<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22 , 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 9511 77-0096608
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5380 NORTH STERLING CENTER DRIVE
WESTLAKE VILLAGE, CALIFORNIA 91361
(818) 865-2205
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARVIN MEARS
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
5380 NORTH STERLING CENTER DRIVE
WESTLAKE VILLAGE, CALIFORNIA 91361
(818) 865-2205
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL D. DONAHUE, ESQ.
ASHER M. LEIDS, ESQ.
DONAHUE, MESEREAU & LEIDS LLP
1900 AVENUE OF THE STARS, SUITE 2700
LOS ANGELES, CALIFORNIA 90067
(310) 277-1441
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
- ---------------
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
===============================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share................................ 2,820,000(1) $7.3125(2) $20,621,250(2) $6,083.27(2)
===============================================================================================================================
</TABLE>
(1) Represents (i) 380,000 shares owned by Jonathan Fink; (ii) 190,000 shares
owned by Brad Billik; (iii) 200,000 shares issuable upon exercise of an
outstanding warrant, dated January 22, 1998, held by Jonathan Fink (the
"Fink Warrant") at an exercise price of $2.00 per share; (iv) 100,000 shares
issuable upon exercise of an outstanding warrant, dated January 22, 1998,
held by Brad Billik (the "Billik Warrant") at an exercise price of $2.00 per
share; (v) 1,950,000 shares issuable (A) upon conversion of 3,000 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Stock") issued
in a private placement in April 1998 (the "1998 Private Placement") and (B)
upon exercise of warrants (the "Private Placement Warrants") granted to the
purchasers in the 1998 Private Placement (clauses (A) and (B) together, the
"Conversion Shares"). The Conversion Shares do not include fractional shares
of Common Stock that the Company is not required to issue upon conversion of
the Series A Preferred Stock or exercise of the Private Placement Warrants.
Although the number of Conversion Shares is currently indeterminable, for
purposes of estimating the number of shares of Common Stock included in this
Registration Statement, the Company calculated the Conversion Shares to be
registered based on 200% of the number of shares of Common Stock that would
have been issuable upon conversion of or otherwise with respect to the
Series A Preferred Stock at a conversion price of $3.875 per share, plus
300,000 shares issuable upon exercise of the Private Placement Warrants at
an exercise price of $3.875 per share. In accordance with Rule 416 of the
Securities Act of 1933, as amended ("Rule 416"). This calculation represents
the Company's good faith estimate of the additional number of shares of
Common Stock that may be issued upon conversion of the shares of Series A
Preferred Stock if the number of such shares is adjusted upward pursuant to
the floating rate conversion price mechanism as a result of a decline in the
market price of the Common Stock. Pursuant to Rule 416, this Registration
Statement also covers that number of additional shares of Common Stock that
may be offered or issued pursuant to terms which provide for a change in the
amount of shares of Common Stock being offered or issued to prevent dilution
resulting from stock splits, stock dividends or similar transactions or by
reason of reductions in the conversion price of the Series A Preferred Stock
in accordance with the terms thereof.
(2) Pursuant to Rule 457(c), the registration fee is based upon a price of
$7.3125 per share, the closing price of the Registrant's Common Stock as
reported on the over-the-counter Bulletin Board on May 19, 1998.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 22, 1998
PROSPECTUS
2,820,000 SHARES
ENVIRONMENTAL PRODUCTS
& TECHNOLOGIES CORPORATION
COMMON STOCK
------------------------
All of the 2,820,000 shares of Common Stock offered hereby, including
600,000 shares issuable upon exercise of warrants held by certain investors (the
"Warrants") and 1,650,000 shares issuable upon conversion of the Company's
Series A Convertible Preferred Stock (the "Series A Preferred Stock"), are being
sold by the Selling Stockholders. The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders; however, it may
receive proceeds from the exercise of the Warrants held by the Selling
Stockholders. See "Selling Stockholders" and "Plan of Distribution." The
Company's Common Stock is traded on the OTC Bulletin Board under the symbol
EPTC. The closing price of the Company's Common Stock on May 19, 1998 was
$7.3125 per share.
The Company is a development stage company that intends to engage in the
business of selling and marketing a closed loop waste management system.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND LIMITED
LIQUIDITY. SEE "RISK FACTORS" ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
The Company intends to furnish its stockholders annual reports containing
financial statements audited by an independent public accounting firm after the
end of each fiscal year. In addition, the Company will furnish to its
stockholders quarterly reports for the first three quarters of each fiscal year
containing unaudited financial and other information after the end of each
fiscal quarter, upon written request to the Secretary of the Company.
2
<PAGE> 4
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual events and results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Except as otherwise
indicated, all information in this Prospectus reflects a two-for-one stock split
that was effected in May 1998.
THE COMPANY
Environmental Products & Technologies Corporation (the "Company") is a
development stage company that intends to engage in the business of selling and
marketing a closed loop waste management system. The Company is a Delaware
corporation formed in 1983. Its address is 5380 North Sterling Center Drive,
Westlake Village, California 91361 and its telephone number is (818) 865-2205.
THE OFFERING
BY SELLING STOCKHOLDERS....... 2,820,000 shares of the Company's Common Stock,
including 600,000 shares issuable upon the
exercise of warrants held by certain investors
(the "Warrants") and 1,650,000 shares issuable
upon the conversion of the company's Series A
Preferred Stock. The Company will not receive
any proceeds from the sale of these shares.
However, if the Selling Stockholders who hold
Warrants determine to exercise their Warrants
in order to sell shares hereunder, the Company
will receive the net proceeds of the exercise
of the Warrants. If all of the Warrants were
exercised, the Company would receive proceeds
of $1,762,500.
COMMON STOCK CURRENTLY
OUTSTANDING................... 8,017,148 shares, excluding the 600,000 shares
issuable upon exercise of the Warrants and the
1,650,000 shares issuable upon conversion of
the Company's Series A Preferred Stock.
RISK FACTORS.................. The securities involve a high degree of risk
and limited liquidity. See "Risk Factors."
3
<PAGE> 5
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company's
audited financial statements included elsewhere herein and does not reflect the
two for one stock split that the Company effected in May 1998.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WEIGHTED AVERAGE OUTSTANDING SHARES):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
SEPTEMBER 30, SIX MONTHS ENDED
---------------------- --------------------------------
1996 1997 MARCH 31, 1997 MARCH 31, 1998
--------- --------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales............................... $ -0- $ -0- $ -0- $ -0-
Gross profit (loss)..................... -0- -0- -0- -0-
Loss from operations.................... (266) (379) (214) (407)
Net Loss................................ (265) (395) (221) (412)
Net loss per common share............... (0.09) (0.11) (.06) (.10)
Weighted average common shares
outstanding........................... 3,078,066 3,591,345 3,591,345 3,991,907
</TABLE>
BALANCE SHEET DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
---------------- --------------------------
1996 1997 1997 1998
----- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total assets...................................... $ 273 $ 312 $ 44 $ 165
Total liabilities................................. $ 149 $ 223 $ 142 $ 581
Accumulated deficit............................... $(960) $(1,387) $(1,181) $(1,799)
</TABLE>
4
<PAGE> 6
PROSPECTUS-INTRODUCTION
This Prospectus relates to the offer and sale from time to time of up to
2,820,000 shares (the "Shares") of common stock, $.01 par value per share
("Common Stock"), of Environmental Products & Technologies Corporation, a
Delaware corporation (the "Company"), by the Selling Stockholders named herein
(the "Selling Stockholders"), or by their respective pledgees, donees,
transferees or other successors in interest that receive such Shares as a gift,
partnership distribution or other non-sale related transfer. Of the 2,820,000
Shares being offered hereby: (i) 1,650,000 Shares are issuable upon conversion
of or otherwise with respect to 3,000 shares of the Company's Series A
Convertible Preferred Stock, $.01 par value per share ("Series A Preferred
Stock"), held by two of the Selling Stockholders; (ii) 300,000 Shares are
issuable upon the exercise of certain warrants (the "Private Placement
Warrants") held by two of the Selling Stockholders, (iii) 380,000 Shares held by
Jonathan Fink; (iv) 190,000 Shares held by Brad Billik; (v) 200,000 Shares
issuable upon the exercise of a warrant held by Jonathan Fink (the "Fink
Warrant"); and (vi) 100,000 Shares issuable upon the exercise of a warrant held
by Brad Billik (the "Billik Warrant"). The Series A Preferred Stock and the
Private Placement Warrants were issued by the Company to the Selling
Stockholders on April 7, 1998 in a private transaction (the "1998 Private
Placement").
The number of Shares indicated as being issuable upon conversion of or
otherwise with respect to the Series A Preferred Stock and the Private Placement
Warrants sold in the 1998 Private Placement and offered hereby represents a good
faith estimate of the number of shares of Common Stock that may be issued upon
conversion of or otherwise with respect to the Series A Preferred Stock by
reason of the floating rate conversion mechanism included in the Certificate of
Designations, Preferences and Rights for the Series A Preferred Stock. The
estimate is based on 200% of the number of shares of common Stock issuable at a
conversion price of $3.875 per share in accordance with Rule 416 ("Rule 416") of
the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to Rule
416, the number of shares of Common Stock underlying the Series A Preferred
Stock and offered for sale hereby includes an indeterminate number of shares as
may be issued or issuable upon conversion of or otherwise with respect to the
Series A Preferred Stock by reason of the floating rate conversion price
mechanism and other adjustment mechanisms described in the Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock (the
"Certificate of Designation"), or by reason of any stock splits, stock dividends
or similar transactions involving the Common Stock, in order to prevent
dilution. Although the Company will receive the exercise price of any Warrants
which are exercised, the Company will not receive any of the proceeds from the
sale of the Shares by the Selling Stockholders. The expenses of registration of
the Shares which may be offered hereby under the Securities Act will be paid by
the Company.
The Shares covered under the Registration Statement of which this
Prospectus is a part may be offered for sale from time to time by or for the
account of the Selling Stockholders, or their pledgees, donees, transferees or
other successors in interest, in the open market, in the over the counter market
on the electronic bulletin board (the "Bulletin Board") or on one or more
exchanges on which the Shares are then listed, in privately negotiated
transactions, in an underwritten offering, in a combination of such methods, or
by any other legally available means, at market prices prevailing at the time of
such sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices. The Shares are intended to be sold through one or
more broker-dealers or directly to purchasers. Such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders, their successors in interest and/or the purchasers of the
Shares for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). The Selling Stockholders, their successors
in interest and/or any broker-dealers acting in connection with the sale of the
Shares hereunder may be deemed to be underwriters within the meaning of Section
2(11) of the Securities Act, and any commissions or other compensation received
by them and any profits realized by them on the resale of the Shares as
principals may be deemed underwriting compensation under the Securities Act. See
"Selling Stockholders" and "Plan of Distribution."
5
<PAGE> 7
RISK FACTORS
The securities offered hereby are speculative in nature and an investment
in the Shares offered hereby involves a high degree of risk. In addition to the
other information contained in this Prospectus, prospective investors should
carefully consider the following risk factors in evaluating whether to purchase
the Shares offered hereby.
Accumulated Deficit; Working Capital Deficit; Negative Net Worth; History
of Operating Losses; Expectation of Future Losses. The Company has experienced
significant operating losses since its inception. At March 31, 1998, the Company
had an accumulated deficit of approximately $1,799,000, a working capital
deficit of approximately $546,000 and a negative net worth of approximately
$(415,000). The Company incurred an operating loss of approximately $(379,000)
for the fiscal year ended September 30, 1997, and has incurred an operating loss
of approximately $(407,000) for the six months ended March 31, 1998. Such losses
have resulted principally from no revenues from operations and costs associated
with the acquisition of the Company's technologies and general and
administrative expenses. The Company has generated no revenues from operations
and incurred increased losses to date and expects that it will continue to incur
losses until such time, if ever, as revenues from product sales are sufficient
to fund its continuing operations. The Company's profitability will depend on
its ability to commercialize its waste management system. There can be no
assurance that the Company will ever generate sufficient revenues to achieve
profitability. See "Management's Discussion and Analysis or Plan of Operations."
Development Stage Company. The Company is designated by its independent
auditors as a development stage company in accordance with SFAS 7 "Accounting
and Report by Development Stage Enterprises." Under this statement, a
development stage company is an enterprise that is devoting substantially all of
its time to establishing a new business and planned operations have not
commenced. At this stage there is no assurance that the Company will be able to
raise sufficient capital and develop a profitable market for its planned
product.
Capital Intensive Business; Need for Additional Financing. The Company's
business is capital intensive. The proceeds of this offering will be received by
the Selling Stockholders. While the Company may receive cash from the exercise
of warrants held by the Selling Stockholders, there can be no assurance that the
Company will derive any specific amount of proceeds from this offering.
Developments in the Company's business and possible expansion into other markets
could indicate that the Company should expand its business at a faster rate than
that currently planned for. Moreover, there can be no assurance that the Company
will not encounter unforeseen difficulties that may deplete its capital
resources more rapidly than anticipated, which would require that the Company
seek additional funds through equity, debt or other external financing. In any
event, it is likely that the Company will attempt to raise additional capital to
meet its obligations and to accelerate its growth. There can be no assurance
that any additional capital resources which the Company may need will be
available to the Company if and when required, or on terms that will be
acceptable to the Company. If additional financing is required, or desired, the
Company may be required to forgo a substantial interest in its future revenues
or dilute the equity interests of existing stockholders, and a change in control
of the Company may result. Further, if the Company is unable to obtain necessary
financing, it may be required to significantly curtail its activities or cease
operations. See "Management's Discussion and Analysis or Plan of Operations" and
"Use of Proceeds."
Limited Operating History; New Business; No Product Sales. The Company has
a limited operating history and has not generated any revenues to date. There
can be no assurance that the Company will be able to successfully market its
waste management system, products and services. While attempting to
commercialize its products, the Company will be subject to risks inherent in a
new business. Such risks include unanticipated problems relating to
environmental regulatory compliance, the competitive environment in which the
Company operates and marketing problems, and additional costs and expenses that
may exceed current estimates. There can be no assurance that, even after the
expenditure of substantial funds and efforts, the Company will ever achieve or
maintain a substantial level of sales of its products. The failure to
successfully market its products and services will have a material adverse
effect on the Company's financial condition, business and results of operations.
6
<PAGE> 8
Uncertain Market Acceptance of the Company's Products. To date, the Company
has had no sales of its waste management system. There can be no assurance that
significant, or any, sales will occur or that the Company's waste management
system will obtain broad, or even limited, market acceptance. The decision by a
potential customer to utilize the Company's waste management system is, among
other things, technical in nature, requiring the customer to make an evaluation
as to whether changes in its capital equipment or operating procedures will be
required in order to realize the performance benefits of the Company's products.
There can be no assurance that potential customers will choose to change their
equipment or established procedures or be willing to incur any necessary costs
to make such changes or that the benefits derived from utilizing the Company's
waste management system will outweigh the costs incurred to make such changes.
Further, there can be no assurance that all customers will experience the
performance and cost advantages expected by the Company. For example, a
by-product of the Company's waste management system is the ability to convert
the methane by-product into electricity. Such ability may be of little or no
interest to consumers at a time when electricity is relatively inexpensive. If
the Company is not successful in marketing its waste management system, its
ability to generate revenues will be greatly diminished and the Company will be
dependent on other future products and services that may be developed or
otherwise obtained by the Company. There can be no assurance that the Company's
waste management system will be successfully marketed or that future products
and services will be developed or obtained.
Development Risks. Environmental Products and Technologies is a development
stage company. The Company has products in various stages of development, and no
revenue has been recognized from the sale of its products. The Company has
developed and plans to market new products and new applications of technology
and, accordingly, is subject to risks associated with such ventures. To date,
the Company has assembled one prototype waste management system. The probability
of success of the Company must be considered in light of the expenses and delays
frequently encountered in connection with the operation of a new business and
the development of practical production techniques for new products.
No Independent Certification as to the Effectiveness of the Company's
Products. The Company has only recently completed development of its closed loop
waste management system and has assembled one complete system. The Company
intends to assemble three additional waste management systems within the next
three to six months. The Company has not yet tested its waste management system
under commercial circumstances. No assurance can be given that the Company's
waste management system will perform as anticipated under commercial conditions
or that substantial reengineering, redesign and/or redevelopment work will not
be required for the Company's waste management system to operate as anticipated.
Further, the Company has not submitted its waste management system to an
independent laboratory for testing to ensure that its system is effective.
Equipment Failure; Limited Engineering, Design and Construction Experience;
Limited Manufacturing Experience. The Company has completed assembly of and
operated since March 1, 1998 one waste management system. The Company commenced
demonstrations to dairies on April 24, 1998. With the proceeds from the 1998
Private Placement (as hereinafter defined), the Company intends to manufacture
three additional demonstration units of its waste management system. From time
to time, the Company has experienced mechanical or technical difficulties with
such waste management system which has required repairs and maintenance. Any
such mechanical or technical difficulties with its systems in the future could
result in an interruption in the Company's ability to manufacture and sell such
systems. The failure of the Company to effect prompt repairs and otherwise keep
its waste management systems operating at targeted capacities could have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company may experience problems associated with
the manufacturing, assembling and engineering of additional waste management
systems, including, without limitation, cost overruns, start-up delays and
technical or mechanical problems. To date, the Company has engaged in only
limited manufacturing and there can be no assurance that the Company's efforts
to expand its manufacturing capabilities will not exceed estimated costs or take
longer than expected, or that other unanticipated problems will not arise that
would materially adversely affect the Company's business and prospects. See
"Management's Discussion and Analysis or Plan of Operations" and "Business."
7
<PAGE> 9
Dependence on Major Subcontractors and Suppliers. The Company relies on
subcontractors and suppliers to manufacture, subassemble and perform certain
testing of all of the components of the Company's waste management system. The
Company plans to outsource the manufacture of major components and complete
final assembly and testing of its waste management systems at its customers
operations. The inability to develop relationships with, or the loss of,
subcontractors or suppliers, or the failure of its subcontractors or suppliers
to meet the Company's price, quality, quantity and delivery requirements, could
require the Company to reduce or eliminate expenditures for research and
development, production or marketing of its products, or otherwise to curtail or
discontinue its operations, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Suppliers."
Product Warranty. The Company intends to warrant its waste management
systems to be free of defects in workmanship and materials for 90 days from
installation at the location of the end user. There can be no assurance that the
Company will not experience warranty claims or parts failure rates in excess of
those which it has assumed in pricing its products and spare parts. Any such
excess warranty claims or spare parts failure rates could have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company currently has no experience with warranty claims
relating to its products.
Dependence on a Single Product Line. The Company anticipates that it will
derive substantially all of its revenue in the foreseeable future from sales of
its waste management systems, related consumables and spare parts. If the
Company is unable to generate sufficient sales of its waste management systems
due to market conditions, manufacturing difficulties or other reasons, it may
not be able to continue its business. Similarly, if purchasers of its waste
management systems were to continue utilizing current waste management
practices, the Company's business, results of operations and financial condition
could be materially adversely affected. Dependence on a single product line
makes the Company particularly vulnerable to the successful introduction of
competitive products.
No Product Liability Insurance. The Company could be subject to product
liability claims in connection with the use of the products that it sells. There
can be no assurance that the Company would have sufficient resources to satisfy
any liability resulting from these claims or would be able to have its customers
indemnify or insure the Company against such claims. The Company does not
currently carry product liability insurance and there can be no assurance that
such coverage, if obtainable, would be adequate in terms and scope to protect
the Company against material adverse effects in the event of a successful
product liability claim. Accordingly, any product liability claim brought
against the Company could, and probably would, have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks Inherent in International Operations. The Company intends to market
its products and services internationally and plans to seek opportunities
overseas, either independently or through joint ventures or other collaborative
arrangements with strategic partners. To the extent that the Company operates
its business overseas and/or sells its products in foreign markets, it will be
subject to all of the risks inherent in international operations and
transactions, including the burdens of complying with a wide variety of foreign
laws and regulations, exposure to fluctuations in currency exchange rates and
tariff regulations, potential economic instability and export license
requirements. In addition, international environmental regulations and
enforcement of such regulations vary by country and are subject to changes which
may adversely affect the Company's operations. See "Business."
Competition. The Company will directly and indirectly compete with other
businesses, including businesses in the solid waste collection and disposal
business. In many cases, these potential competitors are larger and more firmly
established than the Company. In addition, many of such potential competitors
have greater marketing and development budgets and greater capital resources
than the Company. Accordingly, there can be no assurance that the Company will
be able to achieve and maintain a competitive position in the businesses in
which it will compete. See "Business -- Competition."
Dependence on Patents and Proprietary Technology; Reliance on Licensed
Technology. The Company's success will depend, in part, on its ability to
maintain protection for its products and processes under United States and
foreign patent laws, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. Currently, a portion of the
Company's technology for its waste management system is
8
<PAGE> 10
licensed from third parties and the Company has not obtained indemnification
from the licensors of such technology. Accordingly, if the technology licensed
by such licensors to the Company infringes the rights of third parties, the
Company could be held liable for damages to such third party and could not seek
reimbursement from the licensor. The Company does not maintain any insurance to
protect against such occurrence and, if such a claim were made against the
Company it could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not possess any
patents and does not have any applications pending. There can be no assurance
that any patent applications, if applied for, will result in issued patents,
that any issued patents will afford adequate protection to the Company or not be
challenged, invalidated, infringed or circumvented or that any rights thereunder
will afford competitive advantages to the Company. Furthermore, there can be no
assurance that others have not independently developed, or will not
independently develop, similar products and technologies or otherwise duplicate
any of the Company's products and technologies.
There can be no assurance that the validity of any patent issued to the
Company or any licensor of technology to the Company would be upheld if
challenged by others in litigation or that the Company's activities would not
infringe patents owned by others. The Company could incur substantial costs in
defending itself in suits brought against it, or in suits in which the Company
seeks to enforce its patent and/or license rights against others. Should the
Company's products or technologies be found to infringe patents issued to third
parties, the Company would be required to cease the manufacture, use and sale of
the Company's products and the Company could be required to pay substantial
damages. In addition, the Company may be required to obtain licenses to patents
or other proprietary rights of third parties in connection with the development
and use of its products and technologies. No assurance can be given that any
such licenses required would be made available on terms acceptable to the
Company, or at all.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its employees,
consultants, advisors and others. There can be no assurance that such parties
will maintain the confidentiality of such trade secrets or proprietary
information, or that the trade secrets or proprietary information of the Company
will not otherwise become known or be independently developed by competitors in
a manner that would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Intellectual
Property."
Dependence on Environmental Regulation. Federal, state and local
environmental legislation and regulations mandate stringent waste management and
operations practices, which require substantial capital expenditures and often
impose strict liabilities for non-compliance. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
technology and services being developed or offered by the Company. The level of
enforcement activities by federal, state and local environmental protection and
related agencies, and changes in regulations and waste generator compliance
activities, will also affect demand. To the extent that the burdens of complying
with such laws and regulations may be eased as a result of, among other things,
political factors, or that producers of industrialized farm waste find
alternative means to comply with applicable regulatory requirements, demand for
the Company's products and services could be adversely affected, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Any changes in these regulations which increase
compliance standards may require the Company to change or improve its operating
procedures. To the extent the Company conducts its business overseas,
international environmental regulations will be applicable. Such regulations
vary by country and are subject to changes which may adversely affect the
Company's operations. See "Business -- Environmental Matters."
Regulatory Status of Operations. The Company and its customers operate in a
highly regulated environment, and the Company's potential customers and/or the
Company's products and services may be required to have various federal, state
and/or local government permits and authorizations, registrations and/or
exemptions. Any of these permits or approvals may be subject to denial,
revocation or modification under various circumstances. Failure to comply with
the conditions of such permits, approvals, registrations, authorizations or
exemptions may adversely affect the installation or operation of the Company's
waste management system and may subject the Company to federal, state or
locally-imposed penalties. The Company's ability to satisfy the permitting
requirements for a particular installation does not assure that
9
<PAGE> 11
permitting requirements for other installations will be satisfied. In addition,
if new environmental legislation is enacted or current regulations are amended
or are interpreted or enforced differently, the Company or its customers may be
required to obtain additional operating permits, registrations, certifications,
exemptions or approvals. There can be no assurance that the Company or its
customers will meet all of the applicable regulatory requirements.
Potential Environmental Liability. The Company's business exposes it to the
risk that harmful substances may be released or escape into the environment from
its processes or equipment, resulting in potential liability for the clean-up or
remediation of the release and/or potential personal injury associated with the
release. Liability for investigation and/or clean-up and corrective action costs
exists under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), and corresponding state laws.
Additionally, the Company is potentially subject to regulatory liability for the
generation, transportation, treatment, storage or disposal of hazardous waste if
it does not act in accordance with the requirements of federal or state
hazardous waste regulations or facility specific regulatory determinations,
authorizations or exemptions. The Company is also potentially subject to
regulatory liability for releases into the air or water under the Clean Air Act
of 1970, as amended, and the Federal Water Pollution Control Act of 1972, as
amended (hereinafter the "Clean Water Act"), and analogous state laws and
regulations and various other applicable federal or state laws and regulations
if it does not comply with those requirements.
Dependence on Key Management and Personnel. The Company is highly dependent
upon the efforts of its senior management. The Company is also dependent upon
its other management personnel, as well as certain scientific advisors and
consultants. The loss of the services of one or more of these individuals could
have a material adverse effect upon the Company. The Company's future success
will depend in large part upon its ability to attract and retain additional
highly skilled scientific, managerial, manufacturing and marketing personnel.
The Company faces competition for hiring such personnel from other companies,
research and academic institutions, government agencies and other organizations.
There can be no assurance that the Company will continue to be successful in
attracting and retaining such personnel. See "Management."
Prior Legal Actions Involving Chief Executive Officer and Principal
Stockholder. On March 12, 1993, the United States District Court for the Central
District of California permanently enjoined Mr. Marvin Mears, the President,
Chief Executive Officer, Director and a major stockholder of the Company, from
future violations of aiding and abating violations of the antifraud provisions
of the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended. In addition, by order dated February 27, 1996, Mr. Mears,
without admitting or denying any of the findings contained in an order issued by
the Securities and Exchange Commission, consented to the entry of an Order
Making Findings and Imposing Sanctions Pursuant to Section 9(b) of the
Investment Company Act of 1940 whereby Mr. Mears agreed to be barred from
association with any investment advisor or investment company.
Control by Existing Management. The Company's executive officers and
directors currently beneficially own approximately 48.88% of the outstanding
shares of Common Stock. These persons, if acting in concert, will have
significant voting power with respect to the election of directors and, in
general, the outcome of any other matter submitted to a vote of stockholders.
See "Principal Stockholders."
Potential Adverse Effects of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of shares of "blank check" preferred
stock, which will have such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the Common
Stock. The preferred stock could be utilized to discourage, delay or prevent a
change in control of the Company. Although the Company has no present intention
to issue any shares of preferred stock other than the shares of Series A
Preferred Stock currently outstanding, there can be no assurance that the
Company will not do so in the future. See "Description of Capital
Stock -- Preferred Stock."
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<PAGE> 12
No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. The Company intends to retain earnings, if any, to provide
funds for the expansion of the Company's business. See "Dividend Policy."
Outstanding Warrants and Options; Exercise of Registration Rights. The
Company has outstanding (i) warrants to purchase an aggregate of 300,000 shares
of Common stock at an exercise price of $2.00 per share; (ii) the Private
Placement Warrants to purchase 300,000 shares of Common Stock at an exercise
price of $3.875 per share; and (iii) options to purchase an aggregate of 330,000
shares of Common Stock granted under the Company's 1996 Stock Option Plan at an
exercise price of $.1875 per share. The Company has reserved an aggregate of
400,000 shares of Common Stock for issuance under its stock option plan as of
the date of this Prospectus. Holders of such warrants and options are likely to
exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by such warrants and
options. Further, while these warrants and options are outstanding, the
Company's ability to obtain additional financing on favorable terms may be
adversely affected.
General Risks of Business. Any future success that the Company might enjoy
will depend upon many factors, including factors which may be beyond the control
of the Company or which cannot be predicted at this time. These factors may
include technological advances or product obsolescence, increased levels of
competition, including the entry of additional competitors and increased success
by existing competitors, changes in general economic conditions, increases in
operating costs including costs of supplies, personnel, and equipment, reduced
margins caused by competitive pressures and other factors, and changes in
governmental regulation imposed under federal, state or local laws.
Risks Associated with Management of Potential Growth. The Company's growth
is expected to place a significant strain on its managerial, operation,
financial and information systems resources. To accommodate its current size and
manage growth, the Company must continue to implement and improve its
operational, financial and information systems, and expand, train and manage its
employee base. Additionally, expansion of the Company's information and network
systems is required to accommodate its growth. There can be no assurance that
the Company will be able to effectively manage the expansion of its operations,
or that the Company's facilities, systems, procedures or controls will be
adequate to support the Company's operations. The inability of the company to
manage effectively its future growth would have a material adverse effect on the
Company's business, financial condition and results of operations. This problem
may be exacerbated to the extent the Company continues to acquire additional
technologies, as each such technology must then be integrated into the Company's
operations and systems.
Delaware Anti-Takeover Statute; Issuance of Preferred Stock; Barriers to
Takeover. The Company is a Delaware corporation and thus, upon the consummation
of the Offering will become subject to the prohibitions imposed by Section 203
of the Delaware General Corporation Law, which is generally viewed as an
anti-takeover statute. In general, this statute will prohibit the Company, once
public, from entering into certain business combinations without the approval of
its Board of Directors and, as such, could prohibit or delay mergers or other
attempted takeovers or changes in control with respect to the Company. Such
provisions may discourage attempts to acquire the Company. In addition, the
Company's authorized capital consists of 40,000,000 shares of capital stock of
which 20,000,000 shares are designated as Common Stock and 20,000,000 shares are
designated as preferred stock. The Board of Directors, without any action by the
Company's stockholders, is authorized to designate and issue shares in such
classes or series (including classes or series of preferred stock) as it deems
appropriate and to establish the rights, preferences and privileges of such
shares, including dividends, liquidation and voting rights. The rights of
holders of preferred stock and other classes of Common Stock that may be issued
may be superior to the rights granted to the holders of the existing classes of
Common Stock. Further, the ability of the Board of Directors to designate and
issue such undesignated shares could impede or deter an unsolicited tender offer
or takeover proposal regarding the Company and the issuance of additional shares
having preferential rights could adversely affect the voting power and other
rights of holders of Common Stock. Issuance of preferred stock, which may be
accomplished through a public offering or a private placement, may dilute the
voting power of holders of Common Stock (such as by issuing preferred stock with
super voting rights) and may render more difficult the removal of current
management, even if such removal may be in the stockholders' best interests. Any
such issuance of
11
<PAGE> 13
preferred stock could prevent the holders of Common Stock from realizing a
premium on their shares. See "Description of Securities."
Risks Associated with Forward-Looking Statements Included in this
Prospectus. This Prospectus contains certain forward-looking statements
regarding the plans and objectives of management for future operations. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. The Company's plans and
objectives are based, in part, on assumptions involving the Company's ability to
successfully integrate the various technologies it has licensed, the Company's
ability to market successfully its waste management system and insecticide
products, increased governmental regulation of livestock and poultry operations
and that there will be no unanticipated material adverse change in the Company's
business. Assumptions relating to the foregoing, among others, involve judgments
with respect to, among other things, future economic, competitive, regulatory
and market conditions and future business decisions, all of which are difficult
or impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, particularly in view of the Company's early stage operations,
the inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
Limited Market for the Common Stock. The Company's Common Stock is traded
on the OTC Bulletin Board, but is not listed on any stock exchange or on NASDAQ.
Trading volume in the Common Stock has fluctuated considerably in the recent
past. The Company intends to file for the registration of the entire class of
its Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act" ), in order to make the Company a "reporting
company" in that it will be required to file all of the reports, proxy
statements and other information required to be filed with the Securities and
Exchange Commission (the "Commission") under the Exchange Act.
Possible Volatility of Stock Prices; Penny Stock Rules. The
over-the-counter markets for securities such as the Company's Common Stock
historically have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors, such as new
product developments and general trends in the investment markets, as well as
general economic conditions and quarterly variations in the Company's results of
operations, may adversely affect the market price of the Company's Common Stock.
Moreover, unless and until it is approved for quotation on NASDAQ, the Company's
Common Stock could become subject to rules adopted by the Commission regulating
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
NASDAQ, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or the NASDAQ
system). Unless an exemption from the definition of a "penny stock" were
available, any broker engaging in a transaction in the Company's Common Stock
would be required to provide any customer with a risk disclosure document,
disclosure of market conditions, if any, disclosure of the compensation of the
broker-dealer and its salesperson in the transaction, and monthly accounts
showing the market values of the Company's Common Stock held in the customer's
account. The bid and offer quotation and compensation information must be
provided prior to effecting the transaction and must be contained on the
customer's confirmation. It may be anticipated that a number of brokers may be
unwilling to engage in transactions in the Company's Common Stock because of the
need to comply with the "penny stock" rules, thereby making it more difficult
for purchasers of Common Stock offered hereby to dispose of their shares. The
Company's Common Stock is covered by a Securities and Exchange Commission rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser's written agreement to the transaction prior
to the
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<PAGE> 14
sale. Consequently, the rule may affect the ability of broker-dealers to sell
the Company's securities and also may affect the ability of purchasers in this
offering to sell their shares in the secondary market.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock and does
not expect to declare or pay any cash or other dividends in the foreseeable
future. The Company intends to retain earnings, if any, to provide funds for the
expansion of the Company's business. See "Risk Factors -- Dividend Policy."
USE OF PROCEEDS
The Company will not receive the proceeds of sales of shares by the Selling
Stockholders. However, if the Selling Stockholders who hold Warrants determine
to exercise their Warrants in order to sell shares hereunder, the Company will
receive the proceeds of the exercise of the Warrants. If all of the Warrants
were exercised, the Company would receive net proceeds of $1,762,500. The
Company plans to use any such net proceeds for advertising and marketing and as
working capital. The amounts actually expended for each such use, if any, are at
the discretion of the Company and may vary significantly depending upon a number
of factors, including the amount of such proceeds, future revenue growth and the
amount of cash generated by the Company's operations. To the extent such
proceeds are not utilized immediately, they will be invested in United States
government or governmental agency securities or short-term insured certificates
of deposit.
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Company was incorporated in 1983 by Corporate Capital Resources, Inc.
and later that year acquired Information Bureau, Inc. and subsequently changed
its name to Information Bureau, Inc. In 1989, the Company changed its name to
Central Corporate Reports Services, Inc. and operated in the financial public
relations business until March 1990 when the Company became inactive. In 1990
the Company changed its name to ACP International, Inc. and in 1994 the Company
changed its name to Combined Assets, Inc. In January 1995, the Company's name
was changed to Environmental Products & Technologies Corporation.
At the end of 1995, the Company commenced development of a waste management
system to control odors and solid stream waste in the farming industry. In
addition, the Company is developing organic based insecticides for agricultural,
commercial and residential use.
The Company is currently in the development stage of operations and, to
this time, has devoted its time to raising capital, product and supplier
development and marketing future products. No products have been assembled,
manufactured or marketed at this time, except that the Company has assembled one
prototype closed loop waste management system for demonstration purposes.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
The Company recognized no revenue for the six months ended March 31, 1998
(the "1998 Period") and for the six months ended March 31, 1997 (the "1997
Period"). During each of the 1997 and 1998 Periods, the Company's efforts were
directed at researching, designing, developing and testing its closed loop waste
management system.
Research and development expenses primarily consist of the cost of
personnel and equipment needed to conduct the Company's research and development
efforts. Research and development expenses for the 1998 Period increased
$185,596, or approximately 243%, to $262,095 from $76,499 for the 1997 Period.
This increase in research and development expenses reflects additional expenses
associated with the design, development and testing of prototype systems, the
increase in personnel and purchase of components for the Company's currently
operating prototype waste management system and acquiring the rights to mine
diatomaceous earth on four claims approximately 640 acres which is located in
Harper Valley, Oregon.
General and administrative expenses primarily consist of general and
administrative costs related to the salaries of the Company's administrative
personnel and associated costs. General and administrative expenses for the 1998
Period increased by $8,204 to $145,282 from $137,078 for the 1997 Period.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996
The Company generated no revenue for the fiscal year ended September 30,
1997 ("Fiscal 1997") and for the fiscal year ended September 30, 1996 ("Fiscal
1996").
Research and development expenses for Fiscal 1997 increased by $69,238, to
$69,238 from -0- for Fiscal 1996. This increase in research and development
expenses for Fiscal 1997 reflects expenses associated with the research, design
and development of the Company's closed loop waste management system.
General and administrative expenses for Fiscal 1997 increased by $44,035,
or approximately 16.57%, to $309,914 from $265,879 for Fiscal 1996. This
increase in general and administrative expenses was primarily the result of
increased salaries and rental expense which was partially offset by decreased
consulting and other expenses.
Interest expense for Fiscal 1997 was $18,310 compared to -0- for Fiscal
1996. Interest expense for Fiscal 1997 related to the note payable to Ronald
Knudsen, formerly the Director of Product Development of the Company.
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<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the design and
development of its prototype closed loop waste management system. The Company's
primary sources of liquidity have been private placements of equity and debt
securities and loans from officers/stockholders on an as needed basis.
Between October and December 1995, the Company sold 100,000 shares of
Common Stock for an aggregate of $10,000, or $.10 per share. Between January and
March 1996, the Company sold 400,000 shares of Common Stock for an aggregate of
$189,650, or approximately $.47 per share. Between April and June 1996, the
Company sold 40,000 shares of Common Stock for an aggregate of $35,000, or $.87
per share. Between July and September 1996, the Company sold 480,000 shares of
Common Stock for an aggregate of $149,200, or approximately $.31 per share.
Between June and September 1997, the Company sold 550,000 shares of Common Stock
for an aggregate of $337,925, or approximately $.614 per share. The figures in
this paragraph do not give effect to the two-for-one forward stock split that
was effected by the Company in May 1998.
In April 1998, the Company sold 3,000 shares of Series A Preferred Stock
together with warrants (the "Private Placement Warrants") to purchase 300,000
shares of Common Stock (the "1998 Private Placement") for gross proceeds of
$3,000,000. The net proceeds to the Company of approximately $2,675,000 will be
used for continued research and development, working capital and general
corporate purposes. The Private Placement Warrants have an initial exercise
price of $3.875 per share. Private Placement Warrants expire on March 31, 2003.
The Private Placement Warrants contain provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon exercise under
certain circumstances, including without limitation, stock dividends, stock
splits, reorganizations, reclassifications, consolidations, certain dilutive
sales of securities for which the Private Placement Warrants are exercisable
below the then existing Market Price (as defined) and failure to maintain a
sufficient number of authorized shares of Common Stock for issuance and delivery
upon exercise of the Private Placement Warrants. See "Description of
Securities -- Preferred Stock" and "-- Warrants."
Based on its current operating plan, the Company anticipates that
additional financing will be required to finance its operations and capital
expenditures. The Company's currently anticipated levels of revenues and cash
flow are subject to many uncertainties and cannot be assured. Further, the
Company's business plan may change, or unforseen events may occur, requiring the
Company to raise additional funds. The amount of funds required by the Company
will depend upon many factors, including without limitation, the extent and
timing of sales of the Company's waste management system, future product costs,
the timing and costs associated with the establishment and/or expansion, as
appropriate, of the Company's manufacturing, development, engineering and
customer support capabilities, the timing and cost of the Company's product
development and enhancement activities and the Company's operating results.
Until the Company generates cash flow from operations which will be sufficient
to satisfy its cash requirements, the Company will need to seek alternative
means for financing its operations and capital expenditures and/or postpone or
eliminate certain investments or expenditures. Potential alternative means for
financing may include leasing capital equipment, obtaining a line of credit, or
obtaining additional debt or equity financing. There can be no assurance that,
if and when needed, additional financing will be available, or available on
acceptable terms. The inability to obtain additional financing or generate
sufficient cash from operations could require the Company to reduce or eliminate
expenditures for capital equipment, research and development, production or
marketing of its product, or otherwise curtail or discontinue its operations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, if the Company raises funds
through the sale of additional equity securities, the Common Stock offered
hereby may be further diluted.
INFLATION
Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's
financial results to date.
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<PAGE> 17
SELECTED FINANCIAL DATA
The data set forth below is qualified by reference to, and should be read
in conjunction with, the financial statements of the Company and related notes
thereto and "Management's Discussion and Analysis or Plan of Operations"
included elsewhere in this Prospectus. The following selected financial data of
the Company for the fiscal years ended September 30, 1997 and 1996 are derived
from the financial statements of the Company audited by Clumeck, Stern, Phillips
& Schenkelberg, independent accountants. The balance sheets at September 30,
1997 and 1996 and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the fiscal years ended
September 30, 1997 and 1996, respectively, and notes thereto are included
elsewhere in this Prospectus. The selected financial data as of March 31, 1998
and 1997, and for the six-month periods ended March 31, 1998 and 1997 have been
derived from the Company's unaudited financial statements which, in the opinion
of management, reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the results of operations for such periods.
The results of the interim periods are not necessarily indicative of the results
of a full year.
The data relating to outstanding shares has not been retroactively revised
to give effect to the two for one stock split that the Company effected in May
1998.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WEIGHTED AVERAGE OUTSTANDING SHARES):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
---------------------- --------------------------------
1996 1997 1997 1998
--------- --------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales............................... $ -0- $ -0- $ -0- $ -0-
Gross profit (loss)..................... -0- -0- -0- -0-
Loss from operations.................... (266) (379) (214) (407)
Net Loss................................ (265) (395) (221) (412)
Net loss per common share............... (0.09) (0.11) (.06) (.10)
Weighted average common shares
outstanding........................... 3,078,066 3,591,345 3,591,345 3,991,907
</TABLE>
BALANCE SHEET DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------ --------------------
1996 1997 1997 1998
----- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total assets................................... $ 273 $ 312 $ 44 $ 165
Total liabilities.............................. $ 149 $ 223 $ 142 $ 581
Accumulated deficit............................ $(960) $(1,387) $(1,181) $(1,799)
</TABLE>
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<PAGE> 18
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol EPTC. The following table sets forth the range of high and low bid
quotation per share for the Common Stock as reported by the OTC Bulletin Board
during the calendar years indicated. The bid price reflects inter-dealer prices
and does not include retail mark-up, markdown, or commission. The Company
effected a 2 for 1 forward stock split that became effective on May 12, 1998.
The following table does not give effect to such stock split except as
indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1996
Third Quarter............................................. $ 5.50 $ 2.00
Fourth Quarter............................................ 5.00 1.125
1997
First Quarter............................................. 4.25 1.875
Second Quarter............................................ 2.125 0.563
Third Quarter............................................. 3.188 0.625
Fourth Quarter............................................ 4.188 1.000
1998
First Quarter............................................. 10.375 2.313
Second Quarter............................................ 13.000 7.625
Second Quarter (after May 11, 1998)....................... 9.125 7.250
</TABLE>
The Company has never declared or paid a cash dividend on its Common Stock
and does not expect to pay any cash dividends in the foreseeable future.
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<PAGE> 19
BUSINESS
GENERAL
Environmental Products and Technologies Corporation was established to
solve environmental problems regarding the safe disposal of waste created by
large livestock, hog, poultry and other similar operations. The Company has
developed a system that converts animal wastes into commercial quantities of a
pathogen-free, nutrient-rich, soil-building medium.
Over the past few years, there has been an increasing concern regarding the
potential for animal waste pollution from intensive livestock and poultry
operations. The concentration of animal waste from larger and larger operations
have lead to more complaints about odor, greater challenges for animal waste
management and a growing public opinion that more environmental protections are
needed.
Nationwide, 130 times more animal waste is produced than human waste -- 5
tons for every United States citizen -- with some livestock and poultry
operations producing as much waste as a town or even a city! As animals become
increasingly concentrated in certain regions of the country and on larger
operations, there is not always enough fallow land to use all of the manure as
fertilizer. These increasing concentrations of manure mean that the risk of
water pollution from waste spills, runoff from fields and leakage from storage
facilities is also increasing.
Currently, Federal regulations do not address the handling, storage, land
application or disposal of manure. The Inspector General of the Environmental
Protection Agency (the "EPA") recently reported that "Federal regulations
inadequately protect water quality from animal waste."
To respond to these problems, Senator Tom Harkin recently introduced the
Animal Agriculture Reform Act in the United States Senate, as the first bill of
its kind introduced in Congress, to serve as a national approach to animal waste
problems. This bill would set environmental standards for animal waste handling
by large livestock and poultry operations, and require those operations to
follow waste management plans approved by the United States Department of
Agriculture.
To address these problems the Company has developed its closed loop waste
management system. This system is comprised of four basic components: a waste
separator, an anaerobic digester, a bio-reactor and a co-generation system.
The Company currently has one prototype waste management system and intends
to develop three additional systems within the next three to six months. With
these systems, the Company expects to test its systems in, among other places,
Chino, California with the assistance of a professor from the California State
University at Pomona ("Cal Poly Pomona"), Logan, Utah with the assistance of
Utah State University and Pullman, Washington with the assistance of Washington
State University. The Company does not currently have any agreements with any of
the above mentioned universities and, although the Company is currently in
discussions with each such university and believes that an oral understanding
has been reached with each such university to participate in tests of the
Company's waste management system, no assurance can be given as to whether the
oral understanding will lead to a binding agreement for any of such universities
to participate in the testing of the Company's waste management systems.
TYPICAL ANIMAL WASTE MANAGEMENT PRACTICES
Animal waste mainly consists of manure and urine from cows, hogs, chickens,
turkeys, mink and other animals that are raised for food or other purposes.
These materials are potential sources of crop nutrients, but also can pose
environmental threats.
The composition of animal waste depends on both the kind of animal and the
way the waste is handled. For example, poultry operations typically produce dry
litter with about 15% to 25% moisture content, that may be mixed with straw or
another dry material for easier handling. The removed litter is stacked or
stored in metal or wooden structures or on the ground on a temporary basis.
18
<PAGE> 20
Hogs and cattle generate a manure that is more liquid and typically water
is used to flush the manure out of the barns and into storage facilities. The
resulting "slurry" is up to 97% liquid, and most commonly stored in earthen
lagoons. An alternative storage method now being adopted more widely is the
"slurry tank," which offers a greater level of structural stability and
environmental protection.
In the lagoons or tanks, many of the solids settle into a sludge at the
bottom. A farmer who utilizes the animal waste for nutrients pumps the liquid
out for nutrients or irrigation and may agitate the sludge at pumping time to
capture the nutrients that otherwise would remain behind.
The problem with these methods is that as the number of animals raised has
increased and the amount of land utilized has decreased, there is an
insufficient amount of fallow land available for the farmer to utilize the waste
produced by the animals. Accordingly, the animal waste is building up on the
farm causing various health hazards such as run-off and leaching. Further,
manure cannot be spread on land when a crop is growing.
THE ENVIRONMENTAL PRODUCTS & TECHNOLOGIES SOLUTION
The Company has developed a closed loop waste management system to provide
for the safe disposal of waste created by large livestock, poultry, hog and
other similar operations. In addition, the Company's waste management system
converts animal wastes into commercial quantities of a pathogen-free,
nutrient-rich, soil-building medium. Further, if the Company's co-generation
product is utilized, the Company is able to take the methane that is produced by
the Company's system and use it for producing energy for the farmer's property.
The Company's closed loop waste management system consists of the following:
The Waste Separator. The purpose of the waste separator is to pump all of
the effluent into the waste separator which then catches all of the solids,
takes them up through a set of rollers and basically squeezes the moisture out
of the solids. The moisture then goes through a belt and goes into a large tank
at the bottom where the moisture is then pumped into the anaerobic digester. The
solids go into the bio-reactor.
The Anaerobic Digester. The anaerobic digester is sized to eliminate the
lagoon. The anaerobic digester can handle from anywhere between 10,000 and
30,000 gallons of fluid. The anaerobic digester is made out of fiberglass and,
in its typical configuration, is about eight feet in diameter and 42 feet long
for a tank that can hold up to 30,000 gallons of effluent. In that tank, the
Company has isolated a set of proprietary enzymes which excite off the methane.
The methane is then captured and pulled off the tank and used to run an engine
which is able to produce electricity which the farmer can use in his or her
operations.
The anaerobic digester handles all of the fluids. From that methane is
excited off which runs the co-generation system. It goes through a series of
three tanks and in the last tank the liquid is processed. Finally, the liquid is
put through a filter system from which non-potable, re-useable, re-cyclable
water is available for use for irrigation and/or for washing and flushing and
using again to clean out the barns and wash the animals and basically used
without having to repump or use fresh water.
In the first tank, any solids that are not consumed by the enzymes
basically settle to the bottom of the tank. On a regular interval, the solids
that have settled at the bottom of the tank are flushed into the bio-reactor.
In the second set of tanks, all of the solids are settled out. In the third
tank, the clarifier, the water is filtered and then reused.
The Enzymes. The Company employs enzymes for the purpose of exciting the
methane from the animal waste in the anaerobic digester. The Company has tested
this methane producing technology with its enzymes. According to the Company,
the enzymes work best in temperatures ranging from 90 degrees to 105 degrees F.
The Technology. The Company relies, among other things, on technology that
was designed by Lifeline Enterprises L.L.C., a Utah limited liability company
("Lifeline"). Pursuant to a letter of understanding dated May 18, 1998, Lifeline
agreed to transfer to the Company all rights, title and interest in and to the
anaerobic digester, the bio-reactor and the biologicals used therewith. Patents
are currently pending on the co-generation technology and the bio-reactor. There
can be no assurance that a patent will be issued on either the co-
19
<PAGE> 21
generation technology or the bio-reactor, that such products do not or will not
infringe on the intellectual property rights of others or that if a patent is
issued that it will not be invalidated later. In consideration for this
transfer, the Company issued 100,000 shares of Common Stock to Lifeline and has
agreed to issue an additional 50,000 shares of Common Stock upon assignment to
the Company of all patents to the bio-reactor. In addition, the Company has
agreed to issue to Lifeline an aggregate of 320,000 shares of Common Stock,
payable 80,000 shares on each of October 15, 1999, 2000, 2001 and 2002.
The Bio-reactor. Finally, the bio-reactor takes all of the solids. The
bio-reactor is basically a steel vessel that will be sized to the requirements
of the particular application. The tank is rotated and the Company's
biologicals, including enzymes, are introduced into the tank through a computer
controlled process. The purpose of this process is to compost the solid
materials and at the end of the process, the Company is left with useable soil.
By way of comparison, the process that the Company is using is, basically, an
acceleration of the process utilized by nature. For example, windrow composting
generally takes between 90 to 100 days, whereas the Company produces a stable
product in less than one week.
THE COMPANY'S STRATEGY
The Company's strategy is to enter into agreements with various
universities located in the states of California, Utah and Washington in order
to verify the utility of the Company's waste management system. The Company is
engaging in discussions with professors at Utah State University, Cal
Poly-Pomona, and Washington State University. The purpose of these placements is
to obtain third-party data that can be used by the Company to verify its
preliminary testing and, eventually, in its marketing endeavors. The Company
intends to use various vegetable crop residuals and dairy solids in the testing
program.
Pursuant to preliminary discussions with Utah State University, the Company
intends to place one of its waste management systems at Utah State University.
The Company believes that Utah State University is an ideal testing grounds for
its waste management system because Utah State University owns a dairy of 225
cows. Utah State University utilizes these cattle for manufacturing and
processing its own milk and cheese for use on campus and for sale at retail. It
is the Company's intention to make arrangements with a professor at Utah State
University, to operate one of its waste management systems. From this, the
Company expects to publish test data by October 1998. There can be no assurance
that the Company will be successful in completing arrangements with Utah State
University, or if successful, that the data developed from this test will be
favorable to the Company or of sufficient quality for use by the Company to
verify the utility of its system or in its marketing endeavors.
In addition, the Company is in the process of making arrangements to test
its waste management system at a dairy located in Chino, California and to have
graduate students from Cal Poly-Pomona operate the system and compile data for
use by the Company. The Company believes that Chino, California provides a
perfect environment for testing its waste management system. According to the
Company, there are approximately 274 dairies located within a five square mile
area in Chino. There are approximately 300,000 dairy cows located in the Chino,
California area, comprising the largest concentration of cows in the United
States. There can be no assurance that the Company will be successful in
completing negotiations for placing its waste management system in Chino,
California.
SUPPLIERS
It is the Company's intention not to manufacture on its own any of the
components necessary to produce its waste management system. The Company intends
to utilize third party suppliers to provide the products necessary to complete
its waste management systems. While the Company believes that there are a
variety of suppliers for most of the components that will comprise its waste
management system, there are certain components of the waste management system
that will only be available from one or possibly two suppliers. In this regard,
the Company will be reliant on Lifeline for the co-generation technology,
Vineyard Technologies for the dual fuel engine, and RBR Technologies and Fan
Systems, Inc. for the waste separator. The Company does not have any agreements
or arrangements with any of the above-mentioned companies to provide the Company
with the products that the Company will need to assemble a full waste management
system.
20
<PAGE> 22
However, the Company believes that it will be able to purchase the products that
it needs from each of these companies. There can be no assurance, however, that
the Company will be able to purchase the components from the above-mentioned
companies, or if it is able to purchase such components, that it will be able to
do so on terms that are satisfactory to the Company.
ASSEMBLY
The Company currently contemplates that once it has proven the utility of
its waste management system that it will contract with the various suppliers of
the constituent components of the waste management system to deliver them (i.e.,
dropship) to sites specified by the Company. The Company will then provide for
the assembly of the components into the waste management system for use at the
specified location. There can be no assurance that the Company will be
successful in coordinating the various deliveries of the component parts of its
waste management system, or that it will be successful in assembling the
component parts in the field, as currently contemplated.
COMPETITION
The Company will directly and indirectly compete with other businesses,
including businesses in the solid waste collection and disposal business. In
many cases, these potential competitors are larger and more firmly established
than the Company. In addition, many of such potential competitors have greater
marketing and development budgets and greater capital resources than the
Company. Accordingly, there can be no assurance that the Company will be able to
achieve and maintain a competitive position in the businesses in which it will
compete. See "Risk Factors -- Competition."
INTELLECTUAL PROPERTY
The Company's success will depend, in part, on its ability to maintain
protection for its products and processes under United States and foreign patent
laws, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. Currently, a portion of the Company's
technology for its waste management system is licensed from third parties and
the Company has not obtained indemnification from the licensors of such
technology. Accordingly, if the technology licensed by such licensors to the
Company infringes the rights of third parties, the Company could be held liable
for damages to such third party and could not seek reimbursement from the
licensor. The Company does not maintain any insurance to protect against such
occurrence and, if such a claim were made against the Company it could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not possess any patents and does not
have any applications pending. There can be no assurance that any patent
applications, if applied for, will result in issued patents, that any issued
patents will afford adequate protection to the Company or not be challenged,
invalidated, infringed or circumvented or that any rights thereunder will afford
competitive advantages to the Company. Furthermore, there can be no assurance
that others have not independently developed, or will not independently develop,
similar products and technologies or otherwise duplicate any of the Company's
products and technologies.
There can be no assurance that the validity of any patent issued to the
Company or any licensor of technology to the Company would be upheld if
challenged by others in litigation or that the Company's activities would not
infringe patents owned by others. The Company could incur substantial costs in
defending itself in suits brought against it, or in suits in which the Company
seeks to enforce its patent and/or license rights against others. Should the
Company's products or technologies be found to infringe patents issued to third
parties, the Company would be required to cease the manufacture, use and sale of
the Company's products and the Company could be required to pay substantial
damages. In addition, the Company may be required to obtain licenses to patents
or other proprietary rights of third parties in connection with the development
and use of its products and technologies. No assurance can be given that any
such licenses required would be made available on terms acceptable to the
Company, or at all.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its employees,
consultants, advisors and others. There can be no assurance that
21
<PAGE> 23
such parties will maintain the confidentiality of such trade secrets or
proprietary information, or that the trade secrets or proprietary information of
the Company will not otherwise become known or be independently developed by
competitors in a manner that would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Patents and Proprietary Technology; Reliance on
Licensed Technology."
ENVIRONMENTAL MATTERS
Federal, state and local environmental legislation and regulations mandate
stringent waste management and operations practices, which require substantial
capital expenditures and often impose strict liabilities for non-compliance.
Environmental laws and regulations are, and will continue to be, a principal
factor affecting demand for the technology and services being developed or
offered by the Company. The level of enforcement activities by federal, state
and local environmental protection and related agencies, and changes in
regulations and waste generator compliance activities, will also affect demand.
To the extent that the burdens of complying with such laws and regulations may
be eased as a result of, among other things, political factors, or that
producers of industrialized farm waste find alternative means to comply with
applicable regulatory requirements, demand for the Company's products and
services could be adversely affected, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
changes in these regulations which increase compliance standards may require the
Company to change or improve its operating procedures. To the extent the Company
conducts its business overseas, international environmental regulations will be
applicable. Such regulations vary by country and are subject to changes which
may adversely affect the Company's operations.
The Company and its customers operate in a highly regulated environment,
and the Company's potential customers and/or the Company's products and services
may be required to have various federal, state and/or local government permits
and authorizations, registrations and/or exemptions. Any of these permits or
approvals may be subject to denial, revocation or modification under various
circumstances. Failure to comply with the conditions of such permits, approvals,
registrations, authorizations or exemptions may adversely affect the
installation or operation of the Company's waste management system and may
subject the Company to federal, state or locally-imposed penalties. The
Company's ability to satisfy the permitting requirements for a particular
installation does not assure that permitting requirements for other
installations will be satisfied. In addition, if new environmental legislation
is enacted or current regulations are amended or are interpreted or enforced
differently, the Company or its customers may be required to obtain additional
operating permits, registrations, certifications, exemptions or approvals. There
can be no assurance that the Company or its customers will meet all of the
applicable regulatory requirements.
The Company's business exposes it to the risk that harmful substances may
be released or escape into the environment from its processes or equipment,
resulting in potential liability for the clean-up or remediation of the release
and/or potential personal injury associated with the release. Liability for
investigation and/or clean-up and corrective action costs exists under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), the Resource Conservation and Recovery Act of 1976, as
amended ("RCRA"), and corresponding state laws. Additionally, the Company is
potentially subject to regulatory liability for the generation, transportation,
treatment, storage or disposal of hazardous waste if it does not act in
accordance with the requirements of federal or state hazardous waste regulations
or facility specific regulatory determinations, authorizations or exemptions.
The Company is also potentially subject to regulatory liability for releases
into the air or water under the Clean Air Act of 1970, as amended, and the
Federal Water Pollution Control Act of 1972, as amended (hereinafter the "Clean
Water Act"), and analogous state laws and regulations and various other
applicable federal or state laws and regulations if it does not comply with
those requirements. See "Risk Factors -- Dependence on Environmental
Regulations," "-- Regulatory Status of Operations" and "-- Potential
Environmental Liability."
FACILITIES
The Company's facilities are located at 5380 North Sterling Center Drive,
Westlake Village, California and presently consist of approximately 3,150 sq.
ft. The Company believes that these facilities will meet the
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<PAGE> 24
Company's needs. The Company leases this facility under a lease that expires on
December 31, 1999. The base rent for the leased premises is $2,520 per month.
The Company has the option to extend the lease for an additional two-year period
on the same terms and conditions except that the monthly rental payment for the
first year of any such extension would be $2,674 and $2,754 for the second year.
PERSONNEL
As of May 20, 1998, the Company employed nine people. In addition the
Company utilizes on a regular basis the services of nine consultants. The
Company believes that its future success will depend, in part, on its ability to
continue to attract, hire and retain qualified personnel. The competition for
such personnel is intense and no assurance can be given that the Company will be
successful in attracting such personnel, particularly considering the low
unemployment rate currently being experienced across the United States. None of
the Company's employees is represented by a labor union and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are good.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings, and is not aware of
any pending or threatened litigation against the Company.
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<PAGE> 25
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Marvin Mears.... 64 President, Chief Executive Officer and Director
Joel G. 38 Chief Financial Officer and Secretary
Wadman........
</TABLE>
Two directors of the Company recently resigned and the Company is currently
seeking replacements. The Company anticipates that the Board of Directors will
consist of five members and that three additional members will be nominated and
appointed within the next 45 days.
Marvin Mears has been the President, Chief Executive Officer and a director
of the Company since December 1994. From March 1993 to November 1994, Mr. Mears
was President of Combined Assets, Inc., a privately-held consulting company.
From January 1991 to February 1993, Mr. Mears was the President of Corporate
Capital Resources, Inc. and prior thereto, from November 1986 to January 1991,
Mr. Mears was the Vice President -- Corporate Development and a member of the
Valuation Committee of Corporate Capital Resources, Inc., a publicly-traded
venture capital company that specialized in early stage and start-up companies.
Mr. Mears also currently serves on the Board of Directors of Chatsworth Products
Inc., a privately-held company engaged in manufacturing hardware for computer
networks and Robert T. Dorris and Associates, a privately-held company that
provides employee assistance programs to large corporations.
On March 12, 1993, the United States District Court for the Central
District of California permanently enjoined Mr. Mears from future violations of
aiding and abating violations of the antifraud provisions of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended. In
addition, by order dated February 27, 1996, Mr. Mears, without admitting or
denying any of the findings contained in an order issued by the Securities and
Exchange Commission, consented to the entry of an Order Making Findings and
Imposing Sanctions Pursuant to Section 9(b) of the Investment Company Act of
1940 whereby Mr. Mears agreed to be barred from association with any investment
advisor or investment company.
Joel G. Wadman has been the Chief Financial Officer of the Company since
July 1997 and became Secretary of the Company in May 1998. Mr. Wadman is not
employed by the Company full time. Since January 1994 Mr. Wadman has been a
consultant to SRS Consulting specializing in system development and forensic
accounting. From February 1990 to December 1993, Mr. Wadman was the Vice
President and Controller of WCT Communications, Inc. Mr. Wadman received a B.S.
in Finance from Brigham Young University in 1989.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid or accrued by the
Company during the years ended September 30, 1996 and September 30, 1997 to its
President and Chief Executive Officer (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Marvin Mears, President and CEO................ 1966 -0- -0- -0-
1997 -0- -0- -0-
</TABLE>
1996 STOCK OPTION PLAN
On December 29, 1995 the Board of Directors adopted and, on December 29,
1995 the shareholders approved, the Company's 1996 Stock Option Plan (the
"Option Plan") under which a total of 400,000 shares of Common Stock has been
reserved for issuance. The Option Plan terminates on September 30, 2006, unless
sooner terminated by the Board of Directors.
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<PAGE> 26
Options granted under the Option Plan may be either "incentive stock
options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or nonstatutory stock options and become exercisable in accordance with
terms approved at the time of grant. Options may be granted to any employee of
or consultant to the Company or any parent, subsidiary or successor of the
Company, including employees who are also officers or directors, selected by the
Board of Directors in its discretion. The Option Plan is currently administered
by the board of directors which has the authority to determine optionees, the
number of shares covered by each option, the type of option (i.e., incentive or
nonstatutory), the applicable vesting schedule, the exercise price, the method
of payment and certain other option terms.
The exercise price of an option granted under the Option Plan may not be
less than 85%, in the case of a nonstatutory stock option, or 100%, in the case
of an incentive stock option, of the fair market value of the Common Stock
subject to the option on the date of the option grant. To the extent that the
aggregate fair market value of the stock subject to incentive stock options that
become exercisable for the first time during any one calendar year exceeds
$100,000 (as determined at the grant date) plus fifty percent (50%) of any
unused limit carryover from prior years, the options in excess of such limit
shall be treated as nonstatutory stock options. Options may be granted under the
Option Plan for terms of up to ten years and will typically be exercisable in
installments in accordance with a vesting schedule approved by the board of
Directors at the time an option is granted. Options are not transferable other
than upon death or between spouses incident to divorce. Options may be exercised
at various periods up to 12 months after the death or disability of the optionee
or up to three months after the termination of employment of the optionee, to
the extent the option was then exercisable.
With Respect to the Option Plan, the board of directors has the discretion
to subject any options granted under the Option Plan to a right of repurchase in
favor of the Company, which right may be exercised by the Company upon the
termination of employment of any employee or consultant who was granted options
under the Option Plan at a price equal to the option exercise price. In
addition, the Company has been granted a right of first refusal by each optionee
pursuant to which each optionee has agreed to provide the Company with the right
to purchase from such optionee any shares acquired by such optionee upon the
exercise of options on the same terms and conditions as such optionee was
proposing to sell such shares.
As of May 19, 1998, options to acquire 330,000 shares of Common Stock were
outstanding under the Option Plan. Such options have an exercise price of
$0.1875 per share and expire in July 2006. Holders of 280,000 of such options
have agreed not to exercise such options prior to July 15, 1999.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into a four-year employment agreement with Marvin Mears
effective as of April 15, 1998 (the "Mears Employment Agreement"). The Mears
Employment Agreement provides, among other things, that the Company shall pay
and/or provide to Mr. Mears: (i) a fixed annual salary of $96,000 in year one,
$120,000 in year two, $144,000 in year three and $168,000 in year four, payable
in each case in equal bi-monthly installments; (ii) all fringe benefits which
the Company or any subsidiary may make available from time-to-time for persons
with comparable positions and responsibilities; (iii) medical group insurance
coverage or equivalent coverage for Mr. Mears and his dependents, which coverage
shall commence on December 31, 1998 and continue throughout the term of
employment; (iv) reimbursement for reasonable and necessary business expenses
incurred by Mr. Mears in the course of his duties as Chief Executive Officer of
the Company; and (v) $750.00 per month as an automobile allowance. The company
may terminate Mr. Mears' employment "for cause" provided the Company provides
Mr. Mears with 30 days notice and an opportunity to cure any alleged breach or
violation of the agreement. Further, Mr. Mears may be terminated if he commits
gross negligence in the performance of his duties under the agreement or
breaches his fiduciary duties to the Company. If Mr. Mears is disabled to a
degree that he is unable to fulfill his duties then the Company will pay his
full salary for the first 12 months of his disability, 75% of salary for the
second twelve months and 50% of salary for the next twenty-four months;
provided, however, that any such disability payment will cease on April 14,
2002, regardless of when any such disability commenced. If Mr. Mears is
terminated without cause upon a change of control, all of the Mr. Mears'
converted stock options will
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<PAGE> 27
immediately vest and Mr. Mears will also be entitled to receive $250,000 and an
amount of money sufficient to allow him to exercise all unexercised options and
to pay any taxes due therefor.
Pursuant to a letter agreement (the "SPC Agreement") dated January 22,
1998, the Company retained the services of Strategic Planning Consultants, Inc.
("SPC") pursuant to which SPC has agreed to provide the Company with general
business consulting services, including without limitation, strategic planning
and analyzing the Company's capital structure. The SPC Agreement is for a period
of 360 days from January 22, 1998. In consideration for entering into the SPC
Agreement, the Company agreed to provide to the principals of SPC warrants to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share, the underlying shares of which are being registered under the
Registration Statement of which this Prospectus is a part. In addition, the
Company has agreed to pay SPC $3,000 per month for a period of 24 months and to
reimburse SPC for pre-approved expenses.
CERTAIN TRANSACTIONS
The Company has an employment agreement with Marvin Mears. See
"Management -- Employment and Consulting Agreements."
On November 13, 1997, Morris Lerner, formerly a director and secretary of
the Company, borrowed $12,115.88 from the Company (the "Lerner Note"). The
Lerner Note bears interest at the rate of 9% per annum and matures on November
12, 1999.
On November 1, 1995, a company controlled by Marvin Mears, the Chief
Executive Officer, President and a Director of the Company, issued a note to the
Company in the original principal amount of $35,000 (the "Mears Note"). The
Mears Note bears interest at the rate of 9% per annum and matures on November 1,
1998. Interest has not been paid on the Mears Note and as of September 30, 1997,
accrued interest on the Mears Note totaled $4,329.
In August 1996, in satisfaction for acquiring odor control application
technology from Ronald Knudsen, formerly a Manager of Product Development of the
Company, the Company issued to Mr. Knudsen a promissory note in the original
principal amount of $125,000 (the "Knudsen Note"). The Knudsen Note bears
interest at the rate of 12% per annum and matures on August 1, 1998. The Knudsen
Note contains an acceleration clause that requires full principal and interest
payments within ten business days of the completion of a secondary offering to
the public of at least $3,000,000. The Company is currently in default of the
Knudsen Note.
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<PAGE> 28
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998 by each director
and executive officer of the Company, each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, and all
directors and executive officers of the Company as a group. Except as otherwise
indicated below, each person has sole voting and investment power with respect
to the shares owned, subject to applicable community property laws.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
(INCLUDES EXERCISABLE
OPTIONS)(2)
----------------------
NAME AND ADDRESS(1) NUMBER PERCENT
------------------- ---------- --------
<S> <C> <C>
Marvin Mears............................................. 3,868,412 48.25%
Morris L. Lerner......................................... 562,000 7.01%
Joel G. Wadman........................................... 50,000 0.62%
All directors and executive officers of the Company as a
group (2 persons)...................................... 3,918,412 48.88%
</TABLE>
- ---------------
(1) The address of each such person is 5380 North Sterling Center Drive,
Westlake Village, California 91361.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of Common Stock subject
to options held by that person that are currently exercisable, or become
exercisable within 60 days from the date hereof, are deemed outstanding.
However, such shares are not deemed outstanding for purposes of computing
the percentage ownership of any other person. Percentage ownership is based
on 8,017,148 shares of Common Stock outstanding as of March 31, 1998.
SELLING STOCKHOLDERS
The Shares being offered for resale by the Selling Stockholders were
acquired in connection with the 1998 Private Placement, previous exercise of
warrants, and the execution of the SPC Agreement, consist of the shares of
Common Stock issuable upon the conversion of or otherwise with respect to the
Series A Preferred Stock, upon exercise of the Private Placement Warrants and
upon exercise of the Fink Warrant and the Billik Warrant that were issued
pursuant to the SPC Agreement. In connection with the 1998 Private Placement,
the Company granted the Selling Stockholders who purchased the shares of Series
A Preferred Stock and the Private Placement Warrants certain registration rights
pursuant to which the Company agreed to keep the Registration Statement, of
which this Prospectus is a part, effective until the date that all of such
Shares have been sold pursuant to the Registration Statement. The Company has
agreed to indemnify the Selling Stockholders and each of their officers,
directors, members, employees, partners, agents and each person who controls any
of the Selling Stockholders against certain expenses, claims, losses, damages
and liabilities (or action, proceeding or inquiry by any regulatory or
self-regulatory organization in respect thereof). The Company has agreed to pay
its expenses of registering the Shares under the Securities Act, including
registration and filing fees, blue sky expenses, printing expenses, accounting
fees, administrative expenses and its own counsel fees.
The following table sets forth the name of each Selling Stockholder, the
number of shares of Common Stock beneficially owned by such Selling Stockholder
as of May 21, 1998 and the number of Shares being offered by each Selling
Stockholder. The Shares being offered hereby are being registered to permit
public secondary trading, and the Selling Stockholders may offer all or part of
the Shares for resale from time to time. However, such Selling Stockholders are
under no obligation to sell all or any portion of such Shares nor are such
Selling Stockholders obligated to sell any Shares immediately under this
Prospectus. All information with respect to share ownership has been furnished
by the Selling Stockholders. Because the Selling Stockholders may sell all or
part of their Shares, no estimates can be given as to the number of Shares that
will
27
<PAGE> 29
be held by any Selling Stockholders upon termination of any offering made
hereby. See "Plan of Distribution."
In the case of the Shares underlying the Series A Preferred Stock, the
number of Shares owned and offered for sale hereby represents an estimate of the
number of shares of Common Stock issuable upon conversion of or otherwise with
respect to the Series A Preferred Stock, based on 200% of the number of shares
of Common Stock issuable at a conversion price of $3.875 in accordance with Rule
416 and in certain other events described in the Certificate of Designation.
Pursuant to Rule 416 under the Securities Act, the Selling Stockholders may also
offer and sell Shares issued with respect to the Series A Preferred Stock and/or
the Private Placement Warrants as a result of (i) stock splits, stock dividends
or similar transactions, (ii) the effect of antidilution provisions contained in
the Certificate of Designation of the Series A Preferred Stock and in the
Private Placement Warrants and (iii) by reason of changes in the conversion
price of the Series A Preferred Stock in accordance with the terms thereof. This
is not intended to constitute a prediction as to the number of Shares into which
the Series A Preferred Stock will be converted and the Private Placement
Warrants will be exercised.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES OWNED
OWNED PRIOR TO SHARES TO BE AFTER THE
NAME OF SELLING STOCKHOLDER THE OFFERING(1) SOLD IN THE OFFERING OFFERING (1)(2)
--------------------------- ------------------- -------------------- ---------------
<S> <C> <C> <C>
JNC Opportunity Fund, Ltd............... 1,787,500(3) 1,787,500 -0-
Diversified Strategies Fund, L.P........ 162,500(3) 162,500 -0-
Jonathan Fink........................... 580,000 580,000 -0-
Brad Billik............................. 290,000 290,000 -0-
</TABLE>
- ---------------
(1) Except as set forth in footnote (3) below, beneficial ownership is
determined in accordance with Rule 13d-3 of the Exchange Act. The persons
named in the table above have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them.
(2) Assumes all Shares offered hereby are sold in the offering.
(3) In accordance with Rule 416, the number of shares of Common Stock set forth
in the table represents an estimate of the number of shares of Common Stock
to be offered by the Selling Stockholders, based on 200% of the number of
shares of Common Stock that would have been issuable upon conversion of or
otherwise with respect to the Series A Preferred Stock at a conversion price
of $3.875 per share in accordance with Rule 416 (1,650,000 shares). In
addition, the Registration Statement also covers up to 300,000 shares that
may become issuable upon the exercise of the Private Placement Warrants. The
actual number of shares of Common Stock issuable upon conversion of the
Series A Preferred Stock is determined by a formula based on the market
price at the number depending on factors which cannot be predicted by the
Company. Specifically, at any given time, the Series A Preferred Stock is
convertible into a number of shares of Common Stock determined by dividing
the sum of (a) the stated value of the Series A Preferred Stock, (b) a
premium amount equal to 6% (on an annualized basis) of the stated value of
the Series A Preferred Stock and (c) any Conversion Default amount (as
defined in the Certificate of Designation), by the then applicable
conversion price (calculated generally as the lesser of (i) $3.875 and (ii)
80% of the average of the five (5) lowest closing bid prices of the Common
Stock for the fifteen (15) consecutive trading days immediately preceding
the date of determination) subject to certain restrictions and adjustments.
The Shares offered hereby, and included in the Registration Statement of
which this Prospectus is a part, include such additional number of shares of
Common Stock as may be issued or issuable upon conversion of the Series A
Preferred Stock by reason of the floating rate conversion price mechanism or
other adjustment mechanisms described in the Certificate of Designation for
the Series A Preferred Stock, or by reason of any stock split, stock
dividend or similar transaction involving the Common Stock, in order to
prevent dilution, in accordance with Rule 416. Pursuant to the terms of the
Series A Preferred Stock and the Private Placement Warrants, the shares of
Series A Preferred Stock and the Private Placement Warrants are convertible
or exercisable by any holder only to the extent that the number of shares of
Common Stock thereby issuable, together with the number of shares of Common
Stock owned by such holder and its affiliates (but not including shares of
Common Stock underlying unconverted shares of Series A Preferred Stock or
the unexercised portion of
28
<PAGE> 30
the Private Placement Warrants) would not exceed (except in certain limited
circumstances) 4.99% of the then outstanding Common Stock as determined in
accordance with Section 13(d) of the Exchange Act. Accordingly, the number
of Shares set forth in the table for a Selling Stockholder may exceed the
number of Shares that such Selling Stockholder could own beneficially at any
given time through such Selling Stockholder's ownership of the Series A
Preferred Stock and the Private Placement Warrants. In this regard,
beneficial ownership of such Selling Stockholder set forth in the table is
not determined in accordance with Rule 13d-3 under the Exchange Act.
USE OF PROCEEDS
All the Shares offered hereby are being offered for the account of the
Selling Stockholders. Accordingly, the Company will not receive any proceeds of
any sales made hereunder, but will receive the exercise price of any Warrants
exercised by the Selling Stockholders. Any proceeds received from the exercise
of Warrants will be used for working capital and general corporate purposes. See
"Use of Proceeds."
PLAN OF DISTRIBUTION
The Shares may be sold or distributed from time to time by the Selling
Stockholders or by pledgees, donees or transferees of, or successors in interest
to, the Selling Stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire Shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the Shares
may be effected in one or more of the following methods: (i) ordinary brokers
transactions, which may include long or short sales, (ii) purchases by brokers,
dealers or underwriters as principal and resale by such purchasers for their own
accounts pursuant to this Prospectus, (iii) "at the market" to or through market
makers or into an existing market for the Common Stock, (iv) in other ways not
involving market makers or established trading markets, including direct sales
to purchasers or sales effected through agents, (v) through transactions in
options, swaps or other derivatives (whether exchange listed or otherwise), or
(vi) any combination of the foregoing, or by any other legally available means.
In addition, the Selling Stockholders or their successors in interest may enter
hedging transactions with broker-dealers who may engage in short sales of Shares
of Common Stock in the course of hedging the positions they assume with the
Selling Stockholders. The Selling Stockholders or their successors in interest
may also enter into option or other transactions with broker-dealers that
require that delivery by such broker-dealers of the Shares, which Shares may be
resold thereafter pursuant to this Prospectus.
Brokers, dealers, underwriters or agents participating in the distribution
of the Shares may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of Shares for
whom such broker-dealers may act as agent or to whom they may sell as principal,
or both (which compensation as to a particular broker-dealer may be in excess of
customary commission). Any broker-dealer acting in connection with the sale of
the Shares hereunder may be deemed to be underwriters within the meaning of
Section 2(11) of the Securities Act, and any commissions received by them and
any profit realized by them on the resale of Shares as principals may be deemed
underwriting compensation under the Securities Act. Neither the Company nor any
Selling Stockholder can presently estimate the amount of such compensation. The
Company knows of no existing arrangements between any Selling Stockholder and
any such stockholder, broker, dealer, underwriter or agent relating to the sale
or distribution of the Shares.
Each Selling Stockholder and any other person participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Stockholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
29
<PAGE> 31
Any securities covered by this Prospectus that qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under that Rule rather than
pursuant to this Prospectus.
There can be no assurance that the Selling Stockholders will sell any or
all of the Shares of Common Stock offered by them hereunder.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and material
provisions of the Certificate of Incorporation (the "Certificate") is a summary
and is qualified in its entirety by the provisions of the Certificate, which has
been filed as an exhibit to the Company's Registration Statement of which this
Prospectus is a part.
The authorized capital stock of the Company currently consists of
20,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"), of
which 8,017,148 are currently outstanding, and 20,000,000 shares of Preferred
Stock, $.01 par value per share, of which 3,000 shares have been designated as
Series A Convertible Preferred Stock (the "Series A Preferred Stock"), all of
which shares are currently outstanding. As of May 14, 1998, there were 989
record and beneficial holders of the Common Stock and two record and beneficial
holders of the Series A Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. There is no
cumulative voting with respect to the election of directors. The holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 20,000,000 shares of Preferred Stock, $.01 par
value per share, in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without further vote or action by stockholders. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.
SERIES A PREFERRED STOCK
The following is a brief summary of the material rights, preferences,
privileges, restrictions and limitations of the outstanding shares of Series A
Preferred Stock.
Dividends. The holders of shares of Series A Preferred Stock are not
entitled to any dividends.
Liquidation Preference. In the event of a liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Stock are
entitled to a cash payment equal to the Liquidation Preference (as defined
below) for each share held, before any distribution of the Company's assets to
holders of the Common Stock. The "Liquidation Preference" per share means an
amount equal to (i) $1,000.00 plus (ii) a premium
30
<PAGE> 32
equal to (.06)x(N/365)x(1000), where N equals the number of days from the date
the shares of Series A Preferred Stock were issued.
Voluntary Conversion. Each share of Series A Preferred Stock is, at the
option of the holder, convertible into such number of shares as results from
dividing 1,000 by the Conversion Price then in effect. The Conversion Price
means, with respect to any Conversion Date (as defined in the Certificate) the
lower of the Variable Conversion Price (as defined) and the Fixed Conversion
Price (as defined) but in no event less than $1.00 per share unless certain
specified events shall have occurred and be then continuing. The Conversion
Price is currently $3.875 per share.
Automatic Conversion. Subject to certain limitations and provided that all
shares of Common Stock issuable upon conversion of all outstanding shares of
Series A Preferred Stock are then (i) authorized and reserved for issuance, (ii)
registered under the Act for resale by the holders of such shares of Series A
Preferred Stock and (iii) eligible to be publicly traded, each share of Series A
Preferred Stock issued and outstanding on April 7, 2000 automatically shall be
converted at the Conversion Price then in effect.
Redemption. The holders of Series A Preferred Stock have no right to
require the Company to effect a redemption of their outstanding shares so long
as the Company (i) has not decreased the number of shares of Common Stock
reserved for issuance to the holders of Series A Preferred Stock to an amount
below 1,650,000 (the "Reserved Amount"), (ii) the Company takes immediate action
following the applicable Authorization Trigger Date (as defined) to increase the
Reserved Amount to 200% of the number of shares of Common Stock then issuable
upon conversion of the outstanding Series A Preferred Stock and (iii) the
Company continues to use its good faith best efforts to increase the Reserved
Amount to 200% of the number of shares of Common Stock then issuable upon
conversion of the outstanding Series A Preferred Stock.
Voting Rights. The holders of Series A Preferred Stock have no voting
rights except as otherwise provided by the Delaware General Corporation Law (the
"Business Corporation Law") and as follows:
So long as any shares of Series A Preferred Stock are outstanding, the
Company shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the holders of 67% then
outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
capital stock of the Company as to affect adversely the Series A Preferred
Stock;
(c) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets
upon liquidation, dissolution or winding up of the Company ("Senior
Securities");
(d) create any new class or series of capital stock ranking pari passu
with the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Company ("Pari Passu
Securities");
(e) increase the authorized number of shares of Series A Preferred
Stock;
(f) issue any shares of Senior Securities or Pari Passu Securities;
(g) issue any additional shares of Series A Preferred Stock;
(h) redeem, or declare or pay any cash dividend or distribution on,
any Junior Securities (as defined); or
(i) increase the par value of the Common Stock.
Registration Rights. The Company has agreed to register for resale shares
of Common Stock (i) issuable upon exercise of the Series A Preferred Stock, (ii)
issuable upon exercise of the Private Placement Warrants and (iii) issuable upon
exercise of warrants previously granted to consultants to the Company. If the
Company is unable to effectuate the registration of the shares of Common Stock
issuable to
31
<PAGE> 33
the holders of Series A Preferred Stock and the Private Placement Warrants
within 123 days from March 31, 1998 or if certain other events, as specified in
the Registration Rights Agreement that was filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, occur, then the
Company will be obligated to make payments to such holders of an amount equal to
the product of (i) the aggregate Purchase Price (as defined) of the Series A
Preferred Stock and accompanying warrants multiplied by (ii) two hundredths
(.02), for each thirty day period specified in the Registration Rights
Agreement. Any such amounts shall be paid in cash or, at such holder's option
may be convertible into Common Stock at the "Conversion Price" (as defined in
the "Certificate of Designation") then in effect.
WARRANTS
As of March 31, 1998, the Company had outstanding warrants to purchase
300,000 shares of Common Stock at an exercise price of $2.00 per share. The
warrants expire on January 21, 2001. Each warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations, reclassifications, and consolidations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a description of
the Private Placement Warrants that have been issued to the investors in the
Private Placement.
ANTI-TAKEOVER PROVISIONS
The Company is a Delaware corporation and is subject to Section 203
("Section 203") of the Delaware General Corporation Law (the "DGCL"). In
general, Section 203 prevents an "interested stockholder" (defined generally as
a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination" (as defined) with a Delaware corporation
for three years following the time such person became an interested stockholder
unless: (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) at the time of or following the time of the transaction in which such
person became an interested stockholder, the business combination was approved
by the board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors.
Section 203 defines a business combination to include: (i) any merger or
consolidation of the corporation with the interested stockholder; (ii) any sale,
transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
32
<PAGE> 34
In addition, certain of the Company's executive officers that have entered
into employment agreements with the Company will be entitled to receive certain
bonuses in cash or Common Stock upon a change in control of the Company in such
amounts that, in the aggregate, could have an adverse effect on the Company's
liquidity and capital resources. Accordingly, such provisions could discourage
or prevent bids to takeover the Company and decrease values that would otherwise
be obtained by stockholders for their Common Stock. See
"Management -- Employment Agreements."
The Commission has indicated the use of authorized unissued shares of
voting stock could have an anti-takeover effect. It has not been management's
intent to install an anti-takeover device nor is it expected that the Company's
authorized but unissued shares of common and preferred stock would be used for
that purpose. Any business combination, as that term is used in Section 203,
would be reviewed by the Company's Board of Directors for its impact on the
Company.
EFFECT OF THE CALIFORNIA CORPORATIONS CODE
The California Corporations Code includes provisions designed to apply
certain aspects of California Law to corporations organized outside California
where, in general, such corporations are doing more than 50% of their business
in California and have more than 50% of their outstanding voting securities held
of record by persons residing in California (the "California Test"). These
provisions, which are generally more restrictive than their counterparts under
Delaware Law, currently apply to the Company.
Among the provisions of the California Law which will apply are limitations
on corporate dividends and other distributions and rights of stockholders to
cumulate votes in the election of directors. Numerous other provisions which are
listed in Section 2115 of the California General Corporation Law could also
apply. In some cases, these provisions are in conflict with the laws of
Delaware. The following summarizes some of the principal differences which could
apply to the Company:
Under both Delaware and California Law, cumulative voting for the election
directors is permitted. However, under Delaware law cumulative voting must be
expressly authorized in the Certificate of Incorporation. Both Delaware and
California Law allow a classified Board of Directors, however, Delaware Law
requires that it be authorized in the Certificate of Incorporation or the Bylaws
and California Law does not permit staggered classes for smaller corporations,
such as the Company, and directors must be elected at each annual meeting of
stockholders. Under Delaware Law, the Certificate of Incorporation or Bylaws may
limit the removal of directors for cause only while under California Law,
stockholders may remove directors without cause. Pursuant to Delaware Law, the
directors may amend the Bylaws to change the number of authorized directors.
Under California Law, subject to limited circumstances, any amendment to the
Bylaws changing the number of authorized directors requires stockholder
approval.
Under Delaware Law, a director is obligated to discharge his or her duties
in good faith and to inform himself or herself about all material information
reasonably available to him or her before making a business decision. Pursuant
to California Law, a director is obligated to discharge his or her duties in
good faith, and to exercise such care, including reasonable inquiry, as an
ordinarily prudent person in a similar position would use under similar
circumstances. Whereas California Law specifically prohibits a corporation from
limiting or eliminating a director's liability for reckless disregard or
abdication of these duties, Delaware Law contains no such prohibition.
California Law also requires stockholder approval for certain
sale-of-assets and stock-for-stock reorganizations, whereas Delaware Law does
not. Delaware Law permits the payment of dividends out of paid-in and earned
surplus or out of net profits for the current and preceding fiscal years and the
repurchase or redemption of shares out of earned, paid-in or reduction surplus.
Under California Law, any such distributions cannot be made unless retained
earnings equals or exceeds the amount of the distributions, or if after giving
effect to the distribution, the corporation's tangible assets are less than 125%
of its liabilities, the corporation's current liabilities exceed its current
assets, the corporation's average operating income for the two most recently
completed fiscal years is less than 125% of its current liabilities or the
corporation would be unable to meet its liabilities as they mature.
33
<PAGE> 35
At such time as the Company has any class of securities listed on the New
York Stock Exchange or the American Stock Exchange, or approved for inclusion on
the Nasdaq National Market System, and the Company has at least 800 holders of
its equity securities, or the Company no longer satisfies each of the elements
of the California Test, the Company will be exempt from the provisions of
Section 2115. No assurance can be given that the Company will ever satisfy any
exemption from Section 2115.
LIMITATIONS ON LIABILITY
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Company's Certificate of
Incorporation ("Certificate of Incorporation") limits the liability of directors
of the Company to the fullest extent permitted by Delaware law. Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders. The Certificate of Incorporation provides indemnification to its
officers and directors and certain other persons with respect to certain
matters, and the Company has entered into agreements with each of its directors
and executive officers providing for indemnification with respect to certain
matters.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Common Stock is American
Stock Transfer and Trust Company.
LEGAL MATTERS
The validity of the shares of the Company's Common Stock offered hereby
will be passed upon for the Company by Donahue, Mesereau & Leids LLP, Los
Angeles, California.
EXPERTS
The audited financial statements of the Company as of September 30, 1997
and 1996 and the related statements of operations, shareholders' equity and cash
flows for the fiscal years ended September 30, 1997 and 1996, included elsewhere
in this Prospectus, have been so included in reliance on the report of Clumeck,
Stern, Phillips & Schenkelberg, independent certified public accountants, given
on the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933, as
amended, with respect to the securities offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement. For further
information with respect to the Company and the securities offered hereby,
reference is made to the
34
<PAGE> 36
Registration Statement, including the exhibits and financial statements filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other documents are not necessarily complete, and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each statement being qualified in its
entirety by such reference. All of these documents may be obtained upon payment
of the prescribed fees or examined without charge at the office of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, or by way of the Commission's Internet address, http://www.sec.gov.
35
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL REPORT
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements
Balance Sheet............................................. F-3
Statements of Stockholders' Equity........................ F-4
Statements of Operations.................................. F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Environmental Products & Technologies Corporation
Thousand Oaks, California
We have audited the balance sheet of Environmental Products & Technologies
Corporation (a development stage company), as of September 30, 1997 and the
related statements of stockholders' equity, operations and cash flows for the
years ended September 30, 1997 and 1996. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Environmental Products &
Technologies Corporation as of September 30, 1997 and the results of its
operations and its cash flow for the years ended September 30, 1997 and 1996 in
conformity with generally accepted accounting principles.
CLUMECK, STERN, PHILLIPS & SCHENKELBERG
Certified Public Accountants
Encino, California
December 18, 1997
F-2
<PAGE> 39
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 271,360 $ 11,871
Prepaid expenses.......................................... -- 9,500
Interest receivable....................................... 4,329 1,372
Due from stockholders..................................... -- 209,200
---------- ----------
Total Current Assets.............................. 275,689 231,943
---------- ----------
EQUIPMENT................................................... 1,093 --
---------- ----------
OTHER ASSETS
Note receivable -- related party.......................... 34,850 30,850
Deposits.................................................. 700 10,200
---------- ----------
Total Other Assets................................ 35,550 41,050
---------- ----------
TOTAL ASSETS................................................ $ 312,332 $ 272,993
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 17,383 $ 36,016
Accrued salaries.......................................... 68,000 --
Accrued interest.......................................... 7,320 --
Settlement payable........................................ 27,005 --
Note payable -- related party............................. 103,000 --
---------- ----------
Total Current Liabilities......................... 222,708 36,016
---------- ----------
LONG TERM DEBT
Note payable -- related party............................. -- 113,000
---------- ----------
TOTAL LIABILITIES........................................... 222,708 149,016
---------- ----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 20,000,000
shares; issued and outstanding 3,803,574 shares (1997)
and 3,698,074 shares (1996)............................ 38,035 36,980
Preferred stock, $.01 par value, authorized 20,000,000
shares; no shares issued or outstanding................ -- --
Additional paid in capital................................ 1,383,826 1,046,956
Additional paid in capital -- stock options............... 54,450 --
Retained (Deficit)........................................ (695,452) (695,452)
Deficit accumulated during development stage.............. (691,235) (264,507)
---------- ----------
89,624 123,977
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 312,332 $ 272,993
========== ==========
</TABLE>
(See Notes to Financial Statements)
F-3
<PAGE> 40
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL DEFICIT RETAINED
COMMON STOCK PAID-IN ACCUMULATED DEFICIT
------------------------- ADDITIONAL CAPITAL DURING THE PRIOR TO THE
NUMBER OF PAID-IN STOCK DEVELOPMENT DEVELOPMENT
SHARES AMOUNT CAPITAL OPTIONS STAGE STAGE
----------- ----------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- September 30,
1995........................ 2,678,074 $ 26,780 $ 673,306 $(695,452)
----------- ----------- ----------
Common stock issued for cash
Oct. -- Dec., 1995........ 100,000 1,000 9,000
Jan. -- Mar., 1996........ 400,000 4,000 185,650
Apr. -- Jun., 1996........ 40,000 400 34,600
July -- Sept., 1996....... 480,000 4,800 144,400
----------- ----------- ---------- ------- --------- ---------
1,020,000 10,200 373,650
Common stockholder loss for
the year ended September 30,
1996........................ $(264,507)
----------- ----------- ---------- ------- --------- ---------
Balance, September 30, 1996... 3,698,074 36,980 1,046,956 (264,507) (695,452)
Common stock cancelled........ (444,500) (4,445) 4,445
Common stock issued for cash
June -- September, 1997..... 550,000 5,500 332,425
Stock options granted......... $54,450
Cost to raise capital......... (32,223)
Common stockholder loss for
the year ended September 30,
1997........................ (394,505)
----------- ----------- ---------- ------- --------- ---------
3,803,574 $ 38,035 $1,383,826 $54,450 $(691,235) $(695,452)
=========== =========== ========== ======= ========= =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance -- September 30,
1995........................ $ 4,634
Common stock issued for cash
Oct. -- Dec., 1995........
Jan. -- Mar., 1996........
Apr. -- Jun., 1996........
July -- Sept., 1996.......
---------
383,850
Common stockholder loss for
the year ended September 30,
1996........................ (264,507)
---------
Balance, September 30, 1996... 123,977
Common stock cancelled........
Common stock issued for cash
June -- September, 1997..... 337,925
Stock options granted......... 54,450
Cost to raise capital......... (32,223)
Common stockholder loss for
the year ended September 30,
1997........................ (394,505)
---------
$ 89,624
=========
</TABLE>
(See Notes to Financial Statements)
F-4
<PAGE> 41
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996 AND THE PERIOD
OCTOBER 1, 1995 (DATE OF DEVELOPMENT STAGE) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OCTOBER 1, 1995
TO
1997 1996 SEPTEMBER 30, 1997
--------- --------- ------------------
<S> <C> <C> <C>
SALES.............................................. $ -- $ -- $ --
--------- --------- ---------
EXPENSES
Consulting....................................... 104,171 159,605 263,776
Legal and professional........................... 33,346 7,486 40,832
Liability insurance.............................. 11,007 -- 11,007
Miscellaneous.................................... 24,354 14,200 38,554
Office supplies and expenses..................... 8,138 2,492 10,630
Other expenses................................... 216 43,642 43,858
Rent............................................. 52,155 19,775 71,930
Repairs and maintenance.......................... -- 1,500 1,500
Research and development......................... 69,238 -- 69,238
Salaries......................................... 68,000 -- 68,000
Telephone........................................ 3,068 1,356 4,424
Travel........................................... 5,459 15,823 21,282
--------- --------- ---------
Total General & Administrative........... 379,152 265,879 645,031
--------- --------- ---------
LOSS FROM OPERATIONS............................... (379,152) (265,879) (645,031)
--------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income.................................. 2,957 1,372 4,329
Interest expense................................. (18,310) -- (18,310)
--------- --------- ---------
(15,353) 1,372 (13,981)
--------- --------- ---------
NET LOSS........................................... $(394,505) $(264,507) $(659,012)
========= ========= =========
NET LOSS PER SHARE................................. $ (.11) $ (.09) (.20)
========= ========= =========
</TABLE>
(See Notes to Financial Statements)
F-5
<PAGE> 42
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996 AND THE PERIOD
OCTOBER 1, 1995 (DATE OF DEVELOPMENT STAGE) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OCTOBER 1, 1995
TO
1997 1996 SEPTEMBER 30, 1997
--------- --------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $(394,505) $(264,507) $(659,012)
--------- --------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities
Non-cash consulting fees.................... 54,450 125,000 179,450
(Increase) decrease in operating assets
Prepaid expenses......................... 9,500 (9,500) --
Interest receivable...................... (2,957) (1,372) (4,329)
Deposits................................. 9,500 (10,200) (700)
Increase (decrease) in operating liabilities
Accounts payable......................... (18,633) 30,758 12,125
Accrued salaries......................... 68,000 -- 68,000
Accrued interest......................... 7,320 -- 7,320
Settlement payable....................... 27,005 -- 27,005
--------- --------- ---------
Total Adjustments...................... 154,185 134,686 288,871
--------- --------- ---------
NET CASH USED IN OPERATING
ACTIVITIES....................................... (240,320) (129,821) (370,141)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to related party......................... (4,000) (30,850) (34,850)
Purchase of equipment......................... (1,093) -- (1,093)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES.............. (5,093) (30,850) (35,943)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock.......................... 547,125 182,350 729,475
Loan payments................................. (10,000) (12,000) (22,000)
Cost to raise capital......................... (32,223) -- (32,223)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES....................................... 504,902 170,350 675,252
--------- --------- ---------
NET INCREASE IN CASH............................... 259,489 9,679 269,168
CASH, October 1.................................... 11,871 2,192 2,192
--------- --------- ---------
CASH, September 30................................. $ 271,360 $ 11,871 $ 271,360
========= ========= =========
</TABLE>
(See Notes to Financial Statements)
F-6
<PAGE> 43
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 1 -- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company was incorporated in 1983 by Corporate Capital Resources, Inc.
and later that year acquired Information Bureau, Inc. and subsequently changed
its name to Information Bureau, Inc. In 1989 its name was changed to Central
Corporate Reports Service, Inc. and operated in the financial public relation
business until March, 1990 when the Company became inactive. In 1990 the Company
changed its name to ACP International, Inc. and then again in 1994 to Combined
Assets, Inc. In January, 1995 the Company's name was changed to Environmental
Products & Technologies Corporation. At the end of 1995 the Company began to
develop systems to control odors and solid stream waste in the farming industry.
In addition the Company is developing organic based insecticides for
agricultural, commercial and residential use.
The Company is currently in the development stage of operations devoting
its time to raising capital, product and supplier development, and marketing
future products. No products have been manufactured or marketed at this time.
These financial statements have been prepared on the basis that adequate capital
will be obtained.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all cash
accounts not subject to withdrawal restrictions and certificates of deposits
with original maturities of ninety days or less to be cash or cash equivalents.
INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Statement No. 109, "Accounting for Income Taxes", which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year which the differences are expected to be settled or realized.
LOSS PER SHARE
The computations of loss per share of common stock are based on the
weighted average number of shares outstanding of 3,591,345 shares (1997) and
3,078,066 shares (1996) and 3,334,706 shares (cumulative period).
RECLASSIFICATION
Health insurance of $10,905 for the year ended September 30, 1996 has been
reclassified as consulting expense for comparative purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities as the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-7
<PAGE> 44
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 2 -- NOTE RECEIVABLE -- RELATED PARTY
The receivable is due from a corporation owned by an officer and major
stockholder of the Company. The note calls for interest at nine percent per
annum and is due November 1, 1998. Interest accrued on this note amounted to
$4,329 (1997) and $1,372 (1996).
NOTE 3 -- FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The fair market value of the note receivable and the note payable
approximates cost based on current borrowing rates.
NOTE 4 -- DUE FROM STOCKHOLDERS
Common stock was issued in 1996 prior to receipt of full payment. Payments
for the stock were received in 1997.
NOTE 5 -- NOTE PAYABLE -- RELATED PARTY
The note payable to an officer-stockholder calls for monthly interest only
payments at the rate of 12% per annum. The principal is due August 1, 1998. The
note has an acceleration clause that requires full principal and interest
payments within ten business days of the completion of a secondary offering to
the public of at least $3,000,000. Interest charged against income for 1997 was
$14,820, of which $7,320 is accrued.
NOTE 6 -- COMMITMENTS
The Company has an employment agreement with an officer. The contract
commenced October 1, 1996 and continues for five years. The compensation calls
for an annual salary of $68,000 plus bonuses determined by the Board of
Directors.
The Company entered into a lease for facilities beginning January 1, 1998.
The lease calls for a term of two years, plus an option for an additional two
years. The minimum annual commitment is as follows:
<TABLE>
<S> <C>
1998....................................................... $22,680
1999....................................................... 30,924
2000....................................................... 7,788
-------
$61,392
=======
</TABLE>
NOTE 7 -- STOCK OPTIONS
In December 1995, the Board of Directors and the shareholders approved the
1996 Stock Option Plan. The Plan provides for non-qualified and incentive stock
options. The Board has designated 400,000 shares for the Plan. No options may be
granted under this plan after December 2005, and the Plan terminates September
30, 2006. The exercise price of the non-qualified stock option shall not be less
than 85 percent of the fair market value at the date of grant. The Board of
Directors granted 165,000 options on July 29, 1997 to outside consultants for
services rendered to the Company. The option price, which was equal to the
trading price on the grant date is $.375 per share. The options are immediately
exercisable under the plan; however, option holders representing 140,000 shares
have signed agreements to not exercise the option prior to July 15, 1999.
Options of 25,000 remain immediately exercisable. As of September 30, 1997 none
of the options had been exercised. Under Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", options granted to non-employees are
recognized at the fair value of the goods or services received or the fair value
of the equity instrument issued. The Company has recorded the service at the
fair value of the option
F-8
<PAGE> 45
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 7 -- STOCK OPTIONS (CONTINUED)
on the grant date using an option pricing model which used the one-year U.S.
Treasury rate of 5.54%, volatility of 300, a one year expected life, and no
expected dividends.
NOTE 8 -- WARRANTS
The Board of Directors at their June 1995 meeting authorized the issuance
of 600,000 warrants. These warrants entitled the holder to purchase an equal
number of capital stocks at $.10 per share. The right to purchase the shares
expires June 21, 1998. The 600,000 warrants authorized were purchased for the
Board stated price of $200. In 1997, 300,000 warrants were cancelled. To date
the 300,000 outstanding warrants have not been exercised.
NOTE 9 -- INCOME TAXES
The Company has available at September 30, 1997, unused operating loss
carryforwards that may be applied against future taxable income and that expire
as follows:
<TABLE>
<S> <C>
September 30, 2012.......................................... $ 340,055
September 30, 2011.......................................... 264,507
September 30, 2010.......................................... 23,133
September 30, 2003.......................................... 530,859
September 30, 2004.......................................... 15,507
September 30, 2005.......................................... 1,061
----------
Total............................................. $1,175,122
==========
</TABLE>
No deferred tax asset has been recorded, as there is a more than 50% chance
that the loss carryovers will expire unused.
NOTE 10 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
OCTOBER 1, 1995
TO
1997 1996 SEPTEMBER 30, 1997
------- ------ ------------------
<S> <C> <C> <C>
Cash paid during the year for
Interest.................................. $10,990 $2,400 $13,390
------- ------ -------
Income taxes.............................. $ -- $ -- $ --
------- ------ -------
</TABLE>
NOTE 11 -- SUBSEQUENT EVENTS
Subsequent to the year end, the Company reached a settlement with a former
associate. The agreement called for payment of $15,990 cash plus 5,000 shares of
stock. This settlement was accrued at September 30, 1997.
November 5, 1997, the Company signed a letter of understanding with a Utah
Limited Liability Company to develop an aerobic bio-reactor. The letter calls
for payment of $21,000 cash plus 50,000 shares of stock. The total number of
shares to be issued to the reactor developer will be determined over a
three-year period based upon projected and actual profits.
The Company loaned $12,116 to an officer-stockholder. The note is dated
November 18, 1997 and principal plus interest at the rate of nine percent (9%)
per annum are due on or before November 18, 1999.
F-9
<PAGE> 46
======================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or the solicitation of any offer to buy any security other than the shares of
the Common Stock offered by this Prospectus, nor does it constitute an offer to
sell or a solicitation of any offer to buy the shares of Common Stock by anyone
in any jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Dividend Policy....................... 13
Use of Proceeds....................... 13
Management's Discussion and Analysis
or Plan of Operations............... 14
Selected Financial Data............... 16
Price Range of Common Stock........... 17
Business.............................. 18
Management............................ 24
Certain Transactions.................. 26
Principal Stockholders................ 27
Selling Stockholders.................. 27
Plan of Distribution.................. 29
Description of Capital Stock.......... 30
Legal Matters......................... 34
Experts............................... 34
Additional Information................ 34
Index to Financial Statements......... F-1
</TABLE>
Until , 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
2,820,000 SHARES
ENVIRONMENTAL PRODUCTS
& TECHNOLOGIES CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MAY , 1998
======================================================
<PAGE> 47
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate of Incorporation (the "Certificate") and By-Laws
of the Registrant filed as Exhibits 3.1 and 3.2 hereto, provide that the
Registrant shall indemnify any person to the fullest extent permitted by the
Delaware General Corporation Law (the "DGCL").
In accordance with Section 102(a)(7) of the DGCL, the Certificate of the
Registrant eliminates the personal liability of directors to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty as a director
with certain limited exceptions set forth in Section 102(a)(7).
The Registrant intends to enter into indemnification agreements with each
of its officers and directors, the form of which is filed as exhibit 10.15 and
reference is hereby made to such form.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Units being registered hereby. All of the amounts shown are
estimates except for the Securities and Exchange Commission (the "Commission")
registration fee and the National Association of Securities Dealers ("NASD")
filing fee.
<TABLE>
<S> <C>
Commission Registration Fee................................. $ 6,083.27
Accounting Fees and Expenses................................ $
Legal Fees and Expenses..................................... $50,000.00
Printing and Engraving Expenses............................. $20,000.00
Transfer Agent Fees......................................... $ 2,000.00
Miscellaneous Expenses...................................... $ --
----------
TOTAL.................................................. $
==========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Between October and December 1995, the Registrant sold 100,000 shares of
Common Stock for an aggregate of $10,000, or $.10 per share to one investor.
Between January and March 1996, the Registrant sold 400,000 shares of
Common Stock for an aggregate of $189,650, or approximately $.47 per share to
two investors.
Between April and June 1996, the Registrant sold 40,000 shares of Common
Stock for an aggregate of $35,000, or $.87 per share to one investor.
Between July and September 1996, the Registrant sold 480,000 shares of
Common Stock for an aggregate of $149,200, or approximately $.31 per share to
five investors.
Between June and September 1997, the Registrant sold 550,000 shares of
Common Stock for an aggregate of $337,925, or approximately $.614 per share to
ten investors.
On October 2, 1995, the Registrant issued warrants to purchase an aggregate
of 600,000 shares of Common Stock at an exercise price of $.10 per share to 4
investors. On May 29, 1997, warrants representing the right to purchase 300,000
shares of Common Stock were canceled. On April 13, 1998 the holders of the
remaining warrants to purchase 300,000 shares of Common Stock agreed to exercise
such warrants and in lieu of paying an aggregate of $30,000 agreed to received
285,000 shares of Common Stock instead of 300,000 shares of Common Stock.
On January 22, 1998, the Registrant sold for an aggregate of $200 warrants
to purchase 150,000 shares of Common Stock at an exercise price of $4.00 per
share.
II-1
<PAGE> 48
On November 5, 1997, the Registrant issued 50,000 shares to Lifeline
Enterprises L.L.C. in consideration for the transfer by Lifeline to the
Registrant of all right, title and interest in and to the aerobic bioreactor,
the anaerobic system and the biologicals used with each.
In April 1998, the Registrant sold 3,000 shares of Series A Preferred Stock
together with warrants (the "Private Placement Warrants") to purchase 300,000
shares of Common Stock (the "Private Placement") for gross proceeds of
$3,000,000. The Private Placement Warrants have an initial exercise price of
$3.875 per share. The Private Placement Warrants expire on March 31, 2003. the
Private Placement Warrants contain provisions of the adjustment of the exercise
price and the aggregate number of shares issuable upon exercise under certain
circumstances, including without limitation, stock dividends, stock splits,
reorganizations, reclassifications, consolidations, certain dilutive sales of
securities for which the Private Placement Warrants are exercisable below the
then existing Market Price (as defined) and failure to maintain a sufficient
number of authorized shares of Common Stock for issuance and delivery upon
exercise of the Private Placement Warrants. The shares of Series A Preferred
Stock and the Private Placement Warrants were sold to two accredited investors.
The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), as transactions not
involving any public offering or (ii) only in the case of options or warrants
granted to employees, directors, officers and consultants, Rule 701 under the
Securities Act. In the case of private placements exempt pursuant to Section
4(2), such offers and sales were made only to [accredited investors]; the
Registrant did not engage in any form of general solicitation or advertising;
and the Registrant exercised reasonable care to assure that the purchasers of
the Registrant's securities were not underwriters within the meaning of Section
2(11) of the Securities Act.
ITEM 27. EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
3.3 Certificate of Designation, Preferences and Rights
4.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 hereof) and Bylaws of the
Registrant (incorporated by reference to Exhibit 3.2 hereof)
4.2 Form of Common Stock Certificate*
5.1 Legal opinion of Donahue, Mesereau & Leids LLP re legality*
10.1 Securities Purchase Agreement dated as of March 31, 1998 by
and between the Registrant and each of Diversified
Strategies fund, L.P. and JNC Opportunity Fund, Ltd.
10.2 Warrant to purchase 137,500 shares of Common Stock of the
Registrant issued to JNC Opportunity Fund, Ltd.
10.3 Warrant to purchase 12,500 shares of Common Stock of the
Registrant issued to Diversified Strategies Fund, L.P.
10.4 Registration Rights Agreement dated as of March 31, 1998 by
and between the Registrant and each of Diversified Fund,
L.P. and JNC Opportunity Fund, Ltd.
10.5 Consulting Agreement dated January 22, 1998 by and between
the Registrant and Strategic Planning Consultants, Inc.*
10.6 Warrant to purchase 200,000 shares of Common Stock of the
Registrant issued to Jonathan Fink (the "Fink Warrant") at
an exercise price of $.10 per share.*
</TABLE>
II-2
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
10.7 Letter agreement from Jonathan Fink to the Registrant
agreeing to exercise the Fink Warrant.*
10.8 Warrant to purchase 100,000 shares of Common Stock of the
Registrant issued to Brad Billik (the "Billik Warrant") at
an exercise price of $.10 per share.*
10.9 Letter agreement from Brad Billik to the Registrant agreeing
to exercise the Billik Warrant.*
10.10 Warrant to purchase 100,000 shares of Common Stock of the
Registrant issued to Jonathan Fink at an exercise price of
$4.00 per share.*
10.11 Warrant to purchase 50,000 shares of Common Stock of the
Registrant issued to Brad Billik at an exercise price of
$4.00 per share.*
10.12 Lease Agreement dated December 3, 1997 by and between the
Registrant and Westlake Industrial Complex.*
10.13 1996 Stock Option Plan and related agreements.*
10.14 Employment Agreement dated as of April 15, 1998 by and
between the Registrant and Marvin Mears.*
10.15 Form of Indemnification Agreement.*
10.16 Promissory Note issued to the Registrant by Morris Lerner.*
10.17 Promissory Note issued to the Registrant by Combined Assets,
Inc.*
10.18 Promissory Note issued by the Registrant to Ronald Knudsen.*
10.19 Agreement with Lifeline Enterprises L.L.C.*
23.1 Consent of Donahue, Mesereau & Leids LLP (incorporated by
reference to Exhibit 5.1 hereof)
23.2 Consent of Clumeck, Stern, Phillips & Schenkelberg
24.1 Power of Attorney (reference is made to page II-5 hereof)
</TABLE>
- ---------------
* To be filed by Amendment.
(b) Financial Statement Schedules:
None.
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which individually, or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered
II-3
<PAGE> 50
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(6) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed as part
of this Registration Statement as of the time it was declared effective.
(7) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 51
SIGNATURES
In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Los Angeles, State
of California, on May 22, 1998.
ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION
/s/ MARVIN MEARS
--------------------------------------
By: Marvin Mears
Title: Chief Executive Officer and
President
POWER OF ATTORNEY
We, the undersigned officers, and directors of Environmental Products &
Technologies Corporation, do hereby constitute and appoint Marvin Mears and Joel
Wadman, and each of them, our true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any all capacities, to sign any and all amendments to this
Registration Statement, and to file the same, with exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby, ratifying and confirming all
that each of said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ MARVIN MEARS Chief Executive Officer, May 22, 1998
- ----------------------------------------------------- President and Director
Marvin Mears
/s/ JOEL WADMAN Chief Financial Officer May 22, 1998
- ----------------------------------------------------- (principal
Joel Wadman accounting officer) and Secretary
</TABLE>
II-5
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
3.3 Certificate of Designation, Preferences and Rights
4.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 hereof) and Bylaws of the
Registrant (incorporated by reference to Exhibit 3.2 hereof)
4.2 Form of Common Stock Certificate*
5.1 Legal opinion of Donahue, Mesereau & Leids LLP re legality*
10.1 Securities Purchase Agreement dated as of March 31, 1998 by
and between the Registrant and each of Diversified
Strategies fund, L.P. and JNC Opportunity Fund, Ltd.
10.2 Warrant to purchase 137,500 shares of Common Stock of the
Registrant issued to JNC Opportunity Fund, Ltd.
10.3 Warrant to purchase 12,500 shares of Common Stock of the
Registrant issued to Diversified Strategies Fund, L.P.
10.4 Registration Rights Agreement dated as of March 31, 1998 by
and between the Registrant and each of Diversified Fund,
L.P. and JNC Opportunity Fund, Ltd.
10.5 Consulting Agreement dated January 22, 1998 by and between
the Registrant and Strategic Planning Consultants, Inc.*
10.6 Warrant to purchase 200,000 shares of Common Stock of the
Registrant issued to Jonathan Fink (the "Fink Warrant") at
an exercise price of $.10 per share.*
10.7 Letter agreement from Jonathan Fink to the Registrant
agreeing to exercise the Fink Warrant.*
10.8 Warrant to purchase 100,000 shares of Common Stock of the
Registrant issued to Brad Billik (the "Billik Warrant") at
an exercise price of $.10 per share.*
10.9 Letter agreement from Brad Billik to the Registrant agreeing
to exercise the Billik Warrant.*
10.10 Warrant to purchase 100,000 shares of Common Stock of the
Registrant issued to Jonathan Fink at an exercise price of
$4.00 per share.*
10.11 Warrant to purchase 50,000 shares of Common Stock of the
Registrant issued to Brad Billik at an exercise price of
$4.00 per share.*
10.12 Lease Agreement dated December 3, 1997 by and between the
Registrant and Westlake Industrial Complex.*
10.13 1996 Stock Option Plan and related agreements.*
10.14 Employment Agreement dated as of April 15, 1998 by and
between the Registrant and Marvin Mears.*
</TABLE>
II-6
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
10.15 Form of Indemnification Agreement.*
10.16 Promissory Note issued to the Registrant by Morris Lerner.*
10.17 Promissory Note issued to the Registrant by Combined Assets,
Inc.*
10.18 Promissory Note issued by the Registrant to Ronald Knudsen.*
10.19 Agreement with Lifeline Enterprises L.L.C.*
23.1 Consent of Donahue, Mesereau & Leids LLP (incorporated by
reference to Exhibit 5.1 hereof)
23.2 Consent of Clumeck, Stern, Phillips & Schenkelberg
24.1 Power of Attorney (reference is made to page II-5 hereof)
</TABLE>
- ---------------
* To be filed by Amendment.
(b) Financial Statement Schedules:
None.
II-7
<PAGE> 1
Exhibit 3.3
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(Pursuant to Section 151 of the Delaware General Corporation Law)
Environmental Products & Technologies, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "CORPORATION"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation pursuant to authority of the Board of Directors as required
by Section 151 of the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD")
in accordance with the provisions of its Certificate of Incorporation and
Bylaws, each as amended and restated through the date hereof, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $.01 per share (the "PREFERRED STOCK"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
<PAGE> 2
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 3,000 shares of
Preferred Stock, is the Series A Convertible Preferred Stock (the "SERIES A
PREFERRED STOCK") and the face amount shall be One Thousand U.S. Dollars
($1000.00) per share (the "FACE AMOUNT").
II. DIVIDENDS
The Series A Preferred Stock shall bear no dividends, and the holders of
the Series A Preferred Stock shall not be entitled to receive dividends on the
Series A Preferred Stock.
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A. "CLOSING BID PRICE" means, for any security as of any date, the
closing bid price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg Financial Markets or a comparable reporting service of national
reputation selected by the Corporation and reasonably acceptable to holders of a
majority of the then outstanding shares of Series A Preferred Stock if Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "BLOOMBERG"), or if the foregoing does not apply, the last
reported sale price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing does not apply, the last reported sale price
of such security in the over-the-counter market on the electronic bulletin board
(the "Bulletin Board") for such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc., in each case for such date or, if such
date was not a trading date for such security, on the next preceding date which
was a trading date. If the Closing Bid Price cannot be calculated for such
security as of either of such dates on any of the foregoing bases, the Closing
Bid Price of such security on such date shall be the fair market value as
reasonably determined by an investment banking firm selected by the Corporation
and reasonably acceptable to the holders of a majority of the then outstanding
shares of Series A Preferred Stock, with the costs of such appraisal to be borne
by the Corporation.
B. "CONVERSION DATE" means, for any Conversion, the date specified in
the notice of conversion in the form attached hereto (the "NOTICE OF
CONVERSION"), so long as the copy of the Notice of Conversion is faxed (or
delivered by other means resulting in notice) to the Corporation at or before
11:59 p.m., New York City time, on the Conversion Date indicated in the Notice
of Conversion; provided, however, that if the Notice of Conversion is not so
faxed or otherwise
-2-
<PAGE> 3
delivered before such time, then the Conversion Date shall be the date the
holder faxes or otherwise delivers the Notice of Conversion to the Corporation.
C. "CONVERSION PERCENTAGE" shall initially mean eighty percent (80%). In
the event the Corporation's Common Stock, par value $.01 per share ("COMMON
STOCK"), is no longer designated for quotation on the Bulletin Board or any
other United States stock exchange or trading market with equivalent or higher
listing standards than the Bulletin Board, the Conversion Percentage shall be
permanently reduced by ten percent (10%) to seventy percent (70%). The
Conversion Percentage also shall be subject to adjustment as provided herein.
D. "CONVERSION PRICE" means, with respect to any Conversion Date, the
lower of the Variable Conversion Price and the Fixed Conversion Price, each in
effect as of such date and subject to adjustment as provided herein; provided,
however, that in no event shall the Conversion Price in effect on any Conversion
Date be less than the Floor Price in effect on such Conversion Date unless a
Reserved Amount Trigger Event (as defined in Article V hereof) a Conversion
Default (as defined in Article VI hereof) or a Mandatory Redemption Event (as
defined in Article VIII.A hereof) shall have occurred and be then continuing;
provided, further, however, that the restriction contained in the immediately
preceding proviso shall not apply on any Conversion Date occurring after an
Announcement Date (as defined in Article XI.C hereof) and prior to the sixth
(6th) trading day following (i) the consummation of the proposed transaction or
tender offer, exchange offer or other transaction to which the Announcement Date
relates or (ii) the Abandonment Date (as defined in Article XI.C hereof).
E. "FIXED CONVERSION PRICE" means $7.75, and shall be subject to
adjustment as provided herein (including, without limitation, Articles V.D, VI.B
and XI).
F. "FLOOR PRICE" means, with respect to any Conversion Date, the lower
of (i) $2.00 and (ii) the Fixed Conversion Price then in effect.
G. "ISSUANCE DATE" means the date of the closing under that certain
Securities Purchase Agreement by and between the Corporation and the purchaser
named therein with respect to the issuance of the Series A Preferred Stock (the
"SECURITIES PURCHASE AGREEMENT").
H. "N" means the number of days from, but excluding, the Issuance Date.
I. "PREMIUM" means an amount equal to (.06)x(N/365)x(1,000).
J. "VARIABLE CONVERSION PRICE" means, as of any date of determination,
the amount obtained by multiplying the Conversion Percentage then in effect by
the average of the five (5) lowest Closing Bid Prices for the Common Stock
during the fifteen (15) consecutive trading days ending on the trading day
immediately preceding such date of determination (subject to equitable
adjustment for any stock splits, stock dividends, reclassifications or similar
events during such
-3-
<PAGE> 4
fifteen (15) trading day period), and shall be subject to adjustment as provided
herein. For the avoidance of doubt, the trading day immediately preceding any
Conversion Date is the last calendar day that is a trading day and which is
immediately preceding the Conversion Date.
K. "BUSINESS DAY" and "TRADING DAY" means any day on which the New York
Stock Exchange is open for trading.
IV. CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the
limitations on conversions contained in Paragraph C of this Article IV, each
holder of shares of Series A Preferred Stock may, at any time and from time to
time, convert (an "OPTIONAL CONVERSION") each of its shares of Series A
Preferred Stock into a number of fully paid and nonassessable shares of Common
Stock determined in accordance with the following formula if the Corporation
timely redeems the Premium thereon in cash or shares of Common Stock in
accordance with subparagraph (ii) below:
1,000
----------------
CONVERSION PRICE
or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:
1,000 + THE PREMIUM
-------------------
CONVERSION PRICE
(ii) (a) The Corporation shall have the right, in its sole
discretion, upon receipt of a Notice of Conversion, or in the event of a
Required Conversion at Maturity, to redeem the Premium subject to such
conversion for a sum of cash equal to the amount of the Premium being so
redeemed. All cash redemption payments hereunder shall be paid in lawful money
of the United States of America at such address for the holder as appears on the
record books of the Corporation (or at such other address as such holder shall
hereafter give to the Corporation by written notice). In the event the
Corporation so elects to redeem the Premium in cash and fails to pay such holder
the applicable redemption amount to which such holder is entitled by depositing
a check in the U.S. Mail to such holder within three (3) business days of
receipt by the Corporation of a Notice of Conversion (in the case of a
redemption in connection with an Optional Conversion) or the Maturity Date (in
the case of a redemption in connection with a Required Conversion at Maturity),
the Corporation shall thereafter forfeit its right to redeem such Premium in
cash and such Premium shall thereafter be converted into shares of Common Stock
in accordance with Article IV.A(i).
(b) Each holder of Series A Preferred Stock shall have the
right to require the Corporation to provide advance notice to such holder
stating whether the Corporation will elect to redeem the Premium in cash
pursuant to the Corporation's redemption rights discussed in
-4-
<PAGE> 5
subparagraph (a) of this Article IV.A(ii). A holder may exercise such right from
time to time by sending notice (an "ELECTION NOTICE") to the Corporation, by
facsimile, requesting that the Corporation disclose to such holder whether the
Corporation would elect to redeem the Premium for cash in lieu of issuing shares
of Common Stock therefor if such holder were to exercise its right of conversion
pursuant to this Article IV.A. The Corporation shall, no later than the close of
business on the next business day following receipt of an Election Notice,
disclose to such holder whether the Corporation would elect to redeem the
Premium in connection with a conversion pursuant to a Notice of Conversion
delivered over the subsequent five (5) business day period. If the Corporation
does not respond to such holder within such one business day period via
facsimile, the Corporation shall, with respect to any conversion pursuant to a
Conversion Notice delivered within the subsequent five (5) business day period,
forfeit its right to redeem such Premium in accordance with subparagraph (a) of
this Article IV.A(ii) and shall be required to convert such Premium into shares
of Common Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion, a
holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation or the transfer agent for the Common Stock and
(y) surrender or cause to be surrendered the original certificates representing
the Series A Preferred Stock being converted (the "PREFERRED STOCK
CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation or the transfer agent. Upon
receipt by the Corporation of a facsimile copy of a Notice of Conversion from a
holder, the Corporation shall immediately send, via facsimile, a confirmation to
such holder stating that the Notice of Conversion has been received, the date
upon which the Corporation expects to deliver the Common Stock issuable upon
such conversion and the name and telephone number of a contact person at the
Corporation regarding the conversion. The Corporation shall not be obligated to
issue shares of Common Stock upon a conversion unless either the Preferred Stock
Certificates are delivered to the Corporation or the transfer agent as provided
above, or the holder notifies the Corporation or the transfer agent that such
certificates have been lost, stolen or destroyed and delivers the documentation
to the Company required by Article XIV.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the surrender
of Preferred Stock Certificates from a holder of Series A Preferred Stock
accompanied by a Notice of Conversion, the Corporation shall, no later than the
later of (a) the second business day following the Conversion Date and (b) the
business day following the date of such surrender (or, in the case of lost,
stolen or destroyed certificates, after provision of indemnity pursuant to
Article XIV.B) (the "DELIVERY PERIOD"), issue and deliver to the holder or its
nominee (x) that number of shares of Common Stock issuable upon conversion of
such shares of Series A Preferred Stock being converted and (y) a certificate
representing the number of shares of Series A Preferred Stock not being
converted, if any. If the Corporation's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer program, and
so long as the certificates therefor do not bear a legend and the holder thereof
is not obligated to return such certificate for the placement of a legend
thereon, the Corporation shall cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the holder by crediting
the account of the holder or
-5-
<PAGE> 6
its nominee with DTC through its Deposit Withdrawal Agent Commission system
("DTC TRANSFER"). If the aforementioned conditions to a DTC Transfer are not
satisfied, the Corporation shall deliver to the holder physical certificates
representing the Common Stock issuable upon conversion. Further, a holder may
instruct the Corporation to deliver to the holder physical certificates
representing the Common Stock issuable upon conversion in lieu of delivering
such shares by way of DTC Transfer.
(ii) Taxes. The Corporation shall pay any and all taxes which may
be imposed upon it with respect to the issuance and delivery of the shares of
Common Stock upon the conversion of the Series A Preferred Stock.
(iii) No Fractional Shares. If any conversion of Series A
Preferred Stock would result in the issuance of a fractional share of Common
Stock, such fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock shall be
the next higher whole number of shares.
(iv) Conversion Disputes. In the case of any dispute with respect
to a conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with subparagraph (i) above. If
such dispute involves the calculation of the Conversion Price, the Corporation
shall submit the disputed calculations to an independent outside accountant via
facsimile within two (2) business days of receipt of the Notice of Conversion.
The accountant, at the Corporation's sole expense, shall audit the calculations
and notify the Corporation and the holder of the results no later than two (2)
business days from the date it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive, absent manifest error. The
Corporation shall then issue the appropriate number of shares of Common Stock in
accordance with subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series A
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) No Five Percent Holders. Unless a holder of shares of Series
A Preferred Stock delivers a waiver in accordance with the last sentence of this
subparagraph (i), except in connection with a Required Conversion at Maturity,
in no event shall a holder of shares of Series A Preferred Stock be entitled to
receive shares of Common Stock upon a conversion to the extent that the sum of
(x) the number of shares of Common Stock beneficially owned by the holder and
its affiliates (exclusive of shares issuable upon conversion of the unconverted
portion of the shares of Series A Preferred Stock or the unexercised or
unconverted portion of any other securities of the Corporation (including,
without limitation, the warrants (the "WARRANTS") issued by the Corporation
pursuant to the Securities Purchase Agreement) subject to a limitation on
conversion or exercise analogous to the limitations contained herein) and (y)
the number of shares of Common Stock issuable upon the conversion of the shares
of Series A Preferred Stock with respect to which the determination of this
subparagraph is being made, would result in beneficial ownership by the holder
-6-
<PAGE> 7
and its affiliates of more than 4.99% of the outstanding shares of Common Stock.
For purposes of this subparagraph, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (x) above. Except as provided in the immediately succeeding sentence, the
restriction contained in this subparagraph (i) shall not be altered, amended,
deleted or changed in any manner whatsoever unless the holders of a majority of
the outstanding shares of Common Stock and each holder of outstanding shares of
Series A Preferred Stock shall approve such alteration, amendment, deletion or
change. Notwithstanding the foregoing, a holder of shares of Series A Preferred
Stock may waive the restriction set forth in this subparagraph (i) upon not less
than 61 days prior written notice to the Corporation (with such waiver taking
effect only upon the expiration of such 61-day period).
D. Required Conversion at Maturity. Subject to the limitations set forth
in Paragraphs C(i) and C(ii) of this Article IV and provided all shares of
Common Stock issuable upon conversion of all outstanding shares of Series A
Preferred Stock are then (i) authorized and reserved for issuance, (ii)
registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
for resale by the holders of such shares of Series A Preferred Stock and (iii)
eligible to be traded on either the New York Stock Exchange ("NYSE"), the
American Stock Exchange ("AMEX"), the Nasdaq National Market ("NNM"), the Nasdaq
Small Cap Market ("SMALL CAP"), or the Bulletin Board, each share of Series A
Preferred Stock issued and outstanding on the second (2nd) anniversary of the
Issuance Date (the "MATURITY DATE") automatically shall be converted into shares
of Common Stock on such date in accordance with the conversion formulas set
forth in Paragraph A of this Article IV (the "REQUIRED CONVERSION AT MATURITY").
If the Required Conversion at Maturity occurs, the Corporation and the holders
of Series A Preferred Stock shall follow the applicable conversion procedures
set forth in Paragraph B of this Article IV; provided, however, that the holders
of Series A Preferred Stock are not required to deliver a Notice of Conversion
to the Corporation or its transfer agent. If the Required Conversion at Maturity
does not occur (including by reason of the limitations set forth in Paragraph
C(i) of this Article IV), each holder of Series A Preferred Stock shall
thereafter have the option, exercisable in whole or in part at any time and from
time to time by delivery of a Mandatory Redemption Notice (as defined in Article
VIII.C) to the Corporation, to require the Corporation to purchase for cash, at
an amount per share equal to the Mandatory Redemption Amount (as defined in
Article VIII.B), the holder's Series A Preferred Stock. If the Corporation fails
to redeem any of such shares within five (5) business days after the day on
which the Corporation receives such Mandatory Redemption Notice, then such
holder shall be entitled to the remedies provided in Article VIII.C.
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. Upon the initial issuance of shares of Series A
Preferred Stock, the Corporation shall reserve 825,000 shares (200% of the
maximum number of shares of Common Stock which would be issuable if all shares
of Series A Preferred Stock are converted in their entirety on the Issuance
Date) of the authorized but unissued shares of Common Stock for issuance upon
conversion of the Series A Preferred Stock and thereafter the number of
authorized but unissued
-7-
<PAGE> 8
shares of Common Stock so reserved (the "RESERVED AMOUNT") shall at all times be
sufficient to provide for the conversion of the shares of Series A Preferred
Stock then outstanding at the then current Conversion Price. The Reserved Amount
shall be allocated to the holders of Series A Preferred Stock as provided in
Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three
(3) consecutive trading days (the last of such three (3) trading days being the
"AUTHORIZATION TRIGGER DATE") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series A
Preferred Stock, the Corporation shall immediately notify the holders of Series
A Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking stockholder approval to authorize the issuance of
additional shares of Common Stock) to increase the Reserved Amount to 200% of
the number of shares of Common Stock then issuable upon conversion of the
outstanding Series A Preferred Stock. In the event the Corporation fails to so
increase the Reserved Amount within ninety (90) days after an Authorization
Trigger Date, each holder of Series A Preferred Stock shall thereafter have the
option, exercisable in whole or in part at any time and from time to time by
delivery of a Mandatory Redemption Notice (as defined in Article VIII.C) to the
Corporation, to require the Corporation to purchase for cash, at an amount per
share equal to the Mandatory Redemption Amount (as defined in Article VIII.B), a
portion of the holder's Series A Preferred Stock such that, after giving effect
to such purchase, such holder's allocated portion of the Reserved Amount exceeds
135% of the total number of shares of Common Stock issuable to such holder upon
conversion of the holder's Series A Preferred Stock. If the Corporation fails to
redeem any of such shares within five (5) business days after its receipt of a
Mandatory Redemption Notice, then such holder shall be entitled to the remedies
provided in Article VIII.C.
C. Limitations on Redemption Right. Notwithstanding the provisions of
Paragraph B of this Article V, the holders of Series A Preferred Stock shall
have no right to require the Corporation to effect a redemption of their
outstanding shares of Series A Preferred Stock as provided in Paragraph B of
this Article V so long as (i) the Corporation has not, at any time, decreased
the Reserved Amount below 825,000 shares of Common Stock; (ii) the Corporation
shall have taken immediate action following the applicable Authorization Trigger
Date (including, if necessary, seeking stockholder approval to authorize the
issuance of additional shares of Common Stock) to increase the Reserved Amount
to 200% of the number of shares of Common Stock then issuable upon conversion of
the outstanding Series A Preferred Stock; and (iii) the Corporation continues to
use its good faith best efforts (including the resolicitation of stockholder
approval to authorize the issuance of additional shares of Common Stock) to
increase the Reserved Amount to 200% of the number of shares of Common Stock
then issuable upon conversion of the outstanding Series A Preferred Stock. The
Corporation will be deemed to be using "its good faith best efforts" to increase
the Reserved Amount so long as it solicits stockholder approval, if required, to
authorize the issuance of additional shares of Common Stock not less than three
(3) times during each twelve month period following the applicable Authorization
Trigger Date during which any shares of Series A Preferred Stock remain
outstanding.
-8-
<PAGE> 9
D. Adjustment to Conversion Price. If the Corporation is prohibited, at
any time, from issuing shares of Common Stock upon conversion of Series A
Preferred Stock to any holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common Stock
(a "RESERVED AMOUNT TRIGGER EVENT"), then the Fixed Conversion Price in respect
of any shares of Series A Preferred Stock held by any holder (including shares
of Series A Preferred Stock submitted to the Corporation for conversion, but for
which shares of Common Stock have not been issued to any such holder) shall
thereafter be the lesser of (i) the Fixed Conversion Price on the date of the
Reserved Amount Trigger Event and (ii) the lowest Conversion Price in effect
during the period beginning on, and including the date of, the Reserved Amount
Trigger Event through and including the date on which the Corporation shall have
taken all action necessary to increase the number of authorized shares of Common
Stock and to increase the Reserved Amount to 200% of the number of shares of
Common Stock then issuable upon conversion of the then outstanding Series A
Preferred Stock. Upon the occurrence of each reset of the Fixed Conversion Price
pursuant to this Paragraph D, the Corporation, at its expense, shall promptly
compute the new Fixed Conversion Price and prepare and furnish to each holder of
Series A Preferred Stock a certificate setting forth such new Fixed Conversion
Price and showing in detail each Conversion Price in effect during such reset
period.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of shares
of Series A Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount for which failure the holders
shall have the remedies set forth in Article V) to deliver, on or prior to the
fourth (4th) business day following the expiration of the Delivery Period for
such conversion, such number of freely tradeable shares of Common Stock to which
such holder is entitled upon such conversion, or (y) the Corporation provides
notice to any holder of shares of Series A Preferred Stock at any time of its
intention not to issue freely tradeable shares of Common Stock upon exercise by
any holder of its conversion rights in accordance with the terms of this
Certificate of Designation (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount) (each of (x) and (y) being a
"CONVERSION DEFAULT"), then the Corporation shall pay to the affected holder, in
the case of a Conversion Default described in clause (x) above, and to all
holders, in the case of a Conversion Default described in clause (y) above, an
amount equal to:
(.24) x (D/365) x (Default Amount)
where:
"D" means the number of days after the expiration of the Delivery Period
through and including the Default Cure Date;
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<PAGE> 10
"DEFAULT AMOUNT" means (i) the total Face Amount of all shares of Series
A Preferred Stock held by such holder, plus (ii) the total accrued Premium as of
the first day of the Conversion Default on all shares of Series A Preferred
Stock included in clause (i) of this definition; and
"DEFAULT CURE DATE" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series A Preferred Stock and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation issues freely tradeable shares of Common Stock in
satisfaction of all conversions of Series A Preferred Stock in accordance with
Article IV.A, and (iii) with respect to either type of a Conversion Default, the
date on which the Corporation redeems shares of Series A Preferred Stock held by
such holder pursuant to Paragraph D of this Article VI.
The payments to which a holder shall be entitled pursuant to this
Paragraph A are referred to herein as "CONVERSION DEFAULT PAYMENTS." A holder
may elect to receive accrued Conversion Default Payments in cash or to convert
all or any portion of such accrued Conversion Default Payments, at any time,
into Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the Conversion Default through the Conversion Date with
respect to such Conversion Default Payments. In the event a holder elects to
receive any Conversion Default Payments in cash, it shall so notify the
Corporation in writing. Such payment shall be made in accordance with and be
subject to the provisions of Article XIV.E. In the event a holder elects to
convert all or any portion of the Conversion Default Payments into Common Stock,
the holder shall indicate on a Notice of Conversion such portion of the
Conversion Default Payments which such holder elects to so convert and such
conversion shall otherwise be effected in accordance with the provisions of
Article IV.
B. Adjustment to Conversion Price. If a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series A Preferred Stock for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount, for which failure
the holders shall have the remedies set forth in Article V), then the Fixed
Conversion Price in respect of any shares of Series A Preferred Stock held by
such holder (including shares of Series A Preferred Stock submitted to the
Corporation for conversion, but for which shares of Common Stock have not been
issued to such holder) shall thereafter be the lesser of (i) the Fixed
Conversion Price on the Conversion Date specified in the Notice of Conversion
which resulted in the Conversion Default and (ii) the lowest Conversion Price in
effect during the period beginning on, and including, such Conversion Date
through and including the earlier of (x) the day such shares of Common Stock are
delivered to the holder and (y) the day on which the holder regains its rights
as a holder of Series A Preferred Stock with respect to such unconverted shares
of Series A Preferred Stock pursuant to the provisions of Article XIV.F hereof.
If there shall occur a Conversion Default of the type described in clause (y) of
Article VI.A, then the Fixed Conversion Price with respect to any conversion
thereafter shall be the lowest Conversion Price in effect at any time during the
period beginning on, and including, the date of the occurrence of such
Conversion Default through and including the
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<PAGE> 11
Default Cure Date. The Fixed Conversion Price shall thereafter be subject to
further adjustment for any events described in Article XI.
C. Buy-In Cure. Unless the Corporation has notified the applicable
holder in writing prior to the delivery by such holder of a Notice of Conversion
that the Corporation is unable to honor conversions, if (i) (a) the Corporation
fails for any reason to deliver during the Delivery Period shares of Common
Stock to a holder upon a conversion of shares of Series A Preferred Stock or (b)
there shall occur a Legend Removal Failure (as defined in Article VIII.A(iii)
below) and (ii) thereafter, such holder purchases (in an open market transaction
or otherwise) shares of Common Stock to make delivery in satisfaction of a sale
by such holder of the unlegended shares of Common Stock (the "SOLD SHARES")
which such holder anticipated receiving upon such conversion (a "BUY-IN"), the
Corporation shall pay such holder (in addition to any other remedies available
to the holder) the amount by which (x) such holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares of Common
Stock so purchased exceeds (y) the net proceeds received by such holder from the
sale of the Sold Shares. For example, if a holder purchases unlegended shares of
Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for $10,000, the Corporation will be
required to pay the holder $1,000. A holder shall provide the Corporation
written notification and supporting documentation indicating any amounts payable
to such holder pursuant to this Paragraph C. The Corporation shall make any
payments required pursuant to this Paragraph C in accordance with and subject to
the provisions of Article XIV.E.
D. Redemption Right. If the Corporation fails, and such failure
continues uncured for five (5) business days after the Corporation has been
notified thereof in writing by the holder, for any reason (other than because
such issuance would exceed such holder's allocated portion of the Reserved
Amount, for which failure the holders shall have the remedies set forth in
Articles V) to issue shares of Common Stock within ten (10) business days after
the expiration of the Delivery Period with respect to any conversion of Series A
Preferred Stock, then the holder may elect at any time and from time to time
prior to the Default Cure Date for such Conversion Default, by delivery of a
Mandatory Redemption Notice to the Corporation, to have all or any portion of
such holder's outstanding shares of Series A Preferred Stock purchased by the
Corporation for cash, at an amount per share equal to the Mandatory Redemption
Amount (as defined in Article VIII.B). If the Corporation fails to redeem any of
such shares within five (5) business days after its receipt of such Mandatory
Redemption Notice, then such holder shall be entitled to the remedies provided
in Article VIII.C.
VII. [INTENTIONALLY OMITTED]
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<PAGE> 12
VIII. EVENTS OF DEFAULT
A. Events of Default. In the event (each of the events described in
clauses (i) - (vi) below after expiration of the applicable cure period (if any)
being a "MANDATORY REDEMPTION EVENT"):
(i) the Common Stock (including any of the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock) is suspended from
trading on any of, or is not listed (and authorized) for trading on at least one
of, the NYSE, the AMEX, the NNM, the SmallCap or the Bulletin Board, for an
aggregate of fifteen (15) trading days in any nine (9) month period;
(ii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of that certain Registration Rights
Agreement, dated as of March 31, 1998, by and among the Corporation and the
other signatories thereto (the "REGISTRATION RIGHTS AGREEMENT") has not been
declared effective by the 183rd day following the Issuance Date or such
Registration Statement, after being declared effective, cannot be utilized by
the holders of Series A Preferred Stock for the resale of all of their
Registrable Securities (as defined in the Registration Rights Agreement) for an
aggregate of more than thirty (30) days;
(iii) the Corporation fails to remove any restrictive legend on
any certificate or any shares of Common Stock issued to the holders of Series A
Preferred Stock upon conversion of the Series A Preferred Stock as and when
required by this Certificate of Designation, the Securities Purchase Agreement
or the Registration Rights Agreement (a "LEGEND REMOVAL FAILURE"), and any such
failure continues uncured for five (5) business days after the Corporation has
been notified thereof in writing by the holder;
(iv) the Corporation provides notice to any holder of Series A
Preferred Stock, including by way of public announcement, at any time, of its
intention not to issue shares of Common Stock to any holder of Series A
Preferred Stock or otherwise fails to deliver to any such holder within the
requisite time period shares of Common Stock upon conversion in accordance with
the terms of this Certificate of Designation (other than due to the
circumstances contemplated by Article V for which the holders shall have the
remedies set forth in such Article);
(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of
its assets (the presentation of any such transaction for stockholder approval
being conclusive evidence that such transaction involves the sale of all or
substantially all of the assets of the Corporation); or
(b) merge, consolidate or engage in any other business
combination with any other entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation of
the Corporation and other than pursuant to a merger in which the Corporation is
the surviving or continuing entity; or
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<PAGE> 13
(c) have approved, recommended or consented to any
transaction or series of related transactions which result in fifty percent
(50%) or more of the voting power of its capital stock being owned beneficially
by one person, entity or "group" (as such term is used under Section 13(d) of
the Securities Exchange Act of 1934, as amended); or
(vi) the Corporation breaches any material covenant or other
material term hereunder (other than as specifically provided in subparagraphs
(i)-(v) of this Paragraph A), or under the Securities Purchase Agreement or the
Registration Rights Agreement and such breach continues uncured for ten (10)
business days after the Corporation has been notified thereof in writing by the
holder;
then, upon the occurrence of any such Mandatory Redemption Event, each holder of
shares of Series A Preferred Stock shall thereafter have the option, exercisable
in whole or in part at any time and from time to time by delivery of a Mandatory
Redemption Notice (as defined in Paragraph C below) to the Corporation while
such Mandatory Redemption Event continues, to require the Corporation to
purchase for cash any or all of the then outstanding shares of Series A
Preferred Stock held by such holder for an amount per share equal to the
Mandatory Redemption Amount (as defined in Paragraph B below) in effect at the
time of the redemption hereunder. For the avoidance of doubt, the occurrence of
any event described in clauses (i), (ii), (iv) or (v) above shall immediately
constitute a Mandatory Redemption Event and there shall be no cure period;
provided, however, that the holders of Series A Preferred Stock shall have no
right to deliver a Mandatory Redemption Notice following the occurrence of a
Mandatory Redemption Event specified in clause (i) above if the Corporation
pays, at its option exercisable in its sole discretion, to each holder within
five (5) business days after the occurrence of such Mandatory Redemption Event,
as liquidated damages for the decrease in the value of the Series A Preferred
Stock (and the shares of the Corporation's Common Stock issuable upon conversion
thereof) which will result from the occurrence of such Mandatory Redemption
Event, an amount (the "DAMAGES AMOUNT") equal to twenty-five percent (25%) of
the aggregate Face Amount of the shares of Series A Preferred Stock then held by
each such holder. The Damages Amount shall be payable, at the Corporation's
option, in cash or shares of Common Stock (based upon a price per share of
Common Stock equal to fifty percent (50%) of the Conversion Price in effect as
of the date of such Mandatory Redemption Event). Upon the initial issuance of
shares of Series A Preferred Stock, the Corporation shall reserve 250,000 shares
of Common Stock to satisfy its obligation with respect to the Damages Amount and
thereafter the number of authorized but unissued shares of Common Stock so
reserved shall not be decreased. In the event that the number of shares required
to be issued by the Corporation with respect to the Damages Amount exceeds
250,000 shares of Common Stock and the Corporation does not have a sufficient
number of shares of Common Stock authorized and available for issuance to
satisfy its obligation with respect to the Damages Amount, the Corporation shall
issue and deliver to the holders, on a pro-rata basis based on the number of
shares of Series A Preferred Stock then held by each such holder, a number of
shares of Common Stock equal to the greater of (i) the number of shares
authorized and available for issuance by the Corporation to satisfy such
obligation and (ii) all 193,548 shares of Common Stock so reserved for such
purpose and, upon such issuance, the holders shall have no right of redemption
with respect to such Mandatory Redemption Event, but shall retain
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<PAGE> 14
all other remedies to which they may be entitled at law or in equity (which
remedies shall not include the right of redemption).
Upon the Corporation's receipt of any Mandatory Redemption Notice
hereunder (other than during the three (3) trading day period following the
Corporation's delivery of a Mandatory Redemption Announcement (as defined below)
to all of the holders in response to the Corporation's initial receipt of a
Mandatory Redemption Notice from a holder of Series A Preferred Stock), the
Corporation shall immediately (and in any event within one (1) business day
following such receipt) deliver a written notice (a "MANDATORY REDEMPTION
ANNOUNCEMENT") to all holders of Series A Preferred Stock stating the date upon
which the Corporation received such Mandatory Redemption Notice and the amount
of Series A Preferred Stock covered thereby. The Corporation shall not redeem
any shares of Series A Preferred Stock during the three (3) trading day period
following the delivery of a required Mandatory Redemption Announcement
hereunder. At any time and from time to time during such three (3) trading day
period, each holder of Series A Preferred Stock may request (either orally or in
writing) information from the Corporation with respect to the instant redemption
(including, but not limited to, the aggregate number of shares of Series A
Preferred Stock covered by Mandatory Redemption Notices received by the
Corporation) and the Corporation shall furnish (either orally or in writing) as
soon as practicable such requested information to such requesting holder.
B. Definition of Mandatory Redemption Amount. The "MANDATORY REDEMPTION
AMOUNT" with respect to a share of Series A Preferred Stock means an amount
equal to the greater of:
(i) V X M
------
C P
and
(ii) The sum of (x) the product of (I) one hundred percent (100%)
divided by the Conversion Percentage in effect on the date on which the
Corporation receives the Mandatory Redemption Notice, times (II) the Face Amount
thereof, plus (y) the accrued Premium thereon and all unpaid Conversion Default
Payments owing (if any) with respect thereto through the date of payment of the
Mandatory Redemption Amount.
"V" means the Face Amount thereof plus the accrued Premium thereon and
all unpaid Conversion Default Payments owing (if any) with respect thereto
through the date of payment of the Mandatory Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Mandatory Redemption Notice; and
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<PAGE> 15
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which the
Corporation receives the Mandatory Redemption Notice and ending on the date
immediately preceding the date of payment of the Mandatory Redemption Amount and
(ii) with respect to redemptions pursuant to Article VIII.A(v) hereof, the
greater of (a) the amount determined pursuant to clause (i) of this definition
or (b) the fair market value, as of the date on which the Corporation receives
the Mandatory Redemption Notice, of the consideration payable to the holder of a
share of Common Stock pursuant to the transaction which triggers the redemption.
For purposes of this definition, "fair market value" shall be determined by the
mutual agreement of the Corporation and holders of a majority-in-interest of the
shares of Series A Preferred Stock then outstanding, or if such agreement cannot
be reached within five (5) business days prior to the date of redemption, by an
investment banking firm selected by the Corporation and reasonably acceptable to
holders of a majority-in-interest of the then outstanding shares of Series A
Preferred Stock, with the costs of such appraisal to be borne by the
Corporation.
C. Redemption Defaults. If the Corporation fails to pay any holder the
Mandatory Redemption Amount with respect to any share of Series A Preferred
Stock within five (5) business days after its receipt of a notice requiring such
redemption (a "MANDATORY REDEMPTION NOTICE"), then the holder of Series A
Preferred Stock delivering such Mandatory Redemption Notice (i) shall be
entitled to interest on the Mandatory Redemption Amount at a per annum rate
equal to the lower of twenty-four percent (24%) and the highest interest rate
permitted by applicable law from the date on which the Corporation receives the
Mandatory Redemption Notice until the date of payment of the Mandatory
Redemption Amount hereunder, and (ii) shall have the right, at any time and from
time to time prior to payment thereof in cash, to require the Corporation, upon
written notice, to immediately convert (in accordance with the terms of
Paragraph A of Article IV) all or any portion of the Mandatory Redemption
Amount, plus interest as aforesaid, into shares of Common Stock at the lowest
Conversion Price in effect during the period beginning on the date on which the
Corporation receives the Mandatory Redemption Notice and ending on the
Conversion Date with respect to the conversion of such Mandatory Redemption
Amount. In the event the Corporation is not able to redeem all of the shares of
Series A Preferred Stock subject to Mandatory Redemption Notices delivered prior
to the date upon which such redemption is to be effected, the Corporation shall
redeem shares of Series A Preferred Stock from each holder pro rata, based on
the total number of shares of Series A Preferred Stock outstanding at the time
of redemption included by such holder in all Mandatory Redemption Notices
delivered prior to the date upon which such redemption is to be effected
relative to the total number of shares of Series A Preferred Stock outstanding
at the time of redemption included in all of the Mandatory Redemption Notices
delivered prior to the date upon which such redemption is to be effected.
D. Redemption at the Corporation's Option.
(i) The Corporation shall have the right, at any time and from
time to time, commencing on the 90th day following the effective date of the
Registration Statement referred to in Article VIII.A.(ii) hereof, so long as no
Conversion Default or Mandatory Redemption Event shall
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<PAGE> 16
have occurred and be continuing, to redeem (an "OPTIONAL REDEMPTION") all or any
portion of the then outstanding shares of Series A Preferred Stock (excluding
shares of Series A Preferred Stock subject to a Notice of Conversion delivered
to the Corporation prior to the date of the Optional Redemption Notice (as
defined in subparagraph (iii) below)) for cash, at an amount per share equal to
the Optional Redemption Amount (as defined below), by delivering an Optional
Redemption Notice to the holders of Series A Preferred Stock. Subject to the
provisions of Article IV.C hereof, holders of Series A Preferred Stock may
convert all or any part of their shares of Series A Preferred Stock selected for
redemption hereunder into Common Stock by delivering a Notice of Conversion to
the Corporation at any time prior to the Effective Date of Redemption. For
purposes hereof, the "OPTIONAL REDEMPTION AMOUNT" with respect to a share of
Series A Preferred Stock means an amount equal to the greater of:
(a) V X M
--------
C P
and
(b) The sum of (x) the product of (I) one hundred percent
(100%) divided by the Conversion Percentage in effect on the date of the
Optional Redemption Notice, times (II) the Face Amount thereof, plus (y) the
accrued Premium thereon and all unpaid Conversion Default Payments owing (if
any) with respect thereto through the Effective Date of Redemption (as defined
in subparagraph (iii) below).
where:
"V" means the Face Amount thereof plus the accrued Premium thereon and
all unpaid Conversion Default Payments owing (if any) with respect thereto
through the Effective Date of Redemption;
"CP" means the Conversion Price in effect on the date of the Optional
Redemption Notice; and
"M" means the Closing Bid Price of the Corporation's Common Stock on the
date of the Optional Redemption Notice.
(ii) The Corporation may not deliver an Optional Redemption
Notice to the holders of Series A Preferred Stock unless on or prior to the date
of delivery of such Optional Redemption Notice, the Corporation shall have
deposited with an escrow agent reasonably acceptable to holders of a majority of
the then outstanding shares of Series A Preferred Stock, as a trust fund, cash
sufficient in amount to pay all amounts to which the holders of Series A
Preferred Stock are entitled upon such redemption pursuant to subparagraph (i)
of this Paragraph D, with irrevocable instructions and authority to such escrow
agent to complete the redemption thereof in accordance with this Paragraph D.
Any Optional Redemption Notice delivered in accordance with
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<PAGE> 17
the immediately preceding sentence shall be accompanied by a statement executed
by a duly authorized officer of its escrow agent, certifying the amount of funds
which have been deposited with such escrow agent and that the escrow agent has
been instructed and agrees to act as redemption agent hereunder.
(iii) The Corporation shall effect an Optional Redemption under
this Section VIII.D by giving at least thirty (30) business days prior written
notice (the "OPTIONAL REDEMPTION NOTICE") of the date on which such redemption
is to become effective (the "EFFECTIVE DATE OF REDEMPTION") and the Optional
Redemption Amount to (i) the holders of Series A Preferred Stock at the address
and facsimile number of each holder appearing in the Corporation's register for
the Series A Preferred Stock and (ii) the transfer agent for the Common Stock,
which Optional Redemption Notice shall be deemed to have been delivered on the
business day after the Corporation's fax (with a copy sent by overnight courier
to the holders of Series A Preferred Stock) of such notice to the holders of
Series A Preferred Stock.
(iv) The Optional Redemption Amount shall be paid to the holder
of the Series A Preferred Stock being redeemed within three (3) business days of
the Effective Date of Redemption; provided, however, that the Corporation shall
not be obligated to deliver any portion of the Optional Redemption Amount until
either the certificates evidencing the Series A Preferred Stock being redeemed
are delivered to the office of the Corporation or the escrow agent or the holder
notifies the Corporation or the escrow agent that such certificates have been
lost, stolen or destroyed and delivers the documentation in accordance with
Article XIV.B hereof. Notwithstanding anything herein to the contrary, in the
event that the certificates evidencing the Series A Preferred Stock being
redeemed are not delivered to the Corporation or the escrow agent prior to the
third business day following the Effective Date of Redemption, the redemption of
the Series A Preferred Stock pursuant to this Article VIII.D shall still be
deemed effective as of the Effective Date of Redemption and the Optional
Redemption Amount shall be paid to the holder of Series A Preferred Stock being
redeemed within five (5) business days of the date the certificates evidencing
the Series A Preferred Stock being redeemed are actually delivered to the
Corporation or the escrow agent.
IX. RANK
All shares of the Series A Preferred Stock shall rank (i) prior to the
Corporation's Common Stock; (ii) prior to any class or series of capital stock
of the Corporation hereafter created (unless, with the consent of the holders of
Series A Preferred Stock obtained in accordance with Article XIII hereof, such
class or series of capital stock specifically, by its terms, ranks senior to or
pari passu with the Series A Preferred Stock) (collectively with the Common
Stock, "JUNIOR SECURITIES"); (iii) pari passu with any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series A Preferred Stock obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, on parity with the Series A
Preferred Stock (the "PARI PASSU SECURITIES"); and (iv) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series A Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series A
Preferred Stock
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<PAGE> 18
(collectively, the "SENIOR SECURITIES"), in each case as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary.
X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event, the Corporation shall liquidate, dissolve or wind
up, or if the Corporation shall otherwise liquidate, dissolve or wind up,
including, but not limited to, the sale or transfer of all or substantially all
of the Corporation's assets in one transaction or in a series of related
transactions (a "LIQUIDATION EVENT"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other than Senior
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Series A Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series A Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series A Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.
B. The purchase or redemption by the Corporation of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof, be regarded
as a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "LIQUIDATION PREFERENCE" with respect to a share of Series A
Preferred Stock means an amount equal to the Face Amount thereof plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.
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<PAGE> 19
XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price and the Floor Price shall be subject to adjustment
from time to time as follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
Issuance Date, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price and the Floor Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is decreased by
a reverse stock split, combination or reclassification of shares, or other
similar event, the Fixed Conversion Price and the Floor Price shall be
proportionately increased. In such event, the Corporation shall notify the
Corporation's transfer agent of such change on or before the effective date
thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after
the Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) - (iv) above being a "CORPORATE CHANGE"), then the holders of Series A
Preferred Stock shall thereafter have the right to receive upon conversion, in
lieu of the shares of Common Stock otherwise issuable, such shares of stock,
securities and/or other property as would have been issued or payable in such
Corporate Change with respect to or in exchange for the number of shares of
Common Stock which would have been issuable upon conversion (without giving
effect to the limitations contained in Article IV.C) had such Corporate Change
not taken place, and in any such case, appropriate provisions shall be made with
respect to the rights and interests of the holders of the Series A Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Conversion Price and the Floor Price and of the
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock) shall thereafter be applicable, as nearly as may be practicable
in relation to any shares of stock or securities thereafter deliverable upon the
conversion thereof. The Corporation shall not effect any Corporate Change unless
(i) each holder of Series A Preferred Stock has received written notice of such
transaction at least sixty (60) days prior thereto, but in no event later than
ten (10) days prior to the record date for the determination of stockholders
entitled to vote with respect thereto, and (ii) the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligations of this Certificate of Designation. The above provisions shall apply
regardless of whether or not there would have been a sufficient number of shares
of Common Stock authorized and available for issuance upon conversion of the
shares of Series A Preferred Stock outstanding as of the date of such
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<PAGE> 20
transaction, and shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
C. Adjustment Due to Major Announcement. In the event the Corporation at
any time after the Issuance Date (i) makes a public announcement that it intends
to consolidate or merge with any other entity (other than a merger in which the
Corporation is the surviving or continuing entity and its capital stock is
unchanged) or to sell or transfer all or substantially all of the assets of the
Corporation or (ii) any person, group or entity (including the Corporation)
publicly announces a tender offer, exchange offer or another transaction to
purchase 50% or more of the Corporation's Common Stock or otherwise publicly
announces an intention to replace a majority of the Corporation's Board of
Directors by waging a proxy battle or otherwise (the date of the announcement
referred to in clause (i) or (ii) of this Paragraph C is hereinafter referred to
as the "ANNOUNCEMENT DATE"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the sixth (6th) trading day following
the earlier of the consummation of the proposed transaction or tender offer,
exchange offer or another transaction or the Abandonment Date (as defined
below), be equal to the lower of (x) the Conversion Price which would have been
applicable for an Optional Conversion occurring on the Announcement Date and (y)
the Conversion Price determined in accordance with Article III.D on the
Conversion Date set forth in the Notice of Conversion for the Optional
Conversion. From and after the sixth (6th) trading day following the Abandonment
Date, the Conversion Price shall be determined as set forth in Article III.D.
"ABANDONMENT DATE" means with respect to any proposed transaction or tender
offer, exchange offer or another transaction for which a public announcement as
contemplated by this Paragraph C has been made, the date upon which the
Corporation (in the case of clause (i) above) or the person, group or entity (in
the case of clause (ii) above) publicly announces the termination or abandonment
of the proposed transaction or tender offer, exchange offer or another
transaction which caused this Paragraph C to become operative.
D. Adjustment Due to Distribution. If, at any time after the Issuance
Date, the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's stockholders in cash or shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"DISTRIBUTION"), then the holders of Series A Preferred Stock shall be entitled,
upon any conversion of shares of Series A Preferred Stock after the date of
record for determining stockholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) had such holder been
the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution.
E. Issuance of Other Securities With Variable Conversion Price. If, at
any time after the Issuance Date, the Corporation shall issue any securities
which are convertible into or exchangeable for Common Stock ("CONVERTIBLE
SECURITIES") at a conversion or exchange rate based on a discount to the market
price of the Common Stock at the time of conversion or exercise, then the
Conversion
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<PAGE> 21
Percentage in respect of any conversion of Series A Preferred Stock after such
issuance shall be calculated utilizing the higher of the greatest discount
applicable to any such Convertible Securities and the difference between one
hundred percent (100%) and the Conversion Percentage then in effect hereunder.
F. Purchase Rights. If, at any time after the Issuance Date, the
Corporation issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "PURCHASE RIGHTS") pro rata to the
record holders of any class of Common Stock, then the holders of Series A
Preferred Stock will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Series A Preferred Stock (without giving effect
to the limitations contained in Article IV.C) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price and/or Floor Price pursuant to this Article
XI, the Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series A Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
A Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price and/or Floor Price at
the time in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon conversion of a share of Series A Preferred Stock.
XII. VOTING RIGHTS
The holders of the Series A Preferred Stock shall have no voting rights
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "BUSINESS CORPORATION LAW"), in this Article XII and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
stockholders (and copies of proxy materials and other information sent to
stockholders). If the Corporation takes a record of its stockholders for the
purpose of determining stockholders entitled to (a) receive payment of any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Corporation, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least ten (10) days prior to the record date specified therein (or
sixty (60) days prior to the
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<PAGE> 22
consummation of the transaction or event, whichever is earlier, but in no event
earlier than public announcement of such proposed transaction), of the date on
which any such record is to be taken for the purpose of such vote, dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such vote, dividend, distribution, right or other event to the
extent known at such time.
To the extent that under the Business Corporation Law the vote of the
holders of the Series A Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series A Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock
(except as otherwise may be required under the Business Corporation Law) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Law holders of the Series A Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series A Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article IV.C(ii)) using the
record date for the taking of such vote of stockholders as the date as of which
the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the holders of 67% then
outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges
of the Series A Preferred Stock;
(b) alter or change the rights, preferences or privileges
of any capital stock of the Corporation so as to affect adversely the Series A
Preferred Stock;
(c) create any new class or series of capital stock having
a preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "SENIOR SECURITIES");
(d) create any new class or series of capital stock
ranking pari passu with the Series A Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article IX hereof, "PARI PASSU SECURITIES");
(e) increase the authorized number of shares of Series A
Preferred Stock;
(f) issue any shares of Senior Securities or Pari Passu
Securities;
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<PAGE> 23
(g) issue any shares of Series A Preferred Stock other
than pursuant to the Securities Purchase Agreement;
(h) redeem, or declare or pay any cash dividend or
distribution on, any Junior Securities; or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series A Preferred Stock then outstanding.
XIV. MISCELLANEOUS
A. Cancellation of Series A Preferred Stock. If any shares of Series A
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series A Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the Corporation shall not be
obligated to reissue such lost or stolen Preferred Stock Certificate(s) if the
holder contemporaneously requests the Corporation to convert such Series A
Preferred Stock.
C. Allocation of Reserved Amount. The initial Reserved Amount shall be
allocated pro rata among the holders of Series A Preferred Stock based on the
number of shares of Series A Preferred Stock issued to each holder. Each
increase to the Reserved Amount shall be allocated pro rata among the holders of
Series A Preferred Stock based on the number of shares of Series A Preferred
Stock held by each holder at the time of the increase in the Reserved Amount. In
the event a holder shall sell or otherwise transfer any of such holder's shares
of Series A Preferred Stock, each transferee shall be allocated a pro rata
portion of such transferor's Reserved Amount. Any portion of the Reserved Amount
which remains allocated to any person or entity which does not hold any Series A
Preferred Stock shall be allocated to the remaining holders of shares of Series
A Preferred Stock, pro rata based on the number of shares of Series A Preferred
Stock then held by such holders.
D. Quarterly Statements of Available Shares. For each calendar quarter
beginning in the quarter in which the registration statement required to be
filed pursuant to Section 2(a) of the Registration Rights Agreement is declared
effective and thereafter so long as any shares of Series A Preferred Stock are
outstanding, the Corporation shall deliver (or cause its transfer agent to
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<PAGE> 24
deliver) to each holder a written report notifying the holders of any occurrence
which prohibits the Corporation from issuing Common Stock upon any such
conversion. The report shall also specify (i) the total number of shares of
Series A Preferred Stock outstanding as of the end of such quarter, (ii) the
total number of shares of Common Stock issued upon all conversions of Series A
Preferred Stock prior to the end of such quarter, (iii) the total number of
shares of Common Stock which are reserved for issuance upon conversion of the
Series A Preferred Stock as of the end of such quarter and (iv) the total number
of shares of Common Stock which may thereafter be issued by the Corporation upon
conversion of the Series A Preferred Stock before the Corporation would exceed
the Reserved Amount. The Corporation (or its transfer agent) shall deliver the
report for each quarter to each holder prior to the tenth day of the calendar
month following the quarter to which such report relates. In addition, the
Corporation (or its transfer agent) shall provide, within fifteen (15) days
after delivery to the Corporation of a written request by any holder, any of the
information enumerated in clauses (i) - (iv) of this Paragraph D as of the date
of such request.
E. Payment of Cash; Defaults. Whenever the Corporation is required to
make any cash payment to a holder under this Certificate of Designation (as a
Conversion Default Payment, upon redemption or otherwise), such cash payment
shall be made to the holder within five (5) business days after delivery by such
holder of a notice specifying that the holder elects to receive such payment in
cash and the method (e.g., by check, wire transfer) in which such payment should
be made. If such payment is not delivered within such five (5) business day
period, such holder shall thereafter be entitled to interest on the unpaid
amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law until such amount is paid
in full to the holder.
F. Status as Stockholder. Upon submission of a Notice of Conversion by a
holder of Series A Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their issuance would exceed
such holder's allocated portion of the Reserved Amount) shall be deemed
converted into shares of Common Stock and (ii) the holder's rights as a holder
of such converted shares of Series A Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such holder because of a failure by the Corporation to comply with the terms
of this Certificate of Designation. In situations where Article VI.B is
applicable, the number of shares of Common Stock referred to in clauses (i) and
(ii) of the immediately preceding sentence shall be determined on the date on
which such shares of Common Stock are delivered to the holder. Notwithstanding
the foregoing, if a holder has not received certificates for all shares of
Common Stock prior to the tenth (10th) business day after the expiration of the
Delivery Period with respect to a conversion of Series A Preferred Stock for any
reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such ten (10) business day period after expiration of
the Delivery Period) the holder shall regain the rights of a holder of Series A
Preferred Stock with respect to such unconverted shares of Series A Preferred
Stock and the Corporation shall, as soon as practicable, return such unconverted
shares to the holder. In all cases, the holder shall retain all of its rights
and remedies, if any, (including, without limitation, (i) the
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<PAGE> 25
right to receive Conversion Default Payments pursuant to Article VI.A to the
extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with respect
to subsequent conversions determined in accordance with Article VI.B) for the
Corporation's failure to convert Series A Preferred Stock.
G. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series A Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series A Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 31st day of March, 1998
ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION
By:
------------------------------------
Name:
Title:
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<PAGE> 26
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series A Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series A Preferred Stock (the "CONVERSION"), represented by stock certificate
Nos(s). ___________ (the "PREFERRED STOCK CERTIFICATES"), into shares of Common
Stock ("COMMON STOCK") of ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION (the
"CORPORATION") according to the conditions of the Certificate of Designations,
Preferences and Rights of Series A Convertible Preferred Stock (the "CERTIFICATE
OF DESIGNATION"), as of the date written below. If securities are to be issued
in the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The Corporation shall electronically transmit the Common Stock issuable pursuant
to this Notice of Conversion to the account of the undersigned or its nominee
(which is _________________) with DTC through its Deposit Withdrawal Agent
Commission System ("DTC TRANSFER").
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series A Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "ACT"), or pursuant to
an exemption from registration under the Act.
[ ] In lieu of receiving the shares of Common Stock issuable pursuant to
this Notice of Conversion by way of DTC Transfer, the undersigned hereby
requests that the Corporation issue and deliver to the undersigned
physical certificates representing such shares of Common Stock.
Date of Conversion:
-------------------------
Applicable Conversion Price:
-------------------------
Amount of Conversion Default Payments to be
Converted, if any:
-------------------------
Number of Shares of
Common Stock to be Issued:
------------------
Signature:
----------------------------------
Name:
---------------------------------------
Address:
------------------------------------
------------------------------------
------------------------------------
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<PAGE> 1
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of March 31,
1998, by and between ENVIRONMENTAL PRODUCTS & TECHNOLOGIES, CORPORATION a
corporation organized under the laws of the State of Delaware (the "COMPANY"),
and each of the purchasers (the "PURCHASERS") set forth on the execution pages
hereof (the "EXECUTION PAGES").
WHEREAS:
A. The Company and each Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("REGULATION D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "SECURITIES ACT").
B. The Company desires to sell, and the Purchasers collectively desire
to purchase, upon the terms and conditions stated in this Agreement, for an
aggregate purchase price equal to Three Million Dollars ($3,000,000) (the
"PURCHASE PRICE"), (i) Three Thousand (3,000) shares of the Company's Series A
Convertible Preferred Stock, par value $.01 per share (the "PREFERRED SHARES"),
convertible into shares of the Company's Common Stock, par value $.01 per share
(the "COMMON STOCK"), and (ii) warrants, in the form attached hereto as Exhibit
B, to acquire One Hundred Fifty Thousand (150,000) shares of Common Stock (the
"WARRANTS"). The rights, preferences and privileges of the Preferred Shares,
including the terms upon which such Preferred Shares are convertible into shares
of Common Stock, are set forth in the form of Certificate of Designations,
Preferences and Rights attached hereto as Exhibit A (the "CERTIFICATE OF
DESIGNATION"). The shares of Common Stock issuable upon conversion of the
Preferred Shares or otherwise pursuant to the Certificate of Designation are
referred to herein as the "CONVERSION SHARES" and the shares of Common Stock
issuable upon exercise of or otherwise pursuant to the Warrants are referred to
herein as the "WARRANT SHARES." The Preferred Shares, the Warrants, the
Conversion Shares and the Warrant Shares are collectively referred to herein as
the "SECURITIES" and each of them may individually be referred to herein as a
"SECURITY."
C. Contemporaneous with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
in the form attached hereto as Exhibit C (the "REGISTRATION RIGHTS AGREEMENT"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws.
<PAGE> 2
NOW, THEREFORE, the Company and the Purchasers hereby agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
a. Purchase. On the Closing Date (as defined below), subject to the
satisfaction (or waiver) of the conditions set forth in Section 6 and Section 7
below, the Company shall issue and sell to each Purchaser, and each Purchaser
severally agrees to purchase from the Company, such number of Preferred Shares
and Warrants as is set forth on such Purchaser's Execution Page hereto. Each
Purchaser's obligation to purchase Preferred Shares or Warrants hereunder is
distinct and separate from each other Purchaser's obligation to purchase
Preferred Shares or Warrants and no Purchaser shall be required to purchase
hereunder more than the number of Preferred Shares or Warrants set forth on such
Purchaser's Execution Page hereto notwithstanding any failure by any other
Purchaser to purchase Preferred Shares or Warrants hereunder.
b. Form of Payment. On the Closing Date, each Purchaser shall pay the
aggregate Purchase Price for the Preferred Shares and Warrants being purchased
by such Purchaser on the Closing Date by wire transfer to the Company, in
accordance with the Company's written wiring instructions, against delivery of
duly executed certificates representing the Preferred Shares and duly executed
Warrants being purchased by such Purchaser and the Company shall deliver such
duly executed certificates and Warrants against delivery of such aggregate
Purchase Price.
c. Closing Date. The date and time of the issuance and sale of the
Preferred Shares and Warrants to each of the Purchasers pursuant to this
Agreement (the "CLOSING") shall be as soon as practicable after the satisfaction
(or waiver) of the conditions thereto set forth in Section 6 and Section 7
below, or such other time as may be mutually agreed upon by the Company and the
Purchasers (the "CLOSING DATE"). The Closing shall occur at the offices of
Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, 1401 Walnut Street,
Philadelphia, Pennsylvania 19102.
2. PURCHASERS' REPRESENTATIONS AND WARRANTIES
Each Purchaser severally represents and warrants to the Company as
follows:
a. Investment Purpose. Purchaser is purchasing the Preferred Shares and
the Warrants for Purchaser's own account and not with a present view towards the
public sale or distribution thereof, except pursuant to sales that are exempt
from the registration requirements of the Securities Act and/or sales registered
under the Securities Act. Purchaser understands that Purchaser must bear the
economic risk of this investment indefinitely, unless the Securities are
registered pursuant to the Securities Act and any applicable state securities or
blue sky laws or an exemption from such registration is available, and that the
Company has no present intention of registering the resale of any such
Securities other than as contemplated by the Registration Rights Agreement.
Notwithstanding anything in this Section 2(a) to the contrary, by making the
representations herein,
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<PAGE> 3
the Purchaser does not agree to hold the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption from the
registration requirements under the Securities Act.
b. Accredited Investor Status. Purchaser is an "ACCREDITED INVESTOR" as
that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. Purchaser understands that the Preferred
Shares and the Warrants are being offered and sold to Purchaser in reliance upon
specific exemptions from the registration requirements of United States federal
and state securities laws and that the Company is relying upon the truth and
accuracy of, and Purchaser's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of Purchaser set forth herein in
order to determine the availability of such exemptions and the eligibility of
Purchaser to acquire the Preferred Shares and Warrants.
d. Information. Purchaser and its counsel, if any, have been furnished
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Preferred Shares and the
Warrants which have been specifically requested by the Purchaser or its counsel.
Purchaser and its counsel have been afforded the opportunity to ask questions of
the Company and have received what Purchaser believes to be satisfactory answers
to any such inquiries. Neither such inquiries nor any other investigation
conducted by Purchaser or its counsel or any of its representatives shall
modify, amend or affect Purchaser's right to rely on the Company's
representations and warranties contained in Section 3 below. Purchaser
understands that Purchaser's investment in the Securities involves a high degree
of risk.
e. Governmental Review. Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
Purchaser further acknowledges and understands that the Company is not currently
obligated to, and does not, file reports or financial statements with the
Securities and Exchange Commission pursuant to Sections 12, 13, 14 or 16 of the
Securities Exchange Act of 1934, as amended.
f. Transfer or Resale. Purchaser understands that (i) except as provided
in the Registration Rights Agreement, the sale or resale of the Securities have
not been and are not being registered under the Securities Act or any state
securities laws, and the Securities may not be transferred unless (a) the resale
of the Securities has been registered thereunder; or (b) Purchaser shall have
delivered to the Company an opinion of counsel (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions) to the effect that the Securities to be sold or transferred may be
sold or transferred pursuant to an exemption from such registration; or (c) the
Securities are sold under Rule 144 promulgated under the Securities Act (or a
successor rule) ("RULE 144"); or (d) the Securities are sold or transferred to
an affiliate of Purchaser who agrees to sell or otherwise transfer the
Securities only in accordance with the provisions of this Section 2(f) and who
is an Accredited Investor; and (ii) neither the Company nor
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<PAGE> 4
any other person is under any obligation to register such Securities under the
Securities Act or any state securities laws (other than pursuant to the
Registration Rights Agreement). Notwithstanding the foregoing or anything else
contained herein to the contrary, the Securities may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.
g. Legends. Purchaser understands that the Preferred Shares and the
Warrants and, until such time as the Conversion Shares and Warrant Shares have
been registered under the Securities Act (including registration pursuant to
Rule 416 thereunder) as contemplated by the Registration Rights Agreement or
otherwise may be sold by Purchaser under Rule 144, the certificates for the
Conversion Shares and Warrant Shares may bear a restrictive legend in
substantially the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the securities laws of
any state of the United States. The securities represented hereby may
not be offered, sold, transferred or assigned in the absence of an
effective registration statement for the securities under applicable
securities laws unless offered, sold, transferred or assigned under an
available exemption from the registration requirements of those laws.
The legend set forth above shall be removed and the Company shall issue
a certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by state securities laws, (a) the sale of
such Security is registered under the Securities Act (including registration
pursuant to Rule 416 thereunder) as contemplated by the Registration Rights
Agreement; (b) such holder provides the Company with an opinion of counsel, in
form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Security may
be made without registration under the Securities Act; or (c) such holder
provides the Company with reasonable assurances that such Security can be sold
under Rule 144. Purchaser agrees to sell all Securities, including those
represented by a certificate(s) from which the legend has been removed, pursuant
to an effective registration statement or under an exemption from the
registration requirements of the Securities Act. In the event the above legend
is removed from any Security and thereafter the effectiveness of a registration
statement covering such Security is suspended or the Company determines that a
supplement or amendment thereto is required by applicable securities laws, then
upon reasonable advance notice to Purchaser the Company may require that the
above legend be placed on any such Security that cannot then be sold pursuant to
an effective registration statement or under Rule 144 and Purchaser shall
cooperate in the replacement of such legend. Such legend shall thereafter be
removed when such Security may again be sold pursuant to an effective
registration statement or under Rule 144.
h. Authorization; Enforcement. This Agreement and the Registration
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of Purchaser and are valid and binding agreements of Purchaser
enforceable in accordance with their terms.
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<PAGE> 5
i. Residency. Purchaser is a resident of the jurisdiction set forth
under such Purchaser's name on the Execution Page hereto executed by such
Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each Purchaser as follows:
a. Organization and Qualification. The Company and each of its
subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated, and has the requisite
corporate power to own its properties and to carry on its business as now being
conducted. The Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary and where the failure so to qualify would have a Material Adverse
Effect. "MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the
Securities, (ii) the ability of the Company to perform its obligations hereunder
or under the Certificate of Designation, the Warrants or the Registration Rights
Agreement or (iii) the business, operations, properties, prospects or financial
condition of the Company and its subsidiaries, taken as a whole.
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Warrants and the Registration Rights Agreement, to issue and
sell the Preferred Shares and the Warrants in accordance with the terms hereof,
and to issue the Conversion Shares upon conversion of the Preferred Shares in
accordance with the terms of the Certificate of Designation and to issue the
Warrant Shares upon exercise of the Warrants in accordance with the terms of
such Warrants; (ii) the execution, delivery and performance of this Agreement,
the Warrants and the Registration Rights Agreement by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Preferred Shares and
Warrants and the issuance and reservation for issuance of the Conversion Shares
and Warrant Shares) have been duly authorized by the Company's Board of
Directors and no further consent or authorization of the Company, its Board of
Directors, any committee of the Board of Directors, or its stockholders is
required; (iii) this Agreement has been duly executed and delivered by the
Company; and (iv) this Agreement constitutes, and, upon execution and delivery
by the Company of the Warrants and the Registration Rights Agreement, such
agreements will constitute, valid and binding obligations of the Company
enforceable against the Company in accordance with their terms.
c. Capitalization. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance pursuant to securities (other than the Preferred Shares and Warrants)
exercisable or exchangeable for, or convertible into, any shares of capital
stock and the number of shares to be reserved for issuance upon conversion of
the Preferred Shares and exercise of the Warrants is set forth on Schedule 3(c).
All of such outstanding shares of capital stock have
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been, or upon issuance in accordance with the terms of any such warrants,
options or preferred stock, will be, validly issued, fully paid and
non-assessable. No shares of capital stock of the Company (including the
Preferred Shares, the Conversion Shares and the Warrant Shares) are subject to
preemptive rights or any other similar rights of the stockholders of the Company
or any liens or encumbrances. Except for the Securities and as set forth on
Schedule 3(c), as of the date of this Agreement, (i) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into or
exercisable or exchangeable for, any shares of capital stock of the Company or
any of its subsidiaries, or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its subsidiaries, and (ii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of its or their securities under the Securities Act
(except the Registration Rights Agreement). Except as set forth on Schedule
3(c), there are no securities or instruments containing antidilution or similar
provisions that will be triggered by the issuance of the Securities in
accordance with the terms of this Agreement, the Certificate of Designation or
the Warrants. The Company has furnished to the Purchasers true and correct
copies of the Company's Certificate of Incorporation as in effect on the date
hereof ("CERTIFICATE OF INCORPORATION"), the Company's By-laws as in effect on
the date hereof (the "BY-LAWS"), and all other instruments and agreements
governing securities convertible into or exercisable or exchangeable for capital
stock of the Company. The Certificate of Designation, in the form attached
hereto, will be duly filed prior to Closing with the Secretary of State of the
State of [Delaware] and, upon issuance of the Preferred Shares in accordance
with the terms hereof, each Purchaser shall be entitled to the rights set forth
therein.
d. Issuance of Shares. The Preferred Shares are duly authorized and,
upon issuance in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and free from all taxes, liens, claims
and encumbrances and will not be subject to any preemptive or other similar
rights of stockholders of the Company and will not impose personal liability on
the holders thereof. The Conversion Shares and Warrant Shares are duly
authorized and reserved for issuance, and, upon conversion of the Preferred
Shares and exercise of the Warrants, as applicable, in accordance with the terms
thereof, will be validly issued, fully paid and non-assessable, and free from
all taxes, liens, claims and encumbrances and will not be subject to any
preemptive or other similar rights of stockholders of the Company and will not
impose personal liability upon the holder thereof.
e. No Conflicts. The execution, delivery and performance of this
Agreement, the Warrants and the Registration Rights Agreement by the Company,
the performance by the Company of its obligations under the Certificate of
Designation and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance and reservation
for issuance, as applicable, of the Preferred Shares, the Conversion Shares and
the Warrant Shares) will not (i) result in a violation of the Certificate of
Incorporation or By-laws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment (including, without
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limitation, the triggering of any anti-dilution provisions), acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including U.S. federal and state
securities laws and regulations and rules or regulations of any self-regulatory
organizations to which either the Company or its securities are subject)
applicable to the Company or any of its subsidiaries or by which any property or
asset of the Company or any of its subsidiaries is bound or affected (except,
with respect to clause (ii), for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect). Neither the
Company nor any of its subsidiaries is in violation of its Certificate of
Incorporation, By-laws or other organizational documents and neither the Company
nor any of its subsidiaries is in default (and no event has occurred which, with
notice or lapse of time or both, would put the Company or any of its
subsidiaries in default) under, nor has there occurred any event giving others
(with notice or lapse of time or both) any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, except for actual or possible
violations, defaults or rights as would not, individually or in the aggregate,
have a Material Adverse Effect. The businesses of the Company and its
subsidiaries are not being conducted, and shall not be conducted so long as
Purchaser owns any of the Securities, in violation of any law, ordinance or
regulation of any governmental entity, except for possible violations the
sanctions for which either singly or in the aggregate would not have a Material
Adverse Effect. Except as specifically contemplated by this Agreement and the
Registration Rights Agreement, the Company is not required to obtain any
consent, approval, authorization or order of, or make any filing or registration
with, any court or governmental agency or any regulatory or self regulatory
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement, the Warrants or the Registration Rights Agreement or to
perform its obligations under the Certificate of Designation, in each case in
accordance with the terms hereof or thereof.
f. Absence of Certain Changes. Since September 30, 1997, there has been
no material adverse change and no material adverse development in the business,
properties, operations, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole, except as disclosed in
Schedule 3(f) or in the SEC Documents filed prior to the date hereof.
g. Absence of Litigation. Except as disclosed in the SEC Documents filed
prior to the date hereof or in Schedule 3(g) hereto, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its subsidiaries, threatened against or
affecting the Company, any of its subsidiaries, or any of their respective
directors or officers in their capacities as such, which could reasonably be
expected to have a Material Adverse Effect. There are no facts which, if known
by a potential claimant or governmental authority, could give rise to a claim or
proceeding which, if asserted or conducted with results unfavorable to the
Company or any of its subsidiaries, could reasonably be expected to have a
Material Adverse Effect.
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<PAGE> 8
h. Intellectual Property. Each of the Company and its subsidiaries owns
or is licensed to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright applications,
licenses, permits, 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 and as
described, conditioned, qualified or excepted in Schedule 3(h) to this
Agreement. To the best knowledge of the Company, neither the Company nor any
subsidiary of the Company infringes or is in conflict with any right of any
other person with respect to any Intangibles which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a Material Adverse Effect. Neither the Company nor any of its subsidiaries
has received written notice of any pending conflict with or infringement upon
such third party Intangibles, which alleged pending conflict or alleged
infringement, if adversely determined, would result in a Material Adverse
Effect. Except as disclosed in Schedule 3(h) hereto, the termination of the
Company's ownership of, or right to use, any single Intangible would not result
in a Material Adverse Effect on the Company. Except as described in Schedule
3(h) hereto, (a) neither the Company nor any of its subsidiaries has entered
into any consent agreement, indemnification agreement, forbearance to sue or
settlement agreement with respect to the validity of the Company's or its
subsidiaries' ownership or right to use its Intangibles and, to the best
knowledge of the Company, there is no reasonable basis for any such claim to be
successful, (b) the Intangibles are valid and enforceable and no registration
relating thereto has lapsed, expired or been abandoned or canceled or is the
subject of cancellation or other adversarial proceedings, and all applications
therefor are pending and in good standing and (c) the Company and its
subsidiaries have complied, in all material respects, with their respective
contractual obligations relating to the protection of the Intangibles used
pursuant to licenses. To the best knowledge of the Company, no person is
infringing on or violating the Intangibles owned or used by the Company or its
subsidiaries.
i. Foreign Corrupt Practices. Neither the Company, nor any of its
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of his actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
j. Disclosure Materials. The financial statements of the Company dated
September 30, 1997 and any other financial statements delivered by the Company
to the Purchasers (the "Financial Statements" and, together with the Schedules
to this Agreement and other documents and information furnished by or on behalf
of the Company at any time prior to the Closing, the "Disclosure Materials")
comply in all material respects with applicable accounting requirements. Such
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved,
except as may be otherwise
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<PAGE> 9
specified in such Financial Statements or the notes thereto, and fairly present
in all material respects the financial position of the Company as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal year-end audit
adjustments. There are not liabilities, contingent or otherwise, of the Company
involving material amounts not disclosed in said Financial Statements. The
Disclosure Materials do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. Since September 30, 1997, there has been no
event, occurrence or development that has had or that could have or result in a
Material Adverse Effect.
k. Acknowledgment Regarding Purchasers' Purchase of the Securities. The
Company acknowledges and agrees that none of the Purchasers is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement or the transactions contemplated hereby, the
relationship between the Company and the Purchasers is "arms-length" and any
statement made by any Purchaser or any of its representatives or agents in
connection with this Agreement and the transactions contemplated hereby is not
advice or a recommendation and is merely incidental to such Purchaser's purchase
of Securities and has not been relied upon by the Company, its officers or
directors in any way. The Company further acknowledges that the Company's
decision to enter into this Agreement has been based solely on an independent
evaluation by the Company and its representatives.
l. Form SB-2 Eligibility. The Company is currently eligible to register
the resale of its Common Stock on a registration statement on Form SB-2 under
the Securities Act. There exist no facts or circumstances that would prohibit or
delay the preparation and filing of a registration statement on Form SB-2 with
respect to the Registrable Securities (as defined in the Registration Rights
Agreement).
m. No General Solicitation. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.
n. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would require registration of the
Securities being offered hereby under the Securities Act or cause this offering
of Securities to be integrated with any prior offering of securities of the
Company for purposes of the Securities Act or any applicable stockholder
approval provisions.
o. No Brokers. Except for fees payable to CDC Consulting, Inc. and
advisory fees payable by the Corporation to Strategic Planning Associates, Inc.,
no fees or commissions will be payable by the Company to any broker, financial
advisor, finder, investment banker, or bank with respect to the transactions
contemplated hereby. The Purchaser shall have no obligation with respect to such
fees or with respect to any claims made by or on behalf of other persons for
fees of a type
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<PAGE> 10
contemplated in this Section 3(p) that may be due in connection with the
transactions contemplated hereby. The Company shall indemnify and hold harmless
the Purchaser, its respective employees, officers, directors, agents and
partners, and their respective Affiliates (as such term is defined under Rule
405 promulgated under the Securities Act), from and against all claims, losses,
damages, costs (including the costs of preparation and reasonable attorney's
fees) and expenses suffered in respect of any such claimed or existing fees.
p. Acknowledgment of Dilution. The number of Conversion Shares issuable
upon conversion of the Preferred Shares may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company's executive officers have studied and fully
understand the nature of the Securities being sold hereunder. The Company
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Preferred Shares in accordance with the terms of the Certificate of
Designation is absolute and unconditional, regardless of the dilution that such
issuance may have on the ownership interests of other stockholders. Taking the
foregoing into account, the Company's Board of Directors has determined in its
good faith business judgment that the issuance of the Preferred Shares hereunder
and the consummation of the other transactions contemplated hereby are in the
best interests of the Company and its stockholders.
q. Title. The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 3(q) 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
its subsidiaries. Any real property and facilities held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries, except as described in
Schedule 3(q).
r. Tax Status. Except as set forth on Schedule 3(r), the Company and
each of its subsidiaries has made or filed all foreign, federal, state and local
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. Except as set forth on Schedule 3(r), there are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim. The Company
has not executed a waiver with respect to any statute of limitations relating to
the assessment or
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<PAGE> 11
collection of any federal, state or local tax. Except as set forth on Schedule
3(r), none of the Company's tax returns is presently being audited by any taxing
authority.
4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts timely to
satisfy each of the conditions described in Section 6 and Section 7 of this
Agreement.
b. Form D: Blue Sky Laws. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Purchaser promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for sale to the Purchasers
pursuant to this Agreement under applicable securities or "blue sky" laws of the
states of the United States or obtain exemption therefrom, and shall provide
evidence of any such action so taken to the Purchasers on or prior to the
Closing Date.
c. Reporting Status. So long as any Purchaser beneficially owns any of
the Securities, the Company shall take all actions necessary to continue to be
eligible to register the resale of its Common Stock on a registration statement
on Form SB-2 under the Securities Act.
d. Use of Proceeds. The Company shall use the proceeds from the sale of
the Securities as set forth in Schedule 4(d).
e. Additional Equity Capital; Right of First Offer. The Company agrees
that during the period beginning on the date hereof and ending on the date which
is 183 days following the Closing Date (the "LOCK-UP PERIOD"), the Company will
not contract with any party to obtain additional financing in which any equity
or equity-linked securities are issued (including any debt financing with an
equity component) ("FUTURE OFFERINGS"). In addition, during the period beginning
on the date hereof and ending 180 days following the expiration of the Lock-Up
Period, the Company will not conduct a future offering unless it shall have
first delivered to each Purchaser, at least ten (10) business days prior to the
closing of such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof, and providing each
Purchaser and its affiliates an option during the ten (10) business day period
following delivery of such notice to purchase all of the securities being
offered in the Future Offering on the same terms as contemplated by such Future
Offering (the limitation referred to in this Section 4(e) is referred to as the
"CAPITAL RAISING LIMITATION"). The Capital Raising Limitation shall not apply to
any transaction involving issuances of securities as consideration in a merger,
consolidation or acquisition of assets, or in connection with any strategic
partnership or joint venture (the primary purpose of which is not to raise
equity capital), or as consideration for the acquisition of a business, product
or license by the Company. The Capital Raising Limitation also shall not apply
to (i) the issuance of securities pursuant to an underwritten public offering,
(ii) the issuance of securities upon exercise or conversion of the Company's
options, warrants or other convertible securities outstanding as of the date
hereof or (iii) the grant of additional options or warrants, or the issuance of
additional securities,
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<PAGE> 12
under any duly authorized Company stock option or restricted stock plan for the
benefit of the Company's employees or directors.
f. Expenses. The Company shall pay to each Purchaser, or at its
direction, at the Closing, reimbursement for the expenses reasonably incurred by
such Purchaser and its affiliates and advisors in connection with the
negotiation, preparation, execution and delivery of this Agreement and the other
agreements to be executed in connection herewith, including, without limitation,
the Purchaser's and its affiliates' and advisors' reasonable due diligence and
attorneys' fees and expenses (the "EXPENSES"). In addition, from time to time
thereafter, upon any Purchaser's written request, the Company shall pay to such
Purchaser such additional Expenses, if any, not covered by such payment, in each
case to the extent reasonably incurred by such Purchaser in connection with the
negotiation, preparation, execution and delivery of this Agreement and the other
agreements to be executed in connection herewith. Notwithstanding the foregoing,
the Company shall not be obligated to reimburse the Purchasers for more than
$25,000 pursuant to this Section 4(f).
g. Financial Information. The Company agrees to send the following
reports to each Purchaser until such Purchaser transfers, assigns or sells all
of its Securities, provided that the Company is obligated to file such reports
with the SEC: (i) within ten (10) days after the filing with the SEC, a copy of
its Annual Report on Form 10-KSB, its Quarterly Reports on Form 10-QSB, its
proxy statements and any Current Reports on Form 8-K; and (ii) within one (1)
day after release, copies of all press releases issued by the Company or any of
its subsidiaries.
h. Reservation of Shares. The Company shall at all times have authorized
and reserved for the purpose of issuance a sufficient number of shares of Common
Stock to provide for the full conversion of the outstanding Preferred Shares and
the issuance of the Conversion Shares in connection therewith and the full
exercise of the Warrants and the issuance of the Warrant Shares in connection
therewith subject to and as otherwise required by the Certificate of Designation
and the Warrants. In that regard, a "sufficient number of shares" with respect
to the Preferred Shares shall be deemed to be equal to the number of shares of
Common Stock required to be reserved for issuance by the Company pursuant to
Article V of the Certificate of Designation. The Company shall not reduce the
number of shares reserved for issuance upon conversion of the Preferred Shares
and the full exercise of the Warrants (except as a result of any such conversion
or exercise) without the consent of the Purchaser.
i. Listing. The Company shall promptly secure the listing of the
Conversion Shares and Warrant Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any Purchaser (or any of their affiliates) own any Securities, such listing of
all Conversion Shares from time to time issuable upon conversion of the
Preferred Shares and all Warrant Shares from time to time issuable upon exercise
of the Warrants. The Company will take all action necessary to continue the
listing and trading of its Common Stock on the New York Stock Exchange ("NYSE"),
the American Stock Exchange ("AMEX"), the Nasdaq National Market ("NNM"), the
Nasdaq SmallCap Market ("SMALLCAP") or in the over the counter market on the
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electronic bulletin board (the "Bulletin Board") and will comply in all respects
with the Company's reporting, filing and other obligations under the bylaws or
rules of the NASD and such exchanges, as applicable. The Company shall promptly
provide to each Purchaser copies of any notices it receives regarding the
continued eligibility of the Common Stock for trading on the Bulletin Board or,
if applicable, any securities exchange or automated quotation system on which
securities of the same class or series issued by the Company are then listed or
quoted, if any.
j. Corporate Existence. So long as a Purchaser beneficially owns any
Securities, the Company shall maintain its corporate existence, and in the event
of a merger, consolidation or sale of all or substantially all of the Company's
assets, the Company shall ensure that the surviving or successor entity in such
transaction (i) assumes the Company's obligations hereunder and under the
Certificate of Designation, the Warrants and the agreements and instruments
entered into in connection herewith regardless of whether or not the Company
would have had a sufficient number of shares of Common Stock authorized and
available for issuance in order to effect the full conversion of all Preferred
Shares and the exercise in full of all Warrants outstanding as of the date of
such transaction and (ii) is a publicly traded corporation whose common stock is
listed for trading on the NNM, SmallCap, NYSE, AMEX or Bulletin Board.
k. No Integrated Offerings. The Company shall not make any offers or
sales of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered or sold hereunder under the
Securities Act or cause this offering of Securities to be integrated with any
other offering of securities by the Company for purposes of any stockholder
approval provision applicable to the Company or its securities.
l. Legal Compliance. The Company shall conduct its business and the
business of its subsidiaries in compliance with all laws, ordinances or
regulations of governmental entities applicable to such businesses, except where
the failure to do so would not have a Material Adverse Effect.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company shall instruct its transfer agent to issue certificates,
registered in the name of each Purchaser or its nominee, for the Conversion
Shares and the Warrant Shares in such amounts as specified from time to time by
such Purchaser to the Company upon conversion of the Preferred Shares or
exercise of the Warrants, as applicable. To the extent and during the periods
provided in Sections 2(f) and 2(g) of this Agreement, all such certificates
shall bear the restrictive legend specified in Section 2(g) of this Agreement.
b. The Company warrants that no instruction other than such instructions
referred to in this Section 5, and stop transfer instructions to give effect to
Section 2(f) hereof in the case of the transfer of the Conversion Shares or the
Warrant Shares, as applicable, prior to registration thereof under the
Securities Act or without an exemption therefrom, will be given by the Company
to its transfer agent and that the Securities shall otherwise be freely
transferable on the books and records
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of the Company as and to the extent provided in this Agreement, the Certificate
of Designation, the Warrants and the Registration Rights Agreement. Nothing in
this Section shall affect in any way each Purchaser's obligations and agreement
set forth in Section 2(g) hereof to resell the Securities pursuant to an
effective registration statement or under an exemption from the registration
requirements of applicable securities law.
c. If (i) (A) the Conversion Shares and the Warrant Shares, as
applicable, have been registered under the Securities Act as contemplated by the
Registration Rights Agreement, or (B) a Purchaser provides the Company and the
transfer agent with an opinion of counsel, which opinion of counsel shall be in
form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that the Securities to be sold or transferred may be
sold or transferred pursuant to an exemption from registration, or (C) a
Purchaser provides the Company with reasonable assurances that such Securities
may be sold under Rule 144, and (ii) (A) such Purchaser has delivered to the
Company certificates representing the Conversion Shares and/or Warrant Shares,
as applicable, along with a written request for the removal of any restrictive
legend set forth thereon or (B) in the case of the conversion by such Purchaser
of the Preferred Shares or the exercise by the Purchaser of the Warrants, such
Purchaser has complied with the procedures for conversion set forth in Article
IV of the Certificate of Designation and the procedures for exercise set forth
in the Warrants, the Company shall permit the transfer and promptly instruct its
transfer agent to issue the Conversion Shares and/or Warrant Shares, as
applicable, in such name and in such denominations as specified by such
Purchaser. If the Company's transfer agent is participating in the Depository
Trust Company ("DTC") Fast Automated Securities Transfer program, the Company
shall cause its transfer agent to electronically transmit the Conversion Shares
and/or Warrant Shares, as applicable, to such Purchaser or its transferee by
crediting the account of such Purchaser or its transferee with DTC through its
Deposit Withdrawal Agent Commission system ("DTC TRANSFER"). If the
aforementioned conditions to a DTC Transfer are not satisfied, the Company shall
deliver to such Purchaser or its transferee physical certificates representing
the Conversion Shares and/or Warrant Shares, as applicable, which certificates
shall not bear any legend restricting transfer of the Conversion Shares and/or
Warrant Shares represented thereby. Further, a Purchaser may instruct the
Company to deliver to such Purchaser or its transferee unlegended physical
certificates representing the Conversion Shares and/or Warrant Shares, as
applicable, in lieu of delivering such shares by way of DTC Transfer.
d. If the Company fails (a "LEGEND REMOVAL FAILURE") to deliver such
unlegended Conversion Shares and/or Warrant Shares to a Purchaser or its
transferee in accordance with Section 5(c) within five (5) business days after
the conditions to such delivery have been satisfied (the "LEGEND REMOVAL
PERIOD"), then the Company shall pay to such Purchaser an amount equal to:
(.24) x (N/365) x (MP)
where:
-14-
<PAGE> 15
"N" means the number of days after the expiration of the Legend Removal
Period through and including the Legend Removal Cure Date;
"MP" means the product of (x) the Closing Bid Price (as defined in the
Certificate of Designation) of the Common Stock in effect on the date of the
Legend Removal Failure and (y) the number of Conversion Shares and/or Warrant
Shares which are the subject of such Legend Removal Failure; and
"LEGEND REMOVAL CURE DATE" means the date the Company issues freely
tradeable shares of Common Stock in accordance with Section 5(c).
The payments to which a holder shall be entitled pursuant to this
Section 5(d) are referred to herein as "LEGEND REMOVAL PAYMENTS." A Purchaser
may elect to receive accrued Legend Removal Payments in cash or to convert all
or any portion of such accrued Legend Removal Payments, at any time, into Common
Stock at the lowest Conversion Price (as defined in the Certificate of
Designation) in effect during the period beginning on the date of the Legend
Removal Failure through the date of conversion of such Legend Removal Payments.
In the event such Purchaser elects to take such payment in cash, cash payment
will be made by the Company within five (5) days after its receipt of written
notice of such election from the Purchaser. In the event such Purchaser elects
to convert all or any portion of the Legend Removal Payment into Common Stock,
such Purchaser shall provide written notice of such election specifying the
amount of such Legend Removal Payment to be converted and the applicable
Conversion Price at which such amount is to be converted. The Company shall
deliver the shares of Common Stock issuable upon any such conversion to such
Purchaser within five (5) days of its receipt of such written notice from such
Purchaser.
Nothing herein shall limit a Purchaser's right to pursue actual damages
for the Company's failure to deliver unlegended Conversion Shares and Warrant
Shares pursuant to Section 5(c), and such Purchaser shall have the right to
pursue all remedies available at law or in equity (including a decree of
specific performance and/or injunctive relief).
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Preferred
Shares and Warrants to a Purchaser at the Closing is subject to the
satisfaction, on or before the Closing Date, of each of the following conditions
thereto, provided that these conditions are for the Company's sole benefit and
may be waived by the Company at any time in its sole discretion:
a. Each Purchaser shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Company.
-15-
<PAGE> 16
b. Each Purchaser shall have delivered the Purchase Price for the
Preferred Shares and Warrants in accordance with Section 1(b) above.
c. The representations and warranties of each Purchaser shall be true
and correct as of the date when made and as of the Closing Date as though made
at that time (except for representations and warranties that speak as of a
specific date, which representations and warranties shall be true and correct as
of such date), and each Purchaser shall have performed, satisfied and complied
in all material respects with the covenants, agreements and conditions required
by this Agreement to be performed, satisfied or complied with by such Purchaser
at or prior to the Closing Date.
d. No litigation, statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.
e. The aggregate number of Preferred Shares and Warrants being purchased
hereunder by all Purchasers hereunder shall be 3,000 and 150,000 respectively.
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
The obligation of each Purchaser hereunder to purchase the Preferred
Shares and Warrants at the Closing is subject to the satisfaction, on or before
the Closing Date, of each of the following conditions, provided that these
conditions are for such Purchaser's sole benefit and may be waived by such
Purchaser at any time in Purchaser's sole discretion:
a. The Company shall have executed this Agreement, the Warrants and the
Registration Rights Agreement, and delivered the same to such Purchaser.
b. The Certificate of Designation shall have been accepted for filing
with the Secretary of State of the State of Delaware and a copy thereof
certified by the Secretary of State of the State of [Delaware] shall have been
delivered to such Purchaser.
c. The Company shall have delivered to such Purchaser duly executed
Warrants and certificates (in such denominations as such Purchaser shall
request) representing the Preferred Shares in accordance with Section 1(b)
above.
d. The Common Stock shall be authorized for quotation on the Bulletin
Board and trading in the Common Stock (or the Bulletin Board generally) shall
not have been suspended by the SEC or the Bulletin Board, nor shall any such
suspension be pending or threatened.
-16-
<PAGE> 17
e. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct as of such
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing Date. The Purchaser shall have received a certificate, executed
by the Chief Executive Officer of the Company, dated as of the Closing Date, to
the foregoing effect and as to such other matters as may be reasonably requested
by the Purchaser.
f. No litigation, statute, rule, regulation, executive order, decree,
ruling, injunction, action or proceeding shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction or any self-regulatory organization having authority over the
matters contemplated hereby which questions the validity of, or challenges or
prohibits the consummation of any of the transactions contemplated by this
Agreement.
g. Such Purchaser shall have received an opinion of the Company's
counsel, dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to such Purchaser and in substantially the form of Exhibit D
attached hereto.
h. The Company shall have delivered evidence reasonably satisfactory to
the Purchasers that the Company's transfer agent has agreed to act in accordance
with irrevocable instructions in the form attached hereto as Exhibit E.
i. There shall have been no material adverse changes and no material
adverse developments in the business, properties, operations, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, since the date hereof, and no information, of
which the Purchasers are not currently aware, shall come to the attention of the
Purchasers that is materially adverse to the Company.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts located in the State of Delaware in any suit or proceeding
based on or arising under this Agreement and irrevocably agrees that all claims
in respect of such suit or proceeding may be determined in such courts. The
Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The Company further agrees that service
of process mailed by first class mail shall be deemed in every respect effective
service of process in any such suit or proceeding. Nothing herein shall affect
the right of the Purchaser to serve process in any other manner permitted by
law. The Company agrees that a
-17-
<PAGE> 18
final non-appealable judgment in any such suit or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on such judgment or in any
other lawful manner.
b. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed Execution Page(s)
to be physically delivered to the other party within five (5) days of the
execution hereof.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein. No provision of this Agreement may be
waived other than by an instrument in writing signed by the party to be charged
with enforcement and no provision of this Agreement may be amended other than by
an instrument in writing signed by the Company and the Purchaser.
f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
Environmental Products & Technologies Corporation
5380 Sterling Centre Drive
Westlake Village, CA 91301
Telecopy: 818-865-2005
Attention: Marvin Mears, President
-18-
<PAGE> 19
with a copy simultaneously transmitted by like means to:
Mark J. Richardson, Esquire
1299 Ocean Avenue, Suite 900
Santa Monica, CA 90401
Telecopy: 310-393-2004
If to any Purchaser, to such address set forth under such Purchaser's
name on the Execution Page hereto executed by such Purchaser.
Each party shall provide notice to the other parties of any change in
address.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Except as
provided herein or therein, neither the Company nor any Purchaser shall assign
this Agreement, the Registration Rights Agreement or the Warrants or any rights
or obligations hereunder or thereunder. Notwithstanding the foregoing, any
Purchaser may assign its rights hereunder to any of its "affiliates" (as that
term is defined under the Exchange Act) who are Accredited Investors without the
consent of the Company (provided such assignees agree to be bound by all of the
terms and conditions hereof), or to any other person or entity with the consent
of the Company, which consent shall not be unreasonably withheld. This provision
shall not limit a Purchaser's right to transfer the Securities pursuant to the
terms of the Certificate of Designation, the Warrants and this Agreement or to
assign such Purchaser's rights hereunder and/or thereunder to any such
transferee.
h. Third Party Beneficiaries. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
i. Survival. The representations, warranties, agreements and covenants
of the Company set forth in Sections 3, 4, 5 and 8 hereof shall survive the
Closing hereunder notwithstanding any investigation conducted by or on behalf of
any Purchaser. Moreover, none of the representations and warranties made by the
Company herein shall act as a waiver of any rights or remedies the Purchaser may
have under applicable federal or state securities laws. The Company agrees to
indemnify and hold harmless each Purchaser and each of such Purchaser's
officers, directors, employees, partners, members, agents and affiliates for
loss or damage arising as a result of or related to any breach or alleged breach
by the Company of any of its representations or covenants set forth herein,
including advancement of reasonable expenses as they are incurred.
j. Publicity. The Company and the Purchaser shall have the right to
review before issuance any press releases, SEC or NASD filings, or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior review
of the Purchasers, to make any press release or SEC or NASD filings with respect
-19-
<PAGE> 20
to such transactions as is required by applicable law and regulations (although
the Purchasers shall be consulted by the Company in connection with any such
press release and filing prior to its release and shall be provided with a copy
thereof).
k. Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have occurred on
or before April 3, 1998, unless the parties agree otherwise, this Agreement
shall terminate at the close of business on such date. Notwithstanding any
termination of this Agreement, any party not in breach of this Agreement shall
preserve all rights and remedies it may have against another party hereto for a
breach of this Agreement prior to or relating to the termination hereof.
m. Joint Participation in Drafting. Each party to this Agreement has
participated in the negotiation and drafting of this Agreement, the Certificate
of Designation, the Warrants and the Registration Rights Agreement. As such, the
language used herein and therein shall be deemed to be the language chosen by
the parties hereto to express their mutual intent, and no rule of strict
construction will be applied against any party to this Agreement.
n. Equitable Relief. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to a Purchaser by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
hereunder (including, but not limited to, its obligations pursuant to Section 5
hereof) will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Agreement (including, but not
limited to, its obligations pursuant to Section 5 hereof), that a Purchaser
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer of the
Securities, without the necessity of showing economic loss and without any bond
or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-20-
<PAGE> 21
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
By:
-------------------------
Name:
-----------------------
Title:
----------------------
PURCHASER:
JNC OPPORTUNITY FUND LTD.
By:
-----------------------------
Name:
Title:
RESIDENCE: Cayman Islands
ADDRESS: c/o Olympia Capital (Cayman) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Telecopy: (441) 295-2305
Attention: Thomas Davis
with copies of all notices to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Telecopy: (703) 476-7711
Attention: Neil T. Chau
AGGREGATE SUBSCRIPTION AMOUNT
<TABLE>
<S> <C>
Number of Preferred Shares to be Purchased 2,750
Number of Warrants to be Purchased 137,500
</TABLE>
-21-
<PAGE> 22
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have
caused this Agreement to be duly executed as of the date first above written.
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
By:
-------------------------
Name:
-----------------------
Title:
----------------------
PURCHASER:
DIVERSIFIED STRATEGIES FUND, L.P.
By:
-----------------------------
Name:
Title:
RESIDENCE: Kentucky
ADDRESS: c/o Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Telecopy: (703) 476-7711
Attention: Manager
with copies of all notices to:
Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Telecopy: (703) 476-7711
Attention: Manager
AGGREGATE SUBSCRIPTION AMOUNT
<TABLE>
<S> <C>
Number of Preferred Shares to be Purchased 250
Number of Warrants to be Purchased 12,500
</TABLE>
-22-
<PAGE> 1
EXHIBIT 10.2
VOID AFTER 5:00 P.M., NEW YORK CITY
TIME, ON MARCH 31, 2003
(UNLESS EXTENDED PURSUANT TO SECTION 2 HEREOF)
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER JURISDICTION. THE SECURITIES REPRESENTED HEREBY MAY
NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES
LAWS UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Right to Purchase 137,500 Shares of
Common Stock, par value $.01 per share
Date: March 31, 1998
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, JNC Opportunity Fund Ltd. or
its registered assigns, is entitled to purchase from ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION, a corporation organized under the laws of the State of
Delaware (the "COMPANY"), at any time or from time to time during the period
specified in Section 2 hereof, 137,500 fully paid and nonassessable shares of
the Company's common stock, par value $ 0.01 per share (the "COMMON STOCK"), at
an exercise price per share (the "EXERCISE PRICE") equal to $7.75. The number of
shares of Common Stock purchasable hereunder (the "WARRANT SHARES") and the
Exercise Price are subject to adjustment as provided in Section 4 hereof. The
term "WARRANTS" means this Warrant and the other warrants of the Company, if
any, issued pursuant to that certain Securities Purchase Agreement, dated as of
March 31, 1998, by and among the Company, the initial holder hereof and the
other signatory(ies) thereto (the "SECURITIES PURCHASE AGREEMENT").
<PAGE> 2
This Warrant is subject to the following terms, provisions and
conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "EXERCISE
AGREEMENT"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the holder is effectuating
a Cashless Exercise (as defined in Section 11(c) hereof) pursuant to Section
11(c) hereof, delivery to the Company of a written notice of an election to
effect a Cashless Exercise for the Warrant Shares specified in the Exercise
Agreement. The Warrant Shares so purchased shall be deemed to be issued to the
holder hereof or such holder's designee, as the record owner of such shares, as
of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment shall have been made for such shares as set forth above or, if such date
is not a business date, on the next succeeding business date. The Warrant Shares
so purchased, representing the aggregate number of shares specified in the
Exercise Agreement, shall be delivered to the holder hereof within a reasonable
time, not exceeding two (2) business days after this Warrant shall have been so
exercised in accordance with the foregoing (the "DELIVERY PERIOD"). If the
Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer program, and so long as the
certificates therefor do not bear a legend and the holder is not obligated to
return such certificate for the placement of a legend thereon, the Company shall
cause its transfer agent to electronically transmit the Warrant Shares so
purchased to the holder by crediting the account of the holder or its nominee
with DTC through its Deposit Withdrawal Agent Commission system ("DTC
TRANSFER"). If the aforementioned conditions to a DTC Transfer are not
satisfied, the Company shall deliver to the holder physical certificates
representing the Warrant Shares so purchased. Further, the holder may, in its
sole discretion, instruct the Company to deliver to the holder physical
certificates representing the Warrant Shares so purchased in lieu of delivering
such shares by way of DTC Transfer. Any certificates so delivered shall be in
such denominations as may be reasonably requested by the holder hereof, shall be
registered in the name of such holder or such other name as shall be designated
by such holder and, following the date on which the Warrant Shares have been
registered under the Securities Act pursuant to that certain Registration Rights
Agreement, dated as of March __, 1998, by and between the Company and the other
signatories thereto (the "REGISTRATION RIGHTS AGREEMENT") or otherwise may be
sold by the holder pursuant to Rule 144 promulgated under the Securities Act (or
a successor rule), shall not bear any restrictive legend. If this Warrant shall
have been exercised only in part, then, unless this Warrant has expired, the
Company shall, at its expense, at the time of delivery of such certificates,
deliver to the holder a new Warrant representing the number of shares with
respect to which this Warrant shall not then have been exercised.
-2-
<PAGE> 3
If, at any time, a holder of this Warrant submits this Warrant, an
Exercise Agreement and payment to the Company of the Exercise Price for each of
the Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth (4th) business day following the expiration of the Delivery Period
for such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "EXERCISE DEFAULT"), then the Company shall pay
to the holder payments ("EXERCISE DEFAULT PAYMENTS") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the amount by which the Market
Price (as defined in Section 4(l) hereof) on the date the Exercise Agreement
giving rise to the Exercise Default is transmitted in accordance with this
Section 1 (the "EXERCISE DEFAULT DATE") exceeds the Exercise Price, multiplied
by (c) the number of shares of Common Stock the Company failed to so deliver in
such Exercise Default, multiplied by (d) .24, where N = the number of days from
the Exercise Default Date through and including the date on which the Company
effects in full the exercise of this Warrant which gave rise to the Exercise
Default. The accrued Exercise Default Payment for each calendar month shall be
paid in cash or shall be convertible into Common Stock, at the holder's option,
as follows:
(a) In the event holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth (5th) day of the month following
the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common
Stock, the holder may convert such payment amount into Common Stock (in
accordance with the terms contained in Article IV of the Certificate of
Designations, Preferences and Rights (the "Certificate of Designation")
governing the Company's Series A Convertible Preferred Stock (the "Series A
Preferred Stock")) at the lower of the Exercise Price or the Market Price (as in
effect at the time of conversion) at any time after the fifth (5th) day of the
month following the month in which it has accrued.
Nothing herein shall limit the holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock as required pursuant to the terms of Section 3(b) hereof or to
otherwise issue shares of Common Stock upon exercise of this Warrant in
accordance with the terms hereof, and the holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
2. Period of Exercise.
(a) This Warrant is immediately exercisable, at any time or from
time to time on or after the date of initial issuance of this Warrant (the
"ISSUE DATE") and before 5:00 p.m., New York City time, on the fifth (5th)
anniversary of the Issue Date (the "EXERCISE PERIOD"). The Exercise Period shall
automatically be extended by one (1) day for each day (i) on which the Company
does not have a number of shares of Common Stock reserved for issuance upon
exercise
-3-
<PAGE> 4
hereof at least equal to the number of shares of Common Stock issuable upon
exercise hereof and (ii) after the ninetieth (90th) day following the Issue Date
on which the registration statement required to be filed by the Company pursuant
to Section 2(a) of the Registration Rights Agreement has not been declared
effective by the United States Securities and Exchange Commission.
3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, claims and encumbrances.
(b) Reservation of Shares. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a suf ficient number of shares of Common
Stock to provide for the exercise in full of this Warrant (without giving effect
to the limitations on exercise set forth in Section 7(g) hereof).
(c) Listing. The Company shall promptly secure the listing of the
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system (including the over the
counter market on the electronic bulletin board (the "Bulletin Board")), if any,
upon which shares of Common Stock are then listed or become listed (subject to
official notice of issuance upon exercise of this Warrant) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such listing of
all shares of Common Stock from time to time issuable upon the exercise of this
Warrant; and the Company shall so list on each national securities exchange or
automated quotation system, as the case may be, and shall maintain such listing
of, any other shares of capital stock of the Company issuable upon the exercise
of this Warrant if and so long as any shares of the same class shall be listed
on such national securities exchange or automated quotation system.
(d) Certain Actions Prohibited. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the economic benefit inuring to the holder
hereof and the exercise privilege of the holder of this Warrant against dilution
or other impairment, consistent with the tenor and purpose of this Warrant.
Without limiting the generality of the foregoing, the Company (i) will not
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the Exercise Price then in effect, and (ii) will
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
-4-
<PAGE> 5
(e) Successors and Assigns. This Warrant will be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.
(f) Blue Sky Laws. The Company shall, on or before the date of
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction.
4. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares issuable hereunder and for which this
Warrant is then exercisable pursuant to Section 2 hereof shall be subject to
adjustment from time to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
or down to the nearest cent.
(a) Adjustment of Exercise Price. Except as otherwise provided in
Sections 4(c) and 4(e) hereof, if and whenever during the Exercise Period the
Company issues or sells, or in accordance with Section 4(b) hereof is deemed to
have issued or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Market Price on the date of issuance (a
"DILUTIVE ISSUANCE"), other than upon a conversion of the Company's outstanding
Series A Preferred Stock, then effective immediately upon the Dilutive Issuance,
the Exercise Price will be adjusted in accordance with the following formula:
E' = E x O + P/M
-------
CSDO
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set
forth in Section 4(b) hereof, received by the
Company upon such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as defined in Section 4(l)(i))
immediately after the Dilutive Issuance.
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<PAGE> 6
(b) Effect on Exercise Price of Certain Events. For purposes of
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) Issuance of Rights or Options. If the Company in any
manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities exercisable, convertible into or exchangeable for Common Stock
("CONVERTIBLE SECURITIES") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "OPTIONS") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Market Price on the date of issuance ("BELOW MARKET
OPTIONS"), then the maximum total number of shares of Common Stock issuable upon
the exercise of such Below Market Options to the extent of the discount
(assuming full exercise, conversion or exchange of Convertible Securities, if
applicable) will, as of the date of the issuance or grant of such Below Market
Options, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For purposes of the preceding sentence, the
"price per share for which Common Stock is issuable upon the exercise of such
Below Market Options" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or
granting of all such Below Market Options, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise of
all such Below Market Options, plus, in the case of Convertible Securities
issuable upon the exercise of such Below Market Options, the minimum aggregate
amount of additional consideration payable upon the exercise, conversion or
exchange thereof at the time such Convertible Securities first become
exercisable, convertible or exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the exercise of all such Below Market
Options (assuming full conversion of Convertible Securities, if applicable). No
further adjustment to the Exercise Price will be made upon the actual issuance
of such Common Stock upon the exercise of such Below Market Options or upon the
exercise, conversion or exchange of Convertible Securities issuable upon
exercise of such Below Market Options. The terms "Convertible Securities,"
"Options" and "Below Market Options" will not include convertible securities or
options outstanding prior to the date of issuance of these Warrants, nor any
shares of the Company's Series A Convertible Preferred Stock.
(ii) Issuance of Convertible Securities.
(A) If the Company in any manner issues or sells
any Convertible Securities (other than Series A Convertible Preferred Stock),
whether or not immediately convertible (other than where the same are issuable
upon the exercise of Options) and the price per share for which Common Stock is
issuable upon such exercise, conversion or exchange (as determined pursuant to
Section 4(b)(ii)(B) if applicable) is less than the Market Price on the date of
issuance, then the maximum total number of shares of Common Stock issuable upon
the exercise, conversion or exchange of such Convertible Securities to the
extent of the discount will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon such exercise,
conversion or exchange" is
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<PAGE> 7
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities. No further adjustment to the Exercise Price will be made upon the
actual issuance of such Common Stock upon exercise, conversion or exchange of
such Convertible Securities.
(B) If the Company in any manner issues or sells
any Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "VARIABLE RATE CONVERTIBLE SECURITY"), other than its Series A
Convertible Preferred Stocks, then the "price per share for which Common Stock
is issuable upon such exercise, conversion or exchange" for purposes of the
calculation contemplated by Section 4(b)(ii)(A) shall be deemed to be the lowest
price per share which would be applicable (assuming all holding period and other
conditions to any discounts contained in such Convertible Security have been
satisfied) if the Market Price on the date of issuance of such Convertible
Security was 75% of the Market Price on such date (the "ASSUMED VARIABLE MARKET
PRICE"). Further, if the Market Price at any time or times thereafter is less
than or equal to the Assumed Variable Market Price last used for making any
adjustment under this Section 4 with respect to any Variable Rate Convertible
Security, the Exercise Price in effect at such time shall be readjusted to equal
the Exercise Price which would have resulted if the Assumed Variable Market
Price at the time of issuance of the Variable Rate Convertible Security had been
75% of the Market Price existing at the time of the adjustment required by this
sentence.
(iii) Change in Option Price or Conversion Rate. If there
is a change at any time in (i) the amount of additional consideration payable to
the Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions designed to protect
against dilution), the Exercise Price in effect at the time of such change will
be readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. If, in any case, the total number of shares of Common
Stock issuable upon exercise of any Option or upon exercise, conversion or
exchange of any Convertible Securities is not, in fact, issued and the rights to
exercise such Option or to exercise, convert or exchange such Convertible
Securities shall have expired or terminated, the Exercise Price then in effect
will be readjusted to the Exercise Price which would have been in effect at the
time of such expiration or termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such expiration or
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<PAGE> 8
termination (other than in respect of the actual number of shares of Common
Stock issued upon exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair
market value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price thereof as of the date of receipt. In case any Common
Stock, Options or Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair market value of
such portion of the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair market value of any consideration other than cash or
securities will be determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the Company and reasonably
acceptable to the holder hereof, with the costs of such appraisal to be borne by
the Company.
(vi) Exceptions to Adjustment of Exercise Price. No
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities issued and outstanding on the Issue
Date and set forth on Schedule 3(c) of the Securities Purchase Agreement in
accordance with the terms of such securities in effect on the Issue Date; (ii)
upon the grant or exercise of any stock or options which may hereafter be
granted or exercised under any employee benefit plan of the Company now existing
or to be implemented in the future, so long as the issuance of such stock or
options is approved by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iii) upon the issuance of
any shares of Series A Preferred Stock or Warrants issued or issuable in
accordance with the terms of the Securities Purchase Agreement; or (iv) upon the
conversion of any shares of Series A Preferred Stock or upon the exercise of any
Warrants.
(c) Subdivision or Combination of Common Stock. If the Company,
at any time during the Exercise Period, subdivides (by any stock split, stock
dividend, recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company, at
any time during the Exercise Period, combines (by reverse stock split,
recapitalization, reorganization, reclassification or otherwise) its shares of
Common Stock into a smaller number of shares, then, after
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<PAGE> 9
the date of record for effecting such combination, the Exercise Price in effect
immediately prior to such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant and for which this
Warrant is or may become exercisable shall be adjusted by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of shares of Common Stock issuable or for which this Warrant is or
may become exercisable (as applicable) upon exercise of this Warrant immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
(e) Consolidation, Merger or Sale. In case of any consolidation
of the Company with, or merger of the Company into, any other corporation in
which the consideration payable to the holders of the Company's Common Stock
consists, in whole or in part, of shares of stock or other securities, then as a
condition of such consolidation or merger, adequate provision will be made
whereby the holder of this Warrant will have the right to acquire and receive
upon exercise of this Warrant in lieu of the shares of Common Stock immediately
theretofore acquirable upon the exercise of this Warrant, such shares of stock
or other securities as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of this Warrant had such consolidation or merger not
taken place. In any such case, the Company will make appropriate provision to
insure that the provisions of this Section 4 will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
such consolidation or merger unless (i) prior to the consummation thereof, the
successor corporation (if other than the Company) assumes by written instrument
the obligations under this Warrant and the obligations to deliver to the holder
of this Warrant such shares of stock or other securities as, in accordance with
the foregoing provisions, the holder may be entitled to acquire and (ii) the
successor corporation is a publicly traded corporation whose common stock is
listed for trading on the New York Stock Exchange, the American Stock Exchange,
the Nasdaq National Market or the Nasdaq SmallCap Market. In the case of any
sale or conveyance of all or substantially all of the Company's assets (other
than in connection with a plan of complete liquidation of the Company) or in the
case of any consolidation of the Company with, or merger of the Company into,
any other corporation which involves the receipt of cash consideration by the
holders of the Company's capital stock or in which the surviving or continuing
entity is not a publicly traded corporation whose common stock is listed for
trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq
National Market or the Nasdaq SmallCap Market, the holder of this Warrant shall
be entitled to receive, in connection with such transaction, cash consideration
equal to the fair market value (as determined by the holder of this Warrant) of
this Warrant.
(f) Distribution of Assets. In case the Company shall declare or
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a partial liquidating dividend, stock repurchase by way of
return of capital or otherwise (including any dividend or distribution to the
Company's stockholders of cash or shares (or rights to acquire shares)
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<PAGE> 10
of capital stock of a subsidiary) (a "DISTRIBUTION"), at any time during the
Exercise Period, then the holder of this Warrant shall be entitled upon exercise
of this Warrant for the purchase of any or all of the shares of Common Stock
subject hereto, to receive the amount of such assets (or rights) which would
have been payable to the holder had such holder been the holder of such shares
of Common Stock on the record date for the determination of stockholders
entitled to such Distribution.
(g) Notice of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
(j) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to
the holders of the Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization of the
Company, or reclassification of the Common Stock, or consolidation or merger of
the Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
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<PAGE> 11
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable estimate thereof by the Company)
when the same shall take place. Such notice shall also specify the date on which
the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least seventy-five
(75) days prior to the record date or the date on which the Company's books are
closed in respect thereto. Failure to give any such notice or any defect therein
shall not affect the validity of the proceedings referred to in clauses (i),
(ii), (iii) and (iv) above.
(k) Certain Events. If, at any time during the Exercise Period,
any event occurs of the type contemplated by the adjustment provisions of this
Section 4 but not expressly provided for by such provisions, the Company will
give notice of such event as provided in Section 4(g) hereof, and the Company's
Board of Directors will make an appropriate adjustment in the Exercise Price and
the number of shares of Common Stock acquirable upon exercise of this Warrant so
that the rights of the holder shall be neither enhanced nor diminished by such
event.
(l) Certain Definitions.
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the
number of shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) in the case of any
adjustment required by Section 4(a) resulting from the issuance of any Options,
the maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required to the extent of the discount
(including any Common Stock issuable upon the conversion of Convertible
Securities issuable upon the exercise of such Options), and (y) in the case of
any adjustment required by Section 4(a) resulting from the issuance of any
Convertible Securities, the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of the Convertible Securities
for which the adjustment is required, as of the date of issuance of such
Convertible Securities, if any.
(ii) "COMMON STOCK," for purposes of this Section 4,
includes the Common Stock and any additional class of stock of the Company
having no preference as to dividends or distributions on liquidation, provided
that the shares purchasable pursuant to this Warrant shall include only Common
Stock in respect of which this Warrant is exercisable, or shares resulting from
any subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
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<PAGE> 12
(iii) "CLOSING BID PRICE" means, for any security as of
any date, the closing bid price of such security on the principal United States
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg Financial Markets or a comparable reporting service of
national reputation selected by the Company and reasonably acceptable to the
holder hereof if Bloomberg Financial Markets is not then reporting closing bid
prices of such security (collectively, "BLOOMBERG"), or if the foregoing does
not apply, the last reported sale price of such security on the principal United
States securities exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing does not apply, the last
reported sale price of such security on the Bulletin Board as reported by
Bloomberg, or, if no sale price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc., in each case for such
date or, if such date was not a trading date for such security, on the next
preceding date which was a trading date. If the Closing Bid Price cannot be
calculated for such security as of either of such dates on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the fair
market value as reasonably determined by an investment banking firm selected by
the Company and reasonably acceptable to the holder, with the costs of such
appraisal to be borne by the Company.
(iv) "MARKET PRICE" means, as of any date, the average of
the Closing Bid Prices for the Common Stock for the five (5) consecutive trading
days ending on the trading day immediately preceding such date of determination
(subject to equitable adjustment for any stock splits, stock dividends,
reclassifications or similar events occurring during such five (5) trading day
period).
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. No Rights or Liabilities as a Stockholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
(a) Restriction on Transfer. This Warrant and the rights granted
to the holder hereof are transferable, in whole or in part, upon surrender of
this Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the
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<PAGE> 13
conditions set forth in Sections 7(f) and (g) hereof and to the provisions of
Sections 2(f) and 2(g) of the Securities Purchase Agreement. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Section 8 hereof are assignable only in
accordance with the provisions of the Registration Rights Agreement.
(b) Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Section 7(e) below, for new
Warrants of like tenor of different denominations representing in the aggregate
the right to purchase the number of shares of Common Stock which may be
purchased hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by the holder hereof at
the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7. The Company shall indemnify
and reimburse the holder of this Warrant for all costs and expenses (including
legal fees) incurred by such holder in connection with the enforcement of its
rights hereunder.
(e) Warrant Register. The Company shall maintain, at its
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the holder hereof), a register for this Warrant, in
which the Company shall record the name and address of the person in whose name
this Warrant has been issued, as well as the name and address of each transferee
and each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. If, at the time of
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act and under applicable state securities or blue sky laws, the Company may
require, as a condition of allowing such exercise, transfer, or exchange, (i)
that the holder or transferee of this Warrant, as the case may be, furnish to
the Company a written opinion of counsel (which opinion
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<PAGE> 14
shall be in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that such exercise, transfer, or exchange
may be made without registration under the Securities Act and under applicable
state securities or blue sky laws (the cost of which shall be borne by the
Company if the Company's counsel renders such an opinion and up to $250 of such
cost shall be borne by the Company if the holder's counsel is requested to
render such opinion), (ii) that the holder or transferee execute and deliver to
the Company an investment letter in form and substance acceptable to the Company
and (iii) that the transferee be an "ACCREDITED INVESTOR" as defined in Rule
501(a) promulgated under the Securities Act; provided that no such opinion,
letter, or status as an "accredited investor" shall be required in connection
with a transfer pursuant to Rule 144 under the Securities Act.
(g) Additional Restrictions on Exercise or Transfer.
Notwithstanding anything contained herein to the contrary, unless the holder
hereof delivers a waiver in accordance with the last sentence of this Section
7(g), this Warrant shall not be exercisable by a holder hereof to the extent
(but only to the extent) that (a) the number of shares of Common Stock
beneficially owned by such holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised portion of the Warrants or the unexercised or unconverted portion of
any other securities of the Company (including the Series A Preferred Stock)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein) and (b) the number of shares of Common Stock issuable upon
exercise of this Warrant (or portion hereof) with respect to which the
determination described herein is being made, would result in beneficial
ownership by such holder and its affiliates of more than 4.99% of the
outstanding shares of Common Stock. To the extent the above limitation applies,
the determination of whether and to what extent this Warrant shall be
exercisable vis-a-vis other securities owned by such holder shall be in the sole
discretion of the holder and submission of this Warrant for full or partial
exercise shall be deemed to be the holder's determination of whether and the
extent to which this Warrant is exercisable, in each case subject to such
aggregate percentage limitation. No prior inability to exercise the Warrant
pursuant to this Section shall have any effect on the applicability of the
provisions of this Section with respect to any subsequent determination of
exercisability. For purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (a) hereof. Except as provided in the immediately
succeeding sentence, the restrictions contained in this Section 7(g) may not be
amended without the consent of the holder of this Warrant and the holders of a
majority of the Company's then outstanding Common Stock. Notwithstanding the
foregoing, the holder hereof may waive the restrictions set forth in this
Section 7(g) by written notice to the Company upon not less than sixty-
one (61) days prior notice (with such waiver taking effect only upon the
expiration of such sixty-one (61) day notice period).
8. Registration Rights. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in the Registration Rights
Agreement, including the right to assign such rights to certain assignees, as
set forth therein.
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<PAGE> 15
9. Notices. Any notices required or permitted to be given under the
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier, or by confirmed telecopy, in each case addressed to a party. The
addresses for such communications shall be:
If to the Company:
Environmental Products & Technologies Corporation
5380 Sterling Centre Drive
Westlake Village, CA 91301
Telecopy: 818-865-2005
Attention: Marvin Mears, President
with a copy simultaneously transmitted by like means to:
Mark J. Richardson, Esquire
1299 Ocean Avenue, Suite 900
Santa Monica, CA 90401
Telecopy: 310-393-2004
If to the holder, at such address as such holder shall have provided in writing
to the Company, or at such other address as such holder furnishes by notice
given in accordance with this Section 9.
10. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
state courts located in the State of Delaware in any suit or proceeding based on
or arising under this Warrant and irrevocably agrees that all claims in respect
of such suit or proceeding may be determined in such courts. The Company
irrevocably waives any objection to the laying of venue and the defense of an
inconvenient forum to the maintenance of such suit or proceeding. The Company
further agrees that service of process upon the Company mailed by certified or
registered mail shall be deemed in every respect effective service of process
upon the Company in any such suit or proceeding. Nothing herein shall affect the
holder's right to serve process in any other manner permitted by law. The
Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
-15-
<PAGE> 16
11. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and the holder hereof.
(b) Descriptive Headings. The descriptive headings of the several
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
(c) Cashless Exercise. Notwithstanding anything to the contrary
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the first
anniversary of the Issue Date until the end of the Exercise Period, by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"CASHLESS EXERCISE"). In the event of a Cashless Exercise, in lieu of paying the
Exercise Price in cash, the holder shall surrender this Warrant for that number
of shares of Common Stock determined by multiplying the number of Warrant Shares
to which it would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current Market Price of a share of the
Common Stock on the date of exercise and the Exercise Price, and the denominator
of which shall be the then current Market Price per share of Common Stock.
(d) Business Day. For purposes of this Warrant, the term
"business day" means any day, other than a Saturday or Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by
law, regulation or executive order to close.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-16-
<PAGE> 17
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION
By: ________________________________
Name:___________________________
Title:__________________________
<PAGE> 18
FORM OF EXERCISE AGREEMENT
(TO BE EXECUTED BY THE HOLDER IN ORDER TO EXERCISE THE WARRANT)
To: ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
[address]
Telecopy:
Attention:
The undersigned hereby irrevocably exercises the right to purchase
_____________ shares of the Common Stock of ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION, a corporation organized under the laws of the State of
[Delaware] (the "COMPANY"), evidenced by the attached Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws.
o The undersigned requests that the Company cause its transfer agent to
electronically transmit the Common Stock issuable pursuant to this
Exercise Agreement to the account of the undersigned or its nominee
(which is _________________) with DTC through its Deposit Withdrawal
Agent Commission System ("DTC TRANSFER").
o In lieu of receiving the shares of Common Stock issuable pursuant to
this Exercise Agreement by way of DTC Transfer, the undersigned hereby
requests that the Company cause its transfer agent to issue and deliver
to the undersigned physical certificates representing such shares of
Common Stock.
The undersigned requests that a Warrant representing any unexercised
portion hereof be issued, pursuant to the Warrant, in the name of the Holder and
delivered to the undersigned at the address set forth below:
Dated:_________________ _____________________________________
Signature of Holder
____________________________________
Name of Holder (Print)
Address:
____________________________________
____________________________________
<PAGE> 19
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints______________________________
_____________________________________ as agent and attorney-in-fact to transfer
said Warrant on the books of the within-named corporation, with full power of
substitution in the premises.
Dated: _____________________, ____
In the presence of
________________________
Name: ____________________________
Signature: _______________________
Title of Signing Officer or Agent
(if any):
________________________
Address: ________________________
________________________
Note: The above signature should
correspond exactly with the
name on the face of the
within Warrant.
<PAGE> 1
EXHIBIT 10.3
VOID AFTER 5:00 P.M., NEW YORK CITY
TIME, ON MARCH 31, 2003
(UNLESS EXTENDED PURSUANT TO SECTION 2 HEREOF)
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER JURISDICTION. THE SECURITIES REPRESENTED HEREBY MAY
NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES
LAWS UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Right to Purchase 12,500 Shares of
Common Stock, par value $.01 per share
Date: March 31, 1998
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, Diversified Strategies Fund,
L.P. or its registered assigns, is entitled to purchase from ENVIRONMENTAL
PRODUCTS & TECHNOLOGIES CORPORATION, a corporation organized under the laws of
the State of Delaware (the "COMPANY"), at any time or from time to time during
the period specified in Section 2 hereof, 12,500 fully paid and nonassessable
shares of the Company's common stock, par value $ 0.01 per share (the "COMMON
STOCK"), at an exercise price per share (the "EXERCISE PRICE") equal to $7.75.
The number of shares of Common Stock purchasable hereunder (the "WARRANT
SHARES") and the Exercise Price are subject to adjustment as provided in Section
4 hereof. The term "WARRANTS" means this Warrant and the other warrants of the
Company, if any, issued pursuant to that certain Securities Purchase Agreement,
dated as of March 31, 1998, by and among the Company, the initial holder hereof
and the other signatory(ies) thereto (the "SECURITIES PURCHASE AGREEMENT").
<PAGE> 2
This Warrant is subject to the following terms, provisions and
conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "EXERCISE
AGREEMENT"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the holder is effectuating
a Cashless Exercise (as defined in Section 11(c) hereof) pursuant to Section
11(c) hereof, delivery to the Company of a written notice of an election to
effect a Cashless Exercise for the Warrant Shares specified in the Exercise
Agreement. The Warrant Shares so purchased shall be deemed to be issued to the
holder hereof or such holder's designee, as the record owner of such shares, as
of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment shall have been made for such shares as set forth above or, if such date
is not a business date, on the next succeeding business date. The Warrant Shares
so purchased, representing the aggregate number of shares specified in the
Exercise Agreement, shall be delivered to the holder hereof within a reasonable
time, not exceeding two (2) business days after this Warrant shall have been so
exercised in accordance with the foregoing (the "DELIVERY PERIOD"). If the
Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer program, and so long as the
certificates therefor do not bear a legend and the holder is not obligated to
return such certificate for the placement of a legend thereon, the Company shall
cause its transfer agent to electronically transmit the Warrant Shares so
purchased to the holder by crediting the account of the holder or its nominee
with DTC through its Deposit Withdrawal Agent Commission system ("DTC
TRANSFER"). If the aforementioned conditions to a DTC Transfer are not
satisfied, the Company shall deliver to the holder physical certificates
representing the Warrant Shares so purchased. Further, the holder may, in its
sole discretion, instruct the Company to deliver to the holder physical
certificates representing the Warrant Shares so purchased in lieu of delivering
such shares by way of DTC Transfer. Any certificates so delivered shall be in
such denominations as may be reasonably requested by the holder hereof, shall be
registered in the name of such holder or such other name as shall be designated
by such holder and, following the date on which the Warrant Shares have been
registered under the Securities Act pursuant to that certain Registration Rights
Agreement, dated as of March __, 1998, by and between the Company and the other
signatories thereto (the "REGISTRATION RIGHTS AGREEMENT") or otherwise may be
sold by the holder pursuant to Rule 144 promulgated under the Securities Act (or
a successor rule), shall not bear any restrictive legend. If this Warrant shall
have been exercised only in part, then, unless this Warrant has expired, the
Company shall, at its expense, at the time of delivery of such certificates,
deliver to the holder a new Warrant representing the number of shares with
respect to which this Warrant shall not then have been exercised.
-2-
<PAGE> 3
If, at any time, a holder of this Warrant submits this Warrant, an
Exercise Agreement and payment to the Company of the Exercise Price for each of
the Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth (4th) business day following the expiration of the Delivery Period
for such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "EXERCISE DEFAULT"), then the Company shall pay
to the holder payments ("EXERCISE DEFAULT PAYMENTS") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the amount by which the Market
Price (as defined in Section 4(l) hereof) on the date the Exercise Agreement
giving rise to the Exercise Default is transmitted in accordance with this
Section 1 (the "EXERCISE DEFAULT DATE") exceeds the Exercise Price, multiplied
by (c) the number of shares of Common Stock the Company failed to so deliver in
such Exercise Default, multiplied by (d) .24, where N = the number of days from
the Exercise Default Date through and including the date on which the Company
effects in full the exercise of this Warrant which gave rise to the Exercise
Default. The accrued Exercise Default Payment for each calendar month shall be
paid in cash or shall be convertible into Common Stock, at the holder's option,
as follows:
(a) In the event holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth (5th) day of the month following
the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common
Stock, the holder may convert such payment amount into Common Stock (in
accordance with the terms contained in Article IV of the Certificate of
Designations, Preferences and Rights (the "Certificate of Designation")
governing the Company's Series A Convertible Preferred Stock (the "Series A
Preferred Stock")) at the lower of the Exercise Price or the Market Price (as in
effect at the time of conversion) at any time after the fifth (5th) day of the
month following the month in which it has accrued.
Nothing herein shall limit the holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock as required pursuant to the terms of Section 3(b) hereof or to
otherwise issue shares of Common Stock upon exercise of this Warrant in
accordance with the terms hereof, and the holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
2. Period of Exercise.
(a) This Warrant is immediately exercisable, at any time or from
time to time on or after the date of initial issuance of this Warrant (the
"ISSUE DATE") and before 5:00 p.m., New York City time, on the fifth (5th)
anniversary of the Issue Date (the "EXERCISE PERIOD"). The Exercise Period shall
automatically be extended by one (1) day for each day (i) on which the Company
does not have a number of shares of Common Stock reserved for issuance upon
exercise
-3-
<PAGE> 4
hereof at least equal to the number of shares of Common Stock issuable upon
exercise hereof and (ii) after the ninetieth (90th) day following the Issue Date
on which the registration statement required to be filed by the Company pursuant
to Section 2(a) of the Registration Rights Agreement has not been declared
effective by the United States Securities and Exchange Commission.
3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon
issuance in accordance with the terms of this Warrant, be validly issued, fully
paid, and nonassessable and free from all taxes, liens, claims and encumbrances.
(b) Reservation of Shares. During the Exercise Period, the
Company shall at all times have authorized, and reserved for the purpose of
issuance upon exercise of this Warrant, a suf ficient number of shares of Common
Stock to provide for the exercise in full of this Warrant (without giving effect
to the limitations on exercise set forth in Section 7(g) hereof).
(c) Listing. The Company shall promptly secure the listing of the
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system (including the over the
counter market on the electronic bulletin board (the "Bulletin Board")), if any,
upon which shares of Common Stock are then listed or become listed (subject to
official notice of issuance upon exercise of this Warrant) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such listing of
all shares of Common Stock from time to time issuable upon the exercise of this
Warrant; and the Company shall so list on each national securities exchange or
automated quotation system, as the case may be, and shall maintain such listing
of, any other shares of capital stock of the Company issuable upon the exercise
of this Warrant if and so long as any shares of the same class shall be listed
on such national securities exchange or automated quotation system.
(d) Certain Actions Prohibited. The Company will not, by
amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the holder of
this Warrant in order to protect the economic benefit inuring to the holder
hereof and the exercise privilege of the holder of this Warrant against dilution
or other impairment, consistent with the tenor and purpose of this Warrant.
Without limiting the generality of the foregoing, the Company (i) will not
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the Exercise Price then in effect, and (ii) will
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
-4-
<PAGE> 5
(e) Successors and Assigns. This Warrant will be binding upon any
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.
(f) Blue Sky Laws. The Company shall, on or before the date of
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required to qualify as a foreign corporation or file a
general consent to service of process in any such jurisdiction.
4. Antidilution Provisions. During the Exercise Period, the Exercise
Price and the number of Warrant Shares issuable hereunder and for which this
Warrant is then exercisable pursuant to Section 2 hereof shall be subject to
adjustment from time to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required
herein results in a fraction of a cent, such Exercise Price shall be rounded up
or down to the nearest cent.
(a) Adjustment of Exercise Price. Except as otherwise provided in
Sections 4(c) and 4(e) hereof, if and whenever during the Exercise Period the
Company issues or sells, or in accordance with Section 4(b) hereof is deemed to
have issued or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Market Price on the date of issuance (a
"DILUTIVE ISSUANCE"), other than upon a conversion of the Company's outstanding
Series A Preferred Stock, then effective immediately upon the Dilutive Issuance,
the Exercise Price will be adjusted in accordance with the following formula:
E' = E x O + P/M
-------
CSDO
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price;
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set
forth in Section 4(b) hereof, received by the
Company upon such Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as defined in Section 4(l)(i))
immediately after the Dilutive Issuance.
-5-
<PAGE> 6
(b) Effect on Exercise Price of Certain Events. For purposes of
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) Issuance of Rights or Options. If the Company in any
manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities exercisable, convertible into or exchangeable for Common Stock
("CONVERTIBLE SECURITIES") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "OPTIONS") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Market Price on the date of issuance ("BELOW MARKET
OPTIONS"), then the maximum total number of shares of Common Stock issuable upon
the exercise of such Below Market Options to the extent of the discount
(assuming full exercise, conversion or exchange of Convertible Securities, if
applicable) will, as of the date of the issuance or grant of such Below Market
Options, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For purposes of the preceding sentence, the
"price per share for which Common Stock is issuable upon the exercise of such
Below Market Options" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or
granting of all such Below Market Options, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise of
all such Below Market Options, plus, in the case of Convertible Securities
issuable upon the exercise of such Below Market Options, the minimum aggregate
amount of additional consideration payable upon the exercise, conversion or
exchange thereof at the time such Convertible Securities first become
exercisable, convertible or exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the exercise of all such Below Market
Options (assuming full conversion of Convertible Securities, if applicable). No
further adjustment to the Exercise Price will be made upon the actual issuance
of such Common Stock upon the exercise of such Below Market Options or upon the
exercise, conversion or exchange of Convertible Securities issuable upon
exercise of such Below Market Options. The terms "Convertible Securities,"
"Options" and "Below Market Options" will not include convertible securities or
options outstanding prior to the date of issuance of these Warrants, nor any
shares of the Company's Series A Convertible Preferred Stock.
(ii) Issuance of Convertible Securities.
(A) If the Company in any manner issues or sells
any Convertible Securities (other than Series A Convertible Preferred Stock),
whether or not immediately convertible (other than where the same are issuable
upon the exercise of Options) and the price per share for which Common Stock is
issuable upon such exercise, conversion or exchange (as determined pursuant to
Section 4(b)(ii)(B) if applicable) is less than the Market Price on the date of
issuance, then the maximum total number of shares of Common Stock issuable upon
the exercise, conversion or exchange of such Convertible Securities to the
extent of the discount will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon such exercise,
conversion or exchange" is
-6-
<PAGE> 7
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of all such Convertible
Securities. No further adjustment to the Exercise Price will be made upon the
actual issuance of such Common Stock upon exercise, conversion or exchange of
such Convertible Securities.
(B) If the Company in any manner issues or sells
any Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "VARIABLE RATE CONVERTIBLE SECURITY"), other than its Series A
Convertible Preferred Stocks, then the "price per share for which Common Stock
is issuable upon such exercise, conversion or exchange" for purposes of the
calculation contemplated by Section 4(b)(ii)(A) shall be deemed to be the lowest
price per share which would be applicable (assuming all holding period and other
conditions to any discounts contained in such Convertible Security have been
satisfied) if the Market Price on the date of issuance of such Convertible
Security was 75% of the Market Price on such date (the "ASSUMED VARIABLE MARKET
PRICE"). Further, if the Market Price at any time or times thereafter is less
than or equal to the Assumed Variable Market Price last used for making any
adjustment under this Section 4 with respect to any Variable Rate Convertible
Security, the Exercise Price in effect at such time shall be readjusted to equal
the Exercise Price which would have resulted if the Assumed Variable Market
Price at the time of issuance of the Variable Rate Convertible Security had been
75% of the Market Price existing at the time of the adjustment required by this
sentence.
(iii) Change in Option Price or Conversion Rate. If there
is a change at any time in (i) the amount of additional consideration payable to
the Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions designed to protect
against dilution), the Exercise Price in effect at the time of such change will
be readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. If, in any case, the total number of shares of Common
Stock issuable upon exercise of any Option or upon exercise, conversion or
exchange of any Convertible Securities is not, in fact, issued and the rights to
exercise such Option or to exercise, convert or exchange such Convertible
Securities shall have expired or terminated, the Exercise Price then in effect
will be readjusted to the Exercise Price which would have been in effect at the
time of such expiration or termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such expiration or
-7-
<PAGE> 8
termination (other than in respect of the actual number of shares of Common
Stock issued upon exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair
market value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price thereof as of the date of receipt. In case any Common
Stock, Options or Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair market value of
such portion of the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair market value of any consideration other than cash or
securities will be determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the Company and reasonably
acceptable to the holder hereof, with the costs of such appraisal to be borne by
the Company.
(vi) Exceptions to Adjustment of Exercise Price. No
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities issued and outstanding on the Issue
Date and set forth on Schedule 3(c) of the Securities Purchase Agreement in
accordance with the terms of such securities in effect on the Issue Date; (ii)
upon the grant or exercise of any stock or options which may hereafter be
granted or exercised under any employee benefit plan of the Company now existing
or to be implemented in the future, so long as the issuance of such stock or
options is approved by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iii) upon the issuance of
any shares of Series A Preferred Stock or Warrants issued or issuable in
accordance with the terms of the Securities Purchase Agreement; or (iv) upon the
conversion of any shares of Series A Preferred Stock or upon the exercise of any
Warrants.
(c) Subdivision or Combination of Common Stock. If the Company,
at any time during the Exercise Period, subdivides (by any stock split, stock
dividend, recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company, at
any time during the Exercise Period, combines (by reverse stock split,
recapitalization, reorganization, reclassification or otherwise) its shares of
Common Stock into a smaller number of shares, then, after
-8-
<PAGE> 9
the date of record for effecting such combination, the Exercise Price in effect
immediately prior to such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant and for which this
Warrant is or may become exercisable shall be adjusted by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of shares of Common Stock issuable or for which this Warrant is or
may become exercisable (as applicable) upon exercise of this Warrant immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
(e) Consolidation, Merger or Sale. In case of any consolidation
of the Company with, or merger of the Company into, any other corporation in
which the consideration payable to the holders of the Company's Common Stock
consists, in whole or in part, of shares of stock or other securities, then as a
condition of such consolidation or merger, adequate provision will be made
whereby the holder of this Warrant will have the right to acquire and receive
upon exercise of this Warrant in lieu of the shares of Common Stock immediately
theretofore acquirable upon the exercise of this Warrant, such shares of stock
or other securities as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon exercise of this Warrant had such consolidation or merger not
taken place. In any such case, the Company will make appropriate provision to
insure that the provisions of this Section 4 will thereafter be applicable as
nearly as may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise of this Warrant. The Company will not effect any
such consolidation or merger unless (i) prior to the consummation thereof, the
successor corporation (if other than the Company) assumes by written instrument
the obligations under this Warrant and the obligations to deliver to the holder
of this Warrant such shares of stock or other securities as, in accordance with
the foregoing provisions, the holder may be entitled to acquire and (ii) the
successor corporation is a publicly traded corporation whose common stock is
listed for trading on the New York Stock Exchange, the American Stock Exchange,
the Nasdaq National Market or the Nasdaq SmallCap Market. In the case of any
sale or conveyance of all or substantially all of the Company's assets (other
than in connection with a plan of complete liquidation of the Company) or in the
case of any consolidation of the Company with, or merger of the Company into,
any other corporation which involves the receipt of cash consideration by the
holders of the Company's capital stock or in which the surviving or continuing
entity is not a publicly traded corporation whose common stock is listed for
trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq
National Market or the Nasdaq SmallCap Market, the holder of this Warrant shall
be entitled to receive, in connection with such transaction, cash consideration
equal to the fair market value (as determined by the holder of this Warrant) of
this Warrant.
(f) Distribution of Assets. In case the Company shall declare or
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a partial liquidating dividend, stock repurchase by way of
return of capital or otherwise (including any dividend or distribution to the
Company's stockholders of cash or shares (or rights to acquire shares)
-9-
<PAGE> 10
of capital stock of a subsidiary) (a "DISTRIBUTION"), at any time during the
Exercise Period, then the holder of this Warrant shall be entitled upon exercise
of this Warrant for the purchase of any or all of the shares of Common Stock
subject hereto, to receive the amount of such assets (or rights) which would
have been payable to the holder had such holder been the holder of such shares
of Common Stock on the record date for the determination of stockholders
entitled to such Distribution.
(g) Notice of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but the Company shall pay a
cash adjustment in respect of any fractional share which would otherwise be
issuable in an amount equal to the same fraction of the Market Price of a share
of Common Stock on the date of such exercise.
(j) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to
the holders of the Common Stock any additional shares of stock of any class or
other rights;
(iii) there shall be any capital reorganization of the
Company, or reclassification of the Common Stock, or consolidation or merger of
the Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
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<PAGE> 11
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Common Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, notice of
the date (or, if not then known, a reasonable estimate thereof by the Company)
when the same shall take place. Such notice shall also specify the date on which
the holders of Common Stock shall be entitled to receive such dividend,
distribution, or subscription rights or to exchange their Common Stock for stock
or other securities or property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up, as the case may be. Such notice shall be given at least seventy-five
(75) days prior to the record date or the date on which the Company's books are
closed in respect thereto. Failure to give any such notice or any defect therein
shall not affect the validity of the proceedings referred to in clauses (i),
(ii), (iii) and (iv) above.
(k) Certain Events. If, at any time during the Exercise Period,
any event occurs of the type contemplated by the adjustment provisions of this
Section 4 but not expressly provided for by such provisions, the Company will
give notice of such event as provided in Section 4(g) hereof, and the Company's
Board of Directors will make an appropriate adjustment in the Exercise Price and
the number of shares of Common Stock acquirable upon exercise of this Warrant so
that the rights of the holder shall be neither enhanced nor diminished by such
event.
(l) Certain Definitions.
(i) "COMMON STOCK DEEMED OUTSTANDING" shall mean the
number of shares of Common Stock actually outstanding (not including shares of
Common Stock held in the treasury of the Company), plus (x) in the case of any
adjustment required by Section 4(a) resulting from the issuance of any Options,
the maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required to the extent of the discount
(including any Common Stock issuable upon the conversion of Convertible
Securities issuable upon the exercise of such Options), and (y) in the case of
any adjustment required by Section 4(a) resulting from the issuance of any
Convertible Securities, the maximum total number of shares of Common Stock
issuable upon the exercise, conversion or exchange of the Convertible Securities
for which the adjustment is required, as of the date of issuance of such
Convertible Securities, if any.
(ii) "COMMON STOCK," for purposes of this Section 4,
includes the Common Stock and any additional class of stock of the Company
having no preference as to dividends or distributions on liquidation, provided
that the shares purchasable pursuant to this Warrant shall include only Common
Stock in respect of which this Warrant is exercisable, or shares resulting from
any subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
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<PAGE> 12
(iii) "CLOSING BID PRICE" means, for any security as of
any date, the closing bid price of such security on the principal United States
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg Financial Markets or a comparable reporting service of
national reputation selected by the Company and reasonably acceptable to the
holder hereof if Bloomberg Financial Markets is not then reporting closing bid
prices of such security (collectively, "BLOOMBERG"), or if the foregoing does
not apply, the last reported sale price of such security on the principal United
States securities exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing does not apply, the last
reported sale price of such security on the Bulletin Board as reported by
Bloomberg, or, if no sale price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc., in each case for such
date or, if such date was not a trading date for such security, on the next
preceding date which was a trading date. If the Closing Bid Price cannot be
calculated for such security as of either of such dates on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be the fair
market value as reasonably determined by an investment banking firm selected by
the Company and reasonably acceptable to the holder, with the costs of such
appraisal to be borne by the Company.
(iv) "MARKET PRICE" means, as of any date, the average of
the Closing Bid Prices for the Common Stock for the five (5) consecutive trading
days ending on the trading day immediately preceding such date of determination
(subject to equitable adjustment for any stock splits, stock dividends,
reclassifications or similar events occurring during such five (5) trading day
period).
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. No Rights or Liabilities as a Stockholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
(a) Restriction on Transfer. This Warrant and the rights granted
to the holder hereof are transferable, in whole or in part, upon surrender of
this Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the
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<PAGE> 13
conditions set forth in Sections 7(f) and (g) hereof and to the provisions of
Sections 2(f) and 2(g) of the Securities Purchase Agreement. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Section 8 hereof are assignable only in
accordance with the provisions of the Registration Rights Agreement.
(b) Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the holder hereof at the
office or agency of the Company referred to in Section 7(e) below, for new
Warrants of like tenor of different denominations representing in the aggregate
the right to purchase the number of shares of Common Stock which may be
purchased hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by the holder hereof at
the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7. The Company shall indemnify
and reimburse the holder of this Warrant for all costs and expenses (including
legal fees) incurred by such holder in connection with the enforcement of its
rights hereunder.
(e) Warrant Register. The Company shall maintain, at its
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the holder hereof), a register for this Warrant, in
which the Company shall record the name and address of the person in whose name
this Warrant has been issued, as well as the name and address of each transferee
and each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. If, at the time of
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act and under applicable state securities or blue sky laws, the Company may
require, as a condition of allowing such exercise, transfer, or exchange, (i)
that the holder or transferee of this Warrant, as the case may be, furnish to
the Company a written opinion of counsel (which opinion
-13-
<PAGE> 14
shall be in form, substance and scope customary for opinions of counsel in
comparable transactions) to the effect that such exercise, transfer, or exchange
may be made without registration under the Securities Act and under applicable
state securities or blue sky laws (the cost of which shall be borne by the
Company if the Company's counsel renders such an opinion and up to $250 of such
cost shall be borne by the Company if the holder's counsel is requested to
render such opinion), (ii) that the holder or transferee execute and deliver to
the Company an investment letter in form and substance acceptable to the Company
and (iii) that the transferee be an "ACCREDITED INVESTOR" as defined in Rule
501(a) promulgated under the Securities Act; provided that no such opinion,
letter, or status as an "accredited investor" shall be required in connection
with a transfer pursuant to Rule 144 under the Securities Act.
(g) Additional Restrictions on Exercise or Transfer.
Notwithstanding anything contained herein to the contrary, unless the holder
hereof delivers a waiver in accordance with the last sentence of this Section
7(g), this Warrant shall not be exercisable by a holder hereof to the extent
(but only to the extent) that (a) the number of shares of Common Stock
beneficially owned by such holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unexercised portion of the Warrants or the unexercised or unconverted portion of
any other securities of the Company (including the Series A Preferred Stock)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein) and (b) the number of shares of Common Stock issuable upon
exercise of this Warrant (or portion hereof) with respect to which the
determination described herein is being made, would result in beneficial
ownership by such holder and its affiliates of more than 4.99% of the
outstanding shares of Common Stock. To the extent the above limitation applies,
the determination of whether and to what extent this Warrant shall be
exercisable vis-a-vis other securities owned by such holder shall be in the sole
discretion of the holder and submission of this Warrant for full or partial
exercise shall be deemed to be the holder's determination of whether and the
extent to which this Warrant is exercisable, in each case subject to such
aggregate percentage limitation. No prior inability to exercise the Warrant
pursuant to this Section shall have any effect on the applicability of the
provisions of this Section with respect to any subsequent determination of
exercisability. For purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (a) hereof. Except as provided in the immediately
succeeding sentence, the restrictions contained in this Section 7(g) may not be
amended without the consent of the holder of this Warrant and the holders of a
majority of the Company's then outstanding Common Stock. Notwithstanding the
foregoing, the holder hereof may waive the restrictions set forth in this
Section 7(g) by written notice to the Company upon not less than sixty-
one (61) days prior notice (with such waiver taking effect only upon the
expiration of such sixty-one (61) day notice period).
8. Registration Rights. The initial holder of this Warrant (and certain
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in the Registration Rights
Agreement, including the right to assign such rights to certain assignees, as
set forth therein.
-14-
<PAGE> 15
9. Notices. Any notices required or permitted to be given under the
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier, or by confirmed telecopy, in each case addressed to a party. The
addresses for such communications shall be:
If to the Company:
Environmental Products & Technologies Corporation
5380 Sterling Centre Drive
Westlake Village, CA 91301
Telecopy: 818-865-2005
Attention: Marvin Mears, President
with a copy simultaneously transmitted by like means to:
Mark J. Richardson, Esquire
1299 Ocean Avenue, Suite 900
Santa Monica, CA 90401
Telecopy: 310-393-2004
If to the holder, at such address as such holder shall have provided in writing
to the Company, or at such other address as such holder furnishes by notice
given in accordance with this Section 9.
10. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
state courts located in the State of Delaware in any suit or proceeding based on
or arising under this Warrant and irrevocably agrees that all claims in respect
of such suit or proceeding may be determined in such courts. The Company
irrevocably waives any objection to the laying of venue and the defense of an
inconvenient forum to the maintenance of such suit or proceeding. The Company
further agrees that service of process upon the Company mailed by certified or
registered mail shall be deemed in every respect effective service of process
upon the Company in any such suit or proceeding. Nothing herein shall affect the
holder's right to serve process in any other manner permitted by law. The
Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
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<PAGE> 16
11. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and the holder hereof.
(b) Descriptive Headings. The descriptive headings of the several
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
(c) Cashless Exercise. Notwithstanding anything to the contrary
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the first
anniversary of the Issue Date until the end of the Exercise Period, by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise, including a calculation of the number of shares of Common
Stock to be issued upon such exercise in accordance with the terms hereof (a
"CASHLESS EXERCISE"). In the event of a Cashless Exercise, in lieu of paying the
Exercise Price in cash, the holder shall surrender this Warrant for that number
of shares of Common Stock determined by multiplying the number of Warrant Shares
to which it would otherwise be entitled by a fraction, the numerator of which
shall be the difference between the then current Market Price of a share of the
Common Stock on the date of exercise and the Exercise Price, and the denominator
of which shall be the then current Market Price per share of Common Stock.
(d) Business Day. For purposes of this Warrant, the term
"business day" means any day, other than a Saturday or Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by
law, regulation or executive order to close.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 17
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer.
ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION
By: ________________________________
Name:___________________________
Title:__________________________
<PAGE> 18
FORM OF EXERCISE AGREEMENT
(TO BE EXECUTED BY THE HOLDER IN ORDER TO EXERCISE THE WARRANT)
To: ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
[address]
Telecopy:
Attention:
The undersigned hereby irrevocably exercises the right to purchase
_____________ shares of the Common Stock of ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION, a corporation organized under the laws of the State of
[Delaware] (the "COMPANY"), evidenced by the attached Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full, all in
accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws.
o The undersigned requests that the Company cause its transfer agent to
electronically transmit the Common Stock issuable pursuant to this
Exercise Agreement to the account of the undersigned or its nominee
(which is _________________) with DTC through its Deposit Withdrawal
Agent Commission System ("DTC TRANSFER").
o In lieu of receiving the shares of Common Stock issuable pursuant to
this Exercise Agreement by way of DTC Transfer, the undersigned hereby
requests that the Company cause its transfer agent to issue and deliver
to the undersigned physical certificates representing such shares of
Common Stock.
The undersigned requests that a Warrant representing any unexercised
portion hereof be issued, pursuant to the Warrant, in the name of the Holder and
delivered to the undersigned at the address set forth below:
Dated:_________________ _____________________________________
Signature of Holder
____________________________________
Name of Holder (Print)
Address:
____________________________________
____________________________________
<PAGE> 19
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints______________________________
_____________________________________ as agent and attorney-in-fact to transfer
said Warrant on the books of the within-named corporation, with full power of
substitution in the premises.
Dated: _____________________, ____
In the presence of
________________________
Name: ____________________________
Signature: _______________________
Title of Signing Officer or Agent
(if any):
________________________
Address: ________________________
________________________
Note: The above signature should
correspond exactly with the
name on the face of the
within Warrant.
<PAGE> 1
Exhibit 10.4
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of March 31,
1998, by and among ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION, a
corporation organized under the laws of the State of Delaware (the "COMPANY"),
and the undersigned (together with affiliates, the "INITIAL INVESTORS").
WHEREAS:
A. In connection with the Securities Purchase Agreement of even date
herewith by and between the Company and the Initial Investors (the "SECURITIES
PURCHASE AGREEMENT"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Investors (i)
Three Thousand (3,000) shares of its Series A Convertible Preferred Stock (the
"PREFERRED STOCK") that are convertible into shares of the Company's Class A
Common Stock, par value $0.01 per share (the "COMMON STOCK"), upon the terms and
subject to the limitations and conditions set forth in the Certificate of
Designations, Rights and Preferences with respect to such Preferred Stock (the
"CERTIFICATE OF DESIGNATION") and (ii) warrants to acquire One Hundred Fifty
Thousand (150,000) shares of Common Stock (the "WARRANTS"); and
B. To induce the Initial Investors to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"SECURITIES ACT"), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investors hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the
following meanings:
<PAGE> 2
(i) "INVESTORS" means the Initial Investors and any
transferees or assignees who agree to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
(ii) "REGISTER," "REGISTERED," and "REGISTRATION" refer to
a registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("RULE 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "REGISTRABLE SECURITIES" means the Conversion Shares
and the Warrant Shares (including (A) any Conversion Shares issuable with
respect to the Damages Amount or with respect to Conversion Default Payments
under the Certificate of Designation or in redemption of any Preferred Stock and
(B) any Warrant Shares issuable with respect to Exercise Default Payments under
the Warrants) issued or issuable with respect to the Preferred Stock and the
Warrants, and any shares of capital stock issued or issuable, from time to time
(with any adjustments), as a distribution on or in exchange for or otherwise
with respect to any of the foregoing.
(iv) "REGISTRATION STATEMENT" means a registration
statement of the Company under the Securities Act.
b. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare and, on or
before the forty-eighth (48th) day following the Closing Date (the "FILING
DATE"), file with the SEC a Registration Statement on Form SB-2 (or, if Form
SB-2 is not then available, on such form of Registration Statement as is then
available to effect a registration of all of the Registrable Securities, subject
to the consent of the Initial Investors (as determined pursuant to Section 11(j)
hereof)) covering the resale of at least 825,000 Registrable Securities (200% of
the maximum number of shares of Common Stock issuable upon the full conversion
of or otherwise with respect to the Preferred Stock (based on the Conversion
Price (as defined in the Certificate of Designation) in effect on the Closing
Date), plus 100% of the maximum number of shares of Common Stock issuable upon
the full exercise of the Warrants which amount shall be 150,000 shares of Common
Stock), which Registration Statement, to the extent allowable under the
Securities Act and the Rules promulgated thereunder (including Rule 416), shall
state that such Registration Statement also covers such indeterminate number of
additional shares of Common Stock as may become issuable upon conversion of the
Preferred Stock (i) to prevent dilution resulting from stock splits, stock
dividends or similar transactions or (ii) by reason of reductions in the
Conversion Price of the
2
<PAGE> 3
Preferred Stock in accordance with the terms thereof (including, but not limited
to, the terms which cause the Variable Conversion Price to decrease to the
extent the Closing Bid Price of the Common Stock decreases). The Registrable
Securities initially set forth in such Registration Statement shall be allocated
to the Investors as set forth in Section 11(k) hereof. The Registration
Statement (and each amendment or supplement thereto, and each request for
acceleration of effectiveness thereof) shall be provided to (and subject to the
approval of) the Initial Investors and their counsel prior to its filing or
other submission.
b. Underwritten Offering. If any offering pursuant to a
Registration Statement pursuant to 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, with the consent of the
Initial Investors, shall have the right to select one legal counsel to represent
the Investors and an investment banker or bankers and manager or managers to
administer the offering, which investment banker or bankers or manager or
managers shall be reasonably satisfactory to the Company. In the event that any
Investors elect not to participate in such underwritten offering, the
Registration Statement covering all of the Registrable Securities shall contain
appropriate plans of distribution reasonably satisfactory to the Investors
participating in such underwritten offering and the Investors electing not to
participate in such underwritten offering (including, without limitation, the
ability of nonparticipating Investors to sell from time to time and at any time
during the effectiveness of such Registration Statement).
c. Payments by the Company. The Company shall cause the
Registration Statement required to be filed pursuant to Section 2(a) hereof to
become effective as soon as practicable, but in no event later than the
one-hundred-twenty-third (123rd) day following the date hereof (the
"REGISTRATION DEADLINE"). If (i) (A) the Registration Statement required to be
filed by the Company pursuant to Section 2(a) hereof is not filed with the SEC
on or before the Filing Date or (B) any Registration Statement required to be
filed by the Company pursuant to Section 3(b) hereof is not filed with the SEC
within fifteen (15) days after the applicable Registration Trigger Date (as
defined in Section 3(b) hereof), or (ii) (A) the Registration Statement required
to be filed by the Company pursuant to Section 2(a) hereof is not declared
effective by the SEC on or before the Registration Deadline or (B) any
Registration Statement required to be filed by the Company pursuant to Section
3(b) hereof is not declared effective by the SEC within sixty (60) days after
the applicable Registration Trigger Date, or (iii) if, after any such
Registration Statement has been declared effective by the SEC, sales of all of
the Registrable Securities (including any Registrable Securities required to be
registered pursuant to Section 3(b) hereof) cannot be made pursuant to such
Registration Statement (by reason of a stop order or the Company's failure to
update the Registration Statement or any other reason outside the control of the
Investors) or (iv) the Common Stock is not listed or included for quotation on
the Nasdaq National Market ("NNM"), the Nasdaq SmallCap Market ("SMALLCAP"), the
New York Stock Exchange (the "NYSE"), the American Stock Exchange (the "AMEX")
or in the over the counter market on the electronic bulletin board (the
"BULLETIN BOARD") at any time after the Registration Deadline, then the Company
will make payments to the Investors in such amounts and at such times as shall
be determined pursuant to this Section 2(c) as partial relief for the damages to
the Investors by reason of any such delay in or
3
<PAGE> 4
reduction of their ability to sell the Registrable Securities (which remedy
shall not be exclusive of any other remedies available at law or in equity). The
Company shall pay to each Investor an amount equal to the product of (i) the
aggregate Purchase Price of the Preferred Stock and Warrants held by such
Investor (including, without limitation, Preferred Stock that has been converted
into Conversion Shares and Warrants that have been exercised for Warrant Shares
then held by such Investor) (the "AGGREGATE SHARE PRICE"), multiplied by (ii)
two hundredths (.02), for each thirty (30) day period (or portion thereof) (A)
after the Filing Date and prior to the date the Registration Statement required
to be filed pursuant to Section 2(a) hereof is filed with the SEC, (B) after the
fifteenth (15th) day following a Registration Trigger Date and prior to the date
on which the Registration Statement required to be filed pursuant to Section
3(b) hereof is filed with the SEC, (C) after the Registration Deadline and prior
to the date the Registration Statement required to be filed pursuant to Section
2(a) hereof is declared effective by the SEC, (D) after the sixtieth (60th) day
following a Registration Trigger Date and prior to the date the Registration
Statement required to be filed pursuant to Section 3(b) hereof is declared
effective by the SEC, (E) during which sales of any Registrable Securities
cannot be made pursuant to any such Registration Statement after the
Registration Statement has been declared effective, and (F) during which the
Common Stock is not listed or included for quotation on the NNM, SmallCap, NYSE,
AMEX or Bulletin Board after the Registration Deadline; provided, however, that
there shall be excluded from each such period any delays which are solely
attributable to changes (other than corrections of Company mistakes with respect
to information previously provided by the Investors) required by the Investors
in the Registration Statement with respect to information relating to the
Investors, including, without limitation, changes to the plan of distribution.
(For example, if the Registration Statement is not effective by the Registration
Deadline, the Company would pay $200 for each thirty (30) day period thereafter
with respect to each $10,000 of Aggregate Share Price until the Registration
Statement becomes effective.) Such amounts shall be paid in cash or, at each
Investor's option, may be convertible into Common Stock at the "CONVERSION
PRICE" (as defined in the Certificate of Designation) then in effect. Any shares
of Common Stock issued upon conversion of such amounts shall be Registrable
Securities. If the Investor desires to convert the amounts due hereunder into
Registrable Securities it shall so notify the Company in writing within two (2)
business days after the date on which such amounts are first payable in cash and
such amounts shall be so convertible (pursuant to the mechanics set forth under
Article IV of the Certificate of Designation) beginning on the last day upon
which the cash amount would otherwise be due in accordance with the following
sentence. Payments of cash pursuant hereto shall be made within five (5) days
after the end of each period that gives rise to such obligation, provided that,
if any such period extends for more than thirty (30) days, interim payments
shall be made for each such thirty (30) day period.
d. Piggy-Back Registrations. If at any time prior to the
expiration of the Registration Period (as hereinafter defined) the Company shall
file with the SEC a Registration Statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities (other than on Form S-4 or Form S-8 or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans), the Company shall
send to each Investor who is entitled to registration rights under this Section
2(d)
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written notice of such determination and, if within fifteen (15) days after the
date of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering, the managing underwriter(s)
thereof shall impose a limitation on the number of shares of Common Stock which
may be included in the Registration Statement because, in such underwriter(s)'
judgment, marketing or other factors dictate such limitation is necessary to
facilitate public distribution, then the Company shall be obligated to include
in such Registration Statement only such limited portion of the Registrable
Securities with respect to which such Investor has requested inclusion hereunder
as the underwriter shall permit. Any exclusion of Registrable Securities shall
be made pro rata among the Investors seeking to include Registrable Securities,
in proportion to the number of Registrable Securities sought to be included by
such Investors; provided, however, that the Company shall not exclude any
Registrable Securities unless the Company has first excluded all outstanding
securities, the holders of which are not entitled to inclusion of such
securities in such Registration Statement or are not entitled to pro rata
inclusion with the Registrable Securities; and provided, further, however, that,
after giving effect to the immediately preceding proviso, any exclusion of
Registrable Securities shall be made pro rata with holders of other securities
having the right to include such securities in the Registration Statement other
than holders of securities entitled to inclusion of their securities in such
Registration Statement by reason of demand registration rights. No right to
registration of Registrable Securities under this Section 2(d) shall be
construed to limit any registration required under Section 2(a) hereof. If an
offering in connection with which an Investor is entitled to registration under
this Section 2(d) is an underwritten offering, then each Investor whose
Registrable Securities are included in such Registration Statement shall, unless
otherwise agreed by the Company, offer and sell such Registrable Securities in
an underwritten offering using the same underwriter or underwriters and, subject
to the provisions of this Agreement, on the same terms and conditions as other
shares of Common Stock included in such underwritten offering.
e. Eligibility for Form SB-2. The Company represents and warrants
that it meets the requirements for the use of Form SB-2 for registration of the
sale by the Initial Investors and any other Investor of the Registrable
Securities and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form SB-2.
f. Rule 416. The Company and the Investors each acknowledge that
an indeterminate number of Registrable Securities shall be registered pursuant
to Rule 416 under the Securities Act so as to include in such Registration
Statement any and all Registrable Securities which may become issuable (i) to
prevent dilution resulting from stock splits, stock dividends or similar
transactions and (ii) by reason of reductions in the Conversion Price of the
Preferred Stock in accordance with the terms thereof, including, but not limited
to, the terms which cause the Variable Conversion Price to decrease to the
extent the Closing Bid Price of the Common Stock decreases (collectively, the
"RULE 416 SECURITIES"). In this regard, the Company agrees to take all steps
necessary to ensure that all Registrable Securities are registered pursuant to
Rule 416 under the Securities Act in such Registration Statement and, absent
guidance from the SEC or other definitive
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<PAGE> 6
authority to the contrary, the Company shall affirmatively support and not take
any action adverse to the position that the Registration Statements filed
hereunder cover all of the Rule 416 Securities. If the Company determines that
the Registration Statements filed hereunder do not cover all of the Rule 416
Securities, the Company shall immediately provide to each Investor written
notice (a "RULE 416 NOTICE") setting forth the basis for the Company's position
and the authority therefor. The Company acknowledges that the number of shares
of Common Stock initially included in such Registration Statement relating to
the Registrable Securities represents a good faith estimate of the maximum
number of shares issuable upon conversion of the Preferred Stock and exercise of
the Warrants.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare and file with the SEC the
Registration Statement required by Section 2(a) as soon as practicable after the
date hereof (but in no event later than the Filing Date) and shall cause such
Registration Statement relating to Registrable Securities to become effective as
soon as practicable after such filing (but in no event later than the
Registration Deadline), and keep the Registration Statement effective pursuant
to Rule 415 at all times until such date as is the earlier of (i) the date on
which all of the Registrable Securities have been sold and (ii) the date on
which all of the Registrable Securities (in the reasonable opinion of counsel to
the Initial Investors) may be immediately sold to the public without
registration or restriction pursuant to Rule 144(k) under the Securities Act or
any successor provision (the "REGISTRATION PERIOD"), which Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein and all documents incorporated by reference therein) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein not
misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary to keep the Registration Statement
effective at all times during the Registration Period, and, during such 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 seller or sellers thereof as set forth in the Registration Statement. In
the event (i) the Company delivers a Rule 416 Notice to the Investors or the
Investors who hold a majority in interest of the Registrable Securities shall
reasonably determine, or the SEC shall state formally or informally, that Rule
416 under the Securities Act does not permit a registration statement to cover
securities which may become issuable upon conversion or exercise of convertible
or exercisable securities by reason of reductions in the conversion or exercise
price of such securities and (ii) the number of shares available under a
Registration Statement filed pursuant to this Agreement is, for any three (3)
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<PAGE> 7
consecutive trading days (the last of such three (3) trading days being the
"REGISTRATION TRIGGER DATE"), insufficient to cover one hundred thirty-five
percent (135%) of the Registrable Securities issued or issuable upon conversion
(without giving effect to any limitations on conversion contained in Article
IV.C of the Certificate of Designation) of the Preferred Stock and exercise of
the Warrants (without giving effect to any limitations on exercise contained in
Section 7 of the Warrants), the Company shall amend such Registration Statement,
or file a new Registration Statement (on the short form available therefor, if
applicable), or both, so as to cover two hundred percent (200%) of the
Registrable Securities issued or issuable (without giving effect to any
limitations on conversion or exercise contained in the Certificate of
Designation or the Warrants) as of the Registration Trigger Date, in each case,
as soon as practicable, but in any event within fifteen (15) days after the
Registration Trigger Date (based on the market price then in effect of the
Common Stock and other relevant factors on which the Company reasonably elects
to rely). The Company shall cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. In the event the Company fails to obtain the effectiveness of any such
Registration Statement within sixty (60) days after a Registration Trigger Date,
each Investor shall thereafter have the option, exercisable in whole or in part
at any time and from time to time by delivery of a written notice to the Company
(a "MANDATORY REDEMPTION NOTICE"), to require the Company to purchase for cash,
at an amount per share equal to the Mandatory Redemption Amount (as defined in
Article VIII.B of the Certificate of Designation), a portion of the Investor's
Preferred Stock such that the total number of Registrable Securities included on
the Registration Statement for resale by such Investor exceeds 135% of the
Registrable Securities issued or issuable upon conversion (without giving effect
to any limitations on conversion contained in Article IV.C of the Certificate of
Designation) of such Investor's Preferred Stock and exercise of such Investor's
Warrants. If the Corporation fails to redeem any of such shares within five (5)
business days after its receipt of a Mandatory Redemption Notice, then such
Investor shall be entitled to the remedies provided in Article VIII.C of the
Certificate of Designation.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC (including, without limitation, any request to
accelerate the effectiveness of any Registration Statement or amendment
thereto), and each item of correspondence from the SEC or the staff of the SEC,
in each case relating to such Registration Statement (other than any portion, if
any, thereof which contains information for which the Company has sought
confidential treatment), (ii) on the date of effectiveness of the Registration
Statement or any amendment thereto, a notice stating that the Registration
Statement or amendment has been declared effective, and (iii) such number of
copies of a prospectus, including a preliminary 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.
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d. The Company shall use its best efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as each Investor who holds Registrable Securities being offered
reasonably requests, (ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (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, (c) file a general consent to service of process in any such
jurisdiction, (d) provide any undertakings that cause the Company undue expense
or burden, or (e) make any change in its charter or bylaws, which in each case
the Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
e. In the event the Investors who hold a majority in interest of
the Registrable Securities being offered in an offering select underwriters for
the offering, the Company shall enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering.
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor of the happening of any event, of which
the Company has knowledge, 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 omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
g. The Company shall use its best efforts to prevent the issuance
of any stop order or other suspension of effectiveness of a Registration
Statement, and, if such an order is issued, to obtain the withdrawal of such
order at the earliest practicable moment (including in each case by amending or
supplementing such Registration Statement) and to notify each Investor who holds
Registrable Securities being sold (or, in the event of an underwritten offering,
the managing underwriters) of the issuance of such order and the resolution
thereof (and if such Registration Statement is supplemented or amended, deliver
such number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request).
h. The Company shall permit a single firm of counsel designated
by the Initial Investors to review the Registration Statement and all amendments
and supplements thereto a
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<PAGE> 9
reasonable period of time prior to their filing with the SEC, and not file any
document in a form to which such counsel reasonably objects and will not request
acceleration of the effectiveness of any Registration Statement without prior
notice to such counsel.
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the Securities Act) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall furnish, on
the date of effectiveness of the Registration Statement (i) an opinion, dated as
of such date, from counsel representing the Company addressed to the Investors
and in form, scope and substance as is customarily given in an underwritten
public offering and (ii) in the case of an underwriting, a letter, dated such
date, from the Company's independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and the Investors.
k. The Company shall, upon reasonable prior notice once each
fiscal quarter, make available for inspection by (i) any Investor, (ii) any
underwriter participating in any disposition pursuant to the Registration
Statement, (iii) one firm of attorneys and one firm of accountants or other
agents retained by the Investors who owns or has the right to convert into at
least 2% of the total issued and outstanding Company Stock of the Company, and
(iv) one firm of attorneys retained by all such underwriters (collectively, the
"INSPECTORS") all pertinent financial and other records, and pertinent corporate
documents and properties of the Company (collectively, the "RECORDS"), as shall
be reasonably deemed necessary by each Inspector to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (b) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction, or (c)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information
in such Records to any Inspector until and unless such Inspector shall have
entered into confidentiality agreements (in form and substance satisfactory to
the Company) with the Company with respect thereto, substantially in the form of
this Section 3(k). Each Investor agrees that it shall, upon learning that
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the Company
and allow the Company, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential. Nothing herein shall be deemed to limit the
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Investors' ability to sell Registrable Securities in a manner which is otherwise
consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement, or (v) such Investor
consents to the form and content of any such disclosure. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
m. The Company shall use its best efforts to promptly either (i)
cause all of the Registrable Securities covered by the Registration Statement to
be listed on the NYSE or the AMEX or another national securities exchange and on
each additional national securities exchange on which securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure the designation and quotation of all of the Registrable
Securities covered by the Registration Statement on the NNM, SmallCap or
Bulletin Board and, without limiting the generality of the foregoing, to arrange
for or maintain at least two market makers to register with the National
Association of Securities Dealers, Inc. ("NASD") as such with respect to such
Registrable Securities.
n. The Company shall provide 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.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and shall
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 opinion of such
counsel in the form attached hereto as EXHIBIT 1.
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p. At the request of any Investor, the Company shall prepare and
file with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary in order to change the plan
of distribution set forth in such Registration Statement.
q. The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all applicable
rules and regulations of governmental authorities in connection therewith
(including, without limitation, the Securities Act and the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated by the SEC.)
r. The Company shall take all such other actions as any Investor
or the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of the Registrable Securities.
s. From and after the date of this Agreement, the Company shall
not, and shall not agree to, allow the holders of any securities of the Company
to include any of their securities in any Registration Statement under Section
2(a) hereof or any amendment or supplement thereto under Section 3(b) hereof
without the consent of the holders of a majority in interest of the Registrable
Securities.
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 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. At least five (5)
business 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.
b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
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c. In the event Investors holding a majority in interest of the
Registrable Securities being offered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election not to participate in such
underwritten distribution.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Sections 3(f) or
3(g), such Investor will immediately discontinue 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 Sections 3(f) or 3(g) 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.
e. No Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 4, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, the
fees and disbursements of counsel for the Company and the fees and disbursements
contemplated by Section 3(k) hereof shall be borne by the Company. In addition,
the Company shall pay all of the Investors' costs and expenses (including legal
fees) incurred in connection with the enforcement of the rights of the Investors
hereunder.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify,
hold harmless and defend (i) each Investor who holds such Registrable
Securities, and (ii) the directors, officers,
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partners, members, employees, agents and each person who controls any Investor
within the meaning of Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), if any, (each,
an "INDEMNIFIED PERSON"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "CLAIMS") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any other applicable securities law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities (the matters in the
foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject
to the restrictions set forth in Section 6(c) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each other
Indemnified Person, promptly as such expenses are incurred and are due and
payable, for any reasonable legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in the Registration Statement or any such amendment thereof or
supplement thereto; (ii) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld; and (iii) with
respect to any preliminary prospectus, shall not inure to the benefit of any
Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, if such corrected prospectus was
timely made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a Violation and such Indemnified
Person, notwithstanding such advice, used it. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9 hereof.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, its employees, agents and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act or
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<PAGE> 14
Section 20 of the Exchange Act, and any other stockholder selling securities
pursuant to the Registration Statement or any of its directors or officers or
any person who controls such stockholder within the meaning of the Securities
Act or the Exchange Act (collectively and together with an Indemnified Person,
an "INDEMNIFIED PARTY"), against any Claim to which any of them may become
subject, under the Securities Act, the Exchange Act or otherwise, insofar as
such Claim arises out of or is based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and subject to
Section 6(c) such Investor will reimburse any legal or other expenses (promptly
as such expenses are incurred and are due and payable) reasonably incurred by
them in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Agreement (including this Section 6(b) and Section 7) for only
that amount as does not exceed the net proceeds actually received by such
Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9 hereof. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented, and the Indemnified Party failed to utilize
such corrected prospectus.
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to made against any indemnifying
party under this Section 6, deliver to the indemnifying party a written notice
of the commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that such indemnifying party shall not be entitled to assume such
defense and an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential conflicts of interest between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding or the actual or potential defendants in, or targets of, any such
action include both the Indemnified Person or the Indemnified Party and the
indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are different from or in addition
14
<PAGE> 15
<PAGE> 16
to those available to such indemnifying party. The indemnifying party shall pay
for only one separate legal counsel for the Indemnified Persons or the
Indemnified Parties, as applicable, and such legal counsel shall be selected by
Investors holding a majority-in-interest of the Registrable Securities included
in the Registration Statement to which the Claim relates (with the approval of
the Initial Investors if they hold Registrable Securities included in such
Registration Statement), if the Investors are entitled to indemnification
hereunder, or by the Company, if the Company is entitled to indemnification
hereunder, as applicable. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation, and (iii) contribution (together with any
indemnification or other obligations under this Agreement) by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE EXCHANGE ACT.
With a view to making available to the Investors the benefits of Rule
144 promulgated under the Securities Act or any other similar rule or regulation
of the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to,
after the initial effective date of its Registration Statement on Form SB-2:
a. file with the SEC in a timely manner and make and keep
available all reports and other documents required of the Company under the
Securities Act and the Exchange Act so long as the Company remains subject to
such requirements (it being understood that nothing herein shall limit the
Company's obligations under Section 4(c) of the Securities Purchase Agreement)
and the filing and availability of such reports and other documents is required
for the applicable provisions of Rule 144; and
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<PAGE> 17
b. furnish to each Investor so long as such Investor owns shares
of Preferred Stock, Warrants or Registrable Securities, promptly upon request,
(i) a written statement by the Company that it has complied with the reporting
requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy
of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested to permit the Investors to sell such securities
under Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any transferee of all or any
portion of the shares of Preferred Stock, the Warrants or the Registrable
Securities if: (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company after such assignment, (ii) the Company is furnished with written notice
of (a) the name and address of such transferee or assignee, and (b) the
securities with respect to which such registration rights are being transferred
or assigned, (iii) following such transfer or assignment, the further
disposition of such securities by the transferee or assignee is restricted under
the Securities Act and applicable state securities laws, (iv) the transferee or
assignee agrees in writing for the benefit of the Company to be bound by all of
the provisions contained herein, and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with written consent of the Company and
Investors who hold a majority in interest of the Registrable Securities;
provided, however, that no amendment hereto which restricts the ability of an
Investor to elect not to participate in an underwritten offering shall be
effective against any Investor which does not consent in writing to such
amendment; provided, further, however, that no consideration shall be paid to an
Investor by the Company in connection with an amendment hereto unless each
Investor similarly affected by such amendment receives a pro-rata amount of
consideration from the Company. Unless an Investor otherwise agrees, each
amendment hereto must similarly affect each Investor. Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon each Investor
and the Company.
11. MISCELLANEOUS.
a. A person or entity is 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
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<PAGE> 18
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. Any notices required or permitted to be given under the terms
of this Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier or by confirmed telecopy, and
shall be effective five (5) days after being placed in the mail, if mailed, or
upon receipt or refusal of receipt, if delivered personally or by courier or
confirmed telecopy, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company:
Environmental Products & Technologies Corporation
5380 Sterling Center Drive
Westlake Village, CA 91301
Telecopy: 818-865-2205
Attn: Marvin Mears, President
with a copy simultaneously transmitted by like means to:
Mark J. Richardson, Esquire
1299 Ocean Avenue, Suite 900
Santa Monica, CA 90401
Telecopy: 310-393-2004
and if to any 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 with this Section 11(b).
c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in the State of Delaware. The Company irrevocably consents
to the jurisdiction of the United States federal courts and the state courts
located in the State of Delaware in any suit or proceeding based on or arising
17
<PAGE> 19
under this Agreement and irrevocably agrees that all claims in respect of such
suit or proceeding may be determined in such courts. The Company irrevocably
waives the defense of an inconvenient forum to the maintenance of such suit or
proceeding. The Company further agrees that service of process upon the Company,
mailed by first class mail shall be deemed in every respect effective service of
process upon the Company in any such suit or proceeding. Nothing herein shall
affect the Investors' right to serve process in any other manner permitted by
law. The Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
e. This Agreement, the Securities Purchase Agreement (including
all schedules and exhibits thereto) and the Warrants constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
thereof. This Agreement, the Securities Purchase Agreement and the Warrants
supersede all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents, approvals and other determinations to be made by
the Investors or the Initial Investors pursuant to this Agreement shall be made
by the Investors or the Initial Investors holding a majority in interest of the
Registrable Securities (determined as if all shares of Preferred Stock and
Warrants then outstanding had been converted into or exercised for Registrable
Securities) held by all Investors or Initial Investors, as the case may be.
k. The initial number of Registrable Securities included on any
Registration Statement and each increase (if any) to the number of Registrable
Securities included thereon shall be allocated pro rata among the Investors
based on the number of Registrable Securities held by each Investor at the time
of such establishment or increase, as the case may be. In the event an Investor
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<PAGE> 20
shall sell or otherwise transfer any of such holder's Registrable Securities,
each transferee shall be allocated a pro rata portion of the number of
Registrable Securities included on a Registration Statement for such transferor.
Any shares of Common Stock included on a Registration Statement and which remain
allocated to any person or entity which does not hold any Registrable Securities
shall be allocated to the remaining Investors, pro rata based on the number of
shares of Registrable Securities then held by such Investors. For the avoidance
of doubt, the number of Registrable Securities held by any Investor shall be
determined as if all shares of Preferred Stock and Warrants then outstanding
were converted into or exercised for Registrable Securities.
l. For purposes of this Agreement, the term "business day" means
any day other than a Saturday or Sunday or a day on which banking institutions
in the State of New York are authorized or obligated by law, regulation or
executive order to close.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 21
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
By:_____________________________
Name:___________________________
Its:____________________________
INITIAL INVESTORS:
JNC OPPORTUNITY FUND LTD.
By:_____________________________
Name:___________________________
Its:____________________________
DIVERSIFIED STRATEGIES FUND, L.P.
By:_____________________________
Name:___________________________
Its:____________________________
<PAGE> 22
EXHIBIT 1
TO
REGISTRATION
RIGHTS
AGREEMENT
[Date]
[Name and address
of transfer agent]
RE: ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
Ladies and Gentlemen:
We are counsel to ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION, a
corporation organized under the laws of the State of Delaware (the "COMPANY"),
and we understand that [Name of Investor] (the "HOLDER") has purchased from the
Company (i) shares of the Company's Series A Convertible Preferred Stock (the
"PREFERRED STOCK") that are convertible into shares of the Company's Class A
Common Stock, par value $.01 per share (the "COMMON STOCK"), and (ii) warrants
(the "WARRANTS") to acquire shares of Common Stock. Pursuant to a Registration
Rights Agreement, dated as of March __1998, by and among the Company and the
signatories thereto (the "REGISTRATION RIGHTS AGREEMENT"), the Company agreed
with the Holder, among other things, to register the Registrable Securities (as
that term is defined in the Registration Rights Agreement) under the Securities
Act of 1933, as amended (the "SECURITIES ACT"), upon the terms provided in the
Registration Rights Agreement. In connection with the Company's obligations
under the Registration Rights Agreement, on ________ __, 1998, the Company filed
a Registration Statement on Form S-___ (File No. 333- _____________) (the
"REGISTRATION STATEMENT") with the Securities and Exchange Commission (the
"SEC") relating to the Registrable Securities, which names the Holder as a
selling stockholder thereunder. The Registration Statement was declared
effective by the SEC on _____________, 1998.
[Other customary introductory and scope of examination language to be
inserted]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
[Other customary language to be included.]
Very truly yours,
cc: [Name of Investor]
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Environmental Products
& Technologies Corporation on Form SB-2 of our report dated December 18, 1997
for the financial statements as of September 30, 1997 and September 30, 1996
and the years ended September 30, 1997 and 1996 appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Clumeck, Stern, Phillips & Schenkelberg
May 21, 1998
