<PAGE>
As filed with the Securities and Exchange Commission on October 26, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMERICAN TELESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
74-2690895
(I.R.S. Employer Identification Number)
12500 Network Boulevard, Suite 407, San Antonio, Texas 78249
(210) 558-6090
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Arthur L. Smith, Chief Executive Officer
12500 Network Boulevard, Suite 407, San Antonio, Texas 78249
(210) 558-6090
(Name, address, including zip code and telephone number, including area code, of
agent for service)
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If only the securities being registered on this Form are being offered pursuant
to a dividend or interest reinvestment plans, please check the following box.
/__/
If any of the securities being registered on this Form are to be offered on a
delayed or continuos basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. /__/
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /__/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /__/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of Amount Maximum Maximum Amount of
Securities To be Offering Price Aggregate Registration
To be Registered Registered Per Share Offering Price Fee
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock issuable upon conversion of
convertible preferred stock (1) 984,640 $0.76 $748,326 $208.03
- --------------------------------------------------------------------------------------------------------
Common Stock to be paid as dividend on
convertible preferred (1) 118,157 $0.76 $89,799 $24.96
- --------------------------------------------------------------------------------------------------------
Common stock issuable upon exercise of
warrants granted as placement fee (2) 50,000 $0.76 $38,000 $10.56
- --------------------------------------------------------------------------------------------------------
Common stock issuable as placement fee (2) 19,693 $0.76 $14,967 $4.16
- --------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of
warrants (2) 40,000 $0.76 $30,400 $8.45
========================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457 (c), using the average of the high and low
prices reported on October 18, 1999, solely for the purpose of calculating
the Registration Fee.
(2) Calculated pursuant to Rule 457 (g) (3), using the average of the high and
low prices reported on October 18, 1999, solely for the purpose of
calculating the Registration Fee.
<PAGE>
PROSPECTUS NOT COMPLETE
Issued October 26, 1999
1,212,490 Shares of Common Stock
AMERICAN TELESOURCE INTERNATIONAL, INC.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 3.
The selling shareholders identified on page 11 of this prospectus are
offering these shares of common stock. For additional information on the methods
of sale, you should refer to the section entitled "Plan of Distribution" on page
12. We will not receive any of the proceeds from the sale of the common stock by
the selling shareholders.
Our common stock is traded on the National Association of Securities
Dealers, Inc. Over-the-Counter Bulletin Board under the symbol "AMTI." On
October 18, 1999, the last reported bid price of our common stock was $0.8125
per share.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is October 26, 1999.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
FORWARD LOOKING STATEMENTS 1
RELY ONLY ON THIS PROSPECTUS 1
THE COMPANY 1
RISK FACTORS 3
USE OF PROCEEDS 9
COMMON STOCK ISSUED 9
SELLING SHAREHOLDERS 11
PLAN OF DISTRIBUTION 12
LEGAL MATTERS 13
EXPERTS 13
WHERE YOU CAN FIND MORE INFORMATION 13
</TABLE>
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FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference in this
prospectus contain "forward-looking statements." "Forward looking statements"
are those statements which describe management's beliefs and expectations about
the future. We have identified forward-looking statements in this prospectus by
using words such as "anticipate," "believe," "could," "estimate," "may,"
"could," "expect," and "intend." Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those described in the Risk Factors section of this prospectus.
Therefore, these types of statements may prove to be incorrect. We do not
promise to update any forward-looking statements, even if new information or
future events indicate that these statements will prove to be incorrect.
RELY ONLY ON THIS PROSPECTUS
You should rely only on the information provided or incorporated by
reference in this prospectus or any supplement. We have not authorized anyone
to provide you with different information. This prospectus may be used only in
states and other jurisdictions where it is legal to sell the common stock. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or the sale of
any shares.
THE COMPANY
American TeleSource International, Inc. ("ATSI") is a communications
company, focusing on the market for wholesale and retail services between the
United States and Latin America, and within Latin America. In 1993, we began
assembling a framework of licenses, interconnection and service agreements,
network facilities and distribution channels so that we would be in a position
to take advantage of the de-monopolization of the Latin American
telecommunications market, as well as the increasing demand for services in this
market. Most of our current operations involve services between the U.S. and
Mexico or within Mexico. We have some operations in Central America as well, and
may expand our operations in the rest of Latin America as the regulatory
environment permits.
We originate retail traffic in Mexico through our captive distribution
channels of public payphones and casetas. (Casetas are indoor calling centers
where travelers or the large portion of the Mexican population that does not
have a telephone may place or receive calls or faxes.) We originate retail
traffic in the U.S. with our MEXICOnnectSM service (1010-624) and One Plus
residential and commercial long distance services. We carry wholesale traffic
into Mexico for other U.S. carriers who lack transmission facilities or require
additional capacity. We also provide private network services to companies
needing reliable private communications within Mexico and Central America and
between Mexico or Central America and the United States.
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We also own a subsidiary, GlobalSCAPE, Inc., ("GlobalSCAPE") which sells,
markets and distributes its proprietary Internet productivity software, CuteFTP,
CuteHTML and CuteMAP(TM).
The company began operations in 1994 as a Canadian holding company, Latcomm
International, Inc. with a Texas operating subsidiary, Latin America Telecomm,
Inc. Both corporations were renamed "American TeleSource International, Inc."
in 1994. In May, 1998, the Canadian corporation completed a share exchange
with a newly-formed Delaware corporation, also called American TeleSource
International, Inc., which resulted in the Canadian corporation becoming the
wholly-owned subsidiary of the Delaware corporation. Our principal operating
subsidiaries are:
. American TeleSource International de Mexico, S.A. de C.V., which we
formed in 1995 to further position ourselves in the Mexican and Latin
American market;
. Sistema de Telefonia Computarizada, S.A. de C.V., which we acquired in
August, 1997; this subsidiary owns 126 casetas in 66 cities in Mexico;
. Servicios de Infraestructura, S.A. de C.V., which we acquired in June,
1997; this subsidiary owns certain transmission equipment and valuable
long term licenses in Mexico;
. TeleSpan, Inc., which we formed in February, 1998 to carry our wholesale
and private network services traffic between the U.S. and Latin America;
and
. GlobalSCAPE, Inc., which we formed in April, 1996 to implement Internet
strategies, which are not currently consistent with our core business.
We are currently investigating various options to divest ourselves of
this business, or to distribute some of the ownership of this business
to our shareholders, in an effort to maximize shareholder value.
Our strategy for the future is to maximize the use of our current
infrastructure between Mexico and the United States, while focusing on expanding
our retail customer base in Mexico and the United States. We also want to
expand our network infrastructure in Mexico to reduce costs. We want to
increase the ratio of retail traffic vs. wholesale traffic, because we believe
that retail traffic is less volatile than wholesale traffic, and retail
customers pay more for our services than wholesale customers. Retail traffic
should therefore produce greater profit margins than wholesale traffic. Our
defined retail target market will be the underserved and underdeveloped Latino
markets in the Mexico and the United States, where we plan to offer "borderless"
services, such as enhanced prepaid calling services which will function
regardless of the user's location north or south of the U.S./Mexico border.
We have applied for a long distance concession from the Mexican government
which, if obtained, could permit us to reduce our costs and expand our network
in Mexico. Currently we must rely on Mexican-licensed long distance carriers to
transport our
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facilities in Mexico and the local telephone company. If we obtain this license
and are able to interconnect directly with the local telephone company in
Mexico, we expect to reduce our costs significantly. This would also allow us to
implement our retail strategy more effectively.
RISK FACTORS
The purchase of our common stock is very risky. You should not invest any
money that you cannot afford to lose. Before you buy our stock, you should
carefully read this entire prospectus. We have highlighted for you what we
think are the major risks which could most affect our business.
. We expect to incur losses
We have never been profitable and do not expect to become profitable in
the near future. We have invested and will continue to invest
significant amounts of money in our network and personnel in order to
maintain and develop the infrastructure we need to compete in the
markets for our services. We must improve our cash flow from operations
to generate a profit, either by increasing our sales or decreasing our
expenses, or both.
. We may not achieve anticipated sales
We have made a substantial investment in our network and personnel to
position ourself in our target markets and will continue to do so. We
may not be able to achieve the sales volume needed to make this
investment Profitable table.
. If we do not raise additional capital we may go out of business
In the past we have financed our operations almost exclusively through
the private sales of securities. Since we are losing money, we must
raise the money we need to continue operations and expand our network
either by selling more securities or borrowing money. We may not be able
to sell additional securities or borrow money on acceptable terms. If we
are not able to raise additional money, we will not be able to implement
our strategy for the future, and we will either have to scale back our
operations or stop operations. If we sell more common stock the interest
of our existing shareholders will be diluted, meaning that their
percentage of ownership of ATSI will be reduced, and the price of our
common stock may go down.
. Our auditors have questioned our viability
Our auditors' opinion on our financial statements as of July 31, 1999
calls attention to substantial doubts as to our ability to continue as a
going concern. This means that they question whether we can continue in
business. If we cannot continue in business, our common stockholders
would likely lose their entire investment. Our financial statements are
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prepared on the assumption that we will continue in business. They do
not contain any adjustments to reflect the uncertainty over our
continuing in business.
. We do not expect to pay dividends
We have no plan to pay dividends in the near future.
. Our stock has been a penny stock which is more difficult to sell
Our common stock is a "penny stock." It is relatively difficult for an
investor to sell shares of a penny stock.
A "penny stock" is any stock which falls below a selling price of $5.00
per share in the public market. Our common stock has traded below $5.00
per share since it began trading on the NASD Over-the-Counter Bulletin
Board in January, 1998. It is much more difficult to sell a penny stock
than stock that trades on a national market or stock exchange because of
the extra steps the broker/dealer must take before selling the stock. A
sale of penny stock does not usually take place as quickly as a sale of
shares that trade on a national market or stock exchange. You may decide
to sell your stock when the price is high enough for you to make a
profit on your investment, but by the time the sale is complete, the
price of the stock may have fallen to the point that you have a loss on
your investment. Also, because of the difficulty in dealing in penny
stock, many broker/dealers are unwilling to participate in buying and
selling our shares.
. Our common stock price is volatile
Our stock price has historically been volatile. Volatility makes it more
difficult for you to sell shares when you choose, at prices you find
attractive.
. Our stock price may fall if we fail to spin off GlobalSCAPE
We have announced that we are considering a spin off or public offering
(or combination of the two) of our subsidiary, GlobalSCAPE, and that we
have retained an investment banking firm to help us evaluate the
alternatives in achieving the appropriate value for GlobalSCAPE. If we
do not complete this type of transaction (or if we take too long to
complete this transaction) our stock price could fall. This transaction
could be delayed or cancelled if we are unable to find an underwriter,
are unable to negotiate a favorable offering price for the stock of
GlobalSCAPE, there is a lack of public interest in such a transaction,
or management and the Board determine that this transaction involves
excessive operational and economic risk.
. We may not successfully compete with others in our industry
The market for all of our services is very competitive.
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The market for wholesale network services is particularly competitive on
the basis of price. We currently have seven customers for this service.
The volume of business sent by each customer fluctuates, but this
traffic is often heavily concentrated among three or four customers. In
the past, two of these customers have been responsible for 50% of this
traffic. If we are not able to continue to offer competitive prices,
these customers will find some other supplier and we will lose a
substantial portion of our revenue very quickly. Many of our competitors
in this market have more extensive networks than we do, as well as
substantially greater financial, technical and marketing resources. For
example, we compete with American Telephone and Telegraph Company
("AT&T"), MCI/WorldCom, Inc. ("MCI/WorldCom") and Sprint Communications
Company, L.P. ("Sprint") in this market, as well as numerous other large
and small companies. Our large competitors are able to take advantage of
their established customer base to generate economies of scale,
substantially lowering their costs. In addition, industry capacity along
the routes serviced by ATSI is generally growing as fiber optic cable is
activated. If industry capacity exceeds demand along these routes,
severe pricing pressure could develop.
There have been and we expect there will continue to be, mergers,
acquisitions, and joint ventures in our industry that create more large
and well-positioned competitors, and reduce the number of potential
customers for our wholesale network services.
The market for retail services is also extremely competitive. ATSI
competes with many other companies in this market, including AT&T,
MCI/WorldCom and Sprint. These companies have stronger name recognition
and brand loyalty, as well as a broader portfolio of services. We
believe we can successfully compete by targeting the Latino population
in the U.S. and by introducing innovative services. However, certain
larger companies have announced that they intend to enter the Latino
market in the U.S. as well, and in Mexico, we will compete with the
former Mexican telephone monopoly, Telefonos de Mexico ("Telmex"), which
has substantially greater resources than we do.
The telecommunications industry has been characterized by steady
technological change. We may not be able to raise the money we need to
acquire the new technology necessary to keep our services competitive.
. We may not be able to collect large receivables
Our wholesale network customers generate large receivable balances,
often over $500,000 for a two week period. We incur substantial direct
costs to provide this service since we must pay our carrier in Mexico to
terminate these calls. If a customer fails to pay a large balance on
time, we will have difficulty paying our carrier in Mexico on time. If
our carrier suspends services to us, it will affect all our customers.
. Reliance on key personnel
We depend on a small number of key technical and managerial personnel.
We may not be able to retain these personnel or attract the new
personnel that we need to attain profitability.
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. We may not be able to lease transmission facilities we need
We do not own all of the transmission facilities we need to complete
calls. Therefore, we depend on contractual arrangements with other
telecommunications companies to complete our network. For example,
although we own the switching and transport equipment needed to receive
and transmit calls via satellite and fiber optic cable, we do not own a
satellite or any fiber optic cable and must therefore lease transmission
capacity from other companies. We may not be able to lease facilities at
cost-effective rates in the future or enter into contractual
arrangements necessary to expand our network or improve our network as
necessary to keep up with technological change.
There are a limited number of suppliers for the products and services we
need to complete our network. We may have difficulty finding alternate
suppliers if any of our suppliers go out of business or are acquired by
our competitors.
Also if certain current suppliers fail to honor their contractual
commitments, we could be very seriously affected.
. We may not be able to pay our suppliers on time
We have not always paid all of our suppliers on time due to temporary
cash shortfalls. These suppliers have given us payment extensions in the
past, but critical suppliers may discontinue service if we are not able
to make payments on time in the future. In addition, equipment vendors
may refuse to provide critical technical support for their products if
they are not paid on time under the terms of support arrangements. Our
ability to make payments on time depends on our ability to raise
additional capital or improve our cash flow from operations.
. We may not be able to make our debt payments on time
We purchased some of our significant equipment with borrowed money. The
lenders have a security interest in the equipment to secure repayment of
the debt. This means that the lenders may take possession of the
equipment and sell it to repay the debt if we do not make our payments
on time. We have not always paid all of our equipment lenders on time
due to temporary cash shortfalls. These lenders have given us payment
extensions in the past, but they may exercise their right to take
possession of certain critical equipment if we are not able to make
payments on time in the future. Our ability to make our payments on time
depends on our ability to raise additional capital or improve our cash
flow from operations.
. We may have service interruptions and problems with the quality of
transmission
To retain and attract customers, we must keep our network operational 24
hours per day, 365 days per year. We have experienced service
interruptions and other problems that affect the quality of voice and
data transmission. To date, these problems have been temporary. We may
experience more serious problems. In addition to the normal risks that
any telecommunications company faces (such as fire, flood, power
failure, equipment failure), we
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may have a serious problem if a meteor or space debris strikes the
satellite that transmits our traffic, or a volcanic eruption or
earthquake interferes with our operations in Mexico City. We have the
ability to transmit calls via either the satellite or fiber optic
portion of our network, and this redundancy should protect us if there
is a problem with one portion of our network. However, a significant
amount of time could pass before we could re-route traffic from one
portion of our network to the other, and there may not be sufficient
capacity on only one portion of the network to carry all of our traffic
at any given time.
To stay competitive, we will continue to integrate the latest
technologies into our network. We are currently implementing "packet
switching" transport capabilities such as Asynchronous Transfer Mode and
we will continue to explore new technologies as they are developed. The
risk of network problems increases during periods of expansion and
transition to new technologies.
. Changes in telecommunications regulations may harm our competitive
position
The telecommunications industry in the United States is regulated by the
Federal Communications Commission (the "FCC") and by the public
utilities commissions in the various states. As a result of the
deregulation required by the Telecommunications Act of 1996, the FCC has
issued, and continues to issue, major changes to their regulations.
These new regulations have significantly changed and will continue to
change the competitive environment. For example, FCC regulations now
permit the regional Bell operating companies (former local telephone
monopolies such as Southwestern Bell) to enter the long distance market
if certain conditions are met. The entry of these formidable competitors
into the long distance market will make it more difficult for us to
establish a retail customer base. Other new regulations affect the
pricing for services that we purchase from others. Pricing changes could
put us at a relative disadvantage to larger competitors. We cannot
predict what other changes there may be in the regulations or what
effect these changes will have on our business.
The Mexican telecommunications industry is also going through the
process of de-monopolization and regulatory change, and new laws and
regulations there could affect our business. These regulatory changes
may not continue to improve market conditions for us and, even if they
do, we may not have the opportunity to provide additional
telecommunications services within Mexico and between Mexico and other
countries.
The international telecommunications industry is also governed by
foreign laws and treaties between the United States and other countries.
Changes in these laws or treaties may also affect the competitive
environment.
. Our compliance with laws and regulations could be challenged
We believe that we are in compliance with all domestic and foreign
telecommunications laws that govern our current business. However,
government enforcement and interpretation of the telecommunications laws
and licenses is unpredictable and is often based on informal views of
government officials and ministries. This is particularly true in Mexico
and certain
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of our target Latin American markets, where government officials and
ministries may be subject to influence by the former telecommunications
monopoly, such as Telmex. This means that our compliance with the laws
may be challenged. It could be very expensive to defend this type of
challenge and we might not win. If we were found to have violated the
laws that govern our business, we could be fined or denied the right to
offer services. To our knowledge, we are not currently subject to any
regulatory inquiry or investigation.
. We may not be able to obtain new licenses we need to reduce costs and
expand our network
Our strategy for the future depends on obtaining a long distance
concession from the Mexican government. We may not be able to obtain
this license, and if we do not obtain this license, we may not be able
to implement our strategy for the future or continue to offer services
at competitive prices. Our strategy is to expand into other Latin
American countries as regulatory conditions in those countries permit.
We may not be able to obtain the licenses we need for this expansion.
. Our operations may be interrupted by the Year 2000 problem
The Year 2000 problem is the result of computer programs that were
designed to use two digits rather than four to specify the applicable
year. As a result, date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in
miscalculations or major system failures which could cause disruptions
in our operations, including the inability to process call billing
records. We have implemented a comprehensive Year 2000 plan to assess
our internal readiness and the readiness of our suppliers. We have
identified some software applications that must be upgraded to avoid a
disruption in our operations, but we expect to have those upgrades
installed prior to the end of the year. Although we have received
satisfactory responses from our suppliers regarding their Year 2000
readiness, we do not control them. Their systems may be affected by the
Year 2000 problem. If any of our critical suppliers fails to perform
because of the Year 2000 problem, we could suffer a serious interruption
in service.
. Our operations may be affected by political changes in Mexico and other
Latin American countries
The majority of our foreign operations are in Mexico. The political and
economic climate in Mexico and other Latin American countries is more
uncertain than in the United States and unfavorable changes could have a
direct impact on our operations in Mexico. For example, a newly elected
set of government officials could decide to quickly reverse the
deregulation of the Mexican telecommunications industry economy and take
steps such as seizing our property, revoking our licenses, or modifying
our contracts with Mexican suppliers. A period of poor economic
performance could reduce the demand for our services in Mexico. There
might be trade disputes between the United States and Mexico which
result in trade barriers such as additional taxes on our services. The
Mexican government might also decide to restrict the conversion of pesos
into dollars or restrict the transfer of dollars out of
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Mexico. These types of changes, whether they occur or are only
threatened, would also make it more difficult for us to obtain financing
in the United States.
. If the value of the Mexican Peso declines relative to the Dollar, we
will have decreased earnings as stated Dollars
Approximately 20% of ATSI's revenue is collected in Mexican Pesos. If
the value of the Peso relative to the Dollar declines, that is, if Pesos
are convertible into fewer Dollars, then our earnings, which are stated
in dollars, will decline. We do not engage in any type of hedging
transactions to minimize this risk and do not intend to do so.
USE OF PROCEEDS
The selling shareholders will receive the proceeds from the shares
of common stock. We will not receive any of the proceeds.
COMMON STOCK ISSUED
The common stock offered by this prospectus may be issued pursuant
to the terms of (i) shares of 6% Series C Cumulative Convertible Preferred Stock
issued to The Shaar Fund on September 24, 1999 (the "Series C Preferred Stock"),
(ii) a Common Stock Warrant issued to The Shaar Fund on September 24, 1999,
(iii) a Common Stock Purchase Warrant that may be issued to The Shaar Fund if
ATSI elects to redeem the Series C Preferred Stock (iv) Common Stock Warrant
issued to Corporate Capital Management as commission on the Company's Series B
Cumulative Convertible Preferred Stock issuance and (v) shares issued to
Corporate Capital Management as commission on the Company's Series C Cumulative
Convertible Preferred Stock issuance.
Series C Preferred Stock
The Shaar Fund purchased 500 shares of Series C Preferred Stock for $1000 per
share on September 24, 1999. The Shaar Fund may convert each share of Series C
Preferred Stock into that number of shares of common stock that is equal to 1000
divided by the lesser of: (i) $1.031 (the closing bid price of the common stock
on the NASD Over-the-Counter Bulletin Board on September 23, 1999), and (ii)
seventy-eight percent (78%) of the average of the five lowest closing bid prices
of the common stock on the NASD Over-the-Counter Bulletin Board during the ten
trading day period immediately preceding the date of conversion (the "Conversion
Price"). Therefore, the number of shares of common stock that The Shaar Fund may
acquire increases if the price of the common stock decreases. Although there is
no ceiling on the maximum number of shares of common stock that The Shaar Fund
may acquire, if the closing bid price for the common stock falls to $.85 or less
on any trading day, The Shaar Fund may not convert any Series C Preferred Stock
for a single period of forty-five days from that day. The Series C Preferred
Stock will never be convertible into fewer than 484,966 shares of common stock
(i.e., the number of shares that may be acquired if the Conversion Price is
$1.031). Here are some examples of the number of shares of common stock that The
Shaar Fund may acquire, assuming different prices of the common stock:
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<TABLE>
<CAPTION>
78% of Avg. of 5 Closing Bid on Formula Number of Shares
Lowest Bid Prices September 23, 1999 of Common Stock
During 10 Trading
Days Preceding
Conversion
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<S> <C> <C> <C>
0.85 1.031 500,000 divided by 588,235
0.85
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1.01 1.031 500,000 divided by 495,050
1.01
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1.05 1.031 500,000 divided by 484,966
1.031
- ---------------------------------------------------------------------------------------------
2.00 1.031 500,000 divided by 484,966
1.031
- ---------------------------------------------------------------------------------------------
2.50 1.031 500,000 divided by 484,966
1.031
- ---------------------------------------------------------------------------------------------
</TABLE>
The Shaar Fund may convert any of its shares of Series C Preferred Stock at any
time it elects after December 23, 1999, but any shares not converted by
September 24, 2001 must be converted by ATSI at the Conversion Price on that
day.
The Registration Rights Agreement signed by ATSI and The Shaar Fund at the time
of the sale of the Series C Preferred Stock requires ATSI to register that
number of common shares into which all of the shares of the Series C Preferred
Stock would be convertible at a Conversion Price of $.5078 (one-half of the
closing bid price of the common stock on the NASD Over-the-Counter Bulletin
Board on September 24, 1999). If the closing bid price for the common stock
falls below .80, ATSI is required to register additional shares of its common
stock based on an assumed Conversion Price of .30 per share.
ATSI must pay quarterly dividends on the Series C Preferred Stock at the rate of
6% per annum calculated on a value of $1000 per share. ATSI may elect to pay the
dividends in either cash or in shares of its registered common stock, valued at
the Conversion Price on each dividend payment date. We have included 118,157
shares of common stock in this prospectus and Registration Statement for the
payment of dividends on the Series C Preferred Stock.
The Registration Rights Agreement provides that we will indemnify The Shaar Fund
and its assignees against certain liabilities, including civil liabilities under
the Securities Act of 1933, as amended.
The Shaar Fund Warrants
The Shaar Fund may elect to acquire up to 20,000 additional shares of common
stock at an exercise price of $1.19 per share under the terms of a Common Stock
Purchase Warrant issued on September 24, 1999. If ATSI elects to redeem the
Series C Preferred Stock, part of the redemption price is an additional warrant
for 20,000 shares on the same terms as the Common
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Stock Purchase Warrant. ATSI is required to register 40,000 shares of its common
stock for the exercise of these warrants under the Registration Rights Agreement
signed by The Shaar Fund and ATSI at the time of the sale of the Series C
Preferred Stock and the Common Stock Purchase Warrant.
SELLING SHAREHOLDERS
There are two selling shareholders. The selling shareholders and their
affiliates have not held any position, office or other material relationship,
other than as a shareholder, with ATSI during the three years preceding the date
of this prospectus. The shareholders, the amount of common stock owned as of
October 25, 1999, the maximum amount of common stock that may be offered under
the Registration Statement, and the percentage ownership in ATSI as of October
25, 1999:
<TABLE>
<CAPTION>
Amount of Common Maximum Amount of % Ownership of ATSI
Stock Owned as of Common Stock that as of October 25,
Name October 25, 1999 may be Offered 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Shaar Fund 3,749,331/1/ 1,004,640/2/ 7.2%/3/
- ----------------------------------------------------------------------------------------------------
Corporate Capital Management 69,693/4/ 69,693/4/ Less than 1%
- ----------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------
/1/ The maximum number of shares that The Shaar Fund may acquire pursuant to
the terms of the Company's 6% Series B Convertible Cumulative Preferred Stock
("Series B Preferred Stock") issued to The Shaar Fund on July 2, 1999 (and
described in our Registration Statement on Form S-3 filed on August 18, 1999)
assum ing a conversion price of $0.7422 plus the number of shares that the Shaar
Fund may purchase under the terms of the Common Stock Purchase Warrant issued on
July 2, 1999 in connection with the Series B Preferred Stock; the maximum number
of shares that The Shaar Fund may acquire pursuant to the terms of the Company's
6% Series C Convertible Cumulative Preferred Stock ("Series C Preferred Stock")
described in the section entitled Issuance of Common Stock if a conversion price
of $0.5078 is assumed plus the number of shares that The Shaar Fund may purchase
pursuant to the Common Stock Purchase Warrant issued on September 24, 1999; does
not include any shares of common stock that may be paid as a dividend on the
Series B Preferred Stock or the Series C Preferred Stock and does not include
the shares that The Shaar Fund could purchase under additional warrants for
70,000 shares of common stock that ATSI would be required to issue if it elected
to redeem the Series B Preferred Stock and Series C Preferred Stock.
/2/ Assumes that The Shaar Fund acquires (I) the maximum number of shares that
The Shaar Fund may acquire pursuant to the terms of the Series C Preferred Stock
(described in the section entitled Issuance of Common Stock) if a conversion
price of $0.5078 is assumed, and (ii) the maximum number of shares that The
Shaar Fund may purchase pursuant to the Common Stock Purchase Warrant issued on
September 24, 1999; does not include any shares of common stock that may be paid
as a dividend on the Series C Preferred Stock and does not include the shares
that The Shaar Fund could purchase under an additional warrant for 20,000 shares
of common stock that ATSI would be required to issue if it elected to redeem the
Series C Preferred Stock.
/3/ Assumes that The Shaar Fund acquires all of the common stock described in
footnote 1.
/4/ The maximum number of shares that Corporate Capital Management may acquire
pursuant to the Company's Series B Preferred Stock and Series C Preferred Stock
issuance to The Shaar Fund on July 2, 1999 and September 24, 1999, respectively.
11
<PAGE>
PLAN OF DISTRIBUTION
The Registration Statement of which this prospectus forms a part has been
filed to satisfy registration rights held by the selling shareholders under
agreements between ATSI and the selling shareholders. To ATSI's knowledge, as of
this date, none of the selling shareholders has entered into any agreement,
arrangement or understanding with any particular broker or market maker with
respect to the shares offered by them, nor does ATSI know the identity of the
brokers or market makers which might participate in such an offering.
The shares being registered and offered may be sold from time to time by
the selling shareholders while the Registration Statement is in effect. The
selling shareholders will act independently of ATSI in making decisions with
respect to the timing, manner, and size of each sale. The sales may be made on
the NASD Over-the- Counter Bulletin Board or otherwise, at prices and on terms
then prevailing or at prices related to the market price, or in negotiated
transactions.
The shares may be sold by one or more of the following methods:
(1) A block trade in which the broker-dealer engaged by a selling
shareholder would attempt to sell shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction.
(2) Purchases by the broker-dealer as principal and resale by such broker
or dealer for its account according to this prospectus.
(3) ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
To our knowledge, none of the selling shareholders has, as of the date of
this prospectus, entered into any arrangement with a broker or dealer for the
sale of shares through a block trade, special offering, or secondary
distribution of a purchase by a broker-dealer. In effecting sales, broker-
dealers engaged by a selling shareholder may arrange for other broker-dealers to
participate. Broker-dealers may receive commissions or discounts from a selling
shareholder in amounts to be negotiated.
In offering the shares, the selling shareholders and any broker-dealers who
execute sales for the selling shareholders may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 in connection with such sales,
and any profits realized by the selling shareholders and the compensation of
such broker-dealers may be deemed to be underwriting discounts and commissions.
We have agreed to keep the Registration Statement of which this prospectus
is a part effective until The Shaar Fund sells the shares of common stock
offered under this prospectus or until two years following the effective date of
the Registration Statement of which this prospectus is a part, whichever comes
first. No sales may be made pursuant to this prospectus
12
<PAGE>
after this date unless we amend or supplement this prospectus to indicate that
we have agreed to extend the effective period.
We cannot assure you that any of the selling shareholders will sell any or
all of the shares of common stock registered in the Registration Statement.
LEGAL MATTERS
The validity of the shares of common stock offered hereby is being passed
upon by Alice King, Esq., San Antonio, Texas. Alice King is ATSI's Corporate
Counsel and is an employee.
EXPERTS
The consolidated balance sheets as of July 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity,
comprehensive loss and cash flows for the years ended July 31, 1997, 1998 and
1999 of ATSI and its subsidiaries have been incorporated by reference in this
prospectus and Registration Statement in reliance upon the report of Arthur
Andersen LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Government Filings. We file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any document we file at the SEC's public
reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
The SEC public reference room in Washington D.C. is located at 450 Fifth Street,
N.W., Washington D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the pubic reference rooms. Our SEC filings are also available to
you free of charge at the SEC's web site at http://www.sec.gov.
-------------------
Information Incorporated by Reference. The SEC allows us to "incorporate
by reference" the information we file with them which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and later information that we file with the SEC will automatically
update and replace information previously filed, including information contained
in this prospectus.
We incorporate by reference the documents listed below and any future filings
made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until this offering has been completed.
. Our Annual Report on Form 10-K for the years ended July 31, 1998 and 1999
. Our Quarterly Reports on Form 10-Q for the quarters ended October 31, 1998,
January 31, 1999 and April 30, 1999;
13
<PAGE>
. Our Proxy Statements dated November 6, 1998 and October 25, 1999 for our
annual meeting of shareholders ;
. The description of our common stock included in our Registration Statement
on Form S-4 filed on March 6, 1998.
. Our Registration Statement on Form S-3 for 3,198,054 shares of Common Stock
filed on August 18, 1999.
You may request a free copy of these filings by writing or telephoning us at the
following address:
American TeleSource International, Inc.
Investor Relations
12500 Network Blvd., Suite 407
San Antonio, Texas 78249
(210) 558-6090.
We will not send exhibits to these documents unless the exhibits are
specifically incorporated by reference in these documents.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the expenses (estimated except for the SEC registration
fee) for the issuance and distribution of the securities being registered, all
of which will be paid by ATSI:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration $ 256.16
Legal 1,000.00
Printing 3,000.00
Miscellaneous 500.00
Total: $4,756.16
</TABLE>
ATSI will not pay commissions and discounts of underwriters, dealers or agents,
if any, or any transfer taxes.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, ATSI's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach or alleged breach of their duty of care. In addition, the DGCL and
ATSI's Bylaws provide for indemnification of ATSI's directors and officers for
certain liabilities and expenses that they may incur in such capacities. In
general, directors and
14
<PAGE>
officers are indemnified with respect to actions taken in good faith in a manner
reasonably believed to be in, or not opposed to, the best interests of ATSI, and
with respect to any criminal action or proceeding, actions that the indemnitee
had no reasonable cause to believe were unlawful.
ATSI has purchased insurance with respect to, among other things, the
liabilities that may arise under the provisions referred to above. The directors
and officers of ATSI are also insured against liabilities, including liabilities
arising under the Securities act of 1933, as amended, which might be incurred by
them in their capacities as directors and officers of ATSI and against which
they are not indemnified by ATSI.
In connection with this offering, The Shaar Fund (or its assignees under a
Registration Rights Agreement signed by ATSI and The Shaar Fund) has agreed to
indemnify ATSI, and its officers, directors and controlling persons, against any
losses, claims, damages or liabilities to which they may become subject that
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in this prospectus or the Registration Statement or
any omission or alleged omission to state in this prospectus or the Registration
Statement a material fact required to be stated or necessary to make the
statements in this prospectus or the Registration Statement not misleading, to
the extent that such statement or omission was made in reliance on the written
information furnished to ATSI by The Shaar Fund.
ITEM 16. EXHIBITS.
5.1 Opinion regarding legality*
10.39 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated
September 24, 1999*
10.40 Certificate of Designation, Preferences and Rights of 6% Series C
Cumulative Convertible Preferred Stock of American TeleSource
International, Inc.*
10.41 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American
TeleSource International dated September 24, 1999*
10.42 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated
September 24, 1999*
23 Consent of Arthur Andersen LLP*
24 Power of Attorney (included on signature page to the Registration
Statement)
*filed herewith
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
A. Undertakings Regarding Amendments to this Prospectus and the
Registration Statement
15
<PAGE>
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" in the effective Registration
Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that the undertakings set forth in paragraphs (1)(A)(i)
and (ii) of this section do not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by ATSI pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in
this Registration Statement.
2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
B. Undertaking Regarding Filings Incorporating Subsequent Exchange Act
Documents by Reference. ATSI hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of ATSI's Annual
Report on Form 10-K pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of any employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
16
<PAGE>
C. Undertaking in Respect of Indemnification. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers and controlling person of ATSI pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by ATSI of
expenses incurred or paid by a director, officer or controlling person of ATSI
in the successful defense of any action , suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas on the 26th day of
October, 1999.
AMERICAN TELESOURCE INTERNATIONAL, INC.
By: /s/ H. Douglas Saathoff
------------------------
H. Douglas Saathoff
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints H.
Douglas Saathoff as attorney-in-fact, with the power of substitution, for him in
any and all capacities, to sign this Registration Statement and any amendments
to this Registration Statement and to file the same, with exhibits thereto and
other documents in connection therewith, with the SEC, granting to said
attorney-in-fact full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
17
<PAGE>
In witness whereof, each of the undersigned has executed this Power of
Attorney as of the date indicted.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Arthur L. Smith Chairman of the Board of Directors October 26, 1999
- --------------------------
Arthur L. Smith Chief Executive Officer
Director
/s/ H. Douglas Saathoff Chief Financial Officer October 26, 1999
- --------------------------
H. Douglas Saathoff Senior Vice President
Secretary
Treasurer
/s/Richard C. Benkendorf Director October 26, 1999
- --------------------------
Richard C. Benkendorf
/s/Carlos K. Kauachi Director October 26, 1999
- --------------------------
Carlos K. Kauachi
/s/ Murray R. Nye Director October 26, 1999
- --------------------------
Murray R. Nye
/s/ Tomas Revesz Director October 26, 1999
- --------------------------
Tomas Revesz
/s/Robert B. Werner Director October 26, 1999
- --------------------------
Robert B. Werner
</TABLE>
18
<PAGE>
EXHIBIT INDEX
5.1 Opinion regarding legality*
10.39 Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated
September 24, 1999*
10.40 Certificate of Designation, Preferences and Rights of 6% Series C
Cumulative Convertible Preferred Stock of American TeleSource
International, Inc.*
10.41 Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by American
TeleSource International dated September 24, 1999*
10.42 Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated
September 24, 1999*
23 Consent of Arthur Andersen LLP*
24 Power of Attorney (included on signature page to the Registration
Statement)
*filed herewith
<PAGE>
Exhibit 5.1
October 25, 1999
American TeleSource International, Inc.
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
Re: American TeleSource International, Inc. Registration Statement on Form
S-3 (the "Registration Statement")
Ladies and Gentlemen:
I have acted as counsel to American TeleSource International, Inc., a
Delaware corporation, ("ATSI") in connection with the registration for resale of
1,212,490 shares of common stock of ATSI (the "Shares") on Form S-3. This
opinion is being furnished in accordance with the requirements of Item 16 of
Form S-3.
I have reviewed the following:
1. ATSI's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation");
2. ATSI's Bylaws (the "Bylaws");
3. ATSI's Certificate of Designation, Preferences and Rights of 6%
Series C Cumulative Convertible Preferred Stock (the "Certificate
of Designation") ;
4. Common Stock Purchase Warrant issued by ATSI to The Shaar Fund
Ltd. dated September 24, 1999 (the "Shaar Fund Warrant");
5. Written Consent of the Board of Directors of ATSI dated September
effective September 24, 1999 regarding the issuance of the Series
C Preferred Stock; and
6. Certificate of Good Standing for ATSI issued by the Secretary of
State of the State of Delaware dated June 22, 1999.
The Certificate of Designation permits ATSI to redeem the 6%
Series C Cumulative Convertible Preferred Stock upon payment of
cash and delivery of an additional warrant in the form of the
Shaar Fund Warrant (the "Redemption Warrant"). I have assumed, for
the purposes of this opinion, that the Redemption Warrant, if
issued, will be in the exact form of the Shaar Fund Warrant except
for the date of issuance.
Based on my review of these documents, it is my opinion that the Shares,
if, as and when issued in accordance with the terms of the Certificate of
Incorporation and the Bylaws, and in accordance with the terms of the
Certificate of Designation, the Shaar Fund Warrant, the Redemption Warrant, or
in payment of dividends on the 6% Series C Cumulative Convertible Preferred
Stock pursuant to the terms of the Certificate of Designation, as applicable,
will be duly authorized, validly issued, fully paid and nonassessable.
I consent to the filing of this opinion as an Exhibit to the Registration
Statement and to the reference to me under the caption "Legal Matters" in the
prospectus which is part of the Registration Statement. In giving this consent,
I do not admit that I come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the Rules
and Regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/Alice L. King
Alice L. King
Corporate Counsel
1
<PAGE>
EXHIBIT 10.39
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement, dated as of September 24, 1999,
between American TeleSource International, Inc., a Delaware corporation with
principal executive offices located at 12500 Network Boulevard, Suite 407, San
Antonio, Texas 78249 (the "Company"), and The Shaar Fund Ltd. ("Buyer").
Whereas, Buyer desires to purchase from the Company, and the Company
desires to issue and sell to the Buyer, upon the terms and subject to the
conditions of this Agreement, (i) 500 shares of the Company's 6% Series C
Cumulative Convertible Preferred Stock, par value $0.001 per share
(collectively, the "Preferred Shares"), and (ii) its Common Stock Purchase
Warrants or Warrant in the form attached hereto as Exhibit A (collectively, the
"Warrants");
Whereas, upon the terms and subject to the designations, preferences
and rights set forth in the Company's Certificate of Designation of 6% Series C
Cumulative Convertible Preferred Stock in the form attached hereto as Exhibit B
(the "Certificate of Designation"), the Preferred Shares are convertible into
shares of the Company's common stock, par value $0.001 per share (the "Common
Stock");
Whereas, the Warrants, upon the terms and subject to the conditions in
the Warrants, will for a period of five (5) years be exercisable to purchase
20,000 shares of Common Stock;
Whereas, upon the terms and subject to the conditions of the
Certificate of Designation, the Preferred Stock may be redeemed by the Company
at a redemption price including, without limitation, the issuance of its Common
Stock Purchase Warrants having the same terms and conditions as the Warrants and
exercisable to purchase an additional 20,000 shares of Common Stock (the
"Redemption Warrants");
Now, Therefore, in consideration of the premises and the mutual
covenants contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
I. Purchase and Sale of Preferred Shares and Warrants
A. Transaction. Buyer hereby agrees to purchase from the Company,
and the Company has offered and hereby agrees to issue and sell to the Buyer in
a transaction exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933, as amended (the "Securities Act"), the Preferred
Shares and the Warrants to purchase 20,000 shares of Common Stock.
B. Purchase Price; Form of Payment. The purchase price for the
Preferred Shares and the Warrants to be purchased by Buyer hereunder shall be
$500,000 (the "Purchase
<PAGE>
Price"). Buyer shall pay the Purchase Price by wire transfer of immediately
available funds to the escrow agent (the "Escrow Agent") identified in those
certain Escrow Instructions of even date herewith, a copy of which is attached
hereto as Exhibit C (the "Escrow Instructions"). Simultaneously with the
execution of this Agreement and against receipt by the Escrow Agent of the
Purchase Price, the Company shall deliver one or more duly authorized, issued
and executed certificates (I/N/O Buyer or, if the Company has been notified
otherwise, I/N/O Buyer's nominee) evidencing the Preferred Shares and the
Warrants which the Buyer is purchasing, to the Escrow Agent or its designated
depository. By executing and delivering this Agreement, Buyer and the Company
each hereby agree to observe the terms and conditions of the Escrow
Instructions, all of which are incorporated herein by reference as if fully set
forth herein.
C. Method of Payment. Payment into escrow of the Purchase Price
shall be made by wire transfer of immediately available funds to:
The Bank of New York
48 Wall Street
New York, NY 10038
ABA No.: 021000018
For the Account of: Cadwalader, Wickersham & Taft
Trust Account IOLA Fund
Account No.: 0902061070
Simultaneously with the execution of this Agreement, the Buyer shall deposit
with the Escrow Agent the Purchase Price and the Company shall deposit with the
Escrow Agent the Preferred Shares and the Warrants.
II. Buyer's Representations, Warranties; Access to
Information; Independent Investigation
Buyer represents and warrants to and covenants and agrees with the
Company as follows:
A. Buyer is purchasing the Preferred Shares, the Warrants, the
Redemption Warrants, if any, the Common Stock issuable upon exercise of the
Warrants and the Redemption Warrants, if any, (the "Warrant Shares") and the
shares of Common Stock issuable upon conversion of the Preferred Shares (the
"Conversion Shares" and, collectively with the Preferred Shares, the Warrants,
the Redemption Warrants and the Warrant Shares, the "Securities") for its own
account, for investment purposes only and not with a view towards or in
connection with the public sale or distribution thereof in violation of the
Securities Act.
B. Buyer is (i) an "accredited investor" within the meaning of Rule
501 of Regulation D under the Securities Act, (ii) experienced in making
investments of the kind contemplated by this Agreement, (iii) capable, by reason
of its business and financial experience, of evaluating the relative merits and
risks of an investment in the Securities, and (iv) able to afford the loss of
its investment in the Securities.
<PAGE>
C. Buyer understands that the Securities are being offered and sold
by the Company in reliance on an exemption from the registration requirements of
the Securities Act and equivalent state securities and "blue sky" laws, and that
the Company is relying upon the accuracy of, and Buyer's compliance with,
Buyer's representations, warranties and covenants set forth in this Agreement to
determine the availability of such exemption and the eligibility of Buyer to
purchase the Securities;
D. Buyer acknowledges that in making its decision to purchase the
Securities it has been given an opportunity to ask questions of and to receive
answers from the Company's executive officers, directors and management
personnel concerning the terms and conditions of the private placement of the
Securities by the Company.
E. Buyer understands that the Securities have not been approved or
disapproved by the Securities and Exchange Commission (the "Commission") or any
state securities commission and that the foregoing authorities have not reviewed
any documents or instruments in connection with the offer and sale to Buyer of
the Securities and have not confirmed or determined the adequacy or accuracy of
any such documents or instruments.
F. This Agreement has been duly and validly authorized, executed and
delivered by Buyer and is a valid and binding agreement of Buyer enforceable
against Buyer in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and except as rights to
indemnity and contribution may be limited by federal or state securities laws or
the public policy underlying such laws.
G. Neither Buyer nor its affiliates nor any person acting on its or
their behalf has the intention of entering, or will enter into, prior to the
closing, any put option, short position or other similar instrument or position
with respect to the Common Stock and neither Buyer nor any of its affiliates nor
any person acting on its or their behalf will at any time use shares of Common
Stock acquired pursuant to this Agreement to settle any put option, short
position or other similar instrument or position that may have been entered into
prior to the execution of this Agreement.
H. Neither Buyer nor any of its affiliates is a broker-dealer
registered as such with the Commission.
III. The Company's Representations, Warranties and Covenants
The Company represents and warrants to and convenants and agrees with
Buyer that:
A. Capitalization.
1. The authorized capital stock of the Company consists of: (i)
100,000,000 shares of Common Stock, of which 48,685,287 shares are issued
and outstanding on the date hereof, and (ii) 10,000,000 shares of "blank
check" preferred stock, par value $0.001 per share, of which (x) 50,000
shares have been designated
<PAGE>
10% Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock"), of which 24,146 shares have been issued and are
outstanding and (y) 2,000 shares have been designated 6% Series B
Cumulative Convertible Preferred Stock (the "Series B Preferred Stock"), of
which 2,000 shares have been issued and are outstanding. All of the issued
and outstanding shares of Common Stock, Series A Preferred Stock and Series
B Preferred Stock have been duly authorized and validly issued and are
fully paid and nonassessable. As of the date hereof, the Company has
outstanding vested stock options to purchase 3,933,000 shares of Common
Stock and non-vested stock options to purchase 2,204,467 shares of Common
Stock, in each case pursuant to its 1997 and 1998 Stock Option Plans, and
warrants to purchase 4,203,925 shares of Common Stock. The Conversion
Shares and Warrant Shares have been duly and validly authorized and
reserved for issuance by the Company, and when issued by the Company upon
conversion of, or in lieu of accrued dividends on, the Preferred Shares and
on exercise of the Warrants and the Redemption Warrants, if any, will be
duly and validly issued, fully paid and nonassessable and will not subject
the holder thereof to personal liability by reason of being such holder.
There are no preemptive, subscription, "call" or other similar rights to
acquire the Common Stock (including the Conversion Shares and Warrant
Shares) that have been issued or granted to any person, except as disclosed
on Schedule III.A.1. hereto or otherwise previously disclosed in writing to
Buyer.
2. Except as disclosed on Schedule III.A.2. hereto, the Company
does not own or control, directly or indirectly, any interest in any other
corporation, partnership, limited liability company, unincorporated
business organization, association, trust or other business entity.
B. Organization; Reporting Company Status.
1. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
is duly qualified as a foreign corporation in all jurisdictions in which
the failure to so qualify would have a material adverse effect on the
business, properties, prospects, condition (financial or otherwise) or
results of operations of the Company or on the consummation of any of the
transactions contemplated by this Agreement (a "Material Adverse Effect").
2. The Company has registered the Common Stock pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and has timely filed with the Commission all reports and
information required to be filed by it pursuant to all reporting
obligations under Section 13(a) or 15(d), as applicable, of the Exchange
Act for the 12-month period immediately preceding the date hereof. The
Common Stock is traded on the OTC Bulletin Board service of the National
Association of Securities Dealers, Inc. (the "OTCBB") and the Company has
not received any notice regarding, and to its knowledge there is no threat
of, the termination or discontinuance of the eligibility of the Common
Stock for such trading.
C. Authorized Shares. The Company has duly and validly authorized
and reserved for issuance 1,250,000 shares of Common Stock sufficient in number
for the conversion
<PAGE>
of the Preferred Shares and the exercise of the Warrants and the Redemption
Warrants. The Company understands and acknowledges the potentially dilutive
effect to the Common Stock of the issuance of the Preferred Shares and Warrant
Shares upon conversion of the Preferred Shares and exercise of the Warrants and
Redemption Warrants, respectively. The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Preferred Shares
and Warrant Shares upon exercise of the Warrants or Redemption Warrants, if any,
in accordance with this Agreement, the Certificate of Designation, the Warrants
and the Redemption Warrants is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company and notwithstanding the commencement of any case
under 11 U.S.C. (S) 101 et seq. (the "Bankruptcy Code"). In the event the
Company is a debtor under the Bankruptcy Code, the Company hereby waives to the
fullest extent permitted any rights to relief it may have under 11 U.S.C. (S)
362 in respect of the conversion of the Preferred Shares and the exercise of the
Warrants or Redemption Warrants, if any. The Company agrees, without cost or
expense to Buyer, to take or consent to any and all action necessary to
effectuate relief under 11 U.S.C. (S) 362. Schedule III.C. hereto sets forth (i)
all issuances and sales by the Company since July 31, 1998 of its capital stock,
and other securities convertible, exercisable or exchangeable for capital stock
of the Company, (ii) the amount of such securities sold, including any
underlying shares of capital stock, (iii) the purchaser thereof, and (iv) the
amount paid therefor.
D. Authority; Validity and Enforceability. The Company has the
requisite corporate power and authority to file and perform its obligations
under the Certificate of Designation and to enter into the Documents (as
hereinafter defined), and to perform all of its obligations hereunder and
thereunder (including the issuance, sale and delivery to Buyer of the
Securities). The execution, delivery and performance by the Company of the
Documents, and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the filing of the Certificate
of Designation with the Delaware Secretary of State's office, the issuance of
the Preferred Shares, the Warrants and the Redemption Warrants and the issuance
and reservation for issuance of the Conversion Shares and Warrant Shares), has
been duly authorized by all necessary corporate action on the part of the
Company. Each of the Documents has been duly and validly executed and delivered
by the Company, the Certificate of Designation has been duly filed with the
Delaware Secretary of State's office by the Company, and each instrument
constitutes a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and except as rights to
indemnity and contribution may be limited by federal or state securities laws or
the public policy underlying such laws. The Securities have been duly and
validly authorized for issuance by the Company and, when executed and delivered
by the Company, will be valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally. For purposes of
this Agreement, the term "Documents" means (i) this Agreement; (ii) the
Registration Rights Agreement of even date herewith between the Company and
Buyer, a copy of which is annexed hereto as Exhibit D (the "Registration Rights
Agreement"); (iii) the Certificate of Designation; (iv) the Warrants; and (v)
the Escrow Instructions.
<PAGE>
E. Authorization of the Securities. The authorization, issuance,
sale and delivery of the Preferred Shares, the Warrants and the Redemption
Warrants has been duly authorized by all requisite corporate action on the part
of the Company. As of the Closing Date, the Preferred Shares and the Warrants,
and the Conversion Shares and Redemption Warrants and the Warrant Shares upon
their issuance in accordance with the Preferred Shares and the Warrants,
respectively, will be validly issued and outstanding, fully paid and
nonassessable, and not subject to any preemptive rights, rights of first refusal
or other similar rights.
F. Non-contravention. The execution and delivery by the Company of
the Documents, the issuance of the Securities, and the consummation by the
Company of the other transactions contemplated hereby and thereby, including,
without limitation, the filing of the Certificate of Designation with the
Delaware Secretary of State's office, do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default (or an event which, with notice, lapse of time or both,
would constitute a default) under (i) the articles of incorporation or by-laws
of the Company or (ii) any indenture, mortgage, deed of trust or other material
agreement or instrument to which the Company is a party or by which its
properties or assets are bound, or any law, rule, regulation, decree, judgment
or order of any court or public or governmental authority having jurisdiction
over the Company or any of the Company's properties or assets, except as to
clause (ii) above such conflict, breach or default which would not have a
Material Adverse Effect.
G. Approvals. No authorization, approval or consent of any court or
public or governmental authority is required to be obtained by the Company for
the issuance and sale of the Preferred Shares or the Warrants (and the
Redemption Warrants, the Conversion Shares and Warrant Shares) to Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents as have been obtained by the Company prior to the date hereof.
H. Commission Filings. None of the Company's reports and documents
filed with the Commission pursuant to the Securities Act or the Exchange Act
(collectively, the "Commission Filings") prior to the date hereof contained at
the time they were filed any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
I. Absence of Certain Changes. Except as set forth on Schedule
III.I., since the Balance Sheet Date (as defined in Section III.M.), there has
not occurred any change, event or development in the business, financial
condition, prospects or results of operations of the Company, and there has not
existed any condition, having or reasonably likely to have a Material Adverse
Effect.
J. Full Disclosure. There is no fact known to the Company (other
than general economic or industry conditions known to the public generally) that
has not been fully disclosed in writing to the Buyer that (i) reasonably could
be expected to have a Material Adverse Effect or (ii) reasonably could be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to the Documents.
<PAGE>
K. Absence of Litigation. There is no action, suit, claim,
proceeding, inquiry or investigation pending or, to the Company's knowledge,
threatened, by or before any court or public or governmental authority which, if
determined adversely to the Company, would have a Material Adverse Effect.
L. Absence of Events of Default. No "Event of Default" (as defined
in any agreement or instrument to which the Company is a party) and no event
which, with notice, lapse of time or both, would constitute an Event of Default
(as so defined), has occurred and is continuing, which could have a Material
Adverse Effect.
M. Financial Statements; No Undisclosed Liabilities. The Company has
delivered to Buyer true and complete copies of its audited balance sheet as at
July 31, 1997 and July 31, 1998 and the related audited statements of operations
and cash flows for the three fiscal years ended July 31, 1998 including the
related notes and schedules thereto (collectively, the "Financial Statements"),
and all management letters, if any, from the Company's independent auditors
relating to the dates and periods covered by the Financial Statements. Each of
the Financial Statements is complete and correct in all material respects, has
been prepared in accordance with United States General Accepted Accounting
Principles ("GAAP") (subject, in the case of the interim Financial Statements,
to normal year end adjustments and the absence of footnotes) and in conformity
with the practices consistently applied by the Company without modification of
the accounting principles used in the preparation thereof, and fairly presents
the financial position, results of operations and cash flows of the Company as
at the dates and for the periods indicated. For purposes hereof, the audited
balance sheet of the Company as at July 31, 1998 is hereinafter referred to as
the "Balance Sheet" and July 31, 1998 is hereinafter referred to as the "Balance
Sheet Date". The Company has no indebtedness, obligations or liabilities of any
kind (whether accrued, absolute, contingent or otherwise, and whether due or to
become due) that would have been required to be reflected in, reserved against
or otherwise described in the Balance Sheet or in the notes thereto in
accordance with GAAP, which was not fully reflected in, reserved against or
otherwise described in the Balance Sheet or the notes thereto or was not
incurred since the Balance Sheet Date in the ordinary course of business
consistent with the Company's past practices.
N. Compliance with Laws; Permits. The Company is in compliance with
all laws, rules, regulations, codes, ordinances and statutes (collectively,
"Laws") applicable to it or to the conduct of its business, except for such
noncompliance as would not have a Material Adverse Effect. The Company possesses
all permits, approvals, authorizations, licenses, certificates and consents from
all public and governmental authorities which are necessary to conduct its
business, except for those the absence of which would not have a Material
Adverse Effect.
O. Related Party Transactions. Except as set forth on Schedule
III.O. hereto and excluding receivables between the Company and its
Subsidiaries, neither the Company nor any of its officers, directors or
"Affiliates" (as such term is defined in Rule 12b-2 under the Exchange Act) has
borrowed any moneys from or has outstanding any indebtedness or other similar
obligations to the Company. Except as set forth on Schedule III.O. hereto,
neither the Company nor any of its officers, directors or Affiliates (i) owns
any direct or indirect interest
<PAGE>
constituting more than a 1% equity (or similar profit participation) interest
in, or controls or is a director, officer, partner, member or employee of, or
consultant to or lender to or borrower from, or has the right to participate in
the profits of, any person or entity which is (x) a competitor, supplier,
customer, landlord, tenant, creditor or debtor of the Company, (y) engaged in a
business related to the business of the Company, or (z) a participant in any
transaction to which the Company is a party (other than in the ordinary course
of the Company's business) or (ii) is a party to any contract, agreement,
commitment or other arrangement with the Company.
P. Insurance. The Company maintains property and casualty, general
liability, workers' compensation, environmental hazard, personal injury and
other similar types of insurance with financially sound and reputable insurers
that is adequate and consistent with industry standards and the Company's
historical claims experience. The Company has not received notice from, and has
no knowledge of any threat by, any insurer (that has issued any insurance policy
to the Company) that such insurer intends to deny coverage under or cancel,
discontinue or not renew any such insurance policy presently in force.
Q. Securities Law Matters. Based, in part, upon the representations
and warranties of Buyer set forth in Section II hereof, the offer and sale by
the Company of the Securities is exempt from (i) the registration and prospectus
delivery requirements of the Securities Act and the rules and regulations of the
Commission thereunder and (ii) the registration and/or qualification provisions
of all applicable state securities and "blue sky" laws. Other than pursuant to
an effective registration statement under the Securities Act, the Company has
not issued, offered or sold the Preferred Shares or any shares of Common Stock
(including for this purpose any securities of the same or a similar class as the
Preferred Shares or Common Stock, or any securities convertible into or
exchangeable or exercisable for the Preferred Shares or Common Stock or any such
other securities) within the one-year period next preceding the date hereof,
except as disclosed on Schedule III.A or III.Q. hereto or otherwise previously
disclosed in writing to Buyer, and the Company shall not directly or indirectly
take, and shall not permit any of its directors, officers or Affiliates directly
or indirectly to take, any action (including, without limitation, any offering
or sale to any person or entity of the Preferred Shares or shares of Common
Stock), so as to make unavailable the exemption from Securities Act registration
being relied upon by the Company for the offer and sale to Buyer of the
Preferred Shares and the Warrants (and the Redemption Warrants, the Conversion
Shares and the Warrant Shares) as contemplated by this Agreement. No form of
general solicitation or advertising has been used or authorized by the Company
or any of its officers, directors or Affiliates in connection with the offer or
sale of the Preferred Shares and the Warrants (and the Redemption Warrants, the
Conversion Shares and the Warrant Shares) as contemplated by this Agreement or
any other agreement to which the Company is a party.
R. Environmental Matters.
1. The operations of the Company are in compliance with all
applicable Environmental Laws and all permits issued pursuant to
Environmental Laws or otherwise;
<PAGE>
2. The Company has obtained or applied for all permits required
under all applicable Environmental Laws necessary to operate its business;
3. The Company is not the subject of any outstanding written
order of or agreement with any governmental authority or person respecting
(i) Environmental Laws, (ii) Remedial Action or (iii) any Release or
threatened Release of Hazardous Materials;
4. The Company has not received, since July 31, 1998, any
written communication alleging that it may be in violation of any
Environmental Law or any permit issued pursuant to any Environmental Law,
or may have any liability under any Environmental Law;
5. The Company does not have any current contingent liability in
connection with any Release of any Hazardous Materials into the indoor or
outdoor environment (whether on-site or off-site);
6. Except as set forth on Schedule III.R. hereto, to the
Company's knowledge, there are no investigations of the business,
operations, or currently or previously owned, operated or leased property
of the Company pending or threatened which could lead to the imposition of
any liability pursuant to any Environmental Law;
7. There are not located at any of the properties of the Company
any (A) underground storage tanks, (B) asbestos-containing material or (C)
equipment containing polychlorinated biphenyls; and,
8. The Company has provided to Buyer all environmentally related
audits, studies, reports, analyses, and results of investigations that have
been performed with respect to the currently or previously owned, leased or
operated properties of the Company.
For purposes of this Section III.R.:
"Environmental Law" means any foreign, federal, state or local
statute, regulation, ordinance, or rule of common law now in effect in any way
relating to the protection of human health and safety or the environment
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, the Hazardous Materials Transportation Act, the
Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act,
the Toxic Substances Control Act, the Federal Insecticide, Fungicide, and
Rodenticide Act, and the Occupational Safety and Health Act, and the regulations
promulgated pursuant thereto.
"Hazardous Material" means any substance, material or waste which is
regulated by the United States, Canada or any of its provinces, or any state or
local governmental authority including, without limitation, petroleum and its
by-products, asbestos, and any material or substance which is defined as a
"hazardous waste," "hazardous substance," "hazardous material," "restricted
hazardous waste," "industrial waste," "solid waste," "contaminant,"
<PAGE>
"pollutant," "toxic waste" or "toxic substance" under any provision of any
Environmental Law;
"Release" means any release, spill, filtration, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, or leaching into
the indoor or outdoor environment, or into or out of any property;
"Remedial Action" means all actions to (x) clean up, remove, treat or
in any other way address any Hazardous Material; (y) prevent the Release of any
Hazardous Material so it does not endanger or threaten to endanger public health
or welfare or the indoor or outdoor environment; or (z) perform pre-remedial
studies and investigations or post-remedial monitoring and care.
S. Labor Matters. The Company is not party to any labor or
collective bargaining agreement and there are no labor or collective bargaining
agreements which pertain to employees of the Company. Except as set forth on
Schedule III.S, no employees of the Company are represented by any labor
organization and none of such employees has made a pending demand for
recognition, and there are no representation proceedings or petitions seeking a
representation proceeding presently pending or, to the Company's knowledge,
threatened to be brought or filed, with the National Labor Relations Board or
other labor relations tribunal. There is no organizing activity involving the
Company pending or, to the Company's knowledge, threatened by any labor
organization or group of employees of the Company. There are no (i) strikes,
work stoppages, slowdowns, lockouts or arbitrations or (ii) material grievances
or other labor disputes pending or, to the knowledge of the Company, threatened
against or involving the Company. There are no unfair labor practice charges,
grievances or complaints pending or, to the knowledge of the Company, threatened
by or on behalf of any employee or group of employees of the Company.
T. ERISA Matters. The Company and its ERISA Affiliates are in
compliance in all material respects with all provisions of ERISA applicable to
it. No Reportable Event has occurred, been waived or exists as to which the
Company or any ERISA Affiliate was required to file a report with the PBGC, and
the present value of all liabilities under all Plans (based on those assumptions
used to fund such Plans) did not, as of the most recent annual valuation date
applicable thereto, exceed the value of the assets of all such Plans in the
aggregate. None of the Company or ERISA Affiliates has incurred any Withdrawal
Liability that could result in a Material Adverse Effect. None of the Company
or ERISA Affiliates has received any notification that any Multiemployer Plan is
in reorganization or has been terminated within the meaning of Title IV of
ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization
or termination where such reorganization or termination has resulted or could
reasonably be expected to result in increases to the contributions required to
be made to such Plan or otherwise.
For purposes of this Section III.T.:
"ERISA" means the Employee Retirement Income Security Act of 1974,
together with the regulations thereunder, as the same may be amended from time
to time.
<PAGE>
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that was, is or hereafter may become, a member of a group of which
the Company is a member and which is treated as a single employer under Section
414 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue
Code").
"Multiemployer Plan" means a multiemployer plan as defined in Section
4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other than one
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section
414 of the Internal Revenue Code) is making or accruing an obligation to make
contributions, or has within any of the preceding five plan years made or
accrued an obligation to make contributions.
"PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA or any successor thereto.
"Plan" means any pension plan (other than a Multiemployer Plan)
subject to the provision of Title IV of ERISA or Section 412 of the Internal
Revenue Code that is maintained for employees of the Company or any ERISA
Affiliate.
"Reportable Event" means any reportable event as defined in Section
4043(b) of ERISA or the regulations issued thereunder with respect to a Plan
(other than a Plan maintained by an ERISA Affiliate that is considered an ERISA
Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Internal
Revenue Code).
"Withdrawal Liability" means liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.
U. Tax Matters.
1. The Company has filed all Tax Returns which it is required to
file under applicable Laws, except for such Tax Returns in respect of which
the failure so to file does not and could not have a Material Adverse
Effect; all such Tax Returns are true and accurate in all material respects
and have been prepared in compliance with all applicable Laws; the Company
has paid all Taxes due and owing by it (whether or not such Taxes are
required to be shown on a Tax Return) and has withheld and paid over to the
appropriate taxing authorities all Taxes which it is required to withhold
from amounts paid or owing to any employee, stockholder, creditor or other
third parties; and since the Balance Sheet Date, the charges, accruals and
reserves for Taxes with respect to the Company (including any provisions
for deferred income taxes) reflected on the books of the Company are
adequate to cover any Tax liabilities of the Company if its current tax
year were treated as ending on the date hereof.
2. No claim has been made by a taxing authority in a
jurisdiction where the Company does not file tax returns that such
corporation is or may be subject to taxation by that jurisdiction. There
are no foreign, federal, state or local tax audits or administrative or
judicial proceedings pending or being conducted with respect to the
Company; no information related to Tax matters has been requested by any
foreign,
<PAGE>
federal, state or local taxing authority; and, except as disclosed above,
no written notice indicating an intent to open an audit or other review has
been received by the Company from any foreign, federal, state or local
taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (A) has not executed or
entered into a closing agreement pursuant to Section 7121 of the Internal
Revenue Code or any predecessor provision thereof or any similar provision
of state, local or foreign law; or (B) has not agreed to nor is required to
make any adjustments pursuant to Section 481(a) of the Internal Revenue
Code or any similar provision of state, local or foreign law by reason of a
change in accounting method initiated by the Company or any of its
subsidiaries or has any knowledge that the IRS has proposed any such
adjustment or change in accounting method, or has any application pending
with any taxing authority requesting permission for any changes in
accounting methods that relate to the business or operations of the
Company. The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Internal Revenue
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of
the Internal Revenue Code.
3. The Company has not made an election under Section 341(f) of
the Internal Revenue Code. The Company is not liable for the Taxes of
another person that is not a subsidiary of the Company (A) under Treas.
Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign
law), (B) as a transferee or successor, (C) by contract or indemnity or (D)
otherwise. The Company is not a party to any tax sharing agreement. The
Company has not made any payments, nor is it obligated to make payments nor
is it a party to an agreement that could obligate it to make any payments,
that would not be deductible under Section 280G of the Internal Revenue
Code.
For purposes of this Section III.U.:
"IRS" means the United States Internal Revenue Service.
"Tax" or "Taxes" means federal, state, county, local, foreign, or
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto), whether disputed or not.
"Tax Return" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and including any
amendment thereof.
V. Property. The Company has good and indefeasible title to all real
and personal property owned by it, free and clear of all liens, encumbrances and
defects except such as are described on Schedule III.V. hereto or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the
<PAGE>
Company; and any real property and buildings held under lease by the Company
are held by it under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company.
W. Intellectual Property. The Company owns or possesses adequate and
enforceable rights to use all patents, patent applications, trademarks,
trademark applications, trade names, service marks, copyrights, copyright
applications, licenses, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures) and other similar rights and proprietary knowledge (collectively,
"Intangibles") necessary for the conduct of its business as now being conducted
including, but not limited to, those described on Schedule III.W. hereto. The
Company is not infringing upon or in conflict with any right of any other person
with respect to any Intangibles. Except as disclosed on Schedule III.W. hereto,
no claims have been asserted by any person to the ownership or use of any
Intangibles and the Company has no knowledge of any basis for such claim.
X. Internal Controls and Procedures. The Company maintains accurate
books and records and internal accounting controls which provide reasonable
assurance that (i) all transactions to which the Company is a party or by which
its properties are bound are executed with management's authorization; (ii) the
reported accountability of the Company's assets is compared with existing assets
at regular intervals; (iii) access to the Company's assets is permitted only in
accordance with management's authorization; and (iv) all transactions to which
the Company is a party or by which its properties are bound are recorded as
necessary to permit preparation of the financial statements of the Company in
accordance with GAAP.
Y. Payments and Contributions. Neither the Company nor any of its
directors, officers or, to its knowledge, other employees has (i) used any
Company funds for any unlawful contribution, endorsement, gift, entertainment or
other unlawful expense relating to political activity; (ii) made any direct or
indirect unlawful payment of Company funds to any foreign or domestic government
official or employee, (iii) violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe,
rebate, payoff, influence payment, kickback or other similar payment to any
person with respect to Company matters.
Z. No Misrepresentation. No representation or warranty of the
Company contained in this Agreement, any schedule, annex or exhibit hereto or
any agreement, instrument or certificate furnished by the Company to Buyer
pursuant to this Agreement, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
AA. Finder's Fee. There is no finder's fee, brokerage commission or
like payment in connection with the transactions contemplated by this Agreement
for which Buyer is liable or responsible.
<PAGE>
IV. Certain Covenants and Acknowledgments
A. Restrictive Legend. Buyer acknowledges and agrees that, upon
issuance pursuant to this Agreement, the Preferred Shares the Warrants and the
Redemption Warrants shall have endorsed thereon a legend in substantially the
following form (and a stop-transfer order may be placed against transfer of the
Preferred Shares until such legend has been removed):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH
OTHER LAWS."
B. Filings. The Company shall make all necessary Commission Filings
and "blue sky" filings required to be made by the Company in connection with
the sale of the Securities to the Buyer as required by all applicable Laws, and
shall provide a copy thereof to the Buyer promptly after such filing.
C. Reporting Status. So long as the Buyer beneficially owns any of
the Securities, the Company shall timely file all reports required to be filed
by it with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
D. Use of Proceeds. The Company shall use the net proceeds from the
sale of the Securities (excluding amounts paid by the Company for Buyer's out-
of-pocket costs and expenses incurred in connection with the transactions
contemplated by this Agreement) solely for general corporate and working capital
purposes.
E. Listing. Except to the extent the Company lists its Common Stock
on the New York Stock Exchange or The Nasdaq Stock Market, the Company shall use
its best efforts to maintain its trading of the Common Stock on the OTCBB.
F. Reserved Conversion Shares. The Company at all times from and
after the date hereof shall have a sufficient number of shares of Common Stock
duly and validly authorized and reserved for issuance to satisfy the conversion,
in full, of the Preferred Shares and upon the exercise of the Warrants and the
Redemption Warrants.
G. Right of First Refusal. If the Company should propose (the
"Proposal") to issue Common Stock or securities convertible into Common Stock at
a price less than the Current Market Price (as defined in the Certificate of
Designation), or debt at less than par value or having an effective annual
interest rate in excess of 9.9% (each a "Right of First Refusal Security" and
collectively, the "Right of First Refusal Securities"), in each case on the
<PAGE>
date of issuance during the period ending two years after the Closing Date (the
"Right of First Refusal Period"), the Company shall be obligated to offer such
right of First Refusal Securities to the Buyer on the terms set forth in the
Proposal (the "Offer") and the Buyer shall have the right, but not the
obligation, to accept such Offer on such terms. If during the Right of First
Refusal Period, the Company provides written notice to the Buyer that it
proposes to issue any Right of First Refusal Securities on the terms set forth
in the Proposal, then Buyer shall have ten (10) business days to accept or
reject such offer in writing. If the Company fails to: (i) issue a Proposal
during the Right of First Refusal Period; (ii) offer Buyer the opportunity to
complete the transaction as set forth in the Proposal; or (iii) enter into an
agreement with Buyer, at such terms after the Buyer has accepted the Offer, then
the Company shall pay to Buyer, as liquidated damages, an amount in total equal
to 10% of the amount paid to the Company for the Right of First Refusal
Securities. The foregoing right of first refusal is and shall be senior in
right to any other right of first refusal issued by the Company to any other
Person (as defined in the Certificate of Designation). Notwithstanding the
foregoing, the Buyer shall have no rights under this Section IV.G. in respect of
Common Stock or any other securities of the Company issuable (i) upon the
exercise or conversion of options, warrants or other rights to purchase
securities of the Company outstanding as of the date hereof or (ii) to officers,
directors or employees of the Company or any of its subsidiaries.
V. Transfer Agent Instructions
A. The Company undertakes and agrees that no instruction other than
the instructions referred to in this Section V and customary stop transfer
instructions prior to the registration and sale of the Common Stock pursuant to
an effective Securities Act registration statement will be given to its transfer
agent for the Common Stock and that the Common Stock issuable upon conversion of
the Preferred Shares and exercise of the Warrants and the Redemption Warrants
otherwise shall be freely transferable on the books and records of the Company
as and to the extent provided in this Agreement, the Registration Rights
Agreement and applicable law. Nothing contained in this Section V.A. shall
affect in any way Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of such Common Stock. If, at any time,
Buyer provides the Company with an opinion of counsel reasonably satisfactory to
the Company that registration of the resale by Buyer of such Common Stock is not
required under the Securities Act, the Company shall permit the transfer of such
Common Stock and, promptly instruct the Company's transfer agent to issue one or
more certificates for Common Stock without any restrictive legends endorsed
thereon.
B. The Company shall permit Buyer to exercise its right to convert the
Preferred Shares by telecopying an executed and completed Notice of Conversion
(as defined in the Certificate of Designation) to the Company. Each date on
which a Conversion Notice is telecopied to and received by the Company in
accordance with the provisions hereof shall be deemed a Conversion Date (as
defined in the Certificate of Designation). The Company shall transmit the
certificates evidencing the shares of Common Stock issuable upon conversion of
the Preferred Shares (together with certificates evidencing any Preferred Shares
not being so converted) to Buyer via express courier, by electronic transfer or
otherwise, within five business days after receipt by the Company of the Notice
of Conversion (the "Delivery Date"). Within
<PAGE>
30 days after Buyer delivers the Notice of Conversion to the Company, Buyer
shall deliver to the Company the Preferred Shares being converted.
C. The Company shall permit Buyer to exercise its right to purchase
shares of Common Stock pursuant to exercise of the Warrants and the Redemption
Warrants in accordance with the applicable terms of the Warrants and the
Redemption Warrants. The last date that the Company may deliver shares of Common
Stock issuable upon any exercise of Warrants or Redemption Warrants is referred
to herein as the "Warrant Delivery Date."
D. The Company understands that a delay in the issuance of the shares
of Common Stock issuable in lieu of cash dividends on the Preferred Shares, upon
the conversion of the Preferred Shares or exercise of the Warrants or Redemption
Warrants beyond the applicable Dividend Payment Due Date (as defined in the
Certificate of Designation), Delivery Date or Warrant Delivery Date could result
in economic loss to Buyer. As compensation to Buyer for such loss (and not as a
penalty), the Company agrees to pay to Buyer for late issuance of Common Stock
issuable in lieu of cash dividends on the Preferred Shares, upon conversion of
the Preferred Shares or exercise of the Warrants or Redemption Warrants in
accordance with the following schedule (where "No. Business Days" is defined as
the number of business days beyond five days from the Dividend Payment Due Date,
the Delivery Date or the Warrant Delivery Date, as applicable):
<TABLE>
<CAPTION>
Compensation For Each
10 Shares of
of Preferred Shares Not Converted
Timely or 500 Shares of Common
Stock Issuable In Payment of
Dividends or Upon Exercise of
Warrants or Redemption
No. Business Days Warrants Not Issued Timely
----------------- ----------------------------
<S> <C>
1 $ 25
2 50
3 75
4 100
5 125
6 150
7 175
8 200
9 225
10 250
more than 10 $250 + $100 for each Business Day
Late beyond 10 days
</TABLE>
The Company shall pay to Buyer the compensation described above by the transfer
of immediately available funds upon Buyer's demand. Nothing herein shall limit
Buyer's right to pursue actual damages for the Company's failure to issue and
deliver Common Stock to Buyer; and in addition to any other remedies which may
be available to Buyer, in the event the Company fails for any reason to effect
delivery of such shares of Common Stock within five business days after the
relevant Dividend Payment Due Date, the Delivery Date or the Warrant
<PAGE>
Delivery Date, as applicable, Buyer shall be entitled to rescind the relevant
Notice of Conversion or exercise of Warrants or Redemption Warrants by
delivering a notice to such effect to the Company whereupon the Company and
Buyer shall each be restored to their respective original positions immediately
prior to delivery of such Notice of Conversion on delivery.
VI. Delivery Instructions
The Securities shall be delivered by the Company to the Escrow Agent
pursuant to Section I.B. hereof on a "delivery-against-payment basis" at the
Closing.
VII. Closing Date
The date and time of the issuance and sale of the Preferred Shares and
the Warrants (the "Closing Date") shall be the date hereof or such other date as
shall be mutually agreed upon in writing. The issuance and sale of the
Securities shall occur on the Closing Date at the offices of the Escrow Agent.
Notwithstanding anything to the contrary contained herein, the Escrow Agent
shall not be authorized to release to the Company the Purchase Price and to
Buyer the Securities being purchased by Buyer unless the conditions set forth in
Section VIII.C. and IX.G. hereof have been satisfied.
VIII. Conditions To The Company's Obligations
Buyer understands that the Company's obligation to sell the Securities
on the Closing Date to Buyer pursuant to this Agreement is conditioned upon:
A. Delivery by Buyer to the Escrow Agent of the Purchase Price;
B. The accuracy in all material respects on the Closing Date of the
representations and warranties of Buyer contained in this Agreement as if made
on the Closing Date (except for representations and warranties which, by their
express terms, speak as of and relate to a specified date, in which case such
accuracy shall be determined as of such specified date) and the performance by
Buyer in all material respects on or before the Closing Date of all covenants
and agreements of Buyer required to be performed by it pursuant to this
Agreement on or before the Closing Date; and
C. There shall not be in effect any Law or order, ruling, judgment or
writ of any court or public or governmental authority restraining, enjoining or
otherwise prohibiting any of the transactions contemplated by this Agreement.
IX. Conditions To Buyer's Obligations
The Company understands that Buyer's obligation to purchase the
Securities on the Closing Date pursuant to this Agreement is conditioned upon:
A. Delivery by the Company to Buyer of evidence that the Certificate
of Designation has been filed and is effective;
<PAGE>
B. Delivery by the Company to the Escrow Agent of one or more
certificates (I/N/O Buyer or I/N/O Buyer's nominee) evidencing the Securities to
be purchased by Buyer pursuant to this Agreement;
C. The accuracy in all respects on the Closing Date of the
representations and warranties of the Company contained in this Agreement as if
made on the Closing Date (except for representations and warranties which, by
their express terms, speak as of and relate to a specified date, in which case
such accuracy shall be determined as of such specified date) and the performance
by the Company in all respects on or before the Closing Date of all covenants
and agreements of the Company required to be performed by it pursuant to this
Agreement on or before the Closing Date;
D. Buyer having received an opinion of counsel for the Company, dated
the Closing Date, in form, scope and substance reasonably satisfactory to the
Buyer as to the matters set forth in Annex A;
E. There not having occurred (i) any general suspension of trading
in, or limitation on prices listed for, the Common Stock on the OTCBB, (ii) the
declaration of a banking moratorium or any suspension of payments in respect of
banks in the United States, (iii) the commencement of a war, armed hostilities
or other international or national calamity directly or indirectly involving the
United States or any of its territories, protectorates or possessions, or (iv)
in the case of the foregoing existing at the date of this Agreement, a material
acceleration or worsening thereof;
F. There not having occurred any event or development, and there
being in existence no condition, having or which reasonably and foreseeably
could have a Material Adverse Effect;
G. The Company shall have delivered to Buyer (as provided in the
Escrow Instructions) reimbursement of Buyer's out-of-pocket costs and expenses
whether or not accounted for or incurred in connection with the transactions
contemplated by this Agreement (including the fees and disbursements of Buyer's
legal counsel);
H. There shall not be in effect any Law or order, ruling, judgment or
writ of any court or public or governmental authority restraining, enjoining or
otherwise prohibiting any of the transactions contemplated by this Agreement;
and
I. Delivery of irrevocable instructions to the Company's transfer
agent to reserve 1,250,000 shares of Common Stock for issuance of the Conversion
Shares and the Warrant Shares.
X. Termination
A. Termination by Mutual Written Consent. This Agreement may be
terminated and the transactions contemplated hereby may be abandoned, for any
reason and at any time prior to the Closing Date, by the mutual written consent
of the Company and Buyer.
<PAGE>
B. Termination by the Company or Buyer. This Agreement may be
terminated and the transactions contemplated hereby may be abandoned by action
of the Company or Buyer if (i) the Closing shall not have occurred at or prior
to 5:00 p.m., New York City time, on September [30], 1999 (the "Latest Closing
Date"); provided, however, that the right to terminate this Agreement pursuant
to clause (i) shall not be available to any party whose failure to fulfill any
of its obligations under this Agreement has been the cause of or resulted in the
failure of the Closing to occur at or before such time and date, or (ii) any
court or public or governmental authority shall have issued an order, ruling,
judgment or writ, or there shall be in effect any Law, restraining, enjoining or
otherwise prohibiting the consummation of any of the transactions contemplated
by this Agreement; provided, further, however, that if the Closing shall not
have occurred on or prior to the Latest Closing Date, the Closing may only occur
after the Latest Closing Date with the written acceptance of Buyer.
C. Termination by Buyer. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by Buyer at any time prior to
the Closing Date, if (i) the Company shall have failed to comply with any of its
covenants or agreements contained in this Agreement, (ii) there shall have been
a breach by the Company with respect to any representation or warranty made by
it in this Agreement, (iii) there shall have occurred any event or development,
or there shall be in existence any condition, having or reasonably and
forseeably likely to have a Material Adverse Effect or (iv) the Company shall
have failed to satisfy the conditions set forth in Section IX hereof.
D. Termination by the Company. This Agreement may be terminated and
the transactions contemplated hereby may be abandoned by the Company at any time
prior to the Closing Date, if (i) Buyer shall have failed to comply with any of
its covenants or agreements contained in this Agreement or (ii) there shall have
been a breach by Buyer with respect to any representation or warranty made by it
in this Agreement.
E. Fees and Expenses of Termination. If this Agreement is terminated
for any reason, other than pursuant to Section X.D, the Company shall reimburse
Buyer for all of Buyer's out-of-pocket costs and expenses incurred in connection
with the transactions contemplated by this Agreement and the other Documents
(including, without limitation, the fees and disbursements of Buyer's legal
counsel).
XI. Survival; Indemnification
A. The representations, warranties and covenants made by each of the
Company and Buyer in this Agreement, the annexes, schedules and exhibits hereto
and in each instrument, agreement and certificate entered into and delivered by
them pursuant to this Agreement, shall survive the Closing and the consummation
of the transactions contemplated hereby. In the event of a breach or violation
of any of such representations, warranties or covenants, the party to whom such
representations, warranties or covenants have been made shall have all rights
and remedies for such breach or violation available to it under the provisions
of this Agreement or otherwise, whether at law or in equity, irrespective of any
investigation made by or on behalf of such party on or prior to the Closing
Date.
<PAGE>
B. The Company hereby agrees to indemnify and hold harmless the
Buyer, its Affiliates and their respective officers, directors, partners and
members (collectively, the "Buyer Indemnitees"), from and against any and all
losses, claims, damages, judgments, penalties, liabilities and deficiencies
(collectively, "Losses"), and agrees to reimburse the Buyer Indemnitees for all
out of-pocket expenses (including the fees and expenses of legal counsel), in
each case promptly as incurred by the Buyer Indemnitees and to the extent
arising out of or in connection with:
1. any misrepresentation, omission of fact or breach of any of
the Company's representations or warranties contained in this Agreement or
the other Documents, or the annexes, schedules or exhibits hereto or
thereto or any instrument, agreement or certificate entered into or
delivered by the Company pursuant to this Agreement or the other Documents;
or
2. any failure by the Company to perform any of its covenants,
agreements. undertakings or obligations set forth in this Agreement or the
other Documents, or the annexes, schedules or exhibits hereto or thereto or
any instrument, agreement or certificate entered into or delivered by the
Company pursuant to this Agreement or the other Documents; or
3. resales of the Common Shares by Buyer in the manner and as
contemplated by this Agreement and the Registration Rights Agreement.
C. Buyer hereby agrees to indemnify and hold harmless the Company,
its Affiliates and their respective officers, directors, partners and members
(collectively, the "Company Indemnitees"), from and against any and all Losses,
and agrees to reimburse the Company Indemnitees for all out-of-pocket expenses
(including the fees and expenses of legal counsel), in each case promptly as
incurred by the Company Indemnitees and to the extent arising out of or in
connection with:
1. any misrepresentation, omission of fact, or breach of any of
Buyer's representations or warranties contained in this Agreement or the
other Documents, or the annexes, schedules or exhibits hereto or thereto or
any instrument, agreement or certificate entered into or delivered by Buyer
pursuant to this Agreement or the other Documents; or
2. any failure by Buyer to perform in any material respect any
of its covenants, agreements, undertakings or obligations set forth in this
Agreement or the other Documents or any instrument, certificate or
agreement entered into or delivered by Buyer pursuant to this Agreement or
the other Documents.
D. Promptly after receipt by either party hereto seeking
indemnification pursuant to this Section XI (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to this
Section XI is being sought (the "Indemnifying Party") of the commencement
<PAGE>
thereof; but the omission so to notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party except
to the extent that the Indemnifying Party is materially prejudiced and forfeits
substantive rights and defenses by reason of such failure. In connection with
any Claim as to which both the Indemnifying Party and the Indemnified Party are
parties, the Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the Indemnifying
Party, the Indemnified Party shall have the right to employ separate legal
counsel and to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and
expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall
have concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (z) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in
clause (x), (y) or (z) above, the fees, costs and expenses of such legal counsel
shall be borne exclusively by the Indemnified Party. Except as provided above,
the Indemnifying Party shall not, in connection with any Claim in the same
jurisdiction, be liable for the fees and expenses of more than one firm of legal
counsel for the Indemnified Party (together with appropriate local counsel).
The Indemnifying Party shall not, without the prior written consent of the
Indemnified Party (which consent shall not unreasonably be withheld), settle or
compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
E. In the event one party hereunder should have a claim for
indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association. Judgment upon any
award rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
XII. Governing Law; Miscellaneous
THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW
PRINCIPLES OF SUCH STATE. EACH OF THE PARTIES CONSENTS TO THE JURISDICTION OF
THE FEDERAL COURTS WHOSE DISTRICTS ENCOMPASS ANY PART OF THE CITY OF NEW YORK OR
THE STATE COURTS OF THE STATE OF NEW YORK SITTING IN THE CITY OF NEW YORK IN
CONNECTION WITH ANY DISPUTE ARISING UNDER THIS AGREEMENT AND HEREBY WAIVES, TO
<PAGE>
THE MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION
BASED ON FORUM NON CONVENIENS, TO THE BRINGING OF ANY SUCH PROCEEDING IN SUCH
JURISDICTIONS. A signed facsimile transmission of this Agreement shall
constitute delivery thereof and shall be legal and binding on all parties
hereto. This Agreement may be signed in one or more counterparts, each of which
shall be deemed an original. The headings of this Agreement are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Agreement. If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement and the other Documents supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof.
XIII. Notices
Except as may be otherwise provided herein, any notice or other
communication or delivery required or permitted hereunder shall be in writing
and shall be delivered personally or sent by certified mail, postage prepaid, or
by a nationally recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or, if mailed,
three (3) days after the date of deposit in the United States mails, as follows:
A. if to the Company, to:
American TeleSource International, Inc.
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
(210) 558-6090
(210) 558-6095 (Fax)
Attention: H. Douglas Saathoff
with a copy to:
Alice L. King, Esq.
Corporate Counsel
American TeleSource International, Inc.
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
(210) 558-6090
(210) 558-6095 (Fax)
<PAGE>
B. if to the Buyer, to:
The Shaar Fund Ltd.
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7711
(212) 432-7771 (Fax)
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
C. if to the Escrow Agent, to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
The Company, Buyer or the Escrow Agent may change the foregoing address by
notice given pursuant to this Section XIII.
XIV. Confidentiality
Each of the Company and Buyer agrees to keep confidential and not to
disclose to or use for the benefit of any third party the terms of this
Agreement or any other information which at any time is communicated by the
other party as being confidential without the prior written approval of the
other party; provided, however, that this provision shall not apply to
information which, at the time of disclosure, is already part of the public
domain (except by breach of this Agreement) and information which is required to
be disclosed by law (including, without limitation, pursuant to Item 601(b)(10)
of Regulation S-K under the Securities Act and the Exchange Act).
XV. Assignment
<PAGE>
This Agreement shall not be assignable by either of the parties hereto
prior to the Closing without the prior written consent of the other party, and
any attempted assignment contrary to the provisions hereby shall be null and
void; provided, however, that Buyer may assign its rights and obligations
hereunder, in whole or in part, to any financially able affiliate of Buyer who
furnishes to the Company the representations and warranties set forth in Section
II hereof and otherwise agrees to be bound by the terms of this Agreement.
<PAGE>
In Witness Whereof, the parties hereto have duly executed and
delivered this Agreement on the date first above written.
American TeleSource International, Inc.
By: (s) H. Douglas Saathoff
-----------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
The Shaar Fund Ltd.
By: /s/ Samuel Levinson
-------------------
Name: Samuel Levinson
Title: Managing Director
<PAGE>
Exhibit 10.40
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
6% SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
AMERICAN TELESOURCE INTERNATIONAL, INC.
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware
American TeleSource International, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby certifies that the Board of Directors of the Corporation
on September 21, 1999 adopted resolutions by Unanimous Written Consent adopting
this Certificate of Designation, Preferences and Rights designating a new class
of its preferred stock called the 6% Series C Cumulative Convertible Preferred
Stock, having the terms set forth herein, and that the Corporation has caused
this Certificate of Amendment to the Certificate of Incorporation to be executed
by a duly authorized officer as of the 21st day of September, 1999.
6% Series C Cumulative Convertible Preferred Stock
ARTICLE 1
Definitions
The terms defined in this Article whenever used in this Certificate of
Designation have the following respective meanings:
(a) "Additional Capital Shares" has the meaning set forth in Section
6.1(c).
(b) "Affiliate" has the meaning ascribed to such term in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended.
(c) "Business Day" means a day other than Saturday, Sunday or any day on
which banks located in the State of New York are authorized or obligated to
close.
(d) "Capital Shares" means the Common Shares and any other shares of any
other class or series of common stock, whether now or hereafter authorized and
however designated, which have the right to participate in the distribution of
earnings and assets (upon dissolution, liquidation or winding-up) of the
Corporation.
(e) "Closing Date" means the Issue Date.
(f) "Common Shares" or "Common Stock" means shares of common stock, par
value $0.001 per share, of the Corporation.
(g) "Common Stock Issued at Conversion" when used with reference to the
securities issuable upon conversion of the Series C Preferred Stock, means all
Common Shares now or hereafter Outstanding and securities of any other class or
series into which the Series C Preferred Stock hereafter shall have been changed
or substituted, whether now or hereafter created and however designated.
(h) "Conversion Date" means any day on which all or any portion of shares
of the Series C Preferred Stock is converted in accordance with the provisions
hereof.
<PAGE>
(i) "Conversion Notice" has the meaning set forth in Section 6.2.
(j) "Conversion Price" means on any date of determination the applicable
price for the conversion of shares of Series C Preferred Stock into Common
Shares on such day as set forth in Section 6.1.
(k) "Conversion Ratio" means on any date of determination the applicable
percentage of the Market Price for conversion of shares of Series C Preferred
Stock into Common Shares on such day as set forth in Section 6.1.
(l) "Corporation" means American TeleSource International, Inc., a Delaware
corporation, and any successor or resulting corporation by way of merger,
consolidation or otherwise.
(m) "Current Market Price" means on any date of determination the closing
bid price of a Common Share on such day as reported on the OTCBB; provided, if
such security bid is not listed or admitted to trading on the OTCBB, as reported
on the principal national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not quoted or listed
or admitted to trading on any national securities exchange or quotation system,
the closing bid price of such security on the over-the-counter market on the day
in question as reported by Bloomberg LP, or a similar generally accepted
reporting service, as the case may be.
(n) "Default Dividend Rate" shall be equal to the Preferred Stock Dividend
Rate plus an additional 4% per annum.
(o) "Holder" means The Shaar Fund Ltd., any successor thereto, or any
Person or Persons to whom the Series C Preferred Stock is subsequently
transferred in accordance with the provisions hereof.
(p) "Issue Date" has the meaning set forth in Section 6.1.
(q) "Market Disruption Event" means any event that results in a material
suspension or limitation of trading of the Common Shares on the OTCBB.
(r) "Market Price" per Common Share, on any date of determination, means
the arithmetic mean of the lowest closing bid prices of the Common Shares as
reported on the OTCBB for five (5) Trading Days during the period of ten (10)
Trading Days immediately preceding such date of determination, it being
understood that such five (5) Trading Days need not be consecutive; provided, if
such security is not listed or admitted to trading on the OTCBB, as reported on
the principal national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not quoted or listed
or admitted to trading on any national securities exchange or quotation system,
the closing bid price of such security on the over-the-counter market on the day
in question as reported by Bloomberg LP, or a similar generally accepted
reporting service, as the case may be, for five (5) Trading Days during the
period of ten (10) Trading Days immediately preceding such date of
determination, it being understood that such five (5) Trading Days need not be
consecutive.
(s) "Optional Redemption Price" means (i) a sum in cash equal to one
hundred twenty-seven percent (127%) of the Stated Value plus (ii) the Company's
----
common stock purchase warrant or warrants to purchase 50,000 shares of Common
Stock, having the same terms and conditions as the Warrant.
(t) "OTCBB" means the OTC Bulletin Board service of the National
Association of Securities Dealers, Inc.
(u) "Outstanding" when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), means, on any date of determination, all issued
and outstanding Shares, and includes all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares;
<PAGE>
provided, however, that any such Shares directly or indirectly owned or held by
or for the account of the Corporation or any Subsidiary of the Corporation shall
not be deemed "Outstanding" for purposes hereof.
(v) "Person" means an individual, a corporation, a partnership, an
association, a limited liability company, an unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(w) "Registration Rights Agreement" means that certain Registration Rights
Agreement dated the Closing Date between the Corporation and The Shaar Fund
Ltd., including any amendments thereto.
(x) "SEC" means the United States Securities and Exchange Commission.
(y) "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder, all as in effect at the time.
(z) "Securities Purchase Agreement" means that certain Securities Purchase
Agreement dated the Closing Date between the Corporation and The Shaar Fund
Ltd., including any amendments thereto.
(aa) "Series C Preferred Shares" or "Series C Preferred Stock" means the
shares of 6% Series C Cumulative Convertible Preferred Stock of the Corporation
or such other convertible Preferred Stock exchanged therefor.
(bb) "Stated Value" has the meaning set forth in Article 2.
(cc) "Subsidiary" means any entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are owned directly or
indirectly by the Corporation.
(dd) "Trading Day" means any day on which purchases and sales of securities
authorized for quotation on the OTCBB are reported thereon and on which no
Market Disruption Event has occurred.
(ee) "Valuation Event" has the meaning set forth in Section 6.1.
(ff) "Valuation Period" means the ten (10) Trading Day period immediately
preceding the Conversion Date.
(gg) "Warrant" means the warrant to purchase Common Stock issued by the
Company to the initial Holder pursuant to the Securities Purchase Agreement.
All references to "cash" or "$" herein means currency of the United States
of America.
<PAGE>
ARTICLE 2
Designation And Amount
The designation of this series, which consists of 500 shares of Preferred
Stock, is 6% Series C Cumulative Convertible Preferred Stock (the "Series C
Preferred Stock") and the stated value shall be $1,000.00 per share (the "Stated
Value").
ARTICLE 3
Rank
The Series C Preferred Stock shall rank (i) prior to the Common Stock; (ii)
prior to any class or series of capital stock of the Corporation hereafter
created other than "Pari Passu Securities" (collectively, with the Common Stock,
"Junior Securities") and (iii) pari passu with the 10% Series A Cumulative
Convertible Preferred Stock and the 6% Series B Cumulative Convertible Preferred
Stock of the Corporation currently outstanding and any class or series of
capital stock of the Corporation hereafter created specifically ranking on
parity with the Series C Preferred Stock ("Pari Passu Securities").
ARTICLE 4
Dividends
(a) (i) The Holder shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available for the
payment of dividends, dividends (subject to Article 4(a)(ii) hereof) at the rate
of six percent (6%) per annum (computed on the basis of a 360-day year) (the
"Dividend Rate") on the Stated Value of each share of Series C Preferred Stock
on and as of the most recent Dividend Payment Due Date (as defined below) with
respect to each Dividend Period (as defined below). Dividends on the Series B
Preferred Stock shall be cumulative from the date of issue, whether or not
declared for any reason, including if such declaration is prohibited under any
outstanding indebtedness or borrowings of the Corporation or any of its
Subsidiaries, or any other contractual provision binding on the Corporation or
any of its Subsidiaries, and whether or not there shall be funds legally
available for the payment thereof.
(ii) Each dividend shall be payable in equal quarterly amounts on
each March 31, June 30, September 30 and December 31 of each year or, if any
such date is not a business day, on the next succeeding business day (each, a
"Dividend Payment Due Date"), commencing December 31, 1999, to the holders of
record of shares of the Series C Preferred Stock, as they appear on the stock
records of the Corporation at the close of business on any record date, not more
than 60 days or less than 10 days preceding the payment dates thereof, as shall
be fixed by the Board of Directors. For the purposes hereof, "Dividend Period"
means the period commencing on and including the Issue Date through December 31,
1999 and thereafter each quarterly period commencing on the day after the
immediately preceding Dividend Payment Due Date and ending on and including the
immediately subsequent Dividend Payment Due Date. Accrued and unpaid dividends
for any past Dividend Period may be declared and paid at any time, without
reference to any Dividend Payment Due Date, to holders of record on such date,
not more than 15 days preceding the payment date thereof, as may be fixed by the
Board of Directors.
(iii) Subject to the next sentence, at the option of the Corporation,
the dividend shall be paid in cash or through the issuance of duly and validly
authorized and issued, fully paid and nonassessable shares of the Common Stock
valued at the Market Price. The Corporation may exercise such option only if
the Common Stock to be issued in lieu of cash payments shall be registered for
resale in the Registration Statement (as defined in the Registration Rights
Agreement) to be filed by the Corporation to register the Common Stock issuable
upon conversion of the shares of Series C Preferred Stock and exercise of the
Warrants as set forth in the Registration Rights Agreement. Notwithstanding the
foregoing, until such Registration Statement (as defined in the
<PAGE>
Registration Rights Agreement) has been declared effective under the Securities
Act by the SEC, payment of dividends on the Series C Preferred Stock shall be in
cash.
(b) The Holder shall not be entitled to any dividends in excess of the
cumulative dividends, as herein provided, on the Series C Preferred Stock.
Except as provided in this Article 4, no interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on the
Series C Preferred Stock that may be in arrears.
(c) So long as any shares of the Series C Preferred Stock are outstanding,
no dividends, except as described in the next succeeding sentence, shall be
declared or paid or set apart for payment on Pari Passu Securities for any
period unless full cumulative dividends required to be paid in cash have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Series C Preferred Stock for
all Dividend Periods terminating on or prior to the date of payment of the
dividend on such class or series of Pari Passu Securities. When dividends are
not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon shares of the Series C Preferred Stock
and all dividends declared upon any other class or series of Pari Passu
Securities shall be declared ratably in proportion to the respective amounts of
dividends accumulated and unpaid on the Series C Preferred Stock and accumulated
and unpaid on such Pari Passu Securities.
(d) So long as any shares of the Series C Preferred Stock are outstanding,
no dividends shall be declared or paid or set apart for payment or other
distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of shares of Common Stock made for
purposes of an employee incentive or benefit plan (including a stock option
plan) of the Corporation or any subsidiary or any cashless exercise of
warrants), (all such dividends, distributions, redemptions or purchases being
hereinafter referred to as a "Junior Securities Distribution") for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly, unless in each case (i) the full cumulative dividends required to be
paid in cash on all outstanding shares of the Series C Preferred Stock and any
other Pari Passu Securities shall have been paid or set apart for payment for
all past Dividend Periods with respect to the Series C Preferred Stock and all
past dividend periods with respect to such Pari Passu Securities, and (ii)
sufficient funds shall have been paid or set apart for the payment of the
dividend for the current Dividend Period with respect to the Series C Preferred
Stock and the current dividend period with respect to such Pari Passu
Securities.
ARTICLE 5
Liquidation Preference
(a) If the Corporation shall commence a voluntary case under the Federal
bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the Federal bankruptcy laws or any other applicable
Federal or state bankruptcy, insolvency or similar law resulting in the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of 30 consecutive days and, on account of any such event, the Corporation
shall liquidate, dissolve or wind up, or if the Corporation shall otherwise
liquidate, dissolve or wind up (each such event being considered a "Liquidation
Event"), no distribution shall be made to the holders of any shares of Common
Stock or Junior Securities of the Corporation upon liquidation, dissolution or
winding-up unless prior thereto, the holders of shares of Series C Preferred
Stock, subject to this Article 5, shall have received the Liquidation Preference
(as defined in Article 5(c)) with respect to each share. If upon the occurrence
of a
<PAGE>
Liquidation Event, the assets and funds legally available for distribution among
the holders of the Series C Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series C Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the liquidation preference payable on each such share bears to
the aggregate liquidation preference payable on all such shares.
(b) At the option of each Holder, the sale, conveyance or disposition of
all or substantially all of the assets of the Corporation, the effectuation by
the Corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the Corporation is obtained by any Person or
"group" as defined in or pursuant to Section 13 of the Securities Exchange Act
of 1934, as amended, other than a Person or "group" (as so defined), if any,
having more than 50% of the voting power of the Corporation on the Issue Date,
or the consolidation, merger or other business combination of the Corporation
with or into any other Person or Persons when the Corporation is not the
survivor shall either: (i) be deemed to be a liquidation, dissolution or winding
up of the Corporation pursuant to which the Corporation shall be required to
distribute, upon consummation of and as a condition to, such transaction an
amount equal to 120% of the Liquidation Preference with respect to each
outstanding share of Series C Preferred Stock in accordance with and subject to
the terms of this Article 5 or (ii) be treated pursuant to Section 6.4 hereof;
provided, that all holders of Series C Preferred Stock shall be deemed to elect
the option set forth in clause (i) hereof if at least a majority in interest of
such holders elect such option.
(c) For purposes hereof, the "Liquidation Preference" with respect to a
share of the Series C Preferred Stock shall mean an amount equal to the sum of
(i) the Stated Value thereof, plus (ii) an amount equal to 30% of such Stated
Value, plus (iii) the aggregate of all accrued and unpaid dividends on such
share of Series C Preferred Stock until the most recent Dividend Payment Due
Date; provided that, in the event of an actual liquidation, dissolution or
winding up of the Corporation, the amount referred to in clause (iii) above
shall be calculated by including accrued and unpaid dividends to the actual date
of such liquidation, dissolution or winding up, rather than the Dividend Payment
Due Date referred to above.
ARTICLE 6
Conversion of Preferred Stock
Section 6.1 Conversion; Conversion Price
At the option of the Holder, the shares of Series C Preferred Stock may be
converted, either in whole or in part (in whole shares of Series C Preferred
Stock), into Common Shares (calculated as to each such conversion to the nearest
1/100th of a share of Common Stock), at any time, and from time to time
following the date ninety (90) days after the date of issuance of the Series C
Preferred Stock (the "Issue Date") at a Conversion Price per share of Common
Stock equal to the lesser of: (i) the closing bid price of the Common Stock on
the Trading Day immediately preceding the Issue Date and (ii) seventy-eight
percent (78%) of the Market Price determined as of the Conversion Date; provided
that the Holder may not exercise any right of conversion set forth in this
Article 6 during the period of forty-five (45) days commencing on and including
the first Trading Day following the Issue Date, if any, on which the Current
Market Price of the Common Stock is $0.85 or less; and provided, further, that
if the Corporation's Common Stock, for any reason, (a) becomes ineligible for
trading on OTCBB, (b) is not listed on the New York Stock Exchange or the
American Stock Exchange or (c) is not admitted to trading on the NASDAQ National
Market or the NASDAQ SmallCap Market, then any remaining unconverted Series C
Preferred Stock may be converted, at the sole option of the Holder, at a
Conversion Price per share of Common Stock equal to 65% of the Market Price
determined as of the Conversion Date. At the Corporation's option, the amount
of accrued and unpaid dividends as of the Conversion Date may be paid in cash
or in Common Stock valued at the Market Price on the Conversion Date.
The number of shares of Common Stock due upon conversion of Series C
Preferred Stock shall be (i) the number of shares of Series C Preferred Stock to
be converted, multiplied by (ii) the Stated Value and divided by
<PAGE>
(iii) the applicable Conversion Price. Notwithstanding any other provision
herein, the Conversion Price shall not be less than the par value of the Common
Stock
Within two Business Days of the occurrence of a Valuation Event, the
Corporation shall send notice (the "Valuation Event Notice") of such occurrence
to the Holder. Notwithstanding anything to the contrary contained herein, if a
Valuation Event occurs during the period of ten (10) Trading Days immediately
preceding a Conversion Date, the Market Price with respect to such Conversion
Date shall be (a) the arithmetic mean of the lowest closing bid prices of the
Common Shares (reported as provided in the definition of "Market Price") for
five (5) Trading Days (it being understood that such five (5) Trading Days need
not be consecutive) during the period beginning on the Trading Day immediately
following the occurrence of such Valuation Event and ending on the Conversion
Date (the "New Valuation Period"), if such New Valuation Period includes five
(5) Trading Days or more, or (b) the arithmetic mean of the lowest closing bid
prices of the Common Shares (reported as provided in the definition of "Market
Price") for all Trading Days in the New Valuation Period, if such New Valuation
Period includes four (4) Trading Days or less; provided that, if the Valuation
Event occurs on the Trading Day immediately preceding such Conversion Date, then
the Conversion Price shall be the lesser of (x) the closing bid price of the
Common Stock on the Trading Day immediately preceding the Issue Date and (y)
seventy-eight percent (78%) of the Current Market Price of the Common Shares on
the Trading Day immediately preceding the Conversion Date; and provided,
further, that the Holder may, in its discretion, postpone such Conversion Date
to a Trading Day which is no more than ten (10) Trading Days after the
occurrence of the latest Valuation Event by delivering a notification to the
Corporation within two Business Days of the receipt of the Valuation Event
Notice. In the event that the Holder deems the Market Price is to be calculated
with reference to a period other than the ten (10) Trading Days immediately
prior to the Conversion Date, the Holder shall give written notice of such fact
to the Corporation in the related Conversion Notice at the time of conversion.
For purposes of this Section 6.1, a "Valuation Event" shall mean an event
in which the Corporation at any time takes any of the following actions:
(a) subdivides or combines its Capital Shares;
(b) makes any distribution on its Capital Shares;
(c) issues any additional Capital Shares (the "Additional Capital
Shares"), otherwise than as provided in the foregoing Sections 6.1(a)
and 6.1(b) above, at a price per share less, or for other
consideration lower, than the Current Market Price in effect
immediately prior to such issuances, or without consideration, except
for issuances under stock option plans presently in effect and
issuances under presently outstanding warrants, options or convertible
securities (and except for issuances upon exercise, conversion or
exchange of securities described in Section 6.1(d) and 6.1(e) below);
(d) issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for
which Additional Capital Shares may at any time thereafter be issuable
pursuant to such warrants, options or other rights shall be less than
the Current Market Price in effect immediately prior to such issuance
of the warrants, options or other rights;
(e) issues any securities convertible into or exchangeable or exercisable
for Additional Capital Shares and the consideration per share for
which Additional Capital Shares may at any time thereafter be issuable
pursuant to the terms of such convertible, exchangeable or exercisable
securities shall be less than the Current Market Price in effect
immediately prior to such issuance of such convertible or exchangeable
securities;
(f) makes a distribution of its assets or evidences of indebtedness to the
holders of its Capital Shares as a dividend in liquidation or by way
of return of capital or other than as a dividend payable out
<PAGE>
of earnings or surplus legally available for the payment of dividends
under applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Corporation's
assets (other than under the circumstances provided for in the
foregoing Sections 6.1(a) through 6.1(e)); or
(g) takes any action affecting the number of Outstanding Capital Shares,
other than an action described in any of the foregoing Sections 6.1(a)
through 6.1(f) hereof, inclusive, which in the opinion of the
Corporation's Board of Directors, determined in good faith, would have
a material adverse effect upon the rights of the Holder at the time of
a conversion of the Preferred Stock.
Section 6.2 Exercise of Conversion Privilege
(a) Conversion of the Series C Preferred Stock may be exercised, in whole
or in part, by the Holder by telecopying an executed and completed notice of
conversion in the form annexed hereto as Annex I (the "Conversion Notice") to
the Corporation. Each date on which a Conversion Notice is telecopied to the
Corporation in accordance with the provisions of this Section 6.2 shall
constitute a Conversion Date. The Corporation shall convert the Series C
Preferred Stock and issue the Common Stock Issued at Conversion to be issued
upon conversion thereof, and all voting and other rights associated with the
beneficial ownership of such Common Stock Issued at Conversion to be issued
upon conversion thereof shall vest with the Holder, effective as of the
Conversion Date at the time specified in the Conversion Notice. The Conversion
Notice also shall state the name or names (with addresses) of the Persons who
are to become the holders of the Common Stock Issued at Conversion in connection
with such conversion. The Holder shall deliver the shares of Series C Preferred
Stock to the Corporation by express courier within 30 days following the date on
which the telecopied Conversion Notice has been transmitted to the Corporation.
Upon surrender for conversion, the Preferred Stock shall be accompanied by a
proper assignment thereof to the Corporation or be endorsed in blank. As
promptly as practicable after the receipt of the Conversion Notice as aforesaid,
but in any event not more than five (5) Business Days after the Corporation's
receipt of such Conversion Notice and the Series C Preferred Stock being
converted, the Corporation shall (i) issue the Common Stock Issued at Conversion
in accordance with the provisions of this Article 6 (including, without
limitation, any shares of Common Stock issued pursuant to Section 4(a)(iii), at
the option of the Corporation, in payment of dividends on the Series C Preferred
Stock), (ii) cause to be mailed for delivery by overnight courier to the Holder
a certificate or certificate(s) representing the number of Common Shares to
which the Holder is entitled by virtue of such conversion and (iii) remit, in
immediately available funds, payment as provided in Section 6.3 in respect of
any fraction of a Common Share issuable upon such conversion and payment in the
amount of accrued and unpaid dividends as of the Conversion Date. Such
conversion shall be deemed to have been effected at the time at which the
Conversion Notice indicates so long as the Series C Preferred Stock shall have
been surrendered as aforesaid at such time, and at such time the rights of the
Holder of the Series C Preferred Stock, as such, shall cease and the Person or
Persons in whose name or names the Common Stock Issued at Conversion shall be
issuable shall be deemed to have become the holder or holders of record of the
Common Shares represented thereby and all voting and other rights associated
with the beneficial ownership of such Common Shares shall at such time vest with
such Person or Persons. The Conversion Notice shall constitute a contract
between the Holder and the Corporation, whereby the Holder shall be deemed to
subscribe for the number of Common Shares which it will be entitled to receive
upon such conversion and, in payment and satisfaction of such subscription (and
for any cash adjustment to which it is entitled pursuant to Section 6.4), to
surrender the Series C Preferred Stock and to release the Corporation from all
liability thereon. No cash payment aggregating less than $1.00 shall be
required to be given unless specifically requested by the Holder.
(b) If, at any time (i) the Corporation challenges, disputes or denies the
right of the Holder hereof to effect the conversion of the Series C Preferred
Stock into Common Shares or otherwise dishonors or rejects any Conversion Notice
delivered in accordance with this Section 6.2 or (ii) any third party who is not
and has never
<PAGE>
been an Affiliate of the Holder commences any lawsuit or proceeding or otherwise
asserts any claim before any court or public or governmental authority which
seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right of
the Holder hereof to effect the conversion of the Series C Preferred Stock into
Common Shares, then the Holder shall have the right, by written notice to the
Corporation, to require the Corporation to promptly redeem, to the extent
permitted by law, the Series C Preferred Stock for cash at a redemption price
equal to 127% of the Stated Value thereof together with all accrued and unpaid
dividends thereon (the "Mandatory Purchase Amount"). Under any of the
circumstances set forth above, the Corporation shall be responsible for the
payment of all costs and expenses of the Holder, including reasonable legal fees
and expenses, as and when incurred in disputing any such action or pursuing its
rights hereunder (in addition to any other rights of the Holder).
(c) The Holder shall be entitled to exercise its conversion privilege
notwithstanding the commencement of any case under 11 U.S.C. (S) 101 et seq.
(the "Bankruptcy Code"). In the event the Corporation is a debtor under the
Bankruptcy Code, the Corporation hereby waives to the fullest extent permitted
any rights to relief it may have under 11 U.S.C. (S) 362 in respect of the
Holder's conversion privilege. The Corporation hereby waives to the fullest
extent permitted any rights to relief it may have under 11 U.S.C. (S) 362 in
respect of the conversion of the Series C Preferred Stock. The Corporation
agrees, without cost or expense to the Holder, to take or consent to any and all
action necessary to effectuate relief under 11 U.S.C. (S) 362.
Section 6.3 Fractional Shares
No fractional Common Shares or scrip representing fractional Common Shares
shall be issued upon conversion of the Series C Preferred Stock. Instead of any
fractional Common Shares which otherwise would be issuable upon conversion of
the Series C Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fraction in an amount equal to the same fraction. No cash
payment of less than $1.00 shall be required to be given unless specifically
requested by the Holder.
Section 6.4 Reclassification, Consolidation, Merger or Mandatory Share
Exchange
At any time while the Series C Preferred Stock remains outstanding and any
shares thereof have not been converted, in case of any reclassification or
change of Outstanding Common Shares issuable upon conversion of the Series C
Preferred Stock (other than a change in par value, or from par value to no par
value per share, or from no par value per share to par value or as a result of a
subdivision or combination of outstanding securities issuable upon conversion of
the Series C Preferred Stock) or in case of any consolidation, merger or
mandatory share exchange of the Corporation with or into another corporation
(other than a merger or mandatory share exchange with another corporation in
which the Corporation is a continuing corporation and which does not result in
any reclassification or change, other than a change in par value, or from par
value to no par value per share, or from no par value per share to par value, or
as a result of a subdivision or combination of Outstanding Common Shares upon
conversion of the Series C Preferred Stock), or in the case of any sale or
transfer to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, the Corporation will not effect any
such action unless the Corporation, or such successor, resulting or purchasing
corporation, as the case may be, shall, without benefit of any additional
consideration therefor, issues a new preferred stock providing that the Holder
shall have the right to convert such new preferred stock (upon terms and
conditions not less favorable to the Holder than those in effect pursuant to the
Series C Preferred Stock) and to receive upon such exercise, in lieu of each
Common Share theretofore issuable upon conversion of the Series C Preferred
Stock, the kind and amount of shares of stock, other securities, money or
property receivable upon such reclassification, change, consolidation, merger,
mandatory share exchange, sale or transfer by the holder of one Common Share
issuable upon conversion of the Series C Preferred Stock had the Series C
Preferred Stock been converted immediately prior to such reclassification,
change, consolidation, merger, mandatory share exchange or sale or transfer.
The provisions of this Section 6.4 shall similarly apply to successive
reclassifications, changes, consolidations, mergers, mandatory share exchanges
and sales and transfers.
<PAGE>
Section 6.5 Adjustments to Conversion Price
For so long as any shares of the Series C Preferred Stock are outstanding,
if the Corporation: (i) issues and sells pursuant to an exemption from
registration under the Securities Act (A) Common Shares at a purchase price on
the date of issuance thereof that is lower than the Conversion Price (other than
Common Shares issuable upon exercise, conversion or exchange of securities
described in the following clause (B) or (C), (B) warrants or options with an
exercise price representing a percentage of the Current Market Price on the date
of issuance of the warrants or options that is lower than the Conversion Price,
except for employee stock option agreements or stock incentive agreements of the
Corporation, or (C) convertible, exchangeable or exercisable securities with a
right to exchange at lower than the Current Market Price on the date of issuance
or conversion, as applicable, of such convertible, exchangeable or exercisable
securities, except for stock option agreements or stock incentive agreements;
and (ii) grants the right to the purchaser(s) thereof to demand that the
Corporation register under the Securities Act prior to two years from the Issue
Date such Common Shares issued or the Common Shares for which such warrants or
options may be exercised or such convertible, exchangeable or exercisable
securities may be converted, exchanged or exercised, then the Conversion Price
shall be reduced to equal the lowest of any such lower prices.
Section 6.6 Optional Redemption and Optional Conversion
At any time after the date of issuance of the Series C Preferred Stock
until the Mandatory Conversion Date (as defined below), to the extent permitted
by law, the Corporation, upon notice delivered to the Holder as provided in
Section 6.7, may redeem all (but not less than all) of the Series C Preferred
Stock (but only with respect to such shares as to which the Holder has not
theretofore furnished a Conversion Notice in compliance with Section 6.2), at
the Optional Redemption Price, together with all accrued and unpaid dividends
thereon to the date of redemption (the "Redemption Date"); provided, however,
that the Corporation may only redeem the Series B Preferred Stock under this
Section 6.6 if the Current Market Price is less than the Current Market Price on
the Issue Date. Except as set forth in this Section 6.6, the Corporation shall
not have the right to prepay or redeem the Series C Preferred Stock.
Section 6.7 Notice of Redemption
Notice of redemption pursuant to Section 6.6 shall be provided by the
Corporation to the Holder in writing (by registered mail or overnight courier at
the Holder's last address appearing in the Corporation's security registry) not
less than 10 nor more than 15 days prior to the Redemption Date, which notice
shall specify the Redemption Date and refer to Section 6.6 (including a
statement of the Market Price per Common Share) and this Section 6.7.
Section 6.8 Surrender of Preferred Stock
Upon any redemption of the Series C Preferred Stock pursuant to Sections
6.6 or 6.7 the Holder shall either deliver the Series C Preferred Stock by hand
to the Corporation at its principal executive offices or surrender the same to
the Corporation at such address by express courier. Payment of the optional
Redemption Price specified in Section 6.6 shall be made by the Corporation to
the Holder against receipt of the Series C Preferred Stock (as provided in this
Section 6.8) by wire transfer of immediately available funds to such account(s)
as the Holder shall specify to the Corporation. If payment of such redemption
price is not made in full by the or the Redemption Date the Holder shall again
have the right to convert the Series C Preferred Stock as provided in Article 6
hereof.
Section 6.9 Mandatory Conversion
On the second (2nd) anniversary of the Issue Date subject to 6.10(a) (the
"Mandatory Conversion Date"), the Corporation shall convert all Series C
Preferred Stock outstanding at the Conversion Price.
<PAGE>
Section 6.10 Certain Conversion Limitations
(a) Notwithstanding anything herein to the contrary, the Holder shall
not have the right, and the Corporation shall not have the obligation, to
convert all or any portion of the Series C Preferred Stock (and the Corporation
shall not have the right to pay dividends on the Series C Preferred Stock in
shares of Common Stock) if and to the extent that the issuance to the Holder of
shares of Common Stock upon such conversion (or payment of dividends) would
result in the Holder being deemed the "beneficial owner" of more than 5% of the
then outstanding shares of Common Stock within the meaning of Section 13(d) of
the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder. If any court of competent jurisdiction shall determine that the
foregoing limitation is ineffective to prevent a Holder from being deemed the
beneficial owner of more than 5% of the then outstanding shares of Common Stock,
then the Corporation shall redeem, to the extent permitted by law, so many of
such Holder's shares (the "Redemption Shares") of Series C Preferred Stock as
are necessary to cause such Holder to be deemed the beneficial owner of not more
than 5% of the then outstanding shares of Common Stock. Upon such determination
by a court of competent jurisdiction, the Redemption Shares shall immediately
and without further action be deemed returned to the status of authorized but
unissued shares of Series C Preferred Stock, and the Holder shall have no
interest in or rights under such Redemption Shares. Any and all dividends paid
on or prior to the date of such determination shall be deemed dividends paid on
the remaining shares of Series C Preferred Stock held by the Holder. Such
redemption shall be for cash at a redemption price equal to the sum of (i) the
Stated Value of the Redemption Shares and (ii) any accrued and unpaid dividends
to the date of such redemption; provided, however, if the redemption is a result
of the mandatory conversion pursuant to Section 6.9, the Corporation may either
(i) make such redemption in cash at a redemption price equal to the sum of (x)
127% of the Stated Value of such shares and (y) any accrued and unpaid dividends
to the date of such redemption or (ii) extend the Mandatory Conversion Date for
a period of one year.
(b) Unless the Corporation shall have obtained the approval of its
voting stockholders to such issuance in accordance with the rules of the OTCBB
or such stock market with which the Corporation shall be required to comply, but
only to the extent required thereby, the Corporation shall not issue shares of
Common Stock (i) upon conversion of any shares of Series C Preferred Stock or
(ii) as a dividend on the Series C Preferred Stock, if such issuance of Common
Stock, when added to the number of shares of Common Stock previously issued by
the Corporation (i) upon conversion of shares of the Series C Preferred Stock,
(ii) upon exercise of the Warrants issued pursuant to the terms of the
Securities Purchase Agreement and (iii) in payment of dividends on the Series C
Preferred Stock, would equal or exceed 20% of the number of shares of the
Corporation's Common Stock which were issued and outstanding on the Issue Date
(the "Maximum Issuance Amount"). In the event that a properly executed
Conversion Notice is received by the Corporation which would require the
Corporation to issue shares of Common Stock equal to or in excess of the Maximum
Issuance Amount, the Corporation shall honor such conversion request by (i)
converting the number of shares of Series C Preferred Stock stated in the
Conversion Notice not in excess of the Maximum Issuance Amount and (ii)
redeeming, to the extent permitted by law, the number of shares of Series C
Preferred Stock stated in the Conversion Notice equal to or in excess of the
Maximum Issuance Amount in cash at a price equal to 127% of the Stated Value of
the shares of Series C Preferred Stock to be so redeemed, together with all
accrued and unpaid dividends thereon. In the event that the Corporation shall
elect to pay a dividend in shares of Common Stock which would require the
Corporation to issue shares of Common Stock equal to or in excess of the Maximum
Issuance Amount, the Corporation shall pay (i) a dividend in shares of Common
Stock equal to one less than an amount which would result in the Corporation
issuing shares equal to the Maximum Issuance Amount and (ii) the balance of the
dividend in cash.
ARTICLE 7
Voting Rights
The holders of the Series C Preferred Stock have no voting power, except as
otherwise provided by the General Corporation Law of the State of Delaware
("DGCL"), in this Article 7, and in Article 8 below.
<PAGE>
Notwithstanding the above, the Corporation shall provide each Holder of
Series C Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
Holder, at least 30 days prior to the consummation of the transaction or event,
whichever is earlier), of the date on which any such action is to be taken for
the purpose of such dividend, distribution, right or other event, and a brief
statement regarding, the amount and character of such dividend, distribution,
right or other event to the extent known at such time.
To the extent that under the DGCL the vote of the Holders of the Series C
Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the Holders of at least a majority of the outstanding shares of
Series C Preferred Stock represented at a duly held meeting at which a quorum is
present or by written consent of a majority of the outstanding shares of Series
C Preferred Stock (except as otherwise may be required under the DGCL) shall
constitute the approval of such action by the class. To the extent that under
the DGCL holders of the Series C Preferred Stock are entitled to vote on a
matter with holders of Common Stock, voting together as one class, each share of
Series C Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated. Holders of the Series C Preferred Stock
shall be entitled to notice of all shareholder meetings or written consents (and
copies of proxy materials and other information sent to shareholders) with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Corporation's bylaws and the DGCL.
Except as otherwise required by applicable law, subject to receipt of the
approval of the Holders of the Series C Preferred Stock as required herein, the
Corporation may alter or change the rights, preferences or privileges of the
Series C Preferred Stock without the approval of any other class or series of
capital stock of the Corporation.
ARTICLE 8
Protective Provisions
So long as shares of Series C Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the DGCL) of the Holders of at least a majority of the
then outstanding shares of Series C Preferred Stock:
(a) alter or change the rights, preferences or privileges of the Series C
Preferred Stock;
(b) create any new class or series of capital stock having a preference
over the Series C Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation ("Senior
Securities") or alter or change the rights, preferences or privileges
of any Senior Securities so as to affect adversely the Series C
Preferred Stock;
(c) increase the authorized number of shares of Series C Preferred Stock;
or
(d) do any act or thing not authorized or contemplated by this Certificate
of Designation which would result in taxation of the holders of shares
of the Series C Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time amended).
<PAGE>
In the event Holders of least a majority of the then outstanding shares of
Series C Preferred Stock give their approval to allow the Corporation to alter
or change the rights, preferences or privileges of the shares of Series C
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series C
Preferred Stock, then the Corporation will deliver notice of such approved
change to the Holders of the Series C Preferred Stock that did not approve such
alteration or change (the "Dissenting Holders") and Dissenting Holders shall
have the right for a period of 30 days to convert pursuant to the terms of this
Certificate of Designation as they exist prior to such alteration or change or
continue to hold their shares of Series C Preferred Stock.
ARTICLE 9
Miscellaneous
Section 9.1 Loss, Theft, Destruction of Preferred Stock Certificates
Upon receipt of evidence satisfactory to the Corporation of the loss,
theft, destruction or mutilation of shares of Series C Preferred Stock and, in
the case of any such loss, theft or destruction, upon receipt of indemnity or
security reasonably satisfactory to the Corporation, or, in the case of any such
mutilation, upon surrender and cancellation of the Series C Preferred Stock, the
Corporation shall make, issue and deliver, in lieu of such lost, stolen,
destroyed or mutilated shares of Series C Preferred Stock, new shares of Series
C Preferred Stock of like tenor. The Series C Preferred Stock shall be held and
owned upon the express condition that the provisions of this Section 9.1 are
exclusive with respect to the replacement of mutilated, destroyed, lost or
stolen shares of Series C Preferred Stock and shall preclude any and all other
rights and remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without the surrender thereof.
Section 9.2 Who Deemed Absolute Owner
The Corporation may deem the Person in whose name the Series C Preferred
Stock shall be registered upon the registry books of the Corporation to be, and
may treat it as, the absolute owner of the Series C Preferred Stock for the
purpose of receiving payment of dividends on the Series C Preferred Stock, for
the conversion of the Series C Preferred Stock and for all other purposes, and
the Corporation shall not be affected by any notice to the contrary. All such
payments and such conversion shall be valid and effectual to satisfy and
discharge the liability upon the Series C Preferred Stock to the extent of the
sum or sums so paid or the conversion so made.
Section 9.3 Notice of Certain Events
In the case of the occurrence of any Valuation Event described in Sections
6.1, or 6.6 of this Certificate of Designation, the Corporation shall cause to
be mailed to the Holder of the Series C Preferred Stock at its last address as
it appears in the Corporation's security registry, at least 20 days prior to the
applicable record, effective or expiration date hereinafter specified (or, if
such 20 days notice is not possible, at the earliest possible date prior to any
such record, effective or expiration date), a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
issuance or granting of rights, options or warrants, or if a record is not to be
taken, the date as of which the Holders of record of Series C Preferred Stock to
be entitled to such dividend, distribution, issuance or granting of rights,
options or warrants are to be determination or the date on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective, and (y) the date as
of which it is expected that Holders of record of Series C Preferred Stock will
be entitled to exchange their shares for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale transfer,
dissolution, liquidation or winding-up.
<PAGE>
Section 9.4 Register
The Corporation shall keep at its principal office a register in which the
Corporation shall provide for the registration of the Series C Preferred Stock.
Upon any transfer of the Series C Preferred Stock in accordance with the
provisions hereof, the Corporation shall register such transfer on the Series C
Preferred Stock register.
The Corporation may deem the person in whose name the Series C Preferred
Stock shall be registered upon the registry books of the Corporation to be, and
may treat it as, the absolute owner of the Series C Preferred Stock for the
purpose of receiving payment of dividends on the Series C Preferred Stock, for
the conversion of the Series C Preferred Stock and for all other purposes, and
the Corporation shall not be affected by any notice to the contrary. All such
payments and such conversions shall be valid and effective to satisfy and
discharge the liability upon the Series C Preferred Stock to the extent of the
sum or sums so paid or the conversion or conversions so made.
Section 9.5 Withholding
To the extent required by applicable law, the Corporation may withhold
amounts for or on account of any taxes imposed or levied by or on behalf of any
taxing authority in the United States having jurisdiction over the Corporation
from any payments made pursuant to the Series C Preferred Stock.
Section 9.6 Headings
The headings of the Articles and Sections of this Certificate of
Designation are inserted for convenience only and do not constitute a part of
this Certificate of Designation.
<PAGE>
In Witness Whereof, the Corporation has caused this Certificate of
Designation, Preferences and Rights to be signed by its duly authorized officers
on September 21,1999.
AMERICAN TELESOURCE INTERNATIONAL, INC.
By: /s/H. Douglas Saathoff
----------------------
H. Douglas Saathoff
Title: Senior Vice President
By: /s/Charles R. Poole
-------------------
Name: Charles R. Poole
Title: President
<PAGE>
Exhibit 10.41
THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR
THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT.
Number of Shares of Common Stock: 20,000
Warrant No. 1
COMMON STOCK PURCHASE WARRANT
To Purchase Common Stock of
American TeleSource International, Inc.
This Is To Certify That The Shaar Fund Ltd., or registered assigns, is
entitled, at any time from the Closing Date (as hereinafter defined) to the
Expiration Date (as hereinafter defined), to purchase from American TeleSource
International, Inc., a Delaware corporation (the "Company"), 20,000 shares of
Common Stock (as hereinafter defined and subject to adjustment as provided
herein), in whole or in part, including fractional parts, at a purchase price
set forth herein, all on the terms and conditions and pursuant to the provisions
hereinafter set forth.
Definitions
-----------
As used in this Common Stock Purchase Warrant (this "Warrant"), the
following terms have the respective meanings set forth below:
"Additional Shares of Common Stock" shall mean all shares of Common
Stock issued by the Company after the Closing Date, other than Warrant Stock.
"Book Value" shall mean, in respect of any share of Common Stock on
any date herein specified, the consolidated book value of the Company as of the
last day of any month immediately preceding such date, divided by the number of
Fully Diluted Outstanding shares of Common Stock as determined in accordance
with GAAP (assuming the payment of the exercise prices for such shares) by
Arthur Andersen LLP or any other firm of independent certified public
accountants of recognized national standing selected by the Company and
reasonably acceptable to the Holder.
"Business Day" shall mean any day that is not a Saturday or Sunday or
a day on which banks are required or permitted to be closed in the State of New
York.
"Closing Date" shall have the meaning set forth in the Securities
Purchase Agreement.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act and other federal
securities laws.
<PAGE>
"Common Stock" shall mean (except where the context otherwise
indicates) the Common Stock, par value $0.001 per share, of the Company as
constituted on the Closing Date, and any capital stock into which such Common
Stock may thereafter be changed, and shall also include (i) capital stock of the
Company of any other class (regardless of how denominated) issued to the holders
of shares of Common Stock upon any reclassification thereof which is also not
preferred as to dividends or assets over any other class of stock of the Company
and which is not subject to redemption and (ii) shares of common stock of any
successor or acquiring corporation received by or distributed to the holders of
Common Stock of the Company in the circumstances contemplated by Section 4.4.
"Convertible Securities" shall mean evidences of indebtedness, shares
of stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for shares of
Common Stock, either immediately or upon the occurrence of a specified date or a
specified event.
"Current Market Price" shall mean, as of any date of determination,
the average of the closing bid prices of the Common Shares as reported on the
OTCBB for the five Trading Days immediately preceding such date of
determination; provided that, if such security is not listed or admitted to
trading on the OTCBB, the closing prices as reported on the principal national
security exchange or quotation system on which such security is quoted or listed
or admitted to trading (closing bid prices in the case of a quotation system),
or if not quoted or listed or admitted to trading on any national securities
exchange or quotation system, the closing bid prices of such security on the
over-the-counter market as reported by Bloomberg LP, or a similar generally
accepted reporting service, as the case may be, for the five Trading Days
immediately preceding such date of determination.
"Current Warrant Price" shall mean, in respect of a share of Common
Stock at any date herein specified, one hundred and fifteen percent (115%) of
the arithmetic mean of the lowest closing bid prices of a share of Common Stock
as reported on the OTCBB on five (5) Trading Days during the period of ten (10)
Trading Days immediately preceding the Closing Date, it being understood that
such five (5) Trading Days need not be consecutive.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Exercise Period" shall mean the period during which this Warrant is
exercisable pursuant to Section 2.1.
"Expiration Date" shall mean September 24, 2004.
"Fully Diluted Outstanding" shall mean, when used with reference to
Common Stock, at any date as of which the number of shares thereof is to be
determined, all shares of Common Stock Outstanding at such date and all shares
of Common Stock issuable in respect of this Warrant, outstanding on such date,
and other options or warrants to purchase, or securities convertible into,
shares of Common Stock outstanding on such date which would be deemed
<PAGE>
outstanding in accordance with GAAP for purposes of determining Book Value or
net income per share.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as from time to time in effect.
"Holder" shall mean the Person in whose name the Warrant or Warrant
Stock set forth herein is registered on the books of the Company maintained for
such purpose.
"Market Price" per Common Share means the average of the closing bid
prices of the Common Shares as reported on the OTCBB for the five trading days
immediately preceding the Closing Date.
"OTCBB" shall mean the OTC Bulletin Board service of the National
Association of Securities Dealers, Inc.
"Other Property" shall have the meaning set forth in Section 4.4.
"Outstanding" shall mean, when used with reference to Common Stock, at
any date as of which the number of shares thereof is to be determined, all
issued shares of Common Stock, except shares then owned or held by or for the
account of the Company or any subsidiary thereof, and shall include all shares
issuable in respect of outstanding scrip or any certificates representing
fractional interests in shares of Common Stock.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, incorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
"Registration Rights Agreement" shall mean the Registration Rights
Agreement dated a date even herewith between the Company and The Shaar Fund
Ltd., as it may be amended from time to time.
"Restricted Common Stock" shall mean shares of Common Stock which are,
or which upon their issuance on their exercise of this Warrant would be,
evidenced by a certificate bearing the restrictive legend set forth in Section
9.1(a).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Securities Purchase Agreement" shall mean the Securities Purchase
Agreement dated as of a date even herewith between the Company and The Shaar
Fund Ltd., as it may be amended from time to time.
"Transfer" shall mean any disposition of any Warrant or Warrant Stock
or of any interest in either thereof, which would constitute a sale thereof
within the meaning of the Securities Act.
<PAGE>
"Transfer Notice" shall have the meaning set forth in Section 9.2.
"Warrant Price" shall mean an amount equal to (i) the number of shares
of Common Stock being purchased upon exercise of this Warrant pursuant to
Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"Warrant Stock" shall mean the shares of Common Stock purchased by the
holders of the Warrants upon the exercise thereof.
"Warrants" shall mean this Warrant and all warrants issued upon
transfer, division or combination of, or in substitution for, any thereof. All
Warrants shall at all times be identical as to terms and conditions and date,
except as to the number of shares of Common Stock for which they may be
exercised.
Exercise of Warrant
-------------------
Manner of Exercise
- ------------------
From and after the Closing Date and until 5:00 p.m., New York time, on
the Expiration Date, Holder may exercise this Warrant, on any Business Day, for
all or any part of the number of shares of Common Stock purchasable hereunder.
In order to exercise this Warrant, in whole or in part, Holder shall
deliver to the Company at its principal office at 12500 Network Boulevard, Suite
407, San Antonio, Texas 78249, or at the office or agency designated by the
Company pursuant to Section 12, (i) a written notice of Holder's election to
exercise this Warrant, which notice shall specify the number of shares of Common
Stock to be purchased, (ii) to the extent such exercise is not being effected
through a Cashless Exercise, payment of the Warrant Price in cash or wire
transfer or cashier's check drawn on a United States bank and (iii) this
Warrant. Such notice shall be substantially in the form of the subscription
form appearing at the end of this Warrant as Exhibit A, duly executed by Holder
or its agent or attorney. Upon receipt of the items referred to in clauses (i),
(ii) and (iii) above, the Company shall, as promptly as practicable, and in any
event within five Business Days thereafter, execute or cause to be executed and
deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Common Stock issuable upon
such exercise, together with cash in lieu of any fraction of a share, as
hereinafter provided. The stock certificate or certificates so delivered shall
be, to the extent possible, in such denomination or denominations as Holder
shall request in the notice and shall be registered in the name of Holder or,
subject to Section 9, such other name as shall be designated in the notice.
This Warrant shall be deemed to have been exercised and such certificate or
certificates shall be deemed to have been issued, and Holder or any other Person
so designated to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the notice, provided that
the cash or check or checks and this Warrant are received by the Company as
described above and all taxes required to be paid by Holder, if any, pursuant to
Section 2.2 prior to the issuance of such shares have been paid. If this Warrant
shall have been exercised in part, the Company shall, at the time of delivery of
the certificate or certificates representing Warrant Stock, deliver to Holder a
new Warrant evidencing the rights of Holder to purchase the unpurchased shares
of Common Stock called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant, or, at the request of Holder,
appropriate notation may be made on this Warrant and the same
<PAGE>
returned to Holder. Notwithstanding any provision herein to the contrary, the
Company shall not be required to register shares in the name of any Person who
acquired this Warrant (or part hereof) or any Warrant Stock otherwise than in
accordance with this Warrant.
Simultaneously with the exercise of this Warrant, payment in full of
the Warrant Price may be made, at the option of the Holder, (i) by payment of
the Warrant Price in cash by wire transfer or cashier's check drawn on a United
States bank, (ii) by the surrender (which surrender shall be evidenced by
cancellation of the number of Warrants represented by any certificate(s)
evidencing the Warrants (the "Warrant Certificate") presented in connection with
a Cashless Exercise) of a Warrant or Warrants (represented by one or more
Warrant Certificates), and without payment of the Warrant Price in cash, for
such number of shares as shall be equal to the product of (1) the number of
shares for which such Warrant is exercisable with payment in cash of the Warrant
Price as of the date of exercise multiplied by (2) the Cashless Exercise Ratio
-------------
or (iii) by any combination of (i) and (ii). For purposes of this Agreement,
the "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is
the excess of the Current Market Price per share of the Common Stock on the date
of exercise over the Warrant Price per share as of the date of exercise and the
denominator of which is the Current Market Price per share of the Common Stock
on the date of exercise. An exercise of a Warrant in accordance with the
immediately preceding sentences is herein called a "Cashless Exercise." Upon
surrender of a Warrant Certificate representing more than one Warrant in
connection with the Holder's option to elect a Cashless Exercise, the number of
shares deliverable upon a Cashless Exercise shall be equal to the Cashless
Exercise Ratio multiplied by the number of Warrants that the Holder specifies is
to be exercised pursuant to a Cashless Exercise. All provisions of this
Agreement shall be applicable with respect to an exercise of a Warrant
Certificate pursuant to a Cashless Exercise for less than the full number of
Warrants represented thereby.
Payment of Taxes and Charges
- ----------------------------
All shares of Common Stock issuable upon the exercise of this Warrant
pursuant to the terms hereof shall be validly issued, fully paid and
nonassessable, without any preemptive rights. The Company shall pay all
expenses in connection with, and all taxes and other governmental charges that
may be imposed with respect to, the issue or delivery thereof, unless such tax
or charge is imposed by law upon Holder, in which case such taxes or charges
shall be paid by Holder. The Company shall not be required, however, to pay any
tax or other charge imposed in connection with any transfer involved in the
issue of any certificate for shares of Common Stock issuable upon exercise of
this Warrant in any name other than that of Holder, and in such case the Company
shall not be required to issue or deliver any stock certificate until such tax
or other charge has been paid or it has been established to the satisfaction of
the Company that no such tax or other charge is due.
Fractional Shares
- -----------------
The Company shall not be required to issue a fractional share of
Common Stock upon exercise of any Warrant. As to any fraction of a share which
Holder would otherwise be entitled to purchase upon such exercise, the Company
shall pay a cash adjustment in respect of such final fraction in an amount equal
to the same fraction of the Market Price per share of Common Stock as of the
Closing Date.
<PAGE>
Continued Validity
- ------------------
A holder of shares of Common Stock issued upon the exercise of this
Warrant, in whole or in part (other than a holder who acquires such shares after
the same have been publicly sold pursuant to a Registration Statement under the
Securities Act or sold pursuant to Rule 144 thereunder), shall continue to be
entitled with respect to such shares to all rights to which it would have been
entitled as Holder under Sections 9, 10 and 14 of this Warrant. The Company
will, at the time of exercise of this Warrant, in whole or in part, upon the
request of Holder, acknowledge in writing, in form reasonably satisfactory to
Holder, its continuing obligation to afford Holder all such rights; provided,
however, that if Holder shall fail to make any such request, such failure shall
not affect the continuing obligation of the Company to afford to Holder all such
rights to the extent permitted by law.
Transfer, Division and Combination
----------------------------------
Transfer
- --------
Subject to compliance with Section 9, transfer of this Warrant and all
rights hereunder, in whole or in part, shall be registered on the books of the
Company to be maintained for such purpose, upon surrender of this Warrant at the
principal office of the Company referred to in Section 2.1 or the office or
agency designated by the Company pursuant to Section 12, together with a written
assignment of this Warrant substantially in the form of Exhibit B hereto duly
executed by Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall, subject to Section 9, execute
and deliver a new Warrant or Warrants in the name of the assignee or assignees
and in the denomination specified in such instrument of assignment, and shall
issue to the assignor a new Warrant evidencing the portion of this Warrant not
so assigned, and this Warrant shall promptly be canceled. A Warrant, if
properly assigned in compliance with Section 9, may be exercised by a new Holder
for the purchase of shares of Common Stock without having a new warrant issued.
Division and Combination
- ------------------------
Subject to Section 9, this Warrant may be divided or combined with
other Warrants upon presentation hereof at the aforesaid office or agency of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued, signed by Holder or its agent or
attorney. Subject to compliance with Section 3.1 and with Section 9, as to any
transfer which may be involved in such division or combination, the Company
shall execute and deliver a new Warrant or Warrants in exchange for the Warrant
or Warrants to be divided or combined in accordance with such notice.
Expenses
- --------
The Company shall prepare, issue and deliver at its own expense (other
than transfer taxes) the new Warrants or Warrants under this Section 3.
Maintenance of Books
- --------------------
The Company agrees to maintain, at its aforesaid office or agency,
books for the registration and the registration of transfer of the Warrants.
<PAGE>
Adjustments
-----------
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give Holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
Stock Dividends, Subdivisions and Combinations
- ----------------------------------------------
If at any time the Company shall:
take a record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend payable in, or other distribution of, Additional
Shares of Common Stock;
subdivide its outstanding shares of Common Stock into a larger number of
shares of Common Stock; or
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock;
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the occurrence of such event would own or be entitled to
receive after the happening of such event, and (ii) the Current Warrant Price
shall be adjusted to equal (A) the Current Warrant Price multiplied by the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the adjustment divided by (B) the number of shares for
which this Warrant is exercisable immediately after such adjustment.
Certain Other Distributions
- ---------------------------
If at any time the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive any dividend or other
distribution of:
cash;
any evidences of its indebtedness, any shares of its stock or any other
securities or property of any nature whatsoever (other than cash, Convertible
Securities or Additional Shares of Common Stock); or
any warrants or other rights to subscribe for or purchase any evidences of its
indebtedness, any shares of its stock or any other securities or property of any
nature whatsoever (other than cash, Convertible Securities or Additional Shares
of Common Stock);
then Holder shall be entitled to receive such dividend or distribution as if
Holder had exercised the Warrant. A reclassification of the Common Stock (other
than a change in par value, or from par value to no par value or from no par
value to par value) into shares of Common Stock and shares of any other class of
stock shall be deemed a distribution by the Company to the holders
<PAGE>
of its Common Stock of such shares of such other class of stock within the
meaning of this Section 4.2 and, if the outstanding shares of Common Stock shall
be changed into a larger or smaller number of shares of Common Stock as a part
of such reclassification, such change shall be deemed a subdivision or
combination, as the case may be, of the outstanding shares of Common Stock
within the meaning of Section 4.1.
Other Provisions Applicable to Adjustments under this Section
- -------------------------------------------------------------
The following provisions shall be applicable to the making of
adjustments of the number of shares of Common Stock for which this Warrant is
exercisable and the Current Warrant Price provided for in this Section 4:
When Adjustments to be Made. The adjustments required by this Section 4 shall
be made whenever and as often as any specified event requiring an adjustment
shall occur. For the purpose of any adjustment, any specified event shall be
deemed to have occurred at the close of business on the date of its occurrence.
Fractional Interests. In computing adjustments under this Section 4, fractional
interests in Common Stock shall be taken into account to the nearest 1/10th of a
share.
When Adjustment not Required. If the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive a
dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution to stockholders thereof, legally abandon
its plan to pay or deliver such dividend, distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of the taking
of such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
Challenge to Good Faith Determination. Whenever the Board of Directors of the
Company shall be required to make a determination in good faith of the fair
value of any item under this Section 4, such determination may be
challenged in good faith by the Holder, and any dispute shall be resolved by
an investment banking firm of recognized national standing selected by the
Company and acceptable to Holder.
Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets
- --------------------------------------------------------------------------------
In case the Company shall reorganize its capital, reclassify its
capital stock, consolidate or merge with or into another corporation (where the
Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell, transfer
or otherwise dispose of all or substantially all its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to
<PAGE>
or in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of the Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, consolidation or disposition of assets by a holder of the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined by resolution of the Board of Directors of
the Company) in order to provide for adjustments of shares of Common Stock for
which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 4. For purposes of
this Section 4.4, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 4.4 still similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
Other Action Affecting Common Stock
- -----------------------------------
In case at any time or from time to time the Company shall take any
action in respect of its Common Stock, other than any action described in this
Section 4, which would have a materially adverse effect upon the rights of
Holder, the number of shares of Common Stock and/or the purchase price thereof
shall be adjusted in such manner as may be equitable in the circumstances, as
determined in good faith by the Board of Directors of the Company.
Certain Limitations
- -------------------
Notwithstanding anything herein to the contrary, the Company agrees
not to enter into any transaction which, by reason of any adjustment hereunder,
would cause the Current Warrant Price to be less than the par value per share of
Common Stock.
Notices to Holder
-----------------
Notice of Adjustments
- ---------------------
Whenever the number of shares of Common Stock for which this Warrant
is exercisable, or whenever the price at which a share of such Common Stock may
be purchased upon exercise of the Warrants, shall be adjusted pursuant to
Section 4, the Company shall forthwith prepare a certificate to be executed by
the chief financial officer of the Company setting forth, in reasonable detail,
the event requiring the adjustment and the method by which such adjustment was
calculated (including a description of the basis on which the Board of Directors
of the Company determined the fair value of any evidences of indebtedness,
shares of stock, other securities or property or warrants or other subscription
or purchase rights referred to
<PAGE>
in Section 4.2), specifying the number of shares of Common Stock for which this
Warrant is exercisable and (if such adjustment was made pursuant to Section 4.4
or 4.5) describing the number and kind of any other shares of stock or Other
Property for which this Warrant is exercisable, and any change in the purchase
price or prices thereof, after giving effect to such adjustment or change. The
Company shall promptly cause a signed copy of such certificate to be delivered
to the Holder in accordance with Section 14.2. The Company shall keep at its
office or agency designated pursuant to Section 12 copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours by the Holder or any prospective purchaser of a
Warrant designated by Holder.
Notice of Corporate Action
- --------------------------
If at any time:
the Company shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend or other distribution, or any
right to subscribe for or purchase any evidences of its indebtedness, any
shares of stock of any class or any other securities or property, or to receive
any other right; or
there shall be any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company or any consolidation or
merger of the Company with, or any sale, transfer or other disposition of all
or substantially all the property, assets or business of the Company to,
another corporation; or
there shall be a voluntary or involuntary dissolution, liquidation or winding
up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, and (ii) in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 30 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 14.2.
<PAGE>
No Impairment
-------------
The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action 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, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form satisfactory
to Holder, the continuing validity of this Warrant and the obligations of the
Company hereunder, to the extent permitted by law.
Reservation and Authorization of Common Stock
---------------------------------------------
From and after the Closing Date, the Company shall at all times
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued shares of Common Stock as will be sufficient to
permit the exercise in full of all outstanding Warrants. All shares of Common
Stock which shall be so issuable, when issued upon exercise of any Warrant and
payment therefor in accordance with the terms of such Warrant, shall be duly and
validly issued and fully paid and nonassessable and not subject to preemptive
rights.
Before taking any action which would cause an adjustment reducing the
Current Warrant Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and nonassessable shares of such Common Stock at
such adjusted Current Warrant Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Current Warrant Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
Taking of Record; Stock and Warrant Transfer Books
--------------------------------------------------
In the case of all dividends or other distributions by the Company to
the holders of its Common Stock with respect to which any provision of Section 4
refers to the taking of record of such holders, the Company will in each case
take such a record and will take such record as of the close of business on a
Business Day. The Company will not at any time, except upon dissolution,
liquidation or winding up of the Company, close its stock transfer books or
<PAGE>
Warrant transfer books so as to result in preventing or delaying the exercise or
transfer of any Warrant.
Restrictions on Transferability
-------------------------------
The Warrants and the Warrant Stock shall not be transferred,
hypothecated or assigned before satisfaction of the conditions specified in this
Section 9, which conditions are intended to ensure compliance with the
provisions of the Securities Act with respect to the Transfer of any Warrant or
any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by
the provisions of this Section 9.
Restrictive Legend
- ------------------
Holder, by accepting this Warrant and any Warrant Stock agrees that this
Warrant and the Warrant Stock issuable upon exercise hereof may not be
assigned or otherwise transferred unless and until (i) the Company has
received an opinion of counsel for Holder that such securities may be sold
pursuant to an exemption from registration under the Securities Act or (ii) a
registration statement relating to such securities has been filed by the
Company and declared effective by the Commission.
Each certificate for Warrant Stock issuable hereunder shall bear a
legend as follows until such securities have been sold pursuant to an effective
registration statement under the Securities Act:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS.
THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OR SUCH OTHER LAWS."
Except as otherwise provided in this Section 9, the Warrant shall be stamped or
otherwise imprinted with a legend in substantially the following form:
"THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS
THEREUNDER OR THE PROVISIONS OF THIS WARRANT."
<PAGE>
Notice of Proposed Transfers
- ----------------------------
Prior to any Transfer or attempted Transfer of any Warrants or any
shares of Restricted Common Stock, the Holder shall give ten days' prior written
notice (a "Transfer Notice") to the Company of Holder's intention to effect such
Transfer, describing the manner and circumstances of the proposed Transfer, and
obtain from counsel to Holder who shall be reasonably satisfactory to the
Company, an opinion that the proposed Transfer of such Warrants or such
Restricted Common Stock may be effected without registration under the
Securities Act. After receipt of the Transfer Notice and opinion, the Company
shall, within five days thereof, notify the Holder as to whether such opinion is
reasonably satisfactory and, if so, such holder shall thereupon be entitled to
Transfer such Warrants or such Restricted Common Stock, in accordance with the
terms of the Transfer Notice. Each certificate, if any, evidencing such shares
of Restricted Common Stock issued upon such Transfer shall bear the restrictive
legend set forth in Section 9.1(a), and the Warrant issued upon such Transfer
shall bear the restrictive legend set forth in Section 9.1(b), unless in the
opinion of such counsel such legend is not required in order to ensure
compliance with the Securities Act. Holder shall not be entitled to Transfer
such Warrants or such Restricted Common Stock until receipt of notice from the
Company under this Section 9.2(a) that such opinion is reasonably satisfactory.
Required Registration
- ---------------------
Pursuant to the terms and conditions set forth in Registration Rights
Agreement, the Company shall prepare and file with the Commission not later than
the 30th day after the Closing Date, a Registration Statement relating to the
offer and sale of the Common Stock issuable upon exercise of the Warrants and
shall use its best efforts to cause the Commission to declare such Registration
Statement effective under the Securities Act as promptly as practicable but no
later than 90 days after the Closing Date.
Termination of Restrictions
- ---------------------------
Notwithstanding the foregoing provisions of Section 9, the
restrictions imposed by this Section upon the transferability of the Warrants,
the Warrant Stock and the Restricted Common Stock (or Common Stock issuable upon
the exercise of the Warrants) and the legend requirements of Section 9.1 shall
terminate as to any particular Warrant or share of Warrant Stock or Restricted
Common Stock (or Common Stock issuable upon the exercise of the Warrants) (i)
when and so long as such security shall have been effectively registered under
the Securities Act and disposed of pursuant thereto or (ii) when the Company
shall have received an opinion of counsel reasonably satisfactory to it that
such shares may be transferred without registration thereof under the Securities
Act. Whenever the restrictions imposed by Section 9 shall terminate as to this
Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive
from the Company upon written request of the Holder, at the expense of the
Company, a new Warrant bearing the following legend in place of the restrictive
legend set forth hereon:
"THE RESTRICTIONS ON TRANSFERABILITY OF THE
WITHIN WARRANT CONTAINED IN SECTION 9 HEREOF
TERMINATED ON __________, _____, AND ARE OF NO
FURTHER FORCE AND EFFECT."
<PAGE>
All Warrants issued upon registration of transfer, division or combination of,
or in substitution for, any Warrant or Warrants entitled to bear such legend
shall have a similar legend endorsed thereon. Whenever the restrictions imposed
by this Section shall terminate as to any share of Restricted Common Stock, as
hereinabove provided, the holder thereof shall be entitled to receive from the
Company, at the Company's expense, a new certificate representing such Common
Stock not bearing the restrictive legend set forth in Section 9.1(a).
Listing on Securities Exchange
- ------------------------------
If the Company shall list any shares of Common Stock on any securities
exchange or quotation system, it will, at its expense, list thereon, maintain
and, when necessary, increase such listing of, all shares of Common Stock issued
or, to the extent permissible under the applicable securities exchange rules,
issuable upon the exercise of this Warrant so long as any shares of Common Stock
shall be so listed during any such Exercise Period.
Supplying Information
---------------------
The Company shall cooperate with Holder in supplying such information
as may be reasonably necessary for Holder to complete and file any information
reporting forms presently or hereafter required by the Commission as a condition
to the availability of an exemption from the Securities Act for the sale of any
Warrant or Restricted Common Stock.
Loss or Mutilation
------------------
Upon receipt by the Company from Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and indemnity reasonably satisfactory to it (it being
understood that the written agreement of the Holder shall be sufficient
indemnity), and in case of mutilation upon surrender and cancellation hereof,
the Company will execute and deliver in lieu hereof a new Warrant of like tenor
to Holder; provided, in the case of mutilation no indemnity shall be required if
this Warrant in identifiable form is surrendered to the Company for
cancellation.
Office of the Company
---------------------
As long as any of the Warrants remain outstanding, the Company shall
maintain an office or agency (which may be the principal executive offices of
the Company) where the Warrants may be presented for exercise, registration of
transfer, division or combination as provided in this Warrant.
Limitation of Liability
-----------------------
No provision hereof, in the absence of affirmative action by Holder to
purchase shares of Common Stock, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of Holder for the
purchase price of any Common Stock or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
Miscellaneous
-------------
Nonwaiver and Expenses
- ----------------------
No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights,
<PAGE>
powers or remedies. If the Company fails to make, when due, any payments
provided for hereunder, or fails to comply with any other provision of this
Warrant, the Company shall pay to Holder such amounts as shall be sufficient to
cover any costs and expenses including, without limitation, reasonable
attorneys' fees, including those of appellate proceedings, incurred by Holder in
collecting any amounts due pursuant hereto or in otherwise enforcing any of its
rights, powers or remedies hereunder.
Notice Generally
- ----------------
Except as may be otherwise provided herein, any notice or other
communication or delivery required or permitted hereunder shall be in writing
and shall be delivered personally or sent by certified mail, postage prepaid, or
by a nationally recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or, if mailed,
three days after the date of deposit in the United States mails, as follows:
if to the Company, to:
American TeleSource International, Inc.
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
(210) 558-6090
(210) 558-6095 (Fax)
Attention: H. Douglas Saathoff
with a copy to:
Alice L. King, Esq.
Corporate Counsel
American TeleSource International, Inc.
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
(210) 558-6090
(210) 558-6095 (Fax)
if to the Holder, to:
The Shaar Fund Ltd.,
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7771
(212) 432-7771 (Fax)
<PAGE>
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
The Company or the Holder may change the foregoing address by notice given
pursuant to this Section 14.2.
Indemnification
- ---------------
The Company agrees to indemnify and hold harmless Holder from and
against any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of
any kind (collectively, "Losses") which may be imposed upon, incurred by or
asserted against Holder in any manner relating to or arising out of any failure
by the Company to perform or observe in any material respect any of its
covenants, agreements, undertakings or obligations set forth in this Warrant;
provided, however, that the Company shall not be liable under this Section 14.3
to the extent that any liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, attorneys' fees, expenses or
disbursements are found in a final nonappealable judgment by a court to have
resulted from Holder's gross negligence, bad faith or willful misconduct in its
capacity as a stockholder or warrantholder of the Company; and provided,
further, that the Company shall not be liable under this Section 14.3 to the
extent that it has provided indemnity to Holder with respect to any Losses
pursuant to the Registration Rights Agreement.
Remedies
- --------
Holder in addition to being entitled to exercise all rights granted by
law, including recovery of damages, will be entitled to specific performance of
its rights under Section 9 of this Warrant. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of Section 9 of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.
Successors and Assigns
- ----------------------
Subject to the provisions of Sections 3.1 and 9, this Warrant and the
rights evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant and, with respect to Section 9 hereof, holders
of Warrant Stock, and shall be enforceable by any such Holder or holder of
Warrant Stock.
Amendment
- ---------
This Warrant and all other Warrants may be modified or amended or the
provisions hereof waived with the written consent of the Company and Holder.
<PAGE>
Severability
- ------------
Wherever possible, each provision of this Warrant shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Warrant shall be prohibited by or invalid under applicable
law, such provision shall only be ineffective to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Warrant.
Headings
- --------
The headings used in this Warrant are for the convenience of reference
only and shall not, for any purpose, be deemed a part of this Warrant.
Governing Law
- -------------
This Warrant shall be governed by the laws of the State of New York,
without regard to the provisions thereof relating to conflicts of law.
[NO FURTHER TEXT ON THIS PAGE]
<PAGE>
In Witness Whereof, the Company has caused this Warrant to be duly
executed and its corporate seal to be impressed hereon and attested by its
Secretary or an Assistant Secretary.
Dated: September 24, 1999
American TeleSource International, Inc.
By: H. Douglas Saathoff
-------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
<PAGE>
Exhibit 10.42
September 24,1999
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement, dated as of September 24, 1999
(this "Agreement"), between American TeleSource International, Inc., a Delaware
corporation, with principal executive offices located at 12500 Network
Boulevard, Suite 407, San Antonio 78249 (the "Company"), and The Shaar Fund Ltd.
(the "Initial Investor").
Whereas, upon the terms and subject to the conditions of the
Securities Purchase Agreement dated as of September 24,1999, between the Initial
Investor and the Company (the "Securities Purchase Agreement"), the Company has
agreed to issue and sell to the Initial Investor (i) 500 shares of its Series C
6% Convertible Preferred Stock, par value $0.001 per share (the "Preferred
Shares"), which, upon the terms and subject to the conditions of the Company's
Certificate of Designation of Series C 6% Convertible Preferred Stock (the
"Certificate of Designation"), are convertible into shares of the Company's
common stock, par value $0.001 per share (the "Common Stock") and (ii) Common
Stock Purchase Warrants (the "Initial Warrants") to purchase 20,000 shares of
Common Stock;
Whereas, upon the terms and subject to the conditions of the
Certificate of Designation, the Preferred Shares may be redeemed by the Company
at a redemption price which includes, but is not limited to, the issuance of its
Common Stock Purchase Warrants having the same terms and conditions as the
Initial Warrants and exercisable to purchase an additional 20,000 shares of
Common Stock (the "Redemption Warrants" and, together with the Initial Warrants,
the "Warrants"); and
Whereas, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide with respect to
the Common Stock issued or issuable in lieu of cash dividend payments on the
Preferred Shares, upon conversion of the Preferred Shares and upon exercise of
the Warrants certain registration rights under the Securities Act;
Now, Therefore, in consideration of the premises and the mutual
covenants contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions
(a) As used in this Agreement, the following terms shall have the
meanings:
(i) "Affiliate," of any specified Person means any other Person who
directly, or indirectly through one or more intermediaries, is in control
of, is controlled by, or is under common control with, such specified
Person. For purposes of this definition, control of a Person means the
power, directly or indirectly, to direct or cause the direction of the
management and policies of such Person whether by
<PAGE>
contract, securities, ownership or otherwise; and the terms "controlling"
and "controlled" have the respective meanings correlative to the foregoing.
(ii) "Closing Date" means the date and time of the issuance and sale of
the Preferred Shares and the Initial Warrants.
(iii) "Commission" means the Securities and Exchange Commission.
(iv) "Current Market Price" on any date of determination means the
closing bid price of a share of the Common Stock on such day as reported on
OTC Bulletin Board service of the National Association of Securities
Dealers, Inc. ("OTCBB") or, if such security is not quoted on the OTCBB, on
the principal national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not quoted or
listed or admitted to trading on any national securities exchange or
quotation system, the closing bid price of such security on the over-the-
counter market on the day in question as reported by Bloomberg LP, or a
similar generally accepted reporting service, as the case may be.
(v) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder, or any
similar successor statute.
(vi) "Investors" means the Initial Investor and any transferee or
assignee of Registrable Securities who agrees to become bound by all of the
terms and provisions of this Agreement in accordance with Section 8 hereof.
(vii) "Person" means any individual, partnership, corporation, limited
liability company, joint stock company, association, trust, unincorporated
organization, or a government or agency or political subdivision thereof.
(viii) "Prospectus" means the prospectus (excluding any preliminary
prospectus but including, without limitation, any final prospectus filed
pursuant to Rule 424(b) under the Securities Act and any prospectus that
discloses information previously omitted from a prospectus filed as part of
an effective registration statement in reliance on Rule 430A under the
Securities Act) included in the Registration Statement, as amended or
supplemented by any prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Securities covered by the
Registration Statement and by all other amendments and supplements to such
prospectus, including all material incorporated by reference in such
prospectus and all documents filed after the date of such prospectus by the
Company under the Exchange Act and incorporated by reference therein.
(ix) "Public Offering" means an offer registered with the Commission and
the appropriate state securities commissions by the Company of its Common
Stock and made pursuant to the Securities Act.
<PAGE>
(x) "Registrable Securities" means the Common Stock issued or issuable
(i) in lieu of cash dividend payments on the Preferred Shares, (ii) upon
conversion of the Preferred Shares or (iii) upon exercise of the Warrants;
provided, however, a share of Common Stock shall cease to be a Registrable
Security for purposes of this Agreement when it no longer is a Restricted
Security.
(xi) "Registration Statement" means a registration statement of the
Company filed on an appropriate form under the Securities Act providing for
the registration of, and the sale on a continuous or delayed basis by the
holders of, all of the Registrable Securities pursuant to Rule 415 under
the Securities Act, including the Prospectus contained therein and forming
a part thereof, any amendments to such registration statement and
supplements to such Prospectus, and all exhibits and other material
incorporated by reference in such registration statement and Prospectus.
(xii) "Restricted Security" means any share of Common Stock issued or
issuable in lieu of cash dividend payments on the Preferred Shares, upon
conversion of the Preferred Shares or upon exercise of the Warrants except
any such share that (i) has been registered pursuant to an effective
registration statement under the Securities Act and sold in a manner
contemplated by the prospectus included in such registration statement,
(ii) has been transferred in compliance with the resale provisions of Rule
144 under the Securities Act (or any successor provision thereto) or is
transferable pursuant to paragraph (k) of Rule 144 under the Securities Act
(or any successor provision thereto), or (iii) otherwise has been
transferred and a new share of Common Stock not subject to transfer
restrictions under the Securities Act has been delivered by or on behalf of
the Company.
(xiii) "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder, or any similar
successor statute.
(b) All capitalized terms used and not defined herein have the
respective meaning assigned to them in the Securities Purchase Agreement.
2. Registration
(a) Filing and Effectiveness of Registration Statement. The Company
shall prepare and file with the Commission not later than 30 days after the
Closing Date, a Registration Statement relating to the offer and sale of the
Registrable Securities and shall use its best efforts to cause the Commission to
declare such Registration Statement effective under the Securities Act as
promptly as practicable but not later than 90 days after the Closing Date,
assuming for purposes hereof a Conversion Price under the Preferred Shares of
fifty percent (50%) of the Current Market Price on the Closing Date. The
Company shall not include any other securities in the Registration Statement
relating to the offer and sale of the Registrable Securities. The Company shall
notify the Initial Investor by written notice that such Registration
<PAGE>
Statement has been declared effective by the Commission within 24 hours of such
declaration by the Commission.
(b) Registration Default. If the Registration Statement covering the
Registrable Securities or the Additional Registrable Securities (as defined in
Section 2(d) hereof) required to be filed by the Company pursuant to Section
2(a) or 2(d) hereof, as the case may be, is not (i) filed with the Commission
within 30 days after the Closing Date or (ii) declared effective by the
Commission within 90 days after the Closing Date (either of which, without
duplication, an "Initial Date"), then the Company shall make the payments to the
Initial Investor as provided in the next sentence as liquidated damages and not
as a penalty. The amount to be paid by the Company to the Initial Investor
shall be determined as of each Computation Date (as defined below), and such
amount shall be equal to 2% (the "Liquidated Damage Rate") of the Purchase Price
(as defined in the Securities Purchase Agreement) from the Initial Date to the
first Computation Date and for each Computation Date thereafter, calculated on a
pro rata basis to the date on which the Registration Statement is filed with (in
the event of an Initial Date pursuant to clause (i) above) or declared effective
by (in the event of an Initial Date pursuant to clause (ii) above) the
Commission (the "Periodic Amount") provided, however, that in no event shall the
liquidated damages be less than $25,000. The full Periodic Amount shall be paid
by the Company to the Initial Investor by wire transfer of immediately available
funds within three days after each Computation Date.
As used in this Section 2(b), "Computation Date" means the date which
is 30 days after the Initial Date and, if the Registration Statement required to
be filed by the Company pursuant to Section 2(a) has not theretofore been
declared effective by the Commission, each date which is 30 days after the
previous Computation Date until such Registration Statement is so declared
effective.
Notwithstanding the above, if the Registration Statement covering the
Registrable Securities or the Additional Registrable Securities required to be
filed by the Company pursuant to Section 2(a) or 2(d) hereof, as the case may
be, is not filed with the Commission by the 30th day after the Closing Date, the
Company shall be in default of this Registration Rights Agreement, and the
Initial Investor shall be entitled to liquidated damages as set forth above.
(c) Eligibility for Use of Form S-3. The Company agrees that at such
time as it meets all the requirements for the use of Securities Act Registration
Statement on Form S-3 it shall file all reports and information required to be
filed by it with the Commission in a timely manner and take all such other
action so as to maintain such eligibility for the use of such form.
(d) Additional Registration Statement. In the event the Current
Market Price declines to $0.80 per share or less (the "Decline Date"), the
Company shall, to the extent required by the Securities Act (because the
additional shares were not covered by the Registration Statement filed pursuant
to Section 2(a)), as reasonably determined by the Initial Investor, file an
additional Registration Statement with the Commission for such additional number
of Registrable Securities as would be issuable upon conversion of the Preferred
Shares and exercise of the Warrants (the "Additional Registrable Securities") in
addition to those previously registered, assuming a Conversion Price of $0.30
per share. The Company shall, to the extent required by the Securities Act, as
reasonably determined by the Initial Investor,
<PAGE>
prepare and file with the Commission not later than the 30th day thereafter, a
Registration Statement relating to the offer and sale of such Additional
Registrable Securities and shall use its best efforts to cause the Commission to
declare such Registration Statement effective under the Securities Act as
promptly as practicable but not later than 60 days thereafter. The Company shall
not include any other securities in the Registration Statement relating to the
offer and sale of such Additional Registrable Securities.
If the Additional Registration Statement is not (i) filed with the
Commission within 30 days after the Decline Date or (ii) declared effective by
the Commission within 90 days after the Decline Date (either of which, without
duplication, an "Additional Registration Date"), then the Company shall make the
payments to the Initial Investor at the Liquidated Damage Rate from the
Additional Registration Date to the first Additional Computation Date and for
each Additional Computation Date thereafter, calculated on a pro rata basis to
the date on which the Additional Registration Statement is filed with (in the
event of an Additional Registration Date pursuant to clause (i) above) or
declared effective by (in the event of an Additional Registration Date pursuant
to clause (ii) above) the Commission (the "Additional Periodic Amount")
provided, however, that in no event shall the liquidated damages be less than
$25,000. The full Additional Periodic Amount shall be paid by the Company to
the Initial Investor by wire transfer of immediately available funds within
three days after each Additional Computation Date.
As used in this Section 2(d), "Additional Computation Date" means the
date which is 30 days after the Additional Registration Date and, if the
Additional Registration Statement required to be filed by the Company pursuant
to this Section 2(d) has not theretofore been declared effective by the
Commission, each date which is 30 days after the previous Additional Computation
Date until such Additional Registration Statement is so declared effective.
(e) (i) If the Company proposes to register any of its warrants,
Common Stock or any other shares of common stock of the Company under the
Securities Act (other than a registration (A) on Form S-8 or S-4 or any
successor or similar forms, (B) relating to Common Stock or any other
shares of common stock of the Company issuable upon exercise of employee
share options or in connection with any employee benefit or similar plan of
the Company or (C) in connection with a direct or indirect acquisition by
the Company of another Person or any transaction with respect to which Rule
145 (or any successor provision) under the Securities Act applies), whether
or not for sale for its own account, it will each such time, give prompt
written notice at least 20 days prior to the anticipated filing date of the
registration statement relating to such registration to the Initial
Investor, which notice shall set forth such Initial Investor's rights under
this Section 3(e) and shall offer the Initial Investor the opportunity to
include in such registration statement such number of Registrable
Securities as the Initial Investor may request. Upon the written request of
an Initial Investor made within 10 days after the receipt of notice from
the Company (which request shall specify the number of Registrable
Securities intended to be disposed of by such Initial Investor), the
Company will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities that the Company has been so
requested to register by the Initial Investor, to the extent requisite to
permit the disposition of the Registrable Securities so to be
<PAGE>
registered; provided, however, that (A) if such registration involves a
Public Offering, the Initial Investor must sell its Registrable Securities
to the underwriters selected as provided in Section 3(b) hereof on the same
terms and conditions as apply to the Company and (B) if, at any time after
giving written notice of its intention to register any Registrable
Securities pursuant to this Section 3 and prior to the effective date of
the registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such Registrable
Securities, the Company shall give written notice to the Initial Investor
and, thereupon, shall be relieved of its obligation to register any
Registrable Securities in connection with such registration. The Company's
obligations under this Section 2(e) shall terminate on the date that the
registration statement to be filed in accordance with Section 2(a) is
declared effective by the Commission.
(ii) If a registration pursuant to this Section 2(e) involves a Public
Offering and the managing underwriter thereof advises the Company that, in
its view, the number of shares of Common Stock, warrants or other shares of
Common Stock that the Company and the Initial Investor intend to include in
such registration exceeds the largest number of shares of Common Stock or
warrants (including any other shares of Common Stock or warrants of the
Company) that can be sold without having an adverse effect on such Public
Offering (the "Maximum Offering Size"), the Company will include in such
registration only that number of shares of Common Stock or warrants, as
applicable, which does not exceed the Maximum Offering Size, with the
difference between the number of shares in the Maximum Offering Size and
the number of shares originally intended for inclusion (including the
Common Stock covered by this Agreement, all shares and warrants originally
intended to be issued and sold by the Company ("Company Shares") and all
shares requested for inclusion by selling shareholders other than the
Initial Investor pursuant to any registration rights agreement now in
effect ("Third-Party Shares")) to be allocated among the Initial Investor,
such other selling shareholders and the Company pro rata on the basis of
the relative number of shares of Common Stock covered by this Agreement,
Third-Party Shares and Company Shares, respectively.
If as a result of the proration provisions of this Section 2(e)(ii),
any Initial Investor is not entitled to include all such Registrable Securities
in such registration, such Initial Investor may elect to withdraw its request to
include any Registrable Securities in such registration. With respect to
registrations pursuant to this Section 2(e), the number of securities required
to satisfy any underwriters' over-allotment option shall be allocated among the
Initial Investor, such other selling shareholders and the Company pro rata on
the basis of the relative number of shares of Common Stock covered by this
Agreement, Third-Party Shares and Company Shares, respectively.
3. Obligations of the Company
In connection with the registration of the Registrable Securities, the
Company shall:
<PAGE>
(a) Promptly (i) prepare and file with the Commission such amendments
(including post-effective amendments) to the Registration Statement and
supplements to the Prospectus as may be necessary to keep the Registration
Statement continuously effective and in compliance with the provisions of the
Securities Act applicable thereto so as to permit the Prospectus forming part
thereof to be current and useable by Investors for resales of the Registrable
Securities for a period of two years from the date on which the Registration
Statement is first declared effective by the Commission (the "Effective Time")
or such shorter period that will terminate when all the Registrable Securities
covered by the Registration Statement have been sold pursuant thereto in
accordance with the plan of distribution provided in the Prospectus, transferred
pursuant to Rule 144 under the Securities Act or otherwise transferred in a
manner that results in the delivery of new securities not subject to transfer
restrictions under the Securities Act (the "Registration Period") and (ii) take
all lawful action such that each of (A) the Registration Statement and any
amendment thereto does not, when it becomes effective, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, not misleading and
(B) the Prospectus forming part of the Registration Statement, and any amendment
or supplement thereto, does not at any time during the Registration Period
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(b) During the Registration Period, comply with the provisions of the
Securities Act with respect to the Registrable Securities of the Company covered
by the Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods of
disposition by the Investors as set forth in the Prospectus forming part of the
Registration Statement;
(c) (i) Prior to the filing with the Commission of any Registration
Statement (including any amendments thereto) and the distribution or delivery of
any Prospectus (including any supplements thereto), provide draft copies thereof
(including a copy of the accountant's consent letter to be included in the
filing) to the Investors and reflect in such documents all such comments as the
Investors reasonably may propose and (ii) furnish to each Investor whose
Registrable Securities are included in the Registration Statement and its legal
counsel identified to the Company, (A) promptly after the same is prepared and
publicly distributed, filed with the Commission, or received by the Company, one
copy of the Registration Statement, each Prospectus, and each amendment or
supplement thereto, and (B) such number of copies of the Prospectus and all
amendments and supplements thereto and such other documents, as such Investor
may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor;
(d) (i) Register or qualify the Registrable Securities covered by the
Registration Statement under such securities or "blue sky" laws of such
jurisdictions as the Investors who hold a majority-in-interest of the
Registrable Securities being offered reasonably request, (ii) prepare and file
in such jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take all such other lawful actions as may be necessary to maintain such
registrations and qualifications in effect at all times during the Registration
Period, and (iv) take all such other lawful actions
<PAGE>
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 (A) qualify to do business
in any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (B) subject itself to general taxation in any such
jurisdiction or (C) file a general consent to service of process in any such
jurisdiction;
(e) As promptly as practicable after becoming aware of such event,
notify each Investor of the occurrence of any event, as a result of which the
Prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and
promptly prepare an amendment to the Registration Statement and supplement to
the Prospectus to correct such untrue statement or omission, and deliver a
number of copies of such supplement and amendment to each Investor as such
Investor may reasonably request;
(f) As promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the Commission of any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time and take all lawful action
to effect the withdrawal, recession or removal of such stop order or other
suspension;
(g) Cause all the Registrable Securities covered by the Registration
Statement to be listed on the principal national securities exchange, and
included in an inter-dealer quotation system of a registered national securities
association, on or in which securities of the same class or series issued by the
Company are then listed or included;
(h) Maintain a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(i) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Securities to be offered pursuant to the registration statement
and enable such certificates for the Registrable Securities to be in such
denominations or amounts, as the case may be, as the Investors reasonably may
request and registered in such names as the Investor may request; and, within
three business days after a registration statement which includes Registrable
Securities is declared effective by the Commission, deliver and cause legal
counsel selected by the Company to deliver to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such registration statement) an appropriate
instruction and, to the extent necessary, an opinion of such counsel;
(j) Take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Investors of their Registrable
Securities in accordance with the intended methods therefor provided in the
Prospectus which are customary under the circumstances;
<PAGE>
(k) Make generally available to its security holders as soon as
practicable, but in any event not later than three (3) months after (i) the
effective date (as defined in Rule 158(c) under the Securities Act) of the
Registration Statement, and (ii) the effective date of each post-effective
amendment to the Registration Statement, as the case may be, an earnings
statement of the Company and its subsidiaries complying with Section 11(a) of
the Securities Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(1) In the event of an underwritten offering, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to the
Registration Statement such information as the managers reasonably agree should
be included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment;
(m) (i) Make reasonably available for inspection by Investors, any
underwriter participating in any disposition pursuant to the Registration
Statement, and any attorney, accountant or other agent retained by such
Investors or any such underwriter all relevant financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, and (ii) cause the Company's officers, directors and employees to
supply all information reasonably requested by such Investors or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
provided, however, that all records, information and documents that are
designated in writing by the Company as confidential, proprietary or containing
any material nonpublic information shall be kept confidential by such Investors
and any such underwriter, attorney, accountant or agent (pursuant to an
appropriate confidentiality agreement in the case of any such holder or agent),
unless such disclosure is made pursuant to judicial process in a court
proceeding (after first giving the Company an opportunity promptly to seek a
protective order or otherwise limit the scope of the information sought to be
disclosed) or is required by law, or such records, information or documents
become available to the public generally or through a third party not in
violation of an accompanying obligation of confidentiality; and provided,
further, that, if the foregoing inspection and information gathering would
otherwise disrupt the Company's conduct of its business, such inspection and
information gathering shall, to the maximum extent possible, be coordinated on
behalf of the Investors and the other parties entitled thereto by one firm of
counsel designed by and on behalf of the majority in interest of Investors and
other parties;
(n) In connection with any underwritten offering, make such
representations and warranties to the Investors participating in such
underwritten offering and to the managers, in form, substance and scope as are
customarily made by the Company to underwriters in secondary underwritten
offerings;
(o) In connection with any underwritten offering, obtain opinions of
counsel to the Company (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the managers) addressed to the
underwriters, covering such matters as are customarily covered in opinions
requested in secondary underwritten offerings (it being agreed that the matters
to be covered by such opinions shall include, without limitation, as of the date
of
<PAGE>
the opinion and as of the Effective Time of the Registration Statement or most
recent post-effective amendment thereto, as the case may be, the absence from
the Registration Statement and the Prospectus, including any documents
incorporated by reference therein, of an untrue statement of a material fact or
the omission of a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, subject to customary
limitations);
(p) In connection with any underwritten offering, obtain "cold
comfort" letters and updates thereof from the independent public accountants of
the Company (and, if necessary, from the independent public accountants of any
subsidiary of the Company or of any business acquired by the Company, in each
case for which financial statements and financial data are, or are required to
be, included in the Registration Statement), addressed to each underwriter
participating in such underwritten offering (if such underwriter has provided
such letter, representations or documentation, if any, required for such cold
comfort letter to be so addressed), in customary form and covering matters of
the type customarily covered in "cold comfort" letters in connection with
secondary underwritten offerings;
(q) In connection with any underwritten offering, deliver such
documents and certificates as may be reasonably required by the managers, if
any; and
(r) In the event that any broker-dealer registered under the Exchange
Act shall be an "Affiliate" (as defined in Rule 2729(b)(1) of the rules and
regulations of the National Association of Securities Dealers, Inc. (the "NASD
Rules") (or any successor provision thereto)) of the Company or has a "conflict
of interest" (as defined in Rule 2720(b)(7) of the NASD Rules (or any successor
provision thereto)) and such broker-dealer shall underwrite, participate as a
member of an underwriting syndicate or selling group or assist in the
distribution of any Registrable Securities covered by the Registration
Statement, whether as a holder of such Registrable Securities or as an
underwriter, a placement or sales agent or a broker or dealer in respect
thereof, or otherwise, the Company shall assist such broker-dealer in complying
with the requirements of the NASD Rules, including, without limitation, by (A)
engaging a "qualified independent underwriter" (as defined in Rule 2720(b)(15)
of the NASD Rules (or any successor provision thereto)) to participate in the
preparation of the Registration Statement relating to such Registrable
Securities, to exercise usual standards of due diligence in respect thereof and
to recommend the public offering price of such Registrable Securities, (B)
indemnifying such qualified independent underwriter to the extent of the
indemnification of underwriters provided in Section 5 hereof, and (C) providing
such information to such broker-dealer as may be required in order for such
broker-dealer to comply with the requirements of the NASD Rules.
4. Obligations of the Investors
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
(a) 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
<PAGE>
itself, the Registrable Securities held by it and the intended method of
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. As least seven days prior to the first anticipated filing
date of the Registration Statement, the Company shall notify each Investor of
the information the Company requires from each such Investor (the "Requested
Information") if such Investor elects to have any of its Registrable Securities
included in the Registration Statement. If at least two business days prior to
the anticipated filing date the Company has not received the Requested
Information from in Investor (a "Non-Responsive Investor"), then the Company may
file the Registration Statement without including Registrable Securities of such
Non-Responsive Investor and have no further obligations to the Non-Responsive
Investor;
(b) Each Investor by its acceptance of the Registrable Securities
agrees to cooperate with the Company in connection with the preparation and
filing of the Registration Statement hereunder, unless such Investor has
notified the Company in writing of its election to exclude all of its
Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the occurrence of any event of the kind described in Section 3(e) or
3(f), it shall immediately discontinue its disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 3(e) 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 Prospectus covering such Registrable Securities
current at the time of receipt of such notice.
5. Expenses of Registration
All expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Section 3, but including, without limitation, all registration, listing, and
qualifications fees, printing and engraving fees, accounting fees, and the fees
and disbursements of counsel for the Company, and the reasonable fees of one
firm of counsel to the holders of a majority in interest of the Registrable
Securities shall be borne by the Company.
6. Indemnification and Contribution
(a) The Company shall indemnify and hold harmless each Investor and
each underwriter, if any, which facilitates the disposition of Registrable
Securities, and each of their respective officers and directors and each person
who controls such Investor or underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act (each such person being
sometimes hereinafter referred to as an "Indemnified Person") from and against
any losses, claims, damages or liabilities, joint or several, to which such
Indemnified Person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement
<PAGE>
or an omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, not misleading,
or arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any Prospectus or an omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company hereby agrees to
reimburse such Indemnified Person for all reasonable legal and other expenses
incurred by them in connection with investigating or defending any such action
or claim as and when such expenses are incurred; provided, however, that the
Company shall not be liable to any such Indemnified Person in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon (i) an untrue statement or alleged untrue statement made in, or an
omission or alleged omission from, such Registration Statement or Prospectus in
reliance upon and in conformity with written information furnished to the
Company by such Indemnified Person expressly for use therein or (ii) in the case
of the occurrence of an event of the type specified in Section 3(e), the use by
the Indemnified Person of an outdated or defective Prospectus after the Company
has provided to such Indemnified Person written notice that such Prospectus is
outdated or defective.
(b) Indemnification by the Investors and Underwriters. Each Investor
agrees, as a consequence of the inclusion of any of its Registrable Securities
in a Registration Statement, and each underwriter, if any, which facilitates the
disposition of Registrable Securities shall agree, as a consequence of
facilitating such disposition of Registrable Securities, severally and not
jointly, to (i) indemnify and hold harmless the Company, its directors
(including any person who, with his or her consent, is named in the Registration
Statement as a director nominee of the Company), its officers and each person,
if any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities to which the Company or such other persons may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in such Registration Statement or Prospectus or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein (in
light of the circumstances under which they were made, in the case of the
Prospectus), not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such holder or underwriter expressly for use
therein; provided, however, that no Investor or underwriter shall be liable
under this Section 6(b) for any amount in excess of the net proceeds paid to
such Investor or underwriter in respect of shares sold by it, and (ii) reimburse
the Company for any legal or other expenses incurred by the Company in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(c) Notice of Claims, etc. Promptly after receipt by a party seeking
indemnification pursuant to this Section 6 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to this
Section 6 is being sought (the "Indemnifying Party") of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it
<PAGE>
from any liability that it otherwise may have to the Indemnified Party, except
to the extent that the Indemnifying Party is materially prejudiced and forfeits
substantive rights and defenses by reason of such failure. In connection with
any Claim as to which both the Indemnifying Party and the Indemnified Party are
parties, the Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the Indemnifying
Party, the Indemnified Party shall have the right to employ separate legal
counsel and to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, costs and expenses, (y)
the Indemnified Party and the Indemnifying Party shall reasonably have concluded
that representation of the Indemnified Party by the Indemnifying Party by the
same legal counsel would not be appropriate due to actual or, as reasonably
determined by legal counsel to the Indemnified Party, potentially differing
interests between such parties in the conduct of the defense of such Claim, or
if there may be legal defenses available to the Indemnified Party that are in
addition to or disparate from those available to the Indemnifying Party, or (z)
the Indemnifying Party shall have failed to employ legal counsel reasonably
satisfactory to the Indemnified Party within a reasonable period of time after
notice of the commencement of such Claim. If the Indemnified Party employs
separate legal counsel in circumstances other than as described in clauses (x),
(y) or (z) above, the fees, costs and expenses of such legal counsel shall be
borne exclusively by the Indemnified Party. Except as provided above, the
Indemnifying Party shall not, in connection with any Claim in the same
jurisdiction, be liable for the fees and expenses of more than one firm of
counsel for the Indemnified Party (together with appropriate local counsel). The
Indemnified Party shall not, without the prior written consent of the
Indemnifying Party (which consent shall not unreasonably be withheld), settle or
compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnifying Party from all liabilities
with respect to such Claim or judgment.
(d) Contribution. If the indemnification provided for in this Section
6 is unavailable to or insufficient to hold harmless an Indemnified Person under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
Indemnifying Party shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party and the Indemnified Party in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
such Indemnifying Party or by such Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 6(d) were determined by
pro rata allocation (even if the Investors or any underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in this Section 6(d).
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof)
<PAGE>
referred to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The obligations of the Investors and any
underwriters in this Section 6(d) to contribute shall be several in proportion
to the percentage of Registrable Securities registered or underwritten, as the
case may be, by them and not joint.
(e) Notwithstanding any other provision of this Section 6, in no event
shall any (i) Investor be required to undertake liability to any person under
this Section 6 for any amounts in excess of the dollar amount of the proceeds to
be received by such Investor from the sale of such Investor's Registrable
Securities (after deducting any fees, discounts and commissions applicable
thereto) pursuant to any Registration Statement under which such Registrable
Securities are to be registered under the Securities Act and (ii) underwriter be
required to undertake liability to any Person hereunder for any amounts in
excess of the aggregate discount, commission or other compensation payable to
such underwriter with respect to the Registrable Securities underwritten by it
and distributed pursuant to the Registration Statement.
(f) The obligations of the Company under this Section 6 shall be in
addition to any liability which the Company may otherwise have to any
Indemnified Person and the obligations of any Indemnified Person under this
Section 6 shall be in addition to any liability which such Indemnified Person
may otherwise have to the Company. The remedies provided in this Section 6 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to an indemnified party at law or in equity.
7. Rule 144
With a view to making available to the Investors the benefits of Rule
144 under the Securities Act or any other similar rule or regulation of the
Commission 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
use its best efforts to:
(a) comply with the provisions of paragraph (c) (1) of Rule 144; and
(b) file with the Commission in a timely manner all reports and other
documents required to be filed by the Company pursuant to Section 13 or 15(d)
under the Exchange Act; and, if at any time it is not required to file such
reports but in the past had been required to or did file such reports, it will,
upon the request of any Investor, make available other information as required
by, and so long as necessary to permit sales of, its Registrable Securities
pursuant to Rule 144.
8. Assignment
The rights to have the Company register Registrable Securities
pursuant to this Agreement shall be automatically assigned by the Investors to
any permitted transferee of all or any portion of such Registrable Securities
(or all or any portion of the Preferred Shares or Warrants of the Company which
is convertible into such securities) only if: (a) the Investor
<PAGE>
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, (b) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (i) the name and
address of such transferee or assignee and (ii) the securities with respect to
which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment, the securities so transferred
or assigned to the transferee or assignee constitute Restricted Securities, and
(d) at or before the time the Company received the written notice contemplated
by clause (b) of this sentence the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions contained herein.
9. Amendment and Waiver
Any provision of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who hold a majority-in-interest of the Registrable Securities.
Any amendment or waiver effected in accordance with this Section 9 shall be
binding upon each Investor and the Company.
10. Miscellaneous
(a) A person or entity shall be deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) If, after the date hereof and prior to the Commission declaring
the Registration Statement to be filed pursuant to Section 2(a) effective under
the Securities Act, the Company grants to any Person any registration rights
with respect to any Company securities which are more favorable to such other
Person than those provided in this Agreement, then the Company forthwith shall
grant (by means of an amendment to this Agreement or otherwise) identical
registration rights to all Investors hereunder.
(c) Except as may be otherwise provided herein, any notice or other
communication or delivery required or permitted hereunder shall be in writing
and shall be delivered personally or sent by certified mail, postage prepaid, or
by a nationally recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or, if mailed,
three days after the date of deposit in the United States mails, as follows:
(i) if to the Company, to:
American TeleSource International, Inc.
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
(210) 558-6090
(210) 558-6095 (Fax)
Attention: H. Douglas Saathoff
<PAGE>
with a copy to:
Alice L. King, Esq.
Corporate Counsel
American TeleSource International, Inc.
12500 Network Boulevard, Suite 407
San Antonio, Texas 78249
(210) 558-6090
(210) 558-6095 (Fax)
(ii) if to the Initial Investor, to:
The Shaar Fund Ltd.,
c/o Levinson Capital Management
2 World Trade Center, Suite 1820
New York, NY 10048
Attention: Samuel Levinson
(212) 432-7711
(212) 432-7771 (Fax)
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
(212) 504-5555
(212) 504-5557 (Fax)
(iii) if to any other Investor, at such address as such Investor shall
have provided in writing to the Company.
The Company, the Initial Investor or any Investor may change the foregoing
address by notice given pursuant to this Section 10(c).
(d) 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.
(e) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions.
<PAGE>
(f) The remedies provided in this Agreement are cumulative and not
exclusive of any remedies provided by law. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(g) The Company shall not enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof. The Company is not currently a party to any agreement
granting any registration rights with respect to any of its securities to any
person which conflicts with the Company's obligations hereunder or gives any
other party the right to include any securities in any Registration Statement
filed pursuant hereto, except for such rights and conflicts as have been
irrevocably waived. Without limiting the generality of the foregoing, without
the written consent of the holders of a majority in interest of the Registrable
Securities, the Company shall not grant to any person the right to request it to
register any of its securities under the Securities Act unless the rights so
granted are subject in all respect to the prior rights of the holders of
Registrable Securities set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement. The restrictions on the
Company's rights to grant registration rights under this paragraph shall
terminate on the date the Registration Statement to be filed pursuant to Section
2(a) is declared effective by the Commission.
(h) This Agreement, the Securities Purchase Agreement, the Escrow
Instructions, dated as of a date even herewith (the "Escrow Instructions"),
between the Company, the Initial Investor and Cadwalader, Wickersham & Taft, the
Preferred Shares and the Warrants constitute the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement, the Securities Purchase Agreement, the
Escrow Instructions, the Preferred Shares and the Warrants supersede all prior
agreements and undertakings among the parties hereto with respect to the subject
matter hereof.
(i) Subject to the requirements of Section 8 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(j) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(k) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning thereof.
(1) The Company acknowledges that any failure by the Company to
perform its obligations under Section 3, or any delay in such performance could
result in direct damages
<PAGE>
to the Investors and the Company agrees that, in addition to any other liability
the Company may have by reason of any such failure or delay, the Company shall
be liable for all direct damages caused by such failure or delay.
(m) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. A facsimile transmission of this signed Agreement shall be
legal and binding on all parties hereto.
<PAGE>
In Witness Whereof, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
American TeleSource International, Inc.
By: /s/ H. Douglas Saathoff
-----------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
The Shaar Fund Ltd.
By: /s/ Samuel Levinson
---------------------
Name: Samuel Levinson
Title: Managing Director
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated October 5, 1999
included in American TeleSource International, Inc.'s Form 10-K for the year
ended July 31, 1999 and to all references to our Firm included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
San Antonio, Texas
October 22, 1999
