U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended June 30, 1998
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 333-16451
---------------------------------
SAC TECHNOLOGIES, INC.
(Exact name of small business Issuer as specified in its charter)
MINNESOTA 41-1741861
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4444 West 76th Street, Suite 600, Edina, MN
55435 (Address of principal executive offices)
(612) 835-7080
(Issuer's telephone number)
---------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X_ No ___
Shares of the registrant's Common Stock, par value $.01 per share, outstanding
as of August 12, 1998: 7,510,867.
<PAGE>
SAC TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1 - Financial Statements
Balance sheets as of December 31, 1997 and June 30, 1998 3
Statements of operations for the three and six months ended June 30,
1997 and 1998, and January 7, 1993 (date of inception) through
June 30, 1998 4
Statements of cash flows for the three and six months ended June 30,
1997 and 1998, and January 7, 1993 (date of inception) through
June 30, 1998 5
Notes to interim financial statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1 - Legal proceedings 16
Item 2 - Changes in securities 16
Item 3 - Defaults upon senior securities 17
Item 4 - Submission of matters to a vote of security holders 17
Item 5 - Other events 17
Item 6 - Exhibits and reports on Form 8-K 17
</TABLE>
2
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,351,753 $ 971,025
Restricted cash (note 6) - 2,320,000
Accounts receivable, net 56,770 58,205
Inventories 464,927 710,598
Prepaid expenses 110,760 164,261
----------- -----------
Total current assets 3,984,210 4,224,089
EQUIPMENT AND FURNITURE AND FIXTURES - AT COST, less
accumulated depreciation 163,966 159,619
OTHER ASSETS 17,518 427,518
----------- -----------
$ 4,165,694 $ 4,811,226
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 288,688 $ 397,789
Accrued liabilities 235,323 117,586
----------- -----------
Total current liabilities 524,011 515,375
CONVERTIBLE DEBENTURES (note 6) - 2,030,000
COMMITMENTS (note 9) - -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - authorized, 20,000,000 shares of $.01 par value;
issued and outstanding, 7,461,367 and 7,503,867 shares 74,614 75,039
Additional contributed capital 7,241,690 8,961,831
Deficit accumulated during the development stage (3,583,666) (6,676,960)
Unearned compensation (90,955) (94,059)
----------- -----------
3,641,683 2,265,851
----------- -----------
$ 4,165,694 $ 4,811,226
=========== ===========
</TABLE>
See accompanying notes to interim financial statements.
3
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
January 7,
1993 (date
Three months Six months of inception)
ended June 30, ended June 30, through
-------------------------- ------------------------- June 30,
1997 1998 1997 1998 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Product sales $ 20,595 $ 275,771 $ 44,310 $ 281,592 $ 434,376
Reimbursed research and development 24,000 10,200 36,000 10,200 284,506
Technical support and other services 39,352 7,750 116,790 7,750 429,885
----------- ----------- ----------- ----------- -----------
83,947 293,721 197,100 299,542 1,148,767
Costs and other expenses
Cost of product sales 9,148 529,777 81,153 560,513 792,352
Cost of technical support and other services 16,879 1,846 48,252 1,846 237,078
Selling, general and administrative 539,422 1,337,010 901,908 1,880,706 4,674,341
Research and development 128,136 380,568 224,667 994,619 2,289,842
----------- ----------- ----------- ----------- -----------
693,585 2,249,201 1,255,980 3,437,684 7,993,613
----------- ----------- ----------- ----------- -----------
Operating loss (609,638) (1,955,480) (1,058,880) (3,138,142) (6,844,846)
Other income (expense)
Interest and other income 70,816 13,210 89,008 44,848 245,487
Interest expense - - (3,897) - (39,504)
----------- ----------- ----------- ----------- -----------
70,816 13,210 85,111 44,848 205,983
----------- ----------- ----------- ----------- -----------
NET LOSS $ (538,822) $(1,942,270) $ (973,769) $(3,093,294) $(6,638,863)
=========== =========== =========== =========== ===========
Basic and diluted loss per common share $ (.07) $ (.26) $ (.14) $ (.41) $ (1.27)
=========== =========== =========== =========== ===========
Weighted average number of shares outstanding 7,437,500 7,490,897 6,761,824 7,478,545 5,243,935
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to interim financial statements.
4
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months
ended June 30,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (538,822) $(1,942,270)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 13,418 15,000
Amortization
Warrants - -
Unearned compensation 19,100 27,616
Allowance for uncollectible receivables - -
Write-down of inventory - 200,000
Interest converted to common stock - -
Revenues realized due to offset of billings against a stock repurchase - -
Options issued for license rights - -
Option issued in connection with distribution agreement - 352,650
Acquired research and development - -
Warrants issued for services - -
Warrants issued for underwriter termination of first right of refusal - 304,000
Contribution of services - -
Non-cash exercise of stock options - -
Change in assets and liabilities:
Accounts receivable (34,530) 11,302
Inventories (160,479) (111,299)
Prepaid expenses (70,144) (60,209)
Accounts payable 112,632 116,084
Accrued liabilities (94,950) (131,472)
----------- -----------
(214,953) 723,672
----------- -----------
Net cash used in operating activities (753,775) (1,218,598)
Cash flows from investing activities
Capital expenditures (117,860) (4,191)
Security deposits (1,082) -
Patents and trademarks - -
----------- -----------
Net cash used for investing activities (118,942) (4,191)
Cash flows from financing activities
Restricted cash - (2,320,000)
Net payments under short-term borrowing agreements - -
Issuance of convertible bridge notes - -
Issuance of convertible debentures - 2,030,000
Issuance of warrants - 470,000
Deferred financing costs - (180,000)
Exercise of stock options - 70,031
Sales of common stock - -
Redemption of common stock - -
----------- -----------
Net cash provided by financing activities - 70,031
----------- -----------
Net increase (decrease) in cash and cash equivalents (872,717) (1,152,758)
Cash and cash equivalents, at beginning of period 5,652,288 2,123,783
----------- -----------
Cash and cash equivalents, at end of period $ 4,779,571 $ 971,025
=========== ===========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
January 7,
1993 (date
Six months of inception)
ended June 30, through
---------------------------- June 30,
1997 1998 1998
----------- ----------- ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (973,769) $(3,093,294) $(6,638,863)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 17,618 28,500 73,605
Amortization
Warrants - - 4,167
Unearned compensation 27,500 55,416 130,670
Allowance for uncollectible receivables - - 99,000
Write-down of inventory - 200,000 200,000
Interest converted to common stock - - 1,841
Revenues realized due to offset of billings against a stock repurchase - - (170,174)
Options issued for license rights - 200,000 200,000
Option issued in connection with distribution agreement - 352,650 352,650
Acquired research and development - - 117,000
Warrants issued for services 27,500 - 27,500
Warrants issued for underwriter termination of first right of refusal - 304,000 304,000
Contribution of services - - 11,250
Non-cash exercise of stock options - - 21,593
Change in assets and liabilities:
Accounts receivable (86,940) (1,435) (157,205)
Inventories (187,280) (445,671) (910,598)
Prepaid expenses (84,681) (53,501) (164,261)
Accounts payable (16,947) 109,101 397,789
Accrued liabilities 57,649 (117,737) 128,547
----------- ----------- -----------
(245,581) 631,323 667,374
----------- ----------- -----------
Net cash used in operating activities (1,219,350) (2,461,971) (5,971,489)
Cash flows from investing activities
Capital expenditures (121,303) (24,153) (233,224)
Security deposits (7,301) - (12,984)
Patents and trademarks - - (4,534)
----------- ----------- -----------
Net cash used for investing activities (128,604) (24,153) (250,742)
Cash flows from financing activities
Restricted cash - (2,320,000) (2,320,000)
Net payments under short-term borrowing agreements (330,000) - (117,000)
Issuance of convertible bridge notes - - 175,000
Issuance of convertible debentures - 2,030,000 2,030,000
Issuance of warrants - 470,000 495,000
Deferred financing costs - (180,000) (180,000)
Exercise of stock options - 105,396 154,424
Sales of common stock 6,368,392 - 7,093,832
Redemption of common stock - - (138,000)
----------- ----------- -----------
Net cash provided by financing activities 6,038,392 105,396 7,193,256
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 4,690,438 (2,380,728) 971,025
Cash and cash equivalents, at beginning of period 89,133 3,351,753 -
----------- ----------- -----------
Cash and cash equivalents, at end of period $ 4,779,571 $ 971,025 $ 971,025
=========== =========== ===========
</TABLE>
See accompanying notes to interim financial statements.
5
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1997, and June 30, 1997 and 1998 (unaudited)
1. Unaudited Statements
The accompanying unaudited interim financial statements have been prepared
by SAC Technologies, Inc. (the "Company") in accordance with generally
accepted accounting principles, pursuant to the rules and regulations of
the Securities and Exchange Commission. Pursuant to such rules and
regulations, certain financial information and footnote disclosures
normally included in the financial statements have been condensed or
omitted.
In the opinion of management, the accompanying unaudited interim financial
statements contain all necessary adjustments, consisting only of those of a
recurring nature, and disclosures to present fairly the financial position
and the results of its operations and cash flows for the periods presented.
It is suggested that these interim financial statements be read in
conjunction with the financial statements and the related notes thereto
included in the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997.
2. Liquidity Matters
Broad commercial acceptance of the Company's products by customers and end
users is critical to the Company's success and ability to generate
revenues. The Company has limited sales to date, principally to affiliates
of the Company, and has accumulated losses since inception of $6,638,863,
of which $3,093,294 was incurred during the six months ended June 30, 1998.
The Company believes operating losses will continue for the foreseeable
future.
During June 1998, the Company raised $2,500,000 in a private offering of
convertible debentures. In connection with this transaction, the Company
has the option to sell an additional $1,000,000 of convertible debentures
at terms similar to those of the $2,500,000 transaction if certain targets
are met (see note 6). The Company believes its existing cash will not be
adequate to fund the expansion and distribution of its product offerings
and it anticipates it will need to raise additional funds to support
operations. No assurances can be given that the Company will meet the
targets to be able to exercise the option on the $1,000,000 of additional
convertible debentures discussed above. Also, no assurances can be given
that any other form of additional financing will be available on terms
acceptable to the Company, that adequate financing will be obtained to meet
its needs, or that such financing would not be dilutive to existing
stockholders. If additional financing is not raised, the Company believes
it can make appropriate adjustments to its operating plan to manage its
cash through the third quarter of 1999.
6
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1997, and June 30, 1997 and 1998 (unaudited)
3. Loss Per Common Share
Basic loss per share is calculated by dividing the net loss attributable to
common stockholders by the number of weighted average common shares
outstanding. Diluted earnings per share were calculated by dividing the net
loss attributable to common stockholders by the weighted average common
shares, and when dilutive, options, warrants and convertible securities
outstanding using the treasury stock method. There was no difference
between basic and dilutive loss per share for all periods presented as the
impact would have been antidilutive.
4. Other Assets
December 31, June 30,
1997 1998
----------- --------
Security deposits $ 12,984 $ 12,984
Patents 4,534 4,534
Deferred finance costs (see note 7) - 410,000
-------- --------
$ 17,518 $427,518
======== ========
Of the above deferred finance costs, $230,000 was a non-cash transaction
resulting from granting stock warrants for 50,000 shares of common stock in
connection with a private convertible debenture offering (see note 7).
5. Accrued Liabilities
December 31, June 30,
1997 1998
----------- --------
Compensation $232,105 $115,813
Other 3,218 1,773
-------- --------
$235,323 $117,586
======== ========
Included in accrued compensation as of December 31, 1997 and June 30, 1998
is $218,438 and $100,146, respectively, which is the remaining amount
payable from a severance agreement with the Company's former Chief
Operating Officer.
6. Convertible Debentures
On June 30, 1998, the Company sold to Shaar Fund, Ltd., an international
investment fund, $2,500,000 of 5% convertible debentures due June 30, 2001.
At the Company's option, an additional $1,000,000 of 5% convertible
debentures may be sold to Shaar Fund Ltd. if certain targets are met,
including certain minimum share price and trading volume levels for the
Company's common stock. As of June 30, 1998 the funds from the $2,500,000
sale were held in escrow and were released on July 1, 1998.
7
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1997, and June 30, 1997 and 1998 (Unaudited)
6. Convertible Debentures - Continued
The debentures are convertible into shares of the Company's common stock in
increments beginning 120 days from June 30, 1998 and are fully convertible
after 181 days. The conversion price equals the lesser of (a) 110% of the
closing bid price of the common stock on June 29, 1998, or (b) the average
closing bid price for a five-day period ending the day prior to the notice
of conversion multiplied by a discount factor, which increases over time
from 15% to 22%. The convertible debentures are redeemable at the option of
the Company under certain circumstances. The Company is obligated to file a
registration statement on or before August 14, 1998 covering the resale of
the shares of common stock underlying the debentures and the warrants. The
convertible debentures agreement contains certain dilution and conversion
price adjustment provisions under certain events, as defined. The Company
is also required to meet certain other covenants, including the
maintenance of its listing on the NASDAQ Smallcap Market, or the
convertible debentures could become due in payable in full.
In connection with the convertible debentures, the Company granted a
warrant to purchase 100,000 shares of common stock to the Shaar Fund, Ltd.
The $470,000 estimated fair market value of the warrant has been reflected
as a discount to the 5% convertible debentures issued and will be amortized
as additional interest expense over the term of the debentures. In
connection with this transaction, a warrant to purchase 200,000 shares of
common stock was also issued to Tuschner & Company, Inc. (TCI), underwriter
for the Company's initial public offering, as part of an agreement in which
TCI agreed to waive all future rights of first refusal to sell the
Company's securities; the right to 66,000 of such shares vests immediately
and the right to 134,000 of such shares vests upon the occurrence of
certain events discussed at note 9. The $304,000 estimated fair market
value of the portion of the warrant which vested immediately has been
reflected as a component of selling, general and administrative expenses
for the three and six months ended June 30, 1998. The $617,200 estimated
fair market value of the remaining portion of the warrant which did not
vest immediately may be offset against proceeds from a future public
offering, if one occurs (see notes 7 and 9).
8
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1997, and June 30, 1997 and 1998 (Unaudited)
7. Stockholders' Equity
The following summarizes option activity since December 31, 1997:
<TABLE>
<CAPTION>
Number
Date of -------------------
Grant, Non-plan
Exercise options
or 1996 and Exercise
Expiration Plan warrants Price Vesting Expiration Issued to
---------- --------- -------- -------- -------------------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 - 451,166 297,216 $ - - - -
Option grant 1/1/98 2,500 - 10.75 125 shares per quarter 1/1/05 Employee
Option grant 2/2/98 10,000 - 8.56 500 shares per quarter 2/1/05 Employee
Option grant 2/13/98 - 48,000 6.42 12,000 shares 2/13/08 An entity the
immediately; Company entered
3,000 per quarter into a license
thereafter agreement with
Option grant 3/1/98 40,000 - 8.29 2,000 shares per quarter 3/1/05 Employee
Option grant 4/13/98 - 100,000 8.46 75,000 upon payment for 4/13/05 ATM (see Item 2)
1,000 SACcat units and
25,000 if ATM purchases
and pays for an additional
1,000 units by July 1, 1998*
Option grant 6/20/98 8,000 - 6.563 400 shares per quarter 6/20/05 Employee
Warrant grant 6/30/98 - 100,000 7.29 Immediately 6/30/03 Shaar Fund, Ltd.
Warrant grant 6/30/98 - 50,000 7.29 Immediately 6/30/03 Company
arranging Shaar
financing
Warrant grant 6/30/98 - 200,000 7.50 66,000 immediately; 134,000
at closing of the next
"public offering" 6/30/03 Tuschner & Co.
Options exercised Various (35,000) (7,500) - - - -
Options canceled Various (30,000) - - - - -
--------- ---------
Balance, June 30,
1998 446,666 787,716
========= =========
Exercisable, June 30,
1998 71,397 595,716
========= =========
</TABLE>
* As of July 1, 1998, ATM did not meet its purchase requirements in order
to vest in the remaining 25,000 shares under the option.
The difference between the option exercise price and estimated fair value
of common stock at the date of grant for the option to purchase 40,000
shares of common stock is $58,520 and has been reflected as unearned
compensation in the Company's financial statements to be recognized as
expense over the five-year vesting term of the stock option agreement. The
estimated fair market value of the option to purchase 48,000 shares of
common stock of $200,000 has been reflected as a non-cash component of
research and development costs for the three months ended March 31, 1998
and the six months ended June 30, 1998. The estimated fair market value of
the option to purchase 75,000 shares of common stock of $352,600, has been
reflected as a non-cash component of selling, general and administrative
expenses for the three and six months ended June 30, 1998. See note 6 for
additional information regarding the estimated fair market value of other
warrants granted.
9
<PAGE>
SAC Technologies, Inc.
(a Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
December 31, 1997, and June 30, 1997 and 1998 (Unaudited)
8. Related Party Transactions
Included in accounts receivable as of December 31, 1997 and June 30, 1998
are $156,895 and $129,020, respectively of amounts due from Jasper
Consulting, Inc. During the three and six months ended June 30, 1997 and
1998, $84,557 and $183,476, and $262,929 and $262,929, respectively of
revenues were recognized from transactions with ATM, Inter-Con/PC, Inc. and
Jasper Consulting, Inc. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further information
regarding the Company's relationship with Inter-Con/PC, Inc. and Jasper
Consulting, Inc.
In addition, the Company had transactions with a related party, IR & D (a
major stockholder of the Company is a director of IR & D). Accounts
receivable from IR & D as of June 30, 1998 were $12,157. Accounts payable
as of June 30, 1997 and 1998 were $8,094 and $58,654, respectively.
Purchases during the three months and six months ended June 30, 1997 and
1998 were $19,708 and $20,891, and $140,129 and $193,135, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further information regarding Company's relationship with
IR&D.
9. Commitments
On June 30, 1998, the Company entered into an agreement with TCI whereby it
agreed to waive all future rights of first refusal to sell the Company's
securities. In exchange for this, the Company agreed to pay TCI $100,000,
of which $34,000 was paid after closing on the convertible debentures and
$66,000 will be due if the Company closes on a future public offering.
Payment of the $100,000 would be reduced by any amount TCI might receive as
a non-accountable expense allowance if a future public offering occurs. In
addition, TCI would have the right to participate as a select dealer or
co-selling agent or co-underwriter to the extent of ten percent (10%) of
any future offering of securities, whether public or private, for a period
of one year.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS PURPOSE,
ANY STATEMENTS CONTAINED IN THIS FORM 10-QSB THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD- LOOKING STATEMENTS. WITHOUT
LIMITING THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE,"
ANTICIPATE," OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATION THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS
INCLUDING, WITHOUT LIMITATION, THE RISK FACTORS SET FORTH IN THE "RISK FACTORS"
SECTION OF THE COMPANY'S REGISTRATION STATEMENTS ON FORMS SB-2 and S-3 (FILE NO.
333-16451) AND THE COMPANY'S ANNUAL AND QUARTERLY REPORTS, ALONG WITH OTHER
PERIODIC REPORTING ON FORMS 10-QSB, 10-KSB, AND 8-K, AS FILED FROM TIME TO TIME
WITH THE SEC.
OVERVIEW
The Company was incorporated in 1993. The Company develops and markets biometric
technology products. To date, the Company has focused on developing products for
use by others in specific applications and developing an end user product for
computer security and access control applications. The Company's products are
marketed to distributors, VAR's (Value Added Resellers), OEM's (Original
Equipment Manufacturers) and system integrators in the information management
and access control markets.
The Company has two products currently available and it intends to devote
significant effort in the near term to enhancing the performances and
capabilities of these existing products. In this regard, the Company has
recently begun to license certain other biometric technologies that it intends
to incorporate into its current product offerings. The Company is dependent upon
others to incorporate such technologies with its existing and future products.
No assurance can be given that these technologies will be incorporated in a
manner acceptable to potential customers, that it will be timely implemented, or
that the products' costs will be acceptable to the marketplace.
The Company is considered a development stage enterprise for accounting
purposes. Broad commercial acceptance of the Company's products by customers and
end users is critical to the Company's success and ability to generate revenues.
The Company has limited sales to date, principally to affiliates of the Company,
and has accumulated losses since inception of $6,638,863, of which $3,093,294
was incurred during the six months ended June 30, 1998. The Company believes
operating losses will continue for the foreseeable future.
During June 1998, the Company raised $2,500,000 in a private offering of
convertible debentures to Shaar Fund, Ltd. In connection with this transaction,
the Company has the option to sell an additional $1,000,000 of convertible
debentures to Shaar Fund Ltd. at terms similar to those of the $2,500,000
transaction if certain targets are met (see note 6 to the interim financial
statements and Exhibits 10.16, 10.17, 10.18 and 10.19 for the terms of the
convertible debentures private offering). The Company believes its existing cash
will not be adequate to fund the expansion and distribution of its product
offerings and it anticipates it will need to raise additional funds to support
operations. No assurances can be given (i) that the Company will meet the
targets to be able to exercise the option on the $1,000,000 of additional
convertible debentures discussed above, (ii) that any other form of additional
financing will be available on terms acceptable to the Company, (iii) that
adequate financing will be obtained to meet its needs, or (iv) that such
financing would not be dilutive to existing stockholders. If such financing is
not raised during 1998, the Company believes it can make appropriate adjustments
to its operating plan to manage its cash through the third quarter of 1999. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the early stage of
development.
11
<PAGE>
OVERVIEW (CONTINUED)
During October 1996, the Company completed initial development of a product
which provides for basic personal computer functions and Internet access via a
wireless keyboard and a conventional television set (the "Set Top Box").
However, the Company did not believe that the promotion and marketing of the Set
Top Box was within its focus and, accordingly, conveyed the technology in
exchange for an initial 50% (35.8% as of December 31, 1997) ownership interest
in Inter-Con/PC, Inc. ("Inter-Con"), a development stage Company. The Company
had a technical support agreement with Inter-Con which provided for Inter-Con to
pay technical support fees to the Company of up to $20,000 per month. Effective
December 31, 1997, the technical support and development agreement between the
Company and Inter-Con was terminated.
By current agreement, Jasper (a former stockholder) is obligated to pay a
royalty to the Company for sales of certain products and the Company has the
exclusive right to manufacture products sold by Jasper, subject to a
predetermined pricing structure. However, the Company has been attempting to
redefine the parties obligations and is not relying on these potential sources
of revenue from Jasper or its interest in Inter-Con to significantly impact its
results of operation.
In April 1998 the Company received certification in the first round of biometric
testing from the International Computer Security Association, a leading
independent certification organization. Of the six participating vendors, SAC
was the only vendor who participated and received certification in the
identification ("one to many") category.
During the quarter ended June 30, 1998, the Company signed a distribution
agreement with Aultimate Technology Marketing, Inc. (ATM) (see below for
additional information regarding transactions with ATM). Also, during the
quarter ended June 30, 1998, the Company signed integration, OEM and
distribution agreements with certain other companies. However, no significant
revenues have been derived from such agreements and no assurances may be given
that any significant revenues will develop.
In June 1998, the Company integrated Pinnacle Technology's "Trusted Desktop
Commander(TM)" security software with its SACCat biometric "identification"
technology which includes workstation log-on and screen saver lockout to provide
for convenient point and click configuration access and control of Windows 95
and 98, tied to a user's actual identity. The product is currently available for
installation by MIS and System Administrators. The Company is currently working
on the development of a simplified end user point and click product. No
assurances can be given that this will be developed timely or in a cost
effective manner, or that it will be accepted in the marketplace.
The Company has integrated Key-Ware Technologies "voice verification technology"
with its SACMan Developer Toolkit. This product offers a fingerprint
identification and voice verification solution to security needs. This product
is not yet available in the Company's SACCat product line. No assurances may be
given that the Company will be able to successfully introduce the Key Ware
Technology into its SACCat product or that significant revenues will ever
develop from products into which the Company incorporates the Key Ware
Technology.
12
<PAGE>
OVERVIEW (CONTINUED)
In June 1998, the Company completed its evaluation of Imedge Technology's
holographic fingerprint imaging technology and currently intends to exercise an
option to acquire the exclusive use of Imedge's holographic fingerprint
technology, subject to negotiation of terms and the signing of a definitive
agreement. The Company believes the benefits to be derived from this technology
include a potential cost reduction from its current optics componentry and a
significant reduction in the size of certain of its optics components. No
assurances can be given that an agreement will be entered into on acceptable
terms to the Company, or that such an agreement would not result in any
significant dilution to stockholders or that the technology will achieve the
Company's intended objectives.
The Company does not anticipate adding any additional employees during 1998. The
Company anticipates ongoing research and development expenses during 1998 at a
level greater than that experienced for the year ended December 31, 1997. The
Company anticipates accounts receivable and inventory levels, and selling,
general and administrative expenses will increase significantly in connection
with its continuing transition to marketing and selling its products.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO JUNE 30, 1998:
Revenues
Total revenues increased $209,774 during the three months ended June 30, 1998 to
$293,721 as compared to $83,947 for the same period in 1997. Total revenue
increased $102,442 during the six months ended June 30, 1998 to $299,542 as
compared to $197,100 for the same period in 1997.
Revenues from product sales increased $255,176 during the three months ended
June 30, 1998 to $275,771 as compared to $20,595 for the same period in 1997.
Revenue from product sales increased $237,282 during the six months ended June
30, 1998 to $281,592 as compared to $44,310 for the same period in 1997. These
revenues were primarily from sales to ATM, a related party and a distributor of
the Company (see below), and, to a lesser extent, include sales of SACMan
Developer Tool Kit System to entities developing or investigating the
development of applications which may utilize the Company products.
Revenues from reimbursed research and development decreased $13,800 to $10,200
during the three months ended June 30, 1998 and decreased $25,800 to $10,200 for
the six months ended June 30, 1998. These revenues related to collection of
previously unrecognized research and development billings to Jasper, which were
recognized on the cash basis of accounting. No assurances can be given that any
additional amounts will be collected in the future.
Revenues from technical support and other services, which were primarily from
Jasper and Inter-Con, decreased $31,602 to $7,750 during the three months ended
June 30, 1998 and decreased $109,040 to $7,750 for the six months ended June 30,
1998. As previously discussed, the technical support agreement with Inter-Con
was mutually terminated effective December 31, 1997. No assurance can be given
that any additional technical support or other revenues will be realized from
Jasper in the future, nor is this a primary focus of the Company.
13
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
Effective April 13, 1998, the Company signed a Distribution Agreement with ATM.
The terms of the agreement provide for the following: ATM is to purchase 1,000
SACcat units or SACman Developer Tool Kits or a mixture thereof, of which 760
units have been purchased and paid for as of June 30, 1998; ATM is to receive
preferential pricing on additional product purchases; ATM became a distributor
of the Company; ATM issued the Company an option to acquire up to 400,000 shares
of the common stock of ATM at $.25 per share, exercisable for seven years, and
the Company granted ATM an option to purchase 100,000 shares of its common stock
(see note 7 to the interim financial statements). Due to the interrelationships
of the parties involved, revenues from this transaction will only be recognized
by the Company when ATM resells or otherwise uses the product and can recognize
the revenue and related costs pursuant to generally accepted accounting
principles. As of June 30, 1998 all of the revenue from the sales to ATM was
recognized by the Company.
Costs and Other Expenses
Cost of product sales exceeded revenues from product sales by $254,006 during
the three months ended June 30, 1998, and $278,921 for the six month period
ended June 30, 1998 as compared to $36,843 for six-month period ended June 30,
1997. This principally was due to a $200,000 write down of inventory to its net
realizable value during the three months ended June 30, 1998. The remaining
variances where primarily from salaries associated with the production of a
limited amount of units.
The principal supplier of the Company's optical components to date has been
Industrial Research Development, Inc. ("IR&D"), a company formerly owned by Rick
Fiskum, an officer and director of the Company. Mr. Fiskum retained a
directorship with IR&D through August 12, 1998 at which time he resigned. Mr.
Fiskum retains a consulting relationship with IR&D and as a result of this and
the previous buyout of his ownership, interest in IR&D will continue to receive
ongoing payments from IR&D. See note 8 to the Financial Statements -- Related
Party Transactions, for additional information regarding the Company's
relationship with IR&D.
As discussed above, in an effort to reduce its product costs, the Company
intends to exercise an option to purchase certain imaging technology to replace
some of its current optics componentry. Additionally, the Company intends to
explore offshore manufacturing opportunities and a redefinition of its
obligations to Jasper. No assurances may be given that the above objectives will
be achieved or that it would result in a reduction of product costs to a level
that is acceptable to customers and is profitable to the Company.
Selling, general and administrative expenses increased $797,588 to $1,337,010
during the three months ended June 30, 1998 and increased $978,798 to $1,880,706
for the six month period ended June 30, 1998, as compared to the three and six
months ended June 30, 1997. Of the increase for the three months and the six
months ended June 30, 1998, $0 and $117,891 was related to additional salaries
and wages for sales and administrative personnel, $49,954 and $21,958 was
related to professional fees, and $656,650 and $690,650 was principally due to
non-cash charges related to the fair market value of a warrant granted to ATM as
part of a sales distribution arrangement (see above) and a warrant granted to
TCI in order to terminate their right of first refusal on future public
offerings (see note 6 to the interim financial statements) and $12,875 and
$36,592 was due to completion of the installation of the Company's internal
computer network.
Research and development expenses increased $252,432 to $380,568 during the
three months ended June 30, 1998 and increased $769,952 to $994,619 for the six
months ended June 30, 1998 as compared to the three and six months ended June
30, 1997. Of the increase for the three and six months ended June 30, 1998,
$173,250 and $360,750 was related to licensing and integration costs associated
with technologies the Company plans to incorporate into its SACCat product, and
$0 and $200,000 was related to a non-cash charge for the estimated fair market
value of an option granted to an entity the Company entered into a license
agreement with. The above costs were expensed because the incorporation of the
related technologies had not reached the stage of "technological feasibility,"
as defined. The remaining increase is attributable to increased development
activity for the Company to commercialize and evolve certain of its products.
The Company expects interest expense will increase in the future in connection
with its recently completed convertible debentures financing.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since January 7, 1993 (date of inception), the Company's capital needs have been
principally met as follows: (i) by a February 1997 initial public offering of
2,420,000 shares of common stock at $3.00 per share which resulted in net
proceeds of $6,220,331, after deduction of offering expenses; (ii) a July 1996
$700,000 private placement of common stock; (iii) a May 1996 sale of $200,000 of
convertible bridge notes (connected to common stock in 1996) and warrants to
purchase 50,000 shares of common stock; and (iv) a $2,500,000 1998 private
offering of convertible debentures (see note 6 to the interim financial
statements for the terms of the debentures).
Net cash used in operating activities during the six months ended June 30, 1998
was $2,461,971 and was principally due to operating losses. Net cash used for
investing activities during the same period was $24,153. Net cash provided by
financing activities during the same period was $105,396 and was principally
from cash received from the exercise of stock options.
See "Overview" above regarding a discussion of the Company's capital needs.
Working capital increased $248,515 during the six months ended June 30, 1998 to
$3,708,714 as compared to $3,460,199 as of December 31, 1997. This increase is
principally due to proceeds from the 1998 private offering of convertible
debentures and cash received from the exercise of stock options, offset by cash
used in operating activities. Additionally, during the six months ended June 30,
1998, there was a $445,671 increase in inventories which was attributable to
purchasing component parts for its products for future production.
See notes 6 and 7 to the interim financial statements for information regarding
stock option and warrant transactions.
The Company intends to file a Form S-3 registration statement concurrent with
the filing of this report on Form 10-QSB to cover the registration of 1,455,170
shares of common stock in connection with certain outstanding convertible
debentures, options and warrants.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
applicable to entities with other comprehensive income. This pronouncement is
effective for the year beginning January 1, 1998. The Company had no items of
other comprehensive income, as defined, for the three and six-month periods
ended June 30, 1998 or 1997.
In June 1997, the financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires that the Company report certain information about operating segments.
This pronouncement is effective for the year beginning January 1, 1998. The
Company currently operates in one reportable segment.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds from Registered Securities
1. The effective date of the registration statement for which
this information is reported was February 14, 1997.
2. The following is a reasonable estimate of, the amount of net
offering proceeds to the issuer used for each of the purpose
listed below. An "X" has been placed in the box to the left of
any amount that is an estimate.
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENT OF DIRECTORS,
OFFICERS GENERAL PARTNERS OF THE ISSUER OR DIRECT OR
THEIR ASSOCIATES; TO PERSONS OWNING TEN PERCENT INDIRECT
OR MORE OF ANY CLASS OF EQUITY SECURITIES OF THE PAYMENTS
ISSUER, AND TO AFFILIATES OF THE ISSUER TO OTHERS
----------------------------------------------------------------------- ---------
(A) (B)
--- ---
<S> <C> <C>
(01) Construction of Plant, Building and Facilities $ - $ -
(02) Purchase and Installation of Machinery and Equipment - 187,553
(03) Purchase of Real Estate - -
(04) Acquisition of Other Business(s) - -
(05) Repayment of Indebtedness 117,000 325,000
(06) Working Capital - -
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
(A) (B)
--- ---
<S> <C> <C>
Other purposes (specify)
Officer
Salaries
(7) X Professional Fees -- 318,422
(8) X Administrative Salaries and Expenses 369,000 1,575,610
(9) X Inventory and Components 113,502 1,000,219
(10) X Research and Development 402,081 393,619
(11) X Product Marketing - 632,152
(12) X Sales Promotion - 260,519
(13) X Acquired Technology - 388,517
(14) X Feasibility Test - 154,750
(15) X Contract Assembly - 97,997
</TABLE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 19, 1998
Proxies for such meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act f 1934 as amended. At the meeting,
sufficient favorable votes were cast to approve each of the following
management proposals:
* Ratified Divine, Scherzer & Brody, Ltd., independent certified
public accountants, as auditors of the Company for its
calender year ending December 31, 1998 (7,035,598 shares
voted for approval; 14,400 shares voted against approval;
20,870 shares abstained).
* Ratified the election of Barry M. Wendt to the Company's Board
of Directors for a term expiring in 1999 (7,016,638 shares
voted for approval and 54,230 shares abstained).
* Ratified the election of Richard T. Fiskum to the Company's
Board of Directors for a term expiring in 1999 (7,025,658
shares voted for approval and 45,210 shares abstained).
* Ratified the election of Gary E. Wendt to the Company's Board
of Directors for a term expiring in 1999 (7,024,708 shares
voted for approval and 46,160 shares abstained).
* Ratified the election of Benedict A. Wittig to the Company's
Board of Directors for a term expiring in 1999 (7,025,308
shares voted for approval and 45,560 shares abstained).
* Ratified the election of Lars T. Carlson to the Company's
Board of Directors for a term expiring in 1999 (7,025,658
shares voted for approval and 45,210 shares abstained).
* Ratified the election of Thomas J. Schrade to the Company's
Board of Directors for a term expiring in 1999 (7,025,658
shares voted for approval and 45,210 shares abstained).
The deadline date for giving notice to the Company of any intention
to present a non-Rule 14a-8 shareholder proposal at the 1999 annual
meeting is April 1, 1999.
Item 5. Other Events
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Those exhibits required to be furnished in response to
this item, other than parts of Exhibit 10 and all of
Exhibit 27, were furnished in connection with the
Company's:
(A) Registration Statement on Form SB-2, File No.
33-16451 as filed with the Securities
17
<PAGE>
Exchange Commission on November 20, 1996, and as
amended by Amendment No. 1 thereto filed on
January 10, 1997, Amendment No. 2 thereto filed
February 7, 1997 and Amendment No. 3 thereto filed
February 14, 1997 and as supplemented by
supplement dated April 9, 1997, all of which are
incorporated herein by reference.
(B) The Company's annual report on Form 10-KSB for the
years ended December 31, 1996 and 1997 as filed on
March 31, 1997 and 1998, and
(C) The Company's quarterly report on Form 10-QSB for
the quarters ended June 30, 1997 through March 31,
1998.
(ii) Exhibit 10 - Material Contracts
(iv) Exhibit 27 - Financial Data Schedule.
10.16 # Warrant Agreement - Shaar Fund, Ltd.
10.17 # Securities Purchase Agreement - Shaar Fund, Ltd.
10.18 # 5% Convertible Debenture - Shaar Fund, Ltd.
10.19 # Registration Right Agreement - Shaar Fund, Ltd.
(b) Reports on Form 8-K
The Company's current report on Form 8-K filed on July 7,
1998.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SAC Technologies, Inc.
(the "Registrant")
Date: August 14, 1998 /s/ Barry Wendt
----------------------------------------
Barry Wendt, Chief Executive Officer
/s/ Gary Wendt
----------------------------------------
Gary Wendt, Chief Financial Officer
19
EXHIBIT 10.16
EXECUTION COPY
THIS WARRANT AND THE SECURITIES
REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAW
OF ANY STATE, AND MAY NOT BE TRANSFERRED
IN VIOLATION OF SUCH ACT, THE RULES AND
REGULATIONS THEREUNDER OR ANY STATE
SECURITIES LAWS OR THE PROVISIONS
OF THIS WARRANT.
No. of Shares of Common Stock: 100,000
WARRANT
To Purchase Common Stock of
SAC Technologies, 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 SAC Technologies,
Inc., a Minnesota corporation (the "Company"), 100,000 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 per share equal to
110% per share of the average of the closing bid prices of the Common Stock as
quoted by NASDAQ for the five day trading period immediately preceding Closing
Date, all on the terms and conditions and pursuant to the provisions hereinafter
set forth.
1. DEFINITIONS
As used in 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 consoli-
<PAGE>
dated 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 Divine, Scherzer & Brody, Ltd. 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.
"Common Stock" shall mean (except where the context otherwise
indicates) the Common Stock, $.01 par value, 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 Warrant Price" shall mean, in respect of a share of Common
Stock at any date herein specified, the price at which a share of Common Stock
may be purchased pursuant to this Warrant on such date.
<PAGE>
"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 June 30, 2003.
"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
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
prices of the Common Shares as reported on the National Association of
Securities Dealers Automated Quotation System for the Smallcap Market,
("NASDAQ") or, if such security is not listed or admitted to trading on the
NASDAQ, 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 the National Association of Security Dealers,
Inc., or a similar generally accepted reporting service, or a price determined
in good faith by the Board of Directors of the Company as being equal to the
fair market value thereof, as the case may be, for the five (5) Trading Days
immediately preceding the Closing Date.
<PAGE>
"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 by and 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 the 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 by and 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.
"Transfer Notice" shall have the meaning set forth in Section 9.2.
<PAGE>
"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.
"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.
2. EXERCISE OF WARRANT
2.1. Manner of Exercise. From and after the Closing Date and until
5:00 P.M., Minnesota 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 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, at least twenty (20) days prior to the intended date of exercise
(ii) payment by cash, check or bank draft payable to the Company of the Warrant
Price in cash or by 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 fifteen (15) 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
<PAGE>
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 Warrant has been exercised by payment to the Company of the Warrant purchase
price 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. 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.
2.2. 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, and 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.
2.3. 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
<PAGE>
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.
2.4. 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.
3. TRANSFER, DIVISION AND COMBINATION
3.1. Transfer. Subject to compliance with Sections 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 cancelled. 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.
3.2. Division and Combination. Subject to Section 9, this Warrant
may be divided or combined with other Warrants upon presentation hereof at the
aforesaid
<PAGE>
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.
3.3. Expenses. The Company shall prepare, issue and deliver at its
own expense (other than transfer taxes) the new Warrant or Warrants under this
Section 3.
3.4. 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.
4. 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.
4.1. Stock Dividends, Subdivisions and Combinations. If at any time
the Company shall:
(a) 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,
(b) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
(c) 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
<PAGE>
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.
4.2. [Reserved]
4.3. 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:
(a) 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.
(b) 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.
(c) 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.
(d) 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
<PAGE>
Holder, and any dispute shall be resolved by an investment banking firm of
recognized national standing selected by the Company and acceptable to the
Holder.
4.4. 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 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, merger, 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
<PAGE>
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 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
4.5. 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 the 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.
4.6. 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.
4.7. No Voting Rights. This Warrant shall not entitle its Holder to
any voting rights or other rights as a shareholder of the Company.
5. NOTICES TO HOLDER
5.1. 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 an executive officer of the Company setting forth,
in reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated, 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
<PAGE>
a signed copy of such certificate to be delivered to the Holder in accordance
with Section 15.2. 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 the Holder.
5.2. Notice of Corporate Action. If at any time
(a) 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
(b) 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
(c) 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
<PAGE>
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
15.2.
6. 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 any 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 reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
<PAGE>
7. 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.
8. 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 a record of such holders, the Company will in
each such 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 or any event that results
in material suspension or limitation of trading of the Company's Common Stock on
a trading market or exchange upon which the Company's Common Stock actively
trades, close its stock transfer books or Warrant transfer books so as to result
in preventing or delaying the exercise or transfer of any Warrant.
<PAGE>
9. 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.
9.1. Restrictive Legend. The 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 the Holder that such
securities may be sold pursuant to an exemption from registration under the
Securities Act of 1933, as amended (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 substantially worded as follows unless such securities have been sold
pursuant to an effective registration statement under the Securities Act:
"The securities represented by this certificate have not
been registered under the Securities Act of 1933, as amended
(the "Act") or any state securities laws. The securities may not
be offered for sale, sold, assigned, offered, transferred or
otherwise distributed for value except (i) pursuant to an
effective registration statement under the Act or any state
securities laws or (ii) pursuant to an exemption from
registration or prospectus delivery requirements under the Act
or any state securities laws in respect of which the Company has
received an opinion of counsel satisfactory to the Company to
such effect. Copies of the agreement covering both the purchase
of the securities and restricting their transfer may be obtained
at no cost by written request made by the holder of record of
this certificate to the Secretary of the Company at the
principal executive offices of the Company."
<PAGE>
(a) 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, or any state securities laws and may not be transferred
in violation of such Act, the rules and regulations thereunder
or any state securities laws or the provisions of this Warrant."
9.2. 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 twenty 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 or state securities laws. After
receipt of the Transfer Notice and opinion, the Company shall, as promptly as
practicable, 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 and the Warrant issued upon
such Transfer shall bear the restrictive legends set forth in Section 9.1,
unless in the opinion of such counsel such legend is not required in order to
ensure compliance with the Securities Act. The 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.
9.3. Required Registration. Pursuant to the terms and conditions set
forth in the 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
<PAGE>
under the Securities Act as promptly as practicable but no later than 90 days
after the Closing Date.
9.4. 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 applicable state
securities laws 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
and applicable state securities laws. 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
________, 19__, AND ARE OF NO FURTHER FORCE AND EFFECT."
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 legends set forth in Section 9.1.
9.5. Listing on Securities Exchange. If the Company shall list any
shares of Common Stock on any securities exchange, 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
<PAGE>
upon the exercise of this Warrant so long as any shares of Common Stock shall be
so listed during any such Exercise Period.
10. 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.
11. 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.
12. 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, such office to be
initially located at 4620 South Valley View Boulevard, Suite A1, Las Vegas,
Nevada 89103, fax: (702) 798-5177, provided, however, that the Company shall
provide prior written notice to Holder of a change in address no less than 30
days prior to such change.
13. 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
<PAGE>
the Company, whether such liability is asserted by the Company or by creditors
of the Company.
14. MISCELLANEOUS
14.1. 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, powers or remedies,
notwithstanding all rights hereunder terminate on the Expiration Date. 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, but not limited to, 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.
14.2. 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 (3) days after the date of deposit in the United
States mails, as follows:
(1) if to the Company, to:
SAC Technologies, Inc.
4620 South Valley View Boulevard
Suite A1
Las Vegas, Nevada 89103
Fax: (702) 798-5177
Attention: Ronald A. Burgmeier
With a copy to:
Doherty, Rumble & Butler,
Professional Association
3500 Fifth Street Towers
150 South Fifth Street
Minneapolis, MN 55402
Attention: Daniel Tanenbaum
<PAGE>
(2) if to the Holder, to:
THE SHAAR FUND LTD.,
c/o SHAAR ADVISORY SERVICES LTD.
62 King George Street, Apartment 4F
Jerusalem, Israel
Attention: Samuel Levinson
The Company or the Holder may change the foregoing address by notice given
pursuant to this Section 14.2.
14.3. 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 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 will not be liable hereunder 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
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
14.4. 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.
14.5. 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.
<PAGE>
14.6. 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 the Holder.
14.7. 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 be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant.
14.8. 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.
14.9. Governing Law. This Warrant shall be governed by the laws of
the State of New York, without regard to the provisions thereof relating to
conflict of laws.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<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: June 30, 1998
SAC TECHNOLOGIES, INC.
By:
-----------------------------------
Name:
Title:
Attest:
By:
----------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of ______ Shares of Common Stock of SAC
Technologies, Inc. and herewith makes payment therefor in cash or by check or
bank draft made payable to the Company, all at the price and on the terms and
conditions specified in this Warrant and requests that certificates for the
shares of Common Stock hereby purchased (and any securities or other property
issuable upon such exercise) be issued in the name of and delivered to
_____________ whose address is _________________ and, if such shares of Common
Stock shall not include all of the shares of Common Stock issuable as provided
in this Warrant, that a new Warrant of like tenor and date for the balance of
the shares of Common Stock issuable hereunder be delivered to the undersigned.
-------------------------------------
(Name of Registered Owner)
-------------------------------------
(Signature of Registered Owner)
-------------------------------------
(Street Address)
-------------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the name as
written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
Name and Address of Assignee No. of Shares of
Common Stock
and does hereby irrevocably constitute and appoint __________________________
attorney-in-fact to register such transfer on the books of SAC Technologies,
Inc. maintained for the purpose, with full power of substitution in the
premises.
Dated: Print Name:
------------------- ----------------------------
Signature:
-----------------------------
Witness:
-------------------------------
NOTICE: The signature on this assignment must correspond with the name as
written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
EXHIBIT 10.17
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT dated as of June 30, 1998, between SAC
TECHNOLOGIES, INC., a Minnesota corporation with principal executive offices
located at 4444 West 76th Street Suite 600, Edina Minnesota 55435 (the
"Company"), and the undersigned, domiciled in the British Virgin Islands
("Buyer").
W I T N E S S E T H:
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, the Company's 5% Convertible Debentures due June
30, 2001 (the "Debentures") which, upon the terms and subject to the conditions
of the Debentures, will be convertible into shares of the Company's common
stock, $.01 par value (the "Common Stock") and warrants to purchase 100,000
shares of Common Stock (the "Warrants") the Warrants and the Debentures are
collectively referred to herein as the "Securities");
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 DEBENTURES
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"), i) $2,500,000
aggregate principal amount of the Debentures having the terms and conditions and
being in the form attached hereto as ANNEX I and ii) the Warrants.
B. PURCHASE PRICE; FORM OF PAYMENT. The purchase price for the
Debentures and the Warrants to be purchased by Buyer hereunder shall be U.S.
$2,500,000 (the "Purchase Price"). Buyer shall pay the Purchase Price on the
date hereof 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 ANNEX II (the "Escrow
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Instructions"). If during the thirty (30) calendar day period from the date upon
which the registration statement required to be filed pursuant to Section 2 of
the Registration Rights Agreement (as defined herein) is declared effective by
the Commission (the "Registration Statement Effective Date")(the "30 Day
Period"), (i) the closing bid price for the Common Stock as reported on NASDAQ
on the 30th day of the 30 Day Period, is at least $5.00 per share (provided,
that the average closing bid price for the Common Stock for the previous 30 Day
Period is at least $5.00) and (ii) the Common Stock has had an average trading
volume, as reported on NASDAQ for such 30 Day Period of at least 40,000 shares
per day, then on such 30th day or the next business day following such 30 Day
Period (the "Second Funding Date"), the Company shall have the option,
exercisable in its sole discretion, to sell to Buyer and the Buyer shall then
have the obligation to buy from the Company on the same terms and pursuant to
the same conditions contained herein and in the Debentures, an additional one
million dollars ($1,000,000) aggregate principal amount of Debentures (the
"Additional Debentures") (the "Sale Option"). The closing of the purchase and
sale and issuance of the Additional Debentures shall occur within 7 days of the
Second Funding Date.
If the conversion of the Debenture is automatically postponed for a
period of 45 days as set forth in Section 3.1 of the Debenture, the 30 day
period used to determine the Second Funding Date shall run from the date upon
which the automatic conversion postponement lapses and not from the Registration
Statement Effective Date. If (a) the conditions set forth in clauses IB(i) and
IB(ii) above are not satisfied or waived by the Buyer and the Company in writing
on the Second Funding Date, or (b) the Company has not exercised its Sale
Option, then the Buyer shall have no further obligation and the Company shall
have no right to require Buyer to purchase any additional Debentures at any
time.
Simultaneously 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 otherwise has been
notified, I/N/O Buyer's nominee) evidencing the Debentures, to the Escrow Agent
or its designated depository. By executing and delivering this Agreement, Buyer
and the Company each hereby agrees to observe the terms and conditions of the
Escrow
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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:
J.P. Morgan Services, Inc.
500 Stanton Christiana
Newark, Delaware 19713-2107
ABA# 021000238
SWIFT# MGTCUS33
For the Account of: Weil, Gotshal & Manges LLP
Special Account
Account# 158-37-474
Reference# 73601.0012
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 Debentures.
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 Debentures and the Warrants 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.
C. Buyer understands that the Securities (and the Common Stock
issuable upon conversion thereof) 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
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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 has been furnished with or provided access to all materials
relating to the business, financial position and results of operations of the
Company, and all other materials requested by Buyer to enable it to make an
informed investment decision with respect to the Securities.
E. Buyer acknowledges that it has been furnished with copies of (i)
the Company's Annual Reports on Form 10- KSB for the fiscal years ended December
31, 1997 and December 31, 1996, (ii) the Company's quarterly reports on Form
10-KSB, and (iii) and all other reports and documents heretofore filed by the
Company with the Securities and Exchange Commission (the "Commission") pursuant
to the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") since November 1, 1996 (collectively the "Commission Filings").
F. Buyer acknowledges that in making its decision to purchase the
Securities it has (i) relied upon independent investigations made by it and its
professional advisors, (ii) visited the Company's principal executive offices
and been given access and the opportunity to examine all material agreements,
books and records of the Company and all documents relating to the Company's
private placement of the Securities, and (iii) 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.
G. Buyer understands that the Securities have not been approved or
disapproved by 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 it of the Securities and have not
confirmed or determined the adequacy or accuracy of any such documents or
instruments.
H. This Agreement has been duly and validly authorized, executed and
delivered by Buyer and is a valid and binding agreement of Buyer enforceable
against it in accordance with its terms, subject to applicable bankruptcy,
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insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally.
I. 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 use at any time shares of Common
Stock acquired pursuant to this Agreement or the Securities 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.
III. COMPANY'S REPRESENTATIONS
Except as otherwise disclosed in the Company's Form SB-2 (file no.
333-16451) effective February 14, 1997, the Companys' Form 10-KSB for the fiscal
year ended December 31, 1997 and the Company's Form 10-QSB for the fiscal year
ended March 31, 1998, the Company represents and warrants to Buyer that:
A. CAPITALIZATION. 1. The authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, of which 7,503,867 shares are
outstanding on the date hereof; all of the issued and outstanding shares of
Common Stock have been duly authorized and validly issued and are fully paid and
non-assessable. The Common Stock issuable upon conversion of the Securities has
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 interest
on, the Debentures, will be duly and validly issued, fully paid and
non-assessable and will not subject the holder thereof to personal liability by
reason of being such holder. There are no outstanding preemptive, subscription,
"call" or other similar rights to acquire the Common Stock (including Common
Stock issuable upon conversion of the Securities) that have been issued or
granted to any person, except as disclosed on Schedule A hereto or otherwise
previously disclosed in writing to Buyer.
2. The Company does not own or control, directly or indirectly, any
interest in any other corporation, partnership, limited liability company,
unincorporated
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business organization, association, trust or other business entity. The Company
has no subsidiaries.
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 Minnesota 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 certain shares of its Common Stock
pursuant to Section 12 of 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 9-month period immediately preceding the date hereof. The
Common Stock is listed and traded on the National Association of Securities
Dealers, Inc. Automated Quotation System - SmallCap Market ("NASDAQ") 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 listing.
C. AUTHORIZED SHARES. The Company has duly and validly authorized
and reserved for issuance shares of Common Stock sufficient in number for the
conversion, in full, of the Debentures (assuming for purposes of this Section
3.c. a Conversion Price of $3.00) and the full exercise of 100,000 Warrants. The
Company understands and acknowledges the potentially dilutive effect to the
Common Stock of the issuance of the Conversion Shares and Warrant Shares upon
conversion of the Debentures and exercise of the Warrants. The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Debentures in accordance with this Agreement, and upon exercise of the
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.
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D. TERMS OF DEBENTURES. The Debentures when issued to Buyer pursuant
to this Agreement shall be in the form of ANNEX I attached hereto.
E. TERMS OF WARRANTS. The Warrants when issued to Buyer pursuant to
this Agreement shall be in the form of ANNEX II attached hereto.
F. AUTHORITY; VALIDITY AND ENFORCEABILITY. The Company has the
requisite corporate power and authority to enter into this Agreement, the
Registration Rights Agreement of even date herewith between the Company and
Buyer, a copy of which is annexed hereto as ANNEX III (the "Registration Rights
Agreement") and the Escrow Instructions and to perform all of its obligations
hereunder and thereunder (including the issuance, sale and delivery to Buyer of
the Debentures and the Common Stock issuable upon conversion thereof). The
execution, delivery and performance by the Company of this Agreement and the
Registration Rights Agreement, and the consummation by the Company of the
transactions contemplated hereby and thereby, has been duly authorized by all
necessary corporate action on the part of the Company. Each of this Agreement
and the Registration Rights Agreement has been duly and validly executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally.
The Debentures and the Warrants 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 it in
accordance with their terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally.
G. NON-CONTRAVENTION. The execution and delivery by the Company of
this Agreement and the Registration Rights Agreement, the issuance of the
Debentures and the exercise of the Warrants (and the Common Stock issuable upon
conversion thereof), and the consummation by the Company of the other
transactions contemplated hereby and thereby, 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
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constitute a default) under, the articles of incorporation or by-laws of the
Company, or 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 its properties or assets, except such conflict, breach or default
which would not have a Material Adverse Effect.
H. 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 Debentures (and the Common Stock issuable upon
conversion thereof) to Buyer as contemplated by this Agreement, except such
authorizations, approvals and consents that have been obtained by the Company
prior to the date hereof.
I. COMMISSION FILINGS. None of the Commission Filings 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.
J. ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date (as
defined in Section 3.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.
K. 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 this Agreement or the Registration Rights
Agreement.
L. 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
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determined adversely to the Company or any of its subsidiaries, would have a
Material Adverse Effect.
M. ABSENCE OF EVENTS OF DEFAULT. No "Event of Default" (as defined
in any agreement or instrument to which the Company or any of its subsidiaries
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.
N. FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. Seller has
delivered to Buyer true and complete copies of its audited balance sheet as at
December 31, 1997 and the related audited statements of operations and cash
flows for the fiscal years ended December 31, 1997 and December 31, 1996
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.
To the best of the Company's knowledge, 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
December 31, 1996 is hereinafter referred to as the "Balance Sheet" and December
31, 1996 is hereinafter referred to as the "Balance Sheet Date". The Company
does not have any 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 in the ordinary course of
business consistent with the Company's past practices since the Balance Sheet
Date.
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O. 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
non-compliance which 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.
P. RELATED PARTY TRANSACTIONS. 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. Neither the Company
nor any of its officers, directors or Affiliates (i) owns any direct or indirect
interest constituting more than a one percent 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 or any of its subsidiaries, (y) engaged in a business related to the
business of the Company or any of its subsidiaries, or (z) a participant in any
transaction to which the Company is a party or (ii) is a party to any contract,
agreement, commitment or other arrangement with the Company.
Q. 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, 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 insurance policy presently in force.
R. SECURITIES LAW MATTERS. Based, in part, upon the representations
and warranties of Buyer set forth in Section 2 hereof, the offer and sale by the
Company of the Securities (and the Common Stock issuable upon conversion
thereof) is exempt from (i) the registration and prospectus
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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 or exemption
therefrom, the Company has not issued, offered or sold the Debentures, Warrants
or any shares of Common Stock (including for this purpose any securities of the
same or a similar class as the Debentures, Warrants or Common Stock, or any
securities convertible into or exchangeable or exercisable for the Debentures or
Common Stock or any such other securities) within the six-month period next
preceding the date hereof, except as 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 Debentures, Warrants 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 Debentures (and the
Common Stock issuable upon conversion thereof) 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 Debentures and the Warrants (and the
Common Stock issuable upon conversion thereof) as contemplated by this Agreement
or any other agreement to which the Company is a party.
S. ENVIRONMENTAL MATTERS. 1. The operations of the Company are, to
its knowledge, in material compliance with all applicable Environmental Laws and
all permits issued pursuant to Environmental Laws or otherwise;
2. to its knowledge, the Company has obtained or applied for all
material 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;
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4. the Company has not received, since December 31, 1996, 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. 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 that would have a Material
Adverse Effect;
7. to the Company's knowledge, there is 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.S.:
"Environmental Law" means any foreign, federal, state or local
statute, regulation, ordinance, or rule of common law as now or hereafter 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 (42 U.S.C. ss. 9601 et seq.), the
Hazardous Materials Transportation Act (49 U.S.C. App. ss. 1801 et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Clean
Water Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et
seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 et seq.), the
Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. ss. 136 et seq.),
and the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), and the
regulations promulgated pursuant thereto.
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"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," "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.
T. 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. 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.
U. ERISA MATTERS. The Company and its ERISA Affiliates are in
compliance in all material respects with
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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 Pension Benefits Guaranty Corporation, 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.U.:
"ERISA" means the Employee Retirement Income Security Act of 1974,
or any successor statute, together with the regulations thereunder, as the same
may be amended from time to time.
"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 ss. 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
ss. 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.
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"Plan" means any pension plan (other than a Multiemployer Plan)
subject to the provision of Title IV of ERISA or ss. 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 Affilare that is considered an ERISA
Affiliate only pursuant to subsection (m) or (o) of ss. 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.
V. 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 to so file does not and could not have a Material Adverse
Effect; all such Tax Returns are true and accurate 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 have 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, the result of which will have a Material
Adverse Effect; no information related to Tax matters has been requested by any
foreign, federal, state or local taxing authority; and, except as disclosed
above, no written notice indicating an intent to open an audit or other review
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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 ss. 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 or is required to make any
adjustments pursuant to ss. 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 ss. 897(c)(2) of the Internal Revenue Code
during the applicable period specified in ss. 897(c)(1)(A)(ii) of the Internal
Revenue Code.
3. The Company has not made an election under ss. 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 under (A) Treas. Reg. ss. 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, is
obligated to make payments or is a party to an agreement that could obligate it
to make any payments that would not be deductible under ss. 280G of the Internal
Revenue Code.
For purposes of this Section III.V.:
"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
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<PAGE>
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.
W. PROPERTY. The Company does not own any real property. The Company
has good and marketable title to all personal property owned by it, free and
clear of all liens, encumbrances and defects or such as do not materially affect
the value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and 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.
X. INTELLECTUAL PROPERTY. To the best of its knowledge, 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. To the best of the Company's knowledge, the
Company is not infringing upon or in conflict with any right of any other person
with respect to any Intangibles. No claims have been asserted by any person to
the ownership or use of any Intangibles that would have a Material Adverse
Effect on the Company and the Company has no knowledge of any basis for such
claim.
Y. [Reserved]
Z. 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
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<PAGE>
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 U.S. generally accepted accounting
principles.
AA. 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.
BB. CUSTOMERS. To the Company's knowledge, except as otherwise
provided to Buyer in writing by the Company, none of [the Company's Largest
Customers] intend to discontinue or decrease their purchases of the Company's
products and the Company's relationship with such customers is strong and all
accounts receivable of such customers are current.
CC. 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.
IV. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
A. RESTRICTIVE LEGEND. Buyer acknowledges and agrees that, upon
issuance pursuant to this Agreement, the Debentures (and any shares of Common
Stock issued in conversion thereof) shall have endorsed thereon a legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of the Debentures and the shares of Common Stock issuable upon
conversion thereon):
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<PAGE>
"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 filings in
connection with the sale of the Debentures 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 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 proceeds from the sale
of the Securities (excluding amounts paid by the Company for legal fees and
finder's fees in connection with such sale) solely for working capital and other
general corporate purposes.
E. LISTING. The Company shall use its best efforts to maintain its
listing of the Common Stock on NASDAQ.
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 Debentures and the full exercise of the Warrants (assuming for
purposes of this Section 3.F., a conversion price of $3.00).
V. TRANSFER AGENT INSTRUCTIONS.
A. The Company undertakes and agrees that no instruction other than
the instructions referred to in this Section 5 and customary stop transfer
instructions prior to the registration and sale of the Common Stock pursuant to
an
19
<PAGE>
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 Debentures 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 5.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 and its legal counsel that registration of the resale by Buyer of
such Common Stock is not required under the Securities Act and that the removal
of restrictive legends is permitted under applicable law, 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 Debentures by telecopying an executed and completed Notice of Conversion to
the Company. Each date on which a Notice of Conversion is telecopied to and
received by the Company in accordance with the provisions hereof shall be deemed
a Conversion Date. The Company shall transmit the certificates evidencing the
shares of Common Stock issuable upon conversion of any Debentures (together with
certificates evidencing any principal amount of the Debentures not being so
converted) to Buyer via express courier, by electronic transfer or otherwise,
within three business days after receipt by the Company of the telecopied Notice
of Conversion (the "Delivery Date").
C. The Company understands that a delay in the issuance of the
shares of Common Stock upon such conversion beyond the 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 upon conversion in accordance with the following schedule (where
"No. Business Days" is defined as the number of business days beyond three (3)
days from Delivery Date):
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<PAGE>
Compensation For Each
$10,000 Principal
Amount of Debentures
No. Business Days Not Converted Timely
----------------- --------------------
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
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 Delivery Date, Buyer shall be entitled to rescind the relevant Notice
of Conversion 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.
VI. DELIVERY INSTRUCTIONS.
The Debentures shall be delivered by the Company to the Escrow Agent
pursuant to Section 1(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 Debentures (the
"Closing Date") shall be the date hereof or such other as shall be mutually
agreed upon in writing. The issuance and sale of the Debentures shall occur on
the Closing Date at the offices of the Escrow Agent. Notwithstanding anything to
the contrary contained herein,
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the Escrow Agent shall not be authorized to release to the Company the Purchase
Price and to Buyer the certificate(s) (I/N/O Buyer) evidencing the Debentures
being purchased by Buyer unless the conditions set forth in Section 8(c) and
9(g) hereof have been satisfied.
VIII. CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The Buyer understands that the Company's obligation to sell the
Debentures 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 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
measured 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;
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
Debentures on the Closing Date pursuant to this Agreement is conditioned upon:
A. Delivery by the Company to the Escrow Agent of one or more
certificates (I/N/O Buyer) evidencing the Debentures to be purchased by Buyer
pursuant to this Agreement;
B. The accuracy 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
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<PAGE>
case such accuracy shall be measured as of such specified date) and the
performance by the Company in all material 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;
C. Buyer having received an opinion of counsel for the Company,
dated the Closing Date, in form, scope and substance reasonably satisfactory to
the Buyer, to the effect set forth in ANNEX IV attached hereto.
D. There not having occurred (i) any general suspension of trading
in, or limitation on prices listed for, the Common Stock on the NASDAQ, (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.
E. 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.
F. The Company shall have delivered to Buyer (as provided in the
Joint Escrow Instructions) reimbursement of Buyer's out-of-pocket costs and
expenses incurred in connection with the transactions contemplated by this
Agreement (including reasonable fees and disbursements of Buyer's legal counsel
not to exceed $30,000), upon submission by Buyer to the Company of appropriate
documentary evidence of such out-of-pocket costs and expenses.
G. 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.
X. TERMINATION.
A. TERMINATION BY MUTUAL WRITTEN CONSENT. This Agreement may be
terminated and the transactions
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<PAGE>
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.
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 June 30, 1998; provided, however, that the
right to terminate this Agreement pursuant to this Section 10.a.(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.
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 in any material
respect 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, or (iii) there shall
have occurred any event or development, or there shall be in existence any
condition, having or reasonably and foreseeably likely to have a Material
Adverse Effect.
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 in any
material respect 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.
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
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<PAGE>
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.
B. Indemnification of Buyer by the Company.
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, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this
Agreement; or
2. any failure by the Company to perform in any material respect any
of its covenants, agreements, undertakings or obligations set forth in
this Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by the
Company pursuant to this Agreement.
C. Indemnification of the Company by Buyer.
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
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<PAGE>
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, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by Buyer pursuant to this Agreement;
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 any instrument, certificate or agreement entered into or
delivered by Buyer pursuant to this Agreement.
D. Third Party Claims. Promptly after receipt by either party hereto
seeking indemnification pursuant to this Section 11 (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 11 is being sought (the "Indemnifying Party") of the
commencement thereof; but the omission to so 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 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
26
<PAGE>
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 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. Other Claims.
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
the maximum extent permitted by law, any objection, including any objection
based on forum non
27
<PAGE>
conveniens, to the bringing of any such proceeding in such jurisdictions. A
facsimile transmission of this signed Agreement 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
supersedes all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof.
XIII. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given upon personal delivery or seven business days after deposit in
the United States Postal Service, by (a) advance copy by fax, and (b) mailing by
express courier or registered or certified mail with postage and fees prepaid,
addressed to each of the other parties thereunto entitled at the following
addresses, or at such other addresses as a party may designate by ten days
advance written notice to each of the other parties hereto.
COMPANY: SAC Technologies, Inc.
4620 South Valley View Boulevard
Suite A1
Las Vegas, Nevada 89103
Tel: (702) 798-9777
Fax: (702) 798-5177
with a copy to:
Doherty, Rumble & Butler
Professional Association
3500 Fifth Street Towers
150 South Street
Minneapolis, Minnesota 55402
Attention: Daniel R. Tenenbaum
28
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BUYER: THE SHAAR FUND, LTD.
C/O THE SHAAR ADVISORY SERVICES LTD.
62 King George Street, Apartment 4F
Jerusalem, Israel
Attention: Samuel Levinson
Telephone: 00-972-2-566-1144
Fax: 00-972-2-566-0424
ESCROW AGENT: WEIL, GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Attention: Dennis J. Block, Esq.
Telephone: (212) 310-8000
Fax: (212) 310-8007
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
10 of Rule 601 of Regulation S-K under the Securities Act and the Exchange Act).
Any press release must be jointly approved by the Buyers and the Company prior
to its release.
XV. ASSIGNMENT. 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 affiliate of Buyer who
furnishes to the Company the representations and warranties set forth in Section
2 hereof and otherwise agrees to be bound by the terms of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement on the date first above written.
SAC TECHNOLOGIES, INC.
By:
------------------------------------
Name:
Title:
THE SHAAR FUND LTD.
By: INTER CARIBBEAN SERVICES
LTD.
By:
------------------------------------
Name:
Title:
30
EXHIBIT 10.18
EXECUTION COPY
"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."
5% CONVERTIBLE DEBENTURE
DUE JUNE 30, 2001
JUNE 30, 1998
$2,500,000
NO. ___________________
SAC Technologies, Inc., a Minnesota corporation with principal executive
offices located at 4444 West 76th Street, Suite 600, Edina, Minnesota 55435 the
("Company"), for value received, hereby promises to pay to the Holder (as
defined below), or order, on June 30, 2001 (the "Maturity Date") the principal
sum of Two Million Five Hundred Thousand Dollars and No Cents ($2,500,000) and
to pay interest thereon from the date of original issuance (or the most recent
interest payment date to which interest has been paid), quarterly in arrears, on
each February 28, May 31, August 31 and November 30 of each year, commencing on
October 29, 1998, at the rate of 5% per annum (the "Debenture Interest Rate"),
until the principal of this Debenture has been paid in full or duly and
irrevocably provided for by conversion or as otherwise permitted herein. The
interest so payable and duly and punctually provided for on any interest payment
date shall be paid to the Person in whose name this Debenture is registered at
the close of business on the 15th day next preceding the applicable interest
payment date and all interest payable on the principal amount of this Debenture
shall be calculated on the basis of 360-day year for the actual number of days
elapsed.
<PAGE>
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article whenever used
in this Debenture have the following respective meanings:
(a) "ADDITIONAL CAPITAL SHARES" has the meaning set forth in Section
3.1(c).
(b) "AFFILIATE" has the meaning ascribed to such term in Rule 12b-2
under the Securities Exchange Act of 1934, as amended.
(c) "APPLICABLE DISCOUNT" 85% for the period beginning 121 days and
ending 150 days from the Closing Date; 82% for the period beginning 151 days and
ending 180 days from the Closing Date; 80% for the period beginning 181 days and
ending 210 days from the Closing Date; and 79% for the period beginning 211 days
and ending 240 days from the Closing Date; and 78% thereafter.
(d) "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.
(e) "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
Company.
(f) "CLOSING DATE" means June 30, 1998.
(g) "COMMON SHARES" or "COMMON STOCK" means shares of the common
stock, $.01 par value, of the Company.
(h) "COMMON STOCK ISSUED AT CONVERSION" when used with reference to
the securities issuable upon conversion of this Debenture, means all Common
Shares now or hereafter Outstanding and securities of any other class or series
into which the Debenture hereafter shall have been changed or substituted,
whether now or hereafter created and however designated.
(i) "COMPANY" means SAC Technologies, Inc., a Minnesota corporation,
and any successor or resulting
<PAGE>
corporation by way of merger, consolidation, sale or exchange of all or
substantially all of the Company's assets, or otherwise.
(j) "CONVERSION DATE" means any day on which all or any portion of
the principal amount of this Debenture is converted in accordance with the
provisions hereof.
(k) "CONVERSION NOTICE" has the meaning set forth in Section 3.2.
(l) "CONVERSION PRICE" on any date of determination means the
applicable price for the conversion of this Debenture into Common Shares on such
day as set forth in Section 3.1.
(m) "CONVERSION RATIO" on any date of determination means the
applicable percentage of the Market Price for conversion of this Debenture into
Common Shares on such day as set forth in Section 3.1.
(n) "CURRENT MARKET PRICE" on any date of determination means the
closing bid price of a Common Share on such day as reported on the National
Association of Securities Dealers, Inc. Automated Quotation System for SmallCap
Market ("NASDAQ") or, if the Common Shares are otherwise listed on the NASDAQ or
on an established United States national stock exchange, the closing price of a
Common Share on such day as reported by such system or exchange (provided, that
the NASDAQ quotation shall be utilized in the event of the dual listing of the
Common Shares).
(o) "DEBENTURE" means this 5% Convertible Debenture due June 30,
2001 of the Company or such other convertible debentures or Debentures exchanged
therefor as provided in Section 2.1.
(p) "DEFAULT INTEREST RATE" shall be equal to the Debenture Interest
Rate plus an additional 4% per annum.
(q) "EVENT OF DEFAULT" has the meaning set forth in Section 6.1.
(r) "HOLDER" means The Shaar Advisory Services Ltd., any successor
thereto, or any Person to whom this Debenture is subsequently transferred in
accordance with the provisions hereof.
<PAGE>
(s) "MARKET DISRUPTION EVENT" means any event that results in a
material suspension or limitation of trading of Common Shares on NASDAQ.
(t) "MARKET PRICE" per Common Share means the average of the closing
bid prices of the Common Shares as reported on NASDAQ for any Valuation Period
or, if the Common Shares are otherwise listed on the NASDAQ or on an established
United States national stock exchange, the average of the closing bid prices of
the Common Shares for any Valuation Period as reported by such system or
exchange (provided, that the NASDAQ quotation shall be utilized in the event of
the dual listing of the Common Shares).
(u) "MAXIMUM RATE" has the meaning set forth in Section 6.3.
(v) "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 warrants, options or rights to subscribe for or purchase
shares outstanding scrip or any certificates representing fractional interests
in such Shares; PROVIDED, HOWEVER, that any such Shares directly or indirectly
owned or held by or for the account of the Company or any Subsidiary of the
Company shall not be deemed "Outstanding" for purposes hereof.
(w) "PERSON" means an individual, a corporation, a partnership, an
association, a limited liability company, a unincorporated business
organization, a trust or other entity or organization, and any government or
political subdivision or any agency or instrumentality thereof.
(x) "REGISTRATION RIGHTS AGREEMENT" means that certain registration
rights agreement dated June 30, 1998, between the Company and The Shaar Advisory
Services Ltd.
(y) "SEC" means the United States Securities and Exchange
Commission.
(z) "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.
<PAGE>
(aa) "SECURITIES PURCHASE AGREEMENT" means that certain Securities
Purchase Agreement dated June 30, 1998, between the Company and The Shaar Fund,
Ltd.
(aa) "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 Company.
(bb) "TRADING DAY" means any day on which purchases and sales of
securities authorized for quotation on NASDAQ are reported thereon and on which
no Market Disruption Event has occurred.
(cc) "VALUATION EVENT" has the meaning set forth in Section 3.1.
(dd) "VALUATION PERIOD" means the five Trading Day period
immediately preceding any Conversion Date.
All references to "cash" or "$" herein means currency of the United
States of America.
ARTICLE 2
EXCHANGES AND TRANSFER
SECTION 2.1 Exchange and Registration of Transfer of Debentures. Subject
to compliance with applicable securities laws, the Holder may, at its option,
surrender this Debenture at the principal executive offices of the Company and
receive in exchange therefor a Debenture or Debentures, each in the denomination
of $10,000 or integral multiples of $1,000 in excess thereof, dated as of the
date of this Debenture, and, subject to Section 4.2, payable to such Person or
order as may be designated by such Holder. The aggregate principal amount of the
Debenture or Debentures exchanged in accordance with this Section 2.1 shall
equal the aggregate unpaid principal amount of this Debenture as of the date of
such surrender; PROVIDED, HOWEVER, that upon any exchange pursuant to this
Section 2.1 there shall be filed with the Company the name and address for all
purposes hereof of the Holder or Holders of the Debenture or Debentures
delivered in such exchange. This Debenture, when presented for registration of
transfer or for exchange or conversion, shall (if so required by the Company) be
duly endorsed, or be accompanied by a written instrument of transfer in form
reasonably satisfactory to
<PAGE>
the Company duly executed, by the Holder duly authorized in writing.
SECTION 2.2 Loss, Theft, Destruction of Debenture. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Debenture and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security reasonably satisfactory to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Debenture, the Company shall make, issue and deliver, in
lieu of such lost, stolen, destroyed or mutilated Debenture, a new Debenture or
Debentures of like tenor and unpaid principal amount dated as of the date
hereof. This Debenture shall be held and owned upon the express condition that
the provisions of this Section 2.2 are exclusive with respect to the replacement
of a mutilated, destroyed, lost or stolen Debenture 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 2.3 Who Deemed Absolute Owner. The Company may deem the Person in
whose name this Debenture shall be registered upon the registry books of the
Company to be, and may treat it as, the absolute owner of this Debenture
(whether or not this Debenture shall be overdue) for the purpose of receiving
payment of or on account of the principal amount of this Debenture, for the
conversion of this Debenture and for all other purposes, and the Company 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 this Debenture to the extent of the sum or sums so paid or the conversion
so made.
<PAGE>
ARTICLE 3
CONVERSION OF DEBENTURE
SECTION 3.1 Conversion; Conversion Price. At the option of the Holder,
this Debenture may be converted, either in whole or in part, up to the full
principal amount hereof (in increments of not less than $10,000 principal
amount) into Common Shares (calculated as to each such conversion to the nearest
1/100th of a share), at any time, and from time to time as set forth below, at a
price equal to the lesser of (a) 110% of the Current Market Price on the
Business Day immediately preceding the Closing Date or (b) the Market Price
multiplied by the Applicable Discount. The Debentures may be converted as
follows: up to 33% during the period beginning 121 days and ending 150 days from
the Closing Date; up to 66% during the period beginning 151 days and ending 180
days from the Closing Date; and up to 100% thereafter. Until the Debenture is
paid in full or otherwise provided for at maturity as provided herein; provided,
however, that 100% this Debenture shall be converted by the second anniversary
of the Closing Date. If, 120 days or more after the Closing Date, the Current
Market Price or the Market Price, as applicable, shall be less than $6.00 on a
Conversion Date, that Conversion Date shall be postponed automatically for a
period of 45 calendar days, provided, however that such postponement shall occur
one time only during the term of this Debenture. The Holder shall not have the
right to convert any portion of this Debenture to the extent that the issuance
to the Holder of Common Shares upon such conversion would result in the Holder
being deemed the "beneficial owner" of 5% or more of the then outstanding Common
Shares within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934,
as amended. At the Company's option, the amount of accrued and unpaid interest
as of the Conversion Date shall not be subject to conversion but instead may be
paid in cash as of the Conversion Date; if the Company elects to convert the
amount of accrued and unpaid interest at the Conversion Date into Common Stock,
the Common Stock issued to the Holder shall be valued at the Conversion Price.
Notwithstanding anything to the contrary contained herein, if a
Valuation Event occurs during any Valuation Period, a new Valuation Period shall
begin on the Trading Day immediately following the occurrence of such Valuation
Event and end on the Conversion Date; provided that if a Valuation Event occurs
on the fifth day of any Valuation Period, then the Conversion Price shall be the
Current
<PAGE>
Market Price of the Common Shares on such day; and provided, further, that the
Holder may, in its discretion, postpone such Conversion Date to a Trading Day
which is no more than five Trading Days after the occurrence of the latest
Valuation Event. In the event that the Holder deems the Valuation Period to be
other than the five Trading Days immediately prior to the Conversion Date, the
Holder shall give written notice of such fact to the Company at the time of
conversion.
For purposes of this Section 3.1, a "VALUATION EVENT" shall mean an event in
which the Company at any time during a Valuation Period takes any of the
following actions:
(a) subdivides or combines its Capital Shares;
(b) pays a dividend in its Capital Shares or makes any other
distribution of its Capital Shares;
(c) issues any additional Capital Shares (the "Additional Capital
Shares"), otherwise than as provided in the foregoing Sections 3.1(a) and 3.1(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 employee benefit plans consistent with
those presently in effect including, without limitation, issuances of Additional
Capital Shares reserved pursuant to the Company's 1996 Stock Option Plan as in
effect on the date hereof, and issuances under presently outstanding warrants,
options or convertible securities;
(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 at any time thereafter may be issuable shall be less
than the Current Market Price on the date of such issuance;
(e) issues any securities convertible into or exchangeable or
exercisable for 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 on the date of such issuance;
(f) makes a distribution of its assets or evidences of indebtedness
to the holders of its Capital
<PAGE>
Shares as a dividend in liquidation or by way of return of capital or other than
as a dividend payable out 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 Company's assets
(other than under the circumstances provided for in the foregoing Sections
3.1(a) through 3.1(e)), PROVIDED, in each case, that such distribution described
in this Section 3.1(f) does not constitute an Event of Default; or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Sections 3.1(a)
through 3.1(f) hereof, inclusive, which in the opinion of the Company'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 this Debenture.
SECTION 3.2 Exercise of Conversion Privilege. (a) Conversion of this
Debenture 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 Company. Each date on which a Conversion
Notice is telecopied to and received by the Company in accordance with the
provisions of this Section 3.2 shall constitute a Conversion Date. The
Conversion Notice shall state the name or names (with addresses) of the persons
who are to become the holders of the Common Stock issued upon such conversion.
Upon receipt of the telecopied Conversion Notice, the Company shall within three
Business Days of receipt of the Conversion Notice (i) issue the Common Stock
effective as of the Conversion Date in accordance with the provisions of this
Article 3, and (ii) cause to be mailed for delivery by overnight courier to the
Holder (X) a certificate or certificate(s) representing the number of Common
Shares to which the Holder is entitled by virtue of such conversion, (Y) cash,
as provided in Section 3.4, in respect of any fraction of a Share issuable upon
such conversion and (Z) cash in the amount of accrued and unpaid interest as of
the Conversion Date, if any, to the extent payable in cash. If the Company fails
to deliver the Common Stock converted on such Conversion Date to Holder within
such period, the Company shall pay such additional amount to Holder as set forth
in Section V.C. of the Securities Purchase Agreement.
<PAGE>
Upon surrender for conversion, this Debenture shall be accompanied
by a proper assignment hereof to the Company or be endorsed in blank. Conversion
shall be deemed to have been effected at the time stated in the Conversion
Notice and at such time the rights of the Holder of this Debenture, as such,
shall cease to the extent of such conversion, and the Person and 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. The Conversion Notice shall constitute a contract
between the Holder and the Company, 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 3.4), and to
release the Company from all liability thereon. No cash payment aggregating less
than $1.50 shall be required to be given unless specifically requested by the
Holder.
(b) Except as set forth in Section 3.1 hereof, at any time after the date
of this Debenture, (i) the Company challenges, disputes or denies the right of
the Holder hereof to effect the conversion of this Debenture into Common Shares
or otherwise dishonors or rejects any Conversion Notice delivered in accordance
with this Section 3.2 and this Agreement or (ii) any third party who is not and
has never 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 this Debenture into
Common Shares, then the Holder shall have the right, by written notice to the
Company, to require the Company to promptly redeem this Debenture for cash at a
redemption price equal to 122% of the principal amount hereof together with all
accrued and unpaid interest thereon (the "Mandatory Purchase Amount"). Under any
of the circumstances set forth above, the Company 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).
<PAGE>
SECTION 3.3 [This Section Reserved]
SECTION 3.4 Fractional Shares. No fractional Common Shares or scrip
representing fractional Common Shares shall be issued upon conversion of this
Debenture. Instead of any fractional Common Shares which otherwise would be
issuable upon conversion of this Debenture, the Company shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction.
No cash payment of less than $1.50 shall be required to be given unless
specifically requested by the Holder.
SECTION 3.5 Reclassification, Consolidation, Merger or Mandatory Share
Exchange. At any time while this Debenture remains outstanding and any principal
amount hereof has not been converted, in case of any reclassification or change
of Outstanding Common Shares issuable upon conversion of this Debenture (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 this
Debenture) or in case of any consolidation, merger or mandatory share exchange
of the Company with or into another corporation (other than a merger or
mandatory share exchange with another corporation in which the Company 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 this
Debenture), or in the case of any sale or transfer to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
Company, or such successor, resulting or purchasing corporation, as the case may
be, shall, without payment of any additional consideration therefor, execute a
new Debenture providing that the Holder shall have the right to convert such new
Debenture (upon terms and conditions not less favorable to the Holder than those
in effect pursuant to this Debenture) and to receive upon such exercise, in lieu
of each Common Share theretofore issuable upon conversion of this Debenture, 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 this Debenture had this Debenture been converted immediately prior
to such
<PAGE>
reclassification, change, consolidation, merger, mandatory share exchange or
sale or transfer. The provisions of this Section 3.5 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, mandatory share
exchanges and sales and transfers.
SECTION 3.6 Adjustments to Conversion Ratio. For so long as this Debenture
is outstanding, if the Company (i) issues and sells pursuant to an exemption
from registration under the Securities Act (A) Common Shares at a purchase price
representing a percentage of the Current Market Price on the date of issuance
thereof that is lower than 75%, (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 75%, except for stock option
agreements or stock incentive agreements, or (C) convertible, exchangeable or
exercisable securities with a right to exchange at lower than 75% of the Current
Market Price on the Common Shares 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 Company register under the
Securities Act 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, exercised or exchanged, then the
Conversion Ratio shall be reduced to equal the lowest of any such lower
percentages.
SECTION 3.7 Optional Redemption Under Certain Circumstances. At any time
following the 120th day after the Closing Date or if, for two or more Trading
Days in any five-Trading Day period (whether or not consecutive), the Market
Price per Common Share is less than $8.00 the Company, upon notice delivered to
the Holder as provided in Section 3.8, may redeem this Debenture in whole or in
part but subject to the percentage limitations on the conversion of the
Debenture set forth in Section 3.1 hereof, (and only with respect to such
principal amount as to which the Holder has not theretofore furnished a
Conversion Notice in compliance with Section 3.2), at a price to be calculated
as follows: for the period beginning 121 days and ending 150 days from the
Closing Date 117% of the then outstanding aggregate principal amount of the
Debenture; for the period beginning 151 days and ending 180 days from the
Closing Date 120% of the then outstanding aggregate principal amount of the
Debenture; for the period beginning 181 days and ending
<PAGE>
210 days from the Closing Date 122% of the then outstanding aggregate principal
amount of the Debenture; for the period beginning 211 days and ending 240 days
from the Closing Date 123% of the then outstanding aggregate principal amount of
the Debenture and thereafter, 124% of the then outstanding aggregate principal
amount of the Debenture, in each case together with all accrued and unpaid
interest thereon to the date of redemption (the "Redemption Date") which shall
be no later than thirty (30) days following the expiration of such five-Trading
Day period. Except as set forth in this Section 3.7, the Company shall not have
the right to prepay or redeem this Debenture.
SECTION 3.8 Notice of Redemption. Notice of optional redemption pursuant
to Section 3.7 shall be provided by the Company to the Holder in writing (by
registered mail or overnight courier at the Holder's last address appearing in
the Company's security registry) not less than seven nor more than 15 days prior
to the Redemption Date, which notice shall specify the Redemption Date and refer
to Section 3.7 (including a statement of the Market Price per Common Share) and
this Section 3.8.
SECTION 3.9 Surrender of Debentures. Upon any redemption of this Debenture
pursuant to Section 3.7, the Holder shall either deliver this Debenture by hand
to the Company at its principal executive offices or surrender the same to the
Company at such address by express courier. Payment of the redemption price
specified in Section 3.7 shall be made by the Company to the Holder against
receipt of this Debenture (as provided in this Section 3.9) by wire transfer of
immediately available funds to such account(s) as the Holder shall specify to
the Company. If payment of such redemption price is not made in full by the
Redemption Date, the Holder shall again have the right to convert this Debenture
as provided in Article 3 hereof.
ARTICLE 4
STATUS; RESTRICTIONS ON TRANSFER
SECTION 4.1 Status of Debenture. This Debenture is a secured obligation of
the Company, and constitutes a legal, valid and binding obligation of the
Company, enforceable in accordance with its terms subject, as to enforceability,
to general principles of equity and to principles of bankruptcy, insolvency,
reorganization and
<PAGE>
other similar laws of general applicability relating to or affecting creditors'
rights and remedies generally.
SECTION 4.2 Restrictions on Transfer. This Debenture, and any Common
Shares issuable according to the terms hereof, have not been registered under
the Securities Act. This Debenture and any Common Shares issued upon conversion
may not be offered or sold, directly or indirectly, except pursuant to an
effective registration statement under the Act, or pursuant to an available
exemption therefrom.
ARTICLE 5
COVENANTS
The Company covenants and agrees that so long as this Debenture shall be
outstanding:
SECTION 5.1 Conversion. The Company shall not later than five Business
Days after its receipt of the Conversion Notice, issue and deliver to the Holder
the requisite shares of common stock issuable upon conversion, according to the
terms hereof.
SECTION 5.2 Notice of Default. If any one or more events occur which
constitute or which, with notice, lapse of time, or both, would constitute an
Event of Default, or if the Holder shall demand the issuance of Common Shares or
take any other action permitted upon the occurrence of any such Event of
Default, the Company shall forthwith give notice to the Holder, specifying the
nature and status of the Event of Default or other event or of such demand or
action, as the case may be.
SECTION 5.3 Insurance. The Company shall carry and maintain in full force
and effect at all times with insurers that are financially sound and reputable
such insurance in such amounts as is customary in the industry of the Company.
SECTION 5.4 Payment of Obligations. Prior to conversion of the entire
principal amount of this Debenture, the Company shall pay, extend, or discharge
at or before maturity, all its respective material obligations and liabilities,
including, without limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings.
<PAGE>
SECTION 5.5 Compliance with Laws. The Company shall comply with all
applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities, except for such noncompliance which would not have a
material adverse effect on the business, properties, prospects, condition
(financial or otherwise) or results of operations of the Company.
SECTION 5.6 Inspection of Property, Books and Records. The Company shall
keep proper books of record and account in which full, true and correct entries
shall be made of all material dealings and transactions in relation to its
business and activities and shall permit representatives of the Holder at the
Holder's expense to visit and inspect any of its respective properties, to
examine and make abstracts from any of its respective books and records, not
reasonably deemed confidential by the Company, and to discuss its respective
affairs, finances and accounts with its respective officers and independent
public accountants, all at such reasonable times and as often as may reasonably
be desired.
ARTICLE 6
REMEDIES
SECTION 6.1 Events of Default. "Event of Default" wherever used herein
means any one of the following events:
(a) the Company shall default in the payment of principal of or
interest on this Debenture as and when the same shall be due and payable and, in
the case of an interest payment default, such default shall continue for five
Business Days after the date such interest payment was due, or the Company shall
fail to perform or observe any other covenant, agreement, term, provision,
undertaking or commitment under this Debenture, the Securities Purchase
Agreement or the Registration Rights Agreement and such default shall continue
for a period of ten Business Days after the receipt by the Company of written
notice that the Company is in default hereunder; or
(b) any of the representations or warranties made by the Company
herein, the Securities Purchase Agreement, the Registration Rights Agreement or
in any certificate or financial or other written statements heretofore or
hereafter furnished by or on behalf of the Company in connection with the
execution and delivery of this
<PAGE>
Debenture, the Securities Purchase Agreement or the Registration Rights
Agreement shall be false or misleading in any material respect on the Closing
Date; or
(c) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company or any subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company under the United
States Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), or any other
applicable Federal or state law, or appointing a receiver, liquidator, assignee,
trustee or sequestrator (or other similar official) of the Company or of any
substantial part of its property, or ordering the winding-up or liquidation of
its affairs, and any such decree or order continues and is unstayed and in
effect for a period of 60 calendar days; or
(d) the institution by the Company or any Subsidiary of proceedings
to be adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the filing by
it of a petition or answer or consent seeking reorganization or relief under the
Bankruptcy Code or any other applicable federal or state law, or the consent by
it to the filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Company or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as and when they become due, or the
taking of corporate action by the Company in furtherance of any such action; or
(e) a final judgment or final judgments for the payment of money
shall have been entered by any court or courts of competent jurisdiction against
the Company and remains undischarged for a period (during which execution shall
be effectively stayed) of 30 days, provided that the aggregate amount of all
such judgments at any time outstanding (to the extent not paid or to be paid, as
evidenced by a written communication to that effect from the applicable insurer,
by insurance) exceeds [$__________]; or
(f) it becomes unlawful for the Company to perform or comply with
its obligations under this Debenture, the Securities Purchase Agreement or the
Registration Rights Agreement; or
<PAGE>
(g) the Common Shares shall be delisted from the NASDAQ (the
"Trading Market," or, to the extent the Company becomes eligible to list its
Common Stock on The New York Stock Exchange, upon official notice of listing on
any such exchange or system, as the case may be, it shall be the "Trading
Market") or suspended from trading on the Trading Market, and shall not be
reinstated, relisted or such suspension lifted, as the case may be, within ten
(10) days; or
(h) the Company shall default (giving effect to any applicable grace
period) in the payment of principal or interest as and when the same shall
become due and payable, under any indebtedness, individually or in the
aggregate, of more than $200,000.
SECTION 6.2 Acceleration of Maturity; Rescission and Annulment. If an
Event of Default occurs and is continuing, then and in every such case any
Holder may rescind the Conversion Notice and obtain payment for the entire
outstanding principal amount of the Debenture which remains unconverted, by a
notice in writing to the Company, and upon any such declaration the entire
principal amount of this Debenture shall become immediately due and payable by
virtue of such rescission; provided, however, in the case of any Event of
Default described in paragraphs (c), (d) or (f) above, the entire then
outstanding principal amount of this Debenture, together with all accrued and
unpaid interest thereon, automatically shall become immediately due and payable
without the necessity of any notice or declaration as aforesaid.
SECTION 6.3 Default Interest Rate. (a) If any portion of the principal of
or interest on the Debenture shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise) such principal of and interest on the
Debenture which is due and owing but not paid shall, without limiting the
Holder's rights under this Debenture, bear interest at the Default Interest Rate
until paid in full or otherwise converted as set forth herein.
SECTION 6.4 Remedies Not Waived. No course of dealing between the Company
and the Holder or any delay in exercising any rights hereunder shall operate as
a waiver by the Holder.
SECTION 6.5 Waiver. No recourse shall be had for the payment of the
principal of, or the interest on, this
<PAGE>
Debenture, or for any claim based hereon, or otherwise in respect hereof,
against any incorporator, shareholder, officer or director, as such, past,
present or future, of the Company or any successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 Notice of Certain Events. In the case of the occurrence of any
event described in Sections 3.1, 3.5 or 3.6 of this Debenture, the Company shall
cause to be mailed to the Holder of this Debenture at its last address as it
appears in the Company'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 Common Stock to be entitled
to such dividend, distribution, issuance or granting of rights, options or
warrants are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is
expected to become effective, and the date as of which it is expected that
holders of record of Common 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.
SECTION 7.2 Register. (a) The Company shall keep at its principal office a
register in which the Company shall provide for the registration of this
Debenture. Upon any transfer of this Debenture in accordance with Article 2 and
4 hereof, the Company shall register such transfer on the Debenture register.
(b) The Company may deem the person in whose name this Debenture
shall be registered upon the registry books of the Company to be, and may treat
it as, the absolute
<PAGE>
owner of this Debenture (whether or not this Debenture shall be overdue) for the
purpose of receiving payment of interest on or principal of this Debenture, for
the conversion of this Debenture and for all other purposes, and the Company
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 this Debenture to the extent of the sum or sums so paid or the conversion
or conversions so made.
SECTION 7.3 Withholding. To the extent required by applicable law, the
Company 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 Company from any payments made pursuant to this Debenture.
SECTION 7.4 Governing Law. THIS DEBENTURE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING
EFFECT TO CONFLICTS OF LAWS PRINCIPLES). WITH RESPECT TO ANY SUIT, ACTION OR
PROCEEDINGS RELATING TO THIS DEBENTURE, THE COMPANY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED
STATES DISTRICT COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK AND HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. SUBJECT TO APPLICABLE LAW, THE COMPANY AGREES THAT FINAL
JUDGMENT AGAINST IT IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS DEBENTURE SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER
JURISDICTION WITHIN OR OUTSIDE THE UNITED STATES BY SUIT ON THE JUDGMENT, A
CERTIFIED COPY OF WHICH JUDGMENT SHALL BE CONCLUSIVE EVIDENCE THEREOF AND THE
AMOUNT OF ITS INDEBTEDNESS, OR BY SUCH OTHER MEANS PROVIDED BY LAW.
SECTION 7.5 Headings. The headings of the Articles and Sections of this
Debenture are inserted for convenience only and do not constitute a part of this
Debenture.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be
signed by its duly authorized officer under its corporate seal, attested by its
duly authorized officer, on the date of this Debenture.
SAC TECHNOLOGIES, INC.
By:
-----------------------------------
Name:
Title:
Attest
By:
-----------------------------------
Name:
Title:
INITIAL
HOLDER
THE SHAAR FUND, LTD.
By: INTER CARIBBEAN SERVICES LTD.
By:
-----------------------------------
Name:
Title:
<PAGE>
ANNEX I
[FORM OF CONVERSION NOTICE]
TO:
---------------------------------
---------------------------------
---------------------------------
The undersigned owner of this 5% Convertible Debenture due June __,
2001 issued by SAC Technologies, Inc. (the "Debenture") hereby irrevocably
exercises its option to convert $_____ principal amount of the Debenture into
shares of the common stock, $.01 par value, of SAC Technologies, Inc. ("Common
Stock"), in accordance with the terms of the Debenture. The undersigned hereby
instructs the Company to convert the portion of the Debenture specified above
into Shares of Common Stock Issued at Conversion in accordance with the
provisions of Article 3 of the Debenture. The undersigned directs that the
Common Stock issuable and certificates therefor deliverable upon conversion, the
Debenture recertificated in the principal amount, if any, not being surrendered
for conversion hereby, together with any check in payment for fractional Common
Stock, be issued in the name of and delivered to the undersigned unless a
different name has been indicated below. All capitalized terms used and not
defined herein have the respective meanings assigned to them in the Debenture.
Dated:
-----------------------------
- ---------------------------------------------
Signature
Fill in for registration of Debenture:
Please print name and address
(including zip code number):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 10.19
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated this 30th day of June, 1998
(this "Agreement"), between SAC TECHNOLOGIES, INC., a Minnesota corporation,
with principal executive offices located at 4444 West 76th Street, Suite 600,
Edina, Minnesota 55435 (the "Company"), and the undersigned (the "Initial
Investor").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the
Securities Purchase Agreement dated June 30, 1998, between the Initial Investor
and the Company (the "Securities Purchase Agreement"), the Company has agreed to
issue and sell to the Initial Investor $2,500,000 aggregate principal amount of
its 5% Convertible Debentures due June 30, 2001 (the "Debentures") which, upon
the terms and subject to the conditions thereof, are convertible into shares of
the common stock, $.01 par value, of the Company (the "Common Stock"); 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 upon conversion of the Debentures 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 contract, securities,
ownership
<PAGE>
or otherwise; and the terms "controlling" and "controlled" have the
respective meanings correlative to the foregoing.
(ii) "COMMISSION" means the Securities and Exchange Commission.
(iii) "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.
(iv) "INVESTOR" 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.
(v) "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.
(vi) "PROSPECTUS" means the prospectus (including, without
limitation, any preliminary prospectus and any final prospectus filed
pursuant to Rule 424(b) under the Securities Act, including 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.
(vii) "REGISTRABLE SECURITIES" means the Common Stock issued or
issuable upon conversion of the Debentures; 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.
<PAGE>
(viii) "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.
(ix) "RESTRICTED SECURITY" means any share of Common Stock issued or
issuable upon conversion of the Debentures 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 the 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.
(x) "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 the 45th day 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 150 days after the Closing Date (as
defined in the Securities Purchase Agreement),
<PAGE>
assuming for purposes hereof a Conversion Price under the Debentures of $3.00
per share.
(b) UNDERWRITTEN OFFERING. If the offering pursuant to a
Registration Statement contemplated by Section 2(a) hereof involves an
underwritten offering, the Investors who hold a majority-in-interest of the
Registrable Securities subject to such underwritten offering shall have the
right to select one legal counsel to represent their interests, and an
investment banker (or bankers) and manager (or managers) to administer the
offering, subject to the consent of the Company (which consent shall not be
unreasonably withheld). The Investors who hold the Registrable Securities to be
included in such underwriting shall pay all underwriting discounts and
commissions of such investment banker (or bankers) and manager (or managers) so
selected in accordance with this Section 2(b) with respect to their Registrable
Securities.
(c) REGISTRATION DEFAULT. If the Registration Statement covering the
Registrable Securities required to be filed by the Company pursuant to Section
2(a) hereof is not (i) filed with the Commission by the 45th day after the
Closing Date or (ii) declared effective by the Commission within 150 days after
the Closing Date (either of which, an "Initial Date"), then the Company shall
make the payments to the Initial Investor as provided in the next sentence. The
amount to be paid by the Company to the Initial Investor shall be determined as
of each Computation Date, and such amount shall be equal to 1% 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, such
amount shall be equal to 2% of the Purchase Price, calculated on a pro rata
basis to the date on which such the Registration Statement is filed with (in the
event of an Initial Date pursuant to (c)(i) above) or declared effective by (in
the event of an Initial Date pursuant to (c)(ii) above) the Commission (the
"Periodic Amount"). The full Periodic Amount shall be paid by the Company to the
Initial Investor by wire transfer of immediately available funds within three
business days after each Computation Date.
As used in this Section 2(c), "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
<PAGE>
days after the previous Computation Date until such Registration Statement is so
declared effective.
(d) 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.
(e) In the event the Current Market Price (as such term is defined
in the Debenture) under the Debentures declines to $3.00, the Company shall file
an additional Registration Statement with the Commission for such additional
number of Registrable Securities as would be issuable upon conversion of the
Debentures, in addition to those previously registered, assuming a Conversion
Price of $1.50 per share. The Company shall prepare and file with the Commission
not later than the 30th day thereafter, a Registration Statement relating to the
offer and sale of such 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.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration
of the Registrable Securities, the Company shall:
(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 Closing Date 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
<PAGE>
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. Notwithstanding the foregoing provisions of this Section 3(a), the
Company may, during the Registration Period, suspend the use of the Prospectus
for a period not to exceed 60 days (whether or not consecutive) in any 12-month
period if the Board of Directors of the Company determines in good faith that
because of pending mergers or other business combination transactions, the
planned acquisition or divestiture of assets, pending material corporate
developments and similar events, it is in the best interests of the Company to
suspend such use, and prior to or contemporaneously with suspending such use the
Company provides the Investors with written notice of such suspension, which
notice need not specify the nature of the event giving rise to such suspension.
At the end of any such suspension period, the Company shall provide the
Investors with written notice of the termination of such suspension.
(b) During the Registration Period, comply with the provisions of
the Securities Act with respect to the disposition of all 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
to the Investors and reflect in such documents all such comments as the
Investors (and their counsel) 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
<PAGE>
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 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
<PAGE>
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) (i) 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 Investors 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 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.
(k) Make generally available to its securityholders as soon as
practicable, but in any event not later than 18 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
<PAGE>
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);
(l) 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) Enter into such customary agreements (including an underwriting
agreement in customary form in the event of an underwritten offering) and take
such other lawful and reasonable action to expedite and facilitate the
registration and disposition of the Registrable Securities, and in connection
therewith, if an underwriting agreement is entered into, cause the same to
contain indemnification provisions and procedures substantially identical to
those set forth in this Agreement;
(n) (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, in good faith, as confidential,
proprietary or containing any material non-public 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
<PAGE>
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 Investors and other parties;
(o) 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;
(p) 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 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);
(q) 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
<PAGE>
of the type customarily covered in "cold comfort" letters in connection with
secondary underwritten offerings;
(r) In connection with any underwritten offering, deliver such
documents and certificates as may be reasonably required by the managers, if
any.
(s) 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. In no event
shall the Company be required to register the market making activities of such
broker-dealer under the Securities Act.
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 itself, the Registrable
Securities held by it and the intended method of
<PAGE>
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request. 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 an 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 selling commissions and stock transfer taxes, 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 (such
<PAGE>
fees not to exceed $30,000) 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 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 an updated Prospectus correcting the
untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such loss, claim, damage or liability.
<PAGE>
(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 who sign any
Registration Statement 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, 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 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
<PAGE>
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 Indemnifying 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
<PAGE>
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 Indemnified 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) 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.
(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
<PAGE>
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:
(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 Holder, 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 transferee of all or any portion of such securities (or all or
any portion of any Debenture of the Company which is convertible into such
securities) of Registrable Securities only if: (a) the Investor agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time before such transfer or
assignment, furnished with (i) written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being transferred or assigned, (ii) a detailed statement
of the circumstances surrounding the proposed transfer or assignment and (iii)
if reasonably requested by the Company, an opinion of counsel, reasonably
satisfactory to the Company that such disposition will not require registration
under the Securities Act, (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
<PAGE>
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, 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) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission, receipt
confirmed) or sent by certified mail, return receipt requested, properly
addressed and with proper postage pre-paid (i) if to the Company, to SAC
Technologies, Inc. 4620 South Valley View Blvd. Suite A1, Las Vegas Nevada,
89103 Attention: Ronald Burgmeier, with a copy to Doherty, Rumble & Butler 350
Fifth Street Towers 150 South 5th Street, Minneapolis, Minnesota 55402
Attention: Sandra Schruer Jones (ii) if to the Initial Investor, at the address
set forth in the Securities Purchase Agreement and (iii) if to any other
Investor, at such address as such Investor shall have provided in writing to the
Company, or at such other address as each such party furnishes by notice given
in accordance
<PAGE>
with this Section 10(b), and shall be effective, when personally delivered, upon
receipt and, when so sent by certified mail, four calendar days after deposit
with the United States Postal Service.
(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.
(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, provision,
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
<PAGE>
as have been irrevocably waived. Without limiting the generality of the
foregoing, without the written consent of the Holders of a majority in number 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.
(h) This Agreement constitutes 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 supersedes 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.
(l) 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 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.
SAC TECHNOLOGIES, INC.
By:
-----------------------------------
Name:
Title:
THE SHAAR FUND LTD.
By: INTER CARIBBEAN SERVICES
LTD.
By:
-------------------------------
Name:
Title:
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