The Nasdaq SmallCap Market, The Nasdaq National Market or The New
York Stock Exchange, Inc. for a period of five consecutive days;
(iv) the Company's failure to deliver Conversion Shares
within 10 days of the Conversion Date or the Company's notice to any holder of
Preferred Shares, including by way of public announcement, at any time, of its
intention not to comply with proper requests for conversion of any Preferred
Shares into shares of Common Stock, including due to any of the reasons set
forth in Section 4(a) below; or
(v) the Company breaches any representation, warranty,
covenant or other term or condition of the Securities Purchase Agreement, the
Registration Rights Agreement, this Certificate of Designations or any other
agreement, document, certificate or other instrument delivered in connection
with the transactions contemplated thereby or hereby, except to the extent that
such breach would not have a Material Adverse Effect (as defined in Section 3(a)
of the Securities Purchase Agreement) and except, in the case of a breach of a
covenant which is curable, only if such breach continues for a period of at
least 10 days.
(e) Mechanics of Redemption at Option of Buyer Upon Major
-----------------------------------------------------
Transaction. No later than 5 days prior to the public announcement of such Major
- -----------
Transaction, the Company shall deliver written notice thereof via facsimile and
overnight courier (a "Notice of Major Transaction") to each holder of Preferred
Shares. At any time after receipt of a Notice of Major Transaction (or, in the
event a
19
<PAGE>
Notice of Major Transaction is not delivered at least 5 days prior to a Major
Transaction, at any time on or after the date which is 5 days prior to a Major
Transaction but in no event later than two (2) days prior to consummation of
such Major Transaction), any holder of the Preferred Shares then outstanding may
require the Company to redeem all or a portion of the holder's Preferred Shares
then outstanding by delivering written notice thereof via facsimile and
overnight courier (a "Notice of Redemption at Option of Buyer Upon Major
Transaction") to the Company, provided, however, that the holders shall only
have the right to submit a Notice of Redemption at Option of Buyer upon Major
Transaction so long as (A) the average of the Closing Bid Prices for the five
consecutive trading days immediately preceding each trading day during the
period beginning on the date immediately following the announcement of such
Major Transaction and ending on and including the date the Notice of Redemption
at Option of Buyer upon Major Transaction is sent to the Company shall be
greater than the Fixed Conversion Price as in effect on such trading day and (B)
in the case of a Major Transaction pursuant to Section 3(c)(iii) above, the
tender offer price is less than $4.50 per share (as adjusted for stock split,
stock dividends, stock combinations and other similar transactions) or the
tender offer price is less than the than the average of the Closing Bid Prices
of the Common Stock for the five consecutive trading days immediately preceding
the day such Major Transaction was first publicly announced. The Notice of
Redemption at Option of Buyer Upon Major Transaction shall indicate (i) the
number of Preferred Shares that such holder is submitting for redemption, and
(ii) the applicable Major Transaction Redemption Price, as calculated pursuant
to Section 3(a).
(f) Mechanics of Redemption at Option of Buyer Upon Triggering
----------------------------------------------------------
Event. Within two (2) Business Days after the occurrence of a Triggering Event,
- -----
the Company shall deliver written notice thereof via facsimile and overnight
courier (a "Notice of Triggering Event") to each holder of Preferred Shares. At
any time after the earlier of a holder's receipt of a Notice of Triggering Event
and such holder becoming aware of a Triggering Event, any holder of Preferred
Shares then outstanding may require the Company to redeem all or a portion of
the holder's Preferred Shares then outstanding by delivering written notice
thereof via facsimile and overnight courier (a "Notice of Redemption at Option
of Buyer Upon Triggering Event") to the Company, provided that such Notice of
Redemption at Option of Buyer upon Triggering Event may only be sent during the
period beginning on the date of the occurrence of the Triggering Event and
ending on the later of the date which is (a) 30 days after the date on which
such holder of the Preferred Shares receives a Notice of Triggering Event from
the Company, (b) 30 days after the termination of the Escrow Agreement, between
the initial holders of the Preferred Shares, the Company and American National
Bank and Trust Company of Chicago, in accordance with Section 9 thereof, and (c)
the date on which such Triggering Event is cured, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the number of Preferred
Shares that such holder is submitting for redemption, and (ii) the applicable
Triggering Event Redemption Price, as calculated pursuant to Section 3(b).
(g) Payment of Redemption Price. Upon the Company's receipt of a
---------------------------
Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a Notice(s)
of Redemption at Option of Buyer Upon Major Transaction from any holder of
Preferred Shares, the Company shall promptly but in no event later than one (1)
Business Day, notify each holder of Preferred Shares by
20
<PAGE>
facsimile of the Company's receipt of such Notice(s) of Redemption at Option of
Buyer Upon Triggering Event or Notice(s) of Redemption at Option of Buyer Upon
Major Transaction and each holder which has sent such a notice shall promptly
submit, if required by Section(2)(f)(vii), to the Company or its Transfer Agent
such holder's Preferred Stock Certificates which such holder has elected to have
redeemed. The Company shall deliver the applicable Triggering Event Redemption
Price, in the case of a redemption pursuant to Section 3(f), to such holder
within ten (10) Business Days after the Company's receipt of a Notice of
Redemption at Option of Buyer Upon Triggering Event and, in the case of a
redemption pursuant to Section 3(e), the Company shall deliver the applicable
Major Transaction Redemption Price contemporaneously with the consummation of
the Major Transaction; provided that, if required by Section 2(f)(vii), a
holder's Preferred Stock Certificates shall have been so delivered to the
Company; provided further that if the Company is unable to redeem all of the
Preferred Shares to be redeemed, the Company shall redeem an amount from each
holder of Preferred Shares being redeemed equal to such holder's pro-rata amount
(based on the number of Preferred Shares held by such holder relative to the
number of Preferred Shares outstanding) of all Preferred Shares being redeemed.
If the Company shall fail to redeem all of the Preferred Shares submitted for
redemption (other than pursuant to a dispute as to the arithmetic calculation of
the Redemption Price), in addition to any remedy such holder of Preferred Shares
may have under this Certificate of Designation, the Securities Purchase
Agreement and the Registration Rights Agreement, the applicable Redemption Price
payable in respect of such unredeemed Preferred Shares shall bear interest at
the rate of 1.25% per month (prorated for partial months) until paid in full. In
the event that the Company fails to pay such unpaid applicable Redemption Price
in full to a holder of Preferred Shares by the 10/th/ Business Day following
delivery of a Notice of Redemption at Option of Buyer Upon Triggering Event or
contemporaneously with the consummation of the Major Transaction, such holder
shall have the option (the "Void Optional Redemption Option") to, in lieu of
redemption, require the Company to promptly return to such holder(s) all of the
Preferred Shares that were submitted for redemption by such holder(s) under this
Section 3 and for which the applicable Redemption Price has not been paid, by
sending written notice thereof to the Company via facsimile (the "Void Optional
Redemption Notice"). Upon the Company's receipt of such Void Optional Redemption
Notice(s) prior to payment of the full applicable Redemption Price to such
holder, (i) the Notice(s) of Redemption at Option of Buyer Upon Triggering Event
or the Notice(s) of Redemption at Option of Buyer Upon Major Transaction, as the
case may be, shall be null and void with respect to those Preferred Shares
submitted for redemption and for which the applicable Redemption Price has not
been paid, (ii) the Company shall immediately return any Preferred Share
Certificates submitted to the Company by each holder for redemption under this
Section 3(g) and for which the applicable Redemption Price has not been paid and
(iii) the Fixed Conversion Price of such returned Preferred Shares shall be
adjusted to the lesser of (A) the Fixed Conversion Price as in effect on the
date on which the Void Optional Redemption Notice(s) is delivered to the Company
and (B) the lowest Closing Bid Price during the period beginning on the date on
which the Notice(s) of Redemption of Option of Buyer Upon Major Transaction or
the Notice(s) of Redemption at Option of Buyer Upon Triggering event, as the
case may be, is delivered to the Company and ending on the date on which the
Void Optional Redemption Notice(s) is delivered to the Company; provided that no
adjustment shall be made if such adjustment would result in an increase of the
Fixed Conversion Price then in effect. Notwithstanding the foregoing, in the
event of a dispute as to the determination of the Closing Bid Price or the
arithmetic calculation
21
<PAGE>
of the Redemption Price, such dispute shall be resolved pursuant to Section
2(f)(iii) above with the term "Redemption Price" being substituted for the term
"Conversion Rate". A holder's delivery of a Void Optional Redemption Notice and
exercise of its rights following such notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of such
notice. Payments provided for in this Section 3 shall have priority to payments
to other stockholders (other than the holders of the Series A Preferred Stock)
in connection with a Major Transaction .
(4) Inability to Fully Convert.
--------------------------
(a) Holder's Option if Company Cannot Fully Convert. If, upon
-----------------------------------------------
the Company's receipt of a Conversion Notice or on the Maturity Date, the
Company cannot issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation, because
the Company (I) does not have a sufficient number of shares of Common Stock
authorized and available, (II) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
Securities, including without limitation the Exchange Cap (as defined in Section
14 below), from issuing all of the shares of Common Stock which are to be issued
to a holder of Preferred Shares pursuant to a Conversion Notice or (III) fails
to have a sufficient number of shares of Common Stock registered for resale
under the Registration Statement, then the Company shall issue as many shares of
Common Stock as it is able to issue in accordance with such holder's Conversion
Notice and pursuant to Section 2(f) and, with respect to the unconverted
Preferred Shares, the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("Mandatory Redemption") at a
price per Preferred Share (the "Mandatory Redemption Price") equal to the
product of (A) the Conversion Rate and (B) the Closing Bid Price as of such
Conversion Date;
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(III), require the Company to issue restricted
shares of Common Stock in accordance with such holder's Conversion Notice and
pursuant to Section 2(f);
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were to be
converted pursuant to such holder's Conversion Notice (provided that a holder's
voiding its Conversion Notice shall not effect the Company's obligations to make
any payments which have accrued prior to the date of such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(iii), require
the Company to issue shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(f) at a Conversion Price equal to
the average of Closing Bid Prices of the Common Stock for the five
22
<PAGE>
consecutive trading days preceding such holder's Notice in Response to Inability
to Convert (as defined below) or such other market price that satisfies the
applicable exchange or trading market.
(b) Mechanics of Fulfilling Holder's Election. The Company shall
-----------------------------------------
promptly, but in no event later than two (2) Business Days send via facsimile to
a holder of Preferred Shares, upon receipt of a facsimile copy of a Conversion
Notice from such holder which cannot be fully satisfied as described in Section
4(a), a notice of the Company's inability to fully satisfy such holder's
Conversion Notice (the "Inability to Fully Convert Notice"). Such Inability to
Fully Convert Notice shall indicate (i) the reason why the Company is unable to
fully satisfy such holder's Conversion Notice, (ii) the number of Preferred
Shares which cannot be converted and (iii) the applicable Mandatory Redemption
Price. Such holder shall notify the Company of its election pursuant to Section
4(a) above by delivering written notice no later than ten (10) Business Days
from the Date of receipt of the Inability to Fully Convert Notice via facsimile
to the Company ("Notice in Response to Inability to Convert").
(c) Payment of Mandatory Redemption Price. If a holder shall
-------------------------------------
elect to have its Preferred Shares redeemed pursuant to Section 4(a)(i), the
Company shall pay the Mandatory Redemption Price in cash to such holder within
ten (10) Business Days of the Company's receipt of the holder's Notice in
Response to Inability to Convert. If the Company shall fail to pay the
applicable Mandatory Redemption Price to such holder on a timely basis as
described in this Section 4(c) (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the Redemption Price), in
addition to any remedy such holder of Preferred Shares may have under this
Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement, such unpaid amount shall bear interest at the
rate of 1.25% per month (prorated for partial months) until paid in full. In the
event that Company fails to pay the Mandatory Redemption Price in full to such
holder by the 10/th/ Business Day following delivery of a Notice in Response to
Inability to Convert, such holder may void the Mandatory Redemption with respect
to those Preferred Shares for which the full Mandatory Redemption Price has not
been paid and (i) receive back such Preferred Shares and (ii) the Fixed
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (A) the Fixed Conversion Price in effect on the date on which the
holder voided the Mandatory Redemption and (B) the lowest Closing Bid Price
during the period beginning on the Conversion Date and ending on the date the
holder voided the Mandatory Redemption. Notwithstanding the foregoing, if the
Company fails to pay the applicable Mandatory Redemption Price within such ten-
day period due to a dispute as to the determination of the arithmetic
calculation of the Redemption Price, such dispute shall be resolved pursuant to
Section 2(f)(iii) with the term "Redemption Price" being substituted for the
term "Conversion Rate".
(d) Pro-rata Conversion and Redemption. In the event the Company
-----------------------------------
receives a Conversion Notice, Notice of Redemption at Option of Buyer Upon Major
Transaction or Notice of Redemption at Option of Buyer Upon Triggering Event
from more than one holder of Preferred Shares on the same day and the Company
can convert and/or redeem some, but not all, of the Preferred Shares pursuant to
this Section 4, the Company shall convert and redeem from each holder of
Preferred Shares electing to have Preferred Shares converted and redeemed at
such time an amount equal to such holder's pro-rata amount (based on the number
of Preferred Shares held by
23
<PAGE>
such holder relative to the number of Preferred Shares outstanding) of all
Preferred Shares being converted and redeemed at such time.
(5) Conversion at the Company's Election. On any day immediately
------------------------------------
following at least thirty (30) consecutive trading days during which the Closing
Bid Price of the Common Stock on each trading day during such thirty (30)
consecutive trading days is not less than 200% of the applicable Fixed
Conversion Price in effect on the first day of such thirty (30) consecutive
trading days, the Company shall have the right, in its sole discretion, to
require that any or all of the outstanding Preferred Shares be converted
("Conversion at Company's Election") at the Conversion Rate; provided that the
Conditions to Conversion at the Company's Election (as set forth below) and the
other terms of this Section 5 are satisfied. The Company shall exercise its
right to Conversion at Company's Election by providing each holder of Preferred
Shares written notice ("Notice of Conversion at Company's Election") at least
twenty (20) trading days prior to the date selected by the Company for
conversion ("Company's Election Conversion Date"). If the Company elects to
require conversion of some, but not all, of such Preferred Shares, the Company
shall convert an amount from each holder of Preferred Shares equal to such
holder's pro rata amount (based on the number of such Preferred Shares held by
such holder relative to the number of such Preferred Shares outstanding on date
of the Company's delivery of the Notice of Conversion at Company's Election) of
all Preferred Shares the Company is requiring to be converted. The Notice of
Conversion at Company's Election shall indicate (x) the number of Preferred
Shares the Company has selected for conversion, (y) the Company's Election
Conversion Date, which date shall be not less than 20 or more than 30 trading
days after each holder's receipt of such notice, and (z) each holder's pro rata
share of outstanding Preferred Shares the Company is requiring to be converted.
All Preferred Shares selected for conversion in accordance with the provision of
this Section 5 and which have not been converted prior to the Company's Election
Conversion Date shall be converted as of the Company's Election Conversion Date
in accordance with Section 2 as if the holders of such Preferred Shares selected
by the Company to be converted had given the Conversion Notice on the Company's
Election Conversion Date and the Company's Election Conversion Date were the
holder's Conversion Date. If required by Section 2(f)(vii), all holders of
Preferred Shares shall thereupon and in no event later than two Business Days
after the Company's Election Conversion Date surrender all Preferred Stock
Certificates selected for conversion, duly endorsed for cancellation, to the
Company. "Conditions to Conversion at the Company's Election" means the
following conditions: (i) on each day during the period beginning 90 days prior
to the date of the Company's Notice of Conversion at Company's Election and
ending on and including the Company's Election Conversion Date, the Registration
Statement shall be effective and available for the sale of no less than 100% of
the sum of (A) the number of shares of Common Stock then issuable upon the
conversion of all outstanding Preferred Shares and exercise of all outstanding
Warrants (in each case, without regard to any limitations on conversion or
exercise herein or elsewhere), and (B) the number of Conversion Shares that are
then held by the holders of the Preferred Shares and Warrant Shares that are
then held by the holders of the Warrants; (ii) on each day during the period
beginning on and including the date which is thirty (30) trading days prior to
the date of receipt by the holders of Preferred Shares of the Company's Notice
of Conversion at Company's Election and ending on and including the Company's
Election Conversion Date, the Common Stock is designated for quotation on The
Nasdaq SmallCap Market, The Nasdaq National Market or listed on The New York
Stock
24
<PAGE>
Exchange, Inc. and is not suspended from trading; (iii) on each day during the
thirty (30) consecutive trading days immediately preceding the date of the
receipt by the holders of Preferred Shares of the Notice of Conversion at
Company's Election, the Closing Bid Price of the Common Stock is at least 200%
of the Fixed Conversion Price in effect on the first day of such thirty (30)
consecutive trading days; (iv) on each day during the period beginning on and
including the date of the receipt by the holders of Preferred Shares of the
Notice of Conversion at Company's Election and ending on and including the
Company's Election Conversion Date, the Closing Bid Price of the Common Stock is
at least 80% of the Closing Bid Price on the trading day immediately preceding
the date of the receipt by the holders of Preferred Shares of the Notice of
Conversion at Company's Election; (v) during the period beginning on the Initial
Issuance Date and ending on and including the Company's Election Conversion
Date, the Company shall have delivered all Conversion Shares upon conversion of
the Preferred Shares to the holders of Preferred Shares on a timely basis as set
forth in Section 2(f)(ii) of this Certificate of Designations; (vi) during the
period beginning 60 trading days prior to the date of the Company's Notice of
Conversion at the Company's Election and ending on and including the Company's
Election Conversion Date there shall not have occurred a Triggering Event nor
shall a Triggering Event be continuing which shall not have been cured (in each
case, other than a Triggering Event set forth in Section 3(d)(v)); (vii) during
the period beginning on the Initial Issuance Date and ending on and including
the Company's Election Conversion Date, there shall not have occurred the
consummation of a Major Transaction or a public announcement of a pending Major
Transaction which has not been abandoned or terminated; (viii) the Company shall
not have completed more than four (4) prior Conversion at the Company's
Elections; (ix) during the period beginning 30 trading days prior to the date of
the Company's Notice of Conversion at Company's election and ending on and
including the Company's Election Conversion Date, there shall not have been any
Grace Period under Section 3(u) of the Registration Rights Agreement; and (x)
the Company otherwise has satisfied its obligations and is not in default under
this Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement, provided, however, that if a Buyer shall have
waived in writing its right to redeem which resulted either pursuant to a
Triggering Event or a Major Transaction, then the Company shall not be required
to satisfy clauses (vi) and (vii) hereof in order to require such Buyer to
convert any or all of its Preferred Shares at the Company's election pursuant to
this Section 5. Notwithstanding the above, any holder of Preferred Shares may
convert such shares (including Preferred Shares selected for conversion) into
Common Stock pursuant to Section 2(a) on or prior to the date immediately
preceding the Company's Election Conversion Date.
(6) Company's Right to Redeem in Lieu of Conversion. Subject to the
-----------------------------------------------
terms and conditions of this Section 6, at any time after the Initial Issuance
Date, and so long as the Company has provided appropriate notice as described
below, the Company may elect to redeem Preferred Shares submitted for conversion
in lieu of converting such Preferred Shares, provided that the Conversion Price
for such Preferred Shares (as reflected in the Conversion Notice for such
Preferred Shares) on the Conversion Date is less than a price (the "Redemption
in Lieu of Conversion Trigger Price") equal to the Market Price on the Initial
Issuance Date (appropriately adjusted for any stock split, stock dividend,
combination or other similar transaction) (a "Company Redemption in Lieu of
Conversion"). If the Company elects to redeem some, but not all, of the
Preferred Shares submitted for conversion, the Company shall redeem a number of
Preferred Shares from each holder
25
<PAGE>
of Preferred Shares submitted for conversion on the applicable date equal to
such holder's pro-rata amount (based on the number of Preferred Shares held by
such holder relative to the number of Preferred Shares outstanding) of all
Preferred Shares submitted for conversion which the Company elects to redeem.
(a) Redemption Price of Company Redemption in Lieu of Conversion. The
------------------------------------------------------------
"Redemption Price of Company Redemption in Lieu of Conversion" shall be an
amount per Preferred Share equal to the product of (i) the Conversion Rate on
the applicable Conversion Date and (ii) the Closing Bid Price on the Conversion
Date.
(b) Mechanics of Company Redemption in Lieu of Conversion. The
-----------------------------------------------------
Company shall exercise its right to redeem by delivering written notice by
facsimile and overnight courier ("Notice of Company Redemption in Lieu of
Conversion") to (i) each holder of the Preferred Shares and (ii) the Transfer
Agent. Such Notice of Company Redemption in Lieu of Conversion shall indicate
(A) the maximum, if any, aggregate number of Preferred Shares which the Company
will redeem in connection with the Company Redemption in Lieu of Conversion and
(B) confirm the time period during which the Company may effect Company
Redemption in Lieu of Conversion, which period shall begin on and include the
date which is five Business Days after the date of delivery to all of the
holders of the Notice of Redemption in Lieu of Conversion and shall end on and
include the date which is 30 calendar days after the fifth business day
following the date of receipt by all of the holders of the Notice of Redemption
in Lieu of Conversion (the "Redemption in Lieu of Conversion Period"). If the
Company elects to limit the number of Preferred Shares which it will redeem
during the Redemption in Lieu of Conversion Period, the Company shall allocate
for redemption from each holder of Preferred Shares a number of Preferred Shares
equal to such holder's pro-rata amount (based on the number of Preferred Shares
held by such holder on the date of the Notice of Company Redemption in Lieu of
Conversion relative to the total number of Preferred Shares outstanding on such
date). The Company may terminate a Redemption in Lieu of Conversion Period at
any time with respect to Preferred Shares which have not been submitted for
conversion by delivering written notice of such termination to each holder of
Preferred Shares by facsimile and overnight courier at least five (5) Business
Days prior to the effective date of such termination. Notwithstanding anything
to the contrary in this Section 6, the Company shall convert Preferred Shares
pursuant to Section 2 if such Preferred Shares are submitted for conversion (i)
before the beginning, or after the effective date of the termination, of the
Redemption in Lieu of Conversion Period, (ii) for a Conversion Price (as
reflected in the Conversion Notice) greater than or equal to the Redemption in
Lieu of Conversion Trigger Price or (iii) are in excess of such holder's pro
rata allocation of the maximum number of Preferred Shares the Company indicated
that it would redeem in its Notice of Company Redemption in Lieu of Conversion.
(c) Payment of Redemption Price. The Company shall pay the applicable
----------------------------
Redemption Price of Company Redemption in Lieu of Conversion to the holder of
the Preferred Shares being redeemed in cash by wire transfer within ten (10)
Business Days after the applicable Conversion Date on which such Preferred
Shares are submitted for conversion. If the Company shall fail to pay the
applicable Redemption Price of Company Redemption in Lieu of Conversion to such
holder on a timely basis as described in this Section 6(c), in addition to any
remedy such holder of
26
<PAGE>
Preferred Shares may have under this Certificate of Designations and the
Securities Purchase Agreement, such unpaid amount shall bear interest at the
rate of 1.25% per month until paid in full. If the Company fails to pay such
unpaid applicable Redemption Price of Company Redemption in Lieu of Conversion
by the 10/th/ Business Day following the applicable Conversion Date in full to
each holder, each holder of Preferred Shares submitted for redemption pursuant
to this Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid, shall have the option to, in
lieu of redemption, (A) to require the Company to promptly return to each holder
all of the Preferred Shares that were submitted for redemption by such holder
under this Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid or (B) to convert those
Preferred Shares for which the applicable Redemption Price of the Company
Redemption in Lieu of Conversion has not been paid at a Conversion Price equal
to the lesser of (I) the Conversion Price applicable to such conversion on the
date on which such Preferred Shares were originally presented for conversion and
(II) the Conversion Price which would have been in effect if such Preferred
Shares were presented for conversion on the Business Day immediately following
the last day on which the Company could have effected a timely Company
Redemption in Lieu of Conversion, by sending written notice thereof to the
Company via facsimile (the "Void Company Redemption Notice"). Upon the Company's
receipt of such Void Company Redemption Notice(s), requesting the return of the
Preferred Shares, prior to payment of the full applicable redemption price to
each holder, (i) the Company's Redemption in Lieu of Conversion shall be null
and void with respect to those Preferred Shares submitted for redemption and for
which the applicable redemption price has not been paid and with respect to any
Preferred Shares submitted in the future for conversion in the same Redemption
in Lieu of Conversion Period, (ii) the Company shall immediately return any
Preferred Shares submitted to the Company by each holder for redemption under
this Section 6 and for which the applicable Redemption Price of Company
Redemption in Lieu of Conversion has not been paid and (iii) the Fixed
Conversion Price of such returned Preferred Shares shall be adjusted to the
lesser of (I) the Conversion Price applicable to such conversion on the date on
which such Preferred Shares were originally presented for conversion and (II)
the lowest Conversion Price which would have been in effect if such Preferred
Shares were presented for conversion on any Business Day during the period
beginning on the Business Day immediately following the last day on which the
Company could have effected a timely Company Redemption in Lieu of Conversion
and ending on the date of the Company's receipt of the applicable Void Company
Redemption Notice. Notwithstanding the foregoing, if the Company fails to pay
the applicable Redemption Price of Company Redemption in Lieu of Conversion to a
holder within the time period described in this Section 6(d) due to a dispute as
to the arithmetic calculation of the Redemption Price of Company Redemption in
Lieu of Conversion, such dispute shall be resolved pursuant to Section 2(f)(iii)
above with the term "Redemption Price of Company Redemption in Lieu of
Conversion" being substituted for the term "Conversion Rate." If the Company
fails to timely effect a Company Redemption in Lieu of Conversion in accordance
with this Section 6, the Company shall not be allowed to submit another Notice
of Company Redemption in Lieu of Conversion without the prior written consent of
the holders of at least two-thirds (2/3) of the Preferred Shares then
outstanding.
27
<PAGE>
(d) Company Must Have Immediately Available Funds or Credit
-------------------------------------------------------
Facilities. The Company shall not be entitled to send any Notice of Company
- ----------
Redemption in Lieu of Conversion pursuant to Section 6(b) above and begin the
redemption procedure under this Section 6, unless it has:
(i) the full amount of the Redemption Price of Company
Redemption in Lieu of Conversion in cash, available in a demand or other
immediately available account in a bank or similar financial institution;
(ii) credit facilities, with a bank or similar financial
institutions that are available for use in redeeming the Preferred Shares, in
the full amount of the Redemption Price of Company Redemption in Lieu of
Conversion;
(iii) a written agreement with a standby underwriter ready,
willing and able to purchase from the Company a sufficient number of shares of
stock to provide proceeds necessary to redeem any Preferred Shares that are not
converted prior to a Company Redemption in Lieu of Conversion; or
(iv) a combination of the items set forth in the preceding
clauses (i), (ii) and (iii), aggregating the full amount of the Redemption Price
of Company Redemption in Lieu of Conversion.
(7) Redemption at the Company's Election. On and after the third
------------------------------------
anniversary of the date on which the SEC shall have declared the Registration
Statement effective, the Company shall have the right, in its sole discretion,
to require that all, but not less than all, of the outstanding Preferred Shares,
which are convertible into the Conversion Shares covered by such Registration
Statement (the "Redeemable Preferred Shares") be redeemed for each Buyer for
which redemption is permitted pursuant to this Section 7 ("Redemption at
Company's Election") at a price per share equal to 115% of the Liquidation Value
("Company's Election Redemption Price"); provided that the Conditions to
Redemption at the Company's Election (as set forth below) and the other terms of
this Section 7 are satisfied. The Company shall exercise its right to Redemption
at Company's Election by providing each holder of Preferred Shares written
notice ("Notice of Redemption at Company's Election") at least 20 trading days
prior to the date selected by the Company for such redemption (the "Company's
Election Redemption Date"). The Notice of Redemption at Company's Election shall
indicate the Company's Election Redemption Date. If the Company has exercised
its right of Redemption at Company's Election and the conditions to such
Redemption at Company's Election have been satisfied, then all Redeemable
Preferred Shares outstanding at the Company's Election Redemption Date shall be
redeemed as of the Company's Election Redemption Date by payment by the Company
to each holder of Redeemable Preferred Shares of the Company's Election
Redemption Price. If required by Section 2(f)(vii), all holders of Redeemable
Preferred Shares shall thereupon and within two Business Days after the
Company's Election Redemption Date, or such earlier date as the Company and each
holder of Redeemable Preferred Shares mutually agree, surrender all outstanding
Preferred Stock Certificates, duly endorsed for cancellation, to the Company. If
the Company fails to pay the full Company's Election Redemption Price with
respect
28
<PAGE>
to any Redeemable Preferred Shares then the Redemption at Company's Election
shall be null and void with respect to such Preferred Shares and the holder of
such Preferred Shares shall be entitled to all the rights of a holder of
outstanding Preferred Shares set forth in this Certificate of Designations.
"Conditions to Redemption at the Company's Election" means the following
conditions: (i) during the period beginning on the Initial Issuance Date and
ending on and including the Company's Election Redemption Date, the Company
shall have delivered Conversion Shares upon conversion of the Preferred Shares
to the holders of the Preferred Shares on a timely basis as set forth in Section
2(f)(ii) of this Certificate of Designations (ii) on each day during the period
beginning 30 trading days prior to the date of Notice of Redemption at Company's
Election and ending on and including the Company's Election Redemption Date, the
Registration Statement for the Conversion Shares relating to the Redeemable
Preferred Shares shall be effective and available for the sale of no less than
100% of the sum of (A) the number of shares of Common Stock then issuable upon
the conversion of all outstanding Redeemable Preferred Shares and exercise of
all outstanding Warrants (without regard to any limitations on conversion herein
or elsewhere), and (B) the number of Conversion Shares that are then held by the
holders of the Preferred Shares and Warrant Shares that are then held by the
holders of the Warrants; (iii) on each day during the period beginning 30
trading days prior to the date of Notice of Redemption at Company's Election and
ending on and including the Company's Election Redemption Date, the Common Stock
is designated for quotation on The Nasdaq SmallCap Market or The Nasdaq National
Market or listed on The New York Stock Exchange, Inc. and is not suspended from
trading; (iv) during the period beginning 60 trading days prior to the date of
Notice of Redemption at Company's Election and ending on and including the
Company's Election Redemption Date, there shall not have occurred a Triggering
Event nor shall a Triggering Event be continuing which shall not have been cured
(in each case, other than a Triggering Event described in Section 3(d)(v)); (v)
during the period beginning 20 trading days prior to the date of the Company's
Notice of Redemption at Company's election and ending on and including the
Company's Election Redemption Date, there shall not have been any Grace Period
under Section 3(u) of the Registration Rights Agreement; and (vi) the Company
otherwise has satisfied its obligations and is not in default under this
Certificate of Designations, the Securities Purchase Agreement and the
Registration Rights Agreement, provided, however, that if a Buyer shall have
waived in writing its right to redeem which resulted pursuant to a Triggering
Event, then the Company shall not be required to satisfy clause (iv) hereof in
order to redeem all of such Buyer's Preferred Shares at the Company's election
pursuant to this Section 7. Notwithstanding the above, any holder of Preferred
Shares may convert such shares (including Preferred Shares selected for
redemption) into Common Stock pursuant to Section 2(a) on or prior to the date
immediately preceding the Company's Election Redemption Date.
(8) Reissuance of Certificates. Subject to Section 2(f)(vii), in the
--------------------------
event of a conversion or redemption pursuant to this Certificate of Designations
of less than all of the Preferred Shares represented by a particular Preferred
Stock Certificate, the Company shall promptly cause to be issued and delivered
to the holder of such Preferred Shares a preferred stock certificate
representing the remaining Preferred Shares which have not been so converted or
redeemed.
(9) Reservation of Shares. The Company shall, so long as any of the
---------------------
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common
29
<PAGE>
Stock, solely for the purpose of effecting the conversion of the Preferred
Shares, such number of shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all of the Preferred Shares then
outstanding (without regard to any limitations on conversions); provided that
the number of shares of Common Stock so reserved shall at no time be less than
200% of the number of shares of Common Stock for which the Preferred Shares are
at any time convertible. The initial number of shares of Common Stock reserved
for conversions of the Preferred Shares and each increase in the number of
shares so reserved shall be allocated pro rata among the holders of the
Preferred Shares based on the number of Preferred Shares held by each holder at
the time of issuance of the Preferred Shares or increase in the number of
reserved shares, as the case may be. In the event a holder shall sell or
otherwise transfer any of such holder's Preferred Shares, each transferee shall
be allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any shares of Common Stock reserved and which
remain allocated to any person or entity which does not hold any Preferred
Shares shall be allocated to the remaining holders of Preferred Shares, pro rata
based on the number of Preferred Shares then held by such holder.
(10) Voting Rights. Holders of Preferred Shares shall have no voting
-------------
rights, except as required by law, including but not limited to the General
Corporation Law of the State of Delaware, and as expressly provided in this
Certificate of Designations.
(11) Liquidation, Dissolution, Winding-Up. In the event of any
------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of the Preferred Shares shall be entitled to receive in cash out of
the assets of the Company, whether from capital or from earnings available for
distribution to its stockholders (the "Preferred Funds"), before any amount
shall be paid to the holders of any of the capital stock of the Company of any
class junior in rank to the Preferred Shares in respect of the preferences as to
the distributions and payments on the liquidation, dissolution and winding up of
the Company, an amount per Preferred Share equal to the sum of (i) $10,000 and
(ii) the Additional Amount (such sum being referred to as the "Liquidation
Value"); provided that, if the Preferred Funds are insufficient to pay the full
amount due to the holders of Preferred Shares and holders of shares of other
classes or series of preferred stock of the Company that are of equal rank with
the Preferred Shares as to payments of Preferred Funds (the "Pari Passu
Shares"), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designations, Preferences and
Rights, as a percentage of the full amount of Preferred Funds payable to all
holders of Preferred Shares and Pari Passu Shares. The purchase or redemption by
the Company of stock of any class, in any manner permitted by law, shall not,
for the purposes hereof, be regarded as a liquidation, dissolution or winding up
of the Company. Neither the consolidation or merger of the Company with or into
any other Person, nor the sale or transfer by the Company of all or
substantially all of its assets, shall, for the purposes hereof, be deemed to be
a liquidation, dissolution or winding up of the Company. No holder of Preferred
Shares shall be entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Company other than the amounts
provided for herein; provided that a holder of Preferred Shares shall be
entitled to all amounts previously accrued with respect to amounts owed
hereunder.
30
<PAGE>
(12) Preferred Rank; Participation. All shares of Common Stock shall
-----------------------------
be of junior rank to all Preferred Shares and the Series A Preferred Stock shall
rank pari passu with the Preferred Shares in respect to the preferences as to
distributions and payments upon the liquidation, dissolution and winding up of
the Company. The rights of the shares of Common Stock shall be subject to the
preferences and relative rights of the Preferred Shares. Without the prior
express written consent of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares, the Company shall not hereafter authorize or
issue additional or other capital stock that is of rank senior to or pari passu
with to the Preferred Shares in respect of the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the Company.
Without the prior express written consent of the holders of not less than two-
thirds (2/3) of the then outstanding Preferred Shares, the Company shall not
hereafter authorize or make any amendment to the Company's Certificate of
Incorporation or bylaws, or file any resolution of the board of directors of the
Company with the Secretary of State of the State of Delaware containing any
provisions, which would adversely affect or otherwise impair the rights or
relative priority of the holders of the Preferred Shares relative to the holders
of the Common Stock or the holders of any other class of capital stock. In the
event of the merger or consolidation of the Company with or into another
corporation, the Preferred Shares shall maintain their relative powers,
designations and preferences provided for herein and no merger shall result
inconsistent therewith.
(13) Restriction on Redemption and Cash Dividends with respect to
------------------------------------------------------------
Other Capital Stock. Until all of the Preferred Shares have been converted or
- -------------------
redeemed as provided herein, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, its Common Stock
without the prior express written consent of the holders of not less than two-
thirds (2/3) of the then outstanding Preferred Shares.
(14) Limitation on Number of Conversion Shares. Notwithstanding any
-----------------------------------------
other provision herein, the Company shall not be obligated to issue any shares
of Common Stock upon conversion of the Preferred Shares if the issuance of such
shares of Common Stock would exceed that number of shares of Common Stock which
the Company may issue upon Conversion of the Preferred Shares (the "Exchange
Cap") without breaching the Company's obligations, if any, under the rules or
regulations of the Nasdaq Stock Market or such exchange on which the stock is
then traded except that such limitation shall not apply in the event that the
Company (a) obtains the approval of its stockholders as required by applicable
rules and regulations of the Nasdaq Stock Market or such other exchange on which
the stock is then traded for issuances of Common Stock in excess of such amount
or (ii) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holders of a majority of the Preferred Shares then outstanding. Until such
approval or written opinion is obtained or such action has been taken by the
required number of holders, no purchaser of Preferred Shares pursuant to the
Securities Purchase Agreement (the "Purchasers") shall be issued, upon
conversion of Preferred Shares, shares of Common Stock in an amount greater than
the product of (i) the Exchange Cap amount multiplied by (ii) a fraction, the
numerator of which is the number of Preferred Shares issued to such Purchaser
pursuant to the Securities Purchase Agreement and the denominator of which is
the aggregate amount of all the Preferred Shares issued to the Purchasers
pursuant to the Securities Purchase Agreement (the "Cap Allocation Amount"). In
the event that
31
<PAGE>
any Purchaser shall sell or otherwise transfer any of such Purchaser's Preferred
Shares, the transferee shall be allocated a pro rata portion of such Purchaser's
Cap Allocation Amount. In the event that any holder of Preferred Shares shall
convert all of such holder's Preferred Shares into a number of shares of Common
Stock which, in the aggregate, is less than such holder's Cap Allocation Amount,
then the difference between such holder's Cap Allocation Amount and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares on a pro rata basis in proportion to the number of Preferred Shares then
held by each such holder.
(15) Vote to Change the Terms of or Issue Preferred Shares. The
-----------------------------------------------------
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, shall be required for (a) any change to
this Certificate of Designations or the Company's Certificate of Incorporation
which would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares, or (b) any issuance of Preferred
Shares other than pursuant to the Securities Purchase Agreement.
(16) Lost or Stolen Certificates. Upon receipt by the Company of
---------------------------
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of an indemnification
undertaking by the holder to the Company and, in the case of mutilation, upon
surrender and cancellation of the Preferred Stock Certificate(s), the Company
shall execute and deliver new preferred stock certificate(s) of like tenor and
date; provided, however, the Company shall not be obligated to re-issue
preferred stock certificates if the holder contemporaneously requests the
Company to convert such Preferred Shares into Common Stock.
(17) Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Certificate of Designations
- -----------------
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly described herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the holder thereof and shall not, except as
expressly provided herein, be subject to any other obligation of the Company (or
the performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the
Preferred Shares and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the holders of the Preferred Shares shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.
32
<PAGE>
(18) Specific Shall Not Limit General; Construction. No specific
----------------------------------------------
provision contained in this Certificate of Designations shall limit or modify
any more general provision contained herein. This Certificate of Designations
shall be deemed to be jointly drafted by the Company and all holders of
Preferred Shares and shall not be construed against any person as the drafter
hereof.
(19) Failure or Indulgence Not Waiver. No failure or delay on the part
--------------------------------
of a holder of Preferred Shares in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
(20) Notice. Whenever notice is required to be given, it shall be
------
given in accordance with Section 9(f) of the Securities Purchase Agreement.
(21) Restriction on Transfer of Preferred Shares. In addition to any
-------------------------------------------
restrictions on transfer in the Securities Purchase Agreement, a holder of
Preferred Shares may only transfer such Preferred Shares with the prior written
consent of the Company, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, the Preferred Shares may be transferred, without
the prior consent of the Company, (i) upon the transfer of all or any portion of
the Preferred Shares to any existing holder of Preferred Shares and (ii) to any
transferee, provided that the transferor, transfers all of its Preferred Shares
to such transferee. Notwithstanding anything to the contrary contained in this
Section 21, a holder of Preferred Shares shall be entitled to pledge such
Preferred Shares in connection with a bona fide margin account or other loan
secured by such Preferred Shares. In addition, notwithstanding anything to the
contrary in this Section 21, the initial holder, HFTP Investment L.L.C., shall
have the right without the consent of the Company, to transfer all or any
portion of its Preferred Shares to a maximum of one Affiliated Transferee. An
"Affiliated Transferee" shall mean (i) an Affiliate of the holder, (ii) any
holder of the Preferred Shares and (iii) any Affiliate of a holder of Preferred
Shares.
* * * * * *
33
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to
be signed by _______________, its ___________, as of May __, 1999.
MEDCARE TECHNOLOGIES, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
34
<PAGE>
EXHIBIT I
MEDCARE TECHNOLOGIES, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Series ___ Convertible Preferred Stock (the "Certificate of Designations"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares of Series ___ Convertible
Preferred Stock, par value $0.25 per share (the "Preferred Shares"), of Medcare
Technologies, Inc., a Delaware corporation (the "Company"), indicated below into
shares of common stock, par value $0.001 per share (the "Common Stock"), of the
Company, by tendering the stock certificate(s) representing the Preferred Shares
specified below as of the date specified below.
Date of Conversion: __________________________________________
Number of Preferred Shares to be converted: ___________________________
Stock certificate no(s). of Preferred Shares to be converted:___________
Please confirm the following information:
Conversion Price: __________________________________________
Number of shares of Common Stock
to be issued: __________________________________________
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to: ________________________________
________________________________
________________________________
________________________________
Facsimile Number: ________________________________
Authorization: ________________________________
By:_____________________________
Title:__________________________
Dated: _______________________________________
Account Number:
(if electronic book entry transfer):____________________________
Transaction Code Number
(if electronic book entry transfer):____________________________
35
<PAGE>
ACKNOWLEDGMENT
--------------
The Company hereby acknowledges this Conversion Notice and hereby directs
Holladay Stock Transfer, Inc. to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated May ___,
1999 from the Company and acknowledged and agreed to by Holladay Stock Transfer,
Inc.
MEDCARE TECHNOLOGIES, INC.
By:________________________
Name:______________________
Title:_____________________
36
<PAGE>
Exhibit C
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 18, 1999,
by and among MEDCARE TECHNOLOGIES, INC., a Delaware corporation, with
headquarters located at 1515 West 22/nd/ Street, Suite 1210, Oak Brook, IL 60521
(the "Company"), and the undersigned buyers (each, a "Buyer" and collectively,
the "Buyers").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties hereto of even date herewith (the "Securities Purchase Agreement"), the
Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, to issue and sell to the Buyers (i) up to 400
shares of the Company's Series B Convertible Preferred Stock, par value $.25 per
share (the "Initial Preferred Shares"), which will be convertible into shares
(as converted, the "Initial Conversion Shares") of the Company's common stock,
par value $.001 per share (the "Common Stock"), in accordance with the terms of
the Company's Certificate of Designations, Preferences and Rights of the Series
B Convertible Preferred Stock (the "Certificate of Designations"), and (ii) on
each Warrant Date (as defined below), warrants to purchase 200 shares of Common
Stock for (a) each Initial Preferred Share held by such Buyer on such Warrant
Date and (b) for each Initial Preferred Share converted by such Buyer before
such Warrant Date at a Conversion Price (as defined in the Certificate of
Designations) equal to the Fixed Conversion Price (as defined in the Certificate
of Designations) as in effect on the date of conversion (the "Initial Warrants"
and, as exercised, the "Initial Warrant Shares"). The "Warrant Dates" shall be
(A) the date which is 120 days after the Issuance Date (as defined in the
Certificate of Designations) of the applicable Preferred Shares, (B) the date
which is 300 days after the Issuance Date of the applicable Preferred Shares and
(C) the date which is 480 days after the Issuance Date of the applicable
Preferred Shares.
B. In connection with the Securities Purchase Agreement, the Buyers may
have the right, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to require the Company to issue and sell to the Buyers (I) a
number of additional Preferred Shares equal to the sum of (i) the number of
Initial Preferred Shares held by such Buyer on the date which is one year after
the Initial Issuance Date (as defined in the Certificate of Designations) and
(ii) the number of Initial Preferred Shares converted by such Buyer on or before
the date which is one year after the Initial Issuance Date at a Conversion Price
equal to the Fixed Conversion Price of such Initial Preferred Shares as in
effect on the date of conversion (the "Additional Preferred Shares" and,
collectively with the Initial Preferred Shares, the "Preferred Shares"), which
will be convertible into Common Stock (as converted, the "Additional Conversion
Shares" and, collectively with the Initial Conversion Shares, the "Conversion
Shares") in accordance with the Certificate of Designations, and (II) on each
Warrant Date, warrants to purchase 200 shares of common stock for (i) each
Additional Preferred Share held by such Buyer on such Warrant Date and (ii) for
each Additional Preferred Share converted by such Buyer before such Warrant Date
at a Conversion Price equal to
<PAGE>
the Fixed Conversion Price as in effect on the date of conversion (the
"Additional Warrants" and, collectively with the Initial Warrants, the
"Warrants"; and as exercised the "Additional Warrant Shares" and, collectively
with the Initial Warrant Shares, the "Warrant Shares").
C. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
-----------
As used in this Agreement, the following terms shall have the
following meanings:
a. "Investor" means a Buyer and any transferee or assignee thereof to
whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9.
b. "Person" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "Register," "registered," and "registration" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous or delayed basis (ARule 415"), and the declaration or
ordering of effectiveness of such Registration Statement(s) by the United States
Securities and Exchange Commission (the "SEC").
d. "Registrable Securities" means (i) the Conversion Shares issued or
issuable upon conversion of the Preferred Shares, (ii) the Warrant Shares issued
or issuable upon exercise of the Warrants and (iii) any shares of capital stock
issued or issuable with respect to the Conversion Shares, the Preferred Shares,
the Warrant Shares or the Warrants as a result of any stock split, stock
dividend, recapitalization, exchange or similar event or otherwise, without
regard to any limitations on conversions of Preferred Shares or exercises of
Warrants.
e. "Initial Registration Statement" means a registration statement or
registration statements of the Company filed under the 1933 Act covering
Registrable Securities relating to the Initial Preferred Shares and the Initial
Warrants.
2
<PAGE>
f. "Additional Registration Statement" means a registration statement
or registration statements of the Company filed under the 1933 Act covering
Registrable Securities relating to the Additional Preferred Shares and the
Additional Warrants.
g. "Registration Statement" means Initial Registration Statement and
the Additional Registration Statement.
h. "Effectiveness Deadline" means the Initial Effectiveness Deadline
or the Additional Effectiveness Deadline, as applicable.
2. REGISTRATION.
------------
a. Mandatory Registration.
----------------------
(i) Initial Mandatory Registration. The Company shall prepare,
------------------------------
and, as soon as practicable file with the SEC an Initial Registration Statement
or Initial Registration Statements (as necessary) on Form S-3 covering the
resale of all of the Registrable Securities relating to the Initial Preferred
Shares which were issued on the Initial Closing Date (as defined in the
Securities Purchase Agreement) and the maximum number of related Initial
Warrants. In the event that Form S-3 is unavailable for such a registration, the
Company shall use such other form as is available for such a registration,
subject to the provisions of Section 2(e). Any initial Registration Statement
prepared pursuant hereto shall register for resale at least 1,600,000 shares of
Common Stock. The Company shall use its best efforts to cause such Registration
Statement to be declared effective by the SEC as soon as possible, but in no
event later than 90 days (or if the SEC reviews such Registration Statement, 120
days) after the Initial Closing Date (the "Initial Effectiveness Deadline").
(iii) Additional Mandatory Registration. The Company shall
---------------------------------
prepare, and, as soon as practicable, file with the SEC an Additional
Registration Statement or Additional Registration Statements (as necessary) on
Form S-3 covering the resale of all of the Registrable Securities relating to
the Additional Preferred Shares which were issued on the Additional Closing Date
(as defined in the Securities Purchase Agreement) and the maximum number of
related Additional Warrants. In the event that Form S-3 is unavailable for such
a registration, the Company shall use such other form as is available for such a
registration, subject to the provisions of Section 2(e). Any Additional
Registration Statement prepared pursuant hereto shall register for resale at
least that number of shares of Common Stock equal to the sum of (A) the product
of (x) 2.0 and (y) the number of Conversion Shares issuable upon conversion of
such Additional Preferred Shares (without regard to any limitations on
conversions) as of the date immediately preceding the date the Registration
Statement is initially filed with the SEC (as if the Additional Preferred Shares
were issued and outstanding on such date) and (B) the maximum number of
Additional Warrant Shares which may be issued upon exercise of the Additional
Warrants relating to the Additional Preferred Shares issued on such Additional
Closing Date, subject to adjustment as provided in Section 3(b). The Company
shall use its best efforts to cause such Registration Statement to be declared
effective by the SEC as soon as possible, but in no event later than 90 days (of
if the SEC reviews such
3
<PAGE>
Registration Statement, 120 days) after the Additional Closing Date (the
"Additional Effectiveness Deadline").
b. Piggy-Back Registrations. If at any time prior to the date on
------------------------
which the Registration Period (as hereinafter defined) with respect to all
Registration Statements shall have expired, the number of shares of Common Stock
available for sale under the Registration Statements is insufficient to cover
all of the Registrable Securities and the Company proposes to file with the SEC
a Registration Statement relating to an offering for its own account or the
account of others under the 1933 Act of any of its securities (other than on
Form S-4 or Form S-8 (or their equivalents at such time) relating to securities
to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other employee
benefit plans), the Company shall promptly send to each Investor written notice
of the Company's intention to file a Registration Statement and, if within ten
(10) business days after receipt of such notice, such Investor shall so request
in writing, the Company shall include in such Registration Statement all or any
part of the Registrable Securities such Investor requests to be registered,
subject to the priorities set forth below in this Section 2(b). No right to
registration of Registrable Securities under this Section 2(b) shall be
construed to limit any registration required under Section 2(a). The obligations
of the Company under this Section 2(b) may be waived by Investors holding a
majority of the Registrable Securities. If an offering in connection with which
an Investor is entitled to registration under this Section 2(b) is an
underwritten offering, then each Investor whose Registrable Securities are
included in such Registration Statement shall, unless otherwise agreed to by the
Company, offer and sell such Registrable Securities in an underwritten offering
using the same underwriter or underwriters and, subject to the provisions of
this Agreement, on the same terms and conditions as other shares of Common Stock
included in such underwritten offering. If a registration pursuant to this
Section 2(b) is to be an underwritten public offering and the managing
underwriter(s) advise the Company in writing, that in their reasonable good
faith opinion, marketing or other factors dictate that a limitation on the
number of shares of Common Stock which may be included in the Registration
Statement is advisable to facilitate and not adversely affect the proposed
offering, then the Company shall include in such registration: (1) first, all
securities the Company proposes to sell for its own account, (2) second, up to
the full number of securities proposed to be registered for the account of the
holders of securities entitled to inclusion of their securities in the
Registration Statement by reason of demand registration rights, and (3) third,
the securities requested to be registered by the Investors and other holders of
securities entitled to participate in the registration, as of the date hereof,
drawn from them pro rata based on the number each has requested to be included
in such registration.
c. Allocation of Registrable Securities. The initial number of
------------------------------------
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time the Registration Statement covering such initial
number of Registrable Securities or increase thereof is declared effective by
the SEC. In the event that an Investor sells or otherwise transfers any of such
Person's Registrable Securities, each transferee shall be allocated a pro rata
portion of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any shares of Common Stock included
4
<PAGE>
in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities covered by such Registration Statement
shall be allocated to the remaining Investors, pro rata based on the number of
Registrable Securities then held by such Investors which are covered by such
Registration Statement.
d. Legal Counsel. Subject to Section 5 hereof, the Buyers holding a
-------------
majority of the Registrable Securities shall have the right to select one legal
counsel to review and oversee any offering pursuant to this Section 2 ("Legal
Counsel"), which shall be Katten Muchin & Zavis or such other counsel as
thereafter designated by the holders of a majority of Registrable Securities.
e. Ineligibility for Form S-3. In the event that Form S-3 is not
--------------------------
available for any registration of Registrable Securities hereunder, the Company
shall (i) register the sale of the Registrable Securities on another appropriate
form reasonably acceptable to the holders of a majority of the Registrable
Securities and (ii) undertake to register the Registrable Securities on Form S-3
as soon as such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statement then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.
f. Sufficient Number of Shares Registered. In the event the number of
--------------------------------------
shares available under a Registration Statement filed pursuant to Section 2(a)
is insufficient to cover all of the Registrable Securities which such
Registration Statement is required to cover or an Investor's allocated portion
of the Registrable Securities pursuant to Section 2(c), the Company shall amend
the Registration Statement, or file a new Registration Statement (on the short
form available therefor, if applicable), or both, so as to cover at least 200%
of such Registrable Securities (based on the market price of the Common Stock on
the trading day immediately preceding the date of filing of such amendment or
new Registration Statement), in each case, as soon as practicable, but in any
event not later than fifteen (15) days after the necessity therefor arises. The
Company shall use it best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof. For purposes of the foregoing provision, the number of shares
available under a Registration Statement shall be deemed "insufficient to cover
all of the Registrable Securities" if, on at least three trading days within any
seven trading day period, the number of Registrable Securities issued or
issuable upon conversion of the Preferred Shares and exercise of the Warrants
covered by such Registration Statement is greater than the quotient determined
by dividing (i) the number of shares of Common Stock available for resale under
such Registration Statement by (ii) 1.5. For purposes of the calculation set
forth in the foregoing sentence, any restrictions on the convertibility of the
Preferred Shares or exercise of the Warrants shall be disregarded and such
calculation shall assume that the Preferred Shares are then convertible into,
and the Warrants are then exercisable for, shares of Common Stock at the then
prevailing Conversion Rate (as defined in the Certificate of Designations) or
Exercise Price (as defined in the Warrants), respectively.
3. RELATED OBLIGATIONS.
-------------------
5
<PAGE>
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(b) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Sections 2(a) or 2(g),
the Company will use its best efforts to effect the registration of the
Registrable Securities in accordance with the intended method of disposition
thereof and, pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities and use its
best efforts to cause such Registration Statement relating to the Registrable
Securities to become effective as soon as practicable after such filing (but in
no event later than the Effectiveness Deadline). The Company shall keep each
Registration Statement effective pursuant to Rule 415 at all times until the
earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities covered by such Registration Statement without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto) or (ii) the date on which the Investors shall have sold all the
Registrable Securities covered by such Registration Statement (the "Registration
Period"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading. The term "best efforts"
shall mean, among other things, that the Company shall submit to the SEC, within
three business days after the Company learns that no review of a particular
Registration Statement will be made by the staff of the SEC or that the staff
has no further comments on the Registration Statement, as the case may be, a
request for acceleration of effectiveness of such Registration Statement to a
time and date not later than 48 hours after the submission of such request.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b)) by
reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any
analogous report under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the Company shall have incorporated such report by reference into
the Registration Statement, if applicable, or shall file such amendments or
supplements with the SEC on the same day on which the 1934 Act report is filed
which created the requirement for the Company to amend or supplement the
Registration Statement.
c. The Company shall (a) permit Legal Counsel to review and comment
upon those Sections of (i) the Initial Registration Statement and the Additional
Registration Statement
6
<PAGE>
which are applicable to the Buyers at least four (4) business days prior to its
filing with the SEC and (ii) all other Registration Statements and all
amendments and supplements to all Registration Statements which are applicable
to the Buyers (except for Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K and any similar or successor reports)
within a reasonable number of days prior to the their filing with the SEC and
(b) not file any document in a form to which Legal Counsel reasonably objects.
In the event of a good faith disagreement as to the reasonableness of the
comments or objections of Legal Counsel, the Effectiveness Deadline for the
Registration Statement or any amendment or supplement thereto shall be extended
for the period of such good faith disagreement. The Company shall not submit a
request for acceleration of the effectiveness of a Registration Statement or any
amendment or supplement thereto without the prior approval of Legal Counsel,
which consent shall not be unreasonably withheld. The Company shall furnish to
Legal Counsel, without charge, (i) any correspondence from the SEC or the staff
of the SEC to the Company or its representatives relating to any Registration
Statement, (ii) promptly after the same is prepared and filed with the SEC, one
copy of any Registration Statement and any amendment(s) thereto, including
financial statements and schedules and all exhibits and (iii) upon the
effectiveness of any Registration Statement, one copy of the prospectus included
in such Registration Statement and all amendments and supplements thereto. The
Company shall reasonably cooperate with Legal Counsel in performing the
Company's obligations pursuant to this Section 3.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, and all exhibits and each preliminary prospectus, (ii)
upon the effectiveness of any Registration Statement, ten (10) copies of the
prospectus included in such Registration Statement and all amendments and
supplements thereto (or such other number of copies as such Investor may
reasonably request) and (iii) such other documents, including copies of any
preliminary or final prospectus, as such Investor may reasonably request from
time to time in order to facilitate the disposition of the Registrable
Securities owned by such Investor.
e. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as Legal Counsel or any Investor reasonably requests, (ii) prepare and
file in those jurisdictions, such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (v) make any change in the Company's Certificate of Incorporation or
by-laws that the Company's board of directors determines in good faith to be
contrary to the best interests of the Company and its shareholders, (w) qualify
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 3(e), (x) subject itself to general taxation in any
such jurisdiction, or (y) file a general consent to service of process
7
<PAGE>
in any such jurisdiction. The Company shall promptly notify Legal Counsel and
each Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the securities
or "blue sky" laws of any jurisdiction in the United States or its receipt of
actual notice of the initiation or threat of any proceeding for such purpose.
f. In the event Investors who hold a majority of the Registrable
Securities being offered in the offering select underwriters (which shall be
reasonably acceptable to the Company) for the offering, the Company shall enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, including, without limitation, customary indemnification and
contribution obligations, with the underwriters of such offering.
g. Subject to Section 3(u), as promptly as practicable after
becoming aware of such event or development, the Company shall notify Legal
Counsel and each Investor in writing of the happening of any event as a result
of which the prospectus included in a Registration Statement, as then in effect,
includes an untrue statement of a material fact or omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
promptly prepare a supplement or amendment to such Registration Statement to
correct such untrue statement or omission, and deliver ten (10) copies of such
supplement or amendment to Legal Counsel and each Investor (or such other number
of copies as Legal Counsel or such Investor may reasonably request). The
Company shall also promptly notify Legal Counsel and each Investor in writing
(i) when a prospectus or any prospectus supplement or post-effective amendment
has been filed, and when a Registration Statement or any post-effective
amendment has become effective (notification of such effectiveness shall be
delivered to Legal Counsel and each Investor by facsimile on the same day of
such effectiveness), (ii) of any request by the SEC for amendments or
supplements to a Registration Statement or related prospectus or related
information, and (iii) of the Company's reasonable determination that a post-
effective amendment to a Registration Statement would be appropriate.
h. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify Legal Counsel and each Investor who holds Registrable
Securities being sold (and, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
i. At the reasonable request of any Investor, the Company shall
furnish to such Investor, within three (3) days of the effectiveness of the
Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, and (ii) an opinion, dated as of such date, of
counsel representing the Company for
8
<PAGE>
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
Investors.
j. The Company shall make available for inspection by (i) any
Investor, (ii) Legal Counsel, (iii) any underwriter participating in any
disposition pursuant to a Registration Statement, (iv) one firm of accountants
or other agents retained by the Investors, and (v) one firm of attorneys
retained by such underwriters (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
provided, however, that each Inspector shall agree, and each Investor hereby
agrees, to hold in strict confidence and shall not make any disclosure (except
to an Investor) or use of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the 1933 Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
has knowledge. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements with the Company with respect
thereto, substantially in the form of this Section 3(j). Each Investor agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential.
k. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement, or (v) such Investor consents to the form and content of any such
disclosure. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
l. The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of
9
<PAGE>
such Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure designation and quotation of all the Registrable Securities
covered by the Registration Statement on the Nasdaq National Market or, if,
despite the Company's best efforts to satisfy the preceding clause (i) or (ii),
the Company is unsuccessful in satisfying the preceding clause (i) or (ii), to
secure the inclusion for quotation on The Nasdaq SmallCap Market for such
Registrable Securities and, without limiting the generality of the foregoing, to
arrange for at least two market makers to register with the National Association
of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 3(l).
m. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any managing
underwriter or underwriters, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request.
n. The Company shall provide a transfer agent and registrar of all
such Registrable Securities not later than the effective date of such
Registration Statement.
o. If requested by the managing underwriters or an Investor, the
Company shall (i) as soon as practicable incorporate in a prospectus supplement
or post-effective amendment such information as the managing underwriters or the
Investors agree should be included therein relating to the sale and distribution
of Registrable Securities, including, without limitation, information with
respect to the number of Registrable Securities being sold to such underwriters,
the purchase price being paid therefor by such underwriters and any other terms
of the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) as soon as practicable make all
required filings of such prospectus supplement or post-effective amendment after
being notified of the matters to be incorporated in such prospectus supplement
or post-effective amendment; and (iii) supplement or make amendments to any
Registration Statement if reasonably requested by an Investor or any underwriter
of such Registrable Securities.
p. INTENTIONALLY LEFT BLANK.
q. The Company shall make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
r. The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder.
10
<PAGE>
s. Within two (2) business days after a Registration Statement which
covers applicable Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
---------
t. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
u. Notwithstanding anything to the contrary in this Agreement, at
any time after the Registration Statement has been declared effective by the
SEC, the Company may delay the disclosure of material non-public information
concerning the Company, the disclosure of which at the time is not, in the good
faith opinion of the Board of Directors of the Company, in the best interest of
the Company and, in the opinion of counsel to the Company, otherwise required (a
"Grace Period"); provided, that the Company shall promptly (i) notify the
Investors in writing of the existence of material non-public information giving
rise to a Grace Period (provided that in such notice the Company shall not
disclose the content of such material non-public information to the Investors)
and the date on which the Grace Period will begin, and (ii) notify the Investors
in writing of the date on which the Grace Period ends; and, provided further,
that during any consecutive 365 day period, there shall be not more than two
Grace Periods and each Grace Period shall not exceed 10 days (an "Allowable
Grace Period"). For purposes of determining the length of a Grace Period above,
the Grace Period shall begin on and include the date the holders receive the
notice referred to in clause (i) above and shall end on and include the later of
the date the holders receive the notice referred to in clause (ii) above and the
date referred to in such notice. The provisions of Section 3(h) and the first
sentence of Section 3(g) hereof and Sections 2(c) and 3(d)(ii) of the
Certificate of Designations shall not be applicable during the period of any
Allowable Grace Period. Upon expiration of the Grace Period, the Company shall
again be bound by the first sentence of Section 3(g) with respect to the
information giving rise thereto. Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended shares of Common
Stock to a transferee of an Investor in accordance with the terms of the
Certificate of Designations in connection with any sale of Registrable
Securities with respect to which an Investor has entered into a contract for
sale prior to the Investor's receipt of the notice referred to in clause (i) and
for which the Investor has not yet settled.
4. OBLIGATIONS OF THE INVESTORS.
----------------------------
a. At least seven (7) days prior to the first anticipated filing
date of a Registration Statement, the Company shall notify each Investor in
writing of the information the Company requires from each such Investor if such
Investor elects to have any of such Investor's Registrable Securities included
in such Registration Statement. It shall be a condition precedent to the
obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
11
<PAGE>
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. In the event any Investor elects to participate in an
underwritten public offering pursuant to Section 2, each such Investor agrees to
enter into and perform such Investor's obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(h), the
first sentence of 3(g) or 3(u), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(h) or the
first sentence of 3(g) or receipt of notice that no supplement or amendment is
required and, if so directed by the Company, such Investor shall deliver to the
Company (at the expense of the Company) or destroy (and deliver to the Company a
certificate of destruction) all copies in such Investor's possession of the
current prospectus covering such Registrable Securities at the time of receipt
of such notice. Notwithstanding anything to the contrary, the Company shall
cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of an Investor in accordance with the terms of the Securities
Purchase Agreement in connection with any sale of Registrable Securities with
respect to which an Investor has entered into a contract for sale prior to the
Investor's receipt of a notice from the Company of the happening of any event of
the kind described in Section 3(h) or the first sentence of 3(g) and for which
the Investor has not yet settled.
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions.
f. Each Investor whose Registrable Securities are included in a
Registration Statement understands that the 1933 Act may require delivery of a
prospectus relating thereto in connection with any sale thereof pursuant to such
Registration Statement, and each such Investor
12
<PAGE>
shall comply with the applicable prospectus delivery requirements of the 1933
Act in connection with any such sale.
g. Each Investor agrees to notify the Company promptly after the
date on which such Investor no longer holds any Registrable Securities, if such
date is prior to the expiration of the Registration Period.
5. EXPENSES OF REGISTRATION.
------------------------
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company and reasonable fees and
disbursements of Legal Counsel (which fees and disbursements shall not exceed
$10,000 in the aggregate) shall be paid by the Company.
6. INDEMNIFICATION.
---------------
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor, the directors,
officers, partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act") (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts
paid in settlement or expenses, joint or several, (collectively, "Claims")
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("Indemnified Damages"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("Blue Sky Filing"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the
13
<PAGE>
Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to Section 6(d), the Company shall
reimburse the Investors and each such controlling person, promptly as such
expenses are incurred and are due and payable, for any legal fees or
disbursements or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(d); (ii) with respect to any preliminary prospectus, shall
not inure to the benefit of any such person from whom the person asserting any
such Claim purchased the Registrable Securities that are the subject thereof (or
to the benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(d), and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it; (iii) shall not be available to
the extent such Claim is based on a failure of the Investor to deliver or to
cause to be delivered the prospectus made available by the Company, if such
prospectus was timely made available by the Company pursuant to Section 3(d);
and (iv) shall not apply to amounts paid in settlement of any Claim, and the
contribution provision of Section 7 shall not apply, if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement and each Person, if any,
who controls the Company within the meaning of the 1933 Act or the 1934 Act
(each an "Indemnified Party"), against any Claim or Indemnified Damages to which
any of them may become subject, under the 1933 Act, the 1934 Act or otherwise,
insofar as such Claim or Indemnified Damages arise out of or are 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 to the Company by such Investor expressly for use in connection with
such Registration Statement; and, subject to Section 6(d), such Investor will
reimburse any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) and the agreement with
respect to contribution contained in Section 7 shall not apply to amounts paid
in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which
14
<PAGE>
consent shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Section 6(b) for only that amount of a Claim
or Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, and the Indemnified Party failed to utilize such
corrected prospectus.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
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 control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and
any other party represented by such counsel in such proceeding. In the case of
an Indemnified Person, legal counsel referred to in the immediately preceding
sentence shall be selected by the Investors holding a majority in interest of
the Registrable Securities included in the Registration Statement to which the
Claim relates. The Indemnified Party or Indemnified Person shall cooperate
fully with the indemnifying party in connection with any negotiation or defense
of any such action or claim by the indemnifying party and shall furnish to the
indemnifying party all information reasonably available to the Indemnified Party
or Indemnified Person which relates to such action or claim. The indemnifying
party shall keep the Indemnified Party or Indemnified Person fully apprised at
all times as to the status of the defense or any settlement negotiations with
respect thereto. No indemnifying party shall be liable for any settlement of
any action, claim or proceeding effected without its prior written consent,
provided, however, that the indemnifying party shall not unreasonably withhold,
delay or condition its consent. No indemnifying party shall, without the prior
written consent of the Indemnified Party or Indemnified
15
<PAGE>
Person, consent to entry of any judgment or enter into any settlement or other
compromise which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party or Indemnified Person of a
release from all liability in respect to such claim or litigation. Following
indemnification as provided for hereunder, the indemnifying party shall be
subrogated to all rights of the Indemnified Party or Indemnified Person with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action.
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
------------
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
--------------------------
With a view to making available to the Investors the benefits of Rule
144 promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to
16
<PAGE>
such requirements (it being understood that nothing herein shall limit the
Company's obligations under Section 4(c) of the Securities Purchase Agreement)
and the filing of such reports and other documents is required for the
applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 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 to
permit the investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
---------------------------------
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
--------------------------------
Provisions 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
and Investors who then hold at least two-thirds (2/3) of the Registrable
Securities. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Registrable Securities. No consideration shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of any of this
Agreement unless the same consideration also is offered to all of the parties to
this Agreement.
11. MISCELLANEOUS.
-------------
a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same
17
<PAGE>
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Medcare Technologies, Inc.
1515 West 22/nd/ Street
Suite 1210
Oak Brook, Illinois 60521
Telephone: 888-479-7900
Facsimile: 630-472-5360
Attention: Jeffrey S. Aronin
With a copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 W. Wacker Drive
Suite 2700
Chicago, Illinois 60606
Telephone: 312-984-3100
Facsimile: 312-984-3150
Attention: Michael J. Legamaro, Esq.
If to Legal Counsel:
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
Telephone: 312-902-5200
Facsimile: 312-902-1061
Attention: Robert J. Brantman, Esq.
If to a Buyer, to its address and facsimile number on the Schedule of Buyers
attached hereto, with copies to such Buyer's representatives as set forth on the
Schedule of Buyers or to such other address
18
<PAGE>
and/or facsimile number and/or to the attention of such other person as the
recipient party has specified by written notice given to each other party five
days prior to the effectiveness of such change. Written confirmation of receipt
(A) given by the recipient of such notice, consent, waiver or other
communication, (B) mechanically or electronically generated by the sender's
facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by a courier or
overnight courier service shall be rebuttable evidence of personal service,
receipt by facsimile or receipt from a nationally recognized overnight delivery
service in accordance with clause (i), (ii) or (iii) above, respectively.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. The corporate laws of the State of Delaware shall govern all
issues concerning the relative rights of the Company and the Buyers as its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of Illinois, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Illinois or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Illinois. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting the City of Chicago, Illinois, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
e. This Agreement, the Securities Purchase Agreement, the Warrants
and the Certificate of Designations constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement, the Securities
Purchase Agreement, the Warrants and the Certificate of Designations supersede
all prior
19
<PAGE>
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities,
determined as if all of the Preferred Shares and the Warrants then outstanding
have been converted into or exercised for Registrable Securities without regard
to any limitation on conversions of the Preferred Shares or exercises of the
Warrants.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties hereto
and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.
20
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
- ------- ------
MEDCARE TECHNOLOGIES, INC. HFTP INVESTMENT L.L.C.
By: Promethean Asset Management L.L.C.
Its: Investment Manager
By:_________________________ By:______________________________
Name:_______________________ Name: E. Kurt Kim
Its:________________________ Its: Authorized Signatory
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By:______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: Investment Advisor
By:______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
21
<PAGE>
[Signature Page to Registration Rights Agreement - p. 2 of 2]
AG SUPER FUND INTERNATIONAL PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By:_______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAPHAEL, L.P.
By:_______________________________
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Its: Investment Advisor
By:_______________________________
Name: Michael L. Gordon
Its: Managing Officer
22
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Investor Address Investor's Representatives' Address
Investor Name and Facsimile Number and Facsimile Number
- --------------------- -------------------------------------- ---------------------------------------
<S> <C> <C>
HFTP Investment L.L.C. c/o Promethean Asset Management L.L.C. Promethean Asset Management L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: E. Kurt Kim Attn: E. Kurt Kim
James F. O'Brien, Jr. James F. O'Brien, Jr
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
GAM Arbitrage c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
Investments, Inc. 245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
AG Super Fund c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
International 245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
Partners, L.P. New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
Raphael, L.P. c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Investor Address Investor's Representatives' Address
Investor Name and Facsimile Number and Facsimile Number
- --------------------- -------------------------------------- ---------------------------------------
<S> <C> <C>
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. Angelo, Gordon & Co., L.P.
245 Park Avenue - 26/th/ Floor 245 Park Avenue - 26/th/ Floor
New York, New York 10167 New York, New York 10167
Attention: Gary Wolf or Ari Storch Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449 Facsimile: (212) 867-6449
Telephone: (212) 692-2035 Telephone: (212) 692-2035
</TABLE>
24
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
Attn:
Re: Medcare Technologies, Inc.
--------------------------
Ladies and Gentlemen:
We are counsel to Medcare Technologies, Inc., a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "Purchase Agreement") entered into by and
among the Company and the buyers named therein (collectively, the "Holders")
pursuant to which the Company issued to the Holders shares of its Preferred
Stock, $0.25 par value per share (the "Preferred Shares") convertible into
shares of the Company's common stock, $0.001 par value per share (the "Common
Stock") and the related Warrants (the "the Warrants") to acquire shares of
Common Stock. Pursuant to the Purchase Agreement, the Company also has entered
into a Registration Rights Agreement with the Holders (the "Registration Rights
Agreement") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the
Preferred Shares and exercise of the Warrants, under the Securities Act of 1933,
as amended (the "1933 Act"). In connection with the Company's obligations under
the Registration Rights Agreement, on _________________, the Company filed a
Registration Statement on Form S-3 (File No. 333-_____________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities which names each of the Holders as
a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[ISSUER'S COUNSEL]
By:__________________________________
cc: [LIST NAMES OF HOLDERS]
<PAGE>
Exhibit D
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO
COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS.
MEDCARE TECHNOLOGIES, INC.
Warrant To Purchase Common Stock
Warrant No.:_______________ Number of Shares: _________
Date of Issuance: _____________, 199_
Medcare Technologies, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for Ten United States Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, ____________________, the registered holder hereof or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof (subject to the vesting requirements of Section 1(c)
below), but not after 11:59 P.M. Central Time on the Expiration Date (as defined
herein) __________ ( ) fully paid nonassessable shares of Common Stock (as
defined herein) (subject to the vesting requirements of Section 1(c) below) of
the Company (the "Warrant Shares") at the purchase price per share provided in
Section 1(b) below; provided, however, that in no event shall the holder be
entitled to exercise this Warrant for a number of Warrant Shares in excess of
that number of Warrant Shares which, upon giving effect to such exercise, would
cause the aggregate number of shares of Common Stock beneficially owned by the
holder and its affiliates to exceed 4.99% of the outstanding shares of the
Common Stock following such exercise. For purposes of the foregoing proviso,
the aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates shall include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the determination of such
proviso is being made, but shall exclude shares of Common Stock which would be
issuable upon (i) exercise of the remaining, unexercised Warrants beneficially
owned by the holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other
<PAGE>
securities of the Company beneficially owned by the holder and its affiliates
(including, without limitation, any convertible notes or preferred stock)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes of
this paragraph, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this provision, in determining the number of outstanding shares Common Stock
a holder may rely on the number of outstanding shares of Common Stock as
reflected in (1) the Company's most recent Form 10-Q or Form 10-K, as the case
may be, (2) a more recent public announcement by the Company or (3) any other
notice by the Company or its transfer agent setting forth the number of shares
of Common Stock outstanding. Upon the written request of any holder, the Company
shall promptly, but in no event later than one (1) Business Day following the
receipt of such notice, confirm in writing to any such holder the number of
shares of Common Stock then outstanding. In any case, the number of outstanding
shares Common Stock shall be determined after giving effect to conversions of
Preferred Shares and exercise of Warrants (as defined below) by such holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. Notwithstanding the foregoing, the holder of this
Warrant shall have the sole obligation to determine whether the restrictions
contained in this provision apply to such holder.
Section 1.
(a) Securities Purchase Agreement. This Warrant is one of the
-----------------------------
Warrants (the "Preferred Share Warrants") issued pursuant to Section 1 of that
certain Securities Purchase Agreement dated as of May __, 1999, among the
Company and the Buyers referred to therein (the "Securities Purchase
Agreement").
(b) Definitions. The following words and terms as used in this
-----------
Warrant shall have the following meanings:
(i) "Approved Stock Plan" shall mean any employee benefit plan
which has been approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer, director,
consultant or other service provider of the Company.
(ii) "Business Day" means any day other than Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law to remain closed.
(iii) "Certificate of Designations" means the Company's
Certificate of Designations, Preferences and Rights of the Preferred Shares.
(iv) "Closing Bid Price" means, for any security as of any date,
the last closing bid price for such security on the Principal Market (as defined
below) as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the
Principal Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if
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<PAGE>
the foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price is reported for such security
by Bloomberg, the last closing trade price for such security as reported by
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as mutually determined by the Company and the holders
of the Preferred Shares. If the Company and the holders of the Preferred Shares
are unable to agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 2(a) of this Warrant with the term
"Closing Bid Price" being substituted for the term "Market Price." (All such
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period.)
(v) "Closing Sale Price" means, for any security as of any date, the
last closing trade price for such security on the Principal Market (as defined
below) as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing trade price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing trade price of such security
in the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the last closing ask price of such
security as reported by Bloomberg, or, if no last closing ask price is reported
for such security by Bloomberg, the average of the ask prices of any market
makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Sale Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Sale Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holders of Preferred Shares. If the Company and the
holders of Preferred Shares are unable to agree upon the fair market value of
the Common Stock, then such dispute shall be resolved pursuant to Section 2(a)
below with the term "Closing Sale Price" being substituted for the term "Market
Price." (All such determinations to be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such period).
(vi) "Common Stock" means (i) the Company's common stock, par
value $0.001 per share, and (ii) any capital stock into which such Common Stock
shall have been changed or any capital stock resulting from a reclassification
of such Common Stock.
(vii) "Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Sections
8(b)(i) and 8(b)(ii) hereof regardless of whether the Options (as defined below)
or Convertible Securities (as defined below) are actually exercisable or
convertible at such time, but excluding any shares of Common Stock owned or held
by or for the account of the Company or issuable upon exercise of the Preferred
Share Warrants.
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<PAGE>
(viii) "Convertible Securities" means any stock or securities
(other than Options) directly or indirectly convertible into or exchangeable for
Common Stock.
(ix) "Expiration Date" means the date five years from the date of
this Warrant or, if such date falls on a Saturday, Sunday or other day on which
banks are required or authorized to be closed in the City of Chicago or the
State of Illinois or on which trading does not take place on the principal
exchange or automated quotation system on which the Common Stock is traded (a
"Holiday"), the next date that is not a Holiday.
(x) "Market Price" means, with respect to any security for any
period, that price which shall be computed as the arithmetic average of the
Closing Bid Prices for such security for each trading day in such period.
(xi) "Options" means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.
(xii) "Other Securities" means (i) those warrants of the Company
issued prior to, and outstanding on, the date of issuance of this Warrant, (ii)
the Preferred Shares and (iii) the shares of Common Stock issued upon conversion
of the Preferred Shares.
(xiii) "Person" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(xiv) "Preferred Shares" means the shares of the Company's Series
B Convertible Preferred Shares issued pursuant to the Securities Purchase
Agreement.
(xv) "Principal Market" means the Nasdaq SmallCap Market.
(xvi) "Securities Act" means the Securities Act of 1933, as amended.
(xvii) "Warrant" means this Warrant and all Warrants issued in
exchange, transfer or replacement of any thereof.
(xviii) "Warrant Exercise Price" shall be equal to, with respect to
any Warrant Share, 125% of the average of the Closing Bid Prices for the five
consecutive trading days immediately preceding the Vesting Date (as defined
below) for such Warrant Share, subject to adjustment as hereinafter provided.
(xviii) "Warrant Period" means the period beginning on the date
hereof and ending on and including the Expiration Date.
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<PAGE>
(c) Vesting of Warrant.
------------------
(i) On the date which is 120 days after the date hereof (the
"First Vesting Date"), this Warrant shall become, and thereafter during the
Warrant Period shall remain, exercisable with respect to that number of Warrant
Shares equal to the product obtained by multiplying (A) 200 by (B) the sum of
(x) the number of [Initial/Additional] Preferred Shares (as defined in the
Securities Purchase Agreement) issued on the date hereof to the initial holder
of this Warrant pursuant to the Securities Purchase Agreement and which remain
outstanding on the First Vesting Date and (y) the aggregate number of
[Initial/Additional] Preferred Shares issued on the date hereof to such holder
pursuant to the Securities Purchase Agreement which have been converted by such
holders before the First Vesting Date at a Conversion Price (as defined in the
Certificate of Designations) equal to the Fixed Conversion Price (as defined in
the Certificate of Designations) (such resulting number of shares is referred to
herein as the "First Vested Shares").
(ii) In addition to the First Vested Shares, on the date which
is 300 days after the date hereof (the "Second Vesting Date"), this Warrant
shall become, and thereafter during the Warrant Period shall remain, exercisable
with respect to an additional number of Warrant Shares equal to the product
obtained by multiplying (A) 200 by (B) the sum of (x) the number of
[Initial/Additional] Preferred Shares issued on the date hereof to the initial
holder of this Warrant pursuant to the Securities Purchase Agreement and which
remain outstanding on the Second Vesting Date and (y) the aggregate number of
shares of [Initial/Additional] Preferred Stock issued on the date hereof to such
holder pursuant to the Securities Purchase Agreement which have been converted
by such holders before the Second Vesting Date at a Conversion Price equal to
the Fixed Conversion Price (such resulting number of shares is referred to
herein as the "Second Vested Shares").
(iii) In addition to the First Vested Shares and the Second
Vested Shares, on the date which is 480 days after the date hereof (the "Third
Vesting Date"), this Warrant shall become, and thereafter during the Warrant
Period shall remain, exercisable with respect to an additional number of Warrant
Shares equal to the product obtained by multiplying (A) 200 by (B) the sum of
(x) the number of [Initial/Additional] Preferred Shares issued on the date
hereof to the initial holder of this Warrant pursuant to the Securities Purchase
Agreement and which remain outstanding on the Third Vesting Date and (y) the
aggregate number of shares of [Initial/Additional] Preferred Stock issued on the
date hereof to such holder pursuant to the Securities Purchase Agreement which
have been converted by such holders before the Third Vesting Date at a
Conversion Price equal to the Fixed Conversion Price (such resulting number of
shares is referred to herein as the "Third Vested Shares").
(iv) The right to exercise this Warrant with respect to that
number of Warrant Shares equal to the difference between (A) the total number of
Warrant Shares initially issuable hereunder (after giving effect to any
adjustment as provided herein) and (B) the sum of the First Vested Shares, the
Second Vested Shares and the Third Vested Shares (the "Vested Shares") shall be
deemed to have been forfeited by the holder hereof.
(v) Within five days of the First Vesting Date, the Second
Vesting Date and the Third Vesting Date (the "Vesting Date") the Company shall
provide the Warrant holder with
-5-
<PAGE>
written notice which shall contain the following information: (a) The Warrant
certificate number to which such written notice is applicable, (b) the Vesting
Date which triggered the requirement for the notice (i.e., First, Second or
Third), (c) the number of Warrant Shares that vested for the specified Warrant
on such Vesting Date and (d) the Warrant Exercise Price for those Warrant
Shares.
Section 2. Exercise of Warrant.
-------------------
(a) Subject to the terms and conditions hereof, this Warrant
may be exercised by the holder hereof then registered on the books of the
Company, in whole or in part, at any time on any Business Day on or after the
opening of business on the date hereof (subject to the vesting requirements of
Section 1(c) below) and prior to 11:59 P.M. Central Time on the Expiration Date
by (i) delivery of a written notice, in the form of the subscription notice
attached as Exhibit A hereto (the "Exercise Notice"), of such holder's election
---------
to exercise this Warrant, which notice shall specify the number of Warrant
Shares to be purchased, (ii) (A) p ayment to the Company of an amount equal to
the applicable Warrant Exercise Price multiplied by the number of Warrant Shares
as to which this Warrant is being exercised (plus any applicable issue or
transfer taxes) (the "Aggregate Exercise Price") in cash or wire transfer of
immediately available funds, and (iii) the surrender to a common carrier for
overnight delivery to the Company as soon as practicable following such date,
this Warrant (or an indemnification undertaking with respect to this Warrant in
the case of its loss, theft or destruction); provided, that if such Warrant
Shares are to be issued in any name other than that of the registered holder of
this Warrant, such issuance shall be deemed a transfer and the provisions of
Section 7 shall be applicable. In the event of any exercise of the rights
represented by this Warrant in compliance with this Section 2(a), the Company
shall on the second Business Day following the date of receipt of the Exercise
Notice, the Aggregate Exercise Price and this Warrant (or an indemnification
undertaking with respect to this Warrant in the case of its loss, theft or
destruction) (the "Exercise Delivery Documents"), credit such aggregate number
of shares of Common Stock to which the holder shall be entitled to the holder's
or its designee's balance account with The Depository Trust Company; provided,
however, if the holder who submitted the Exercise Notice requested physical
delivery of any or all of the Warrant Shares, then the Company shall, on or
before the second Business Day following receipt of the Exercise Delivery
Documents issue and surrender to a common carrier for overnight delivery to the
address specified in the Exercise Notice, a certificate, registered in the name
of the holder, for the number of shares of Common Stock to which the holder
shall be entitled pursuant to such request. Upon delivery of the Exercise Notice
and Aggregate Exercise Price referred to in clause (ii)(A) above or notification
to the Company of a Cashless Exercise referred to in Section 2(f), the holder of
this Warrant shall be deemed for all corporate purposes to have become the
holder of record of the Warrant Shares with respect to which this Warrant has
been exercised, irrespective of the date of delivery of this Warrant as required
by clause (iii) above or the certificates evidencing such Warrant Shares. In the
case of a dispute as to the determination of the Warrant Exercise Price, the
last reported sale price (as reported by Bloomberg) or the Market Price of a
security or the arithmetic calculation of the Warrant Shares, the Company shall
promptly issue to the holder the number of shares of Common Stock that is not
disputed and shall submit the disputed determinations or arithmetic calculations
to the holder via facsimile within one Business Day of receipt of the holder's
subscription notice. If the holder and the Company are unable to agree upon the
determination of the Warrant Exercise Price, the last reported sale price (as
reported by Bloomberg) or Market Price or arithmetic calculation of the Warrant
Shares within one day of such disputed determination or arithmetic calculation
being
-6-
<PAGE>
submitted to the holder, then the Company shall immediately submit via facsimile
(i) the disputed determination of the Warrant Exercise Price, the last reported
sale price (as reported by Bloomberg) or the Market Price to an independent,
reputable investment banking firm or (ii) the disputed arithmetic calculation of
the Warrant Shares to its independent, outside accountant. The Company shall
cause the investment banking firm or the accountant, as the case may be, to
perform the determinations or calculations and notify the Company and the holder
of the results no later than forty-eight (48) hours from the time it receives
the disputed determinations or calculations. Such investment banking firm's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error.
(b) Unless the rights represented by this Warrant shall have expired
or shall have been fully exercised, the Company shall, as soon as practicable
and in no event later than five Business Days after any exercise and at its own
expense, issue a new Warrant identical in all respects to this Warrant exercised
except it shall represent rights to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under this Warrant exercised,
less the number of Warrant Shares with respect to which such Warrant is
exercised.
(c) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.
(d) If the Company shall fail for any reason or for no reason to issue
to the holder within five (5) Business Days of receipt of the Exercise Delivery
Documents, a certificate for the number of shares of Common Stock to which the
holder is entitled or to credit the holder's balance account with The Depository
Trust Company for such number of shares of Common Stock to which the holder is
entitled upon the holder's exercise of this Warrant or a new Warrant for the
number of shares of Common Stock to which such holder is entitled pursuant to
Section 2(b) hereof, the Company shall, in addition to any other remedies under
this Warrant or the Securities Purchase Agreement or otherwise available to such
holder, including any indemnification under Section 8 of the Securities Purchase
Agreement, pay as additional damages in cash to such holder on each day the
issuance of such Common Stock certificate or new Warrant, as the case may be, is
not timely effected an amount equal to 0.125% of the product of (A) the sum of
the number of shares of Common Stock not issued to the holder on a timely basis
and to which the holder is entitled and/or, the number of shares represented by
the portion of this Warrant which is not being converted, as the case may be,
and (B) the average of the Closing Sale Price of the Common Stock for the three
consecutive trading days immediately preceding the last possible date which the
Company could have issued such Common Stock or Warrant, as the case may be, to
the holder without violating this Section 2.
(e) If, despite the Company's obligations provided in the Securities
Purchase Agreement and the Registration Rights Agreement (as defined in the
Securities Purchase Agreement), the Warrant Shares to be issued are not
registered for resale in accordance with the Registration Rights Agreement or a
Triggering Event (as defined in the Certificate of Designations) shall have
occurred, notwithstanding anything contained herein to the contrary and in
addition to and not in lieu of any of the other rights and remedies to which the
holder may be entitled by reason of the Company's failure fully to meet its
obligations under the Securities Purchase Agreement or the
-7-
<PAGE>
Registration Rights Agreement, the holder of this Warrant may, at its election
exercised in its sole discretion, exercise this Warrant in whole or in part and,
in lieu of making the cash payment otherwise contemplated to be made to the
Company upon such exercise in payment of the Aggregate Exercise Price, elect
instead to receive upon such exercise the "Net Number" of shares of Common Stock
determined according to the following formula (a "Cashless Exercise"):
Net Number = (A x B) - (A x C)
-----------------
B
For purposes of the foregoing formula:
A= the total number shares with respect to
which this Warrant is then being exercised.
B= the last reported sale price (as reported
by Bloomberg) of the Common Stock on the date
immediately preceding the date of the
subscription notice.
C= the Warrant Exercise Price then in effect
for the applicable Warrant Shares at the time
of such exercise.
Section 3. Covenants as to Common Stock. The Company hereby covenants
----------------------------
and agrees as follows:
(a) This Warrant is, and any Preferred Share Warrants issued in
substitution for or replacement of this Warrant will upon issuance be, duly
authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise of
the rights represented by this Warrant will, upon issuance, be validly issued,
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issue thereof.
(c) During the period within which the rights represented by
this Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company shall promptly secure the listing of the shares
of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance upon
exercise of this Warrant) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all shares of Common Stock from
time to time issuable upon the exercise of this Warrant; and the Company shall
so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so
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<PAGE>
long as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(e) The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. No impairment of the designations, preferences and rights of the
Preferred Shares contained in the Company's Certificate of Designations or any
waiver thereof which has an adverse effect on the rights granted hereunder shall
be given effect until the Company has taken appropriate action (satisfactory to
the holders of Preferred Share Warrants representing a majority of the shares of
Common Stock issuable upon the exercise of such Preferred Share Warrants then
outstanding) to avoid such adverse effect with respect to this Warrant. Without
limiting the generality of the foregoing, the Company (i) will not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Warrant Exercise Price then in effect, and (ii) will take all
such actions as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to
the Company by merger, consolidation or acquisition of all or substantially all
of the Company's assets.
Section 4. Taxes. The Company shall pay any and all taxes which may be
-----
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant; provided, however, that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issue or delivery of Common Stock or other securities or property in a
name other than that of the registered holders of this Warrant to be converted
and such holder shall pay such amount, if any, to cover any applicable transfer
or similar tax.
Section 5. Warrant Holder Not Deemed a Stockholder. Except as
---------------------------------------
otherwise specifically provided herein, no holder, as such, of this Warrant
shall be entitled to vote or receive dividends or be deemed the holder of shares
of the Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 5, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to
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<PAGE>
the stockholders of the Company generally, contemporaneously with the giving
thereof to the stockholders.
Section 6. Representations of Holder. The holder of this Warrant, by
-------------------------
the acceptance hereof, represents that it is acquiring this Warrant and the
Warrant Shares for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution of
this Warrant or the Warrant Shares, except pursuant to sales registered or
exempted under the Securities Act; provided, however, that by making the
representations herein, the holder does not agree to hold this Warrant or any of
the Warrant Shares for any minimum or other specific term and reserves the right
to dispose of this Warrant and the Warrant Shares at any time in accordance with
or pursuant to a registration statement or an exemption under the Securities
Act. The holder of this Warrant further represents, by acceptance hereof, that,
as of this date, such holder is an "accredited investor" as such term is
defined in Rule 501(a)(1) of Regulation D promulgated by the Securities and
Exchange Commission under the Securities Act (an "Accredited Investor"). Upon
exercise of this Warrant, other than pursuant to a Cashless Exercise the holder
shall, if requested by the Company, confirm in writing, in a form satisfactory
to the Company, that the Warrant Shares so purchased are being acquired solely
for the holder's own account and not as a nominee for any other party, for
investment, and not with a view toward distribution or resale and that such
holder is an Accredited Investor. If such holder cannot make such
representations because they would be factually incorrect, it shall be a
condition to such holder's exercise of this Warrant that the Company receive
such other representations as the Company considers reasonably necessary to
assure the Company that the issuance of its securities upon exercise of this
Warrant shall not violate any United States or state securities laws.
Section 7. Ownership and Transfer.
----------------------
(a) The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each transferee. The Company may treat the
person in whose name any Warrant is registered on the register as the owner and
holder thereof for all purposes, notwithstanding any notice to the contrary, but
in all events recognizing any transfers made in accordance with the terms of
this Warrant.
(b) This Warrant and the rights granted hereunder shall not be
assignable by the holder hereof without the prior written consent of the
Company, which consent shall not be unreasonably withheld; provided, however,
that this Warrant and the rights granted to the holder hereof are transferable,
in whole or in part, without the consent of the Company, upon surrender of this
Warrant, together with a properly executed warrant power in the form of Exhibit
B attached hereto; (i) upon the transfer of all or any portion of Warrants to
any existing holder of the Warrants and (ii) to any transferee, provided that
such transferor, transfers the entire Warrant and its rights hereunder to such
transferee. Notwithstanding the foregoing, the Warrant holder, HFTP Investment
L.L.C., shall have the right without the consent of the Company, to transfer all
or any portion of its rights hereunder to a maximum of one (1) Affiliated
Transferee. An "Affiliated Transferee" shall mean (i) an Affiliate of a holder
of this Warrant, (ii) any holder of Preferred Shares and (iii) any Affiliate of
a holder of Preferred Shares.
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<PAGE>
(c) The holder of this Warrant understands that this Warrant has
not been and is not expected to be, registered under the Securities Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (a) registered thereunder, or (b) such holder shall have
delivered to the Company an opinion of counsel, in form reasonably satisfactory
to the Company, to the effect that the securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration; provided that (i) any sale of such securities made in
reliance on Rule 144 promulgated under the Securities Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (ii)
neither the Company nor any other person is under any obligation to register the
Preferred Share Warrants under the Securities Act or any state securities laws
or to comply with the terms and conditions of any exemption thereunder.
(d) The Company is obligated to register the Warrant Shares for
resale under the Securities Act pursuant to the Registration Rights Agreement
dated May __, 1999 by and between the Company and the Buyers listed on the
signature page thereto (the "Registration Rights Agreement") and the initial
holder of this Warrant (and certain assignees thereof) is entitled to the
registration rights in respect of the Warrant Shares as set forth in the
Registration Rights Agreement.
Section 8. Adjustment of Warrant Exercise Price and Number of Shares.
---------------------------------------------------------
The Warrant Exercise Price and the number of shares of Common Stock issuable
upon exercise of this Warrant shall be adjusted from time to time as follows:
(a) Adjustment of Warrant Exercise Price and Number of Shares upon
Issuance of Common Stock. If and whenever during the Warrant Period the Company
issues or sells, or is deemed to have issued or sold, any shares of Common Stock
(other than Preferred Shares or shares of Common Stock issued upon conversion of
Preferred Shares or deemed to have been issued by the Company in connection with
an Approved Stock Plan (as defined below)) for a consideration per share less
than a price (the "Applicable Price") equal to a applicable Warrant Exercise
Price in effect immediately prior to such issuance or sale, then immediately
after such issue or sale, the Warrant Exercise Price then in effect shall be
reduced to an amount equal to the product of (x) the Warrant Exercise Price then
in effect and (y) the quotient of (1) the sum of (I) the product of the
Applicable Price multiplied by the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale and (II)
the consideration, if any, received by the Company upon such issue or sale,
divided by (2) the product of (I) the Applicable Price multiplied by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such issue
or sale.
(b) Effect on Warrant Exercise Price of Certain Events. For
purposes of determining the adjusted Warrant Exercise Price under Section 8(a)
above, the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants
-------------------
any Options and the lowest price per share for which one share of Common Stock
is issuable upon the
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<PAGE>
exercise of any such Option or upon conversion or exchange of any Convertible
Securities issuable upon exercise of any such Option is less than the Applicable
Price, then such share of Common Stock shall be deemed to be outstanding and to
have been issued and sold by the Company at the time of the granting or sale of
such Option for such price per share. For purposes of this Section 8(b)(i), the
"lowest price per share for which one share of Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option and upon conversion or exchange of any Convertible Security issuable upon
exercise of such Option. No further adjustment of the Warrant Exercise Price
shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities. Notwithstanding the foregoing, no adjustment shall be made pursuant
to this Section 8(b)(i) to the extent that such adjustment is based solely on
the fact that the Convertible Securities issuable upon exercise of such Option
are convertible into or exchangeable for Common Stock at a price which varies
with the market price of the Common Stock.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon such conversion or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 8(b)(ii), the "lowest price per
share for which one share of Common Stock is issuable upon such conversion or
exchange" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion
or exchange of such Convertible Security. No further adjustment of the Warrant
Exercise Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Warrant Exercise Price had been or are to be made
pursuant to other provisions of this Section 8(b), no further adjustment of the
Warrant Exercise Price shall be made by reason of such issue or sale.
Notwithstanding the foregoing, no adjustment shall be made pursuant to this
Section 8(b)(ii) to the extent that such adjustment is based solely on the fact
that such Convertible Securities are convertible into or exchangeable for Common
Stock at a price which varies with the market price of the Common Stock.
(iii) Change in Option Price or Rate of Conversion. If the
---------------------------------------------
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for Common Stock changes at any time, the Warrant Exercise Price
in effect at the time of such change shall be adjusted to the Warrant Exercise
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold and the number of shares of Common Stock
acquirable hereunder shall be correspondingly readjusted. For purposes of this
Section 8(b)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of this Warrant are changed
-12-
<PAGE>
in the manner described in the immediately preceding sentence, then such Option
or Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change. No adjustment pursuant to this Section 8(b) shall be made
if such adjustment would result in an increase of the Warrant Exercise Price
then in effect.
(c) Effect on Warrant Exercise Price of Certain Events. For
--------------------------------------------------
purposes of determining the adjusted Warrant Exercise Price under Sections 8(a)
and 8(b), the following shall be applicable:
(i) Calculation of Consideration Received. In case any Option is
-------------------------------------
issued in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $.01. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of such consideration received by the Company will be the
fair value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price of such securities for the twenty (20) consecutive
trading days immediately preceding the date of receipt. If any Common Stock,
Options or Convertible Securities are issued to the owners of the non-surviving
entity in connection with any merger in which the Company is the surviving
entity, the amount of consideration therefor will be deemed to be the fair value
of such portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
will be determined jointly by the Company and the holders of Preferred Share
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of the Preferred Share Warrants then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an event
requiring valuation (the "Valuation Event"), the fair value of such
consideration will be determined within five Business Days after the tenth
(10th) day following the Valuation Event by an independent, reputable appraiser
jointly selected by the Company and the holders of Preferred Share Warrants
representing a majority of the shares of Common Stock obtainable upon exercise
of the Preferred Share Warrants then outstanding. The determination of such
appraiser shall be final and binding upon all parties and the fees and expenses
of such appraiser shall be borne jointly by the Company and the holders of
Preferred Shares.
(ii) Record Date. If the Company takes a record of the holders
-----------
of Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (2) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
-13-
<PAGE>
(d) Adjustment of Warrant Exercise Price upon Subdivision or
--------------------------------------------------------
Combination of Common Stock. If the Company at any time after the date of
- ---------------------------
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, any Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time after the date of
issuance of this Warrant combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, any Warrant Exercise Price in effect immediately prior
to such combination will be proportionately increased and the number of shares
of Common Stock obtainable upon exercise of this Warrant will be proportionately
decreased. Any adjustment under this Section 8(d) shall become effective at the
close of business on the date the subdivision or combination becomes effective.
(e) Distribution of Assets. If the Company shall declare or make any
----------------------
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities,
property or options by way of a dividend, spin off, reclassification, corporate
rearrangement or other similar transaction) (a "Distribution"), at any time
after the issuance of this Warrant, then, in each such case:
(i) any Warrant Exercise Price in effect immediately prior to
the close of business on the record date fixed for the determination of holders
of Common Stock entitled to receive the Distribution shall be reduced, effective
as of the close of business on such record date, to a price determined by
multiplying such Warrant Exercise Price by a fraction of which (A) the numerator
shall be the Closing Bid Price on the trading day immediately preceding such
record date minus the value of the Distribution (as determined in good faith by
the Company's Board of Directors) applicable to one share of Common Stock, and
(B) the denominator shall be the Closing Bid Price on the trading day
immediately preceding such record date; and
(ii) either (A) the number of Warrant Shares obtainable upon
exercise of this Warrant shall be increased to a number of shares equal to the
number of shares of Common Stock obtainable immediately prior to the close of
business on the record date fixed for the determination of holders of Common
Stock entitled to receive the Distribution multiplied by the reciprocal of the
fraction set forth in the immediately preceding clause (i), or (B) in the event
that the Distribution is of common stock of a company whose common stock is
traded on a national securities exchange or a national automated quotation
system, then the holder of this Warrant shall receive an additional warrant to
purchase Common Stock, the terms of which shall be identical to those of this
Warrant, except that such warrant shall be exercisable into the amount of the
assets that would have been payable to the holder of this Warrant pursuant to
the Distribution had the holder exercised this Warrant immediately prior to such
record date and with an exercise price equal to the amount by which the exercise
price of this Warrant was decreased with respect to the Distribution pursuant to
the terms of the immediately preceding clause (i).
-14-
<PAGE>
(f) Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 8 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the Warrant
Exercise Price and the number of shares of Common Stock obtainable upon exercise
of this Warrant so as to protect the rights of the holders of the Preferred
Share Warrants; provided that no such adjustment will increase the Warrant
Exercise Price or decrease the number of shares of Common Stock obtainable as
otherwise determined pursuant to this Section 8.
(g) Notices.
-------
(i) Immediately upon any adjustment of a Warrant Exercise
Price, the Company will give written notice thereof to the holder of this
Warrant, setting forth in reasonable detail, and certifying, the calculation of
such adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least twenty (20) days prior to the date on which the Company closes
its books or takes a record (A) with respect to any dividend or distribution
upon the Common Stock, (B) with respect to any pro rata subscription offer to
holders of Common Stock or (C) for determining rights to vote with respect to
any Organic Change (as defined below), dissolution or liquidation, provided that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to such holder.
(iii) The Company will also give written notice to the holder of
this Warrant at least twenty (20) days prior to the date on which any Organic
Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.
Section 9. Purchase Rights; Reorganization, Reclassification,
--------------------------------------------------
Consolidation, Merger or Sale. (a) In addition to any adjustments pursuant to
- -----------------------------
Section 8 above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then the holder of this Warrant will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete exercise of this Warrant
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(b) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction in each case which is effected in such a
way that holders of Common Stock are entitled to receive (either directly or
upon subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as "Organic Change." Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other
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<PAGE>
Organic Change following which the Company is not a surviving entity, the
Company will secure from the Person purchasing such assets or the successor
resulting from such Organic Change (in each case, the "Acquiring Entity")
written agreement (in form and substance satisfactory to the holders of
Preferred Share Warrants representing a majority of the shares of Common Stock
obtainable upon exercise of the Preferred Share Warrants then outstanding) to
deliver to each holder of Preferred Share Warrants in exchange for such
Warrants, a security of the Acquiring Entity evidenced by a written instrument
substantially similar in form and substance to this Warrant and satisfactory to
the holders of the Preferred Share Warrants (including, an adjusted warrant
exercise price equal to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, and exercisable for a corresponding number
of shares of Common Stock acquirable and receivable upon exercise of the
Preferred Share Warrants, if the value so reflected is less than any Warrant
Exercise Price in effect immediately prior to such consolidation, merger or
sale). Prior to the consummation of any other Organic Change, the Company shall
make appropriate provision (in form and substance satisfactory to the holders of
Preferred Share Warrants representing a majority of the shares of Common Stock
obtainable upon exercise of the Preferred Share Warrants then outstanding) to
insure that each of the holders of the Preferred Share Warrants will thereafter
have the right to acquire and receive in lieu of or in addition to (as the case
may be) the shares of Common Stock immediately theretofore acquirable and
receivable upon the exercise of such holder's Preferred Share Warrants, such
shares of stock, securities or assets that would have been issued or payable in
such Organic Change with respect to or in exchange for the number of shares of
Common Stock which would have been acquirable and receivable upon the exercise
of such holder's Warrant as of the date of such Organic Change (without taking
into account any limitations or restrictions on the exerciseability of this
Warrant).
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this
--------------------------------------------
Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt
of an indemnification undertaking (or, in the case of a mutilated Warrant, the
Warrant), issue a new Warrant of like denomination and tenor as this Warrant so
lost, stolen, mutilated or destroyed.
Section 11. Notice. Any notices, consents, waivers or other communications
------
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
Medcare Technologies, Inc.
1515 West 22/nd/ Street, Suite
1210
Oak Brook, Illinois 60521
Telephone: 888-479-7900
Facsimile: 630-472-5360
Attention: Chief Executive Officer
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<PAGE>
With copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Facsimile: 312-984-3193
Attention: Michael J. Legamaro
If to a holder of this Warrant, to it at the address and facsimile number set
forth on the Schedule of Buyers to the Securities Purchase Agreement, with
copies to such holder's representatives as set forth on such Schedule of Buyers,
or at such other address and facsimile as shall be delivered to the Company upon
the issuance or transfer of this Warrant. Each party shall provide five days'
prior written notice to the other party of any change in address or facsimile
number. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
Section 12. Amendments. This Warrant and any term hereof may be
----------
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought.
Section 13. Limitation on Number of Warrant Shares. The Company shall
--------------------------------------
not be obligated to issue any Warrant Shares upon exercise of this Warrant if
the issuance of such shares of Common Stock would cause the Company to exceed
that number of shares of Common Stock which the Company may issue upon exercise
of this Warrant (the "Exchange Cap") without breaching the Company's obligations
under the rules or regulations of Principal Market, except that such limitation
shall not apply in the event that the Company (a) obtains the approval of its
stockholders as required by the Principal Market (or any successor rule or
regulation) for issuances of Common Stock in excess of such amount or (b)
obtains a written opinion from outside counsel to the Company that such approval
is not required, which opinion shall be reasonably satisfactory to the holders
of Warrants representing a majority of the Warrant Shares then issuable upon
exercise of outstanding Warrants. Until such approval or written opinion is
obtained, the holder of this Warrant shall not be issued, upon exercise of this
Warrant, Warrant Shares in an amount greater than such holder's Cap Allocation
Amount (as defined in the Certificate of Designations). In the event the
Company is prohibited from issuing Warrant Shares as a result of the operation
of this Section 13, the Company shall redeem for cash those Warrant Shares which
can not be issued, at a price equal to the difference between the Market Price
and the Exercise Price of such Warrant Shares as of the date of the attempted
exercise.
Section 14. Date. The date of this Warrant is [May/ ___], 1999. This
----
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue
-17-
<PAGE>
in full force and effect after such date as to any Warrant Shares or other
securities issued upon the exercise of this Warrant.
Section 15. Amendment and Waiver. Except as otherwise provided herein,
--------------------
the provisions of the Preferred Share Warrants may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of Preferred Share Warrants representing a majority of
the shares of Common Stock obtainable upon exercise of the Preferred Share
Warrants then outstanding; provided that no such action may increase the Warrant
Exercise Price of the Preferred Share Warrants or decrease the number of shares
or class of stock obtainable upon exercise of any Preferred Share Warrants
without the written consent of the holder of such Preferred Share Warrant.
Section 16. Descriptive Headings; Governing Law. The descriptive
-----------------------------------
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of Delaware shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of Illinois, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
Illinois, or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of Illinois.
<PAGE>
MEDCARE TECHNOLOGIES, INC.
By:____________________________________
Name:__________________________________
Title:_________________________________
<PAGE>
EXHIBIT A TO WARRANT
--------------------
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
MEDCARE TECHNOLOGIES, INC.
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("Warrant Shares") of Medcare
Technologies, Inc., a Delaware corporation (the "Company"), evidenced by the
attached Warrant (the "Warrant"). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of the
Warrant Exercise Price shall be made as:
____________ a "Cash Exercise" with respect to
-----------------
____________ Warrant Shares; and/or
____________ a "Cashless Exercise" with respect to ___________
-------------------
Warrant Shares (to the extent permitted by the terms
of the Warrant).
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of $___________________ to
the Company in accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________, ______
_____________________________
Name of Registered Holder
By: __________________________
Name:
Title:
<PAGE>
EXHIBIT B TO WARRANT
--------------------
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of Medcare Technologies, Inc., a
Delaware corporation, represented by warrant certificate no. _____, standing in
the name of the undersigned on the books of said corporation. The undersigned
does hereby irrevocably constitute and appoint ______________, attorney to
transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated: _________, 199_
___________________________________
By: _____________________________
Its: _____________________________
<PAGE>
EXHIBIT E
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made and entered into as of May
18, 1999 by and between Medcare Technologies, Inc., a Delaware corporation
(referred to herein as the "Company"), the investors listed on Schedule A
attached hereto (collectively, "Buyers"), and American National Bank and Trust
Company of Chicago, as escrow agent (sometimes referred to herein as the "Bank"
or the "Escrow Agent").
RECITALS
Through a private placement (the "Placement"), the Company has sold to
Buyers pursuant to the terms and conditions set forth in that certain Securities
Purchase Agreement (the "Purchase Agreement") dated May 18, 1999, an aggregate
of 400 shares of the Company's Series B Convertible Preferred Stock (the
"Initial Preferred Shares") along with the related warrants (the "Warrants").
The Company wishes to appoint the Bank as Escrow Agent to hold the
aggregate amount of consideration that the Buyers are required to deliver in
connection with the purchase of the Initial Preferred Shares at the Initial
Closing (such amount, the "Escrow Amount"), as contemplated under the Purchase
Agreement, and subsequently to dispose of such Escrow Amount as hereinafter
provided.
AGREEMENTS
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. Appointment of Escrow Agent; Acceptance. The Company hereby appoints and
designates the Bank as Escrow Agent for the purposes set forth herein, and
the Bank hereby accepts such appointment on the terms and conditions set
forth herein.
2. Delivery of Escrow Amount to the Escrow Agent. On the Initial Closing Date,
each Buyer shall deposit its proportionate amount of the Escrow Amount, as
determined pursuant to the Purchase Agreement, with the Escrow Agent by wire
transfer of immediately available funds in accordance with the Escrow
Agent's written wire instructions.
3. Release and Disbursement of the Escrow Amount Upon Approval Notice. At (i)
the Company's 1999 Annual Meeting of Shareholders, or (ii) a Special Meeting
of Shareholders, as the case may be, the Company's shareholders will vote
whether to approve the issuance of the Series B Convertible Preferred Stock
and related warrants pursuant to the terms and conditions of the Purchase
Agreement (the "Transaction"). Within one (1) business day of the Company's
Annual Meeting, the President of the Company shall cause American Stock
Transfer Company ("ASTC"), or, in the event ASTC is not the Company's
transfer agent at such time, LaSalle National Bank, Harris Trust and Savings
Bank or another independent third party mutually acceptable to the Company
and the Buyers, as the case may be, to deliver to the Escrow Agent, with a
copy to each of the Buyers, a letter certifying the outcome of the vote of
the Company's shareholders regarding the Transaction (the "Certification
Letter"). In the event that the Certification Letter notifies the Escrow
Agent that the Company's shareholders approved the Transaction (such, an
"Approval Notice"), the Escrow Agent shall immediately disburse to the
Company the entire Escrow Amount, including all interest thereon.
4. Release and Disbursement of Escrow Amount Upon Disapproval Notice or Lack of
Approval. In the event that the Escrow Agent (a) receives a Certification
Letter indicating that the Company's shareholders have not approved the
Transaction (such, a "Disapproval Notice"), (b) has neither received an
Approval Notice nor a Disapproval Notice on or before August 2, 1999 (the
"Notice Cut-Off Date") or (c) on or prior to the date that is seven (7) days
after the date hereof, receives a Due Diligence Notice (as defined below),
then (unless, solely in the case of the circumstance set forth in sub-clause
(b), the Escrow Agent has received specific written instructions from
holders of at least two-thirds (2/3) of the Initial Preferred Shares
outstanding, which instructions agree to extend the
1
<PAGE>
Notice Cut-Off Date), the Escrow Agent shall disburse the Escrow Amount and
all interest earned thereon to the Buyers (at their respective addresses set
forth on the Schedule of Buyers attached hereto) in accordance with their
respective contributions to the Escrow Amount. Each Buyer hereby
acknowledges and agrees that in the event the Escrow Amount and all interest
earned thereon is returned to the Buyers by the Escrow Agent pursuant to
this Section 4, such receipt by the Buyers shall constitute, without further
action or execution or delivery of documents of transfer, a full and
complete redemption by the Company of the Initial Preferred Shares
(including accrued but unpaid dividends thereon) held by each such Buyer.
Each Buyer shall, promptly (but in no event later than three (3) business
days following receipt of its allocable portion of the Escrow Amount and
related interest) deliver to the Company, or to cause to be delivered to the
Company, any and all certificates evidencing the Initial Preferred Shares
(the "Preferred Stock Certificates") and Warrants issued to it or on its
behalf pursuant to the terms and conditions of the Purchase Agreement. "Due
Diligence Notice" shall mean a written notification executed by counsel to
the Buyers indicating that, in the course of its due diligence review of the
material agreements and other material documents (the "Material Documents")
of the Company, it has determined that the consummation of the Transaction
by the Company would violate, breach, conflict, contravene or constitute a
default under any such Material Document.
5. Covenants of Buyers During Pendency of Escrow. Unless and until the earlier
of (a) the date the Escrow Amount is disbursed to the Company in accordance
with the terms of Section 3 hereof, and (b) August 2, 1999, the Buyers agree
and covenant that, notwithstanding the rights of the Buyers or agreements
made with respect to the Initial Preferred Shares or the Warrants, whether
in the Certificate of Designations, Preferences and Rights relating to the
Series B Convertible Preferred Stock (the "Certificate"), the Purchase
Agreement, or otherwise, no Buyer shall, either separately or jointly,
directly or indirectly, do any of the following: (a) exercise or transfer
(including without limitation by sale, exchange or hypothecation) all or any
portion of its respective rights, title and interest in and to the Warrants;
(b) transfer (including without limitation by sale, exchange or
hypothecation) all or any portion of its respective rights, title and
interest in and to the Initial Preferred Shares; (c) exercise its rights to
convert all or any portion of the Initial Preferred Shares into Common Stock
of the Company in accordance with Section 2 of the Certificate; or (d)
exercise its rights to have the Company redeem all or any portion of the
Initial Preferred Shares in accordance with Section 3 of the Certificate
(except such Buyer's rights of redemption as set forth in Section 4(l) of
the Purchase Agreement or Section 4 of this Escrow Agreement).
6. Investment of Funds. The Escrow Agent shall invest the Escrow Amount in
interest-bearing securities, bank deposits and/or so-called "money market
funds" established and managed by nationally recognized firms, as selected
by the Company. All interest earned on the Escrow Amount shall be paid as
specifically provided in this Agreement.
7. Responsibility of Escrow Agent. The Company agrees that the Escrow Agent
shall not be liable to the Company or to any other party for any actions or
omissions except for actions or omissions resulting from the willful
misconduct or gross negligence of the Escrow Agent.
The Escrow Agent may act in reliance upon any instrument or signature believed
to be genuine and may assume that any person purporting to give any writing,
notice, advice or instruction in connection with the provisions hereof has
been duly authorized to do so.
The Company shall indemnify the Escrow Agent against any losses, liabilities or
expenses incurred by the Escrow Agent arising out of or in connection with
this Agreement (including the costs incurred to defend itself against any
claims or liabilities) except for such losses, liabilities or expenses
arising from the gross negligence or willful misconduct of the Escrow Agent.
This provision shall remain in effect despite any termination of this Escrow
Agreement or the resignation or removal of the Escrow Agent.
The Escrow Agent shall have no duties or responsibilities except as expressly
provided in this Agreement and shall neither be obligated to recognize nor
have any liability or responsibility arising under any other agreement to
which the Escrow Agent is not a party, even though reference thereto may be
made herein.
In case any property held by the Escrow Agent hereunder shall be attached,
garnished or levied upon (unless such attachment, garnishment or levy shall
be initiated by or at the direction of the Company) under any order of
court, or the delivery thereof shall be stayed or enjoined by any order of
court, or any other judgment or decree
2
<PAGE>
shall be made or entered by any court affecting such property, or any part
thereof, or any act of the Escrow Agent, the Escrow Agent is hereby
expressly authorized in its sole discretion to obey and comply with all
writs, orders, judgments or decrees so entered or issued, whether with or
without jurisdiction, and in case the Escrow Agent obeys and complies with
any such writ, order, judgment or decree it shall not be liable to the
Company or any Buyer, their successors, heirs or personal representatives or
to any other person, firm or corporation, by reason of such compliance
notwithstanding such writ, order, judgment or decree be subsequently
reversed, modified, annulled, set aside or vacated.
The Escrow Agent shall not be under any duty to give the property held hereunder
any greater degree of care than it gives its own similar property.
The Escrow Agent makes no representation as to the validity, value, genuineness
or the collectibility of any security or other document or instrument held
by or delivered to it under this Escrow Agreement.
8. Withdrawal or Removal of Escrow Agent. The Company may remove the Escrow
Agent at any time upon prior written notice, provided that the Company has
appointed a national or Illinois state bank with assets of at least
$100,000,000 to serve as successor Escrow Agent. The Escrow Agent may resign
upon thirty (30) days' written notice to the parties. After any such removal
or withdrawal, the Escrow Agent shall be required to take no action with
respect hereto except to deliver the Escrowed Items to a successor agent or
to return the Escrowed Items to the respective Investors from whom they
originated.
9. Termination. This Escrow Agreement shall terminate upon delivery of the
Escrow Amount pursuant hereto. All persons shall be conclusively bound as
against the Escrow Agent by any delivery pursuant to the terms of this
Escrow Agreement.
10. Indemnity. In consideration of the Company's execution and delivery of the
documents related to the Transaction, including but not limited to the
Warrants, Purchase Agreement and the Certificate (collectively, the
"Transaction Documents"), in addition to all of the Buyers' other
obligations under the Transaction Documents, the Buyers shall defend,
protect, indemnify and hold harmless the Company and all of its
stockholders, officers, directors, employees and direct or indirect
investors and any of the foregoing persons' agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the
"Indemnitees") from and against any and all actions, causes of action,
suits, claims, losses, costs, penalties, fees, liabilities and damages, and
expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any breach of any warranty or covenant
made by any Buyer in Section 5 hereof or (b) the failure by any Buyer to
deliver (or cause to be delivered) to the Company all of the Preferred Stock
Certificates or the Warrants to the Company within three (3) days of the
Buyer's receipt of the Escrow Amount (as described in Section 4 hereof).
11. Notices. Notices hereunder shall be deemed properly delivered when and if
either (i) personally delivered; or (ii) one (1) business day after deposit
with Federal Express or other commercial overnight courier; or (iii) the
same day if delivered by facsimile (provided confirmation of transmission
is mechanically or electronically generated and kept on file by the sending
party; or (iv) two (2) business days after deposit in the U.S. Mail, by
registered certified mail, return receipt requested, postage prepaid to the
parties as set forth below:
The Company: Medcare Technologies, Inc.
1515 West 22nd Street, Suite 1210
Oak Brook, Illinois 60523
Attn: Jeffrey S. Aronin
3
<PAGE>
With a copy to
its attorneys: Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 W. Wacker Drive
27th Floor
Chicago, Illinois 60606
Attn: Michael J. Legamaro
Buyers: (See Schedule A attached hereto)
----------
The Escrow Agent: American National Bank and Trust
900 75th Street
Willowbrook, Illinois 60521
Attn: John O'Sullivan
12. Miscellaneous.
-------------
(a) Amendments. This Escrow Agreement or any provision hereof may be
amended, waived, discharged or terminated only by the written
agreement of the parties.
(b) Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Illinois.
(c) Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto.
(d) Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the
subjects hereof.
(e) Severability. In case any provision of this Agreement shall be
deemed invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions of this Escrow
Agreement shall not in any way be affected or impaired thereby.
(f) Expenses. The Company shall pay reasonable costs and expenses of
the Escrow Agent hereunder.
(g) Titles and Subtitles. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to
be considered in construing the Escrow Agreement.
(h) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
THE COMPANY:
MEDCARE TECHNOLOGIES, INC.
By: /s/ Jeffrey S. Aronin
---------------------
Name: Jeffrey S. Aronin
Its: President & CEO
THE BUYERS:
HFTP INVESTMENT L.L.C.
By: Promethean Asset Management L.L.C.
Its: Investment Manager
By:/s/ E. Kurt Kim
---------------
Name: E. Kurt Kim
Its: Authorized Signatory
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By:/s/ Michael L. Gordon
---------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By:/s/ Michael L. Gordon
---------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
<PAGE>
AG SUPER FUND INTERNATIONAL PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
Its: General Partner
By:/s/ Michael L. Gordon
---------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
RAPHAEL, L.P.
By:/s/ Michael L. Gordon
---------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C., its Investment
Advisor
By:/s/ Michael L. Gordon
---------------------
Name: Michael L. Gordon
Its: Managing Officer
THE ESCROW AGENT:
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By: /s/ John O'Sullivan
-------------------
Name: John O'Sullivan
Its: Vice President
<PAGE>
SCHEDULE A
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Investor Address
Investor Name and Facsimile Number
<S> <C>
HFTP Investment L.L.C. c/o Promethean Asset Management L.L.C.
40 West 57th Street, Suite 1520
New York, New York 10019
Attn: E. Kurt Kim and James F. O'Brien
Telephone: 212-698-0580
Facsimile: 212-698-0505
Residence: New York
With a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Attn: Philip Adler
Leonardo, L.P. c/o Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor
New York, New York 10167
Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449
Telephone: (212) 692-2034
Residence: Cayman Islands
GAM Arbitrage Investments, Inc. c/o Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor
New York, New York 10167
Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449
Telephone: (212) 692-2034
Residence: British Virgin Islands
AG Super Fund International c/o Angelo, Gordon & Co., L.P.
Partners, L.P. 245 Park Avenue - 26th Floor
New York, New York 10167
Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449
Telephone: (212) 692-2034
Residence: Cayman Islands
Raphael, L.P. c/o Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor
New York, New York 10167
Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449
Telephone: (212) 692-2034
Residence: Cayman Islands
Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P.
245 Park Avenue - 26th Floor
New York, New York 10167
Attention: Gary Wolf or Ari Storch
Facsimile: (212) 867-6449
Telephone: (212) 692-2034
Residence: Bermuda
</TABLE>
<PAGE>
PROPOSAL NO. 4:
To adopt the Company's 2000 Stock Option Plan and reserve 2,000,000 shares
of Common Stock for issuance thereunder.
The Board of Directors views the issuance of stock options to
directors, consultants and employees as necessary in order to attract and
maintain the services of individuals essential to the Company's long-term
success. The purpose of the Plan is to encourage and enable the officers,
employees, directors, consultants and advisors of the Company and its
affiliates, upon whose judgment, initiative and efforts the Company largely
depends for the successful conduct of its business, to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a
direct stake in the Company's welfare will assure a closer identification of
their interests with those of the Company, thereby stimulating their efforts on
the Company's behalf and strengthening their desire to remain with the Company.
A copy of the Company's 2000 Stock Option Plan (the "Plan") is included with
this Proxy Statement as Exhibit F.
The Plan will be administered by the Board of Directors and is
designed to provide the Board of Directors with flexibility in the type of
compensation awards that can be issued. The Plan allows for the Board of
Directors to issue stock options, restricted share awards, performance share
awards and share appreciation rights, to select the persons to whom awards may
be granted, to determine the terms of each award, to interpret the provisions of
the Plan and to make all other determinations necessary or advisable for the
administration of the Plan. Please refer to Exhibit F for additional details.
The reservation of 2,000,000 shares for issuance under the plan is
expected to provide the Board of Directors with enough shares to adequately
administer the Plan for a number of years. By issuing a large enough number of
shares to extend over several years, the Company will save time and money by not
having to go through the process of creating a new plan every year. The benefits
or amounts, if any, that will be received by the executives and directors under
this Plan have not been determined at this time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE COMPANY'S 2000
STOCK OPTION PLAN AND RESERVATION OF 2,000,000 SHARES OF COMMON STOCK FOR
ISSUANCE THEREUNDER.
<PAGE>
EXHIBIT F
EXHIBIT F
YEAR 2000 STOCK OPTION PLAN
SECTION 1. General Purpose of the Plan; Definitions.
----------------------------------------
The name of the plan is the MedCare Technologies, Inc. 2000 Stock Incentive
Plan (the "Plan"). The purpose of the Plan is to encourage and enable the
officers, employees, directors, consultants and advisors of MedCare
Technologies, Inc. (the "Company") and its Affiliates upon whose judgment,
initiative and efforts the Company largely depends for the successful conduct of
its business to acquire a proprietary interest in the Company. It is anticipated
that providing such persons with a direct stake in the Company's welfare will
assure a closer identification of their interests with those of the Company,
thereby stimulating their efforts on the Company's behalf and strengthening
their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board or the Committee as a
participating employer under the Plan, provided that the Company directly
or indirectly owns at least 20% of the combined voting power of all classes
of stock of such entity or at least 20% of the ownership interests in such
entity.
"Award" or "Awards," except where referring to a particular category
of grant under the Plan, shall include, but not be limited to, Incentive
Options, Non-Qualified Options, Restricted Share Awards, Performance Share
Awards, Share Appreciation Rights, and Dividend Equivalents.
"Board" means the Board of Directors of the Company.
"Cause" (a) for an employee who has a written employment agreement
with the Company as of the date of termination, shall mean cause as defined
under that employment agreement; and (b) for an employee who does not have
a written employment agreement with the Company as of the date of
termination, shall be limited to a vote of the Board to the effect that the
participant should be dismissed as a result of (i) any material breach by
the participant of any agreement to which the participant and the Company
or an Affiliate are parties, (ii) any act (other than retirement, death or
disability) or omission to act by the participant, including without
limitation, the commission of any crime, which may have a material and
adverse effect on the business of the Company or any Affiliate or on the
participant's ability to perform services for the Company or any Affiliate,
or (iii) any material misconduct or neglect of duties by the participant in
connection with the business or affairs of the Company or any Affiliate.
"Change of Control" is defined in Section 14.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" means any Committee of the Board referred to in Section 2.
"Disability" means disability as set forth in Section 22(e)(3) of the
Code.
"Dividend Equivalent" means a right, granted under Section 9 hereof,
to receive cash, Shares, or other property equal in value to dividends paid
with respect to a specified number of Shares or the excess of dividends
paid over a specified rate of return. Dividend Equivalents may be awarded
on a free-standing basis or in connection with another Award, and may be
paid currently or on a deferred basis.
<PAGE>
"Effective Date" means the date on which the Plan is approved by the
Board as set forth in Section 16.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the related rules, regulations and interpretations.
"Fair Market Value" on any given date means the average of the
Reference Price for the ten (10) consecutive trading days immediately
preceding the date for which the value is being determined.
"Incentive Option" means any Option designated and qualified as an
"incentive stock option" as defined in Section 422 of the Code.
"Non-Employee Director" means a member of the Board who: (i) is not
currently an officer of the Company or any Affiliate; (ii) does not receive
compensation for services rendered to the Company or any Affiliate in any
capacity other than as a Director; (iii) does not possess an interest in
any transaction with the Company for which disclosure would be required
under the securities laws; or (iv) is not engaged in a business
relationship with the Company for which disclosure would be required under
the securities laws.
"Non-Qualified Option" means any Option that is not an Incentive
Option.
"Option" or "Share Option" means any option to purchase Shares granted
pursuant to Section 5.
"Parent" means a "parent corporation" as defined in Section 424(e) of
the Code.
"Performance Share Award" means Awards granted pursuant to Section 7.
"Reference Price" means for the applicable Shares on a given date: (i)
if such Shares are listed for quotation on a NASDAQ system, the average of
the closing bid and ask prices; or (ii) if such Shares are listed on a
national exchange, the closing price, regular way.
"Restricted Share Award" means Awards granted pursuant to Section 6.
"Share" means the Common Stock, $.01 par value per share, of the
Company, subject to adjustment pursuant to Section 3.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations, beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
SECTION 2. Administration of Plan; Committee Authority to
Select Participants and Determine Awards.
----------------------------------------
(a) Committee. The Plan shall be administered by a committee of not less
than one Non-Employee Directors, as appointed by the Board from time to time
(the "Committee").
(b) Powers of Committee. The Committee shall have the power and authority
to grant Awards consistent with the terms of the Plan, including the power and
authority:
(i) to select the officers, employees, Directors, consultants and
advisors of the Company and Affiliates to whom Awards may from time to time
be granted;
<PAGE>
(ii) to determine the time or times of grant, and the extent, if any,
of Incentive Options, Non-Qualified Options, Restricted Shares, Performance
Shares and Dividend Equivalents, or any combination of the foregoing,
granted to any officer, employee, Director, consultant or advisor;
(iii) to determine the number of shares to be covered by any Award
granted to an officer, employee, Director, consultant or advisor;
(iv) to determine and modify the terms and conditions, including
restrictions, not inconsistent with the terms of the Plan, of any Award
granted to an officer, employee, Director, consultant or advisor, which
terms and conditions may differ among individual Awards and participants,
and to approve the form of written instruments evidencing the Awards;
(v) to accelerate the exercisability or vesting of all or any
portion of any Award granted to a participant;
(vi) subject to the provisions of Section 5(ii), to extend the period
in which Options granted may be exercised;
(vii) to determine whether, to what extent and under what
circumstances Shares and other amounts payable with respect to an Award
granted to a participant shall be deferred either automatically or at the
election of the participant and whether and to what extent the Company
shall pay or credit amounts equal to interest (at rates determined by the
Committee) or dividends or deemed dividends on such deferrals; and
(viii) to adopt, alter and repeal such rules, guidelines and practices
for administration of the Plan and for its own acts and proceedings as it
shall deem advisable; to interpret the terms and provisions of the Plan and
any Award (including related written instruments) granted to a participant;
and to decide all disputes arising in connection with and make all
determinations it deems advisable for the administration of the Plan.
All decisions and interpretations of the Committee shall be binding on all
persons, including the Company and Plan participants.
SECTION 3. Shares Issuable under the Plan; Mergers; Substitution.
-----------------------------------------------------
(a) Shares Issuable. The maximum number of Shares reserved and available
for issuance under the Plan shall be 2,000,000. For purposes of this limitation,
the Shares underlying any Awards which are forfeited, canceled, reacquired by
the Company, satisfied without the issuance of Shares or otherwise terminated
(other than by exercise) shall be added back to the Shares available for
issuance under the Plan so long as the participants to whom such Awards had been
previously granted receive no benefits of ownership of the underlying Shares to
which the Award related. Shares issued under the Plan may be authorized but
unissued Shares or Shares reacquired by the Company.
(b) Share Dividends, Mergers, etc. In the event of any recapitalization,
reclassification, split-up or consolidation of Shares, separation (including a
spin-off), dividend on Shares payable in Shares, or other similar change in
capitalization of the Company or a merger, reverse-merger or consolidation of
the Company or sale by the Company of all or a portion of its assets, or other
similar event, the Committee shall make such appropriate adjustments in the
exercise prices of Awards, including Awards then outstanding, in the number and
kind of securities, cash or other property which may be issued pursuant to
Awards under the Plan, including Awards then outstanding, and in the number of
Shares with respect to which Awards may be granted (in the aggregate and to
individual participants) as the Committee deems equitable with a view toward
maintaining the proportionate interest of the participant and preserving the
value of the Awards.
<PAGE>
(c) Substitute Awards. The Committee may grant Awards under the Plan in
substitution for Share and Share-based awards held by employees of another
corporation who concurrently become employees of the Company or an Affiliate as
the result of a merger or consolidation of the employing corporation with the
Company or an Affiliate or the acquisition by the Company or an Affiliate of
property or shares of the employing corporation. The Committee may direct that
the substitute awards be granted on such terms and conditions as the Committee
considers appropriate in the circumstances.
SECTION 4. Eligibility.
-----------
Participants in the Plan will be Directors and such full or part-time
officers and other employees of the Company and its Affiliates and those
consultants and advisors to the Company and its Affiliates who are responsible
for or who contribute to the management, growth or profitability of the Company
and its Affiliates and who are selected from time to time by the Committee, in
its sole discretion.
SECTION 5. Options.
-------
Any Option granted under the Plan shall be in such form as the Committee
may from time to time approve. Options granted under the Plan may be either
Incentive Options, subject to required shareholder approval, or Non-Qualified
Options. To the extent that any option does not qualify as an Incentive Option,
it shall constitute a Non-Qualified Option.
No Incentive Option may be granted under the Plan after the tenth (10th)
anniversary of the Effective Date and no Incentive Option may be granted to
anyone other those persons who are employees of the Company on the date of
grant.
The Committee in its discretion may grant Options to Directors, employees,
consultants and advisors of the Company or any Affiliate. Options granted
pursuant to this Section 5 shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(i) Exercise Price. The per share exercise price of a Option granted
pursuant to this Section 5 shall be determined by the Committee at the time
of grant. The per share exercise price of an Incentive Option shall not be
less than 100% of Fair Market Value on the date of grant. If an employee
owns or is deemed to own (by reason of the attribution rules applicable
under Section 424(d) of the Code) more than 10% of the combined voting
power of all classes of shares of the Company or any Subsidiary or Parent
and an Incentive Option is granted to such employee, the option price shall
be not less than 110% of Fair Market Value on the grant date.
(ii) Option Term. The term of each Option shall be fixed by the
Committee, but no Incentive Option shall be exercisable more than ten (10)
years after the date the option is granted. If an employee owns or is
deemed to own (by reason of the attribution rules of Section 424(d) of the
Code) more than 10% of the combined voting power of all classes of shares
of the Company or any Subsidiary or Parent and an Incentive Option is
granted to such employee, the term of such option shall be no more than
five (5) years from the date of grant.
(iii) Exercisability; Rights of a Shareholder. Options shall become
exercisable at such time or times, whether or not in installments, as shall
be determined by the Committee at or after the grant date. The Committee
may at any time accelerate the exercisability of all or any portion of any
Option. An optionee shall have the rights of a shareholder only as to
Shares acquired upon the exercise of a Option and not as to unexercised
Options.
(iv) Method of Exercise. Options may be exercised in whole or in
part, by giving written notice of exercise to the Company, specifying the
number of Shares to be purchased. Payment of the purchase price may be made
by one or more of the following methods:
<PAGE>
(A) In cash, by certified or bank check or other instrument
acceptable to the Committee;
(B) In the form of Shares that are not then subject to
restrictions under any Company plan, if permitted by the Committee in
its discretion. Such surrendered Shares shall be valued at Fair Market
Value on the exercise date; or
(C) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company cash or a check payable and
acceptable to the Company to pay the purchase price; provided that in
the event the optionee chooses to pay the purchase price as so
provided, the optionee and the broker shall comply with such
procedures and enter into such agreements of indemnity and other
agreements as the Committee shall prescribe as a condition of such
payment procedure. Payment instruments will be received subject to
collection.
The delivery of certificates representing Shares to be purchased pursuant to the
exercise of the Option will be contingent upon receipt from the optionee (or a
purchaser acting in his stead in accordance with the provisions of the Option)
by the Company of the full purchase price for such Shares and the fulfillment of
any other requirements contained in the Option or applicable provisions of laws.
(v) Non-transferability of Options. No Option shall be transferable
by the optionee other than by will or by the laws of descent and
distribution.
(vi) Termination by Death. If any optionee's service with the Company
and its Affiliates terminates by reason of death, the Option may thereafter
be exercised, to the extent exercisable at the date of death, by the legal
representative or legatee of the optionee, for a period of six (6) months
(or such longer period as the Committee shall specify at any time) from the
date of death, or until the expiration of the stated term of the Option, if
earlier.
(vii) Termination by Reason of Disability.
-----------------------------------
(A) Any Option held by an optionee whose service with the
Company and its Affiliates has terminated by reason of Disability may
thereafter be exercised, to the extent it was exercisable at the time
of such termination, for a period of twelve (12) months (or such
longer period as the Committee shall specify at any time) from the
date of such termination of service, or until the expiration of the
stated term of the Option, if earlier.
(B) The Committee shall have sole authority and discretion to
determine whether a participant's service has been terminated by
reason of Disability.
(C) Except as otherwise provided by the Committee at the time
of grant or otherwise, the death of an optionee during a period
provided in this Section 5(vii) for the exercise of a Non-Qualified
Option, shall extend such period for six (6) months from the date of
death, subject to termination on the expiration of the stated term of
the Option, if earlier.
<PAGE>
(viii) Termination for Cause. If any optionee's service with the
Company and its Affiliates has been terminated for Cause, any Option held
by such optionee shall immediately terminate and be of no further force and
effect; provided, however, that the Committee may, in its sole discretion,
provide that such Option can be exercised for a period of up to thirty (30)
days from the date of termination of service or until the expiration of the
stated term of the Option, if earlier.
(ix) Other Termination. Unless otherwise determined by the
Committee, if an optionee's service with the Company and its Affiliates
terminates for any reason other than death, Disability, or for Cause, any
Option held by such optionee may thereafter be exercised, to the extent it
was exercisable on the date of termination of service, for three (3) months
(or such longer period as the Committee shall specify at any time) from the
date of termination of service or until the expiration of the stated term
of the Option, if earlier.
(x) Annual Limit on Incentive Options. To the extent required for
"incentive stock option" treatment under Section 422 of the Code, the
aggregate Fair Market Value (determined as of the time of grant) of the
Share with respect to which Incentive Options granted under this Plan and
any other plan of the Company or its Subsidiaries become exercisable for
the first time by an optionee during any calendar year shall not exceed one
hundred thousand dollars ($100,000).
(xi) Form of Settlement. Shares issued upon exercise of an Option
shall be free of all restrictions under the Plan, except as otherwise
provided in this Plan.
SECTION 6. Restricted Share Awards.
-----------------------
(a) Nature of Restricted Share Award. The Committee may grant Restricted
Share Awards to Directors, employees, consultants and advisors of the Company or
any Affiliate. A Restricted Share Award is an Award entitling the recipient to
acquire, at no cost or for a purchase price determined by the Committee, Shares
subject to such restrictions and conditions as the Committee may determine at
the time of grant ("Restricted Share"). Conditions may be based on continuing
service and/or achievement of pre-established performance goals and objectives,
or similar conditions. In addition, a Restricted Share Award may be granted to a
Director or employee by the Committee in lieu of any compensation due to such
Director or employee.
(b) Acceptance of Award. A participant who is granted a Restricted Share
Award shall have no rights with respect to such Award unless the participant
shall have accepted the Award within sixty (60) days (or such shorter date as
the Committee may specify) following the award date by making payment to the
Company, if required, by certified or bank check or other instrument or form of
payment acceptable to the Committee in an amount equal to the specified purchase
price, if any, of the shares covered by the Award and by executing and
delivering to the Company a written instrument that sets forth the terms and
conditions of the Restricted Share in such form as the Committee shall
determine.
(c) Rights as a Shareholder. Upon complying with Section 6(b) above, a
participant shall have all the rights of a shareholder with respect to the
Restricted Share including voting and dividend rights, subject to
transferability restrictions and Company repurchase or forfeiture rights
described in this Section 6 and subject to such other conditions contained in
the written instrument evidencing the Restricted Share Award. Unless the
Committee shall otherwise determine, certificates evidencing Restricted Shares
shall remain in the possession of the Company until such shares are vested as
provided in Section 6(e) below.
(d) Restrictions. Restricted Shares may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein.
(e) Vesting of Restricted Shares. The Committee at the time of grant shall
specify the date or dates and/or the attainment of pre-established performance
goals, objectives and other conditions on which the non-transferability of the
Restricted Share and the Company's right of repurchase or forfeiture
<PAGE>
shall lapse. Subsequent to such date or dates and/or the attainment of such pre-
established performance goals, objectives and other conditions, the shares on
which all restrictions have lapsed shall no longer be Restricted Shares and
shall be deemed "vested."
(f) Waiver, Deferral and Reinvestment of Dividends. The written instrument
evidencing the Restricted Share Award may require or permit the immediate
payment, waiver, deferral or investment of dividends paid on the Restricted
Share.
SECTION 7. Performance Share Awards.
------------------------
(a) Nature of Performance Shares. A Performance Share Award is an award
entitling the recipient to acquire Shares upon the attainment of specified
performance goals. The Committee may make Performance Share Awards independent
of or in connection with the granting of any other Award under the Plan.
Performance Share Awards may be granted under the Plan to Directors and
employees of the Company or any Affiliate, including those who qualify for
awards under other performance plans of the Company. The Committee in its sole
discretion shall determine whether and to whom Performance Share Awards shall be
made, the performance goals applicable under each such Award, the periods during
which performance is to be measured, and all other limitations and conditions
applicable to the awarded Performance Shares; provided, however, that the
Committee may rely on the performance goals and other standards applicable to
other performance based plans of the Company in setting the standards for
Performance Share Awards under the Plan.
(b) Restrictions on Transfer. Performance Share Awards and all rights with
respect to such Awards may not be sold, assigned, transferred, pledged or
otherwise encumbered.
(c) Rights as a Shareholder. A participant receiving a Performance Share
Award shall have the rights of a shareholder only as to shares actually received
by the participant under the Plan and not with respect to shares subject to the
Award but not actually received by the participant. A participant shall be
entitled to receive a share certificate evidencing the acquisition of Shares
under a Performance Share Award only upon satisfaction of all conditions
specified in the written instrument evidencing the Performance Share Award (or
in a performance plan adopted by the Committee).
(d) Termination. Except as may otherwise be provided by the Committee at
any time prior to termination of service, a participant's rights in all
Performance Share Awards shall automatically terminate upon the participant's
termination of service with the Company and its Affiliates for any reason
(including, without limitation, death, Disability and for Cause).
(e) Acceleration, Waiver, Etc. At any time prior to the participant's
termination of service with the Company and its Affiliates, the Committee may in
its sole discretion accelerate, waive or, subject to Section 12, amend any or
all of the goals, restrictions or conditions imposed under any Performance Share
Award; provided, however, that in no event shall any provision of the Plan be
construed as granting to the Committee any discretion to increase the amount of
compensation payable under any Performance Share Award to the extent such an
increase would cause the amounts payable pursuant to the Performance Share Award
to be nondeductible in whole or in part pursuant to Section 162(m) of the Code
and the regulations thereunder, and the Committee shall have no such discretion
notwithstanding any provision of the Plan to the contrary.
SECTION 8. Share Appreciation Rights.
-------------------------
(a) Notice of Share Appreciation Rights. A Share Appreciation Right
("SAR") is a right entitling the participant to receive cash or Shares having a
fair market value equal to the appreciation in the Fair Market Value of a stated
number of Shares from the date of grant, or in the case of rights granted in
tandem with or by reference to an Option granted prior to the grant of such
rights, from the date of grant of the related Option to the date of exercise.
SARs may be granted to Directors, employees, consultants and advisors of the
Company or any Affiliate.
<PAGE>
(b) Terms of Awards. SARs may be granted in tandem with or with reference
to a related Option, in which event the participant may elect to exercise either
the Option or the SAR, but not both, as to the same share subject to the Option
and the SAR, or the SAR may be granted independently. In the event of an Award
with a related Option, the SAR shall be subject to the terms and conditions of
the related Option. In the event of an independent Award, the SAR shall be
subject to the terms and conditions determined by the Committee.
(c) Restrictions on Transfer. SARs shall not be transferred, assigned or
encumbered, except that SARs may be exercised by the executor, administrator or
personal representative of the deceased participant within six (6) months of the
death of the participant (or such longer period as the Committee shall specify
at any time) and transferred pursuant to a certified domestic relations order.
(d) Payment Upon Exercise. Upon exercise of an SAR, the participant shall
be paid the excess of the then Fair Market Value of the number of shares to
which the SAR relates over the Fair Market Value of such number of shares at the
date of grant of the SAR, or of the related Option, as the case may be. Such
excess shall be paid in cash or in Shares having a Fair Market Value equal to
such excess or in such combination thereof as the Committee shall determine.
SECTION 9. Dividend Equivalents.
--------------------
The Committee is authorized to grant Dividend Equivalents to Directors and
employees of the Company or any Affiliate. The Committee may provide, at the
date of grant or thereafter, that Dividend Equivalents shall be paid or
distributed when accrued or shall be deemed to have been reinvested in
additional Shares, or other investment vehicles as the Committee may specify,
provided that Dividend Equivalents (other than freestanding Dividend
Equivalents) shall be subject to all conditions and restrictions of the
underlying Awards to which they relate.
SECTION 10. Tax Withholding.
---------------
(a) Payment by Participant. Each participant shall, no later than the date
as of which the value of an Award or of any Share or other amounts received
thereunder first becomes includible in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any Federal, state, or local
taxes of any kind required by law to be withheld with respect to such income.
The Company and its Affiliates shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
participant.
(b) Payment in Shares. A participant may elect to have such tax
withholding obligation satisfied, in whole or in part, by (i) authorizing the
Company to withhold from Shares to be issued pursuant to any Award a number of
Shares with an aggregate Fair Market Value (as of the date the withholding is
effected) that would satisfy the withholding amount due, or (ii) transferring to
the Company Shares owned by the participant with an aggregate Fair Market Value
(as of the date the withholding is effected) that would satisfy the withholding
amount due with respect to any participant who is subject to Section 16 of the
Act, the following additional restrictions shall apply:
(A) the election to satisfy tax withholding obligations relating
to an Award in the manner permitted by this Section 10(b) and the
actual tax withholding shall be made during the period beginning on
the third (3rd) business day following the date of release of
quarterly or annual summary statements of revenues and earnings of the
Company and ending on the twelfth (12th) business day following such
date. Alternatively, such election may be made at least six (6) months
prior to the date as of which the receipt of such an Award first
becomes a taxable event for Federal income tax purposes;
(B) such election shall be irrevocable;
<PAGE>
(C) such election shall be subject to the consent or disapproval
of the Committee; and
(D) the Share(s) withheld to satisfy tax withholding, if granted
at the discretion of the Committee, must pertain to an Award which has
been held by the participant for at least six (6) months from the date
of grant of the Award.
SECTION 11. Transfer, Leave of Absence, Etc.
-------------------------------
For purposes of the Plan, the following events shall not be deemed a
termination of service:
(a) a transfer to the employment of the Company from an Affiliate or from
the Company to an Affiliate, or from one Affiliate to another; and
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to
re-employment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the Committee
otherwise so provides in writing.
SECTION 12. Amendments and Termination.
--------------------------
The Board may at any time amend or discontinue the Plan and the Committee
may at any time amend or cancel any outstanding Award (or provide substitute
Awards at the same or reduced exercise or purchase price or with no exercise or
purchase price, but such price, if any, must satisfy the requirements which
would apply to the substitute or amended Award if it were then initially granted
under this Plan) for the purpose of satisfying changes in law or for any other
lawful purpose, but no such action shall adversely affect rights under any
outstanding Award without the holder's consent.
SECTION 13. Status of Plan.
--------------
With respect to the portion of any Award which has not been exercised and
any payments in cash, Shares or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
unsecured creditor of the Company unless the Committee shall otherwise expressly
determine in connection with any Award or Awards. In its sole discretion, the
Committee may authorize the creation of trusts or other arrangements to meet the
Company's obligations to deliver Shares or make payments with respect to Awards
hereunder, provided that the existence of such trusts or other arrangements is
consistent with the provision of the foregoing sentence.
SECTION 14. Change of Control Provisions.
----------------------------
Upon the occurrence of a Change of Control as defined in this Section 14:
(a) Each Share Option shall automatically become fully exercisable unless
the Committee shall otherwise expressly provide at the time of grant.
(b) Restrictions and conditions on Awards of Restricted Shares,
Performance Shares and Dividend Equivalents shall automatically be deemed
waived, and the recipients of such Awards shall become entitled to receipt of
the maximum amount of Shares subject to such Awards unless the Committee shall
otherwise expressly provide at the time of grant.
(c) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "person", as such term is used in Sections 13(d) and 14(d) of
the Act (other than the Company, any of its Subsidiaries, any Director,
fiduciary or other person or entity holding securities under any employee
benefit plan of the Company or any of its Subsidiaries), together with all
"affiliates" and "associates" (as such terms are defined in Rule 12b-2
under the Act) of
<PAGE>
such person, shall become the "beneficial owner" (as such term is defined
in Rule 13d-3 under the Act), directly or indirectly, of securities of the
Company representing 50% or more of either (A) the combined voting power of
the Company's then outstanding securities having the right to vote in an
election of the Company's Board of Directors ("Voting Securities") or (B)
the then outstanding shares of common shares of the Company (in either such
case other than as a result of acquisition of securities directly from the
Company); or
(ii) persons who, as of the date of the closing of the Company's
initial public offering, constitute the Company's Board of Directors (the
"Incumbent Directors") cease for any reason, including without limitation,
as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board, provided that
any person becoming a director of the Company subsequent to the Closing of
the Company's initial public offering whose election or nomination for
election was approved by a vote of at least a majority of the Incumbent
Directors shall, for purposes of this Plan, be considered an Incumbent
Director; or
(iii) the Company consummates (A) any consolidation or merger of the
Company or any Subsidiary where the stockholders of the Company,
immediately prior to the consolidation or merger, do not, immediately after
the consolidation or merger, beneficially own (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, shares representing in
the aggregate 50% or more of the voting shares of the corporation issuing
cash or securities in the consolidation or merger (or of its ultimate
parent corporation, if any), (B) any sale, lease, exchange or other
transfer (in one transaction or a series of transactions contemplated or
arranged by any party as a single plan) of all or substantially all of the
assets of the Company or (C) any plan or proposal for the liquidation or
dissolution of the Company;
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to
have occurred for purposes of the foregoing clause (i) solely as the result of
an acquisition of securities by the Company which, by reducing the number of
shares of Common Shares or other Voting Securities outstanding, increases (x)
the proportionate number of shares of Common Shares beneficially owned by any
person to 50% or more of the shares of Common Shares then outstanding or (y) the
proportionate voting power represented by the Voting Securities beneficially
owned by any person to 50% or more of the combined voting power of all then
outstanding Voting Securities; provided, however, that if any person referred to
in clause (x) or (y) of this sentence shall thereafter become the beneficial
owner of any additional shares of Common Shares or other Voting Securities
(other than pursuant to a share split, share dividend, or similar transaction),
then a "Change of Control" shall be deemed to have occurred for purposes of the
foregoing clause (i).
SECTION 15. General Provisions.
------------------
(a) No Distribution; Compliance with Legal Requirements. The Committee may
require each person acquiring shares pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof.
No Shares shall be issued pursuant to an Award until all applicable
securities laws and other legal and stock exchange requirements have been
satisfied. The Committee may require the placing of such stop-orders and
restrictive legends on certificates for Shares and Awards as it deems
appropriate.
(b) Delivery of Share Certificates. Delivery of Share certificates to
participants under this Plan shall be deemed effected for all purposes when the
Company or a Share transfer agent of the Company shall have delivered such
certificates in the United States mail, addressed to the participant, at the
participant's last known address on file with the Company.
(c) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, subject to stockholder approval if
such approval is required; and such arrangements may be either
<PAGE>
generally applicable or applicable only in specific cases. The adoption of the
Plan and the grant of Awards do not confer upon any employee any right to
continued employment with the Company or any Subsidiary.
SECTION 16. Effective Date of Plan.
----------------------
The Plan shall become effective upon approval by the Board, or any
committee thereof with such authority. The ability to grant Incentive Option
Awards requires approval by the shareholders, and no such Awards may be issued
hereunder prior to such approval.
SECTION 17. Governing Law.
-------------
THIS PLAN SHALL BE GOVERNED BY ILLINOIS LAW EXCEPT TO THE EXTENT SUCH LAW
IS PREEMPTED BY FEDERAL LAW.
