<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 23, 1997
-----------------------------
TAMBORIL CIGAR COMPANY
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
000-22573 65-0774638
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(Commission File Number) (IRS Employer Identification No.)
2600 S.W. 3rd Avenue, Miami, FL 33129
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(Address of Principal Executive Offices) (Zip Code)
305-860-9887
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(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5. OTHER EVENTS.
On September 22, 1997, Tamboril Cigar Company (the Purchase "Company")
entered into a Convertible Debenture and Convertible Preferred Stock Purchase
Agreement (the "Purchase Agreement") among the Company, Infinity Emerging
Opportunities Limited, Summit Capital Limited and Glacier Capital Limited (each
of these a "Purchaser" and, collectively, the "Purchasers") pursuant to which
the Company agreed to sell, and the Purchasers agreed to buy, up to an aggregate
of $200,000 face amount of the Company's 8% Convertible Debentures (the
"Debentures") and $5,800,000 stated amount of the Company's Series B Convertible
Preferred Stock, all upon the terms and subject to the conditions contained in
the Purchase Agreement.
Pursuant to the Purchase Agreement, a First Tranche Closing was held on
September 23, 1997 in which the Company sold $200,000 face amount of the
Debentures and $2,800,000 stated amount of the Series B Preferred Stock. The
Company also issued a total of 225,000 warrants to purchase shares of its Common
Stock (the "Warrants") to the Purchasers (an aggregate of 105,000 warrants), the
placement agent, Refco Securities, Inc. (75,000 warrants), and Brown Simpson,
LLC (45,000 warrants). The Warrants are exercisable at any time up to the fifth
anniversary of their issuance at an exercise price of $5.89 per share (125% of
the average closing bid price of the Company's Common Stock on the five trading
days immediately preceding the closing). The Debentures, the shares of Series B
Preferred Stock and the Warrants are collectively sometimes referred to herein
as the "Securities." The offer and sale of the Securities was exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon the exemptions from registration under Sections 4(2) and
4(6) of the Securities Act and Regulation D promulgated by the Securities and
Exchange Commission (the "SEC") thereunder.
After deduction of placement agent fees and legal fees, net proceeds to the
Company were approximately $2,600,000. The Company intends to use the proceeds
of these investments for expansion of its cigar manufacturing operations in the
Dominican Republic, including completion of construction of the Company's second
manufacturing facility in the town of Tamboril, purchases of tobacco for
inventory, hiring of additional personnel (principally cigar rollers) and
repayment of debt.
The Debentures and the Series B Preferred Stock are convertible into shares
of the Company's common stock, par value $.0001 per share (the "Common Stock"),
at prices based on the quoted market value per share of the Common Stock,
subject to certain conditions set forth in the Purchase Agreement, the
Debentures and the Certificate of Designation with respect to the Series B
Preferred Stock. The Company is required to reserve for issuance, upon
conversion of the Debentures and the Series B Preferred Stock and the exercise
of the Warrants, such number of shares of its Common Stock as is equal to at
least twice the number of shares of Common Stock issuable at any time in
connection with the conversion of the Debentures and the Series B Preferred
Stock and the exercise of the Warrants. Accordingly, the Company has reserved
2,000,000 shares of Common Stock.
<PAGE>
Pursuant to a Registration Rights Agreement executed and delivered in
connection with the Purchase Agreement, the Company has agreed to file a
registration statement under the Securities Act (the "Registration Statement")
with the SEC within 20 days from the First Tranche Closing Date with respect to
the Common Stock underlying the Debentures, the Series B Preferred Stock and the
Warrants and to use its best efforts to ensure that the Registration Statement
becomes effective within 90 days from the First Tranche Closing Date. The
Company also intends to file an application for listing of the Common Stock for
trading on the Nasdaq Small Cap Stock Market prior to the effectiveness of the
Registration Statement.
Subject to meeting certain conditions set forth in the Purchase Agreement
and associated documentation, which conditions principally involve the
effectiveness of the Registration Statement and the Nasdaq listing and the
trading levels and prices of the Common Stock, the Company has the option to
require the Purchasers to purchase up to an additional $3,000,000 stated amount
of Series B Preferred Stock in two tranches of $1,500,000 each on a date from
180 to 210 days following the First Tranche Closing Date (the "Second Tranche
Closing Date") and a date from 180 to 210 days following the Second Tranche
Closing Date (the "Third Tranche Closing Date"). Pursuant to the Purchase
Agreement, the Purchasers have a right of first refusal to participate in any
equity financings and certain debt financings, if any, proposed by the Company
for a period of 12 months from the First Tranche Closing Date. The Company
plans to continue to evaluate the financing options available to it in the
equity and debt markets and to meet its future financing needs from the most
advantageous sources and upon the most advantageous terms as become available to
it from time to time. There can, of course, be no assurance that the Company
will be able to satisfy the conditions for its ability to exercise the options
to require the Purchasers to purchase the Second Tranche Shares or the Third
Tranche Shares of Series B Preferred Stock or that the Company will have access
to needed capital in the future on advantageous terms or at all.
The terms of the Series B Preferred Stock, the Debentures and the Warrants
are set forth in full in the Exhibits to this Current Report on Form 8-K. In
connection with the authorization of the Series B Preferred Stock and the
transactions under the Purchase Agreement, the Company cancelled its previously
authorized Series A Preferred Stock, of which no shares were ever issued.
The Company manufactures premium, hand-rolled cigars in the Dominican
Republic through its subsidiary, Tabacalera Tamboril, S.A. The cigars are then
sold in the United States by the Company's subsidiary, Tamboril Cigar
International, Inc.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
The following Exhibits are included in this Current Report on Form 8-K:
<PAGE>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
4.1 Convertible Debenture and Convertible Preferred Stock
Purchase Agreement dated as of September 22, 1997 among
Tamboril Cigar Company, Infinity Emerging Opportunities
Limited, Summit Capital Limited and Glacier Capital Limited,
together with all Schedules and Exhibits thereto (the
"Purchase Agreement").
4.2 Form of 8% Convertible Debenture (included as Exhibit A to
the Purchase Agreement)
4.3 Certificate of Designation of the Company's Series B
Preferred Stock (included as Exhibit D to the Purchase
Agreement)
4.4 Form of Warrant Certificate (included as Exhibit E to the
Purchase Agreement)
4.5 Registration Rights Agreement dated as of September 22, 1997
among the Company, the Purchasers and the Placement Agents
(included as Exhibit C to the Purchase Agreement)
99 Press release dated October 1, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TAMBORIL CIGAR COMPANY
----------------------
(Registrant)
Date: October 1, 1997 By: /s/ Anthony Markofsky
----------------------
Anthony Markofsky
<PAGE>
EXHIBIT 4.1
CONVERTIBLE DEBENTURE AND
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Among
TAMBORIL CIGAR COMPANY
and
THE PURCHASERS LISTED ON
THE SIGNATURE PAGES HEREOF
_____________________________
Dated as of
September 22, 1997
_____________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I
CERTAIN DEFINITIONS......................................... 1
1.1 Certain Definitions............................... 1
ARTICLE II
PURCHASE AND SALE OF CONVERTIBLE DEBENTURES AND
PREFERRED SHARES............................................ 8
2.1 Purchase and Sale................................. 8
2.2 Purchase Price.................................... 8
2.3 The Closings...................................... 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES.............................. 11
3.1 Representations, Warranties and Agreements of the
Company........................................... 11
3.2 Representations and Warranties of the Purchasers.. 18
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES............................. 20
4.1 Transfer Restrictions............................. 20
4.2 Qualification of Common Stock and Related Matter.. 22
4.3 Purchaser Ownership of Common Stock............... 22
4.4 Listing of Common Stock and Underlying Shares..... 23
4.5 Purchaser's Rights if Trading in Common Stock is
Suspended......................................... 24
4.6 No Violation of Applicable Law.................... 24
4.7 Redemption Restrictions........................... 24
4.8 Piggyback Registration Rights..................... 24
4.9 Notice of Breaches................................ 25
4.10 Conversion Obligations of the Company............. 25
4.11 Right of First Refusal............................ 25
4.12 The Warrants...................................... 26
4.13 Liquidated Damages................................ 27
4.14 Restrictive Covenants............................. 28
</TABLE>
i
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<TABLE>
<CAPTION>
<S> <C>
ARTICLE V
CONDITIONS.................................................. 35
5.1 Conditions Precedent to the Obligation of the
Company to Sell the Convertible Debentures and
the First Tranche Shares.......................... 35
5.2 Conditions Precedent to the Obligation of each
Purchaser to Purchase the Second Tranche Shares
and the Third Tranche Shares...................... 39
ARTICLE VI
TERMINATION................................................. 42
6.1 Termination by Mutual Consent..................... 42
6.2 Termination by the Company........................ 43
6.3 Termination by the Purchasers..................... 43
ARTICLE VII
MISCELLANEOUS............................................... 45
7.1 Fees and Expenses................................. 45
7.2 Entire Agreement, Amendments...................... 45
7.3 Notices........................................... 46
7.4 Amendments; Waivers............................... 47
7.5 Headings.......................................... 47
7.6 Successors and Assigns............................ 47
7.7 No Third-Party Beneficiaries...................... 47
7.8 Governing Law..................................... 48
7.9 Survival.......................................... 48
7.10 Execution......................................... 48
7.11 Publicity......................................... 48
7.12 Severability...................................... 48
</TABLE>
LIST OF SCHEDULES:
Schedule 2.3(a) - Securities to be Acquired at First Tranche Closing
Schedule 3.1(a) - Subsidiaries
Schedule 3.1(c) - Capitalization and Registration Rights
Schedule 3.1(f) - Consents and Approvals
Schedule 3.1(g) - Litigation and Claims
Schedule 3.1(h) - Defaults and Violations
Schedule 3.1(i) - Insurance
Schedule 3.1(j) - Issuances of Securities
Schedule 3.1(r) - Leases
ii
<PAGE>
LIST OF EXHIBITS:
Exhibit A - Form of 8% Convertible Debentures
Exhibit B - Form of Escrow Agreement
Exhibit C - Form of Registration Rights Agreement
Exhibit D - Series B Terms
Exhibit E - Form of Warrant Certificate
Exhibit F - Form of Company Counsel Legal Opinion
Exhibit G - Form of Instruction Letter to Transfer Agent
iii
<PAGE>
THIS CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT (this "Agreement"), is made and entered into as of September 22, 1997,
---------
among Tamboril Cigar Company, a corporation organized and existing under the
laws of the State of Delaware (the "Company"), and the purchasers listed on the
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signature pages hereof (collectively, the "Purchasers").
----------
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers and the Purchasers
desire to acquire (i) an aggregate of $200,000 principal amount of the Company's
8% Convertible Debentures (as defined below), due September 22, 1999, and (ii)
shares of the Company's Series B Convertible Preferred Stock, par value $.0001
per share, with an aggregate stated value of up to $5,800,000 (the "Series B
--------
Preferred Stock").
- ---------------
IN CONSIDERATION of the mutual covenants contained in this Agreement, the
Company and each Purchaser agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.1 Certain Definitions. As used in this Agreement, and unless the
-------------------
context requires a different meaning, the following terms have the meanings
indicated:
"Affiliate" means, with respect to any Person, any Person that, directly or
---------
indirectly, controls, is controlled by or is under common control with such
Person. For the purposes of this definition, "control" (including, with
---------
correlative meanings, the terms "controlled by" and "under common control with")
------------- -------------------------
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities or by contract or otherwise.
"Agreement" shall have the meaning set forth in the introductory paragraph
---------
to this Agreement.
"Appraiser" means a nationally recognized or major regional investment
---------
banking firm or firm of independent certified public accountants of national
standing retained to determine the Warrant Repurchase Price in accordance with
the terms hereof.
"Asset Sale" shall have the meaning set forth in Section 4.14(s).
---------- ---------------
"Balance Sheet" shall have the meaning set forth in Section 3.1(k).
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"Balance Sheet Date" shall have the meaning set forth in Section 3.1(k).
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"Brown Simpson" shall have the meaning set forth in Section 2.3(a).
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1
<PAGE>
"Business Day" means any day except Saturday, Sunday and any day which
------------
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government actions to close.
"Cash Equivalents" means (i) securities issued or directly and fully
----------------
guaranteed or insured as to principal and interest by the United States of
America or any agency or instrumentality thereof (provided that the full faith
and credit of the United States of America is pledged in support thereof),
maturing within one year of the date of acquisition, (ii) time deposits and
certificates of deposit of any domestic commercial bank having combined capital,
surplus and undivided profits of not less than $100,000,000 (including a
domestic branch of a foreign bank) whose outstanding senior long-term debt
securities are rated, or that is a wholly owned Subsidiary of a bank holding
company whose outstanding senior long-term debt securities are rated, either A-
or higher by Standard & Poor's Ratings Service or A3 or higher by Moody's
Investors Service, Inc., maturing within one year of the date of acquisition,
(iii) repurchase obligations with a term of not more than 7 days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (ii) above, (iv) commercial paper
rated at least A-1 or the equivalent thereof by Standard & Poor's Ratings
Service or at least P-1 or the equivalent thereof by Moody's Investors Service,
Inc., maturing within one year after the date of acquisition and (v) investments
in money market funds substantially all of whose assets are comprised of
securities of the types described in clauses (i) through (iv) above.
"Change of Control" shall have the meaning set forth in Section 5.1(b).
----------------- --------------
"Closing Date" shall have the meaning set forth in Section 2.3(c).
------------ --------------
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the Company's Common Stock, par value $.0001 per
------------
share.
"Company" shall have the meaning set forth in the introductory paragraph to
-------
this Agreement.
"Conversion Date," when used in connection with the Convertible Debentures,
---------------
shall have the meaning set forth in the Convertible Debentures and, when used in
connection with the Series B Preferred Stock, shall have the meaning set forth
in the Series B Terms.
"Conversion Price," when used in connection with the Convertible
-----------------
Debentures, shall have the meaning set forth in the Convertible Debentures and,
when used in connection with the Series B Preferred Stock, shall have the
meaning set forth in the Series B Terms.
"Conversion Ratio," when used in connection with the Convertible
----------------
Debentures, shall have the meaning set forth in the Convertible Debentures and,
when used in connection with the Series B Preferred Stock, shall have the
meaning set forth in the Series B Terms.
2
<PAGE>
"Convertible Debentures" means the Company's 8% Convertible Debentures, due
----------------------
August 29, 1999, in the form attached hereto as Exhibit A, to be issued in
---------
accordance with and subject to the terms and conditions hereof.
"Deadline" shall have the meaning set forth in Section 4.13.
-------- ------------
"Debt" of any Person means at any date, without duplication, (i) all
----
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes, or other similar instruments
issued by such Person, (iii) all obligations of such Person as lessee which (x)
are capitalized in accordance with GAAP or (y) arise pursuant to sale-leaseback
transactions, (iv) all reimbursement obligations of such Person in respect of
letters of credit or other similar instruments, (v) all Debt of others secured
by a Lien on any asset of such Person, whether or not such Debt is otherwise an
obligation of such Person and (vi) all Debt of others Guaranteed by such Person.
"Default" means any event or condition which constitutes an Event of
-------
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Disclosure Materials" means the SEC Documents, the Schedules to this
--------------------
Agreement, and any other written information furnished to the Purchasers by or
on behalf of the Company in connection with the transactions contemplated
hereby.
"Environmental Laws" means any and all federal, state, local and foreign
------------------
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment, including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the cleanup or other
remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor statute.
"Escrow Agent" means the Law Offices of Brian W Pusch, 29 West 57th Street,
------------
New York, New York 10019.
"Escrow Agreement" means that certain Escrow Agreement, dated the date
----------------
hereof, between the Company, the Purchasers and the Escrow Agent substantially
in the form attached hereto as Exhibit B.
---------
3
<PAGE>
"Event of Default," when used in connection with the Convertible
----------------
Debentures, shall have the meaning set forth in the Convertible Debentures and,
when used in connection with the Series B Preferred Stock, shall have the
meaning set forth in the Series B Terms.
"Exchange Act" shall have the meaning set forth in Section 3.1(k).
------------ --------------
"First Tranche Closing" shall have the meaning set forth in Section 2.3(a).
--------------------- --------------
"First Tranche Closing Date" shall have the meaning set forth in Section
-------------------------- -------
2.3(a).
- ------
"First Tranche Closing Expiration Date" shall have the meaning set forth in
-------------------------------------
Section 2.3(a).
- --------------
"First Tranche Net Proceeds" shall have the meaning set forth in Section
-------------------------- -------
2.3(a).
- ------
"First Tranche Purchase Price" shall have the meaning set forth in Section
---------------------------- -------
2.3(a).
- ------
"First Tranche Shares" shall have the meaning set forth in Section 2.3(a).
-------------------- --------------
"GAAP" shall have the meaning set forth in Section 3.1(k).
---- --------------
"Guarantee" by any Person means any obligation, contingent or otherwise, of
---------
such Person directly or indirectly guaranteeing (whether by virtue of
partnership arrangements, by agreement to keep well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain a minimum net worth,
financial ratio or similar requirements, or otherwise) any Debt of any other
Person and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such Debt or
(ii) entered into for the purpose of assuring in any other manner the holder of
such Debt of the payment thereof or to protect such holder against loss in
respect thereof (in whole or in part); provided that the term Guarantee shall
--------
not include endorsements for collection or deposit in the ordinary course of
business. The term Guarantee used as a verb has a corresponding meaning.
"Holder Conversion Notice," when used in connection with the Convertible
------------------------
Debentures, shall have the meaning set forth in the Convertible Debentures and,
when used in connection with the Series B Preferred Stock, shall have the
meaning set forth in the Series B Terms.
"Intellectual Property" shall have the meaning set forth in Section 3.1(t).
--------------------- --------------
"Investment" means any investment in any Person, whether by means of share
----------
purchase, partnership interest, capital contribution, loan, time deposit or
otherwise.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
----
encumbrance, right of first refusal, charge or security interest of any kind in
or on such asset or the revenues or income thereon or therefrom.
4
<PAGE>
"Limitation on Conversion" shall have the meaning set forth in Section 4.3.
------------------------ -----------
"Majority Holders" means (i) as of the First Tranche Closing Date, the
----------------
Purchasers and (ii) at any time thereafter, the holders of more than 50% in
aggregate principal amount of the Convertible Debentures outstanding at such
time.
"Market Price" as at any date shall mean the average Per Share Market Value
------------
for the five (5) Trading Days immediately preceding such date.
"Material Adverse Effect" shall have the meaning set forth in Section
----------------------- -------
3.1(a).
- ------
"Munsch Hardt" shall have the meaning set forth in Section 2.3(a).
------------ --------------
"Net Cash Proceeds" means, with respect to any transaction, the total
-----------------
amount of cash proceeds received by the Company or any Subsidiary less (i)
reasonable underwriters' fees, brokerage commissions, reasonable professional
fees and other customary out-of-pocket expenses payable in connection with such
transaction, (ii) in the case of dispositions of assets, (A) actual transfer
taxes (but not income taxes) payable with respect to such dispositions, and (B)
the amount of Debt, if any, secured by a Lien on the asset or assets disposed of
and required to be, and actually repaid by the Company or any Subsidiary in
connection therewith, and any trade payables specifically relating to such asset
or assets sold by the Company or any Subsidiary that are not assumed by the
purchaser of such asset or assets.
"Original Issue Date," when used in connection with the Convertible
-------------------
Debentures, shall have the meaning set forth in the Convertible Debentures and,
when used in connection with the Series B Preferred Stock, shall have the
meaning set forth in the Series B Terms.
"Per Share Market Value," when used in connection with the Convertible
----------------------
Debentures, shall have the meaning set forth in the Convertible Debentures and,
when used in connection with the Series B Preferred Stock, shall have the
meaning set forth in the Series B Terms.
"Permits" means all domestic and foreign licenses, permits and approvals
-------
required for the full operation of the Company and the Subsidiaries, including
state, federal, city and county permits and approvals.
"Permitted Debt" shall have the meaning set forth in Section 4.14(h).
-------------- ---------------
"Person" means an individual or a corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Placement Agent" means Refco Securities, Inc.
---------------
"Private Placement" shall have the meaning set forth in Section 4.11.
----------------- ------------
5
<PAGE>
"Private Placement Notice" shall have the meaning set forth in Section
------------------------ -------
4.11.
- ----
"Purchasers" shall have the meaning set forth in the introductory paragraph
----------
to this Agreement.
"Purchasers' Representative" shall mean HW Partners, L.P., a Texas limited
--------------------------
partnership.
"Registration Rights Agreement" means the Registration Rights Agreement,
-----------------------------
dated as of the date hereof, by and between the Company and the Purchasers, in
the form attached hereto as Exhibit C.
---------
"Required Approvals" shall have the meaning set forth in Section 3.1(f).
------------------ --------------
"Restricted Payment" means, with respect to any Person, (i) any dividend or
------------------
other distribution on any shares of capital stock of such Person (except
dividends payable solely in shares of capital stock of the same or junior class
of such Person and dividends payable by the Company on the Series B Preferred
Stock), (ii) any payment on account of the purchase, redemption, retirement or
acquisition of (a) any shares of such Person's capital stock or (b) any option,
warrant or other right to acquire shares of such Person's capital stock or (iii)
any loan, or advance or capital contribution to any Person owning any capital
stock of such Person (a "Stockholder") other than relocation, travel or like
-----------
advances to officers and employees in the ordinary course of business.
"Revolving Credit Debt" means any borrowing by the Company under a
---------------------
revolving credit facility, provided the amount of Debt owed thereunder is
required to be or is reduced to zero for at least thirty (30) consecutive days
during the fiscal year in which such facility is established.
"SEC Documents" shall have the meaning set forth in Section 3.1(k).
------------- --------------
"Second Tranche Closing" shall have the meaning set forth in Section
---------------------- -------
2.3(b).
- ------
"Second Tranche Closing Date" shall have the meaning set forth in Section
--------------------------- -------
2.3(b).
- ------
"Second Tranche Closing Expiration Date" shall have the meaning set forth
--------------------------------------
in Section 2.3(b).
--------------
"Second Tranche Shares" has the meaning set forth in Section 2.3(b).
--------------------- --------------
"Securities Act" shall have the meaning set forth in Section 3.1(j).
-------------- --------------
"Series A Preferred Stock" shall have the meaning set forth in Section
------------------------ -------
3.1(c).
- ------
"Series B Designation" shall have the meaning set forth in Section 2.1(b).
-------------------- --------------
"Series B Preferred Stock" shall have the meaning set forth in the recital
------------------------
to this Agreement.
"Series B Terms" shall have the meaning set forth in Section 2.1(b).
-------------- --------------
6
<PAGE>
"Shares" shall have the meaning set forth in Section 2.1(c).
------ --------------
"Subsequent Financing Notice" shall have the meaning set forth in Section
--------------------------- -------
2.3(b).
- ------
"Subsidiaries" shall have the meaning set forth in Section 3.1(a).
------------ --------------
"Third Tranche Closing" shall have the meaning set forth in Section 2.3(c).
--------------------- --------------
"Third Tranche Closing Date" shall have the meaning set forth in Section
-------------------------- -------
2.3(c).
- ------
"Third Tranche Closing Expiration Date" shall have the meaning set forth in
-------------------------------------
Section 2.3(c).
- --------------
"Trading Day," when used in connection with the Convertible Debentures,
-----------
shall have the meaning set forth in the Convertible Debentures and, when used in
connection with the Series B Preferred Stock, shall have the meaning set forth
in Series B Terms.
"Transaction Documents" shall have the meaning set forth in Section 3.1(b).
--------------------- --------------
"Transfer Agent" means Continental Stock Transfer & Trust Company, the
--------------
transfer agent for the Company's Common Stock.
"Underlying Securities Registration Statement" shall have the meaning set
--------------------------------------------
forth in Section 3.1(f).
--------------
"Underlying Shares" shall have the meaning set forth in Section 3.1(d).
----------------- --------------
"Warrant" shall have the meaning set forth in Section 4.12.
------- ------------
"Warrant Exercise Price" means, with respect to any Warrant, the exercise
----------------------
price thereof set forth therein.
"Warrant Repurchase Price" with respect to any Warrant delivered hereunder
------------------------
shall equal (A) if the average Per Share Market Value for the five Trading Days
immediately preceding the date of the notice triggering a repurchase hereunder
or the date of payment in full of the repurchase price calculated under Section
-------
4.5, whichever is greater, is greater than the Warrant Exercise Price, then the
- ---
product of (1) the number of shares of Common Stock issuable upon exercise in
full of such Warrant (less such number of shares of Common Stock as shall have
been previously issued upon conversion of such Warrant) and (2) the average Per
Share Market Value for the five Trading Days immediately preceding (a) the date
of the notice triggering such repurchase or (b) the date of payment in full of
the repurchase price calculated under Section 4.5, whichever is greater, less
-----------
the Warrant Exercise Price; or (B) if the average Per Share Market Value for the
five Trading Days immediately preceding the date of the notice triggering such
repurchase or the date of payment in full of such repurchase price, whichever is
greater, is less than or equal to the Warrant Exercise Price, then such amount
as is determined in good faith by the Purchasers, provided that, if the Company
notifies the
7
<PAGE>
Purchasers within 10 Business Days of its receipt of such Purchaser valuation
that it disagrees with such valuation, within 10 Business Days of such Company
notice, an Appraiser mutually acceptable to each of the Purchasers and the
Company shall determine such amount; provided, however, if the Company and the
-------- -------
Purchasers fail to appoint such mutually acceptable Appraiser within 10 Business
Days of the expiration of such 10 day period, each of the Company and the
Purchasers shall appoint an Appraiser, who (within 10 Business Days of such
appointment) shall appoint a third Appraiser to determine conclusively the
repurchase price for such Warrant, with the fees and disbursements of any such
Appraiser being shared equally by the Company and the Purchasers.
"Warrant Shares" shall have the meaning set forth in Section 3.1(d).
-------------- --------------
ARTICLE II
PURCHASE AND SALE OF CONVERTIBLE DEBENTURES AND
PREFERRED SHARES
2.1 Purchase and Sale.
-----------------
(a) Subject to the terms and conditions set forth herein, the Company
shall issue and sell and the Purchasers shall purchase an aggregate principal
amount of $200,000 of Convertible Debentures and up to 116,000 shares of Series
B Preferred Stock in up to three tranches.
(b) The Series B Preferred Stock shall have the respective rights,
preferences and privileges set forth in Exhibit D attached hereto (the "Series B
--------- --------
Terms"), which shall be incorporated into a Certificate of Designation to be
- -----
approved by the Purchasers and filed on or prior to the First Tranche Closing
Date by the Company with the Secretary of State of Delaware (the "Series B
--------
Designation").
- -----------
2.2 Purchase Price. The purchase price per Share shall be $50.
--------------
2.3 The Closings.
------------
(a) The First Tranche Closing.
-------------------------
(i) The closing into escrow of the purchase and sale of the
Convertible Debentures and 56,000 shares of Series B Preferred Stock (the
"First Tranche Shares") shall take place at the offices of Munsch Hardt
---------------------
Kopf Harr & Dinan, P.C. ("Munsch Hardt"), 4000 Fountain Place, 1445 Ross
------------
Avenue, Dallas, Texas 75202, immediately following the execution hereof or
such later date as the parties shall agree, but not prior to the date that
the conditions set forth in Section 5.1 have been satisfied or waived by
the appropriate party, and provided that the First Tranche Closing may not
occur later than September 26, 1997 (the "First Tranche Closing Expiration
--------------------------------
Date"). The date of the First Tranche Closing is hereinafter referred to
----
as the "First Tranche Closing Date." At the First Tranche Closing, the
--------------------------
Company shall sell and issue to the Purchasers and the Purchasers shall
purchase, in the proportions as
8
<PAGE>
set forth on Schedule 2.3(a) attached hereto, the Convertible Debentures
---------------
for an aggregate purchase price of $200,000 and the First Tranche Shares
for an aggregate purchase price of $2,800,000 (collectively, the "First
-----
Tranche Purchase Price").
----------------------
(ii) At the First Tranche Closing and in the manner described in
the Escrow Agreement, (1) the Company shall deliver to the Escrow Agent (A)
the Convertible Debentures, Warrants to acquire the number of shares of
Common Stock specified in Section 4.12, and one or more stock certificates
representing the First Tranche Shares registered in the names and in the
amounts as specified in Schedule 2.3(a) hereto, (B), Warrants to acquire
---------------
the number of shares of Common Stock specified in Section 4.12 registered
in the name of Brown Simpson, LLC ("Brown Simpson"), and (C) Warrants to
-------------
acquire the number of shares of Common Stock specified in Section 4.12
registered in the name of the Placement Agent; (2) each Purchaser shall
deliver by wire transfer to the Escrow Agent in immediately available funds
in U.S. dollars an amount equal to the portion of the aggregate First
Tranche Purchase Price of the Convertible Debentures and First Tranche
Shares to be purchased by it on the First Tranche Closing Date, in the
proportions as set forth on Schedule 2.3(a) attached hereto (such amounts,
---------------
less the fees and disbursements of the Placement Agent and the legal
counsel contemplated in Section 7.1, being referred to herein as the "First
-----
Tranche Net Proceeds"); and (3) the Company shall deliver to the Purchasers
--------------------
all other documents, instruments and writings required to have been
delivered at or prior to the First Tranche Closing by the Company pursuant
to this Agreement and the Registration Rights Agreement and the Purchasers
shall deliver to the Company all documents, instruments and writings
required to have been delivered at or prior to the First Tranche Closing by
each Purchaser pursuant to this Agreement and the Registration Rights
Agreement. On the First Tranche Closing Date, the Escrow Agent shall
deliver the Convertible Debentures, the First Tranche Shares and the
Warrants described in Section 2.3(a)(ii) to or as directed by the
Purchasers, Brown Simpson and the Placement Agent, as applicable, in
accordance with the Escrow Agreement and shall disburse the First Tranche
Net Proceeds to the Company and the Placement Agent fees to the Placement
Agent, in each case in accordance with the terms of the Escrow Agreement.
(b) The Second Tranche Closing.
--------------------------
(i) The closing of the purchase and sale of the shares of
Series B Preferred Stock (the "Second Tranche Shares") to be issued and
---------------------
sold at such closing in accordance herewith (the "Second Tranche Closing")
----------------------
shall take place at the offices of Munsch Hardt on such date (which may not
be prior to the 30th day after receipt of the notice described hereafter in
this paragraph (b)) as the Company may designate in a written notice to the
Purchasers' Representative (a "Subsequent Financing Notice") relating to
---------------------------
the Second Tranche Shares, which the Company may deliver no earlier than
150 days after the First Tranche Closing Date, and no later than 180 days
after the First Tranche Closing Date (the "Second Tranche Closing
----------------------
Expiration Date"), which Subsequent Financing Notice shall set forth the
---------------
number of Second Tranche Shares (which shall not exceed 30,000 shares of
Series B Preferred Stock) that the Company intends to sell to the
Purchasers hereunder, provided, however, that in no case shall the Second
-------- -------
Tranche Closing take place unless and until the conditions listed in
Section 5.2 have been satisfied or waived by the appropriate party. Unless
9
<PAGE>
the Purchasers' Representative notifies the Company otherwise, the Second
Tranche Shares shall be acquired by the Purchasers in the same proportion
that the First Tranche Shares were acquired by them, as reflected on
Schedule 2.3(a) attached hereto. The date of the Second Tranche Closing is
---------------
hereinafter referred to as the "Second Tranche Closing Date." The Company
---------------------------
has no obligation to send the Subsequent Financing Notice for the Second
Tranche Closing or to sell the Second Tranche Shares to the Purchasers.
(ii) At the Second Tranche Closing, (1) the Company shall
deliver, or shall cause the Transfer Agent to deliver, to the Purchasers,
Brown Simpson, and the Placement Agent, as applicable: (A) one or more
stock certificates representing the Second Tranche Shares to be issued and
delivered to the Purchasers registered in their names and in the respective
amounts as specified in Section 2.3(b)(i), and Warrants to acquire the
number of shares of Common Stock specified in Section 4.12 registered in
the names of the Purchasers, (B) Warrants to acquire the number of shares
of Common Stock specified in Section 4.12 registered in the name of Brown
Simpson, and (C) Warrants to acquire the number of shares of Common Stock
specified in Section 4.12 registered in the name of the Placement Agent;
(2) the Purchasers shall deliver to the Company the purchase price for the
Second Tranche Shares being purchased as determined pursuant to Section 2.2
in immediately available funds in U.S. dollars by wire transfer; and (3)
the Company shall deliver to the Purchasers all other documents,
instruments and writings required to have been delivered at or prior to the
Second Tranche Closing by the Company pursuant to this Agreement and the
Registration Rights Agreement, and the Purchasers shall deliver to the
Company all documents, instruments and writings required to have been
delivered at or prior to the Second Tranche Closing by the Purchasers
pursuant to this Agreement and the Registration Rights Agreement.
(c) The Third Tranche Closing.
-------------------------
(i) The closing of the purchase and sale of the shares of Series
B Preferred Stock (the "Third Tranche Shares" and, collectively with the
--------------------
First Tranche Shares and the Second Tranche Shares, the "Shares") to be
------
issued and sold at such closing in accordance herewith (the "Third Tranche
-------------
Closing") shall take place at the offices of Munsch Hardt on such date
-------
(which may not be prior to the 30th day after receipt of the Subsequent
Financing Notice relating to the Third Tranche Shares) as the Company shall
designate in the Subsequent Financing Notice relating to the Third Tranche
Shares, which the Company may deliver no earlier than 150 days after the
Second Tranche Closing Date and no later than 180 days after the Second
Tranche Closing Date (the "Third Tranche Closing Expiration Date"), which
-------------------------------------
Subsequent Financing Notice shall set forth the number of Third Tranche
Shares (which shall not exceed 30,000 shares of Series B Preferred Stock)
that the Company intends to sell to the Purchasers hereunder, provided,
--------
however, that in no case shall the Third Tranche Closing take place unless
-------
and until the conditions listed in Section 5.2 have been satisfied or
waived by the appropriate party. Unless the Purchasers' Representative
notifies the Company otherwise, the Third Tranche Shares shall be acquired
by the Purchasers in the same proportion that the First Tranche Shares were
acquired by them, as reflected on Schedule 2.3(a) attached hereto. The
---------------
date of the Third Tranche Closing is hereinafter referred to as the
10
<PAGE>
"Third Tranche Closing Date." The First Tranche Closing Date, the Second
--------------------------
Tranche Closing Date or the Third Tranche Closing Date are sometimes
referred to herein as a "Closing Date." The Company has no obligation to
------------
send the Subsequent Financing Notice for the Third Tranche Closing or to
sell the Third Tranche Shares to the Purchasers.
(ii) At the Third Tranche Closing, (1) the Company shall
deliver, or shall cause the Transfer Agent to deliver, to the Purchasers,
Brown Simpson, and the Placement Agent, as applicable: (A) one or more
stock certificates representing the Third Tranche Shares to be issued and
delivered to the Purchasers registered in their names and in the amounts as
specified in Section 2.3(c)(i) hereto, and Warrants to acquire the number
of shares of Common Stock specified in Section 4.12 registered in the names
of the Purchasers, (B) Warrants to acquire the number of shares of Common
Stock specified in Section 4.12 registered in the name of Brown Simpson,
and (C) Warrants to acquire the number of shares of Common Stock specified
in Section 4.12 registered in the name of the Placement Agent; (2) the
Purchasers shall deliver to the Company the purchase price for the Third
Tranche Shares being purchased as determined pursuant to Section 2.2 in
immediately available funds in U.S. dollars by wire transfer; and (3) the
Company shall deliver to the Purchasers all other documents, instruments
and writings required to have been delivered at or prior to the Third
Tranche Closing by the Company pursuant to this Agreement and the
Registration Rights Agreement, and the Purchasers shall deliver to the
Company all documents, instruments and writings required to have been
delivered at or prior to the Third Tranche Closing by the Purchasers
pursuant to this Agreement and the Registration Rights Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations, Warranties and Agreements of the Company. The
---------------------------------------------------------
Company hereby makes the following representations and warranties to the
Purchasers as of the date hereof and as of each Closing Date:
(a) Organization and Qualification. The Company is a corporation,
------------------------------
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, with the requisite corporate power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth on Schedule
--------
3.1(a) attached hereto (collectively, the "Subsidiaries"). Each of the
- ------ ------------
Subsidiaries is a corporation, duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, with the full
corporate power and authority to own and use its properties and assets and to
carry on its business as currently conducted. Each of the Company and the
Subsidiaries is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
would not, individually or in the aggregate, have a material adverse effect on
the results of operations,
11
<PAGE>
assets, prospects, or financial condition of the Company and the Subsidiaries,
taken as a whole (a "Material Adverse Effect").
-----------------------
(b) Authorization, Enforcement. The Company has the requisite
--------------------------
corporate power and authority to enter into and to consummate the transactions
contemplated hereby and by the Warrants, the Series B Designation, the
Registration Rights Agreement, the Convertible Debentures and the Escrow
Agreement and to otherwise to carry out its obligations hereunder and
thereunder. This Agreement, the Warrants, the Series B Designation, the
Registration Rights Agreement, the Convertible Debentures and the Escrow
Agreement are collectively referred to herein as the "Transaction Documents".
---------------------
The execution and delivery of each of this Agreement and each of the other
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby has been duly authorized by all
necessary action on the part of the Company. Each of this Agreement and each of
the other Transaction Documents has been or will be duly executed by the Company
and when delivered in accordance with the terms hereof or thereof will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.
(c) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is set forth on Schedule 3.1(c). No shares of the
---------------
Company's Series A Preferred Stock, par value $.0001 per share (the "Series A
--------
Preferred Stock"), have been issued as of the date hereof and prior to First
- ---------------
Tranche Closing Date all Series A Preferred Stock will be canceled. No shares
of Common Stock are entitled to preemptive or similar rights, nor is any holder
of the Common Stock entitled to preemptive or similar rights arising out of any
agreement or understanding with the Company by virtue of this Agreement. Except
as disclosed in Schedule 3.1(c), there are no outstanding options, warrants,
---------------
script, rights to subscribe to, registration rights, calls or commitments of any
character whatsoever relating to, or, except as a result of the purchase and
sale of the Convertible Debentures, the Shares and the Warrants hereunder,
securities, rights or obligations convertible into or exchangeable for, or
giving any person any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. Neither the Company nor any Subsidiary is in violation of any of
the provisions of its respective Certificate of Incorporation, bylaws or other
charter documents.
(d) Issuance of Convertible Debentures, Shares and Warrants. The
-------------------------------------------------------
Convertible Debentures have been duly and validly authorized for issuance, offer
and sale pursuant to this Agreement and, when issued and delivered as provided
hereunder against payment in accordance with the terms hereof, shall be valid
and binding obligations of the Company enforceable in accordance with their
terms free and clear of all Liens. The Shares and the Warrants are duly
authorized, and when issued and paid for in accordance with the terms hereof,
shall be validly issued, fully paid and nonassessable and free and clear of all
Liens. The Company, as at each Closing Date, as the case may
12
<PAGE>
be, has and at all times while the Convertible Debentures, the Shares and any
Warrants are outstanding will maintain an adequate reserve of duly authorized
shares of Common Stock to enable it to perform its obligations under this
Agreement, the Convertible Debentures, the Warrants and the Series B Designation
and in no circumstances shall such reserved and available shares of Common Stock
be less than the sum of two times (i) the number of shares of Common Stock which
would be issuable upon conversion in full of the aggregate principal amount of
the Convertible Debentures and of the full number of the Shares that may be
issued pursuant to the terms hereof assuming in each case that all of the Shares
were issued hereunder and that such conversion occurred on the First Tranche
Closing Date (the "Underlying Shares") and (ii) the number of shares of Common
------------------
Stock which would be issuable upon exercise in full of the Warrants (the
"Warrant Shares"). When issued in accordance with the terms hereof, the
- ---------------
Convertible Debentures and the Series B Designation, the Underlying Shares will
be duly authorized, validly issued, fully paid and nonassessable and free and
clear of all Liens; and when issued upon exercise of the Warrants in accordance
with their respective terms, the Warrant Shares will be duly authorized, validly
issued, fully paid and nonassessable and free and clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of this
------------
Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
do not and will not (i) conflict with or violate any provision of its
Certificate of Incorporation or bylaws (each as amended through the date hereof)
or (ii) subject to obtaining the consents referred to in Section 3.1(f),
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company or
its Subsidiaries is subject (including, but not limited to, those of other
countries and the federal and state securities laws and regulations), or by
which any material property or asset of the Company or its Subsidiaries is bound
or affected, except in the case of clause (ii), such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect. The
business of the Company and its Subsidiaries is not being conducted in violation
of any law, ordinance or regulation of any governmental authority, except for
violations which, individually or in the aggregate, do not have a Material
Adverse Effect.
(f) Consents and Approvals. Except as specifically set forth in
----------------------
Schedule 3.1(f), neither the Company nor any Subsidiary is required to obtain
- ---------------
any consent, waiver, authorization or order of, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other person in connection with the execution,
delivery and performance by the Company of the Transaction Documents including,
but not limited to, delivery to the Purchasers of the Convertible Debentures and
the Shares (and upon the conversion of the Convertible Debentures and the
Shares, the Underlying Shares) and the Warrants (and, upon exercise of the
Warrants, the Warrant Shares) in the manner contemplated hereby and by the
Registration Rights Agreement free and clear of all Liens and encumbrances of
any nature whatsoever, except for (i) the filing of the Series B Designation
with respect to the Shares with the Secretary of State of Delaware,
13
<PAGE>
which filing shall be effected prior to the First Tranche Closing Date, and (ii)
the filing of the registration statements relating to the Underlying Shares and
the Warrant Shares contemplated by the Registration Rights Agreement (the
"Underlying Securities Registration Statement(s)") with the Commission, which
- ------------------------------------------------
shall be filed in the time periods set forth in the Registration Rights
Agreement (together with the consents, waivers, authorizations, orders, notices
and filings referred to in Schedule 3.1(f), the "Required Approvals").
--------------- ------------------
(g) Litigation; Proceedings. Except as specifically disclosed in the
-----------------------
Disclosure Materials or in Schedule 3.1(g), there is no action, suit, notice of
---------------
violation, proceeding or investigation pending or, to the best knowledge of the
Company, threatened against or affecting the Company or any of its Subsidiaries
or any of their respective properties before or by any court, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) which (i) relates to or challenges the legality, validity or
enforceability of any of the Transaction Documents, the Underlying Shares or the
Warrant Shares, (ii) could, individually or in the aggregate, have a Material
Adverse Effect or (iii) could, individually or in the aggregate, materially
impair the ability of the Company to perform fully on a timely basis its
obligations under the Transaction Documents. Carlin Equities, Inc. shall not be
entitled to any fees, commissions or compensation as a result of the execution
and delivery and performance of this Agreement and the other Transaction
Documents.
(h) No Default or Violation. Neither the Company nor any Subsidiary
-----------------------
(i) is in default under or in violation of (or will be upon notice or a lapse of
time or both) any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound, (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is in violation of any statute, rule or regulation
of any governmental authority, except as is listed on Schedule 3.1(h) or except
---------------
as would not, individually or in the aggregate, have a Material Adverse Effect.
(i) Insurance. The Company and its Subsidiaries maintain insurance in
---------
at least such amounts and against such risks such that any uninsured loss would
not have a Material Adverse Effect. All insurance coverages of the Company and
its Subsidiaries are in full force and effect and there are no past due premiums
in respect of any such insurance. Schedule 3.1(i) attached hereto sets forth a
---------------
list of all of the Company's insurance policies in effect on the date hereof.
(j) Private Offering. Assuming the accuracy of the representations
----------------
and warranties of the Purchasers set forth in Section 3.2, the offer and sale of
the Convertible Debentures, the Shares, the Warrants, the Underlying Shares and
the Warrant Shares are exempt from registration under Section 5 of the
Securities Act of 1933, as amended (the "Securities Act"). Except as is listed
--------------
on Schedule 3.1(j), the Company has not issued any securities in the last six
---------------
months. Neither the Company nor any person acting on its behalf has taken or
will take any action (including, without limitation, any offering of any
securities of the Company under circumstances which would require the
integration of such offering with the offering of the Convertible Debentures or
Shares under the Securities Act) which might subject the offering, issuance or
sale of such Convertible Debentures,
14
<PAGE>
Shares, Warrants, Underlying Shares or Warrant Shares to the registration
requirements of Section 5 of the Securities Act.
(k) Financial Information and SEC Documents. Since it became subject
---------------------------------------
to the periodic reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Company has timely filed all forms, reports
------------
and documents with the Commission required to be filed by it under the Exchange
Act through the date hereof (collectively, the "SEC Documents"). Such SEC
-------------
Documents, at the time filed, complied as to form in all material respects with
the requirements of the Exchange Act. None of the SEC Documents, including
without limitation any financial statements or schedules included therein,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading. There have been no
material adverse changes in the Company's business, properties, results of
operations, condition (financial or otherwise) or prospects since the date of
the Company's most recent SEC Document filed with the Commission which have not
been disclosed to the Purchasers in writing. The audited and unaudited
consolidated balance sheets of the Company and its Subsidiaries contained in the
SEC Documents, and the related consolidated statements of income, changes in
stockholders equity and changes in cash flows for the period ended June 30, 1997
(the consolidated balance sheet of the Company and its subsidiaries as of June
30, 1997 is hereinafter referred to as the "Balance Sheet"), including the
-------------
footnotes thereto, except as indicated therein, have been prepared in accordance
with generally accepted accounting principles ("GAAP") consistently followed
----
throughout the periods indicated, except that the unaudited financial statements
do not contain notes and may be subject to normal audit adjustments and normal
annual adjustments. The Balance Sheet fairly presents the financial condition
of the Company and its Subsidiaries at the date thereof and, except as indicated
therein, reflects all claims against and all debts and liabilities of the
Company and its Subsidiaries, fixed or contingent, as at the date thereof and
the related statements of income, stockholders' equity and changes in cash flows
fairly present the results of the operations of the Company and its Subsidiaries
and the changes in their financial position for the period indicated. Since
June 30, 1997 (the "Balance Sheet Date"), except as disclosed in the SEC
------------------
Documents, or Schedule 3.1(g) attached hereto, there has been (x) no material
---------------
adverse change in the assets or liabilities, or in the business or condition,
financial or otherwise, or in the results of operations or prospects, of the
Company and its Subsidiaries, whether as a result of any legislative or
regulatory change, revocation of any license or rights to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation, act of God, public force or otherwise and (y) no material adverse
change in the assets or liabilities, or in the business or condition, financial
or otherwise, or in the results of operations or prospects, of the Company and
its Subsidiaries except in the ordinary course of business; and no fact or
condition exists or, to the knowledge of the Company, is contemplated or
threatened which might cause such a change in the future.
(l) Compliance with ERISA and other Benefit Plans. Neither the
---------------------------------------------
Company nor any of its Subsidiaries has any employee benefit or pension plans or
arrangements that are covered by ERISA or is subject to the minimum funding
standards under Section 412 of the Code. The Company's existing benefit plans
(including profit sharing, deferred compensation, stock option, employee stock
purchase, bonus, retirement, health or insurance plans), relating to the
employees of
15
<PAGE>
the Company are duly registered where required by, and are in good standing in
all material respects under, all applicable laws; all required employer and
employee contributions and premiums under such benefit plans to the date hereof
have been made; the respective fund or funds established under such benefit
plans are funded in accordance with applicable laws; and no past service funding
liabilities exist thereunder.
(m) Environmental Matters. The costs and liabilities associated with
---------------------
Environmental Laws (including the cost of compliance therewith) will not have a
Material Adverse Effect on the business, condition (financial or otherwise),
operations, performance, properties or prospects of the Company or any
Subsidiary. Each of the Company and the Subsidiaries conducts its businesses in
compliance in all material respects with all applicable Environmental Laws
currently in effect.
(n) Taxes. All United States federal, state, county, municipality
-----
local or foreign income tax returns and all other material tax returns
(including foreign tax returns) which are required to be filed by or on behalf
of the Company and each Subsidiary have been filed and all material taxes due
pursuant to such returns or pursuant to any assessment received by the Company
and each Subsidiary have been paid except those being disputed in good faith and
for which adequate reserves have been established. The charges, accruals and
reserves on the books of the Company and each Subsidiary in respect of taxes or
other governmental charges have been established in accordance with GAAP.
(o) Investments, Joint Ventures. The Company has no subsidiaries
---------------------------
other than the Subsidiaries or other direct or indirect Investment in any
Person, and the Company is not a party to any partnership, management,
shareholders' or joint venture or similar agreement, other than the Distribution
Agreement.
(p) Full Disclosure. The information (including the Schedules to this
---------------
Agreement and the other Disclosure Materials) heretofore furnished by the
Company to the Purchasers for purposes of or in connection with this Agreement
or any transaction contemplated hereby does not, and all such information
hereafter furnished by the Company or any Subsidiary to the Purchasers will not
(in each case taken together and on the date as of which such information is
furnished), contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained therein, in
the light of the circumstances under which they are made, not misleading.
(q) Permits. (a) Each of the Company and its Subsidiaries has all
-------
material Permits as are necessary for the conduct of its business as it has been
carried on; (b) all such Permits are in full force and effect, and each of the
Company and its Subsidiaries has fulfilled and performed all material
obligations with respect to such Permits; (c) to the knowledge of the Company,
no event has occurred which allows, or after notice or lapse of time would
allow, revocation or termination by the issuer thereof or which results in any
other material impairment of the rights of the holder of any such Permit; and
(d) the Company has no reason to believe that any governmental body or agency is
considering limiting, suspending or revoking any such Permit.
16
<PAGE>
(r) Leases. Except as set forth on Schedule 3.1(r), neither the
------ ---------------
Company nor any Subsidiary is a party to any capital lease obligation with a
value greater than $100,000 or to any operating lease with an aggregate annual
rental greater than $100,000 during the life of such lease.
(s) Absence of Any Undisclosed Liabilities or Capital Calls. There
-------------------------------------------------------
are no liabilities of the Company or any Subsidiary of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or otherwise,
and there is no existing condition, situation or set of circumstances which
could reasonably be expected to result in such a liability, other than (i) those
liabilities provided for in the financial statements delivered pursuant to
Section 3.1(k) hereof and (ii) other undisclosed liabilities which, individually
or in the aggregate, would not have a Material Adverse Effect.
(t) Intellectual Property Rights. Each of the Company and its
----------------------------
Subsidiaries owns, or is licensed under, and has the rights to use, all material
patents, trademarks, trade names, copyrights, technology, know-how and processes
(collectively, "Intellectual Property") used in, or necessary for the conduct of
---------------------
its business; no claims have been asserted by any Person to the use of any such
Intellectual Property or challenging or questioning the validity or
effectiveness of any license or agreement related thereto. To the best of the
Company's and its Subsidiaries' knowledge, there is no valid basis for any such
claim and the use of such Intellectual Property by the Company and its
Subsidiaries will not infringe upon the rights of any Person.
(u) Title to Properties. Except as otherwise disclosed in the Balance
-------------------
Sheet, the Company and its Subsidiaries have good and indefeasible title to all
their respective properties reflected on the financial statements referred to in
Section 3.1(k), and there is no Lien on any asset of the Company or its
Subsidiaries. The Company does not own or lease any real property except as
reflected on the financial statements referred to in Section 3.1(k). There are
no currently effective financing statements (or their equivalent) of record in
any jurisdiction covering any tangible or intangible assets of the Company of
any Subsidiary.
(v) Eligibility for Listing on the Nasdaq SmallCap Market. After
-----------------------------------------------------
receipt by the Company from the Escrow Agent of the First Tranche Net Proceeds,
the Company will meet all applicable listing requirements for the listing of its
Common Stock on the Nasdaq SmallCap Market, as such requirements are in effect
on such date.
(w) Seniority. No class of equity securities of the Company is senior
---------
to the Shares in right of payment, whether upon liquidation, dissolution or
otherwise.
(x) Investment Company. The Company is not, and following the
------------------
issuance of the Convertible Debentures and the Shares will not be, nor is it an
Affiliate of, an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(y) Certain Fees. 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 by this Agreement, except to the
Placement Agent and as provided in Section 4.14(o).
17
<PAGE>
(z) Solicitation Materials. The Company has not (i) distributed any
----------------------
offering materials in connection with the offering and sale of the Convertible
Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant
Shares other than the Disclosure Materials to this Agreement and any amendments
and supplements thereto prepared in compliance herewith or (ii) solicited any
offer to buy or sell the Convertible Debentures, the Shares, the Warrants, the
Underlying Shares or the Warrant Shares by means of any form of general
solicitation or advertising.
(aa) Margin Requirements. The Company does not intend to, and will
-------------------
not, use the proceeds of the offer and sale of the Convertible Debentures and
Shares hereunder, directly or ultimately, (i) to purchase or carry Margin Stock
(as such term is defined under Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time) or to extend credit to
others for the purpose of purchasing or carrying Margin Stock or to refund
indebtedness originally incurred for such purpose, or (ii) for any purpose which
entails a violation of, or which is inconsistent with, the provisions of
Regulations G, T, U or X of the Board of Governors of the Federal Reserve
System.
3.2 Representations and Warranties of the Purchasers. Each of the
------------------------------------------------
Purchasers, severally and not jointly, hereby represents and warrants to the
Company as follows as of the date hereof and as of each Closing Date:
(a) Organization; Authority. Such Purchaser is a corporation or
-----------------------
limited partnership, as the case may be, duly incorporated or organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated hereby and by the
Registration Rights Agreement and the Escrow Agreement and otherwise to carry
out its obligations hereunder and thereunder. The acquisition of the
Convertible Debentures, Shares and Warrants to be purchased by such Purchaser
hereunder has been duly authorized by all necessary action on the part of such
Purchaser. Each of this Agreement, the Registration Rights Agreement, and the
Escrow Agreement has been duly executed and delivered by such Purchaser and
constitutes the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to, or affecting generally
the enforcement of, creditors rights and remedies or by other general principles
of equity.
(b) Investment Intent. Such Purchaser is acquiring the Convertible
-----------------
Debentures, the Shares and the Warrants to be purchased by it hereunder, and
will acquire the Underlying Shares and the Warrant Shares relating to such
Convertible Debentures, Shares and Warrants, for its own account for investment
purposes only and not with a view to or for distributing or reselling such
Convertible Debentures, Shares, Underlying Shares, Warrants or Warrant Shares or
any part thereof or interest therein, without prejudice, however, to such
Purchaser's right, subject to the provisions of this Agreement and the
Registration Rights Agreement, at all times to sell or otherwise dispose of all
or any part of such Convertible Debentures, Shares, Underlying Shares, Warrants
or Warrant Shares pursuant to under an effective registration statement under
the Securities Act or pursuant to
18
<PAGE>
an available exemption from the registration requirements thereunder and in
compliance with applicable state securities laws.
(c) Purchaser Status. At the time such Purchaser was offered the
----------------
Convertible Debentures, Shares and Warrants to be acquired by it hereunder, it
was and at the date hereof, it is, and at each date it exercises Warrants it
will be, an "accredited investor" as defined in Rule 501(a) under the Securities
Act.
(d) Investment Company. The Purchaser is not, and following issuance
------------------
of the Convertible Debentures and the Shares will not be, nor is it an Affiliate
of an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
(e) Experience of Purchaser. Such Purchaser, either alone or together
-----------------------
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of an investment in the securities to be acquired by it hereunder, and has
so evaluated the merits and risks of such investment.
(f) Ability of Purchaser to Bear Risk of Investment. Such Purchaser
-----------------------------------------------
is able to bear the economic risk of an investment in the securities to be
acquired by it hereunder and, at the present time, is able to afford a complete
loss of such investment.
(g) Prohibited Transactions. The securities to be acquired by such
-----------------------
Purchaser hereunder are not being acquired, directly or indirectly, with the
assets of any "employee benefit plan," within the meaning of Section 3(3) of
ERISA.
(h) Access to Information. Such Purchaser acknowledges receipt of the
---------------------
Disclosure Materials and further acknowledges that it has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and conditions
of the securities offered hereunder and the merits and risks of investing in
such securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment in such securities;
and (iii) the opportunity to obtain such additional information which the
Company possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the investment
and to verify the accuracy and completeness of the information contained in the
Disclosure Materials.
(i) Reliance. Such Purchaser understands and acknowledges that (i)
--------
the Convertible Debentures, the Shares and the Warrants being offered and sold
to it hereunder are being offered and sold without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act under Section 4(2) of the Securities Act and
(ii) the availability of such exemption depends in part on, and that the Company
will rely upon the accuracy and truthfulness of, the foregoing representations
and such Purchaser hereby consents to such reliance.
19
<PAGE>
(j) Certain Fees. No fees or commissions will be payable by any
------------
Purchaser to any broker, financial advisor, finder, investment banker, or bank
with respect to the transactions contemplated by this Agreement, except as
provided in Section 4.14(o).
The Company acknowledges and agrees that the Purchasers make no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
-----------
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
---------------------
(a) If any Purchaser should decide to dispose of any portion of the
principal amount of the Convertible Debentures or of any of the Shares or any
portion of the Warrants to be purchased by it hereunder (and upon conversion or
exercise thereof, of any Underlying Shares or Warrant Shares, as applicable),
such Purchaser understands and agrees that it may do so only (i) pursuant to an
effective registration statement under the Securities Act, (ii) to the Company
or (iii) pursuant to an available exemption or exclusion from the registration
requirements of the Securities Act. In connection with any transfer of any
Convertible Debentures, Shares, Warrants, Underlying Shares or Warrant Shares
other than pursuant (i) to an effective registration statement, (ii) to the
Company, (iii) to an affiliate of a Purchaser which is an "accredited investor"
within the meaning of Rule 501(a) under the Securities Act, provided that any
such transferee shall agree to be bound by the terms of this Agreement, and (iv)
in reliance on Rule 144 under the Securities Act, the Company may require that
the transferor provide to the Company an opinion in form and substance
reasonably satisfactory to the Company of counsel experienced in the area of
United States securities laws selected by the transferor to the effect that such
transfer does not require registration of such Convertible Debentures, Shares,
Warrants, Underlying Shares or Warrant Shares, as the case may be, under the
Securities Act.
(b) The Purchasers agree to the imprinting, so long as appropriate,
of the following legend on certificates representing the Convertible Debentures,
Shares, Underlying Shares, Warrants and Warrant Shares, to be modified as
applicable:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE [OR EXERCISABLE] HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER REGULATION D
PROMULGATED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
---------------
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
20
<PAGE>
PURSUANT TO AN AVAILABLE EXEMPTION OR EXCLUSION FROM THE REGISTRATION
REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS.
THIS [ ] IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER [AND
CONVERSION] SET FORTH IN A CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED
STOCK PURCHASE AGREEMENT, DATED AS OF SEPTEMBER __1997, BETWEEN THE COMPANY
AND THE ORIGINAL HOLDER HEREOF. A COPY OF SUCH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
Subject to Section 4.13, the legend set forth above shall be removed in
connection with any resale of Underlying Shares or Warrant Shares pursuant to an
effective registration statement under the Securities Act or sooner if, in the
opinion of counsel to the Company experienced in the area of United States
securities laws, such legend is no longer required under applicable requirements
of the Securities Act (including judicial interpretation and pronouncements
issued by the staff of the Commission). The certificates representing the
Convertible Debentures, Shares, Warrants, Underlying Shares and Warrant Shares
shall also bear any other legends required by applicable federal or state
securities laws, which legends shall be removed when, in the opinion of counsel
to the Company experienced in the applicable securities laws, such legends are
no longer required under the applicable requirements of such securities laws.
In connection therewith, the Company may request, and the Purchaser or other
transferor shall provide, such information as the Company or its counsel may
reasonably request to evaluate the propriety of removing any legends (which
shall not include any opinions of counsel). The Company agrees that it will
provide each Purchaser, upon request, with a substitute certificate or
certificates, free from such legend at such time as such legend is no longer
applicable. Each Purchaser agrees that, in connection with any transfer of
Underlying Shares or Warrant Shares by it pursuant to an effective registration
statement under the Securities Act, such Purchaser will comply with all
applicable prospectus delivery requirements of the Securities Act. The Company
makes no representation, warranty or agreement as to the availability of any
exemption from registration under the Securities Act with respect to any resale
of Convertible Debentures, Shares, Underlying Shares, Warrants or Warrant
Shares.
(c) Each Purchaser agrees that the Company shall be entitled to make
a notation on its records and give instructions to any transfer agent of the
Company in order to implement the restrictions on transfer set forth in this
Section 4.1; provided, however, that for so long as an Underlying Securities
-------- -------
Registration Statement is effective, the Company may not issue any stop transfer
instruction or make any notation on its records with respect thereto to any
transfer agent of the Company and shall issue shares of Common Stock upon a
conversion of Convertible Debentures or Shares or exercise of Warrants in
accordance with this Section 4.1.
4.2 Qualification of Common Stock and Related Matters.
-------------------------------------------------
(a) The Company shall (i) advise each Purchaser promptly after
obtaining knowledge thereof, and, if requested by either Purchaser, confirm such
advice in writing, of the
21
<PAGE>
issuance by any state securities commission of any stop order suspending the
qualification or exemption from qualification of the Convertible Debentures, the
Shares, the Warrants, the Warrant Shares or the Underlying Shares or the Common
Stock for offering or sale in any jurisdiction, or the initiation of any
proceeding for such purpose by any state securities commission or other
regulatory authority, or (ii) use its best efforts to prevent the issuance of
any stop order or order suspending the qualification or exemption from
qualification of the Convertible Debentures, the Shares, the Warrants, the
Warrant Shares or the Underlying Shares under any state securities or Blue Sky
laws, and (iii) if at any time any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption from qualification of the Convertible Debentures, the Shares, the
Warrants, the Warrant Shares or the Underlying Shares under any such laws, use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) The Company shall furnish each Purchaser, without charge, as many
copies of the Disclosure Materials, and any amendments or supplements thereto,
as such Purchaser may reasonably request. The Company consents to the use of
the Disclosure Materials, and any amendments and supplements thereto, by a
Purchaser in connection with resales of the Convertible Debentures, the Shares,
the Warrants, the Underlying Shares or the Warrant Shares.
(c) In accordance with the Registration Rights Agreement, the Company
shall qualify the Underlying Shares and the Warrant Shares under the securities
or Blue Sky laws of such jurisdictions as any Purchaser may request and shall
continue such qualification at all times through the third anniversary of the
last Closing Date; provided, however, that neither the Company nor its
-------- -------
Subsidiaries shall be required in connection therewith to qualify as a foreign
corporation where they are not now so qualified or to take any action that would
subject the Company to general service of process in any such jurisdiction where
it is not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(d) The Company shall not and shall use its best efforts to ensure
that no Affiliate of the Company shall sell, offer for sale or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the
Convertible Debentures, the Shares, the Warrants, the Underlying Shares relating
to the Shares or the Warrant Shares in a manner that would require the
registration under the Securities Act of the sale of the Convertible Debentures,
the Shares, the Warrants, the Underlying Shares or the Warrant Shares to any
Purchaser.
4.3 Purchaser Ownership of Common Stock. In addition to and not in lieu of
-----------------------------------
the limitations on conversion set forth in the Convertible Debentures, the
Series B Designation and the Warrants, the conversion and exercise rights of the
Purchasers set forth in the Convertible Debentures, the Series B Designation and
the Warrants, as applicable, shall be limited, solely to the extent required,
from time to time, such that in no instance shall the maximum number of shares
of Common Stock which the Purchasers (singularly, together with any Persons who
in the determination of such Purchasers, together with such Purchasers,
constitute a group as defined in Rule 13d-5 of the Exchange Act) may receive in
respect of any conversion of the Convertible Debentures or Shares, or exercise
of the Warrants, exceed, at any one time, an amount equal to the remainder of
(i) 4.99%
22
<PAGE>
of the then issued and outstanding shares of Common Stock of the Company
following such conversion or exercise minus (ii) the number of shares of Common
Stock of the Company then owned by the Purchasers (but exclusive of any shares
of Common Stock deemed beneficially owned due to ownership of the Convertible
Debentures, Shares and Warrants) (the foregoing being herein referred to as the
"Limitation on Conversion"); provided, however, that the Limitation on
------------------------ -------- -------
Conversion shall not apply to any forced or automatic conversion by the Company
pursuant to Section 4(b) of the Convertible Debentures or pursuant to Section
5(b) of the Series B Designation and, provided, further, that if 10 Business
-------- -------
Days have elapsed since a Purchaser shall have declared an Event of Default (in
accordance with provisions of the Convertible Debentures or the Series B
Designation, as applicable) and the Company shall not have cured such Event of
Default, the provisions of this Section 4.3 shall be null and void from and
-----------
after such date. The Company shall, promptly upon its receipt of a Holder
Conversion Notice tendered by a Purchaser (or its sole designee) under the
Convertible Debentures or the Series B Designation, as applicable, and upon its
receipt of a notice of exercise under the terms of the Warrants, notify such
Purchaser by telephone and by facsimile of the number of shares of Common Stock
outstanding on such date and the number of Underlying Shares and Warrant Shares
which would be issuable to such Purchaser (or its sole designee, as the case may
be) if the conversion requested in such Conversion Notice or exercise requested
in such exercise notice were effected in full, whereupon, notwithstanding
anything to the contrary set forth in the Convertible Debentures or the Series B
Designation or the Warrants, such Purchaser may within one Trading Day of its
receipt of the Company notice required by this Section by telephone or by
facsimile revoke such conversion or exercise to the extent (in whole or in part)
that it determines that such conversion or exercise would result in such
Purchaser owning shares of Common Stock in excess of the Limitation on
Conversion.
4.4 Listing of Common Stock and Underlying Shares. The Company shall take
---------------------------------------------
all steps necessary to cause the Common Stock to be listed on the Nasdaq
SmallCap Market within 90 days after the First Tranche Closing Date (or, if
earlier, on or prior to the date on which the Underlying Securities Registration
Statement relating to the Convertible Debentures and the First Tranche Shares is
declared effective by the Commission). In addition, the Company shall take all
steps necessary to cause the Underlying Shares and Warrant Shares to be approved
for listing on the Nasdaq SmallCap Market (as well as on any other national
securities exchange or market on which the Common Stock is then listed) no later
than the first day after which Convertible Debentures or Shares may be converted
by any Purchaser into Common Stock, and shall provide to such Purchasers
evidence of such listing, and shall maintain the listing of its Common Stock on
such market or exchange. In the event the aggregate number of Underlying Shares
or Warrant Shares increases, the Company shall promptly file one or more
appropriate listing applications to continually list for trading a number of
such additional shares as the Company and the Purchasers shall reasonably agree.
4.5 Purchaser's Rights if Trading in Common Stock is Suspended. In the
----------------------------------------------------------
event that at any time within the period commencing when the first Underlying
Securities Registration Statement is declared effective under the Securities Act
by the Commission and ending three years after the last Closing Date, trading in
the shares of the Common Stock is suspended on the Nasdaq SmallCap Market or the
Nasdaq National Market or such other stock exchange upon which the Common Stock
shall then be listed for trading (other than as a result of the suspension of
trading in securities on such
23
<PAGE>
market generally or temporary suspensions pending the release of material
information), then, at a Purchaser's option exercisable by written notice to the
Company, the Company shall redeem, as applicable, all of the Convertible
Debentures, Shares, Warrants, Underlying Shares and Warrant Shares owned by such
Purchaser at an aggregate purchase price equal to the sum of (i) (A) the product
of (1) the average Per Share Market Value for the five (5) Trading Days
immediately preceding (a) the day of such notice or (b) the date of payment in
full of the repurchase price calculated under this Section 4.5, whichever is
greater, multiplied by (2) the Conversion Ratio on the date of the repurchase
notice, (ii) the Warrant Repurchase Price, (iii) the number of Underlying Shares
and Warrant Shares then held by such Purchaser multiplied by the average Per
Share Market Value for the five (5) Trading Days immediately preceding (A) the
date of the notice or (B) the date of payment in full by the Company of the
repurchase price calculated under this Section 4.5, whichever is greater, and
(iv) interest on such amounts set forth in (i) - (iii) above accruing from the
7th day after such notice until the repurchase price under this Section 4.5 is
paid in full at the rate of 15% per annum.
4.6 No Violation of Applicable Law. Notwithstanding any provision of this
------------------------------
Agreement to the contrary, if the redemption of Shares otherwise required under
this Agreement or the Registration Rights Agreement would be prohibited by the
relevant provisions of the Delaware General Corporation Law, such redemption
shall be effected as soon as it is permitted under such law; provided, however,
-------- -------
that interest payable by the Company with respect to any such redemption shall
continue to accrue in accordance with Section 4.5.
4.7 Redemption Restrictions. Notwithstanding any provision of this
-----------------------
Agreement to the contrary, if any redemption of Convertible Debentures or Shares
otherwise required under this Agreement or the Registration Rights Agreement
would be prohibited in the absence of consent from any lender of the Company or
any of the Subsidiaries, or by the holders of any class of securities of the
Company, the Company shall use its best efforts to obtain such consent as
promptly as practicable after the redemption is required. Interest payable by
the Company with respect to any such redemption shall continue to accrue until
such consent is obtained. Nothing contained in this Section 4.7 shall be
construed as a waiver by any Purchaser of any rights it may have by virtue of
any breach of any representation or warranty of the Company herein as to the
absence of any requirement to obtain any such consent.
4.8 Piggyback Registration Rights. During the period commencing the date
-----------------------------
hereof and ending on the earlier to occur of (i) the one year anniversary of the
last Closing and (ii) the date the last Underlying Securities Registration
Statement required to be filed by the Company in accordance with the
Registration Rights Agreement is declared effective under the Securities Act by
the Commission, the Company may not file any registration statement that
provides for the registration of shares of Common Stock to be sold by other
shareholders of the Company unless the Company provides each Purchaser with not
less than seven (7) Trading Days' notice of its intention to file such
registration statement and provides each Purchaser the option to include any or
all of the Underlying Shares and Warrant Shares then owned by it therein as to
which there is not at that time an effective Underlying Securities Registration
Statement. Such registration rights shall not apply to registration
24
<PAGE>
statements relating solely to (i) employee benefit plans notwithstanding the
inclusion of a resale prospectus for securities received under such employee
benefit plan, or (ii) business combinations.
4.9 Notice of Breaches. Each of the Company and the Purchasers shall give
------------------
prompt written notice to the other of any breach of any representation, warranty
or other agreement contained in this Agreement or in any other Transaction
Document, as well as any events or occurrences arising after the date hereof and
prior to, with respect to the First Tranche Closing, the First Tranche Closing
Date, with respect to the Second Tranche Closing, the Second Tranche Closing
Date and with respect to the Third Tranche Closing, the Third Tranche Closing
Date which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained herein to be
incorrect or breached as of such Closing Date. However, no disclosure by either
party pursuant to this Section 4.9 shall be deemed to cure any breach of any
representation, warranty or other agreement contained herein or in other
Transaction Documents. Notwithstanding the generality of the foregoing, the
Company shall promptly notify each Purchaser of any notice or claim (written or
oral) that it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated hereby and by other Transaction
Documents or would violate any written agreement or understanding between such
lender and the Company, and the Company shall promptly furnish by facsimile to
the holders of the Shares a copy of any written statement in support of or
relating to such claim or notice.
4.10 Conversion Obligations of the Company. The Company covenants to
-------------------------------------
convert the Convertible Debentures and Shares and to deliver Underlying Shares
in accordance with the terms and conditions and time period set forth in the
Convertible Debentures and the Series B Designation, respectively, and to
deliver Warrant Shares in accordance with the terms and conditions and time
periods set forth in the Warrants.
4.11 Right of First Refusal. For a period of one year commencing as of the
----------------------
date hereof, the Company may not enter into any transaction with a person other
than the Purchasers to sell or otherwise dispose of any securities of the
Company in any transaction intended not to be subject to the registration
requirements of the Securities Act (a "Private Placement") unless the Company
-----------------
provides a written notice to the Purchasers describing the terms of such Private
Placement (the "Private Placement Notice") and attaches to such notice any
------------------------
written term sheet or other similar writing with respect thereto. The Majority
Holders shall have the right, exercisable within five (5) Business Days of their
receipt of such notice, to elect, by written notice to the Company to inform the
Company of their intention to provide the financing described in the Private
Placement Notice on terms no less favorable to the Company than as set forth in
the Private Placement Notice. If the Majority Holders fail to elect to
exercise such right, the Company may enter into the Private Placement, but only
if the Private Placement is on terms at least as favorable to the Company as the
terms set forth in the notice provided to the Purchasers in accordance with this
paragraph and provided such Private Placement is consummated within sixty (60)
days after the Company's receipt of such notice. If such Private Placement does
not occur within such period, then the Company shall not consummate such Private
Placement without again providing the Purchasers with the right of first refusal
set forth in this Section.
25
<PAGE>
4.12 The Warrants.
------------
(a) In connection with the First Tranche Closing, the Company shall
issue (i) to the Purchasers common stock purchase warrants, each in the form of
Exhibit E attached hereto (a "warrant"), pursuant to which the Purchasers shall
- --------- -------
have the right at any time thereafter through the fifth anniversary of the date
of issuance thereof to acquire an aggregate of 105,000 shares of Common Stock
(such warrants to be issued to the Purchasers in the respective amounts
specified on Schedule 2.3(a) attached hereto) at an exercise price per share
---------------
equal to 125% of the Market Price as of the First Tranche Closing Date, (ii) to
Brown Simpson a warrant pursuant to which Brown Simpson shall have the right at
any time thereafter through the fifth anniversary of the date of issuance
thereof to acquire 45,000 shares of Common Stock at an exercise price per share
equal to 125% of the Market Price as of the First Tranche Closing Date, and
(iii) to the Placement Agent a warrant pursuant to which the Placement Agent
shall have the right at any time thereafter through the fifth anniversary of the
date of issuance thereof to acquire 75,000 shares of Common Stock at an exercise
price per share equal to 125% of the Market Price as of the First Tranche
Closing Date.
(b) In connection with the Second Tranche Closing, the Company shall
issue to (i) the Purchasers (or as otherwise directed by the Purchasers'
Representatives) warrants pursuant to which Purchasers shall have the right at
any time thereafter through the fifth anniversary of the date of issuance
thereof to acquire an aggregate of 52,500 shares of Common Stock (subject to
equitable adjustment in the event of combinations, subdivisions or
reclassifications of the Common Stock), with such warrants to be issued to the
Purchasers in the same proportion that the Second Tranche Shares are acquired by
the Purchasers (or as otherwise directed by the Purchasers' Representative),
(ii) to Brown Simpson a warrant pursuant to which Brown Simpson shall have the
right at any time thereafter through the fifth anniversary of the date of
issuance thereof to acquire 22,500 shares of Common Stock (subject to equitable
adjustment in the event of combinations, subdivisions or reclassifications of
the Common Stock), and (iii) to the Placement Agent a warrant pursuant to which
the Placement Agent shall have the right at any time thereafter through the
fifth anniversary of the date of issuance thereof to acquire 37,500 shares of
Common Stock (subject to equitable adjustment in the event of combinations,
subdivisions, or reclassifications of the Common Stock), in each case at an
exercise price per share equal to the lesser of (i) 125% of the Market Price as
of the First Tranche Closing Date and (ii) 125% of the Market Price as of the
Second Tranche Closing Date. In connection with the Third Tranche Closing, the
Company shall issue to (i) the Purchasers (as otherwise directed by the
Purchasers' Representative) warrants pursuant to which the Purchasers shall have
the right at any time thereafter through the fifth anniversary of the date of
issuance thereof to acquire an aggregate of 52,500 shares of Common Stock
(subject to equitable adjustment in the event of combinations, subdivisions or
reclassifications of the Common Stock), with such warrants to be issued to the
Purchasers in the same proportion that the Third Tranche Shares are acquired by
the Purchasers (or as otherwise directed by the Purchasers' Representative),
(ii) to Brown Simpson a warrant pursuant to which Brown Simpson shall have the
right at any time thereafter through the fifth anniversary of the date of
issuance thereof to acquire 22,500 shares of Common Stock (subject to equitable
adjustment in the event of combinations, subdivisions or reclassifications of
the Common Stock), and (iii) to the Placement Agent a warrant pursuant to which
the Placement Agent shall have the right at any time thereafter through the
fifth anniversary of the date of issuance thereof to acquire
26
<PAGE>
37,500 shares of Common Stock (subject to equitable adjustment in the event of
combinations, subdivisions, or reclassifications of the Common Stock), in each
case at an exercise price per share equal to the lesser of (i) 125% of the
Market Price as of the First Tranche Closing Date and (ii) 125% of the Market
Price as of the Third Tranche Closing Date. The warrants to be issued pursuant
to this Section 4.12 are collectively referred to herein as the "Warrants."
--------
4.13 Liquidated Damages. The Company shall, and shall use its best efforts
------------------
to cause the Transfer Agent to, issue and deliver (a) shares of Common Stock
within three (3) New York Stock Exchange Trading Days of receipt of a written
Holder Conversion Notice or notice of exercise under the Warrants, as applicable
(or within such other time period as may be specified in the Debentures, the
Series B Designation, or the Warrants, as applicable), or (b) shares of Common
Stock without restrictive legends within five (5) New York Stock Exchange
Trading Days of delivery of a Holder Conversion Notice or notice of exercise
under the Warrants, as applicable (the "Deadline"). Notwithstanding the
--------
foregoing, the delivery obligations of the Company under clause (b) above shall
be conditioned on (i) the existence and effectiveness of an Underlying
Securities Registration Statement, and (ii) receipt of materials reasonably
requested by the Company from the Purchasers, Brown Simpson, or the Placement
Agent, as applicable (which shall not include an opinion of counsel to be
delivered by the Company's counsel to the Transfer Agent regarding the
effectiveness of such registration statements), to permit the issuance of
certificates of Common Stock without restrictive legend. The Company
understands that a delay in the issuance of such certificates after the Deadline
could result in economic loss to the Purchasers, Brown Simpson, or the Placement
Agent, as applicable. If for any reason the Company fails to issue by the
Deadline such certificates of Common Stock by the Deadline, as compensation, and
not as a penalty, the Company agrees to pay liquidated damages to the
Purchasers, Brown Simpson, or the Placement Agent, as applicable, for such late
issuance of such certificates an amount equal to $1,000 per day for each day
such certificates are not delivered for the first ten (10) days after the
Deadline and $2,000 per day for each day thereafter. The Company shall promptly
pay the Purchasers, Brown Simpson, or the Placement Agent, as applicable, any
liquidated damages incurred under this Section by wire transfer in immediately
available funds to an account designated by the Purchasers, Brown Simpson, or
the Placement Agent, as applicable. Nothing herein shall waive the Company's
obligations to deliver shares of Common Stock upon a conversion of the
Convertible Debentures or the Shares or exercise of the Warrants or limit the
right of any Purchaser, Brown Simpson, or the Placement Agent, as applicable, to
pursue actual damages (less the amount of any liquidated damages received
pursuant to the foregoing) for the Company's failure to issue and deliver shares
of Common Stock to such Purchaser, Brown Simpson, or the Placement Agent, as
applicable, consistent with the terms of this Agreement. The Company agrees
that, in addition to any other remedies which may be available to the
Purchasers, Brown Simpson, or the Placement Agent, as applicable, including the
remedies available under this section, in the event the Company fails for any
reason (other than as a result of actions taken by a Purchaser in breach of this
Agreement) to effect delivery to a Purchaser, Brown Simpson, or the Placement
Agent, as applicable, of certificates as contemplated by this section on or
prior to the Deadline, such Purchaser, Brown Simpson, or the Placement Agent, as
applicable, will be entitled, if prior to the delivery of such certificates, to
revoke the Holder Conversion Notice, or notice of
27
<PAGE>
exercise under the Warrants, as applicable, by delivering a notice to such
effect to the Company and the Transfer Agent whereupon the Company and the
Purchaser, Brown Simpson, or the Placement Agent, as applicable, shall each be
restored to their respective positions immediately prior to delivery of such
Holder Conversion Notice, or notice of exercise under the Warrants.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, THE
COMPANY'S OBLIGATIONS UNDER THIS SECTION SHALL SURVIVE ANY TERMINATION OF THIS
AGREEMENT.
4.14 Restrictive Covenants. As long as any Purchaser owns any Convertible
---------------------
Debentures or Shares, the Company agrees that:
(a) Information. The Company will deliver to each holder of the
-----------
Convertible Debentures, Shares or Warrants:
(i) as soon as available and in any event within 90 days
after the end of each fiscal year of the Company, a consolidated balance
sheet of the Company as of the end of such fiscal year and the related
consolidated statements of income and cash flows and stockholders' equity
for such fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, all reported on in a manner
acceptable to the Commission by independent public accountants of
nationally recognized standing;
(ii) as soon as available and in any event within 45 days
after the end of each of the first three fiscal quarters of each fiscal
year of the Company, a consolidated balance sheet of the Company as of the
end of such quarter and the related consolidated statements of income and
cash flows and stockholders' equity for such quarter and for the portion of
the Company's fiscal year ended at the end of such quarter, setting forth
in each case in comparative form the figures for the corresponding quarter
and the corresponding portion of the Company's previous fiscal year, all
certified (subject to footnote presentation and normal year-end
adjustments) as to fairness of presentation, generally accepted accounting
principles and consistency by the chief financial officer or the chief
accounting officer of the Company (the requirements of clause (i) above and
this clause (ii) may be satisfied by delivering to each holder copies of
the Company's Form 10K-SB and Form 10Q-SB, as applicable, under a cover
letter from the chief financial officer or chief accounting officer of the
Company addressing the matters required by such clauses);
(iii) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate from the
Company signed by its President and Chief Financial Officer stating that no
Default has occurred and is continuing, or, if as of the date of such
delivery a Default shall have occurred and be continuing, a certificate
from the Company setting forth the details of such Default and the action
which the Company is taking or proposes to take with respect thereto;
(iv) within two days after any officer of the Company obtains
knowledge of a Default, a certificate of the chief financial officer or the
chief accounting officer of the
28
<PAGE>
Company setting forth the details thereof and the action which the Company
is taking or proposes to take with respect thereto;
(v) promptly upon the mailing thereof to the shareholders of
the Company generally, copies of all financial statements, reports and
proxy statements so mailed and any other document generally distributed to
shareholders;
(vi) promptly upon the filing hereof, copies of all
registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent) and reports on Forms
10-KSB, 10-QSB and 8-K (or their equivalents) which the Company or any
Subsidiary has filed with the Commission;
(vii) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to which
the Company or any Subsidiary is a party in which the amount involved is
$50,000 or more and not covered by insurance or in which injunctive or
similar relief is sought;
(viii) promptly following the occurrence thereof, notice and a
description in reasonable detail of any material adverse change, or
development involving a prospective material adverse change, in the
business, operations, property, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries, taken as a whole; and
(ix) from time to time such additional information regarding
the financial position or business of any of the Company and its
Subsidiaries as the Purchasers may reasonably request.
(b) Payment of Obligations. The Company and its Subsidiaries will pay
----------------------
and discharge, at or before maturity, all their respective material obligations,
including, without limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings and will maintain, in
accordance with GAAP, appropriate reserves for the accrual of any of the same.
(c) Maintenance of Property; Insurance.
----------------------------------
(i) The Company and each Subsidiary will keep all property
useful and necessary in its business in good working order and condition,
ordinary wear and tear excepted.
(ii) The Company and each Subsidiary will maintain insurance in
at least such amounts and against such risks as it has insured against as
of the First Tranche Closing Date.
(d) Maintenance of Existence. The Company will continue, an---
ubsidiary will continue, to engage in business of the same general type as now
conducted by the Company and such Subsidiaries, and will preserve, renew and
keep in full force and effect its respective corporate
29
<PAGE>
existence and their respective material rights, privileges and franchises
necessary or desirable in the normal conduct of business.
(e) Compliance with Laws. The Company and each Subsidiary will
--------------------
comply, in all material respects, with all federal, state, municipal, local or
foreign applicable laws, ordinances, rules, regulations, municipal by-laws,
codes and requirements of governmental authorities (including, without
limitation, Environmental Laws and ERISA and the rules and regulations
thereunder) except (A) where compliance therewith is contested in good faith by
appropriate proceedings or (B) where non-compliance therewith could not
reasonably be expected, in the aggregate, to have a Material Adverse Effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company or such Subsidiary.
(f) Inspection of Property, Books and Records. The Company and each
-----------------------------------------
Subsidiary will keep proper books of record and account in which full, true and
correct entries shall be made of all dealings and transactions in relation to
their respective businesses and activities; and at least once each calendar year
will permit during normal business hours representatives of the Purchasers to
visit and inspect any of their respective properties, upon reasonable prior
notice, to examine and make abstracts from any of their respective books and
records and to discuss their respective affairs, finances and accounts with
their respective executive officers and independent public accountants, all at
such reasonable times. Any information made available to the Purchasers during
such inspections shall be the confidential information of the Company. The
Purchasers agree to use the same degree of care to protect the confidentiality
of all such confidential information of the Company they receive as they use to
protect their own confidential and proprietary information which they do not
wish to have published or disseminated and shall not disclose any such
confidential information to a third party except as required by law.
(g) Investment Company Act. The Company will not be or become an
----------------------
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended.
(h) Limitation on Debt or Other Liabilities. Neither the Company nor
---------------------------------------
any Subsidiary will, without the prior written consent of the Majority Holders,
create, incur, assume or suffer to exist (at any time after the First Tranche
Closing Date, after giving effect to the application of the proceeds of the
issuance of the Convertible Debentures and Shares) any Debt, except for the
following (such Debt, "Permitted Debt"):
--------------
(i) Debt incurred or assumed solely to pay all or any part of
the purchase price or cost of construction, of property (or any improvement
thereon) acquired or constructed by the Company or a Subsidiary after the
First Tranche Closing Date provided: (a) any Lien with respect to such Debt
shall extend solely to the item or items of such property (or improvements
thereon) so acquired or constructed and, if required by the terms of the
instrument originally creating such Lien, other property (or improvement
thereon) which is an improvement to or is acquired for specific use in
connection with such acquired or constructed property (or improvement
thereon) or which is real property being improved
30
<PAGE>
by such acquired or constructed property (or improvement thereon); (b) the
principal amount of the Debt for such property shall at no time exceed an
amount equal to the cost of the operation of the property (or improvement
thereon) so acquired or constructed; and (c) any Lien with respect to such
Debt shall be created substantially contemporaneously with the acquisition
or construction of such property;
(ii) Debt incurred in connection with equipment leases to which
the Company or its Subsidiary is a party incurred in the ordinary course of
business;
(iii) Debt incurred in connection with trade accounts payable,
imbalances and refunds arising in the ordinary course of business;
(iv) Revolving Credit Debt;
(v) Debt incurred with respect to the Convertible Debentures;
(vi) Subject to Section 4.11, Debt not to exceed in the
aggregate $3,000,000 solely to finance the Company's budgeted capital
expenditures or for general corporate or working capital purposes,
provided, however, that (i) the repayment of such Debt is subordinated (on
terms reasonably satisfactory to the Purchasers' Representative) to the
prior payment of all amounts (including principal and interest) due and
owing under the Convertible Debentures, whether at maturity, upon
liquidation or dissolution, or otherwise; (ii) the maturity date of such
Debt will be after, and the Debt by its terms will not permit any
prepayments (whether optional or mandatory) prior to, the Maturity Date (as
such term is defined in the Convertible Debentures) of the Convertible
Debentures and the Company Conversion Date (as such term is defined in the
Series B Designation) of the Shares; (iii) such Debt is not convertible
into or exchangeable for shares of Common Stock or other securities or
rights of the Company that are convertible into or exchangeable for shares
of Common Stock; and (iv) in the event such Debt is incurred from an
Affiliate of the Company, such transaction complies with Section 4.14(l)
hereof.
(i) Restricted Payments. Neither the Company nor any Subsidiary will
-------------------
declare or make Restricted Payments in excess of $50,000 during any calendar
year.
(j) Investments. Neither the Company nor any Subsidiary will make or
-----------
acquire any Investment in any Person other than (a) Investments in Cash
Equivalents and (b) Investments in Subsidiaries existing on the First Tranche
Closing Date.
(k) Liens. Neither the Company nor any Subsidiary will create, assume
-----
or suffer to exist any Lien on any asset now owned or hereafter acquired by it,
except:
(i) (A) inchoate mechanics, workmen's and carriers' liens,
incident to current construction, (B) mechanics, warehousemen's, unpaid
vendors and carriers' liens incident to such construction, (C) statutory
and common law Liens of landlords under
31
<PAGE>
equipment leases to which the Company or any Subsidiary is a party and (D)
Liens of carriers, warehousemen, mechanics and materialmen or other similar
statutory Liens;
(ii) Liens incurred on deposits made in the ordinary course of
business in connection with workers' compensation, performance bonds,
unemployment insurance and other types of social security, other than any
Lien imposed by or under ERISA;
(iii) Liens for taxes not yet due;
(iv) Easements, rights of way, permits, licenses, zoning
ordinances, covenants, restrictions, defects, minor irregularities of title
and other similar Liens on property which in the case of any particular
parcel of real property do not materially detract from the value or
utilization of such real property;
(v) Liens created by or resulting from any litigation or legal
proceeding which is currently being contested by such Company or Subsidiary
in good faith and by appropriate proceedings; and
(vi) Liens securing Permitted Debt.
(l) Transactions with Affiliates. Other than Debt on the Balance
----------------------------
Sheet or otherwise permitted under the terms of this Agreement, the Company and
each Subsidiary will not, directly or indirectly, pay any funds to or for the
account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate, except, on terms to the Company or such Subsidiary no less favorable
than terms that could be obtained by the Company or such Subsidiary from a
Person that is not an Affiliate of the Company, as determined in good faith by
the Board of Directors of the Company; provided that no determination of the
--------
Board of Directors shall be required with respect to any such transactions
entered into in the ordinary course of business.
(m) Merger or Consolidation. The Company and each Subsidiary will
-----------------------
not, in a single transaction or a series of related transactions, (i)
consolidate with or merge with or into any other Person, or (ii) permit any
other Person to consolidate with or merge into it, unless (w) either (A) the
Company shall be the survivor of such merger or consolidation or (B) the
surviving Person shall expressly assume by supplemental agreement all of the
obligations of the Company under the Convertible Debentures, the Series B
Preferred Stock and the Warrants and this Agreement; (x) immediately before and
immediately after giving effect to such transaction (including any indebtedness
incurred or anticipated to be incurred in connection with the transaction), no
Default or Event of Default shall have occurred and be continuing and, following
the transaction, the Company may incur $1.00 of Debt without violating Section
4.14(h) hereof; (y) if the Company is not the surviving entity, such surviving
entity's common shares shall be listed on either The New York Stock Exchange,
32
<PAGE>
American Stock Exchange, or Nasdaq National Market or Nasdaq SmallCap Market and
(z) the Company has delivered to the Purchasers an officers' certificate and
opinion of counsel, each stating that such consolidation, merger or transfer
complies with this Agreement, that the surviving Person agrees to be bound
thereby and that all conditions precedent in this Agreement relating to such
transaction have been satisfied.
(n) Supplemental Information. If at any time the Company is not
------------------------
subject to the requirements of Section 13 or 15(d) of the Exchange Act, the
Company will promptly furnish at its expense, upon request, for the benefit of
the Purchasers, and prospective purchasers of Convertible Debentures, Shares and
Warrants, information satisfying the information requirements of Rule 144 under
the Securities Act.
(o) Use of Proceeds. Upon receipt by the Company of the First Tranche
---------------
Net Proceeds from the Escrow Agent in accordance with the terms of the Escrow
Agreement, the Company shall apply the First Tranche Net Proceeds as follows:
(a) no more than $500,000 will be used to repay existing indebtedness held by
one or more of Jenadosa Holdings Limited, South Edge International Inc., Shangri
La Investments Ltd., and Tradewinds Investments Ltd.; (b) no more than $450,000
will be used to repay existing indebtedness held by Effingham Investments
Limited; (c) no more than $200,000 will be used to repay existing indebtedness
held by Alphacom Data Security Services Ltd.; and (d) the remaining amounts,
after application of amounts pursuant to clauses (a) through (c) above, will be
used by the Company to complete the construction of a cigar manufacturing
facility in the Dominican Republic owned by Tabacalera Tamboril, S.A., a wholly
owned Subsidiary of the Company, and for working capital purposes. None of the
proceeds from the issuance and sale of Convertible Debentures and the Shares by
the Company pursuant to this Agreement will be used directly or indirectly for
the purpose, whether immediate, incidental or ultimate, of purchasing or
carrying any "margin stock" within the meaning of Regulation G of the Board of
Governors of the Federal Reserve System.
(p) Limitation on Restrictions Affecting Subsidiaries. The Company
-------------------------------------------------
will not enter into, or suffer to exist, any agreement with any Person which
prohibits or limits the ability of any Subsidiary to (a) pay dividends or make
other distributions or pay any Debt owed to the Company or any Subsidiary, (b)
make loans or advances to the Company or any Subsidiary or (c) transfer any of
its properties or assets to the Company or any Subsidiary.
(q) Restrictions on Certain Amendments. Neither the Company nor any
----------------------------------
Subsidiary will waive any provision of, amend, or suffer to be amended, any
provision of such entity's existing indebtedness, any material contract or
agreement previously or hereafter filed by the Company with the Commission as
part of its SEC Documents, or the respective Certificates of Incorporation or
by-laws of the Company and its Subsidiaries if such amendment would materially
adversely affect the Purchasers without the prior written consent of the
Majority Holders. The Company will not, without the prior written consent of
the Majority Holders, form any non-wholly owned Subsidiary after the First
Tranche Closing Date.
33
<PAGE>
(r) Compliance with Terms and Conditions of Material Contracts. The
----------------------------------------------------------
Company will comply, in all material respects, with all terms and conditions of
all material contracts to which it is subject.
(s) Limitation on Asset Sales. Neither the Company nor any Subsidiary
-------------------------
will consummate an Asset Sale unless (i) it receives consideration in cash at
the time of such Asset Sale at least equal to the fair market value of the
assets sold or otherwise disposed of (as determined in good faith by the
Company's Board of Directors) and (ii) the Net Cash Proceeds of such sale are
used to purchase similar assets in the same line of business of equivalent value
within 12 months of the date of the Asset Sale. As used herein, "Asset Sale"
----------
means any sale, lease, transfer or other disposition (or series of related
sales, leases, transfers or dispositions) of shares of capital stock of a
Subsidiary (other than directors' qualifying shares), property or other assets
(each referred to for the purposes of this definition as a "disposition"),
including any disposition by means of a merger, consolidation or similar
transaction (other than as permitted under Section 4.14(m)), other than a
disposition of property or assets at fair market value in the ordinary course of
business.
(t) Issuances and Repurchases of Common Stock.
-----------------------------------------
(i) The Company will not repurchase or otherwise enter into
any other transaction (including stock split, recapitalization or other
transaction) which would cause a decrease in the number of its shares of
Common Stock issued and outstanding (other than transactions that similarly
decrease the number of shares of Common Stock into which the Convertible
Debentures, Shares and Warrants are convertible or exercisable, as the case
may be).
(ii) The Company will retain the Transfer Agent as the stock
transfer agent of the Company, provided that if the Transfer Agent
voluntarily or involuntarily fails to so serve or if the Company desires to
replace the Transfer Agent, the Company will select an independent,
unaffiliated replacement stock transfer agent agreeing to be bound by the
terms of the instruction letter to be delivered by the Company to the
Transfer Agent pursuant to Section 5.1(b)(xiii).
(iii) Upon conversion of any Convertible Debentures in
accordance with their terms or the Shares in accordance with the Series B
Designation, and/or exercise of any Warrant in accordance with its terms,
the Company will, and will use its best lawful efforts to cause the
Transfer Agent to, issue one or more certificates representing shares of
Common Stock in such name or names and in such denominations specified by a
Purchaser. As long as an applicable Underlying Securities Registration
Statement contemplated by the Registration Rights Agreement shall remain
effective the Underlying Shares and Warrant Shares shall be issued to any
transferee of such shares from a Purchaser without restrictive legend. The
Company further warrants that no instructions other than these instructions
have been or will be given to the Transfer Agent. Nothing in this Section
shall affect in any way a Purchaser's obligations to comply with all
securities laws applicable to such Purchaser upon resale of such shares of
Common Stock, including any prospectus delivery requirements.
34
<PAGE>
(u) Adoption of ERISA Plans. Neither the Company nor any Subsidiary
-----------------------
will adopt any employee benefit or pension plan or arrangement that is covered
by ERISA or is subject to the minimum funding standards under Section 412 of the
Code.
ARTICLE V
CONDITIONS
5.1
(a) Conditions Precedent to the Obligation of the Company to Sell the
-----------------------------------------------------------------
Convertible Debentures and the First Tranche Shares. The obligation of the
- ---------------------------------------------------
Company to sell the Convertible Debentures and the First Tranche Shares
hereunder is subject to the satisfaction or waiver by the Company, at or before
the First Tranche Closing, of each of the following conditions:
(i) Accuracy of the Purchasers' Representations and Warranties.
----------------------------------------------------------
The representations and warranties of each Purchaser shall be true and
correct in all material respects as of the date when made and as of the
First Tranche Closing Date, as though made on and as of such date;
(ii) Performance by the Purchaser. Each Purchaser shall have
----------------------------
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by each Purchaser at or prior to the
First Tranche Closing;
(iii) No Injunction. No 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 which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement; and
(iv) Required Approvals. All Required Approvals shall have been
------------------
obtained.
(b) Conditions Precedent to the Obligation of each Purchaser to
-----------------------------------------------------------
Purchase the Convertible Debentures and the First Tranche Shares. The
- ----------------------------------------------------------------
obligation of each Purchaser hereunder to acquire and pay for the Convertible
Debentures and the First Tranche Shares is subject to the satisfaction or waiver
by each Purchaser, at or before the First Tranche Closing, of each of the
following conditions:
(i) Accuracy of the Company's Representations and Warranties.
--------------------------------------------------------
The representations and warranties of the Company set forth herein and in
each other Transaction Document shall be true and correct in all material
respects as of the date when made and as of the First Tranche Closing Date
as though made on and as of such date;
35
<PAGE>
(ii) Performance by the Company. The Company shall have
--------------------------
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement and the
other Transaction Documents to be performed, satisfied or complied with by
the Company at or prior to the First Tranche Closing;
(iii) Authorization. The issuance and delivery of the
-------------
Convertible Debentures, the First Tranche Shares and the Warrants to be
delivered at the First Tranche Closing shall have been duly authorized by
all necessary corporate action on the part of the Company;
(iv) No Injunction. No 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 which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement;
(v) Adverse Changes. Since the date of the financial
---------------
statements included in the Company's Quarterly Report on Form 10-QSB or
Annual Report on Form 10-KSB, whichever is more recent, last filed prior to
the date of this Agreement, no event which had a Material Adverse Effect
and no material adverse change in the financial condition or prospects of
the Company shall have occurred (for purposes hereof changes in the market
price of the Common Stock may be considered in determining whether there
has occurred an event which has had a Material Adverse Effect or whether a
material adverse change has occurred);
(vi) No Suspensions of Trading in Common Stock. The trading in
-----------------------------------------
the Common Stock shall not have been suspended by the Commission (except
for any suspension of trading of limited duration solely to permit
dissemination of material information regarding the Company);
(vii) Listing of Common Stock. At all times between the date
-----------------------
hereof and the First Tranche Closing Date, the Common Stock shall be
eligible for trading on the NASD OTC Bulletin Board;
(viii) Legal Opinion. The Company shall have delivered to the
-------------
Purchaser the opinion of Kaplan Gottbetter & Levenson LLP, counsel to the
Company in substantially the form attached hereto as Exhibit F, which shall
---------
include an opinion as required by the Company's Transfer Agent to ensure
that the Underlying Shares and Warrant Shares will be issued free of
restrictive legends upon resale pursuant to an effective registration
statement under the Securities Act;
(ix) Required Approvals. All Required Approvals shall have been
------------------
obtained;
36
<PAGE>
(x) Shares of Common Stock. On or prior to the First Tranche
----------------------
Closing Date, the Company shall have duly reserved for issuance upon
conversion of Convertible Debentures and First Tranche Shares and exercise
of the Warrants, the number of Underlying Shares and Warrant Shares
required by Section 3.1(d);
(xi) Delivery of Convertible Debentures. The Company shall
----------------------------------
have delivered to the Escrow Agent on behalf of the Purchasers the
Convertible Debentures, registered in the name of such Purchaser, each in
form satisfactory to each Purchaser;
(xii) Escrow Agreement. The Company shall have executed and
----------------
delivered the Escrow Agreement.
(xiii) Instruction Letter to Transfer Agent. The Company shall
------------------------------------
have executed and delivered to the Transfer Agent the instruction letter
relating to the transactions contemplated hereby in the form attached
hereto as Exhibit G;
---------
(xiv) Delivery of Stock Certificates. The Company shall have
------------------------------
delivered to the Escrow Agent on behalf of the Purchasers or such
Purchasers' designee the stock certificate(s) representing the First
Tranche Shares, registered in the name of such Purchaser, each in form
satisfactory to each Purchaser;
(xv) Registration Rights Agreement. The Company shall have
-----------------------------
executed and delivered the Registration Rights Agreement;
(xvi) Warrants. The Company shall have executed and delivered
--------
the Warrants to be delivered to the Purchasers, Brown Simpson and the
Placement Agent (as specified in Section 4.12) in accordance with the terms
of this Agreement;
(xvii) Certificate of Designation. The Series B Designation
--------------------------
shall have been duly filed with the Secretary of State of Delaware, and the
Company shall have delivered a copy thereof to each Purchaser certified as
filed by the offic e of the Secretary of State of Delaware;
(xviii) Company Certificates. Each Purchaser shall have received
--------------------
a certificate, dated the First Tranche Closing Date, signed by the
Secretary or an Assistant Secretary of the Company and certifying (i) that
attached thereto is a true, correct and complete copy of (A) the Company's
Restated Certificate of Incorporation, as amended to the date thereof, (B)
the Company's By-Laws, as amended to the date thereof, and (C) resolutions
duly adopted by the Board of Directors of the Company authorizing the
execution, delivery and (where appropriate) filing of the Transaction
Documents and the Series B Designation and the issuance and sale of the
Convertible Debentures, the First Tranche Shares, the Warrants, the
Underlying Shares and the Warrant Shares and (ii) the incumbency of the
officers executing the Transactions Documents, the Series B Designation and
the Warrants;
37
<PAGE>
(xix) President's Certificate Regarding Effectiveness of Form
-------------------------------------------------------
10-SB. Each Purchaser shall have received a certificate, dated the First
-----
Tranche Closing Date, signed by the President of the Company certifying
that the Company's Form 10-SB is effective and the Company has been
verbally notified by the Commission that the Commission will not have any
further comments on the Company's Form 10-SB;
(xx) Change of Control. No Change of Control shall have
-----------------
occurred between the date hereof and the First Tranche Closing Date.
"Change of Control" means the occurrence of any of (i) an acquisition after
-----------------
the date hereof by an individual or legal entity of in excess of 50 % of
the voting securities of the Company, (ii) a replacement of more than one-
half of the members of the Company's board of directors which is not
approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the
merger of the Company with or into another entity, consolidation or sale of
all or substantially all of the assets of the Company in one or a series of
related transactions or (iv) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for any
of the events set forth above in (i), (ii) or (iii);
(xxi) Cancellation of Series A Preferred Stock. All of the
----------------------------------------
Company's authorized Series A Preferred Stock shall have been canceled;
(xxii) Continued Employment. Mr. Juan Capellan shall continue to
--------------------
be serving in a full time capacity as the general manager of the Company's
cigar manufacturing facilities and Mr. Abraham Shafir shall continue to be
employed by the Company or a Subsidiary; and
(xxiii) Hubbard Distribution Agreement. The Purchaser shall have
------------------------------
received (A) a letter executed by an authorized representative of Hubbard
Imports, a Florida general partnership ("Hubbard"), stating that (x) the
-------
Distribution Agreement dated July 1, 1997 by and between Hubbard and the
Company ("Distribution Agreement") is in full force and effect and no
----------------------
defaults exist nor has any event or omission occurred which would
constitute a default with or without notice, lapse of time and/or an
opportunity to cure and (y) Hubbard agrees that the Company's distribution
and sale of cigars at its cigar bar and lounge in New York, New York called
Tamboril at the Park is excluded from Hubbard's exclusive distributorship
rights; and (B) a certificate from an officer of the Company certifying
that (x) 73% of the 1997 Minimum Purchase Requirements (as defined in the
Distribution Agreement) have been met and (y) there have been no returns to
the Company by Hubbard of cigars for which the time period for rejection
has expired and of all the cigars received by Hubbard, the right to object
has expired with respect to approximately 45% of such cigars.
5.2 Conditions Precedent to the Obligation of each Purchaser to Purchase
--------------------------------------------------------------------
the Second Tranche Shares and the Third Tranche Shares. The obligation of each
- ------------------------------------------------------
Purchaser hereunder to acquire and pay for the Second Tranche Shares and the
Third Tranche Shares is subject to the satisfaction
38
<PAGE>
or waiver by each such Purchaser, at or before the Second Tranche Closing and
the Third Tranche Closing, as applicable, of each of the following conditions:
(i) First Tranche Closing. The First Tranche Closing shall
---------------------
have occurred and the Convertible Debentures, the First Tranche Shares and
the Warrants to be delivered at the First Tranche Closing shall have been
delivered to the Purchasers, Brown Simpson and the Placement Agent, as
applicable, by the Escrow Agent and the First Tranche Net Proceeds shall
have been delivered to the Company and the Placement Agent by the Escrow
Agent, each in accordance with the terms of the Escrow Agreement;
(ii) Second Tranche Warrants. With respect to the Second
-----------------------
Tranche Closing, the Company shall have executed and delivered the Warrants
to be delivered to the Purchasers, Brown Simpson and the Placement Agent
(as specified in Section 4.12) in accordance with the terms of this
Agreement;
(iii) Third Tranche Warrants. With respect to the Third Tranche
----------------------
Closing, the Company shall have executed and delivered the Warrants to be
delivered to the Purchasers, Brown Simpson and the Placement Agent (as
specified in Section 4.12) in accordance with the terms of this Agreement;
(iv) Accuracy of the Company's Representations and Warranties.
--------------------------------------------------------
The representations and warranties of the Company contained herein and in
each other Transaction Document shall be true and correct in all material
respects as of the date when made and as of the Second Tranche Closing Date
and the Third Tranche Closing Date, as applicable, as though made on and as
of such date.
(v) Performance by the Company. The Company shall have
--------------------------
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required bythis Agreement and each
other Transaction Document to be performed, satisfied or complied with by
the Company at or prior to the Second Tranche Closing Date or the Third
Tranche Closing Date, as applicable;
(vi) Authorization. The issuance and delivery of the Second
-------------
Tranche Shares and the Third Tranche Shares and the Warrants to be
delivered at the Second Tranche Closing and the Third Tranche Closing, as
the case may be, shall have been duly authorized by all necessary corporate
action on the part of the Company;
(vii) Underlying Securities Registration Statements. With
---------------------------------------------
respect to the Second Tranche Closing, the Underlying Securities
Registration Statement with respect to the Underlying Shares issuable on
conversion of all outstanding Convertible Debentures and First Tranche
Shares and with respect to the Warrant Shares issuable upon exercise of the
Warrants issued in connection with the First Tranche Closing (as specified
in Section 4.12) shall have been declared effective under the Securities
Act by the Commission for a period of at least sixty days; and with respect
to the Third Tranche Closing, the Underlying Securities
39
<PAGE>
Registration Statement with respect to the Underlying Shares issuable on
conversion of all outstanding Second Tranche Shares and with respect to the
Warrant Shares issued upon exercise of the Warrants issued in connection
with the Second Tranche Closing (as specified in Section 4.12) shall have
been declared effective under the Securities Act by the Commission for a
period of at least sixty days; and in each such case such Underlying
Registration Statement shall have remained effective and shall not be
subject to any stop order and no stop order shall be pending or threatened
as at such Closing Date; and the Company shall be current and complete on
updating each resale prospectus contained in an Underlying Securities
Registration Statement and, in connection therewith, shall have removed all
legends required to be removed under Section 4.1(b);
(viii) No Injunction. No statute, rule, regulation, executive
-------------
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court of governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement
relating to the issuance or conversion of any of the Convertible Debentures
or the Shares or exercise of any of the Warrants;
(ix) Adverse Changes. Since the date of the financial
---------------
statements included in the Company's last filed Quarterly Report on Form
10-QSB or Annual Report on Form 10-KSB, whichever is more recent, last
filed prior to the date of this Agreement, no event which had a Material
Adverse Effect which has not specifically been disclosed on Schedule 3.1(g)
---------------
hereto prior to the date of this Agreement shall have occurred, nor shall
there have occurred a material adverse change in the financial conditions
or prospects of the Company (for purposes hereof, changes in the market
price of the Common Stock may be considered in determining whether there
has occurred an event which has had a Material Adverse Effect or whether a
material adverse change has occurred);
(x) Litigation. No material litigation shall have been
----------
instituted or threatened against the Company which has not specifically
been disclosed on Schedule 3.1(g) hereto prior to the First Tranche
---------------
Closing;
(xi) Listing of Common Stock. The Common Stock shall have
-----------------------
been all times since 90 days after the First Tranche Closing Date, and on
such applicable Closing Date shall be, listed for trading on the Nasdaq
SmallCap Market or the Nasdaq National Market;
(xii) No Suspensions of Trading in Common Stock. The trading in
-----------------------------------------
the Common Stock shall not have been suspended by the Commission or on the
Nasdaq SmallCap Market or Nasdaq National Market or such other stock
exchange on which the Common Stock shall then be listed (except for any
suspension of trading of limited duration solely to permit dissemination of
material information regarding the Company);
(xiii) Closing Bid Price. The closing bid price for the Common
-----------------
Stock on the Nasdaq SmallCap Market or Nasdaq National Market or such other
stock exchange on which
40
<PAGE>
the Common Stock shall then be listed has not averaged less than $4.25 per
share for the twenty (20) Trading Days immediately preceding each of the
Second Tranche Closing Date and the Third Tranche Closing Date, as
applicable; and the average daily dollar volume of the Common Stock on the
Nasdaq SmallCap Market or Nasdaq National Market or such other stock
exchange on which the Common Stock shall then be listed shall be at least
$125,000 per day for the twenty (20) Trading Days immediately preceding
each of the Second Tranche Closing Date and the Third Tranche Closing Date,
as applicable;
(xiv) Change of Control. No Change of Control in the Company
-----------------
shall have occurred;
(xv) Legal Opinion. The Company shall have delivered to each
-------------
Purchaser an opinion of outside legal counsel to the Company in
substantially the form attached hereto as Exhibit F and dated the
---------
applicable Closing Date;
(xvi) Required Approvals. All Required Approvals shall have
------------------
been obtained;
(xvii) Shares of Common Stock. On each of the Second Tranche
----------------------
Closing Date and Third Tranche Closing Date, as applicable, the Company
shall have reserved for issuance to each Purchaser two times the number of
Underlying Shares which would be issuable upon conversion in full of the
Second Tranche Shares or Third Tranche Shares, as applicable, assuming such
conversion occurred on the Original Issue Date for such Shares;
(xviii) Delivery of Stock Certificates. The Company shall have
------------------------------
delivered to each Purchaser or such Purchaser's designee the stock
certificate(s) representing the Shares being purchased at such Closing,
registered in the name of such Purchaser, each in form satisfactory to each
Purchaser;
(xix) Performance of Conversion/Exercise Obligations. Through
----------------------------------------------
the Second Tranche Closing Date or Third Tranche Closing Date, as
applicable, the Company shall have (a) delivered Underlying Shares upon
conversion of Convertible Debentures and Shares and otherwise performed its
obligations in accordance with the terms, conditions and timing
requirements of each Convertible Debenture and the Series B Designation and
(b) shall have delivered Warrant Shares upon exercise of the Warrants and
otherwise performed its obligations in accordance with the terms of the
Warrants;
(xx) Cancellation of Series A Preferred Stock. All of the
----------------------------------------
Company's authorized Series A Preferred Stock shall have been canceled;
(xxi) Continued Employment. Mr. Juan Capellan shall continue to
--------------------
be serving in a full time capacity as the general manager of the Company's
cigar manufacturing facilities and Mr. Abraham Shafir shall continue to be
employed by the Company or a Subsidiary; and
41
<PAGE>
(xxii) Hubbard Distribution Agreement. The Purchaser shall have
------------------------------
received (A) a letter executed by an authorized representative of Hubbard,
stating that (x) the Distribution Agreement is in full force and effect and
no defaults exist nor has any event or omission occurred which would
constitute a default with or without notice, lapse of time and/or an
opportunity to cure and (y) Hubbard agrees that the Company's distribution
and sale of cigars at its cigar bar and lounge in New York, New York called
Tamboril at the Park is excluded from Hubbard's exclusive distributorship
rights; and (B) a certificate from an officer of the Company certifying (x)
the percentage of the 1997 Minimum Purchase Requirements that have been met
and (y) the number of cigars returned to the Company by Hubbard and the
number of cigars received by Hubbard that have been inspected and with
respect to which the right to object has expired.
ARTICLE VI
TERMINATION
6.1 Termination by Mutual Consent.
-----------------------------
(a) This Agreement may be terminated with respect to the transactions
contemplated herein relating to the Convertible Debentures, the Shares, the
Warrants, the Underlying Shares and the Warrant Shares at any time prior to the
First Tranche Closing by the mutual consent of the Company and each Purchaser.
(b) This Agreement may be terminated with respect to the transactions
contemplated herein relating solely to the Second Tranche Shares at any time
prior to the Second Tranche Closing by the mutual written consent of the Company
and each Purchaser.
(c) This Agreement may be terminated with respect to the transactions
contemplated herein relating solely to the Third Tranche Shares at any time
prior to the Third Tranche Closing by the mutual written consent of the Company
and each Purchaser.
6.2 Termination by the Company.
--------------------------
(a) In addition to other rights and remedies, this Agreement may be
terminated with respect to the transactions contemplated herein relating to the
Convertible Debentures, the Shares, the Warrants, the Underlying Shares, and the
Warrant Shares prior to the First Tranche Closing by the Company, by giving
notice of such termination to each Purchaser, if any Purchaser has materially
breached any representation, warranty, covenant or agreement contained in this
Agreement and such breach is not cured within five Business Days following
receipt by such Purchaser of notice of such breach.
42
<PAGE>
(b) In addition to other rights and remedies, this Agreement may be
terminated with respect to the transactions contemplated herein relating solely
to the Second Tranche Shares prior to the Second Tranche Closing by the Company,
by giving notice of such termination to each Purchaser.
(c) In addition to other rights and remedies, this Agreement may be
terminated with respect to the transactions contemplated herein relating solely
to the Third Tranche Shares prior to the Third Tranche Closing by the Company,
by giving notice of such termination to each Purchaser.
6.3 Termination by the Purchasers.
-----------------------------
(a) In addition to other rights and remedies, this Agreement may be
terminated prior to the First Tranche Closing with respect to the transactions
contemplated herein relating to the Convertible Debentures, the Shares, the
Warrants, the Underlying Shares and the Warrant Shares by any Purchaser, by
giving notice of such termination to the Company, if:
(i) the Company has breached any representation, warranty,
covenant or agreement contained in this Agreement and such breach is not
cured within five Business Days following receipt by the Company of notice
of such breach;
(ii) there has occurred an event since the date of the
financial statements included in the Company's Quarterly Report on Form 10-
QSB or Annual Report on Form 10-KSB, whichever is more recent, last filed
prior to the date of this Agreement which has had a Material Adverse Effect
and which is not disclosed in the SEC Documents or if there has occurred
since such date a material adverse change in the financial condition or
prospects of the Company (for each such purpose, changes in stock price may
be considered);
(iii) trading in the Company's Common Stock has been suspended
by the Commission or the NASD OTC Bulletin Board;
(iv) a Change of Control shall have occurred; or
(v) the First Tranche Closing shall not have occurred by the
First Tranche Closing Expiration Date.
(b) In addition to other rights and remedies, this Agreement may be
terminated by a Purchaser prior to the Second Tranche Closing with respect to
the transactions contemplated herein relating solely to the Second Tranche
Shares, or prior Third Tranche Closing with respect to the transactions
contemplated herein relating solely to the Third Tranche Shares, by giving
notice of such termination to the Company, if:
(i) after the First Tranche Closing Date, the Company has
breached any representation, warranty, covenant or agreement contained in
this Agreement, the
43
<PAGE>
Registration Rights Agreement, any Convertible Debenture, any Warrant or
the Series B Designation and such breach is not cured within five Business
Days following receipt by the Company of notice of such breach;
(ii) there has occurred an event since the date of the
financial statements included in the Company's Quarterly Report on Form 10-
QSB or Annual Report on Form 10-KSB, whichever is later, last filed prior
to the date of this Agreement which has had a Material Adverse Effect and
which is not disclosed in the SEC Documents or if there has occurred since
such date a material adverse change in the financial condition or prospects
of the Company (for each such purpose, changes in stock price may be
considered);
(iii) trading in the Company's Common Stock has been suspended
by the Commission or the Nasdaq SmallCap Market or Nasdaq National Market
or such other stock exchange on which the Common Stock shall then be listed
(except for any suspension of trading of limited duration solely to permit
dissemination of material information regarding the Company);
(iv) the Company's Common Stock shall have failed to be listed
for trading on either the Nasdaq National Market or Nasdaq SmallCap Market
within 90 days after the First Tranche Closing Date and shall have failed
to continue to be so listed since its initial listing and a Purchaser shall
have exercised its termination right herein provided within 10 Trading Days
of obtaining knowledge of any delisting;
(v) the Underlying Securities Registration Statement with
respect to (1) the Underlying Shares into which the Convertible Debentures
and the First Tranche Shares may be converted and (2) the Warrant Shares
issuable upon conversion of the Warrants issued in connection with the
First Tranche Closing is not declared effective under the Securities Act by
the Commission prior to the earlier of (A) the 90th day after the First
Tranche Closing Date and (B) the fifth day after the Company receives a
"no-review" status from the Commission with respect thereto, or such
Underlying Securities Registration Statement shall not be effective on such
subsequent Closing Date; the Underlying Securities Registration Statement
with respect to (1) the Underlying Shares into which the Second Tranche
Shares may be converted and (2) the Warrant Shares issuable upon conversion
of the Warrants issued in connection with the Second Tranche Closing has
not been declared effective under the Securities Act by the Commission
prior to the earlier of (A) the 90th day after the Second Tranche Closing
Date and (B) the fifth day after the Company receives a "no-review" status
from the Commission with respect thereto, or such Underlying Securities
Registration Statement shall not be effective on such subsequent Closing
Date; or the Underlying Securities Registration Statement with respect to
(1) the Underlying Shares into which the Third Tranche Shares may be
converted and (2) the Warrant Shares issuable upon conversion of the
Warrants issued in connection with the Third Tranche Closing has not been
declared effective under the Securities Act by the Commission prior to the
earlier of (A) the 90th day after the Third Tranche Closing Date and (B)
the fifth day after the Company receives a "no-
44
<PAGE>
review" status from the Commission with respect thereto, or such Underlying
Securities Registration Statement shall not be effective on such subsequent
Closing Date; or
(vi) a Change of Control in the Company shall have occurred.
ARTICLE VII
MISCELLANEOUS
7.1 Fees and Expenses. Each party shall pay the fees and expenses of its
-----------------
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred by such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement, except as set forth in the
Registration Rights Agreement and except that the Company shall pay all fees
and expenses of the Placement Agent and shall reimburse the Purchasers'
Representative at or prior to the First Tranche Closing for its legal fees and
disbursements of $35,000 (the Purchasers' Representative hereby acknowledging
receipt of $10,000 of such amount prior to the date hereof). The Company shall
pay all stamp and other taxes and duties levied in connection with the issuance
of the Shares pursuant hereto. Each Purchaser shall be responsible for such
Purchaser's own tax liability that may arise as a result of the investment
hereunder or the transactions contemplated by this Agreement.
7.2 Entire Agreement, Amendments. This Agreement, together with the
----------------------------
Exhibits and Schedules hereto, the Registration Rights Agreement, and the other
Transaction Documents contain the entire understanding of the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters.
7.3 Notices. Any notice or other communication required or permitted to
-------
be given hereunder shall be in writing and shall be deemed to have been received
(a) upon hand delivery (receipt acknowledged) or delivery by telex (with correct
answer back received), Telecopy or facsimile (with transmission confirmation
report) at the address or number designated below (if delivered on a Business
Day during normal business hours where such notice is to be received), or the
first Business Day following such delivery (if delivered on a Business Day after
during normal business hours where such notice is to be received) or (b) on the
second Business Day following the date of mailing by express overnight courier
service, fully prepaid, addressed to such address, or upon actual receipt of
such mailing, whichever shall first occur. The addresses for such
communications shall be:
If to the Company:
Tamboril Cigar Company
2600 South West 3rd Avenue
Miami, Florida 33129
Attn: Corporate Secretary
Tel: (800) 472-9891
Fax: (305) 860-9342
45
<PAGE>
With copies to:
Adam S. Gottbetter, Esq.
Kaplan Gottbetter & Levenson, LLP
630 Third Avenue
New York, New York 10017
Tel: (212) 983-0532
Fax: (212) 983-9210
If to any Purchaser, to its address set forth opposite its name on the
signature pages hereof.
With copies to
Mr. Stuart Chasanoff
c/o HW Partners, L.P.
1601 Elm Street, Suite 4000
Dallas, Texas 75201
Tel: (214) 720-1600
Fax: (214) 720-1662
Brown Simpson, LLC
Carnegie Hall Tower
152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Matthew Brown
Tel: (212) 247-8200
Fax: (212) 247-1329
A. Michael Hainsfurther, Esq.
Munsch Hardt Kopf Harr & Dinan, P.C.
4000 Fountain Place
1445 Ross Avenue
Dallas, Texas 75202
Tel: (214) 855-7567
Fax: (214) 855-7584
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
7.4 Amendments; Waivers. No provision of this Agreement may be waived or
-------------------
amended except in a written instrument signed, in the case of an amendment, by
both the Company and the Purchasers; or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
46
<PAGE>
7.5 Headings. The headings herein are for convenience only, do not
--------
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
7.6 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their successors and permitted assigns.
Neither the Company nor any Purchaser may assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other. The
assignment by a party of this Agreement or any rights hereunder shall not affect
the obligations of such party under this Agreement.
7.7 No Third-Party Beneficiaries. This Agreement is intended for the
----------------------------
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person, except that the representations, warranties and other
agreements contained herein of the Company are intended for the benefit of and
may be relied upon and enforced by Brown Simpson and the Placement Agent to the
extent such representations, warranties and agreements relate to the Warrants
issued hereunder to Brown Simpson and the Placement Agent, respectively.
7.8 Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof.
7.9 Survival. The agreements and covenants contained in Articles IV, V
--------
and this Article VII shall survive the delivery and conversion of the Shares
pursuant to this Agreement and the representations and warranties of the Company
and the Purchasers contained in Article III shall survive until a date that is
three years after the last Closing date.
7.10 Execution. This Agreement may be executed in two or more
---------
counterparts, all of which when taken together 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, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were the original thereof.
7.11 Publicity. The Company and the Purchasers shall consult with each
---------
other in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and neither party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other, which consent shall not be unreasonably
withheld or delayed, except that no prior consent shall be required if such
disclosure is required by law, in which such case the disclosing party shall
provide the other party with prior notice of such public statement.
7.12 Severability. In case any one or more of the provisions of this
------------
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and
47
<PAGE>
EXHIBIT A
---------
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND IN
COMPLIANCE WITH THE TERMS AND CONDITIONS OF THE PURCHASE AGREEMENT.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND
CONVERSION SET FORTH IN A CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT, DATED AS OF SEPTEMBER _____, 1997, BETWEEN THE COMPANY AND
THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF TAMBORIL CIGAR COMPANY.
No. [ ] $[ ]
TAMBORIL CIGAR COMPANY
8% CONVERTIBLE DEBENTURE DUE SEPTEMBER _____, 1999
THIS DEBENTURE is one of a duly authorized issue of debentures of Tamboril
Cigar Company, a corporation organized and existing under the laws of Delaware
and having a principal place of business at 2600 South West 3rd Avenue, Miami,
Florida 33129 (the "Company"), designated as its 8% Convertible Debentures, due
September _____, 1999 (the "Debentures"), in an aggregate principal amount of
$200,000.
FOR VALUE RECEIVED, the Company promises to pay to [ ], or its registered
assigns (the "Holder"), the principal sum of [ ] ($[ ]), on September _____,
1999 or such earlier date as Debentures are required to be repaid as provided
hereunder (the "Maturity Date") and to pay interest to the Holder on the
principal sum, at the rate of 8% per annum, payable (i) quarterly in arrears on
the last day of March, June, September and December of each year until the
Maturity Date, commencing September 30, 1997 (unless such day is not a Business
Day, in which event on the next succeeding Business Day) (each an "Interest
Payment Date"), (ii) on the Maturity Date, (iii) on each Conversion Date (as
hereafter defined) and (iv) on the date the principal amount of this Debenture
shall be declared to be or shall automatically become due and payable, from the
most recent Interest Payment Date to which interest has been paid on this
Debenture, or if no interest has been paid on this Debenture, from the date of
this Debenture until payment in full of the principal sum hereof has been made.
Interest shall accrue daily commencing on the Original Issue Date (as defined in
Section 5) until payment in full of the principal sum represented hereby,
together with all accrued and unpaid interest and other amounts which may become
due hereunder, has been made or duly provided for. Interest shall be calculated
on the basis of a 360-day year and for the actual number of days elapsed.
Interest hereunder will be paid to the person in whose name this Debenture is
registered on the records maintained by the Company as specified in Section 1(b)
regarding registration and transfers of the Debentures (the "Debenture
Register"); provided, however, that the Company's obligation to a transferee of
-------- -------
this Debenture arises only if such transfer, sale or other disposition is made
in accordance with the
<PAGE>
terms and conditions hereof and of the Convertible Debenture and Convertible
Preferred Stock Purchase Agreement, dated as of September _____, 1997 (the
"Purchase Agreement"), executed by the original Holder, including, without
limitation, the undertaking of any transferee to be bound by the terms and
conditions of the Transaction Documents as if it were an original party thereto.
All overdue amounts hereunder (including interest, to the extent permitted by
applicable law) shall bear interest at the rate of 15% per annum from the date
on which payment was due and payable through and including the date of payment.
The principal of, and interest on, this Debenture are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, except that interest due
hereunder on an Interest Payment Date may, at the Company's option, be paid in,
and interest due hereunder on a Conversion Date shall be paid in, shares of
Common Stock (as defined in Section 5) calculated based upon the average Per
Share Market Value (as defined in Section 5) for the five (5) Trading Days
immediately preceding the Interest Payment Date or the Conversion Date, as the
case may be. Other than conversion of principal of Debentures into shares of
Common Stock on a Conversion Date, all other amounts due hereunder at any time
(including interest due hereunder on the Maturity Date) shall be paid in
immediately available funds. Notwithstanding anything to the contrary contained
herein, the Company may not issue shares of Common Stock in payment of interest
on the Debentures (including, without limitation, pursuant to Section 4(b)) if:
(i) the number of shares of Common Stock at the time authorized, unissued and
reserved for all purposes, or held as treasury stock, is insufficient to pay
such interest in shares of Common Stock; (ii) the shares of Common Stock to be
issued in respect of such interest are not registered for resale pursuant to an
effective registration statement that names the recipient of such interest as a
selling stockholder thereunder; (iii) the shares of Common Stock to be issued in
respect of such interest are not listed on the Nasdaq National Market or Nasdaq
SmallCap Market and each other exchange or quotation system on which the Common
Stock is then listed for trading; or (iv) if the recipient of such interest is
the original Holder or an affiliate thereof, the issuance of such shares would
result in such recipient beneficially owning more than 4.99% of the issued and
outstanding shares of Common Stock; provided, however, if ten Business Days
-------- -------
shall have elapsed from the date that the Holder shall have declared an Event of
Default (as defined in Section 3) as having occurred and the Company shall not
have cured such Event of Default, the provisions of this clause (iv) shall be
null and void, ab initio. In addition, any payment of interest hereunder in
-- ------
shares of Common Stock shall be subject to the provisions of Section 4(a)(ii). A
transfer of the right to receive principal and interest under this Debenture
shall be transferable only through an appropriate entry in the Debenture
Register as provided herein. All terms defined in the Purchase Agreement and not
otherwise defined herein shall have for purposes hereof the meanings provided
for therein.
This Debenture is subject to the following additional provisions:
Section 1.
----------
(a) The Debentures are issuable in denominations of Fifty Thousand Dollars
($50,000) and integral multiples of Fifty Thousand Dollars ($50,000) in excess
thereof (or such other amounts as the Company and the Holder may agree upon).
The Debentures are exchangeable for an equal aggregate principal amount of
Debentures of different authorized denominations, as requested by the Holder
surrendering the same but shall not be issuable in denominations of less than
integral multiplies of Fifty Thousand Dollars ($50,000) (or such other amounts
as the Company and the Holder may agree upon). No service charge will be made
for such registration of transfer or exchange.
(b) The remaining unpaid principal amount of this Debenture (plus accrued
but unpaid interest thereon) that is not converted by the Company or the Holder
on or prior to the Maturity Date in accordance with Section 4 hereof shall be
repaid in full by the Company on the Maturity Date in immediately available
funds. The
2
<PAGE>
Company may not prepay prior to the Maturity Date all or any portion of the
outstanding principal amount of the Debentures.
(c) The Company shall keep through the Transfer Agent the Debenture
Register in which shall be entered the names and addresses of the registered
Holder of this Debenture and particulars of this Debenture held by such Holder
and of all transfers of this Debenture. References to the Holder or "Holders"
shall mean the Person listed in the Debenture Register as the registered holder
of such Debenture. The ownership of this Debenture shall be proved by the
Debenture Register.
Section 2. This Debenture has been issued subject to certain investment
----------
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Securities Act of
1933, as amended (the "Act"), pursuant to an effective registration statement or
pursuant to an available exemption from the registration requirements under the
Act. The Company is under no obligation, and has no present intention, to
register any Debenture for resale under the Act. Prior to due presentment to
the Company for transfer of this Debenture, the Company and the Transfer Agent,
and any other agent of the Company, may treat the person in whose name this
Debenture is duly registered on the Debenture Register as the owner hereof for
the purpose of receiving payment as herein provided and for all other purposes,
whether or not this Debenture is overdue, and neither the Company nor any such
agent shall be affected by notice to the contrary.
Section 3. Events of Default.
----------
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(a) any default in the payment of the principal of or interest on this
Debenture as and when the same shall become due and payable, either on an
Interest Payment Date, the Conversion Date or the Maturity Date, by acceleration
or otherwise or any default by the Company to pay when due and payable dividends
on any shares of the Company's Series B Preferred Stock, par value $.0001 per
share (the "Series B Preferred Stock") either on a Dividend Payment Date or the
Conversion Date (as such terms are defined therein), or, within five (5)
Business Days following the delivery of notice to the Company, any fees or any
other amounts payable (and not otherwise referred to in this clause (a)) by the
Company under the Purchase Agreement;
(b) the Company shall fail to timely observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach of,
this Debenture, any other Debenture issued under the Purchase Agreement, the
Purchase Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Certificate of Designation for the Series B Preferred Stock (the "Series B
Designation") or any Warrants, and such failure or breach shall not have been
remedied within five (5) Business Days after the date on which notice of such
failure or breach shall have been given or such other cure period as may
specifically be provided herein or in such other agreements with respect to any
particular covenant, agreement or warranty;
(c) the Company or any of its subsidiaries shall commence a voluntary case
under the United States Bankruptcy Code as now or hereafter in effect or any
successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced
against the Company under the Bankruptcy Code and the petition is not
controverted within 30 days, or is not dismissed within 60 days, after
commencement of such involuntary case; or a "custodian" (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or any substantial
part of the property of the Company or the Company commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
3
<PAGE>
jurisdiction whether now or hereafter in effect relating to the Company or there
is commenced against the Company any such proceeding which remains undismissed
for a period of 60 days; or the Company is adjudicated insolvent or bankrupt; or
any order of relief or other order approving any such case or proceeding is
entered; or the Company suffers any appointment of any custodian or the like for
it or any substantial part of its property which continues undischarged or
unstayed for a period of 60 days; or the Company makes a general assignment for
the benefit of creditors; or the Company shall call a meeting of its creditors
with a view to arranging a composition or adjustment of its debts; or the
Company shall by any act or failure to act indicate its consent to, approval of
or acquiescence in any of the foregoing; or any corporate or other action is
taken by the Company for the purpose of effecting any of the foregoing;
(d) the Company shall fail to pay any amount of principal or interest on
any mortgage, credit agreement or other facility, indenture or other instrument
under which there may be issued, or by which there may be secured or evidenced,
any indebtedness of the Company in an amount exceeding fifty thousand dollars
($50,000) (collectively, "Indebtedness"), whether such Indebtedness now exists
or shall hereafter be created, when and as the same shall become due and
payable, or the Company shall fail to observe or perform any term, covenant or
agreement contained in any agreement or instrument evidencing or governing any
of such Indebtedness if the cure period for such term, covenant or agreement
contained in such agreement or instrument has run and the holder or holders of
such Indebtedness or a trustee on their behalf shall have the right to cause
such Indebtedness to become due prior to its stated maturity;
(e) the Common Stock shall not be listed on either the Nasdaq National
Market or the Nasdaq SmallCap Market (or a national securities exchange) within
90 days after the First Tranche Closing Date (or if earlier, on or prior to the
date on which the registration statement relating to the shares of Common Stock
into which the Debentures are convertible, as contemplated by the Registration
Rights Agreement, is declared effective by the Commission);
(f) the trading in the Common Stock shall have been suspended by the
Commission or, once the Common Stock is listed on the Nasdaq National Market or
the Nasdaq SmallCap Market, by Nasdaq (except for any suspension of trading of
limited duration solely to permit dissemination of material information
regarding the Company and except if, at the time there is any suspension on the
Nasdaq Market, the Common Stock is then listed and approved for trading on
either the New York Stock Exchange, the American Stock Exchange, the Nasdaq
SmallCap Market, or the Nasdaq National Market within two (2) Trading Days
thereof);
(g) the Company shall have its Common Stock delisted from the Nasdaq
Market for at least ten (10) consecutive Trading Days and is unable to obtain a
listing on either the New York Stock Exchange, the American Stock Exchange, the
Nasdaq SmallCap Market or the Nasdaq National Market within such ten (10)
Trading Days; or
(h) the entry of any judgments against the Company aggregating more than
$100,000.
If any Event of Default occurs and is continuing, and in every such case, then
so long as such Event of Default shall then be continuing, the Majority Holders
(and, with respect to an Event of Default specified in paragraph (a), any
Holder) may, by written notice to the Company, declare the full outstanding
principal amount of this Debenture, together with all accrued but unpaid
interest thereon and other amounts owing hereunder, plus the "Adjustment Amount"
(as defined in Section 5), through the date of acceleration to be, whereupon the
same shall become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are waived by the Company,
notwithstanding anything herein contained to the contrary, and the Holder may
immediately and without expiration of any grace period enforce any and all of
its rights and remedies hereunder
4
<PAGE>
and all other remedies available to it under applicable law. Such declaration
may be rescinded and annulled by Holder at any time prior to payment hereunder.
No such rescission or annulment shall affect any subsequent Event of Default or
impair any right consequent thereon.
Section 4. Conversion.
---------- ----------
(a)
(i) This Debenture shall be convertible into shares of Common
Stock at the Conversion Ratio (as defined in Section 5) (subject to reduction
under Sections 4(a)(ii) and 4(c) and to adjustment under Section 4(d)), at the
option of the Holder in whole or in part at any time commencing on the date
hereof and prior to 7:30 p.m. (Eastern Time) on the Maturity Date. This
Debenture (or portion thereof) may not be converted unless the amount (including
principal and accrued but unpaid interest) surrendered for conversion (together
with the amount (including principal and accrued but unpaid interest) of all
other Debentures surrend ered at the same time for conversion by other holders)
is equal to or greater than $50,000 or, if lesser, unless the entire outstanding
principal amount of this Debenture is surrendered for conversion. The Holder
shall effect conversions by surrendering to the transfer agent the Debentures
(or such portions thereof) to be converted and by delivering to the Company and
the transfer agent for the Company's Common Stock (the "Transfer Agent") a
conversion notice in the form attached hereto as Exhibit A (the "Holder
---------
Conversion Notice"). Each Holder Conversion Notice shall specify the principal
amount of Debentures (plus accrued but unpaid interest thereon) to be converted
and the date on which such conversion is to be effected, which date may not be
prior to the date the Holder delivers such Holder Conversion Notice by facsimile
(the "Holder Conversion Date"). Subject to Sections 4(a)(ii) and 4(c), and, as
to the original Holder, subject to Section 4.3 of the Purchase Agreement, each
Holder Conversion Notice, once given, shall be irrevocable. If the Holder is
converting less than all of the principal amount represented by the Debenture(s)
tendered by the Holder with the Holder Conversion Notice, the Company shall
promptly deliver or cause to be delivered to the Holder a new Debenture for such
principal amount as has not been converted. Notwithstanding the foregoing, the
conversion rights of the original Holder shall be limited to the extent set
forth in Section 4.3 of the Purchase Agreement.
(ii) If on the Conversion Date applicable to any conversion of any
portion of the principal amount of this Debenture (A) the Common Stock is listed
for trading on the Nasdaq National Market or the Nasdaq SmallCap Market (if the
rules of the Nasdaq Stock Market are hereafter amended to extend Rule 4460(i)
promulgated thereby (or any successor or replacement provision thereof) to the
Nasdaq SmallCap Market), (B) the Conversion Price (as defined in Section
4(d)(i)) then in effect is such that the aggregate number of shares of Common
Stock that would then be issuable upon conversion of the entire outstanding
principal amount of Debentures (after taking into account any reduction required
by Section 4(c)) and all outstanding shares of Series B Preferred Stock,
together with any shares of Common Stock previously issued upon conversion of
Debentures and shares of Series B Preferred Stock or in payment of interest or
dividends, as the case may be, thereunder in accordance herewith and the Series
B Designation in shares of Common Stock, would equal or exceed 20% of the number
of shares of Common Stock outstanding on the Original Issue Date (the "Issuable
Maximum"), and (C) the Company has not previously obtained Shareholder Approval
(as defined below), then the Company shall issue to the converting Holder the
Issuable Maximum and, with respect to any shares of Common Stock that would be
issuable to such Holder in respect of the Conversion Notice at issue in excess
of the Issuable Maximum, the converting Holder shall have the option to require
the Company to (I) repay the balance of the principal amount of Debentures then
outstanding at a price equal to the product of (i) the average Per Share Market
Value for the five (5) Trading Days immediately preceding (1) the Conversion
Date or (2) the date of payment in full by the Company of such repayment price,
whichever is greater, and (ii) the Conversion Ratio calculated on the Conversion
Date or (II) as promptly as possible, but in no event later than 60 days after
such Conversion Date,
5
<PAGE>
convene a meeting of the holders of the Common Stock and obtain the Shareholder
Approval. If the Company fails for any reason to pay the repayment price
pursuant to this subsection within seven days after the Conversion Date or fails
to deliver good funds to the Transfer Agent for such purpose, the Company will
pay to the converting Holder interest on such repayment price at a rate of 15%
per annum accruing from the Conversion Date until the repayment price plus any
accrued but unpaid interest thereon is paid in full. If the converting Holder
shall have elected to require the Company to obtain Shareholder Approval and
such approval is not obtained by the Company within 60 days, then the Company
shall repay the principal amount of the Debentures in excess of the Issuable
Maximum as set forth in clause (I) above and, in such case the interest
contemplated by the immediately preceding sentence shall be deemed to accrue
from the Conversion Date. The entire repayment price, including interest
thereon, and any interest accrued because of failure by the Company to obtain
Shareholder Approval, shall be paid in cash by wire transfer of same day funds.
"Shareholder Approval" means the approval by a majority of the total votes cast
on the proposal, in person or by proxy, at a meeting of the shareholders of the
Company or such other procedure as shall be permissible under the General
Corporation Law of the State of Delaware, all held in accordance with the
Company's Certificate of Incorporation and By-laws, of the issuance by the
Company of shares of Common Stock exceeding the Issuable Maximum as a
consequence of the conversion of Debentures into Common Stock at a price less
than the greater of the book or market value on the Original Issue Date as and
to the extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or
any successor or replacement provision thereof).
(b) On the Maturity Date, this Debenture shall be convertible in whole or
in part at the option of the Company into shares of Common Stock at the
Conversion Ratio (subject to reduction under Section 4(c)); provided, however,
-----------------
that the Company is not permitted to deliver or cause to be delivered a Company
Conversion Notice (as defined below) (i) within 10 days of issuing any press
release or other public statement relating to such conversion, (ii) prior to the
270th day after the date the Commission shall have declared effective a
Registration Statement (as defined in the Registration Rights Agreement) (an
"Underlying Securities Registration Statement"), (iii) at any time that an
Underlying Securities Registration Statement is not then effective, (iv) if the
shares of Common Stock issuable upon such conversion are not then listed for
trading on the Nasdaq National Market or Nasdaq SmallCap Market, (v) if the
Company shall not have duly reserved for issuance to the Holder a sufficient
number of shares of Common Stock to issue upon such conversion, (vi) at any time
while there are shares of Series B Preferred Stock outstanding, or (vii) an
Event of Default has occurred and is then continuing. The Company shall effect
such conversion by delivering or causing to be delivered to the Holder a written
notice in the form attached hereto as Exhibit B (the "Company Conversion
---------
Notice"), which Company Conversion Notice, once given, shall be irrevocable.
The Company Conversion Notice shall specify the principal amount (and the amount
of accrued but unpaid interest thereon) of Debentures required by the Company to
be converted. The Company shall deliver or cause to be delivered the Company
Conversion Notice at least two (2) Trading Days before the date of conversion
indicated in the Company Conversion Notice, which date of conversion must be the
Maturity Date (such date is hereinafter referred to as the "Company Conversion
Date"). Any such conversion shall be effected on a prorata basis among all
holders of Debentures. Upon its receipt of a Company Conversion Notice, the
Holder shall surrender the Debentures representing the principal amount subject
to such Company Conversion Notice at the office of the Company or the Transfer
Agent for the Debentures or Common Stock not later than three (3) Trading Days
after the Company Conversion Date. The principal amount (and the amount of
accrued but unpaid interest thereon) of Debentures not converted hereunder
(either by the Company or the Holders) shall be repaid by the Company on the
Maturity Date in accordance with the terms herewith. Each of a Holder
Conversion Notice and a Company Conversion Notice is sometimes referred to
herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a
"Company Conversion Date" is sometimes referred to herein as a "Conversion
Date."
6
<PAGE>
(c) Not later than three (3) Trading Days after the Conversion Date, the
Company will, or will cause the Transfer Agent to, deliver to the Holder (i) a
certificate or certificates representing the number of shares of Common Stock
being acquired upon the conversion of Debentures (subject to reduction pursuant
to Section 4(a)(ii)), including certificates representing the number of shares
of Common Stock as equals the accrued but unpaid interest thereon divided by the
average Per Share Market Value for the five (5) Trading Days immediately
preceding the Conversion Date, and (ii) Debentures in a principal amount equal
to the principal amount of Debentures tendered in connection with a conversion
hereunder but not converted (or, in the case of a Company Conversion Notice,
payment in full in immediately available funds of such amount plus accrued but
unpaid interest thereon on the Maturity Date in accordance with the terms
herewith); provided, however, that if the Conversion Date Per Share Market Value
is less than $3.00 per share, then not later than three (3) Trading Days after
the Conversion Date, the Company will, or will cause the Transfer Agent to,
deliver to the Holder (i) a certificate or certificates representing the number
of shares of Common Stock obtained by dividing (A) the Conversion Amount (as
defined in Section 5) of the Debentures surrendered for conversion by (B) three
(such quotient being referred to herein as the "Delivery Amount"); (ii) a cash
payment in immediately available funds in an amount equal to the difference of
(A) the product of (x) the Conversion Date Per Share Market Value times (y) the
quotient obtained by dividing the Conversion Amount of such Debentures by the
Conversion Price, minus (B) the product of the Delivery Amount times the
Conversion Date Per Share Market Value; and (iii) Debentures in a principal
amount equal to the principal amount of Debentures tendered in connection with a
conversion hereunder but not converted (or, in the case of a Company Conversion
Notice, payment in full in immediately available funds of such amount plus
accrued but unpaid interest thereon on the Maturity Date in accordance with the
terms herewith). Notwithstanding the foregoing, in the event that the cash
payment required by clause (ii) of the proviso to the immediately preceding
sentence is not received by the Holder by the third Trading Day after the
Conversion Date, then such proviso shall be of no force or effect and the
Company shall deliver to the Holder, within five Trading Days after the
Conversion Date, the remaining shares of Common Stock that the Holder was
entitled to receive pursuant to this Section 4(c) upon surrendering such
Debentures for conversion and which were not already delivered to the Holder
pursuant to clause (i) of such proviso. Any certificates representing shares of
Common Stock to be delivered upon a conversion hereunder shall be free of
restrictive legends and trading restrictions on the stock transfer books of the
Company, except those contemplated by Section 4.1(b) of the Purchase Agreement.
The Company shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon conversion of any Debentures and the counting of
Trading Days for purposes of any consequences under this Section for a failure
to deliver such certificates under this Section shall not begin until Debentures
representing the principal amount to be converted are either delivered for
conversion to the Transfer Agent for the Common Stock, or until the Holder
notifies the Company that such Debentures have been lost, stolen or destroyed
and provides a bond and other supporting documentation reasonably satisfactory
to the Company and the Transfer Agent (or other adequate security reasonably
acceptable to the Company and the Transfer Agent) to indemnify the Company from
any loss incurred by it in connection therewith, provided that, if the Company
or the Transfer Agent receives the original Debentures being converted on or
prior to the time specified for the delivery of such shares of Common Stock or
on or prior to the time at which liquidated damages begin to accrue, the date of
the Holder Conversion Notice shall be deemed to be the date of delivery of such
original Debentures. The Company shall, upon request of the Holder, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section 4(c) electronically through the Depository
Trust Corporation or another established clearing corporation performing similar
functions. If such certificate or certificates are not delivered by the date
required under this Section 4(c), the Holder shall be entitled by written notice
to the Company and the Transfer Agent at any time on or before its receipt of
such certificate or certificates, to rescind such conversion, in which event the
Company shall immediately instruct the Transfer Agent to return the Debentures
representing the principal amount subject to such conversion that were tendered
for conversion. The Company shall pay to the converting Holder the liquidated
damages specified in Section 4.13 of the Purchase Agreement for each day that
the Company fails to deliver such certificate or certificates pursuant
7
<PAGE>
to this Section after the applicable Conversion Date. In addition, if the
Company fails to deliver to the holder such certificate or certificates pursuant
to this Section prior to the 15th day after the Conversion Date, the Company
shall, at the Holder's option, (i) repay the principal amount of Debentures then
held by such Holder, as requested by such Holder, in an amount equal to the
repayment price contemplated below, and (ii) pay all accrued but unpaid interest
on account of the Debentures for which the Company shall have failed to issue
Common Stock certificates hereunder, in immediately available funds. The
repayment price shall be equal to the product of (A) the average Per Share
Market Value for the five Trading Days immediately preceding (1) the Conversion
Date or (2) the date of payment in full by the Company of such repayment price,
whichever is greater, and (B) the Conversion Ratio calculated on the Conversion
Date. If the Holder has requested that the Company redeem Debentures pursuant to
this Section and the Company fails for any reason to pay the repayment price
under (2) above within seven days after such notice, the Company will pay
interest on such repayment price at a rate of 15% per annum, in immediately
available funds to such Holder, accruing from such seventh day until such
repayment price and any accrued but unpaid interest thereon is paid in full.
(d)
(i) The conversion price (the "Conversion Price") in effect on any
Conversion Date shall be the lesser of (A) the average Per Share Market Value
for the five (5) Trading Days immediately preceding the Original Issue Date (the
"Initial Conversion Price") or (B) seventy-seven and a one-half percent (77
l/2%) of the average Per Share Market Value for the five (5) Trading Days
immediately preceding the Conversion Date (such average Per Share Market Value
being referred to herein as the "Conversion Date Per Share Market Value");
provided that, if (a) an Underlying Securities Registration Statement is not
filed with the Securities and Exchange Commission (the "Commission") within 20
days after the Original Issue Date, or (b) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12dl-2 promulgated
under the Securities Exchange Act of 1934, as amended, within five (5) days of
the date that the Company is notified by the Commission that an Underlying
Securities Registration Statement will not be reviewed, or (c) if the Underlying
Securities Registration Statement is not declared effective by the Commission
within 90 days after the Original Issue Date, or (d) if such Underlying
Securities Registration Statement is filed with and declared effective by the
Commission but thereafter ceases to be effective at any time prior to the
expiration of the "Effectiveness Period" (as such term as defined in the
Registration Rights Agreement), without being succeeded within 10 Business Days
by a subsequent Underlying Securities Registration Statement filed with and
declared effective by the Commission (any such failure being referred to as an
"Event," and the date on which such Event occurs being referred to as an "Event
Date"), the Initial Conversion Price (as adjusted) and the discount comprising
the Conversion Price (if different from the Initial Conversion Price) shall be
decreased by 1% each month (i.e., 76 1/2% as of the Event Date and 75 1/2% as of
the one month anniversary of the Event Date) until such time as the applicable
Event is cured. If such Event is not cured by the third month anniversary of
the Event Date, commencing with such third month anniversary the Initial
Conversion Price (as adjusted) and the discount comprising the Conversion Price
(if different from the Initial Conversion Price) shall be decreased each month
by .5% (i.e., 75% as of the third anniversary of the Event Date and 74 1/2% as
of the fourth month anniversary of the Event Date) and the Company shall pay to
the Holders in immediately available funds, as liquidated damages and not a
penalty, .5% of the aggregate principal amount of the Debentures outstanding on
each monthly anniversary of the Event Date (each Holder being entitled to
receive such portion of such amount as equals its pro rata portion of the
principal amount of Debentures then outstanding), until such time as the
applicable Event is cured. If such Event is not cured by the fifth month
anniversary of the Event Date, the Company shall pay to the Holders in
immediately available funds, as liquidated damages and not a penalty, 1% of the
aggregate principal amount of the Debentures outstanding (each Holder being
entitled to receive such portion of such amount as equals its pro rata portion
of the principal amount of Debentures then outstanding) until such time as the
applicable Event is cured. The adjustments contained in this Section are
intended to be cumulative and any
8
<PAGE>
decrease in the Conversion Price shall be permanent. The provisions of this
Section are not exclusive and shall in no way limit the Company's obligations
under the Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Junior Securities (as defined in Section 5)
payable in shares of its capital stock (whether payable in shares of its Common
Stock or of capital stock of any class), (b) subdivide outstanding shares of
Common Stock into a larger number of shares, or (c) combine outstanding shares
of Common Stock into a smaller number of shares, the Initial Conversion Price
(as adjusted, if applicable) shall be multiplied by a fraction the numerator of
which shall be the number of shares of Common Stock of the Company outstanding
before such event and the denominator of which shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section 4(d)(ii) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision or combination.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Per Share Market Value at the record date in the
immediately following sentence, the Initial Conversion Price designated in
Section 4(d)(i) (as adjusted, if applicable) shall be multiplied by a fraction,
the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or options that would
be included for purposes of determining earnings per share in accordance with
generally accepted accounting principles) outstanding on the date of issuance of
such rights or warrants plus the number of additional shares of Common Stock
offered for subscription or purchase, and the numerator of which shall be the
number of shares of Common Stock (excluding treasury shares, if any, but
including warrants or options that would be included for purposes of determining
earnings per share in accordance with generally accepted accounting principals)
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so
offered would purchase at such Per Share Market Value. Such adjustment shall be
made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants. However, upon the expiration of any right
or warrant to purchase Common Stock the issuance of which resulted in an
adjustment in the Initial Conversion Price pursuant to this Section 4(d)(iii),
if any such right or warrant shall expire and shall not have been exercised, the
Initial Conversion Price shall immediately upon such expiration be recomputed
and effective immediately upon such expiration be increased to the price which
it would have been (but reflecting any other adjustments in the Initial
Conversion Price made pursuant to the provisions of this Section 4 after the
issuance of such rights or warrants) had the adjustment of the Initial
Conversion Price made upon the issuance of such rights or warrants been made on
the basis of offering for subscription or purchase only that number of shares of
Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised.
(iv) If the Company, at any time while Debentures are outstanding,
shall distribute to all holders of Common Stock (and not to holders of
Debentures) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Section
4(d)(iii) above), then in each such case the Initial Conversion Price at which
each Debenture shall thereafter be convertible shall be determined by
multiplying the Initial Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction the denominator of which shall be the Per Share
Market Value determined as of such record date, and the numerator of which shall
be such Per Share Market Value on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of Common Stock
as
9
<PAGE>
determined by the Board of Directors in good faith; provided, however, that
-----------------
in the event of a distribution exceeding ten percent (10%) of the assets of the
Company, such fair market value shall be determined by a nationally recognized
or major regional investment banking firm or firm of independent certified
public accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the holders of a majority of the principal amount of the
Debentures then outstanding; and provided, further, that the Company, after
--------
receipt of the determination by such Appraiser shall have the right to select an
additional Appraiser, in which case the fair market value shall be equal to the
average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the Holder and all
other holders of Debentures of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution
is made and shall become effective immediately after the record date mentioned
above.
(v) All calculations under this Section 4 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Conversion Price is adjusted pursuant to
Section 4(d)(ii),(iii), (iv) or (v), the Company shall instruct the Transfer
Agent to promptly mail to the Holder a notice setting forth the Initial
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment.
(vii) In case of any reclassification of the Common Stock or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property, the Holder shall have the right thereafter to
convert the principal amount of this Debenture into the shares of stock and
other securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or compulsory share exchange and
the Holder shall be entitled upon such event to receive such amount of
securities or property as would be payable to the holders of the shares of the
Common Stock into which such Debentures could have been converted immediately
prior to such event.
(viii) If:
(A) the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a subdivision of the
outstanding shares of Common Stock) or shall authorize a repurchase or
redemption or otherwise enter into any other transaction (including a
stock split, recapitalization or other transaction) which would cause
a decrease in the number of its shares of Common Stock issued and
outstanding (other than transactions that similarly decrease the
number of shares of Common Stock into which this Debenture is
convertible); or
(B) the Company shall declare a special nonrecurring cash
dividend on its then outstanding Common Stock; or
(C) the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any rights; or
(D) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock
(other than a subdivision or combination of the outstanding shares of
Common Stock), any consolidation or merger to which
10
<PAGE>
the Company is a party, any sale or transfer of all or substantially
all of the assets of the Company, or any compulsory share exchange
whereby the Common Stock is to be converted into other securities,
cash or property; or
(E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding-up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Debentures, and shall cause to be mailed to the
Holder at its last address as it shall appear upon the Debenture Register, at
least 30 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, repurchase, redemption,
rights or warrants, or if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend, distribution,
repurchase, redemption, rights or warrants are to be determined, or (y) the date
on which such reclassification, consolidation, merger, sale, transfer, share
exchange, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding-up; provided, however, that the failure to mail such notice or any
-----------------
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
(e) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Debentures and payment of interest on Debentures,
each as herein provided, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder, such number of
shares of Common Stock no less than twice the number of shares of Common Stock
as shall be issuable upon the conversion of the aggregate principal amount of
all outstanding Debentures and payment of interest hereunder. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issuance thereof, be duly and validly authorized, issued and fully paid, and
nonassessable.
(f) Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the Per Share Market Value at such time. If the Company elects
not to, or is unable to, make such a cash payment, the Holder shall be entitled
to receive, in lieu of the final fraction of a share, one whole share of Common
Stock.
(g) The issuance of certificates for shares of Common Stock upon
conversion of Debentures shall be made without charge to the Holder for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder.
(h) Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Conversion
Notice, shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to the attention of the Chief
Financial Officer of the Company at the facsimile telephone number or address of
the principal place of business of the Company and, if applicable, to the
Transfer Agent. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
11
<PAGE>
by certified or registered mail, postage prepaid, addressed to the Holder at the
facsimile telephone number or address of the Holder appearing on the books of
the Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if delivered via facsimile at the facsimile telephone
number specified in the Purchase Agreement prior to 4:30 p.m. (Eastern Time) on
a Trading Day, (ii) the Trading Day after the date of transmission, if delivered
via facsimile at the facsimile telephone number specified in the Purchase
Agreement later than 4:30 p.m. (Eastern Time) on any date and earlier than 11:59
p.m. (Eastern Time) on such date, (iii) the Trading Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.
Section 5. Definitions. For the purposes hereof, the following terms
---------- -----------
shall have the following meanings:
"Adjustment Amount" is equal to (i) the product of (A) the average Per
Share Market Value for the five Trading Days immediately preceding (1) the
applicable Trigger Date relating to an Event of Default or (2) the date of
payment of all amounts due as a result of such Event of Default, whichever is
greater, and (B) the Conversion Ratio with respect to the aggregate principal
amount of Debentures then outstanding calculated on (1) the applicable Trigger
Date or (2) the date of payment of all amounts due as a result of such Event of
Default, whichever yields a lower Conversion Price denominator for the
determination of the Conversion Ratio, minus (ii) the aggregate principal amount
of Debentures then outstanding, plus all accrued and unpaid interest thereon,
and all other amounts due, except for those referred to in (i) above pursuant to
the terms hereof.
"Business Day" means any day of the year on which commercial banks are not
required or authorized to be closed in New York City.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, par value $.0001 per share, of the Company, stock of any other
class into which such shares may hereafter be reclassified or changed and any
other equity securities of the Company hereafter designated as Common Stock.
"Conversion Amount" means, with respect to any Debentures surrendered for
conversion hereunder, the aggregate principal amount of such Debentures plus
accrued but unpaid interest thereon through and including the applicable
Conversion Date.
"Conversion Ratio" means, at any time, the quotient obtained by dividing
the Conversion Amount represented by any Debenture by the Conversion Price at
such time.
"Junior Securities" means the Common Stock, all other equity securities of
the Company and all other debt that is subordinated to the Debentures by its
terms.
"Original Issue Date" shall mean the date of the first issuance of this
Debenture regardless of the number of transfers hereof.
"Per Share Market Value" means on any particular date (a) the closing bid
price per share of the Common Stock on such date on the Nasdaq National Market
or other stock exchange on which the Common Stock is then listed, as reported on
Bloomberg, L.P. or if there is no such bid price on such date, then the last
closing bid price on such exchange on the date nearest preceding such date, as
reported on Bloomberg, L.P., or (b) if the Common Stock is not listed on the
Nasdaq National Market or any stock exchange, the closing bid price for a share
of
12
<PAGE>
Common Stock on such date on the Nasdaq SmallCap Market or the NASD OTC
Bulletin Board, as reported on Bloomberg, L.P. (or similar organization or
agency succeeding to its functions of reporting prices), or (c) if the Common
Stock is no longer reported on Bloomberg, L.P. (or similar organization or
agency succeeding to its functions of reporting prices), then the average of the
"Pink Sheet" bids on such date, or (d) if the Common Stock is no longer publicly
traded, the fair market value of a share of Common Stock as determined by an
Appraiser selected in good faith by the Majority Holders; provided, however,
-----------------
that the Company, after receipt of the determination by such Appraiser, shall
have the right to select an additional Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such
Appraiser.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the National Quotation Bureau Incorporated (or
any similar organization or agency succeeding its functions of reporting
prices).
"Trigger Date" shall mean, (i) with respect to an Event of Default caused
by an event described in Section 3(a), the date the payment of principal,
interest, dividends or other fees at issue was due, (ii) with respect to an
Event of Default caused by an event described in Section 3(b), the date
specified in any other provision of this Debenture or any other Debenture issued
under the Purchase Agreement, the Purchase Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Transfer Agent Agreement, the Series B
Designation or any Warrants that requires repayment of the outstanding principal
amount of this Debenture as a result of an event so contemplated or, if not, the
date such event becomes an Event of Default pursuant to Section 3(b), and (iii)
with respect to an Event of Default caused by an event described in Sections
3(c) through (i), the date that such event becomes an Event of Default pursuant
to such Sections.
Section 6. Except as expressly provided herein, no provision of this
----------
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, and interest on, this Debenture at
the time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct obligation of the Company. This Debenture ranks pari
passu with all other indebtedness, obligations or liabilities of the Company now
or hereafter issued under the terms set forth herein.
Section 7. This Debenture shall not entitle the Holder to any of the
----------
rights of a stockholder of the Company, including without limitation, the right
to vote, to receive dividends and other distributions, or to receive any notice
of, or to attend, meetings of stockholders or any other proceedings of the
Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 8. If this Debenture shall be mutilated, lost, stolen or
----------
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company and the Transfer Agent.
13
<PAGE>
Section 9. This Debenture may be modified without prior notice to any
----------
Holder but with the written consent of the Majority Holders and the Company.
However, without the consent of each Holder affected, an amendment, supplement
or waiver may not (1) reduce the principal amount of Debentures whose Holders
must consent to an amendment, supplement or waiver, (2) reduce the rate or
extend the time for payment of interest on any Debenture, (3) reduce the
principal amount of or extend the fixed maturity of any Debenture or alter the
redemption or conversion provisions with respect thereto or (4) make any
Debenture payable in money or property other than as stated in the Debenture.
Section 10. This Debenture shall be governed by and construed in
-----------
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof.
Section 11. Any waiver by the Company or the Holder of a breach of any
-----------
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
Section 12. If any provision of this Debenture is invalid, illegal or
-----------
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
Section 13. Whenever any payment or other obligation hereunder shall be
-----------
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next calendar month, the preceding Business Day in the appropriate calendar
month).
14
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
TAMBORIL CIGAR COMPANY
By:__________________________________
Dated: September __, 1997 Name:________________________________
Title:_______________________________
15
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert the above Debenture No.
_______ into shares of Common Stock, par value $.0001 per share (the "Common
Stock"), of Tamboril Cigar Company, a Delaware corporation (the "Company")
according to the conditions hereof, as of the date written below. If shares are
to be issued in the name of a person other than undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the Company
in accordance therewith. No fee will be charged to the Holder for any
conversion, except for such transfer taxes, if any.
Conversion calculations: ________________________________________________
Date to Effect Conversion
_______________________________________________
Principal Amount of Debentures to be Converted
_______________________________________________
Applicable Conversion Price
_______________________________________________
Amount of Interest due on the Principal
Amount of Debentures to be Converted
_______________________________________________
Number of Shares of Common Stock to be Issued
_______________________________________________
Signature
_______________________________________________
Name
_______________________________________________
Address
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
notice were effected in full, whereupon, if the Company determines that such
Conversion would result in the holder owning in excess of 4.99% of the
outstanding shares of Common Stock on such date, the Company shall convert up to
an amount equal to 4.99% of the outstanding shares of Common Stock and shall
issue to the holder one or more Debenture(s) which have not been converted as a
result of this provision.
16
<PAGE>
EXHIBIT B
TAMBORIL CIGAR COMPANY
NOTICE OF CONVERSION
AT THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Tamboril Cigar Company, a Delaware
corporation (the "Company"), hereby notifies the addressee hereof that the
Company hereby elects to exercise its right to convert the above Debenture No.
[____] into shares of Common Stock, $.0001 par value per share (the "Common
Stock"), of the Company according to the conditions hereof, as of the date
written below. No fee will be charged to the Holder for any conversion
hereunder, except for such transfer taxes, if any, which may be incurred by the
Company if shares are to be issued in the name of a person other than the person
to whom this notice is addressed.
Conversion calculations: ________________________________________________
Date to Effect Conversion
_______________________________________________
Principal Amount of Debentures to be Converted
_______________________________________________
Applicable Conversion Price
_______________________________________________
Amount of Interest due on the Principal
Amount of Debentures to be Converted
_______________________________________________
Number of Shares of Common Stock outstanding at
close of trading on Conversion Date
_______________________________________________
Number of Shares of Common Stock to be Issued
_______________________________________________
Signature
_______________________________________________
Name
_______________________________________________
Address
17
<PAGE>
EXHIBIT D
---------
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF THE SERIES B PREFERRED STOCK
OF
TAMBORIL CIGAR COMPANY
**********
TAMBORIL CIGAR COMPANY, a corporation organized under the General
Corporation Law of the State of Delaware (hereinafter referred to as the
"Corporation"),
DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of the
Corporation pursuant to its Amended and Restated Certificate of Incorporation,
and pursuant to the provisions of Section 151 of Title 8 of the Delaware Code of
1953, said Board of Directors by the unanimous written consent of its members,
which consent has been filed with the minutes of the Board, adopted a resolution
providing for the issuance of a series of One Hundred and Sixteen Thousand
(116,000) shares of Series B Preferred Stock, which resolution is as follows:
<PAGE>
UNANIMOUS CONSENT
OF
THE BOARD OF DIRECTORS
OF
TAMBORIL CIGAR COMPANY
THE UNDERSIGNED, being all the Directors of Tamboril Cigar Company (the
"Corporation"), acting pursuant to Section 141(f) of the General Corporation Law
of the State of Delaware, do hereby waive any notice of meeting and consent to
the adoption of the following resolutions, such resolutions to have the full
force and effect as if adopted at a properly scheduled and conducted meeting of
the Board of Directors of the Corporation:
WHEREAS, the Corporation has previously amended and restated
its Certificate of Incorporation to provide for the issuance
of preferred stock; and
WHEREAS, the Board of Directors of the Corporation has
previously adopted a Certificate of Designation relating to
the Corporation's Series A Preferred Stock and the officers
of the Corporation have caused such Certificate of
Designation to be filed with the Secretary of State of the
State of Delaware; and
WHEREAS, the Board of Directors has determined that it is in
the best interests of the Corporation to cancel the Series A
Preferred Stock and to create a Class B Preferred Stock
containing such terms, conditions, features, rights,
preferences and limitations as are contained in the
Certificate of Designation of Series B Preferred Stock
attached to this Consent as Exhibit A to facilitate the
completion of the Corporation's private placement as
aforesaid; and
NOW, THEREFORE, BE IT HEREBY, RESOLVED, that the form of
Certificate of Designation of Series B Preferred Stock of
Tamboril Cigar Company attached to this Unanimous Consent of
the Board of Directors be, and it hereby is, adopted; and be
it further
2
<PAGE>
RESOLVED, that, the officers of the Corporation be, and each
of them hereby is, authorized and directed to cause such
Series Certificate of Designation to be filed with the
Secretary of State of the State of Delaware in the manner
required by the General Corporation Law and to cause the
certificate of designation in respect of the Series A
Preferred to be cancelled; and be it further
RESOLVED, that the officers of the Corporation be, and each
of them hereby is, authorized and directed to execute and
deliver such certificates and other documents, and to take
such other actions, as each of them, in their discretion,
shall deem necessary or advisable to carry out the purposes
of the foregoing resolutions.
IN WITNESS WHEREOF, the undersigned, constituting all the
Directors of the Corporation, have set our respective hands as of this
27th day of August, 1997.
/s/ Abraham Shafir
-----------------------------------------------
Abraham Shafir
/s/ Anthony Markofsky
-----------------------------------------------
Anthony Markofsky
/s/ Thomas E. Knudson
-----------------------------------------------
Thomas E. Knudson
/s/ David Rector
-----------------------------------------------
David S. Rector
3
<PAGE>
TERMS OF
CERTIFICATE OF DESIGNATION OF
SERIES B CONVERTIBLE PREFERRED STOCK OF
TAMBORIL CIGAR COMPANY
Section 1. Designation, Amount and Par Value. The series of Preferred
---------- ---------------------------------
Stock shall be designated as the Series B Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 116,000.
The par value of each share of Preferred Stock shall be $.0001. Each share of
Preferred Stock shall have a stated value of $50 per share (the "Stated Value").
All terms defined in the Convertible Debenture and Convertible Preferred Stock
Purchase Agreement, dated September __, 1997, between the Company and the
purchasers of the Preferred Stock named therein (the "Purchase Agreement") and
not otherwise defined herein shall have for purposes hereof the meanings
provided for therein.
Section 2. Dividends.
---------- ---------
(a) Holders of outstanding shares of Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, cumulative dividends at the rate
per share (as a percentage of the Stated Value per share) equal to 8% per annum
(subject to increase pursuant to Section 2(d) hereof), in cash or (as provided
for herein) shares of Common Stock, payable quarterly in arrears on the last day
of March, June, September and December of each year commencing September 30,
1997 (each, a "Dividend Payment Date"). Any arrears in payment of dividends
hereunder shall be payable on the Conversion Date (as defined in Section 5(b))
or earlier if so determined by the Company. Dividends on shares of the
Preferred Stock shall accrue daily commencing on the Original Issue Date of such
shares, shall be calculated based on the actual number of days in such quarterly
period in a 360 day year and shall be deemed to accrue on such date whether or
not earned or declared and whether or not there are profits, surplus or other
funds of the Company legally available for the payment of dividends. The party
that holds the Preferred Stock on an applicable record date for any dividend
payment will be entitled to receive such dividend payment and any other accrued
and unpaid dividends which accrued prior to such Dividend Payment Date, without
regard to any sale or disposition of such Preferred Stock subsequent to the
applicable record date but prior to the applicable Dividend Payment Date. A
transfer of the right to receive payments hereunder shall be transferable only
through an appropriate entry in the register (the "Register") to be maintained
by the Company through the Transfer Agent, in which shall be entered the names
and addresses of the registered holder of shares of Preferred Stock and all
transfers of such shares. References to the holder or "holders" shall mean the
Person listed in the Register as the registered holder of such shares. The
ownership of such shares shall be proved by the Register. Except as otherwise
provided herein, if at any time the Company pays less
4
<PAGE>
than the total amount of dividends then accrued on account of the Preferred
Stock, such payment shall be distributed ratably among the holders of Preferred
Stock based upon the number of shares held by each Holder. Dividends due
hereunder on a Dividend Payment Date may, at the Company's option, be paid in,
and dividends due hereunder on a Conversion Date shall be paid in, shares of
Common Stock calculated based upon the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Dividend Payment Date or the
Conversion Date, as the case may be. Other than conversion of the Stated Value
of Preferred Stock into shares of Common Stock on a Conversion Date, all other
amounts due hereunder at any time shall be paid in immediately available funds.
Payment of dividends on the Preferred Stock is further subject to the provisions
of Section 5(a)(ii).
(b) Notwithstanding anything to the contrary contained herein, the Company
may not issue shares of Common Stock in payment of dividends (and must deliver
immediately available funds in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held as treasury
stock, is insufficient to issue such dividends to be paid in
shares of Common Stock;
(ii) the shares of Common Stock to be issued in respect of such
dividends are not registered for resale pursuant to an
effective registration statement that names the recipient of
such dividend as a selling stockholder thereunder;
(iii) the shares of Common Stock to be issued in respect of such
dividends are not listed on the Nasdaq SmallCap Market or
Nasdaq National Market and any other exchange or quotation
system on which the Common Stock is then listed for trading; or
(iv) if the recipient thereof is a "Purchaser" under the Purchase
Agreement (or an affiliate thereof) and the issuance of such
shares would result in such recipient beneficially owning more
than 4.99% of the issued and outstanding shares of Common
Stock; provided, however, if ten Business Days
-------- -------
shall have elapsed from the date an Event of Default (as
defined in Section 6) shall have been declared hereunder as
having occurred and the Company shall not have cured such Event
of Default, then the provisions of this clause (iv) shall be
null and void, ab initio.
-- ------
(c) So long as any shares of Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined in
Section 6), nor shall the Company directly or indirectly pay or declare any
dividend or make any distribution (other than a dividend or distribution
described in Section 5) upon, nor shall any distribution be made in respect of,
any Junior Securities, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or
5
<PAGE>
otherwise) of any Junior Securities, unless in each case all dividends on the
Preferred Stock for all past dividend periods shall have been paid.
(d) Notwithstanding anything to the contrary contained herein, upon the
occurrence of an Event of Default and for so long as such Event of Default is
continuing, the dividend rate otherwise applicable specified in Section 2(a)
shall be increased to 16% per annum or, if less, the maximum rate permitted by
applicable law. In addition, the Company shall pay to the holders in
immediately available funds, as liquidated damages and not a penalty, 1% of the
aggregate Stated Value of the Preferred Stock then held by such holder on the
date on which the Event of Default occurs (the "Event Date") and on each monthly
anniversary of the Event Date (each holder being entitled to receive such
portion of such amount as equals its pro rata portion of the aggregate Stated
Value of all shares of Preferred Stock then outstanding), until such time as the
applicable Event of Default is cured. The provisions of this Section are not
exclusive and shall in no way limit the Company's obligations under the Purchase
Agreement and the Registration Rights Agreement.
Section 3. Voting Rights. Except as otherwise provided herein and as
---------- -------------
otherwise provided by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the holders of a majority in interest
of the shares of the Preferred Stock then outstanding, (i) alter or change
adversely the powers, preferences or rights given to the Preferred Stock or (ii)
authorize or create any class of stock ranking as to dividends or distribution
of assets upon a Liquidation senior to, prior to or pari passu with the
Preferred Stock.
Section 4. Liquidation. Upon any liquidation, dissolution or winding-
---------- -----------
up of the Company, whether voluntary or involuntary (a "Liquidation"), the
holders of shares of Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus, for each
share of Preferred Stock an amount equal to the Stated Value, plus an amount
equal to accrued but unpaid dividends per share, whether declared or not, before
any distribution or payment shall be made to the holders of any Junior
Securities, and if the assets of the Company shall be insufficient to pay such
amounts in full, then the entire assets of the Company to be distributed shall
be distributed among the holders of Preferred Stock ratably in accordance with
the respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. A sale, conveyance or disposition of all or
substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than 33
1/3% of the voting power of the Company is disposed of, or a consolidation or
merger of the Company with or into any other company or companies or a
reclassification of the Common Stock shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall mail
written notice of any such Liquidation, not less than 60 days prior to the
payment date stated therein, to each record holder of Preferred Stock.
Section 5. Conversion.
---------- ----------
(a)
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<PAGE>
(i) Each share of Preferred Stock shall be convertible into shares
of Common Stock at the Conversion Ratio (subject to reduction
under Sections 5(a)(ii) and 5(c)), at the option of the holder
in whole or in part at any time after the Original Issue Date
of such share of Preferred Stock. The holder of the Preferred
Stock shall effect conversions by surrendering the certificate
or certificates representing the shares of Preferred Stock to
be converted to the Company, together with the form of
conversion notice attached hereto as Exhibit A (the "Holder
---------
Conversion Notice"). Each Holder Conversion Notice shall
specify the number of shares of Preferred Stock to be converted
and the date on which such conversion is to be effected, which
date may not be prior to the date the holder of Preferred Stock
delivers such Notice by facsimile (the "Holder Conversion
Date"). If no Holder Conversion Date is specified in a Holder
Conversion Notice, the Holder Conversion Date shall be the date
that the Holder Conversion Notice is deemed delivered pursuant
to Section 5(j). Subject to Sections 5(a)(ii) and 5(c) and, as
to the original holder of the Preferred Stock (or its sole
designee), subject to Section 4.3 of the Purchase Agreement,
each Holder Conversion Notice, once given, shall be
irrevocable. If a holder is converting less than all shares of
Preferred Stock represented by the certificate or certificates
tendered by such holder with the Holder Conversion Notice, or
if a conversion hereunder cannot be effected in full for any
reason, the Company shall promptly deliver to such holder (in
the manner within the time set forth in Section 5(c)) a
certificate for such number of shares of Preferred Stock as
have not been converted. Notwithstanding the foregoing, the
conversion rights of the original holder shall be limited to
the extent set forth in Section 4.3 of the Purchase Agreement.
(ii) If on the Conversion Date applicable to any conversion of any
shares of Preferred Stock, (A) the Common Stock is then listed
for trading on the Nasdaq National Market, or the Nasdaq
SmallCap Market (if the rules of the Nasdaq Stock Market are
hereafter amended to extend Rule 4460(i) promulgated thereby
(or any successor or replacement provision thereof) to the
Nasdaq SmallCap Market), (B) the Conversion Price (as defined
below) then in effect is such that the aggregate number of
shares of Common Stock that would then be issuable upon
conversion of all outstanding shares of Preferred Stock (after
taking into account any reduction required by Section 5(c)) and
all Debentures (as defined in Section 6), together with any
shares of Common Stock previously issued upon conversion of
Preferred Stock and Debentures, and together with any shares of
Common Stock issued in payment of dividends hereunder and
interest under the Debentures in shares of Common Stock, would
equal or exceed 20% of the number of shares of Common Stock
outstanding on the Original Issue Date of such shares of
Preferred Stock (the "Issuable Maximum"), and (C) the Company
has not previously obtained Shareholder Approval (as defined
below), then the
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<PAGE>
Company shall issue to the converting holder of Preferred Stock
the Issuable Maximum and, with respect to any shares of Common
Stock that would be issuable to such holder in respect of the
Conversion Notice at issue in excess of the Issuable Maximum,
the converting holder shall have the option to require the
Company as promptly as possible, but in no event later than 60
days after such Conversion Date, convene a meeting of the
holders of the Common Stock and obtain the Shareholder
Approval. "Shareholder Approval" means the approval by a
majority of the total votes cast on the proposal, in person or
by proxy, at a meeting of the shareholders of the Company or
such other procedure as shall be permissible under the General
Corporation Law of the State of Delaware, all held in
accordance with the Company's Certificate of Incorporation and
by-laws, of the issuance by the Company of shares of Common
Stock exceeding the Issuable Maximum as a consequence of the
conversion of shares of Preferred Stock into Common Stock at a
price less than the greater of the book or market value on the
Original Issue Date as and to the extent required pursuant to
Rule 4460(i) of the Nasdaq Stock Market (or any successor or
replacement provision thereof).
(b) On the second year anniversary of the Original Issue Date (the
"Company Conversion Date") for each share of Preferred Stock that has not
previously been converted, such share of Preferred Stock shall be automatically
convertible into shares of Common Stock at the Conversion Ratio (subject to
reduction under Section 5(c)); provided, however, that no shares of Preferred
Stock shall be converted (i) unless the Company shall have duly reserved for
issuance to the holder a sufficient number of shares of Common Stock to issue
upon such conversion; (ii) unless all of such shares may be converted into
shares of Common Stock in accordance with Section 5(a)(ii); or (iii) if an Event
of Default shall have occurred hereunder and is continuing. In connection with
such conversion, the Company shall deliver to the holders of such shares of
Preferred Stock a written notice in the form attached hereto as Exhibit B (the
---------
"Company Conversion Notice"). The Company Conversion Notice shall specify the
number of shares of Preferred Stock that will be subject to automatic conversion
on the Company Conversion Date. The Company shall deliver or cause to be
delivered the Company Conversion Notice at least two (2) Trading Days before the
Company Conversion Date. The holders of the Preferred Stock shall surrender the
certificates representing such shares at the office of the Company or the
Transfer Agent not later than three (3) Trading Days after the Company
Conversion Date. Each of a Holder Conversion Notice and a Company Conversion
Notice is sometimes referred to herein as a "Conversion Notice," and each of a
"Holder Conversion Date" and a "Company Conversion Date" is sometimes referred
to herein as a "Conversion Date."
(c) Not later than three (3) Trading Days after the Conversion Date, the
Company will, or will cause the Transfer Agent to, deliver to the holder of
Preferred Stock (i) a certificate or certificates representing the number of
shares of Common Stock being acquired upon the conversion of shares of Preferred
Stock (subject to any reduction required pursuant to Section 5(a)(ii)),
8
<PAGE>
including certificates representing the number of shares of Common Stock as
equals the accrued but unpaid dividends thereon divided by the average Per Share
Market Value for the five (5) Trading Days immediately preceding the Conversion
Date, and (ii) one or more certificates representing the number of shares of
Preferred Stock not converted; provided, however, that if the Conversion Date
Per Share Market Value is less than $3.00 per share, then not later than three
(3) Trading Days after the Conversion Date, the Company will, or will cause the
Transfer Agent to, deliver to the holder of Preferred Stock (i) a certificate or
certificates representing the number of shares of Common Stock obtained by
dividing (A) the Conversion Amount (as defined in Section 6) of the shares of
Preferred Stock surrendered for conversion by (B) three (such quotient being
referred to herein as the "Delivery Amount"); (ii) a cash payment in immediately
available funds in an amount equal to the difference of (A) the product of (x)
the Conversion Date Per Share Market Value times (y) the quotient obtained by
dividing the Conversion Amount of such shares by the Conversion Price, minus (B)
the product of the Delivery Amount times the Conversion Date Per Share Market
Value; and (iii) one or more certificates representing the number of shares of
Preferred Stock not converted. Notwithstanding the foregoing, in the event that
the cash payment required by clause (ii) of the proviso to the immediately
preceding sentence is not received by the holder by the third Trading Day after
the Conversion Date, then such proviso shall be of no force or effect and the
Company shall deliver to the holder, within five Trading Days after the
Conversion Date, the remaining shares of Common Stock that the holder was
entitled to receive pursuant to this Section 5(c) upon surrendering such shares
of Preferred Stock for conversion and which were not already delivered to the
holder pursuant to clause (i) of such proviso. Any certificates representing
shares of Common Stock to be delivered upon a conversion hereunder shall be free
of restrictive legends and trading restrictions on the stock transfer books of
the Company, except those contemplated by Section 4.1(b) of the Purchase
Agreement. The Company shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon conversion of any shares of Preferred
Stock and the counting of Trading Days for purposes of any consequences under
this Section for a failure to deliver such certificates under this Section shall
not begin until certificates representing the shares of Preferred Stock to be
converted are either delivered for conversion to the Transfer Agent for the
Common Stock, or until the holder notifies the Company that such certificates
representing the shares of Preferred Stock have been lost, stolen or destroyed
and provides a bond and other supporting documentation reasonably satisfactory
to the Company and the Transfer Agent (or other adequate security reasonably
acceptable to the Company and the Transfer Agent) to indemnify the Company from
any loss incurred by it in connection therewith, provided that, if the Company
or the Transfer Agent receives the original certificates representing the shares
of Preferred Stock being converted on or prior to the time specified for the
delivery of such shares of Common Stock or on or prior to the time at which
liquidated damages begin to accrue, the date of the Holder Conversion Notice
shall be deemed to be the date of delivery of such original certificates
representing the shares of Preferred Stock. The Company shall, upon request of
the holder, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section 5(c) electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If such certificate or certificates
are not delivered by the date required under this Section 5(c), the holder shall
be entitled by written notice to the Company and the Transfer Agent at any time
on or before its receipt of such certificate or certificates, to rescind such
conversion, in which event the Company
9
<PAGE>
shall immediately instruct the Transfer Agent to return the certificates
representing the shares of Preferred Stock subject to such conversion that were
tendered for conversion. The Company shall pay to the converting holder the
liquidated damages specified in Section 4.13 of the Purchase Agreement for each
day that the Company fails to deliver such certificate or certificates pursuant
to this Section after the applicable Conversion Date.
(d)
(i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be
the lesser of (x) the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Original Issue
Date for such share of Preferred Stock (the "Initial Conversion
Price"), and (y) seventy-seven and a one-half percent (77 1/2%)
of the average Per Share Market Value for the five (5) Trading
Days immediately preceding the Conversion Date (such average
Per Share Market Value being referred to herein as the
"Conversion Date Per Share Market Value").
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, (a) shall pay a stock dividend or otherwise
make any distributions on shares of its Junior Securities
payable in shares of its capital stock (whether payable in
shares of its Common Stock or of capital stock of any class),
(b) subdivide outstanding shares of Common Stock into a larger
number of shares, or (c) combine outstanding shares of Common
Stock into a smaller number of shares, the Initial Conversion
Price designated in Section 5(d)(i) shall be multiplied by a
fraction of which the numerator shall be the number of shares
of Common Stock of the Company outstanding before such event
and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made
pursuant to this Section 5(d)(ii) shall become effective
immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date
in the case of a subdivision or combination.
(iii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights or warrants to all holders
of Common Stock entitling them to subscribe for or purchase
shares of Common Stock at a price per share less than the Per
Share Market Value of Common Stock at the record date mentioned
below, the Initial Conversion Price designated in Section
5(d)(i) shall be multiplied by a fraction, of which the
denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or
options that would be included for purposes of determining
earnings per share in accordance with generally accepted
accounting principles) outstanding on the date of issuance of
such rights or
10
<PAGE>
warrants plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the
numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or
options that would be included for purposes of determining
earnings per share in accordance with generally accepted
accounting principles) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so
offered would purchase at such Per Share Market Value. Such
adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive
such rights or warrants. However, upon the expiration of any
right or warrant to purchase Common Stock the issuance of which
resulted in an adjustment in the Initial Conversion Price
designated in Section 5(d)(i) pursuant to this Section
5(d)(iii), if any such right or warrant shall expire and shall
not have been exercised, the Initial Conversion Price
designated in Section 5(d)(i) shall immediately upon such
expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been
(but reflecting any other adjustments in the Initial Conversion
Price made pursuant to the provisions of this Section 5 after
the issuance of such rights or warrants) had the adjustment of
the Initial Conversion Price made upon the issuance of such
rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of Common
Stock actually purchased upon the exercise of such rights or
warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock
(and not to holders of Preferred Stock) evidences of its
indebtedness or assets or rights or warrants to subscribe for
or purchase any security (excluding those referred to in
Section 5(d)(iii) above), then in each such case the Initial
Conversion Price at which each share of Preferred Stock shall
thereafter be convertible shall be determined by multiplying
the Initial Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the
denominator shall be the Per Share Market Value of Common Stock
determined as of the record date mentioned above, and of which
the numerator shall be such Per Share Market Value of the
Common Stock on such record date less the then fair market
value at such record date of the portion of such assets or
evidences of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Board of
Directors in good faith; provided, however that in the event of
a distribution exceeding ten percent (10%) of the assets of the
Company, such fair market value shall be determined by a
nationally recognized or major regional investment banking firm
or firm of
11
<PAGE>
independent certified public accountants of recognized
standing (which may be the firm that regularly examines the
financial statements of the Company) (an "Appraiser") selected
in good faith by the holders of a majority in interest of the
shares of Preferred Stock then outstanding; and provided,
further, that the Company, after receipt of the determination
by such Appraiser shall have the right to select an additional
Appraiser, in which case the fair market value shall be equal
to the average of the determinations by each such Appraiser. In
either case the adjustments shall be described in a statement
provided to the holders of Preferred Stock of the portion of
assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record
date mentioned above.
(v) All calculations under this Section 5 shall be made to the
nearest c or the nearest 1/100th of a share, as the case may
be.
(vi) Whenever the Initial Conversion Price is adjusted pursuant to
Section 5(d)(ii),(iii), (iv) or (v), the Company shall, or
shall instruct the Transfer Agent to, promptly mail to the
holders of Preferred Stock a notice setting forth the Initial
Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another
person pursuant to which the Company will not be the surviving
entity, the sale or transfer of all or substantially all of the
assets of the Company or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities,
cash or property, the holders of the Preferred Stock then
outstanding shall have the right thereafter to convert such
shares into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation,
merger, sale, transfer or share exchange, and the holders of
the Preferred Stock shall be entitled upon such event to
receive such amount of securities, cash or property as would be
payable to the holders of the shares of the Common Stock of the
Company into which such shares of Preferred Stock could have
been converted immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange. The
terms of any such consolidation, merger, sale, transfer or
share exchange shall include such terms so as to continue to
give to the holder of Preferred Stock the right to receive the
securities, cash or property set forth in this Section
5(d)(vii) upon any conversion following such consolidation,
merger, sale, transfer or share exchange. This provision shall
similarly apply to
12
<PAGE>
successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.
(viii) If:
(A) the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a
subdivision of the outstanding shares of Common Stock)
or shall authorize a repurchase or redemption or
otherwise enter into any other transaction (including a
stock split, recapitalization or other transaction)
which would cause a decrease in the number of its
shares of Common Stock issued and outstanding (other
than transactions that similarly decrease the number of
shares of Common Stock into which shares of Preferred
Stock are convertible); or
(B) the Company shall declare a special nonrecurring cash
dividend on its then outstanding Common Stock; or
(C) the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or
of any rights; or
(D) the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares of
Common Stock), any consolidation or merger to which the
Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; or
(E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding-up of
the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the holders of Preferred Stock at their last respective addresses as they shall
appear upon the Register, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
repurchase, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of
13
<PAGE>
record to be entitled to such dividend, distribution, repurchase, redemption,
rights or warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding-up; provided,
however, that the failure to mail such notice or any defect therein or in the
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice.
(e) If at any time conditions shall arise by reason of action taken by the
Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and adversely
affect the rights of the holders of Preferred Stock (different than or
distinguished from the effect generally on rights of holders of any class of the
Company's capital stock) or if at any time any such conditions are expected to
arise by reason of any action contemplated by the Company, the Company shall, at
least 30 calendar days prior to the effective date of such action, mail a
written notice to each holder of Preferred Stock briefly describing the action
contemplated and the material adverse effects of such action on the rights of
such holders and an Appraiser selected by the holders of majority in interest of
the Preferred Stock shall give its opinion as to the adjustment, if any (not
inconsistent with the standards established in this Section 5), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of Preferred Stock may thereafter be convertible) and any
distribution which is or would be required to preserve without diluting the
rights of the holders of shares of Preferred Stock; provided, however that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case the adjustment shall be
equal to the average of the adjustments recommended by each such Appraiser. The
Board of Directors shall make the adjustment recommended forthwith upon the
receipt of such opinion or opinions or the taking of any such action
contemplated, as the case may be; provided, however, that no such adjustment of
the Conversion Price shall be made which in the opinion of the Appraiser(s)
giving the aforesaid opinion or opinions would result in an increase of the
Conversion Price to more than the Conversion Price then in effect.
(f) The Company (i) represents and warrants that as of the Initial
Original Issue Date (as defined in Section 6), it has duly reserved solely for
issuance upon conversion of Preferred Stock, as herein provided, out of its
authorized and unissued Common Stock free from preemptive rights or any other
actual or contingent purchase rights of persons other than holder of Preferred
Stock, twice the number of shares of Common Stock as would be issuable upon
conversion of all of the shares of the Preferred Stock that are authorized for
issuance hereunder as if all such shares were issued on, and such conversion had
occurred on, the Initial Original Issue Date and (ii) covenants that it will at
all times reserve and keep available out of its authorized and unissued Common
Stock solely for the purpose of issuance upon conversion of Preferred Stock as
herein provided, free from preemptive rights or any other actual or contingent
purchase rights of persons other than the holders of Preferred Stock, twice the
number of shares of Common Stock as shall be issuable (taking into account the
adjustments and restrictions of Section 5(d) hereof) upon the conversion of the
aggregate of all outstanding shares of Preferred Stock that are authorized for
issuance hereunder. The Company
14
<PAGE>
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid and nonassessable.
(g) Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the Per Share Market Value at such time. If the Company elects
not to, or is unable to, make such a cash payment, the holder of Preferred Stock
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(h) The issuance of certificates for shares of Common Stock on conversion
of Preferred Stock shall be made without charge to the holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the holder of such shares of Preferred Stock so converted and the
Company shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
(i) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
preferred stock.
(j) Any and all notices or other communications or deliveries to be
provided by the holder hereunder, including, without limitation, any Conversion
Notice, shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to the attention of the Chief
Financial Officer of the Company at the facsimile telephone number or address of
the principal place of business of the Company and if applicable to the Transfer
Agent. Any and all notices or other communications or deliveries to be provided
by the Company hereunder shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or sent by
certified or registered mail, postage prepaid, addressed to the holder at the
facsimile telephone number or address of the holder appearing on the books of
the Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if delivered via facsimile at the facsimile telephone
number specified in the Purchase Agreement prior to 4:30 p.m. (Eastern Time) on
a Trading Day, (ii) the Trading Day after the date of transmission, if delivered
via facsimile at the facsimile telephone number specified in the Purchase
Agreement later than 4:30 p.m. (Eastern Time) on any date and earlier than 11:59
p.m. (Eastern Time) on such date, (iii) the Trading Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.
15
<PAGE>
Section 6. Definitions. For the purposes hereof, the following terms
---------- -----------
shall have the following meanings:
"Business Day" means any day of the year on which commercial banks are not
required or authorized to be closed in New York City.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, $.0001 par value, of the Company, stock of any other class into
which such shares may hereafter have been reclassified or changed and any other
equity securities of the Company hereafter designated as Common Stock.
"Conversion Amount" means, with respect to any share of Preferred Stock
surrendered for conversion hereunder, the Stated Value of such share of
Preferred Stock plus accrued but unpaid dividends thereon through and including
the applicable Conversion Date.
"Conversion Ratio" means, at any time, the quotient obtained by dividing
the Conversion Amount by the Conversion Price at such time.
"Debentures" means the 8% Convertible Debentures delivered by the Company
pursuant to the Purchase Agreement.
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(a) any default by the Company to pay when due and payable dividends on
any shares of Preferred Stock, either on a Dividend Payment Date or Conversion
Date, or any other amounts hereunder, or any default in the payment of the
principal of or interest on the Debentures as and when the same shall become due
and payable, either on an Interest Payment Date, the Conversion Date or the
Maturity Date (as such terms are defined in the Debentures), by acceleration or
otherwise, or, within five (5) Business Days following the delivery of notice to
the Company, any fees or any other amounts payable (and not otherwise referred
to in this clause (a)) by the Company under the Purchase Agreement;
(b) the Company shall fail to timely observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach of,
this Certificate of Designation, the Debentures, the Purchase Agreement, the
Registration Rights Agreement, the Escrow Agreement, or any Warrants, and such
failure or breach shall not have been remedied within five (5) Business Days
after the date on which notice of such failure or breach shall have been given
or such other cure period as may specifically be provided herein or in such
other agreements with respect to any particular covenant, agreement or warranty;
16
<PAGE>
(c) the Company or any of its subsidiaries shall commence a voluntary case
under the United States Bankruptcy Code as now or hereafter in effect or any
successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced
against the Company under the Bankruptcy Code and the petition is not
controverted within 30 days, or is not dismissed within 60 days, after
commencement of such involuntary case; or a "custodian" (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or any substantial
part of the property of the Company or the Company commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or there
is commenced against the Company any such proceeding which remains undismissed
for a period of 60 days; or the Company is adjudicated insolvent or bankrupt; or
any order of relief or other order approving any such case or proceeding is
entered; or the Company suffers any appointment of any custodian or the like for
it or any substantial part of its property which continues undischarged or
unstayed for a period of 60 days; or the Company makes a general assignment for
the benefit of creditors; or the Company shall call a meeting of its creditors
with a view to arranging a composition or adjustment of its debts; or the
Company shall by any act or failure to act indicate its consent to, approval of
or acquiescence in any of the foregoing; or any corporate or other action is
taken by the Company for the purpose of effecting any of the foregoing;
(d) the Company shall fail to pay any amount of principal or interest on
any mortgage, credit agreement or other facility, indenture or other instrument
under which there may be issued, or by which there may be secured or evidenced,
any indebtedness of the Company in an amount exceeding fifty thousand dollars
($50,000) (collectively, "Indebtedness"), whether such Indebtedness now exists
or shall hereafter be created, when and as the same shall become due and
payable, or the Company shall fail to observe or perform any term, covenant or
agreement contained in any agreement or instrument evidencing or governing any
of such Indebtedness if the cure period for such term, covenant or agreement
contained in such agreement or instrument has run and the holder or holders of
such Indebtedness or a trustee on their behalf shall have the right to cause
such Indebtedness to become due prior to its stated maturity;
(e) the Common Stock shall not be listed on either the Nasdaq National
Market or the Nasdaq SmallCap Market (or a national securities exchange) within
90 days after the First Tranche Closing Date (or if earlier, on or prior to the
date on which the registration statement relating to the shares of Common Stock
into which shares of Preferred Stock are convertible, as contemplated by the
Registration Rights Agreement, is declared effective by the Commission);
(f) the trading in the Common Stock shall have been suspended by the
Commission or, once the Common Stock is listed on the Nasdaq National Market or
the Nasdaq SmallCap Market, by Nasdaq (except for any suspension of trading of
limited duration solely to permit dissemination of material information
regarding the Company and except if, at the time there is any suspension on the
Nasdaq Market, the Common Stock is then listed and approved for trading on
either the New York Stock Exchange, the American Stock Exchange, the Nasdaq
SmallCap Market, or the Nasdaq National Market within two (2) Trading Days
thereof);
17
<PAGE>
(g) the Company shall have its Common Stock delisted from the Nasdaq
Market for at least ten (10) consecutive Trading Days and is unable to obtain a
listing on either the New York Stock Exchange, the American Stock Exchange, the
Nasdaq SmallCap Market or the Nasdaq National Market within such ten (10)
Trading Days; or
(h) the entry of any judgments against the Company aggregating more than
$100,000.
"Initial Original Issue Date" means the Original Issue Date for the first
shares of Preferred Stock issued hereunder.
"Junior Securities" means the Common Stock and all other classes of equity
securities of the Company, other than the Series B Convertible Preferred Stock.
"Original Issue Date" shall mean, with respect to any share of Preferred
Stock, the date of the first issuance of such share of Preferred Stock
regardless of the number of transfers of such share of Preferred Stock and
regardless of the number of certificates which may be issued to evidence such
share of Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing bid
price per share of the Common Stock on such date on the Nasdaq National Market
or other stock exchange on which the Common Stock is then listed, as reported on
Bloomberg, L.P. or if there is no such bid price on such date, then the last
closing bid price on such exchange on the date nearest preceding such date, as
reported on Bloomberg, L.P., or (b) if the Common Stock is not listed on the
Nasdaq National Market or any stock exchange, the closing bid price for a share
of Common Stock on such date on the Nasdaq SmallCap Market or the NASD OTC
Bulletin Board, as reported on Bloomberg, L.P. (or similar organization or
agency succeeding to its functions of reporting prices), or (c) if the Common
Stock is no longer reported on Bloomberg, L.P. (or similar organization or
agency succeeding to its functions of reporting prices), then the average of the
"Pink Sheet" bids on such date, or (d) if the Common Stock is no longer publicly
traded, the fair market value of a share of Common Stock as determined by an
Appraiser selected in good faith by the holders of a majority in interest of the
shares of Preferred Stock then outstanding; provided, however, that the Company,
after receipt of the determination by such Appraiser, shall have the right to
select an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Trading Day" means (a) a day on which the Common Stock is traded on The
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on The Nasdaq
National Market or Nasdaq SmallCap Market or any principal national
18
<PAGE>
securities exchange or market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices).
19
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder to Convert shares of Series B Preferred
Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series B Convertible Preferred Stock indicated below into shares of Common
Stock, par value $.0001 per share (the "Common Stock"), of Tamboril Cigar
Company (the "Company") according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
Holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
_______________________________________________
Date to Effect Conversion
_______________________________________________
Number of shares of Series B Preferred Stock
to be Converted
_______________________________________________
Applicable Conversion Price
_______________________________________________
Amount of Accrued but Unpaid Dividends due on
the Preferred Stock to be Converted
_______________________________________________
Number of shares of Common Stock to be Issued
_______________________________________________
Signature
_______________________________________________
Name:
_______________________________________________
Address:
20
<PAGE>
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile and telephone of the number of shares
of Common Stock outstanding on such date and the number of shares of Common
Stock which would be issuable to the holder if the conversion requested in this
conversion notice were effected in full, whereupon, the holder may, within one
day of the notice from the Company, revoke the conversion requested hereby in
whole or in part if determines that such conversion would result in it owning in
excess of 4.99% of the outstanding shares of Common Stock on such date, and the
Company shall issue to the holder one or more certificates representing shares
of Preferred Stock which have not been converted as a result of this provision.
If the holder waives the applicability of this limitation by notice to the
Company delivered upon its receipt of the Company's notice regarding the number
of outstanding shares of Common Stock or if the holder fails to respond to the
Company's notice within one day thereafter, the Company shall effect in full the
conversion requested in this notice.
21
<PAGE>
EXHIBIT B
TAMBORIL CIGAR COMPANY
NOTICE OF AUTOMATIC CONVERSION
The undersigned in the name and on behalf of Tamboril Cigar Company (the
"Company") hereby notifies the addressee hereof that [ ] shares of the
Series B Convertible Preferred Stock held by the Holder will be converted into
shares of Common Stock, par value $.0001 per share (the "Common Stock"), of the
Company according to the terms of the Preferred Stock, as of the date written
below. No fee will be charged to the Holder for any conversion hereunder,
except for such transfer taxes, if any which may be incurred by the Company if
shares are to be issued in the name of a person other than the person to whom
this notice is addressed.
Conversion calculations:
_______________________________________________
Date to Effect Conversion
_______________________________________________
Number of shares of Series B Preferred Stock to
be Converted
_______________________________________________
Applicable Conversion Price
_______________________________________________
Amount of Accrued but Unpaid Dividends due on
the Preferred Stock to be Converted
_______________________________________________
Number of shares of Common Stock to be Issued
_______________________________________________
Signature
_______________________________________________
Name:
_______________________________________________
Address:
22
<PAGE>
IN WITNESS WHEREOF, said TAMBORIL CIGAR COMPANY has caused this certificate to
be signed by Anthony Markofsky, its President, and attested by David S. Rector,
its Secretary, this 27 day of August, 1997.
TAMBORIL CIGAR COMPANY
By: /s/ Anthony Markofsky
---------------------------------
Anthony Markofsky
President
ATTEST:
By: /s/ David S. Rector
---------------------------------
David S. Rector
Secretary
23
<PAGE>
EXHIBIT E
---------
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE UNDERLYING 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 OR
BLUE SKY LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO DISTRIBUTION, AND NEITHER THESE SECURITIES NOR ANY
INTEREST OR PARTICIPATION THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED,
ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF AND IN COMPLIANCE
WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
TAMBORIL CIGAR COMPANY
WARRANT CERTIFICATE
Dated [ ], 199[ ]
Warrants to Purchase Common Stock
---------------------------------
TAMBORIL CIGAR COMPANY, a Delaware corporation (the "Company"), hereby
certifies that, for value received, _______________ ("Holder"), or its
registered assigns, is the registered owner of _______/1/ Warrants (the
"Warrants"), each of which will entitle the Holder thereof to purchase one
share, as adjusted from time to time as provided in Section 7, of the Common
Stock, par value $.0001 per share, of the Company (the "Common Stock", each such
share being a "Warrant Share" and all such shares being the "Warrant Shares") at
the exercise price of $____________ per share/2/
_____________________________
/1/ The Warrants issuable at the First Tranche Closing to the
Purchasers, Brown Simpson, LLC, and the Placement Agent shall cover in the
aggregate 225,000 shares of Common Stock. The Warrants issuable at each of the
Second Tranche Closing and the Third Tranche Closing shall cover one-half
(subject to adjustment for combinations, subdivisions, reclassifications, etc.,
of the Common Stock) of the number of shares of Common Stock covered by the
Warrants issuable at the First Tranche Closing.
/2/ The Exercise Price for the Warrants issuable at the First Tranche
Closing shall be equal to 125% of the average Per Share Market Value for the
five Trading Days immediately preceding the Original Issue Date (as such term is
defined in the Series B Terms) for the First Tranche Shares. The Exercise Price
for the Warrants issuable at the Second Tranche Closing and the Third Tranche
Closing, respectively, shall be equal to the lesser of (i) the Exercise Price
for the respective Warrants issuable at the First Tranche Closing and (ii) 125%
of the average Per Share Market Value for the five Trading Days immediately
preceding the Original Issue Date for the Second Tranche Shares or Third Tranche
Shares, as the case may be.
<PAGE>
(as adjusted from time to time as provided in Section 3(e) or Section 7, the
"Exercise Price") at any time on or after the date hereof (the "Initial Exercise
Date") until and including September __, 2002 (the "Expiration Date"), all
subject to the following terms and conditions.
This Warrant is being issued and delivered pursuant to that certain
Convertible Debenture and Convertible Preferred Stock Purchase Agreement among
the Company and the Purchasers listed on the signature pages thereto (the
"Purchase Agreement"). Capitalized terms used and not otherwise defined herein
shall have the meanings given such terms in the Purchase Agreement.
For purposes of calculating the Exercise Price, the following definitions
shall apply:
"Per Share Market Value" means on any particular date (a) the closing bid
price per share of the Common Stock on such date on the Nasdaq National Market
or other stock exchange on which the Common Stock is then listed, as reported on
Bloomberg, L.P. or if there is no such bid price on such date, then the last
closing bid price on such exchange on the date nearest preceding such date, as
reported on Bloomberg, L.P., or (b) if the Common Stock is not listed on the
Nasdaq National Market or any stock exchange, the closing bid price for a share
of Common Stock on such date on the Nasdaq SmallCap Market or the NASD OTC
Bulletin Board, as reported on Bloomberg, L.P. (or similar organization or
agency succeeding to its functions of reporting prices), or (c) if the Common
Stock is no longer reported on Bloomberg, L.P. (or similar organization or
agency succeeding to its functions of reporting prices), then the average of the
"Pink Sheet" bids on such date, or (d) if the Common Stock is no longer publicly
traded, the fair market value of a share of Common Stock as determined by an
Appraiser (as defined below) selected in good faith by the Holder; provided,
--------
however, that the Company, after receipt of the determination by such Appraiser,
- -------
shall have the right to select an additional Appraiser, in which case, the fair
market value shall be equal to the average of the determinations by each such
Appraiser.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the National Quotation Bureau Incorporated (or
any similar organization or agency succeeding its functions of reporting
prices).
1. Registration of Warrants. The Company shall register each Warrant,
------------------------
upon records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder of such Warrant from time to time.
The Company may deem and treat the registered Holder of each Warrant as the
absolute owner thereof for the purpose of any exercise thereof or any
distribution to the Holder thereof, and for all other purposes, and the Company
shall not be affected by the notice to the contrary.
2
<PAGE>
2. Registration of Transfers and Exchanges.
---------------------------------------
a. The Company shall register, or instruct the Transfer Agent to
register, the transfer of any Warrants in the Warrant Register, upon surrender
of this Warrant Certificate, with the Form of Assignment attached hereto duly
completed and signed, to the Transfer Agent or the Company at the office
specified in or pursuant to Section 3(c). Upon any such registration of
transfer, a new Warrant Certificate, in substantially the form of this Warrant
Certificate ("New Warrants"), evidencing the Warrants so transferred shall be
issued to the transferee and a New Warrant evidencing the remaining Warrants not
so transferred, if any, shall be issued to the then registered holder thereof.
b. This Warrant Certificate is exchangeable, upon the surrender
hereof by the holder hereof to the Transfer Agent or at the office of the
Company specified in or pursuant to Section 3(c), for New Warrants evidencing in
the aggregate the right to purchase the number of Warrant Shares which may then
be purchased hereunder, each of such New Warrants to be dated the date of such
exchange and to represent the right to purchase such number of Warrant Shares as
shall be designated by said holder hereof at the time of such surrender.
3. Duration and Exercise of Warrants.
---------------------------------
a. Warrants shall be exercisable by the registered holder thereof on
any business day before 5:00 P.M., New York time, at any time and from time to
time on or after the Initial Exercise Date to and including the Expiration Date.
At 5:00 P.M., New York time, on the Expiration Date, each Warrant not exercised
prior thereto shall be and become void and of no value.
b. Subject to the limitations set forth in Section 3(c) and to the
other provisions of this Warrant Certificate, including adjustments to the
number of Warrant Shares issuable on the exercise of each Warrant and to the
Exercise Price pursuant to Section 3(e) and Section 7, the Holder of this
Warrant shall have the right to purchase from the Company (and the Company shall
be obligated to issue and sell to the Holder) at the Exercise Price one fully
paid Warrant Share which is non-assessable.
c. Subject to Sections 2(b), 4 and 8, upon surrender of this Warrant
Certificate, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Transfer Agent at Two Broadway, 19th Floor, New
York, New York 10004, Attention: Roger Bernhammer or to the Company at its
office at 2600 South West 3rd Avenue, Miami, Florida 33129, Attention: Corporate
Secretary, or at such other address as the Company may specify in writing to the
then registered Holder of the Warrants, and upon payment of the Exercise Price
multiplied by the number of Warrant Shares then issuable upon exercise of the
Warrants being exercised in lawful money of the United States of America, all as
specified by the Holder of this Warrant Certificate in the Form of Election to
Purchase, the Company shall promptly issue and cause to be delivered to or upon
the written order of the registered Holder of such Warrants, and in such name or
names as such registered Holder may designate, a certificate for the Warrant
Shares issued upon such exercise of such Warrants, free of restrictive legends
other than legends that may be required in the opinion of the Company's counsel
in the event at such time there is not an effective Registration Statement as
3
<PAGE>
contemplated by the Registration Rights Agreement. Any person so designated to
be named therein shall be deemed to have become Holder of record of such Warrant
Shares as of the Date of Exercise of such Warrants.
The "Date of Exercise" of any Warrant means the date on which the
Transfer Agent or the Company shall have received (i) this Warrant Certificate
(or any New Warrant, as applicable) with the Form of Election to Purchase
attached hereto (or thereto) appropriately completed and duly signed, and (ii)
payment of the Exercise Price for such Warrant.
d. The Warrants evidenced by this Warrant Certificate shall be
exercisable, either as an entirety or, from time to time, for part of the number
of Warrants evidenced by this Warrant Certificate so long as at least twenty-
five hundred (2,500) Warrant Shares are exercised. If less than all of the
Warrants evidenced by this Warrant Certificate are exercised at any time, the
Company shall issue, at its expense, a New Warrant for the remaining number of
Warrants evidenced by this Warrant Certificate.
e. If (i) an Underlying Securities Registration Statement covering
the Warrant Shares is not filed with the Securities and Exchange Commission (the
"Commission") within 20 days after the Initial Exercise Date, or (ii) the
Company fails to file with the Commission a request for acceleration in
accordance with Rule 12dl-2 promulgated under the Securities Exchange Act of
1934, as amended, within five (5) days of the date that the Company is notified
by the Commission that an Underlying Securities Registration Statement will not
be reviewed, or (iii) the Underlying Securities Registration Statement is not
declared effective by the Commission within 90 days after Initial Exercise Date,
or (iv) if such Underlying Securities Registration Statement is filed with and
declared effective by the Commission but thereafter ceases to be effective at
any time prior to the expiration of the "Effectiveness Period" (as such term as
defined in the Registration Rights Agreement), without being succeeded within 10
Business Days by a subsequent Underlying Securities Registration Statement filed
with and declared effective by the Commission (any such failure being referred
to as an "Event," and the date on which such Event occurs being referred to as
an "Event Date"), the Exercise Price shall be decreased by 1% as of the Event
Date and an additional 1% as of each one month anniversary of the Event Date
until such time as the applicable Event is cured. The adjustments contained in
this Section are intended to be cumulative and any decrease in the Exercise
Price shall be permanent. The provisions of this Section are not exclusive and
shall in no way limit the Company's obligations under the Registration Rights
Agreement.
4. Payment of Taxes. The Company will pay all documentary stamp taxes
----------------
attributable to the issuance of Warrant Shares upon the exercise of the Warrants
represented by this Warrant Certificate; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the registration of any certificates for Warrant Shares
in a name other than that of the Holder, and the Company shall not be required
to issue or deliver the certificates for Warrant Shares unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for all
other tax liability that may arise as a result of holding or transferring the
Warrants represented by this Warrant Certificate or receiving the Warrant Shares
under this Warrant Certificate.
4
<PAGE>
5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or
----------------------
destroyed, the Company may in its discretion issue in exchange and substitution
for and upon cancellation hereof, or in lieu of and substitution for this
Warrant, a new Warrant of like tenor, but only upon receipt of evidence
reasonably satisfactory to the Company and the Transfer Agent of such loss,
theft or destruction and bond or other indemnity, if requested, satisfactory to
it. Applicants for a substitute Warrant certificate also shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
6. Reservation of Warrant Shares. The Company will at all times reserve
-----------------------------
and keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Common Stock or its authorized and issued Common Stock
held in its treasury, for the purpose of enabling it to satisfy any obligation
to issue Warrant Shares upon exercise of the Warrants, a number of shares of
Common Stock equal to at least twice the maximum number of Warrant Shares (as
adjusted from time to time pursuant to Section 7 hereof) which may then be
---------
deliverable upon the exercise of this Warrant and all other outstanding warrants
issued and sold pursuant to the Purchase Agreement. The Company covenants that
all Warrant Shares that shall be so issuable and deliverable shall, upon
issuance thereof, be duly and validly authorized, issued and fully paid, and
nonassessable.
7. Adjustment to the Number of Warrant Shares Issuable. The number of
---------------------------------------------------
Warrant Shares issuable upon the exercise of this Warrant is subject to
adjustment from time to time as set forth in this Section 7. Upon each such
---------
adjustment of the Exercise Price pursuant to this Section 7, the Holder shall
thereafter prior to the Expiration Date be entitled to purchase, at the Exercise
Price resulting from such adjustment, the number of Warrant Shares obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares issuable upon exercise of this Warrant immediately
prior to such adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment. In the event the Company and the holders of the
Warrants issued pursuant to the Purchase Agreement that are then outstanding
disagree as to any adjustment to the Exercise Price hereunder, an Appraiser
selected by the holders of a majority of the Warrants issued pursuant to the
Purchase Agreement that are then outstanding (the "Majority Holders") shall give
its opinion as to the adjustment, if any (not inconsistent with the standards
established in this Section 7), of the Exercise Price; provided, however that
-------- -------
the Company, after receipt of the determination by such Appraiser, shall have
the right to promptly select an additional Appraiser, in which case the
adjustment shall be equal to the average of the adjustments recommended by each
such Appraiser. The Board of Directors shall make the adjustment recommended
forthwith upon the receipt of such opinion or opinions; provided, however, that
-------- -------
no such adjustment of the Exercise Price shall be made which in the opinion of
the Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Exercise Price to more than the Exercise Price then in effect.
a. If the Company, at any time while this Warrant is outstanding,
(i) shall pay a stock dividend or otherwise make a distribution or distributions
on shares of its Junior Securities (as such term is defined in the Convertible
Debentures) payable in shares of its capital stock (whether payable in shares of
its Common Stock or of capital stock of any class), (ii) subdivide outstanding
shares of Common Stock into a larger number of shares, (iii) combine outstanding
shares of Common Stock into a smaller number of shares, or (iv) issue by
reclassification of shares of Common Stock any shares of capital stock of the
Company, the Exercise Price shall be multiplied by a fraction of
5
<PAGE>
which the numerator shall be the number of shares of Common Stock outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section 7(a) shall become effective immediately after the record date for the
- ------------
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification.
b. If the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock (and not to the Holder)
evidences of its indebtedness or assets or rights or warrants to subscribe for
or purchase any security (excluding those referred to in Sections 7(a), 7(c) and
-----------------------
7(d) hereof), then in each such case the Exercise Price for which the Warrant
- ----
Shares shall be purchased shall be determined by multiplying the Exercise Price
in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Exercise Price determined as of the record date
mentioned above, and of which the numerator shall be the Exercise Price on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm that
regularly examines the financial statements of the Company) (an "Appraiser")
---------
selected in good faith by the Majority Holders; and further provided, however,
that the Company, after receipt of the determination by such Appraiser shall
have the right to select an additional Appraiser, in which case the fair market
value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the Holder and all other holders of Warrants of the portion of
assets or evidences of indebtedness so distributed or such subscription rights
applicable to one share of Common Stock. Such adjustment shall be made whenever
any such distribution is made and shall become effective immediately after the
record date mentioned above.
c. In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property as the shares of the Common Stock
into which this Warrant could have been converted immediately prior to such
reclassification, consolidation, merger, sale, transfer or share exchange would
have been entitled. The terms of any such consolidation, merger, sale, transfer
or share exchange shall include such terms so as to continue to give to the
Holder the right to receive the securities or property set forth in this Section
-------
7(c) upon any exercise following such consolidation, merger, sale, transfer or
- ----
share exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share exchanges.
d. If and whenever after the date hereof, the Company shall issue
rights or warrants to acquire or otherwise sell or distribute any shares of
Common Stock for a consideration per share less than the Exercise Price then in
effect, then, forthwith upon such issue or sale, the
6
<PAGE>
Exercise Price shall be reduced to the price (calculated to the nearest cent)
determined by dividing (i) an amount equal to the sum of (A) the number of
shares of Common Stock (excluding treasury shares, if any, but including
warrants or options that would be included for purposes of determining earnings
per share in accordance with generally accepted accounting principles)
outstanding immediately prior to such issue or sale multiplied by the Exercise
Price, and (B) the consideration, if any, received or receivable by the Company
upon such issue or sale by (ii) the total number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or options that would
be included for purposes of determining earnings per share in accordance with
generally accepted accounting principles) outstanding immediately after such
issue or sale. Such adjustment shall be made whenever such rights or warrants
are issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase Common Stock
the issuance of which resulted in an adjustment in the Exercise Price pursuant
to this Section, if any such right or warrant shall expire and shall not have
been exercised, the Exercise Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Exercise Price made pursuant to the provisions hereof after the issuance of such
rights or warrants) had the adjustment of the Exercise Price made upon the
issuance of such rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
e. For the purposes of this Section 7, the following clauses shall
also be applicable:
(i) Record Date. In case the Company shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (A) to receive
a dividend or other distribution payable in Common Stock or in convertible
securities, or (B) to subscribe for or purchase Common Stock or convertible
securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(ii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purposes of this subsection
(e).
(iii) Certain Issues Excepted. Anything herein to the contrary
-----------------------
notwithstanding, the Company shall not be required to make any adjustment of any
Exercise Price in case of the issuance of the Convertible Debentures, the
Shares, the Warrants, the Underlying Shares and the Warrant Shares pursuant to
the Purchase Agreement, or in the event that the Company shall grant options to
purchase the Company's Common Stock pursuant to a bona fide employee stock
option, stock purchase or non-employee director plan duly adopted by its
shareholders.
f. If:
7
<PAGE>
i. the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a
subdivision of the outstanding shares of Common Stock)
or shall authorize a repurchase or redemption or
otherwise enter into any other transaction (including
stock split, recapitalization or other transaction)
which would cause a decrease in the number of its
shares of Common Stock issued and outstanding (other
than transactions that similarly decrease the number
of shares of Common Stock for which this Warrant is
exercisable); or
ii. the Company shall declare a special nonrecurring cash
dividend on its then-outstanding Common Stock; or
iii. the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital stock
of any class or of any rights, or
iv. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares
of Common Stock), any consolidation or merger to which
the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property, or
v. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding-up of
the affairs of the Company;
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least thirty (30) days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, repurchase, redemption, rights or warrants, or if a
record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distributions, repurchase, redemption,
rights or warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding-up; provided,
however, that the failure to mail such notice or any defect therein or in the
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice.
8
<PAGE>
g. In any case in which this Section 7 shall require that an
---------
adjustment be made effective as of the record date for a specified event, the
Company may elect to defer until occurrence of such event (A) issuing to the
Holder, if this Warrant is exercised after such record date, the Warrant Shares
and other capital stock of the Company, if any, issuable upon such exercise over
and above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Exercise Price prior to
adjustment and (B) paying to the Holder any amount in cash in lieu of a
fractional share pursuant to Section 8 hereof, provided, however, that the
Company shall deliver to the Holder a due bill or other appropriate instrument
evidencing the Holder's right to receive such additional Warrant Shares, other
capital stock and/or cash upon the occurrence of the event requiring such
adjustment.
h. Any determination that the Company or the Board of Directors must
make pursuant to this Section 7 shall be conclusive if made in good faith.
---------
i. If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially affect the
rights of the Holders (different than or distinguished from the effect generally
on rights of holders of any class of the Company's capital stock) or if at any
time such conditions are expected to arise by reason of any action contemplated
by the Company, the Company shall mail a written notice briefly describing the
action contemplated and the material adverse effects of such action on the
rights of the Holders at least 30 calendar days prior to the effective date of
such action, and an Appraiser selected by the Holders of majority in interest of
the Warrants shall give its opinion as to the adjustment, if any (not
inconsistent with the standards established in Section 7(e)), of the Exercise
Price (including, if necessary, any adjustment as to the Warrant Shares to be
purchased upon exercise of this Warrant) and any distribution which is or would
be required to be preserved without diluting the rights of the Holders.
8. Fractional Shares. The Company shall not be required to issue
-----------------
fractional Warrant Shares on the exercise of this Warrant. The number of full
Warrant Shares which shall be issuable upon the exercise of this Warrant shall
be computed on the basis of the aggregate number of Warrant Shares purchasable
on exercise of this Warrant so presented. If any fraction of a Warrant Share
would, except for the provisions of this Section 8, be issuable on the exercise
---------
of this Warrant, the Company shall, at its option (a) pay an amount in cash
equal to the Exercise Price multiplied by such fraction or (b) shall round the
number of Warrant Shares issuable, up to the next whole number of such shares.
9. Warrant Agent.
-------------
a. The Company shall serve as warrant agent under this Warrant.
Upon thirty (30) days' notice to the holders of Warrants issued pursuant to the
Purchase Agreement, the Company and the Majority Holders may appoint a new
warrant agent.
b. Any corporation into which the Company or any new warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor
9
<PAGE>
warrant agent under this Warrant without any further act. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent to
be mailed (by first class mail, postage prepaid) to the Holder at the Holder's
last address as shown on the register maintained by the warrant agent pursuant
to this Warrant.
10. Notices. All notices or other communications hereunder shall be
-------
given, and shall be deemed duly given and received if given, by facsimile and by
mail, postage prepaid: (1) if to the Company, addressed as follows: Tamboril
Cigar Company, 2600 South West 3rd Avenue, Miami, Florida 33129, Attention:
Corporate Secretary, or to facsimile no. (305) 860-9342; or (ii) if to the
Holder, addressed to the Holder at the facsimile telephone number and address of
the Holder appearing on the Warrant Register or such other address or facsimile
number as the Holder may provide to the Company in accordance with this Section
-------
10. Any such notice shall be deemed given and effective upon the earliest to
- --
occur of (i) receipt of such facsimile at the facsimile telephone number
specified in this Section 10, (ii) five (5) Business Days after deposit in the
----------
United States mails or (iii) upon actual receipt by the party to whom such
notice is required to be given.
11. Miscellaneous.
-------------
a. This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns (provided that the
Company's obligation to a transferee of this Warrant arises only if such
transfer is made in accordance with the terms of the Purchase Agreement and the
transferee agrees to be bound by the terms of the Purchase Agreement and the
other Transaction Documents).
b. Subject to Section 11(a) above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company, the
Holder and any registered holder of Warrant Shares any legal or equitable right,
remedy or cause under this Warrant; this Warrant shall be for the sole and
exclusive benefit of the Company, the Holder and any other registered holder of
Warrant Shares.
c. This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
d. The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
e. In case any one or more of the provisions of this Warrant shall
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Warrant shall not in any way be
affected or impaired thereby and the parties will attempt in good faith to agree
upon a valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
10
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its authorized officer as of the date first indicated above.
TAMBORIL CIGAR COMPANY
By:________________________________
Name:______________________________
Title:_____________________________
11
<PAGE>
FORM OF ELECTION TO PURCHASE
(To Be Executed by the Holder if the Holder Desires to Exercise Warrants
Evidenced by the Foregoing Warrant Certificate)
To Tamboril Cigar Company:
The undersigned hereby irrevocably elects to exercise ____________ Warrants
evidenced by the foregoing Warrant Certificate for, and to purchase thereunder,
______________ full shares of Common Stock issuable upon exercise of said
Warrants and delivery of $_________ in cash and any applicable taxes payable by
the undersigned pursuant to such Warrant Certificate.
The undersigned requests that certificates for such shares be issued in the
name of
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
_____________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
If said number of Warrants shall not be all the Warrants evidenced by the
foregoing Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercise be issued in the name of and
delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated: ________, 19_____ Name of Holder:
(Print)_____________________________________
(By:)_______________________________________
(Title:)
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, ____________________________________________ hereby
sells, assigns, and transfers to each assignee set forth below all of the rights
of the undersigned in and to the number of Warrants (as defined in and evidenced
by the foregoing Warrant Certificate) set opposite the name of such assignee
below and in and to the foregoing Warrant Certificate with respect to said
Warrants and the shares of Common Stock issuable upon exercise of said Warrants:
Name of Assignee Address Number of Warrants
- ---------------- ------- ------------------
If the total of said Warrants shall not be all the Warrants evidenced
by the foregoing Warrant Certificate, the undersigned requests that a new
Warrant Certificate evidencing the Warrants not so assigned be issued in the
name of and delivered to the undersigned.
Dated: _______, 19_____ Name of Holder:
(Print)_____________________________________
(By:)_______________________________________
(Title:)
<PAGE>
EXHIBIT C
---------
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), is made and entered
into as of September __, 1997, by and among Tamboril Cigar Company, a
corporation organized and existing under the laws of the State of Delaware (the
"Company"), the purchasers listed on the signature pages hereof (collectively,
the "Purchasers"), Brown Simpson, LLC ("Brown Simpson") and Refco Securities,
Inc. (the "Placement Agent").
This Agreement is made in connection with the Convertible Debenture and
Convertible Preferred Stock Purchase Agreement, dated September __, 1997, by and
among the Purchasers and the Company (the "Purchase Agreement"). The execution
of this Agreement is a condition to the closing of the transactions contemplated
by the Purchase Agreement.
The Company, the Placement Agent, Brown Simpson and the Purchasers hereby
agree as follows:
1. Definitions
-----------
Capitalized terms used and not otherwise defined herein shall have the
meanings given such terms in the Purchase Agreement. As used in this Agreement,
the following terms shall have the following meanings:
"Advice" shall have meaning set forth in Section 4.
------ ---------
"Affiliate" means, with respect to any Person, any other Person that
---------
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control " when used with
-------
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
---------- ----------- ----------
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day which
------------
shall be a legal holiday or a day on which banking institutions in the state of
New York generally are authorized or required by law or other government actions
to close.
"Closing" shall mean the First Tranche Closing, the Second Tranche Closing
-------
or the Third Tranche Closing, as applicable, as such terms are defined in the
Purchase Agreement.
"Closing Date" shall mean the First Tranche Closing Date, the Second
------------
Tranche Closing Date or the Third Tranche Closing Date, as applicable, as such
terms are defined in the Purchase Agreement.
<PAGE>
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the Company's Common Stock, $.0001 par value per
------------
share.
"Convertible Debentures" means the Company's 8% Convertible Debentures
----------------------
delivered to the Purchasers pursuant to the Purchase Agreement.
"Effectiveness Date" means, with respect to a Registration Statement, in
------------------
the case of a Closing, the earlier of the 90th day following the applicable
Closing Date and the fifth (5th) day after the date the Company is notified by
the Commission that such Registration Statement will not be reviewed.
"Effectiveness Period" shall have the meaning set forth in Section 2(a).
--------------------
"Event" shall have the meaning set forth in Section 6.
-----
"Event Date" shall have the meaning set forth in Section 6.
----------
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Filing Date" means, with respect to a Registration Statement, in the case
-----------
of a Closing, the 20th day following the applicable Closing Date.
"First Tranche Shares" means the shares of Series B Preferred Stock to be
--------------------
issued and sold at the First Tranche Closing pursuant to the Purchase Agreement.
"Holder" or "Holders" means the holder or holders, as the case may be, from
------ -------
time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 8(c).
-----------------
"Indemnifying Party" shall have the meaning set forth in Section 8(c).
------------------
"Losses" shall have the meaning set forth in Section 8(a).
------
"New York Courts" shall have the meaning set forth in Section 10(h).
---------------
"Person" means an individual or a corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Preferred Shares" means the First Tranche Shares, the Second Tranche
----------------
Shares and the Third Tranche Shares.
2
<PAGE>
"Proceeding" means an action, claim, suit, investigation or proceeding
----------
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration Statement
----------
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by the
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means (a) with respect to the Registration
----------------------
Statement to be filed in connection with the First Tranche Closing, the Warrant
Shares issuable upon exercise of the Warrants to be delivered in connection with
the closing for the First Tranche Shares (including the Warrants to be delivered
to the Placement Agent and Brown Simpson) and the shares of Common Stock
issuable upon conversion of the Convertible Debentures and upon conversion of
the First Tranche Shares; (b) with respect to the Registration Statement to be
filed in connection with the Second Tranche Closing, the Warrant Shares issuable
upon exercise of the Warrants to be delivered in connection with the closing for
the Second Tranche Shares (including the Warrants to be delivered to the
Placement Agent and Brown Simpson) and the shares of Common Stock issuable upon
conversion of the Second Tranche Shares; and (c) with respect to the
Registration Statement to be filed in connection with the Third Tranche Closing,
the Warrant Shares issuable upon exercise of the Warrants to be delivered in
connection with the closing for the Third Tranche Shares (including the Warrants
to be delivered to the Placement Agent and Brown Simpson) and the shares of
Common Stock issuable upon conversion of the Third Tranche Shares; provided,
however, that in order to account for adjustments in the conversion and exercise
ratios, in the case of each of (a), (b) and (c), Registrable Securities shall
include a number of shares of Common Stock equal to no less than two times the
number of shares of Common Stock into which the Convertible Debentures and the
particular Preferred Shares are convertible assuming conversion in full on the
particular Closing Date for the Convertible Debentures and such Preferred Shares
together with such number of Warrant Shares issuable upon exercise of the
Warrants issued on such particular Closing Date, or such other number of shares
of Common Stock as agreed to by the parties to the Purchase Agreement.
Notwithstanding anything herein contained to the contrary, if, by reason of
adjustments or otherwise, the number of shares of Common Stock into which the
Convertible Debentures and Preferred Shares are convertible and for which the
Warrants are exercisable, as calculated at any time after the applicable Closing
Date, exceeds twice the number of shares of Common Stock into which the
Convertible Debentures or the particular Preferred Shares is convertible or for
which the Warrants are exercisable based upon a computation as at such
particular Closing Date, then the term "Registrable Securities" shall be deemed
to include such additional shares and the Company shall promptly file
appropriate amendments to such Registration Statements to evidence such increase
in the time contemplated herein for filing of appropriate amendments in
accordance with the terms hereof.
3
<PAGE>
"Registration Statement" means the registration statement, contemplated by
----------------------
Section 2(a), including the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
--------
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to the
--------
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
--------
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Second Tranche Shares" means the shares of Series B Preferred Stock to be
---------------------
issued and sold at the Second Tranche Closing pursuant to the Purchase
Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Series B Preferred Stock" means the shares of the Company's Series B
------------------------
Convertible Preferred Stock, par value $.0001 per share.
"Special Counsel" means any special counsel to the Holders, the fees and
---------------
expenses of which the Holders will be reimbursed by the Company pursuant to
Section 7(b).
"Third Tranche Shares" means the shares of Series B Preferred Stock to be
--------------------
issued and sold at the Third Tranche Closing pursuant to the Purchase Agreement.
"Underwritten Registration" or "Underwritten Offering" means a registration
------------------------- ---------------------
in connection with which securities of the Company are sold to an underwriter
for reoffering to the public pursuant to an effective registration statement.
"Warrants" means the Common Stock purchase warrants issued in accordance
--------
with the terms of the Purchase Agreement to the Purchasers, the Placement Agent
and Brown Simpson, as applicable.
"Warrant Shares" means the shares of Common Stock issuable upon exercise of
--------------
the Warrants.
2. Shelf Registration
------------------
4
<PAGE>
(a) On or prior to each Filing Date, the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering the resale of
all Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form S-1 or
another appropriate form permitting registration of Registrable Securities for
resale by the Holders in the manner or manners designated by them (including,
without limitation, public or private sales and one or more Underwritten
Offerings). The Company shall (i) not permit any securities other than the
Registrable Securities to be included in the Registration Statement and (ii) use
its best efforts to cause the Registration Statement to be declared effective
under the Securities Act as promptly as practicable after the filing thereof,
but in any event prior to the Effectiveness Date, and to keep such Registration
Statement continuously effective under the Securities Act until the date which
is three years after the date of this Agreement or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold or
may be sold pursuant to Rule 144 as determined by the counsel to the Company
pursuant to a written opinion letter, addressed to the Holders, to such effect
(the "Effectiveness Period"); provided, however, that the Company shall not be
-------------------- -------- -------
deemed to have used its best efforts to keep the Registration Statement
effective during the Effectiveness Period if it voluntarily takes any action
that would result in the Holders not being able to sell the Registrable
Securities covered by such Registration Statement during the Effectiveness
Period, unless such action is required under applicable law or the Company has
filed a post-effective amendment to the Registration Statement and the
Commission has not declared it effective. Should the Registration Statement not
relate to the maximum number of Registrable Securities acquired by (or
potentially acquirable by) the Holders thereof upon conversion or exercise of
the Convertible Debentures, Preferred Shares and Warrants (because of the
indeterminable number of shares of Common Stock issuable upon conversion or
exercise thereof), the Company shall be required to file a separate registration
statement (utilizing Rule 462 promulgated under the Securities Act, where
applicable) relating to such Registrable Securities which then remain
unregistered. The provisions of this Agreement shall relate to such separate
registration statement as if it were an amendment to such Registration
Statement.
(b) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to a Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such offering exceeds the amount of Registrable Securities which can
be sold in such offering, there shall be included in such Underwritten Offering
the amount of such Registrable Securities which in the opinion of such managing
underwriters can be sold, and such amount shall be allocated pro rata among the
--- ----
Holders proposing to sell Registrable Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders of
a majority of the Registrable Securities included in such offering and the
Company shall be advised in advance of the identity of any underwriter and the
general terms of the proposed offering. No Holder may participate in any
Underwritten Offering hereunder unless such Person (i) agrees to sell its
Registrable Securities on the basis provided in any
5
<PAGE>
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
3. Hold-Back Agreements
--------------------
(a) Restrictions on Public Sale by the Holders. Subject to paragraph
------------------------------------------
(b) of this Section 3, each Holder hereby understands and agrees that its
---------
registration rights pursuant to this Agreement and its ability to offer and sell
Registrable Securities pursuant to the Registration Statement are limited by the
provisions of the immediately following sentence. If the Company determines in
its good faith judgment that the filing of a Registration Statement in
accordance with Section 2 or the use of any Prospectus would require the
---------
disclosure of material information relating to a significant merger or
acquisition to which the Company is a party and to which the Company has a bona
fide business purpose for preserving as confidential or the disclosure of which
would impede the Company's ability to consummate such significant transaction,
upon written notice of such determination by the Company, the rights of each
Holder to offer, sell or distribute any Registrable Securities pursuant to a
Registration Statement or to require the Company to take action with respect to
the registration or sale of any Registrable Securities pursuant to a
Registration Statement (including any action contemplated by Section 4) will,
---------
for up to 60 days in respect of a single such notice or event or series of
related events in any 12-month period, be suspended until the date upon which
the Company notifies the Holders in writing that suspension of such rights for
the grounds set forth in this Section 3(a) is no longer necessary.
------------
(b) Limitation on Blackouts. Notwithstanding anything contained
-----------------------
herein to the contrary, the aggregate number of days (whether or not
consecutive) during which the Company may delay the effectiveness of a
Registration Statement or prevent offerings, sales or distributions by a Holder
pursuant to paragraph (a) above or the last paragraph of Section 4
---------
(collectively, a "Blackout") shall in no event exceed 60 days during any 12-
--------
month period.
4. Registration Procedures
-----------------------
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission within the time period set
forth in Section 2 a Registration Statement on Form S-1 or another appropriate
---------
form permitting registration of Registrable Securities for resale by the Holders
in accordance with the method or methods of distribution thereof as specified by
the Holders, and cause the Registration Statement to become effective and remain
effective as provided herein; provided, however that, subject only to the
-------- -------
Holders providing to the Company in writing information relating to the Holders'
proposed method of distribution of Registrable Securities, not less than ten
days prior to the filing of the Registration Statement or any related Prospectus
or any amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the
6
<PAGE>
Company shall (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the opinion of respective counsel to such Holders and such
underwriters, to conduct a reasonable investigation within the meaning of the
Securities Act. The Holders shall have five days after receipt of the
Registration Statement or any related Prospectus or any amendment or supplement
thereto to comment on or object to the filing of such documents. The Company
shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto without including any comments reasonably
requested by the Holders and shall not file any such documents to which the
Holders of a majority of the Registrable Securities, their Special Counsel, or
any managing underwriters, shall object; provided, however, that the counting of
days for determining whether the Company has complied with the Filing Date and
Effectiveness Date requirements for purposes of Section 6 hereof shall not
include any days during the period commencing with such objection and ending
when the Person objecting subsequently consents to the filing of such documents.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective for the
applicable time period; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement, and as so supplemented or
amended to be filed pursuant to Rule 424 (or any similar provisions then in
force) promulgated under the Securities Act; (iii) respond as promptly as
practicable to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto; and (iv) comply with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the Holders thereof set forth in the Registration Statement as so
amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters immediately (and, in the case of
(i)(A) below, not less than ten Business Days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; and (B) with respect to the Registration Statement or any post-
effective amendment, when the same has become effective; (ii) of any request by
the Commission or any other federal or state governmental authority for
amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement (including any underwriting agreement)
contemplated hereby ceases to be true and correct in all material respects; (v)
of the receipt by the Company of any notification with respect to the suspension
of the qualification or exemption from
7
<PAGE>
qualification of any of the Registrable Securities for sale in any jurisdiction,
or the initiation or threatening of any Proceeding for such purpose; and (vi) of
the occurrence of any event that makes any statement made in the Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of a
majority of the Registrable Securities to be sold in connection with an
Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably agree should be included
therein and (ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided, however, that the Company shall not be
required to take any action pursuant to this Section 4(e) that would, in the
opinion of counsel for the Company, violate applicable law.
(f) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one complete copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their respective counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder or underwriter
requests in writing, to
8
<PAGE>
keep each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, however,
-------- -------
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificates shall be free of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such managing underwriters or
Holders may request at least two Business Days prior to any sale of Registrable
Securities.
(j) Upon the occurrence of any event contemplated by Section 4(c)(vi),
----------------
as promptly as practicable, prepare a supplement or amendment, including a post-
effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on the Nasdaq National Market, the
Nasdaq SmallCap Market and any other securities exchange, market or over-the-
counter bulletin board, if any, on which similar securities issued by the
Company are then listed.
(l) Enter into such agreements (including an underwriting agreement in
form, scope and substance as is customary in Underwritten Offerings) and take
all such other actions in connection therewith (including those reasonably
requested by any managing underwriters and the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into, (i) make such representations and warranties to such
Holders and such underwriters as are customarily made by issuers to underwriters
in underwritten public offerings, and confirm the same if and when requested;
(ii) obtain and deliver copies thereof to each Holder and the managing
underwriters, if any, of opinions of counsel to the Company and updates thereof
addressed to each selling Holder and each such underwriter, in form, scope and
substance reasonably satisfactory to any such managing underwriters and Special
Counsel to the selling Holders covering the matters customarily covered in
opinions requested in Underwritten Offerings and such other matters as may be
reasonably requested by such Special Counsel and underwriters; (iii) immediately
prior to the effectiveness of the Registration Statement, and, in the case of an
Underwritten Offering, at the time of delivery of any Registrable Securities
sold pursuant thereto, obtain and deliver copies to the
9
<PAGE>
Holders and the managing underwriters, if any, of "cold comfort" letters and
updates thereof from the independent certified public accountants of the Company
(and, if necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company for which
financial statements and financial data is, or is required to be, included in
the Registration Statement), addressed to each selling Holder and each of the
underwriters, if any, in form and substance as are customary in connection with
Underwritten Offerings; (iv) if an underwriting agreement is entered into, the
same shall contain indemnification provisions and procedures no less favorable
to the selling Holders and the underwriters, if any, than those set forth in
Section 8 (or such other provisions and procedures acceptable to the managing
- ---------
underwriters, if any, and holders of a majority of Registrable Securities
participating in such Underwritten Offering); and (v) deliver such documents and
certificates as may be reasonably requested by the Holders of a majority of the
Registrable Securities being sold, their Special Counsel and any managing
underwriters to evidence the continued validity of the representations and
warranties made pursuant to clause 4(1)(i) above and to evidence compliance with
any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
-------- -------
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the Commission
and make generally available to its security holders earning statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
not later than 45 days after the end of any 12-month period (or 90 days after
the end of any 12-month period if such period is a fiscal year) (i) commencing
at the end of any fiscal quarter in which Registrable Securities are sold to
underwriters in a firm commitment or best efforts Underwritten Offering and (ii)
if not sold to underwriters in such an offering, commencing on the first day of
the first fiscal quarter of the Company after the effective date of the
Registration Statement, which statement shall cover said 12-month period, or
such shorter periods as is consistent with the requirements of Rule 158.
10
<PAGE>
(o) Use its best efforts to cause its legal counsel to render an
opinion at the time the Registration Statement is declared effective by the
Commission, which opinion shall set forth that such legal counsel has
participated in the preparation of the Registration Statement or prospectus
thereunder, as the case may be, and to the knowledge of such legal counsel there
is no reason to believe that the Registration Statement or prospectus
thereunder, as the case may be, contains any untrue statement of material fact
required to be stated therein or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading
(except, in the case of the Registration Statement or prospectus thereunder, for
the financial statements, notes thereto and other financial information and
schedules contained therein).
(p) At such time as the Registration Statement has been declared
effective by the Commission covering the resale of any Registrable Securities,
the Company shall cause its legal counsel to deliver to the Transfer Agent an
opinion certifying that such Registrable Securities may be sold by the Holders
pursuant to such Registration Statement with the purchasers thereof receiving
share certificates without restrictive legend, which opinion shall remain
effective so long as such Registration Statement remains in full force and
effect. In the event that, at any time, such Registration Statement ceases to
be effective, the Company or its legal counsel shall immediately deliver written
notice thereof to the Transfer Agent and the Holders stating that the opinion of
the Company's legal counsel may no longer be relied upon by the Transfer Agent
(unless and until an additional or amended, as applicable, Registration
Statement is so declared effective (with respect to the resale of such
Registrable Securities) with an accompanying opinion to that effect from the
Company's legal counsel). Upon the receipt of any conversion or exercise notice
while the Registration Statement is effective, the share certificates
representing such Registrable Securities shall bear a restrictive legend unless
the Holders, either in connection with the delivery of such notice or
thereafter, deliver written notice to the Transfer Agent and the Company
(including notice via telecopy) that such Registrable Shares have been sold by
the Holders pursuant to such Registration Statement, whereupon the Transfer
Agent shall issue share certificates to the purchasers thereof without
restrictive legend.
(q) Provide a CUSIP number for all Registrable Securities, not later
than the effective date of the Registration Statement.
The Company may require each selling Holder and the underwriters to furnish
to the Company such information regarding the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration Statement
and the Company may exclude from such registration the Registrable Securities of
any such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
If the Registration Statement refers to any Holder by name or otherwise as
the holder of any securities of the Company, then such Holder shall have the
right to require (i) the inclusion therein of language, in form and substance
reasonably satisfactory to such Holder, to the effect that the ownership by such
Holder of such securities is not to be construed as a recommendation by such
Holder of the investment quality of the Company's securities covered thereby and
that such ownership
11
<PAGE>
does not imply that such Holder will assist in meeting any future financial
requirements of the Company, or (ii) if such reference to such Holder by name or
otherwise is not required by the Securities Act or any similar federal statute
then in force, the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Purchaser covenants and agrees that (i) it will not offer or sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 4(g) and notice from the Company that such Registration Statement and
- ------------
any post-effective amendments thereto have become effective as contemplated by
Section 4(c) and (ii) each Purchaser and its officers, directors or Affiliates,
- ------------
if any, will comply with the prospectus delivery requirements of the Securities
Act as applicable to them in connection with sales of Registrable Securities
pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities that,
upon receipt of a written notice from the Company of the occurrence of any event
of the kind described in Section 4(c)(ii), 4(c)(iii), 4(c)(iv), 4(c)(v) or
---------------- --------- -------- -------
4(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
- --------
Securities until such Holder's receipt of the copies of the supplemented
Prospectus and/or amended Registration Statement contemplated by Section 4(j),
------------
or until it is advised in writing (the "Advice") by the Company that the use of
------
the applicable Prospectus may be resumed, and, in either case, has received
copies of any additional or supplemental filings that are incorporated or deemed
to be incorporated by reference in such Prospectus or Registration Statement.
5. Required Registrations. If at any time after the date which is three
----------------------
years from the date of this Agreement, a Holder or Holders of (in the aggregate)
at least 30% of the Warrant Shares (including Holders of Warrants who have not
exercised their right to receive Warrant Shares under such Warrants) shall
notify the Company in writing that it or they desire to offer or cause to be
offered for public sale Warrant Shares having a minimum market value of not less
than $100,000, the Company will so notify all Holders of Warrants and
outstanding Warrant Shares. Upon written request of any Holder given within 15
days after the receipt by such holder from the Company of such notification, the
Company will use its best efforts to cause such of the Warrant Shares as may be
requested by any Holder thereof (including the holder or holders giving the
initial notice of intent to offer) to be registered under the Securities Act as
expeditiously as possible and to keep such registration continuously effective
under the Securities Act until the date which is five years from the date of
this Agreement. The Company shall not be required to effect more than two
registrations pursuant to this Section 5.
---------
6. Liquidated Damages. The Company acknowledges and agrees that the
------------------
Holders will suffer damages, and that it would not be feasible to ascertain the
extent of such damages with precision, if the Company fails to fulfill its
obligations hereunder and if (a) a Registration Statement covering all
Registrable Securities (including any separate registration statement required
hereunder to be filed under Rule 462 of the Securities Act) is not filed with
the Commission on or prior to the applicable Filing Date, (b) a Registration
Statement covering all Registrable Securities (including any
12
<PAGE>
separate registration statement required hereunder to be filed under Rule 462 of
the Securities Act) is not declared effective by the Commission on or prior to
the applicable Effectiveness Date, (c) trading in the Common Stock shall be
suspended for any reason for more than three Trading Days, (d) a Registration
Statement covering all Registrable Securities (including any separate
registration statement required hereunder to be filed under Rule 462 of the
Securities Act) is filed and declared effective but thereafter ceases to be
effective at any time during the Effectiveness Period without being succeeded
within 10 Business Days by a subsequent Registration Statement filed with and
declared effective by the Commission, or (e) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2 promulgated
under the Exchange Act within five (5) days of the date that the Company is
notified by the Commission that the Registration Statement will not be reviewed
(any such failure being hereinafter referred to as an "Event", and for purposes
-----
of clauses (a) and (b) the date on which such Event occurs, or for purposes of
clauses (c), (d), and (e) the date on which such 3, 10 or 5-day limit, as the
case may be, is exceeded, being hereinafter referred to as an "Event Date"). The
----------
Company shall notify each Holder within five (5) days of each Event and Event
Date. Upon the occurrence of an Event specified above, the Company shall adjust
the applicable conversion and exercise prices of the Convertible Debentures,
Preferred Shares and Warrants as set forth therein, and shall pay to each Holder
of Convertible Debentures and Preferred Shares for each month after each Event
Date the liquidated damages specified in the Convertible Debentures and the
Certificate of Designation for the Preferred Shares, as applicable.
7. Registration Expenses
---------------------
(a) All fees and expenses incident to the performance of or compliance
with this Agreement by the Company shall be borne by the Company whether or not
the Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The
fees and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with the
National Association of Securities Dealers, Inc. and (B) in compliance with
state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the underwriters or Holders in connection with Blue
Sky qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters, if any, or Holders of a majority of
Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
and of printing prospectuses if the printing of prospectuses is requested by the
managing underwriters, if any, or by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holders (subject to the provisions of
Section 7(b)), (v) fees and disbursements of all independent certified public
- ------------
accountants referred to in Section 4(a)(ii) (including, without limitation, the
----------------
expenses of any special audit and "cold comfort" letters required by or incident
to such performance), (vi) Securities Act liability insurance, if the Company so
desires such insurance, and (vii) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement. In addition,
13
<PAGE>
the Company shall be responsible for all of its internal expenses incurred in
connection with the consummation of the transactions contemplated by this
Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, the fees and expenses incurred in connection with the listing
of the Registrable Securities on any securities exchange on which similar
securities issued by the Company are then listed.
(b) In connection with the Registration Statement, the Company shall
reimburse the Holders for the reasonable fees and disbursements of one firm of
attorneys chosen by the Holders of a majority of the Registrable Securities (the
"Special Counsel").
8. Indemnification
---------------
(a) Indemnification by the Company. The Company shall,
------------------------------
notwithstanding termination of this Agreement and without limitation as to time,
indemnify and hold harmless each Holder, the officers, directors, agents
(including any underwriters retained by such Holder in connection with the offer
or sale of Registrable Securities), brokers, investment advisors and employees
of each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
costs of preparation and attorneys' fees) and expenses (collectively, "Losses"),
------
as incurred, arising out of or relating to any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
or in any preliminary prospectus, or arising out of or relating to any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, except solely to the extent that (i) such untrue
statements or omissions are based solely upon information regarding such Holder
furnished in writing to the Company by or on behalf of such Holder expressly for
use therein, which information was relied on by the Company for use therein or
(ii) such information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
by such Holder expressly for use in the Registration Statement, such Prospectus
or such form of Prospectus or in any amendment or supplement thereto. The
Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement.
(b) Indemnification by Holders. In connection with the Registration
--------------------------
Statement, each Holder shall furnish to the Company in writing such information
as the Company reasonably requests for use in connection with the Registration
Statement or any Prospectus and agrees, severally and not jointly, to indemnify
and hold harmless the Company, their directors, officers, agents and employees,
each Person who controls the Company (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act), and the directors, officers,
agents or employees
14
<PAGE>
of such controlling Persons, to the fullest extent permitted by applicable law,
from and against all Losses (as determined by a court of competent jurisdiction
in a final judgment not subject to appeal or review) arising solely out of or
based solely upon any untrue statement of a material fact contained in the
Registration Statement, any Prospectus, or any form of prospectus, or arising
solely out of or based solely upon any omission of a material fact required to
be stated therein or necessary to make the statements therein not misleading
solely to the extent, and only to the extent, that (i) such untrue statement or
omission is contained in any information furnished in writing by such Holder to
the Company specifically for inclusion in the Registration Statement or such
Prospectus and such information was relied upon by the Company for use in the
Registration Statement, such Prospectus or such form of prospectus or (ii) such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of prospectus. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder (or net profits, in the case of the Placement
Agent) upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding shall
--------------------------------------
be brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party promptly shall notify the Person
- ------------------
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
------------------
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel in any
such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed to pay such fees and
expenses; or (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by, counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing that
it elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense thereof
and such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending
15
<PAGE>
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable fees
and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within 10 Business
Days of written notice thereof to the Indemnifying Party (regardless of whether
it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 8(a)
------------ ------------
or 8(b) is unavailable to an Indemnified Party or is insufficient to hold such
----
Indemnified Party harmless for any Losses in respect of which this Section would
apply by its terms (other than by reason of exceptions provided in this
Section), then each Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such Losses, (i) in such proportion as is appropriate to reflect
the relative benefits received by the Indemnifying Party on the one hand and the
Indemnified Party on the other from the distribution of the Registrable
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative benefits received by the
Indemnified Party and the Indemnifying Party, as the case may be, shall be
deemed to be in the same proportion as the total net proceeds received by the
Company from the initial sale of the Registrable Securities by the Company to
the Purchasers pursuant to the Purchase Agreement and the Warrants bear to the
gain, if any, realized by the selling Holder upon the resale thereof. The
relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 8(c), any attorneys' or other fees or
------------
expenses incurred by such party in connection with any Proceeding to the extent
such party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party.
The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 8(d) were determined by pro rata allocation or by any
------------
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 8(d), no Purchaser shall be
------------
required to contribute, in
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the aggregate, any amount in excess of the amount by which the proceeds actually
received by such Purchaser from the sale of the Registrable Securities subject
to the Proceeding exceeds the amount of any damages that such Purchaser has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
9. Rule 144
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The Company shall file the reports required to be filed by it under
the Securities Act and the Exchange Act in a timely manner and, if at any time
the Company is not required to file such reports, they will, upon the request of
any Holder, make publicly available other information so long as necessary to
permit sales of its securities pursuant to Rule 144. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Holder to
sell Registrable Securities without registration under the Securities Act within
the limitation of the exemptions provided by Rule 144. Upon the request of any
Holder, the Company shall deliver to such Holder a written certification of a
duly authorized officer as to whether it has complied with such requirements.
10. Miscellaneous
-------------
(a) Remedies. In the event of a breach by the Company or by a Holder,
--------
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) No Inconsistent Agreements. None of the Company nor any of its
--------------------------
subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
Neither the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities
to any Person. Without limiting the generality of the foregoing, without the
written consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are
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subject in all respects to the prior rights in full of the Holders set forth
herein, and are not otherwise in conflict or inconsistent with the provisions of
this Agreement.
(c) No Piggyback on Registrations. Neither the Company nor any of its
-----------------------------
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not enter into any agreement
providing any such right to any of its security holders.
(d) Amendments and Waivers. This Agreement may be amended and the
----------------------
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the Holder or
Holders of the sum of 51% or more of the shares of (i) Registrable Securities
issued at such time, plus (ii) Registrable Securities issuable upon exercise or
conversion of any Convertible Debentures, Preferred Shares and Warrants that
have not been fully exchanged or converted in full as of the date such consent
is sought. Each Holder of any Registrable Securities at the time or thereafter
outstanding shall be bound by any consent authorized by this Section 10(d),
whether or not such Registrable Securities shall have been marked to indicate
such consent.
(e) Notices. Any notice or other communication required or permitted
-------
to be given hereunder shall be in writing and shall be deemed to have been
received (a) upon hand delivery (receipt acknowledged) or delivery by telex
(with correct answer back received), telecopy or facsimile (with transmission
confirmation report) at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company:
Tamboril Cigar Company
2600 South West 3rd Avenue
Miami, Florida 33129
Attn: Corporate Secretary
Tel: (800) 472-9891
Fax: (305) 860-9342
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With copies to:
Adam S. Gottbetter, Esq.
Kaplan Gottbetter & Levenson, LLP
630 Third Avenue
New York, New York 10017
Tel: (212) 983-0532
Fax: (212) 983-9210
If to the Placement Agent:
Refco Securities, Inc.
One World Financial Center
Tower A
200 Liberty Street
New York, New York 10281
Attn: Mr. Charles S. Lazar
Tel: (212) 693-7286
Fax: (212) 693-7292
With copies to:
Brian W Pusch, Esq.
Law Offices of Brian W Pusch
29 W. 57th Street
Penthouse Suite
New York, New York 10019
Tel: (212) 980-0408
Fax: (212) 980-7055
If to Brown Simpson:
Brown Simpson, LLC
Carnegie Hall Tower
152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Matthew Brown
Tel: (212) 247-8200
Fax: (212) 247-1329
If to any Purchaser, to its address set forth opposite its name on the
signature pages hereof.
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With copies to:
Mr. Stuart Chasanoff
c/o HW Partners, L.P.
1601 Elm Street, Suite 4000
Dallas, Texas 75201
Tel: (214) 720-1600
Fax: (214) 720-1662
A. Michael Hainsfurther, Esq.
Munsch Hardt Kopf Harr & Dinan, P.C.
4000 Fountain Place
1445 Ross Avenue
Dallas, Texas 75202
Tel: (214) 855-7567
Fax: (214) 855-7584
If to any other Person who is then the registered Holder: to the address
of such Holder as it appears in the stock transfer books of the Company;
or such other address as may be designated in writing hereafter, in the same
manner, by such person.
(f) Successors and Assigns. This Agreement shall inure to the benefit
----------------------
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(h) Governing Law; Submission to Jurisdiction; Waiver of Jury Trial.
---------------------------------------------------------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York, without regard to principles of conflicts of law. The
Company hereby irrevocably submits to the jurisdiction of any New York state
court sitting in the Borough of Manhattan in the City of New York or any federal
court sitting in the Borough of Manhattan in the City of New York (collectively,
the "New York Courts") in respect of any Proceeding arising out of or relating
---------------
to this Agreement, and irrevocably accepts for itself and in respect of its
property, generally and unconditionally, jurisdiction of the New York Courts.
The Company irrevocably waives to the fullest extent it may effectively do so
under applicable law any objection that it may now or hereafter have to the
laying of the venue of any such Proceeding brought in any New York Court and any
claim that any such
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Proceeding brought in any New York Court has been brought in an inconvenient
forum. Nothing herein shall affect the right of any Holder to serve process in
any manner permitted by law or to commence legal proceedings or otherwise
proceed against the company in any other jurisdiction.
(i) Cumulative Remedies. The remedies provided herein are cumulative
-------------------
and not exclusive of any remedies provided by law.
(j) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(k) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(l) Shares Held by The Company and its Affiliates. Whenever the
---------------------------------------------
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than a Purchaser or transferees or successors or assigns
thereof if such Persons are deemed to be Affiliates solely by reason of their
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
Company:
TAMBORIL CIGAR COMPANY
By:_____________________________
Name:___________________________
Title:__________________________
Placement Agent:
REFCO SECURITIES, INC.
By:_____________________________
Name:___________________________
Title:__________________________
Brown Simpson:
BROWN SIMPSON, LLC
By:_____________________________
Name:___________________________
Title:__________________________
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<PAGE>
Purchasers:
INFINITY EMERGING
OPPORTUNITIES LIMITED
By:_____________________________
Name:___________________________
Title:__________________________
Address: 38 Hertford Street
London W1Y 7TG
England
Telephone: 44-171-355-2051
Fax: 44-171-355-4975
Attn: J. A. Loughran
SUMMIT CAPITAL LIMITED
By:_____________________________
Name:___________________________
Title:__________________________
Address: 38 Hertford Street
London W1Y 7TG
England
Telephone: 44-171-355-2051
Fax: 44-171-355-4975
Attn: J. A. Loughran
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<PAGE>
GLACIER CAPITAL LIMITED
By:_____________________________
Name:___________________________
Title:__________________________
Address: 38 Hertford Street
London W1Y 7TG
England
Telephone: 44-171-355-2051
Fax: 44-171-355-4975
Attn: J. A. Loughran
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EXHIBIT 99
TAMBORIL CIGAR COMPANY ANNOUNCES SUCCESSFUL COMPLETION OF
$3,000,000 FIRST TRANCHE OF $6,000,000 FINANCING
FOR IMMEDIATE RELEASE
October 1, 1997
MIAMI, FL, TAMBORIL CIGAR COMPANY (NASD Bulletin Board symbol: "SMKE") today
announced that it had completed the $3,000,000 first tranche of a $6,000,000
private placement of convertible preferred stock and convertible debentures. The
financing is comprised of three tranches with the first tranche of $2,800,000 of
the Company's Series B Convertible Preferred Stock and $200,000 principal
amount of the Company's 8% Convertible Debentures. Both the Debentures and the
Series B Preferred Stock are convertible into shares of the Company's Common
Stock upon terms and subject to conditions set forth in a Purchase Agreement.
The Company also issued an aggregate 225,000 Warrants to the Purchasers and the
placement agent to purchase shares of the Company's Common Stock at a price
equal to 125% of the average market price of the Company's Common Stock for the
five trading days preceding the closing. Under the terms of the Purchase
Agreement, the Company has the option to require the Purchasers to purchase up
to an additional $3,000,000 of Series B Preferred Stock in two $1,500,000
tranches, provided various conditions are met. The financing was arranged by
Refco Securities, Inc. as Placement Agent.
The Company plans to use the proceeds from the financing to complete its second
manufacturing facility in the Dominican Republic, to expand inventory purchases
and hire workers to support increased production and to repay a portion of its
long-term debt. In addition, the Company plans to apply for listing of its
Common Stock on the Nasdaq SmallCap Stock Market in conjunction with the filing
of its Form 10-Q for the period ended September 30, 1997.
Anthony Markofsky, President of the Company, stated: "We are very pleased to
have attracted the quality of investors brought to our transaction by Refco.
This capital will enable the Company's aggressive expansion plans to continue
apace. With the addition of our second production facility, we will roughly
quadruple our production capacity. This expansion is necessary to enable us to
capitalize on the demand for our Tamboril/TM/ and Cordova/TM/ brand cigars and
the positive initial reaction to our Fore!/TM/ cigar. With our anticipated
application to the Nasdaq SmallCap Stock Market, we should have the continued
access to the capital markets necessary to continue our growth."
The Tamboril Cigar Company manufactures and distributes premium, hand rolled
cigars under the Tamboril/TM/, Cordova/TM/ and Fore!/TM/ brand names. Its
manufacturing facilities are located in the Dominican Republic and its
headquarters and U.S. sales offices are located in Miami, Florida. The
Company's common stock trades on the NASD Electronic Bulletin Board under the
trading symbol "SMKE". For all information requirements please contact the
Company's Investor Relations at 1-800-227-5409.
