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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K
CURRENT REPORT FILED
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 10, 1999
ESOFT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-26580 84-1093721
(Commission File No.) (IRS Employer Identification No.)
295 INTERLOCKEN BOULEVARD, SUITE 500
BROOMFIELD, COLORADO 80021
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (303) 444-1600
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ITEM 5. OTHER EVENTS.
SALE OF CONVERTIBLE SUBORDINATED DEBENTURES
On June 10, 1999, eSoft, Inc. (the "Company") received $3,000,000 from
the sale of its 5% Convertible Subordinated Debentures due June 10, 2002 (the
"Debentures") to investment funds managed by affiliates of New York-based Brown
Simpson Asset Management, LLC (the "Purchasers"). As part of the transaction,
the Company issued warrants (the "Stock Purchase Warrants") to the Purchasers to
purchase 766,773 shares of the Company's Common Stock at an exercise price of
$4.4994 per share. The Stock Purchase Warrants expire on June 10, 2002.
The Debentures were sold pursuant to a Securities Purchase Agreement
dated as of June 10, 1999 among the Company and the Purchasers. The Securities
Purchase Agreement, the Debentures, the Stock Purchase Warrants, the related
Registration Rights Agreement and the Company's press release first announcing
the sale of the Debentures are included as exhibits to this report. The
Debentures were sold and the Stock Purchase Warrants were issued pursuant to an
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act") by virtue of Rule 506 of Regulation D under the Securities
Act.
Under the financing arrangement, the Purchasers have the option to
purchase an additional $5,000,000 in aggregate principal amount of Debentures,
and to receive Stock Purchase Warrants, in two additional tranches. Under
certain circumstances, the Purchasers are obligated to purchase $2,000,000
principal amount of Debentures.
The following is a summary of the principal terms of the Debentures and
the Stock Purchase Warrants. This summary does not purport to explain all of the
material terms of the Debentures or the Stock Purchase Warrants or the related
Securities Purchase Agreement or Registration Rights Agreement, which are filed
as exhibits to this report. ONE SHOULD READ THE DEBENTURES, THE STOCK PURCHASE
WARRANTS, THE SECURITIES PURCHASE AGREEMENT AND THE REGISTRATION RIGHTS
AGREEMENT FOR A MORE DETAILED UNDERSTANDING OF THEIR TERMS.
The $3,000,000 principal amount of the Debentures sold to the
Purchasers in the first tranche (the "First Tranche Debentures") must be repaid
in full in cash on June 10, 2002, but may be converted into the Company's Common
Stock in whole or in part at the Purchasers' option at any time on or prior to
June 10, 2002 at a conversion price of $3.9125 per share. The First Tranche
Debentures bear interest at 5.00% per annum. If the Second Tranche Debentures
(defined below) are not sold to the Purchasers, then the conversion price for
the First Tranche Debentures resets to a floating conversion price equal, at any
time, to 90% of the then current market price for the Company's Common Stock.
Under the Securities Purchase Agreement, an additional $2,000,000
principal amount of Debentures (the "Second Tranche Debentures") will be
purchased by the Purchasers if the Company reaches certain revenue objectives
for quarter ending September 30, 1999 and the registration statement described
below has been declared effective. If these criteria are not met, then the
Purchasers have the option, but not the obligation, to purchase the Second
Tranche
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Debentures. The Second Tranche Debentures will mature on June 10, 2002, will
bear interest at 5.00% per annum and will be convertible in whole or in part at
the option of the Purchasers at any time prior to maturity into Common Stock at
a conversion price of $3.9125 per share. The Second Tranche Debentures will be
accompanied by related Stock Purchase Warrants to purchase 511,182 shares of
Common Stock at an exercise price of $4.4994 per share; such Stock Purchase
Warrants would expire on June 10, 2002.
If the Purchasers purchase the Second Tranche Debentures, then the
Purchasers have the option exercisable at any time prior to June 10, 2001 to
purchase an additional $3,000,000 principal amount of Debentures (the "Third
Tranche Debentures"). The Third Tranche Debentures will mature on June 10, 2002,
will bear interest at 5.00% per annum and will be convertible at the lower of
(i) the Company's then five-day average closing bid price or (iii) $5.50 per
share, but in no event less than $3.9125 per share. The Third Tranche Debentures
will be accompanied by related Stock Purchase Warrants to purchase shares of
Common Stock of the Company equal to the quotient obtained by dividing
$3,000,000 by the conversion price for the Third Tranche Debentures. The
exercise price for these Stock Purchase Warrants will be 115% of the conversion
price for the Third Tranche Debentures; such Stock Purchase Warrants would
expire on June 10, 2002.
The per share conversion price for the Debentures and the per share
warrant exercise price for the Stock Purchase Warrants is subject to adjustment
for stock splits, stock dividends and the like. The conversion price and
exercise price are also subject to anti-dilution adjustments (on a weighted
average basis) in the event the Company issues or sells its Common Stock or
securities convertible into its Common Stock at a price less than the then
applicable conversion price of the Debentures or exercise price of the Stock
Purchase Warrants. Certain securities are exempted from this anti-dilution
feature and will not cause an adjustment to the conversion price. Exempted
securities generally include shares issued pursuant to a stock option plan
approved by the Company's Board of Directors, issued in connection with
acquisitions, issued in strategic partner or collaborative transactions, issued
to financial institutions in connection with lease financings, and issued
pursuant to options and warrants outstanding as of the date the Debentures were
sold.
Interest on the Debentures is payable annually in cash, or at the
Company's option, in Common Stock at a price per share based on recent bid
prices prior to the date interest is paid.
In the event that the bid price for the Common Stock as listed for
quotation exceeds 200% of the then applicable exercise price for the Stock
Purchase Warrants for thirty (30) consecutive trading days and certain other
conditions are met, (i) the Debentures will automatically convert into Common
Stock and (ii) the Stock Purchase Warrants will expire if not exercised within
thirty (30) days following notice from the Company of such event.
As part of the financing, the Company has agreed, under the
Registration Rights Agreement among the Company and the Purchasers included in
this filing, to file a Form S-3 Registration Statement with the Securities and
Exchange Commission to register the resale under the Securities Act of the
shares of Common Stock issuable upon (a) the conversion of the First Tranche
Debentures, (b) the conversion of the Second Tranche Debentures, (c) the
conversion of
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the Third Tranche Debentures, (d) the exercise of the Stock Purchase Warrants,
and (e) payments of interest on the Debentures in stock.
Certain events will trigger an event of default under the Debentures.
An event of default gives the Purchasers the right to accelerate all
indebtedness under the Debentures and declare it due immediately. Upon an event
of default, interest thereafter accrues at 20.00% per annum and a default
premium is added to the principal amount of the Debentures. The premium is the
greater of 10.00% of the principal amount, or a higher amount based on recent
trading prices of the Company's Common Stock.
Circumstances which trigger an event of default include, without
limitation, a material breach of the representations and warranties made by the
Company in the Securities Purchase Agreement, the default in the payment of
principal or interest on the Debentures, the failure of the Company to perform
covenants in its agreements with the Purchasers, an event of default has
occurred on certain other debt of the Company, certain events of insolvency or
bankruptcy, the failure of the Company to keep a registration statement for the
resale of the Common Stock issuable under the Debentures effective, certain
changes of control have occurred, and the Company's Common Stock is delisted
from Nasdaq or is suspended from trading for a period of time. A change of
control generally includes (i) certain changes in the composition of the
Company's Board of Directors without the approval of existing directors and (ii)
a sale of all or substantially all of the Company's assets or a change of
ownership of 50% or more of the voting stock of the Company (including by stock
purchase, merger or similar transaction).
ITEM 7. EXHIBITS
4.1 Debenture dated June 10, 1999 between the Company and Brown Simpson
Strategic Growth Fund, Ltd.
4.2 Debenture dated June 10, 1999 between the Company and Brown Simpson
Strategic Growth Fund, L.P.
10.1 Securities Purchase Agreement dated as of June 10, 1999 among the
Company and the Purchasers.
10.2 Registration Rights Agreement dated as of June 10, 1999 among the
Company and the Purchasers.
10.3 Stock Purchase Warrant dated June 10, 1999 between the Company and
Brown Simpson Strategic Growth Fund, Ltd.
10.4 Stock Purchase Warrant dated June 10, 1999 between the Company and
Brown Simpson Strategic Growth Fund, L.P.
99.1 Press Release dated June 11, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 25, 1999
ESOFT, INC.
By: /s/ Jeffrey Finn
----------------------------------
Jeffrey Finn
President and Chief Executive Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.1 Debenture dated June 10, 1999 between the Company and Brown Simpson
Strategic Growth Fund, Ltd.
4.2 Debenture dated June 10, 1999 between the Company and Brown Simpson
Strategic Growth Fund, L.P.
10.1 Securities Purchase Agreement dated as of June 10, 1999 among the
Company and the Purchasers.
10.2 Registration Rights Agreement dated as of June 10, 1999 among the
Company and the Purchasers.
10.3 Stock Purchase Warrant dated June 10, 1999 between the Company and
Brown Simpson Strategic Growth Fund, Ltd.
10.4 Stock Purchase Warrant dated June 10, 1999 between the Company and
Brown Simpson Strategic Growth Fund, L.P.
99.1 Press Release dated June 11, 1999.
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EXHIBIT 4.1
5% CONVERTIBLE DEBENTURE
THE DEBENTURE REPRESENTED HEREBY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION 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, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
No. 1 $1,900,000
eSOFT, INC.
5% CONVERTIBLE DEBENTURES DUE JUNE 10, 2002
eSOFT, Inc., a Delaware corporation (the "Issuer"), for value received
hereby promises to pay to Brown Simpson Strategic Growth Fund, Ltd. or its
registered assigns ("Holder") the principal sum of One Million Nine Hundred
Thousand Dollars ($1,900,000) at the Issuer's office or agency for said purpose
in New York, New York on June 10, 2002 in such coin or currency (or, as provided
herein, at the Holder's option in Common Stock) of the United States of America
as at the time of payment shall be legal tender for the payment of public and
private debts at the last address of the Holder last appearing on the Register
(as defined herein).
This Debenture is one of a duly authorized issue of 5% Convertible
Debentures, due June 10, 2002 of the Issuer (the "Debenture") referred to in the
Securities Purchase Agreement (the "Purchase Agreement"), dated as of June 10,
1999, by and among the Issuer and the Purchasers listed on Schedule I thereto.
The Debentures are subject to the terms and conditions of the Purchase
Agreement. The Issuer agrees to issue from time to time replacement Debentures
in the form hereof to facilitate any transfers and assignments. In addition,
after delivery of an indemnity in form and substance reasonably satisfactory to
the Issuer, the Issuer also agrees to issue replacement Debentures for
securities which have been lost, stolen, mutilated or destroyed.
The Issuer shall keep at its principal office a register (the
"Register") in which shall be entered the names and addresses of the registered
holders of the Debentures and particulars of the respective Debentures held by
them and of all transfers of such Debentures. References to the "Holder" or
"Holders" shall mean the Person listed in the Register as the payee of any
Debenture unless the payee shall have presented such Debenture to the Issuer for
transfer and the transferee shall have been entered in the Register as a
subsequent holder, in which case the term shall mean such subsequent holder. The
ownership of the Debentures shall be proven by the Register, absent manifest
error. For the purpose of paying interest and principal on the Debentures, the
Issuer shall be entitled to rely on the names and addresses in the Register.
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No provision of this Debenture shall alter or impair the obligations of
the Issuer, which are absolute and unconditional, to pay the principal of and
interest on this Debenture at the place, times, rate, and in the currency,
herein prescribed.
The principal of this Debenture shall bear interest at the rate of 5%
per annum (the "Interest Rate"). The interest shall accrue daily 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 hereof until
payment in full of the principal amount has been made. Interest is payable in
cash or an equivalent value of the Issuer's Common Stock calculated based upon
the Average Price, at the Issuer's option, subject to certain conditions
contained herein, quarterly on January 15, April 15, July 15, and October 15 of
each year (each, an "Interest Payment Date"), commencing on October 15, 1999, to
the Holder hereof until the principal amount is paid or made available for
payment. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will be paid or delivered to the Holder of this
Debenture at the close of business on the Record Date for the interest payable
on such Interest Payment Date. The "Record Date" for any interest payment is the
close of business on January 1, April 1, July 1 or October 1, as the case may
be, whether or not a Business Day, immediately preceding the Interest Payment
Date on which such Interest is payable.
Any amounts that have become due and payable hereunder and remain
unpaid by the Issuer shall accrue interest thereafter until payment in full of
such amount at the rate of twenty percent (20%) (the "Default Rate") per annum
and shall be payable upon demand by the Holder.
Interest, whether at the Interest Rate or the Default Rate, will be
computed on the basis of a fraction, the denominator of which is 365 (or 366 for
any leap year) and the numerator of which is the actual number of days elapsed
from the date such interest begins to accrue, in the case of the Interest Rate,
or becomes due and payable, in the case of the Default Rate.
Each of the Interest Rate and the Default Rate shall be effective both
before and after any judgment may be rendered in a court of competent
jurisdiction, provided, however, that if either the Interest Rate or Default
Rate is deemed to be in excess of the amount permitted to be charged by the
Issuer under applicable laws, the Holder shall be entitled to collect an
Interest Rate or Default Rate, as the case may be, only at the highest rate
permitted by law, and any interest collected by the Holder in excess of such
lawful amount shall be deemed a payment in reduction of the principal amount
then outstanding under this Debenture and shall be so applied.
The principal of, and any interest paid in cash on, this Debenture are
payable in coin or currency of the United States of America as at the time of
payment is legal tender for payment of public or private debts, at the last
address of the Holder last appearing on the Register, except that interest due
on the principal amount, if any (but not interest overdue for more than five (5)
days), may, at the Issuer's option be paid in shares of Common Stock calculated
based upon the Average Price on the date such interest was due. It shall be
assumed that the Company shall elect to make all payments of interest in Common
Stock, unless the Company shall have given written notice to each Holder not
less than one (1) calendar month
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prior to the applicable Interest Payment Date of its intention to pay such
interest in cash. Notwithstanding anything to the contrary contained herein, the
Issuer may not issue shares of Common Stock in payment of the interest on
principal if: (i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all other purposes is insufficient to pay interest
hereunder in shares of Common Stock or there is an insufficient number of
authorized shares of Common Stock reserved (pursuant to Section 3.6(b) of the
Purchase Agreement) for issue for full conversion of all of the Debentures
issued pursuant to the Purchase Agreement; (ii) such shares are not either
registered for resale pursuant to the Registration Statement (as defined in the
Registration Rights Agreement) or freely transferable without volume
restrictions pursuant to Rule 144(k) promulgated under the Securities Act, as
determined by counsel to the Issuer pursuant to a written opinion letter
addressed and in form and substance acceptable to the Holder and the transfer
agent for such shares, subject to receipt from the Holder of a representation
from such Holder that it is not an Affiliate of the Issuer; (iii) such shares
are not listed or quoted on Nasdaq or a Subsequent Market; (iv) the issuance of
such shares would result in the recipient thereof beneficially owning more than
4.99% of the issued and outstanding shares of Common Stock as determined in
accordance with Section 4.6; or (v) an Event of Default has occurred and is
continuing or an event that, with the passage of time or giving of notice or
both would constitute an Event of Default, has occurred and is continuing.
ARTICLE I
DEFINITIONS
1.1 CERTAIN TERMS DEFINED. The following terms (except as otherwise
expressly provided or unless the context otherwise clearly requires) for all
purposes of this Debenture shall have the respective meanings specified below.
All accounting terms used herein and not expressly defined shall have the
meanings given to them in accordance with generally accepted accounting
principles. Capitalized terms not otherwise defined herein shall have the
meanings assigned to them in the Purchase Agreement. The terms defined in this
Section 1.1 include the plural as well as the singular.
"Acceleration Notice" has the meaning set forth in Section 3.1.
"Affiliate" has the meaning set forth in Rule 12b-2 of the Exchange
Act.
"Appraiser" means a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of recognized
standing.
"Authorization Date" has the meaning set forth in Section 4.8.
"Average Price" on any date means (i) the sum of the Per Share Market
Value for the ten (10) Trading Days immediately preceding such date minus (ii)
the highest and lowest Per Share Market Value during the ten (10) Trading Days
immediately preceding such date, divided by (iii) eight (8), or a similar
calculation if another figure for the number of Trading Days is set forth for
clause (i) of this definition.
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"Board of Directors" means either the Board of Directors of the Issuer
or any committee of such Board duly authorized to act hereunder.
"Business Day" means any day except a 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
governmental actions to close.
"Buy-In" has the meaning set forth in Section 4.4(d).
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's capital stock whether now outstanding or issued after the Original
Issue Date, including, without limitation, all Common Stock and all Preferred
Stock.
"Change of Control" means the occurrence of any of (i) an acquisition
after the date hereof by an individual or legal entity or "group" (as described
in Section 13d-5(b)(1) promulgated under the Exchange Act), other than the
Purchasers or their Affiliates, of in excess of 50% of the voting securities of
the Issuer, (ii) a replacement of more than one-half of the members of the Board
of Directors that is not approved by a majority of those individuals who are
members of the Board of Directors on the date hereof, or their duly elected
successors who are directors immediately prior to such transaction, in one or a
series of related transactions, (iii) the merger of the Issuer with or into
another Person, unless following such transaction, the stockholders of the
Issuer prior to such transaction hold at least 51% of the voting securities of
the surviving or resulting entity following such transaction, (iv) the
consolidation or sale of all or substantially all of the assets of the Issuer in
one or a series of related transactions or (v) the execution by the Issuer of an
agreement to which the Issuer is a party or by which it is bound, providing for
any of the events set forth above in clauses (i), (ii), (iii) or (iv).
"Closing Date" has the meaning set forth for the "First Closing Date"
in the Purchase Agreement
"Common Stock" means the common stock, par value $0.01 per share, of
the Issuer.
"Converted Debentures" has the meaning set forth in Section 3.1.
"Convertible Securities" has the meaning set forth in Section
4.5(h)(i)(A).
"Conversion Date" has the meaning set forth in Section 4.4(a).
"Conversion Default" has the meaning set forth in Section 4.8.
"Conversion Default Date" has the meaning set forth in Section 4.8.
"Conversion Default Payments" has the meaning set forth in Section 4.8.
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"Conversion Price" has the meaning set forth in Section 4.2.
"Convertible Securities" has the meaning set forth in Section
4.5(h)(i).
"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, (iii)
all obligations of such Person in respect of letters of credit or bankers'
acceptance or other similar instruments (or reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred
purchase price of property or services, (v) all obligations of such Person as
lessee under capitalized leases, (vi) all Debt of others secured by a Lien on
any asset of such Person, whether or not such Debt is assumed by such Person,
provided that for purposes of determining the amount of any Debt of the type
described in this clause, if recourse with respect to such Debt is limited to
such asset, the amount of such Debt shall be limited to the fair market value of
such asset, (vii) all Debt of others guaranteed by such Person and (viii) all
redeemable stock valued at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends.
"Debenture" or "Debentures" has the meaning set forth in the second
paragraph hereof.
"Debenture Shares" has the meaning set forth in the Purchase Agreement.
"Default Rate" has the meaning set forth in the sixth paragraph hereof.
"Determination Date" has the meaning set forth in Section 4.14.
"Event of Default" has the meaning set forth in Section 3.1.
"Excess Shares" has the meaning set forth in Section 4.14. "Exchange
Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" or "generally accepted accounting principles" means generally
accepted accounting principles in the United States, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession.
"Holder", "Holder of Debentures", "Debentureholder" or other similar
terms means the registered holder of any Debenture.
"Incurrence" or "incurrence" means the incurrence, creation, assumption
or in any other manner becoming liable with respect to, or the extension of the
maturity of or becoming responsible for the payment of, any Debt. "Incur" or
"incur" shall have a comparable meaning.
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"Interest Payment Date" has the meaning set forth in the fifth
paragraph hereof.
"Interest Rate" has the meaning set forth in the fifth paragraph
hereof.
"Issuable Maximum" has the meaning set forth in Section 4.14.
"Issuer" has the meaning set forth in the first paragraph hereof.
"Mandatory Conversion" has the meaning set forth in Section 5.1(a).
"Mandatory Conversion Date" has the meaning set forth in Section 5.2.
"Mandatory Conversion Event" has the meaning set forth in Section
5.1(a).
"Mandatory Conversion Notice" has the meaning set forth in Section
5.1(b)
"Mandatory Conversion Notice Date" has the meaning set forth in Section
5.2.
"Mandatory Prepayment Amount" for any Debenture means the greater of
(i) the sum of (x) 110% of the principal amount of the Debenture to be prepaid
and (y) all other amounts, costs, interest, expenses and liquidated damages due
in respect of such principal amount or (ii) the sum of (x) at the option of the
Holder, either (I) the principal amount of the Debenture to be repaid, plus all
accrued and unpaid interest thereon, divided by the Conversion Price on the date
the Mandatory Prepayment Amount is demanded or otherwise due, multiplied by the
Per Share Market Value on the date the Mandatory Prepayment Amount is demanded
or otherwise due or (II) the principal amount of the Debenture to be prepaid,
plus all accrued and unpaid interest thereon, divided by the Conversion Price on
the Trading Day immediately prior to the date the Mandatory Prepayment Amount is
paid in full, multiplied by the Per Share Market Value on the Trading Day
immediately prior to the date the Mandatory Prepayment Amount is paid in full,
and (y) all other amounts, costs, interest, expenses and liquidated damages due
in respect of such principal amount.
"Maturity Date" means the date on which the principal of a Debenture
becomes due and payable as herein provided, whether on the Stated Maturity Date
or pursuant to acceleration upon an Event of Default.
"Nasdaq" means the Nasdaq Smallcap Market.
"Notice of Conversion" has the meaning set forth in Section 4.2(c).
"Options" has the meaning set forth in Section 4.5(h)(i)(A).
"Original Issue Date" of any Debenture (or portion thereof) means the
earlier of (i) the date of such Debenture and (ii) the date of any Debenture (or
portion thereof) for which such security was issued (directly or indirectly) on
registration of transfer, exchange or substitution.
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"Payment Blockage Notice" has the meaning set forth in Section 6.2(b).
"Payment Due Date" has the meaning set forth in Section 4.5(i).
"Per Share Market Value" means on any particular date (i) the closing
bid price per share of the Common Stock on such date (as reported by Bloomberg
Information Services, Inc., or any successor reporting service) on Nasdaq or, if
the Common Stock is not then quoted on Nasdaq, any Subsequent Market on which
the Common Stock is then listed or if there is no such price on such date, then
the closing bid price on such exchange or quotation system on the date nearest
preceding such date, (ii) if the Common Stock is not listed then on Nasdaq or
any Subsequent Market, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date or (iii) if the Common
Stock is not then publicly traded the fair market value of a share of Common
Stock as determined by an Appraiser selected in good faith by the holder of this
Debenture, whose fees and expenses shall be borne by the Company; provided,
however, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select, in good faith, an additional Appraiser, in which
case the fair market value shall be equal to the average of the determinations
by each such Appraiser; and provided, further that all determinations of the Per
Share Market Value shall be appropriately adjusted for any stock dividends,
stock splits or other similar transactions during such period.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the date of this Debenture, and includes, without limitation, all classes
and series of preferred or preference stock.
"Prepayment Amount" has the meaning set forth in Section 4.14.
"Principal" or "principal" wherever used with reference to the
Debentures or any Debenture or any portion thereof, shall be deemed to include
"and premium or interest, if any."
"Property" or "property" of any Person means all types of real,
personal, tangible, intangible or mixed property owned by such Person whether or
not included in the most recent consolidated balance sheet of such Person under
generally accepted accounting principles.
"Purchase Agreement" has the meaning set forth in the second paragraph
hereof.
"Purchase Price" means, with respect to any Debenture, the purchase
price paid to the Issuer upon issuance of such Debenture.
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"Record Date" has the meaning set forth in the fifth paragraph hereof.
"Redemption Date" has the meaning set forth in Section 4.5(f).
"Redemption Event" has the meaning set forth in Section 4.5(f).
"Redemption Price" has the meaning set forth in Section 4.5(f).
"Redemption Right" has the meaning set forth in Section 4.5(f).
"Register" has the meaning set forth in the third paragraph hereof.
"Registrable Securities" has the meaning set forth in the Registration
Rights Agreement.
"Registration Rights Agreement" means that certain Registration Rights
Agreement, dated as of June 10, 1999, among the Issuer and the Purchasers.
"Reserved Amount" has the meaning set forth in Section 4.8.
"Reset Date" has the meaning set forth in Section 4.2(b).
"Reverse Stock Split" has the meaning set forth in Section4.5(a).
"Senior Indebtedness" has the meaning set forth in Section 6.1.
"Shareholder Approval" has the meaning set forth in Section 4.14.
"Stated Maturity Date" means June 10, 2002.
"Stock Option Plan" means any contract, plan or agreement which has
been approved by the Board of Directors, pursuant to which the Issuer's
securities may be issued to any employee, officer, director or consultant.
"Subscription Rights" has the meaning set forth in Section 4.5(c).
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the Capital Stock or other ownership
interests having ordinary voting power to elect a majority of the Board of
Directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person.
"Subsequent Market" means the New York Stock Exchange, American Stock
Exchange or Nasdaq National Market.
"Trading Day" means (i) a day on which the Common Stock is traded or
quoted on Nasdaq or, if the Common Stock is not then designated on Nasdaq, on
such Subsequent
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Market on which the Common Stock is then listed or quoted, (ii) if the Common
Stock is not listed on Nasdaq or a Subsequent Market, a day on which the Common
Stock is traded in the over-the-counter Market, as reported by the OTC Bulletin
Board or (iii) if the Stock is not quoted on the OTC Bulletin Board, a day on
which the Common Stock is quoted in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding its functions or reporting prices); provided, however that in
any event that the Common Stock is not listed or quoted as set forth in (i),
(ii) or (iii) hereof, then a Trading Day shall mean any Business Day.
"Underlying Shares" has the meaning set forth in Section 4.5(h)(i).
"Valuation Event" has the meaning set forth in Section 4.5(h)(i)(D)(I).
ARTICLE II
PAYMENT; THE SECURITIES
2.1 PAYMENT OF PRINCIPAL AND INTEREST. The Issuer covenants and agrees
that it will duly and punctually pay or cause to be paid the principal and
interest on overdue principal and interest (to the extent enforceable under
applicable law), with respect to each of the Debentures at the place or places,
at the respective times and in the manner provided in the Debentures.
2.2 MUTILATED, DEFACED, DESTROYED, LOST AND STOLEN DEBENTURES. In case
any temporary or definitive Debenture shall become mutilated, defaced or be
apparently destroyed, lost or stolen, the Issuer shall execute and deliver a new
Debenture, bearing a number not contemporaneously outstanding, in exchange and
substitution for the mutilated or defaced Debenture or in substitution for the
apparently destroyed, lost or stolen Debenture. In every case the applicant for
a substitute Debenture shall furnish to the Issuer such security or indemnity as
the Issuer may reasonably require to indemnify and defend and to save the Issuer
harmless from all risks, however remote, and, in every case of destruction, loss
or theft evidence to the Issuer's reasonable satisfaction of the apparent
destruction, loss or theft of such Debenture and of the ownership thereof.
Upon the issuance of any substitute Debenture, the Issuer may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses connected
therewith. In case any Debenture which has matured or is about to mature, or has
been called for redemption in full, or is being surrendered for conversion in
full shall become mutilated or defaced or be apparently destroyed, lost or
stolen, the Issuer may, instead of issuing a substitute Debenture, with the
holder's consent, pay or authorize the payment or conversion of the same
(without surrender thereof except in the case of a mutilated or defaced
Debenture), if the applicant for such payment shall furnish to the Issuer such
security or indemnity as the Issuer may reasonably require to indemnify and
defend and to save the Issuer harmless from all risks, however remote, and, in
every case of apparent destruction, loss or theft, the applicant shall also
furnish to the Issuer evidence to the Issuer's
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reasonable satisfaction of the apparent destruction, loss or theft of such
Debenture and of the ownership thereof.
Every substitute Debenture issued pursuant to the provisions of this
Section by virtue of the fact that any Debenture is apparently destroyed, lost
or stolen shall constitute an additional contractual obligation of the Issuer,
whether or not the apparently destroyed, lost or stolen Debenture shall be at
any time enforceable by anyone and shall be entitled to all the benefits of (but
shall be subject to all the limitations of rights set forth in) this Debenture
equally and proportionately with any and all other Debentures duly authenticated
and delivered hereunder. All Debentures shall be held and owned upon the express
condition that, to the extent permitted by law, the foregoing provisions are
exclusive with respect to the replacement or payment or conversion of mutilated,
defaced, or apparently destroyed, lost or stolen Debentures and shall preclude
any and all other rights or remedies notwithstanding any law or statute existing
or hereafter enacted to the contrary with respect to the replacement or payment
of negotiable instruments or other securities without their surrender.
2.3 CANCELLATION OF DEBENTURES; DESTRUCTION THEREOF. All Debentures
surrendered for payment, redemption, registration of transfer or exchange shall
be delivered to the Issuer for cancellation, and no Debentures shall be issued
in lieu thereof except as expressly permitted by any of the provisions of this
Debenture. The Issuer shall destroy canceled Debentures held by it and deliver a
certificate of destruction to the Holder, unless otherwise required. If the
Issuer shall acquire any of the Debentures, such acquisition alone shall not
operate as a redemption or satisfaction of the indebtedness represented by such
Debentures unless and until such indebtedness is satisfied.
ARTICLE III
DEFAULTS
3.1 EVENT OF DEFAULT DEFINED; ACCELERATION OF MATURITY; WAIVER OF
DEFAULT. In case one or more of the following events (each, an "Event of
Default") (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be 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) shall have occurred and be continuing:
a. a default in the payment of all or any part of the principal of or
interest on overdue principal on any of the Debentures as and when the same
shall become due and payable either at maturity, upon any redemption, by
declaration or otherwise; provided, however, that if such default is in the
payment of interest in cash, such default such not be deemed an Event of Default
until it shall have occurred and be continuing for a period of ten (10) Business
Days; or
b. a failure on the part of the Issuer to duly observe or perform any
of the covenants or agreements on the part of the Issuer (or the making by the
Issuer of any written announcement, statement or threat that it does not intend
to honor the obligations described in
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this paragraph) contained in this Debenture (including the failure to issue
Common Stock upon conversion of this Debenture in accordance with the terms
hereof), the Purchase Agreement or the Registration Rights Agreement for a
period of two (2) Business Days (other than with respect to an announcement,
statement or threat) after the earlier of (x) the date on which any officer of
the Issuer shall have obtained actual knowledge of such failure (or such
announcement, statement or threat) or (y) the date on which written notice
thereof has been given to the Issuer by the Holder; or
c. there shall have occurred with respect to any issue or issues of
Debt of the Issuer and/or one or more Subsidiaries having an outstanding
principal amount of $1,000,000 or more in the aggregate for all such issues of
all such Persons, whether such Debt now exists or shall hereafter be created, an
event of default which has caused the holder thereof to declare such debt to be
due and payable prior to its stated maturity; or
d. a judgment or order (not covered by insurance) for the payment of
money shall be rendered against the Issuer or any Subsidiary of the Issuer in
excess of $1,000,000 in the aggregate for all such judgments or orders against
all such Persons (treating any deductibles, self insurance or retention as not
so covered) that shall not be discharged, and all such judgments and orders
remain outstanding and there shall be any period of sixty (60) consecutive days
following entry of the judgment or order in excess of $1,000,000 or the judgment
or order which causes the aggregate amount described above to exceed $1,000,000
during which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; or
e. a court having jurisdiction in the premises shall enter a decree or
order for relief in respect of the Issuer or any of its Subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Issuer or any of
its Subsidiaries or for any substantial part of the property of the Issuer or
any of its Subsidiaries or ordering the winding up or liquidation of the affairs
of the Issuer or any of its Subsidiaries, and such decree or order shall remain
unstayed and in effect for a period of sixty (60) consecutive days; or
f. the Issuer or any of its Subsidiaries shall commence a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Issuer or any of its Subsidiaries or for any
substantial part of the property of the Issuer or any of its Subsidiaries, or
the Issuer or any of its Subsidiaries shall make any general assignment for the
benefit of creditors; or
g. any representation, warranty, certification or statement made by the
Issuer in the Purchase Agreement or in any certificate, financial statement or
other document delivered pursuant to the Purchase Agreement shall prove to have
been incorrect in any material respect when made; or
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h. the Common Stock shall be delisted from Nasdaq or shall be suspended
from trading on Nasdaq without resuming trading and/or being relisted thereon or
on a Subsequent Market or having such suspension lifted, as the case may be,
within five (5) Business Days; or
i. a Registration Statement (as defined in the Registration Rights
Agreement) for the Underlying Shares shall not have been declared effective by
the Commission on or prior to the 30th day after the Effectiveness Date (as
defined in the Registration Rights Agreement), or after its initial
effectiveness, such Registration Statement lapses in effect or sales of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
otherwise cannot be made thereunder (whether by reason of the Issuer's failure
to amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise, unless such failure is excused
pursuant to Section 3(k) of the Registration Rights Agreement) for more than
five (5) consecutive Business Days or forty-five (45) Business Days in any
twelve (12) month period; or
j. a Change of Control shall occur; or
k. an Event of Default has occurred and is continuing under any of the
other Debentures issued pursuant to the Purchase Agreement; or
l. any material failure on the part of the Issuer to comply with any of
its obligations in connection with the Second Closing or Third Closing which
failure continues for more than five Business Days.
then, in each and every such case (other than an Event of Default specified in
Section 3.1(e) or 3.1(f)), unless the principal shall have already become due
and payable, by notice in writing to the Issuer (the "Acceleration Notice"), a
Holder may declare the entire principal amount of the Debentures owned by such
Holder and any interest accrued thereon (and the aggregate amounts described
below) to be due and payable immediately, and upon any such declaration the same
shall become immediately due and payable. If an Event of Default specified in
Section 3.1(e) or 3.1(f) occurs, the principal of and any accrued interest on
the Debentures (and the aggregate amounts described below) shall become and be
immediately due and payable without any declaration or other act on the part of
any Holder of Debentures. In the event that the Issuer shall not have promptly,
but in any event within five (5) Business Days upon receipt of an Acceleration
Notice, paid the Holder the amount specified below with respect to an Event of
Default under Section 3.1(e) or 3.1(f), the Conversion Price shall automatically
be adjusted to equal the Average Price for the date of computation; provided,
that such Average Price is lower than the Conversion Price.
The aggregate principal amount payable on each Event of Default shall
be equal to the sum of (i) the Mandatory Prepayment Amount plus (ii) at the
option of the Holder, the Mandatory Prepayment Amount for the Converted
Debentures that would then be held by such Holder had the principal amount of
Debentures converted into Underlying Shares that are then held by the Holder not
been so converted; provided, that the Holder shall not be entitled to a
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Mandatory Prepayment Amount with respect to Converted Debentures if prior to the
occurrence of an Event of Default, the Underlying Shares into which the
Converted Debentures were converted had been held by the Holder for more than
five (5) Trading Days.
For purposes of this Section 3.1, principal amount of the Debentures
are outstanding until such date as the Holder shall have been issued Underlying
Shares upon a conversion (or attempted conversion) thereof. Interest shall
accrue on the Mandatory Prepayment Amount hereunder from the day after such
amount is due (being the date of an Event of Default) through the date of
payment in full thereof at the rate of twenty percent (20%) per annum, accruing
daily from the date such payment is due until such amount, plus any interest
thereon, if any, is paid in full. Payment of the Mandatory Prepayment Amount
pursuant to this Section 3.1 shall be in addition to any other amounts that may
be due to the Holder pursuant to this Debenture. Within five (5) Business Days
of receipt by the Holder of payments of amounts due to the Holder, (i) the
Holder shall return the Debentures to the Issuer and (ii) in the event the
Mandatory Prepayment Amount relates to the Converted Debentures, the Holder
shall return the Underlying Shares into which such Converted Debentures were
converted. In the event of the occurrence of an Event of Default, the Holder
need not provide and the Issuer hereby waives any presentment, demand, protest
or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Any
demand for payment may be rescinded and annulled by the 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.
Upon delivery of any Acceleration Notice to the Issuer, the Issuer
shall provide a copy of such notice to the other Holders, if any, within three
(3) Business Days of the Issuer's receipt thereof. Failure to deliver such
notice shall not affect the validity of the notice delivered by the Holders in
accordance with the provisions referred to above.
3.2 POWERS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER OF
DEFAULT. No right or remedy herein conferred upon or reserved to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
No delay or omission of the Holders to exercise any right or power
accruing upon any Event of Default occurring and continuing as aforesaid shall
impair any such right or power or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein; and every power and remedy given by
the Debentures or by law may be exercised from time to time, and as often as
shall be deemed expedient, by the Holders.
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ARTICLE IV
EXCHANGE; CONVERSION
4.1 RIGHT OF DEBENTUREHOLDERS TO EXCHANGE DEBENTURES. Subject to and
upon compliance with the provisions of this Article IV, this Debenture is
exchangeable for an equal principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same. No service
charge will be made for such registration of transfer or exchange.
4.2 RIGHT OF DEBENTUREHOLDERS TO CONVERT DEBENTURES INTO COMMON STOCK.
a. Conversion Price. Subject to and upon compliance with the provisions
of this Section 4.2, the principal amount of this Debenture, or any portion
thereof (and any accrued but unpaid interest thereon) may, at any time and at or
before the close of business on the Maturity Date be converted into duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock
at $3.9125 and shall be adjusted as set forth in Section 4.2(b), and subject to
the provisions of this Article IV (the "Conversion Price").
b. Optional Adjustment of Conversion Price. Unless the Holder elects
otherwise or consummates the Second Closing, if the Issuer's revenue from its
Internet Access Products Unit reported in the third quarter of its 1999 fiscal
year is less than $1,750,000, then, at 5:00 p.m. EST on the date of the
announcement of such revenue (the "Reset Date"), subject to the last sentence of
this Section 4.2(b), the Conversion Price shall be adjusted to be equal to
ninety percent (90%) of the average of the Per Share Market Value for the five
(5) consecutive Trading Days prior to the date of the Notice of Conversion. The
Holder shall send written notice to the Issuer of the Conversion Price, as
adjusted pursuant to this paragraph, together with computation of such adjusted
Conversion Price and the computation of the average Per Share Market Value for
such five (5) day period. The Conversion Price shall be deemed to be adjusted to
such new Conversion Price unless the Issuer notifies the Holder within two (2)
Business Days after receipt of such written notice from the Holder that the
Issuer disagrees with the computation of such adjustment. If the Holder and the
Issuer fail to agree upon the adjusted Conversion Price within one (1) Business
Day after the Issuer has given such notice, the Conversion Price shall be
computed promptly by a securities firm (the fees and expenses of which shall be
paid by the Company) acceptable to both the Holder and the Issuer, and such
computation shall be final and binding; provided, however, that the Conversion
Price shall always be greater than or equal to $2.00 per share but in no event
shall the Conversion Price exceed $3.9125.
c. Notice of Conversion. If an adjustment in the Conversion Price and,
if applicable, a change in the securities or other property issuable upon
conversion has taken place pursuant to Articles III, IV or V, then the
conversion described in Section 4.2(a) shall be at the applicable Conversion
Price and in such securities or other property as so adjusted. The Holder
desiring to make a conversion shall deliver to the Issuer, during usual business
hours of the
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Issuer's office, or, at the Holder's option, to the Issuer's transfer agent
during its usual business hours (with a copy to the Issuer), a written notice of
election to convert, as provided in the form attached hereto as Exhibit A (a
"Notice of Conversion"), accompanied, if required, by this Debenture or the
Debentures, the principal amount of which is (are) to be converted.
4.3 ADJUSTMENT FOR DIVIDENDS; INTEREST PAYMENT AFTER CONVERSION. No
payment or adjustment will be made for dividends on any Common Stock except as
provided herein. On conversion of a Debenture, that portion of interest accrued
and unpaid attributable to the period from the Original Issuance Date to the
Conversion Date with respect to the converted Debenture shall not be canceled,
extinguished or forfeited, but rather shall be paid in full to the Holder
thereof by the payment of an amount of shares of Common Stock valued at the
Average Price equal thereto; provided, however, that the Company may pay such
amount in cash if it provides the Holder with not less than ten (10) days' prior
written notice of such intention. If the Holder converts more than one Debenture
at the same time, the number of shares of Common Stock issuable upon the
conversion shall be based on the total principal amount of the Debentures
converted.
4.4 ISSUANCE OF SHARES UPON CONVERSION.
a. As promptly as practicable, but in any event no later than three (3)
Trading Days after delivery of a Notice of Conversion and, if required, the
surrender, as herein provided, of any Debenture or Debentures for conversion,
the Issuer shall deliver or cause to be delivered to the Holder of this
Debenture or the Debentures delivering such Notice of Conversion, or such
Holder's designee, a certificate or certificates representing the number of duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock,
into which such Debenture or Debentures may be converted in accordance with the
provisions of this Article IV. Such conversion shall be deemed to have been made
at the time and on the date the Notice of Conversion is delivered to the Issuer,
as long as, if required, this Debenture or the Debentures being converted are
promptly delivered to the Issuer, the rights of the Holder of such Debenture or
Debentures as a Holder (subject to the Issuer's satisfaction of its obligations
hereunder with respect to such conversion) shall cease at such time with respect
to the Converted Debentures, the Person or Persons entitled to receive the
shares of Common Stock, upon conversion of such Debenture or Debentures, shall
be treated for all purposes as having become the record holder or holders of
such shares of Common Stock at such time, and such conversion shall be at the
Conversion Price in effect at such time (the "Conversion Date"). Subject to
paragraph 4.4(b), if any Debenture is converted in part only, upon such
conversion the Issuer shall execute and deliver to the Holder thereof, as
requested by such Holder, a new Debenture or Debentures of authorized
denominations in aggregate principal amount equal to the unconverted portion of
such Debenture. Without in any way limiting the Holder's right to pursue other
remedies, including actual damages and/or equitable relief, the parties hereto
agree that if the Issuer fails to deliver the shares of Common Stock required to
be issued upon the conversion of such Debenture or Debentures under this Section
4.4 within the three (3) Trading Day period referred above, the Issuer shall pay
to the Holder upon demand an amount of cash (at the Holder's option) equal to:
(i) the commissions, discounts and similar expenses charged to the Holder in
purchasing a
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number of shares of Common Stock no greater than the number of shares of Common
Stock required to be issued upon the conversion of this Debenture or the
Debentures or (ii) the product of (A) the number of shares of Common Stock
required to be issued upon the conversion of this Debenture or the Debentures,
(B) the Per Share Market Value of such shares on the Conversion Date, (C) the
number of days after such three (3) Trading Day period that such shares are not
delivered to the Holder and (z) 0.005.
b. Notwithstanding anything to the contrary set forth herein, upon
conversion of a Debenture in accordance with the terms thereof, the Holder shall
not be required to physically surrender this Debenture to the Issuer unless the
entire unpaid principal amount of this Debenture is so converted. The Holder and
the Issuer shall maintain records showing the principal amount already converted
and the dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Issuer, so as not to require physical
surrender of this Debenture upon each such conversion. In the event of any
dispute or discrepancy, such records of the Issuer shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if any portion of this Debenture is converted, the Holder may not transfer this
Debenture unless the Holder first physically surrenders this Debenture to the
Issuer, whereupon the Issuer shall promptly issue and deliver upon the order of
the Holder a new Debenture of like tenor, registered as the Holder (upon payment
by the Holder of any applicable transfer taxes) may request, representing in the
aggregate the remaining unpaid principal amount of this Debenture. The Holder
and any assignee, by acceptance of this Debenture, acknowledge and agree that,
by reason of the provisions of this paragraph, following conversion of a portion
of a Debenture, the unpaid and unconverted principal amount of such Debenture
represented by such Debenture may be less than the amount stated on the face
thereof.
c. In lieu of delivering physical certificates representing the
Debenture Shares, provided the Issuer's transfer agent is participating in the
Depository Trust Issuer Fast Automated Securities Transfer (FAST) program, upon
request of the Holder and in compliance with the provisions of Sections 4.1, 4.2
and 4.4, the Issuer shall use its commercially reasonable best efforts to cause
its transfer agent to electronically transmit the shares of Common Stock
issuable upon conversion of this Debenture to the Holder by crediting the
account of the Holder's Prime Broker with the Depository Trust Company through
its Deposit Withdrawal Agent Commission system. The time period for delivery
described in Section 4.4(a) shall apply to the electronic transmittals described
herein.
d. In addition to any other rights available to the Holder, if the
Issuer fails to deliver to the Holder such certificate or certificates pursuant
to Section 4.4(a), including for purposes hereof, any shares of Common Stock to
be issued on the Conversion Date on account of accrued but unpaid interest
hereunder, by the third (3rd) Trading Day after the Conversion Date, and if
after such third (3rd) Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
such Holder of the Underlying Shares which the Holder was entitled to receive
upon such conversion (a "Buy-In"), then the Issuer shall (i) pay in cash to the
Holder (in addition to any remedies available to or elected by the Holder) the
amount by which (A) the Holder's total purchase price (including
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brokerage commissions, if any) for the Common Stock so purchased exceeds (B) the
product of (1) the aggregate number of shares of Common Stock that such Holder
was entitled to receive from the conversion at issue multiplied by (2) the
market price of the Common Stock at the time of the sale giving rise to such
purchase obligation and (ii) at the option of the Holder, either return the
Debentures for which such conversion was not honored or deliver to such Holder
the number of shares of Common Stock that would have been issued had the Issuer
timely complied with its conversion and delivery obligations under Section
4.4(a). For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with respect to which the market price of the
Underlying Shares on the date of conversion totaled $10,000, under clause (i) of
the immediately preceding sentence the Issuer shall be required to pay the
Holder $1,000. The Holder shall provide the Issuer written notice indicating the
amounts payable to the Holder in respect of the Buy-In.
4.5 ADJUSTMENT OF CONVERSION PRICE. In addition to any adjustment to
the Conversion Price provided elsewhere in this Debenture, the Conversion Price
in effect at any time shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
a. Common Stock Dividends; Common Stock Splits; Reverse Common Stock
Splits. If the Issuer, at any time while this Debenture is outstanding, (a)
shall pay a stock dividend on its Common Stock, (b) subdivide outstanding shares
of Common Stock into a larger number of shares, (c) combine outstanding shares
of Common Stock into a smaller number of shares or (d) issue by reclassification
of shares of Common Stock any shares of Capital Stock of the Issuer, the
Conversion Price thereafter shall be determined by multiplying the Conversion
Price by a fraction the numerator of which shall be the number of shares of
Common Stock (excluding treasury shares, if any) 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 paragraph
4.5(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 re-classification.
b. Rights; Warrants. If the Issuer, at any time while this Debenture is
outstanding, shall issue rights or warrants to all of the holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Conversion Price, the Conversion Price thereafter
shall be determined by multiplying the Conversion Price by a fraction, the
denominator of which shall be the number of shares of Common Stock (excluding
treasury shares, if any) 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) 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 the Conversion Price. Such adjustment shall be made
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whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of shareholders entitled
to receive such rights or warrants. Upon the expiration of any right or warrant
to purchase Common Stock the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section 4.5, if any right or warrant shall
expire and shall not have been exercised, the Conversion Price shall immediately
upon such expiration be recomputed to the Conversion Price which would have been
in effect had the adjustment of the Conversion Price made upon the issuance of
such rights or warrants been made on the basis of (i) that number of shares of
Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised and (ii) such number of shares of Common Stock that were
issued and sold for the consideration actually received by the Company upon the
actual exercise of such rights and warrants plus the consideration, if any,
actually received by the Company for the issuance, sale or grant of all such
rights or warrants.
c. Subscription Rights. If the Issuer, at any time while this Debenture
is outstanding, shall distribute to all of the holders of Common Stock evidence
of its indebtedness or assets or rights or warrants to subscribe for or purchase
any security (excluding those referred to in Sections 4.5(a) and (b) above)
("Subscription Rights"), then in each such case the Conversion Price at which
this Debenture shall thereafter be exercisable shall be determined by
multiplying the Conversion Price in effect immediately prior to the record date
fixed for determination of shareholders entitled to receive such distribution by
a fraction, the denominator of which shall be the Per Share Market Value of
Common Stock determined as of the record date mentioned above, and the numerator
of which 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 evidence 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 net assets of the Issuer, such fair market value shall be
determined by an Appraiser selected in good faith by the Holder, whose fees and
expenses shall be paid by the Company; and provided, further, that the Issuer,
after receipt of the determination by such Appraiser shall have the right to
select an additional Appraiser meeting the same qualifications, in good faith,
in which case the fair market value shall be equal to the average of the
determinations by each such Appraiser. Such adjustment shall be made whenever
any such distribution is made and shall become effective immediately after the
record date mentioned above. Upon the expiration or termination of any such
Subscription Rights, the Conversion Price of this Debenture to the extent in any
way affected by or computed using such Subscription Rights, shall be recomputed
to reflect the issuance of only the number of shares of Common Stock (and
convertible or exchangeable securities which remain in effect) actually issued
upon the exercise of such Subscription Rights.
d. Rounding. All calculations under this Section 4.5 shall be made to
the nearest cent or the nearest l/l00th of a share, as the case may be.
e. Notice of Adjustment. Whenever the Conversion Price is adjusted
pursuant to paragraphs 4.5(a), (b) or (c), the Issuer shall promptly deliver to
the Holder a notice
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setting forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
f. Redemption Events.
(i) The following are "Redemption Events" under this Section 4.5(f):
(A) any reclassification of the Common Stock; (B) any Change of Control;
(C) any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property; (D) any suspension from
listing or delisting of the Common Stock from Nasdaq or any Subsequent
Market on which the Common Stock is listed for a period of five (5)
consecutive days; (E) the Issuer's notice to any Holder of the Debentures,
including by way of public announcement, at any time, of its intention, for
any reason, not to comply with proper requests for the conversion of any
such Debentures; or (F) a breach by the Issuer of any representation,
warranty, covenant or other term or condition of the Purchase Agreement,
the Registration Rights Agreement, the Warrants, this Debenture, or any
other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby or hereby, except to
the extent that such breach would not have a Material Adverse Effect (as
defined in Section 2.1(a) of the Purchase Agreement) and except, in the
case of a breach of a covenant which is curable, only if such breach
continues for a period of at least twenty (20) Business Days after the
Issuer knows or reasonably should have known of the existence of such
breach. On and after the date of any Redemption Event, the Holder shall
have the option to require the Issuer to redeem (the "Redemption Right") in
cash and subject to the terms of payment provisions set forth in below,
from funds legally available therefor at the time of such redemption, this
Debenture at a price (the "Redemption Price") equal to the product of (i)
the Average Price immediately preceding the effective date, the date of the
closing, date of occurrence or the date of the notice, as the case may be,
of the Redemption Event triggering such Redemption Right and (ii) the
number of shares of Common Stock of the Issuer into which this Debenture
could have been converted immediately prior to such Redemption Event. After
the occurrence of a Redemption Event specified in clauses (A), (B) or
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<PAGE> 20
(C), the Holder shall have the right at his or its option, in lieu of the
Redemption Right, to convert this Debenture for shares of stock or other
securities, cash or property receivable upon or deemed to be held by
holders of Common Stock following such Redemption Event; the Holder shall
be entitled upon such Redemption Event to receive such amount of
securities, cash or property as if the Holder had held the shares of the
Common Stock into which this Debenture could have been converted
immediately prior to such Redemption Event (without taking into account any
limitations or restrictions on the convertibility of this Debenture). In
the case of a Redemption Event specified in clause (B) in which holders of
the Common Stock receive cash, the Holder shall have the right at his or
its option, in lieu of the Redemption Right, to convert this Debenture for
such number of shares of the surviving company equal to the amount of cash
into which this Debenture is convertible divided by the fair market value
of the shares of the surviving company on the effective date of the Change
of Control. In the case of a Redemption Event specified in clauses (A), (B)
or (C), the Issuer shall not effect any such Redemption Event unless, prior
to the consummation thereof, each Person (other than the Issuer) which may
be required to deliver any stock, securities, cash or property following
the conversion of this Debenture as provided herein shall assume, by
written instrument delivered and reasonably satisfactory to, the Holder of
this Debenture, (x) the obligations of the Issuer under this Debenture (and
if the Issuer shall survive the consummation of such transaction, such
assumption shall be in addition to, and shall not release the Issuer from,
any continuing obligations of the Issuer under this Debenture), (y) the
obligations of the Issuer under this Debenture, and (z) the obligation to
deliver to the Holder such shares of stock, securities, cash or property
as, in accordance with the foregoing provisions of this Section 4.5(f), the
Holder may be entitled to receive. Nothing in this Section 4.5(f) shall be
deemed to authorize the Issuer to enter into any transaction not otherwise
permitted by the Purchase Agreement. This provision shall similarly apply
to successive Redemption Events.
(ii) Payment of Redemption Price. The Company shall pay the
applicable Redemption Price to the Holder of the Debentures being redeemed
in cash on the date which is not more than three (3) Business Days after
the Holder exercises its Redemption Right by written notice to the Issuer
(the "Redemption Date"). If the Issuer shall fail to pay the applicable
Redemption Price to such Holder on the Redemption Date, in addition to any
remedy such Holder may have under this Debenture and the Purchase
Agreement, such unpaid amount shall bear interest at the rate of 1.25% per
month until it is paid in full. Until the Issuer pays such unpaid
applicable Redemption Price in full to each Holder, each Holder of
Debentures submitted for redemption pursuant to this Section 4.5(f) and for
which the applicable Redemption Price has not been paid, shall have the
option, in lieu of redemption, (A) to require the Issuer to promptly return
to such Holder all of the Debentures that were submitted for redemption by
such Holder under this Section 4.5(f) and for which the applicable
Redemption Price has not been paid or (B) to convert those Debentures for
which the applicable Redemption Price has not been paid at the then
applicable Conversion Price.
g. Reclassification, Etc. If:
(i) the Company shall declare a dividend (or any other distribution)
on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash dividend
on or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to the holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
Capital Stock of any class or any rights; or
(iv) the approval of any shareholders of the Company shall be
required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of
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<PAGE> 21
the assets of the Company, or any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or other 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 filed at each office or agency
maintained for the purpose of conversion of this Debenture, and shall cause
to be delivered to the Holder, at least ten (10) Business Days prior to the
applicable record or effective date hereinafter specified, a notice
(provided such notice shall not include any material non-public
information) stating (x) the date on which a record is to be taken for the
purpose of such dividend, distribution, 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, 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 or
close, 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, cash 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.
h. Adjustment to Conversion Price. If the Issuer, at any time while
this Debenture is outstanding, takes any of the actions described in this
Section 4.5(h), then, in order to prevent dilution of the rights granted under
this Debenture, at any time prior to the Maturity Date, the Conversion Price
will be subject to adjustment from time to time as provided in this Section
4.5(h).
(i) Adjustment of Conversion Price upon Issuance of Additional
Securities. If at any time while this Debenture is outstanding the Company
issues or sells, or is deemed to have issued or sold, any shares of Common
Stock, or in any manner grants any rights or options to subscribe for or to
purchase Common Stock ("Options"), or in any manner issues or sells any
stock or other securities convertible into or exercisable or exchangeable
for Common Stock ("Convertible Securities", and collectively with the
Common Stock and Options, "Additional Securities") (other than (1) the
Underlying Shares or shares of Common Stock reserved for issuance or deemed
to have been issued by the Company in connection with an Approved Stock
Plan, (2) the shares of Common Stock issuable upon the exercise of any
options or warrants outstanding on the date hereof and listed in Schedule
2.1(c) of the Purchase Agreement, (3) the securities to be issued in the
transactions set forth on such Schedule 2.1(c), (4) the shares of Common
Stock issued or deemed to have been issued as consideration for an
acquisition by the Company of a division, assets or business (or stock
constituting any portion thereof) from another Person, (5) the shares of
Common Stock issued or deemed
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<PAGE> 22
to have been issued in connection with collaborative or strategic partner
transactions, provided such issuances are for other than primarily equity
financing purposes, (6) the shares of Common Stock issued or deemed to have
been issued in connection with any equipment leasing arrangement or debt
financing from a bank or similar financial institution or (7) the shares of
Common Stock issued to the holders of the Debentures in lieu of cash
interest payments) for an effective consideration per share of Common Stock
less than the Conversion Price in effect immediately prior to such
issuance, sale or grant, then immediately after such issuance, sale or
grant, the Conversion Price then in effect shall be reduced to equal the
Conversion Price determined by dividing (x) the sum of (I) the product
derived by multiplying the Conversion Price in effect immediately prior to
such issue, sale or grant by the number of shares of Common Stock
outstanding and deemed outstanding (pursuant to this Section 4.5(h))
immediately prior to such issue, sale, or grant, plus (II) the
consideration, if any, received by the Company upon such issue, sale or
grant, by (y) the number of shares of Common Stock outstanding and deemed
outstanding (pursuant to this Section 4.5(h)) immediately after such issue,
sale or grant. For the purpose of determining the adjusted Conversion Price
under this Section 4.5(h)(i), the following shall be applicable:
(A) Change in Option Price or Rate of Conversion. If there is a
change at any time in (i) the Purchase Price provided for in any
Options, (ii) the additional consideration, if any, payable upon the
issuance, conversion or exchange of any Convertible Securities or
(iii) the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock, then immediately after such
change in option price or rate of conversion the Conversion Price in
effect at the time of such change shall be readjusted to the
Conversion Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed Purchase Price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or
sold; provided that no adjustment shall be made if such adjustment
would result in an increase of the Conversion Price then in effect.
(B) Expiration of Options or Convertible Securities. Upon the
expiration of any Options or Convertible Securities the issuance of
which resulted in an adjustment in the Conversion Price pursuant to
this Section 4.5(h), if any Option or Convertible Security shall
expire and shall not have been exercised, the Conversion Price shall
immediately upon such expiration be recomputed to the Conversion Price
which would have been in effect had the adjustment of the Conversion
Price made upon the issuance of such Options or Convertible Securities
been made on the basis that (1) the only shares of Common Stock so
issued were that number of shares of Common Stock actually purchased
upon the exercise of such Options and the conversion of such
Convertible Securities and (2) such shares of Common Stock were issued
and sold for the consideration actually received by the Company upon
such exercise or conversion plus the
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<PAGE> 23
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such Options or Convertible Securities.
(C) Effect on Conversion Price of Certain Events. For purposes of
determining the adjusted Conversion Price under this Section
4.5(h)(i), the following shall be applicable:
(I) Calculation of Consideration Received. In the case of
the issuance of any Options or Convertible Securities
constituting Additional Securities, the aggregate consideration
received therefor shall be deemed to be the consideration
received by the Company for the issuance of such Options or
Convertible Securities plus the additional minimum consideration,
if any, to be received by the Company upon the exercise,
conversion or exchange thereof. If any Additional Securities are
issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the
amount of such cash, without any deduction being made for any
commissions, discounts or other expenses incurred by the Company
for any underwriting of the issue or otherwise in connection
therewith. In case any Additional Securities are issued or sold
for a consideration other than cash, the amount of the
consideration other than cash received by the Issuer will be the
fair value of such consideration, except where such consideration
consists of securities, in which case the amount of consideration
received by the Issuer will be the Average Price of such security
on the Trading Day immediately preceding the date of receipt
thereof. In case any Additional Securities are issued to the
owners of the non-surviving entity in connection with any merger
in which the Issuer is the surviving entity the amount of
consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving
entity as is attributable to such Additional Securities. The fair
value of any consideration other than cash or securities will be
determined jointly by the Issuer and the Holders of Debentures
representing a majority of the aggregate principal amount of
Debentures then outstanding. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event
requiring valuation (the "Valuation Event"), the fair value of
such consideration will be determined within forty-eight (48)
hours of the tenth (10th) day following the Valuation Event by an
Appraiser selected in good faith by the Issuer and agreed upon by
the Holders of Debentures representing a majority of the
aggregate principal amount of Debentures then outstanding. The
determination of such Appraiser shall be binding upon all parties
absent manifest error.
(II) Integrated Transactions. In case any Option is issued
in connection with the issue or sale of other securities of the
Issuer,
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together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued
for an aggregate consideration of $0.01.
(III) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or
held by or for the account of the Issuer, and the disposition of
any shares so owned or held will be considered an issue or sale
of Common Stock.
(IV) Record Date. If the Issuer takes a record of the
holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Additional
Securities or (2) to subscribe for or purchase Additional
Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the
making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
(D) Certain Events. If any event occurs of the type contemplated
by the provisions of Section 4.5(h) (subject to the exceptions stated
therein) but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom
stock rights or other rights with equity features), then the Board of
Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder, or assigns, of this
Debenture; provided, however, that no such adjustment will increase
the Conversion Price as otherwise determined pursuant to this Section
4.5(h).
(E) Notices. The Issuer shall give the Holder written notice of
the occurrence of any of the events specified in this Section 4.5(h)
as soon as practicable, but in no event later than three (3) Business
Days, after such event and shall publicly disclose such event prior to
or concurrently with the giving of such notice. Such notice shall
contain at least: (1) a description of the even; (2) the adjusted
Conversion Price with a reference to the applicable paragraph in
Section 4.5(h); and (3) the dates of the five (5) Trading Day period
during which the adjusted Conversion Price is in effect.
4.6 RESTRICTION ON CONVERSION BY EITHER THE HOLDER OR THE ISSUER.
Notwithstanding anything herein to the contrary, in no event shall any Holder or
the Issuer have the right or be required to convert any or all of the aggregate
principal amount and interest accrued thereon of this Debenture if as a result
of such conversion the aggregate number of shares of Common Stock beneficially
owned by such Holder and its Affiliates would exceed 4.99% of the outstanding
shares of the Common Stock following such conversion. For purposes of this
Section 4.6, beneficial ownership shall be calculated in accordance with Section
13(d) of
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the Exchange Act. The provisions of this Section 4.6 may be waived by a
Holder as to itself (and solely as to itself) upon not less than sixty-five (65)
days' prior written notice to the Issuer, and the provisions of this Section 4.6
shall continue to apply until such 65th day (or later, if stated in the notice
of waiver).
4.7 OFFICER'S CERTIFICATE. Whenever the number of shares purchasable
upon conversion shall be adjusted as required by the provisions of Section 4.5,
the Issuer shall forthwith file in the custody of its secretary or an assistant
secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted number of shares determined as herein
provided, setting forth in reasonable detail the facts requiring such adjustment
and the manner of computing such adjustment. Each such officer's certificate
shall be signed by the chairman, president or chief financial officer of the
Issuer and by the secretary or any assistant secretary of the Issuer. Each such
officer's certificate shall be made available at all reasonable times for
inspection by any Holder of the Debentures and the Issuer shall, forthwith after
each such adjustment, deliver a copy of such certificate to the each of the
Holders.
4.8 RESERVATION OF SHARES. The Issuer covenants that it will at all
times reserve and keep available out of its authorized shares of Common Stock,
free from preemptive rights, solely for the purpose of issue upon conversion of
the Debentures as herein provided, such number of shares of the Common Stock as
shall then be issuable upon the conversion of all outstanding Debentures into
Common Stock under the Debentures (the "Reserved Amount"). The Issuer covenants
that all shares of the Common Stock issued upon conversion of this Debenture
which shall be so issuable shall, when issued, be duly and validly issued and
fully paid and nonassessable.
If, at any time a Holder of this Debenture submits a Notice of
Conversion, and the Issuer does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article IV (a "Conversion Default"), subject to Section
4.14, the Issuer shall issue to the Holder all of the shares of Common Stock
which are then available to effect such conversion. The portion of this
Debenture which the Holder included in its Notice of Conversion and which
exceeds the amount which is then convertible into available shares of Common
Stock shall, notwithstanding anything to the contrary contained herein, not be
convertible into Common Stock in accordance with the terms hereof until (and at
the Holder's option at any time after) the date additional shares of Common
Stock are authorized by the Issuer to permit such conversion at which time the
Conversion Price in respect thereof shall be the lesser of (i) the Per Share
Market Value on the Conversion Default Date and (ii) the Per Share Market Value
on the Conversion Date thereafter elected by the Holder in respect thereof. In
addition, the Issuer shall pay to the Holder payments ("Conversion Default
Payments") for a Conversion Default in the amount of (x) the sum of (1) the then
outstanding principal amount of this Debenture plus (2) accrued and unpaid
interest on the unpaid principal amount of this Debenture through the
Authorization Date plus (3) default interest, if any, on the amounts referred to
in clauses (1) and/or (2), multiplied by (y) .24, multiplied by (z) (N/365),
where N equals the number of days from the day the holder submits a Notice of
Conversion giving rise to a Conversion Default (the "Conversion Default Date")
to the
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date (the "Authorization Date") that the Issuer authorizes a sufficient number
of shares of Common Stock to effect conversion of the full outstanding principal
balance of this Debenture. The Issuer shall use its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable following the
earlier of (i) such time that the Holder notifies the Issuer or that the Issuer
otherwise becomes aware that there are or likely will be insufficient authorized
and unissued shares to allow full conversion thereof and (ii) a Conversion
Default. The Issuer shall send notice to the Holder of the authorization of
additional shares of Common Stock, the Authorization Date and the amount of
Holder's accrued Conversion Default Payments. The accrued Conversion Default
Payments for each calendar month shall be paid in cash or shall be convertible
into Common Stock (at such time as there are sufficient authorized shares of
Common Stock following the Authorization Date) at the applicable Conversion
Price, at the Holder's option, as follows:
a. In the event the Holder elects to take such payment in cash, cash
payment shall be made to the Holder by the fifth (5th) Business Day of the month
following the month in which it has accrued; and
b. In the event the Holder elects to take such payment in Common Stock,
the Holder may convert such payment amount into Common Stock at the lesser of
the Conversion Price (as in effect at the time of conversion) and the Per Share
Market Value (on the fifth (5th) day of the month referred to below) at any time
after the fifth (5th) day of the month following the month in which it has
accrued in accordance with the terms of this Article IV (so long as there is
then a sufficient number of authorized shares of Common Stock).
The Holder's election shall be made in writing to the Issuer at any
time prior to 9:00 p.m., New York City time, on the third (3rd) day of the month
following the month in which Conversion Default Payments have accrued. If no
election is made, the Holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the Holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the Issuer's failure to
maintain a sufficient number of authorized shares of Common Stock, and each
Holder shall have the right to pursue all remedies available at law or in equity
(including decree of specific performance and/or injunctive relief).
4.9 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The Issuer covenants
that if any shares of Common Stock required to be reserved for purposes of
conversion of Debentures hereunder require registration with or approval of any
governmental authority under any federal or state law, or any national
securities exchange or quotation system, before such shares may be issued upon
conversion, the Issuer will use its best efforts to cause such shares to be duly
registered or approved, as the case may be.
4.10 FRACTIONAL SHARES. Upon a conversion hereunder, the Issuer shall
not be required to issue stock certificates representing fractions of shares of
the 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 Issuer elects not, or is unable, to make such a
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<PAGE> 27
cash payment, the holder shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
4.11 PAYMENT OF TAX UPON ISSUE OR TRANSFER. The issuance of
certificates for shares of the Common Stock on conversion of the Debentures
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 Issuer shall not be required to pay any tax that
may be payable in respect of any transfer involving the issuance and delivery of
any such certificate upon conversion in a name other than that of the Holder of
such Debentures so converted and the Issuer 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 Issuer the amount of such tax or shall
have established to the satisfaction of the Issuer that such tax has been paid.
4.12 NOTICES. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement shall be in
writing and shall be deemed to have been delivered (a) upon receipt, when
delivered personally, (b) upon receipt, when sent by facsimile, provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party (if received before 7:00 p.m. EST where such
notice is received) or the first business day following such delivery (if
received on or after 7:00 p.m. EST where such notice is received) or (c) one (1)
business day after deposit with a nationally recognized overnight courier, in
each case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
(i) If to the Issuer:
eSOFT, Inc.
295 Interlocken Blvd., #500
Broomfield, Colorado 80012
Attention: Mr. Jeffrey F. Finn
President and Chief Executive Officer
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
with a copy to:
Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Boulder, Colorado 80302
Attention: James H. Carroll, Esq.
Telephone: (303) 546-4000
Facsimile: (303) 546-4099
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(ii) If to the Holder:
Brown Simpson Strategic Growth Fund, Ltd.
152 West 57th Street, 40th Floor
New York, New York 10029
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, New York 10022
Attention: James E. Kaye, Esq.
Telephone: (212) 872-1000
Facsimile: (212) 872-1002
Each party shall provide written notice to the other parties of any
change in address or facsimile number in accordance with the provisions hereof.
4.13 ALLOCATIONS OF RESERVED AMOUNT. The Reserved Amount shall be
allocated pro rata among the Holders based on the principal amount of Debentures
issued to each Holder. Each increase to the Reserved Amount shall be allocated
pro rata among the Holders based on the principal amount of Debentures held by
each Holder at the time of the increase in the Reserved Amount. In the event a
Holder shall sell or otherwise transfer any of such Holder's Debentures, each
transferee shall be allocated a pro rata portion of such transferor's Reserved
Amount. Any portion of the Reserved Amount which remains allocated to any Person
which does not hold any Debentures shall be allocated to the remaining Holders,
pro rata, based on the principal amount of such Debentures then held by such
Holders.
4.14 NASDAQ LIMITATION. If on any date (the "Determination Date") (a)
the Common Stock is listed for trading or quoted on the Nasdaq National Market
or the Nasdaq SmallCap Market, (b) the Conversion Price then in effect is such
that the aggregate number of shares of Common Stock that would then be issuable
upon exercise in full of the then outstanding Debentures as if all such
Debentures were exercised on such Determination Date (without regard to any
limitations on conversion) together with all other shares of Common Stock that
would be integrated with such shares would equal or exceed twenty percent (20%)
of the number of shares of the Common Stock outstanding immediately prior to the
Closing Date (the "Issuable Maximum") and (c) the Company shall not have
previously obtained the vote of the shareholders of the Company (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of the Nasdaq National Market or the Nasdaq SmallCap Market (or any
successor entity) to approve the issuance of shares of Common Stock in excess of
the Issuable Maximum in a private placement whereby shares of Common Stock are
deemed to have been issued at a price that is less than the greater of book
value or fair market value of the
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Common Stock, then with respect to the Debentures then held by the Holders for
which a conversion would result in an issuance of shares of Common Stock in
excess of such Holder's pro rata allocation (as described below) or the Issuable
Maximum (the "Excess Shares") the Company may elect to repurchase such Excess
Shares by payment in cash to the Holders an amount equal to the product of (i)
the Average Price less the Conversion Price and (ii) the number of outstanding
Debenture Shares underlying the Excess Shares (the "Repurchase Amount"). Any
such election by the Company must be made in writing to the Holders within two
(2) Trading Days after the first such Determination Date and the payment of such
Repurchase Amount shall be made in full to the Holders within ten (10) Business
Days after the date such notice is delivered. If the Company does not deliver
timely a notice of its election to repurchase under this Section or shall, if it
shall have delivered such a notice, fail to pay the Repurchase Amount hereunder
within ten (10) Business Days thereafter, then the holders of a majority of the
principal amount of the Debentures then outstanding shall have the option by
written notice to the Company, if applicable, to declare any such notice given
by the Company, if given, to be null and void and require the Company to either:
(A) use its best efforts to obtain the Shareholder Approval applicable to such
issuance as soon as is possible, but in any event not later than the sixtieth
(60th) day after such request unless the Company has previously used its best
efforts, but has failed, to obtain such approval (provided, that if the Company
shall fail to obtain the Shareholder Approval during such 60-day period, the
Holder may demand the cash payment set forth in (B)) herein or (B) pay cash to
such Holder, within five (5) Business Days of such Holder's notice, in an amount
equal to the Repurchase Amount for such Holder's portion of the Excess Shares.
The payment of the Repurchase Amount to each Holder pursuant to this Section
shall be determined on a pro rata basis based upon the number of Debentures held
by such Holder on the Determination Date which is in excess of the pro rata
allocation of the Issuable Maximum. If the Company fails to pay such Repurchase
Amount in full pursuant to this Section 4.14 within five (5) Business Days after
the date payable, the Company will pay interest thereon at a rate of twenty
percent (20%) per annum to the exercising Holder, accruing interest daily from
the date of conversion until such amount, plus all such interest thereon, if
any, is paid in full. Until the Company has received the Shareholder Approval no
Holder of the Debentures shall be issued, upon conversion of the Debentures,
shares of Common Stock in an amount greater than such Holder's allocated portion
of the Issuable Maximum.
In no event shall the Issuer be required to issue shares of Common
Stock upon the conversion of a Debenture if such issuance would violate the
rules of Nasdaq.
ARTICLE V
MANDATORY CONVERSION
5.1 MANDATORY CONVERSION.
a. Mandatory Conversion. This Debenture is convertible in whole at the
option of the Issuer from time to time, subject to the following conditions,
including the conditions set forth in Section 5.1(b) (the "Mandatory
Conversion"), if the average Per Share
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Market Value over thirty (30) consecutive Trading Days exceeds two hundred
percent (200%) of the then applicable Exercise Price for the Warrants issued at
the First Closing (the "Mandatory Conversion Event").
b. Mandatory Conversion Notice. Subject to the conditions set forth in
Section 5.1(a), so long as (i) no Event of Default (or any event that with the
passage of time or giving of notice or both would constitute an Event of
Default) shall have occurred and be continuing, (ii) any Registration Statement
required to be filed and be effective pursuant to the Registration Rights
Agreement is then in effect and has been in effect and sales of all of the
Registrable Securities can be made thereunder for at least twenty (20) days
prior to the Mandatory Conversion Notice Date (as defined below) and (iii) the
Issuer has a sufficient number of authorized shares of Common Stock reserved for
issuance upon full conversion of the Debentures, upon ten (10) Business Days'
prior written notice to the Holder (a "Mandatory Conversion Notice"), the entire
principal amount of this Debenture may be converted by the Issuer in whole into
shares of Common Stock at the Conversion Price.
5.2 MECHANICS OF MANDATORY CONVERSION. The Issuer shall exercise its
right to cause a Mandatory Conversion hereunder by delivering its Mandatory
Conversion Notice by facsimile and overnight courier to each Holder (such date
that the Mandatory Conversion Notice is given on, the "Mandatory Conversion
Notice Date"), no later than two (2) Business Days after the occurrence of the
Mandatory Conversion Event. Such Mandatory Conversion Notice shall indicate (a)
the Conversion Price, (b) the number of shares of Common Stock that each Holder
shall receive as a result of the Mandatory Conversion and (c) a confirmation of
the date that the Issuer shall effect the Mandatory Conversion and issue shares
of Common Stock to the Holders (the "Mandatory Conversion Date"), which shall be
within two (2) Business Days of the receipt of the Mandatory Conversion Notice
by the Holder, unless there is a disagreement as described below. The Issuer
shall issue the Common Stock on the Mandatory Conversion Date unless the Holder
notifies the Issuer within two (2) Business Days after receipt of the Mandatory
Conversion Notice from the Issuer that the Holder disagrees with the occurrence
of the Mandatory Conversion Event or any other matter contained in the Mandatory
Conversion Notice. If the Holder and the Issuer fail to agree upon the
occurrence of the Mandatory Conversion Event or any other matter contained in
the Mandatory Conversion Notice within one (1) Business Day after the Holder has
given such notice, the matter shall be determined promptly by a securities firm
(the fees and expenses of which shall be paid by the Company) acceptable to both
the Holder and the Issuer, and such computation shall be final and binding. The
Mandatory Conversion shall be subject to the provisions set forth in Section
4.4, mutatis mutandis.
ARTICLE VI
SUBORDINATION OF DEBENTURES
6.1 DEBENTURES SUBORDINATE TO SENIOR INDEBTEDNESS. The Company
covenants and agrees, and each Holder of a Debenture, by his or its acceptance
thereof, likewise covenants and agrees, that, to the extent and in the manner
hereinafter set forth in this Article VI,
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the payment of the principal of (and premium, if any) and interest on each and
all of the Debentures are hereby expressly made subordinate and subject in right
of payment to the prior payment in full of all existing or future indebtedness
in an aggregate amount at any time outstanding of up to $2,5000,000 of debt for
borrowed money, including principal and interest and premium (if any) and all
other amounts outstanding on such debt (and any extensions or refinancings
thereof) with financial or other institutions for working capital purposes
("Senior Indebtedness").
6.2 NO PAYMENT ON DEBENTURES IN CERTAIN CIRCUMSTANCES.
a. No payment or distribution of cash, property or securities (other
than Common Stock of the Company or other securities of the Company that are
subordinated to Senior Indebtedness to at least the same extent as the
Debentures) of the Company shall be made by the Company with respect to the
principal of or interest on the Debentures, or to defease or acquire any of the
Debentures, or on account of the redemption provisions of the Debentures and no
action shall be taken (judicial or otherwise) to collect any such payment or
distribution (i) upon the maturity of any Senior Indebtedness by lapse of time,
acceleration or otherwise, unless and until all Senior Indebtedness shall first
be paid in full in cash, or such payment duly made in a manner satisfactory to
the holders of such Senior Indebtedness or (ii) in the event that the Company
defaults in the payment of any principal of, premium, if any, or interest on or
any other amounts payable on or due in connection with any Senior Indebtedness
when it becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise, unless and until such default has
been waived in writing by the holders of the Senior Indebtedness.
b. If any default other than a default contemplated by Section
6.2(a)(ii) above shall have occurred and be continuing that would permit the
holders of the Senior Indebtedness to accelerate the maturity of Senior
Indebtedness, upon written notice (a "Payment Blockage Notice") of the default
given to the Company and the Holders by the holders of, or an agent, trustee or
other representative for, such Senior Indebtedness, then, unless and until such
default has been waived in writing, no payment or distribution of cash or
property (other than Common Stock of the Company or other securities of the
Company that are subordinated to Senior Indebtedness to at least the same extent
as the Debentures) of the Company shall be made by the Company with respect to
the principal of or interest on the Debentures, or on account of redemption
provisions of the Debentures or to acquire or repurchase any of the Debentures
for cash or property other than Common Stock of the Company, and no action shall
be taken (judicial or otherwise) to collect any such payment or distribution. If
such Senior Indebtedness is not declared due and payable within one hundred
eighty (180) days after written notice of the event of default is given,
promptly after the end of the 180-day period, the Company shall pay all sums due
in respect of the Debentures and not paid during the 180-day period. Payments on
the Debentures may and shall be resumed in the case of a payment default only
upon the date on which such default is waived in writing by the holders of the
Senior Indebtedness or their agent. During any 360-day consecutive period, only
one such period during which payment with respect to the Debentures may not be
made as the result of a Payment Blockage Notice may
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commence and the duration of such period may not exceed one hundred eighty (180)
days. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Holders shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default shall have
been waived for a period of not less than ninety (90) days.
c. If any payment or distribution of assets of the Company is received
by any Holder in respect of the Debentures at a time when that payment or
distribution should not have been made because of paragraph (a) or (b) of this
Section 6.2, and provided that prior to the Company's disbursement of such
payment or distribution, the Holders shall have received a written notice from
the Company or from an agent or representative for one or more holders of Senior
Indebtedness, such payment or distribution shall be received and held and shall
be paid over to the holders of Senior Indebtedness (pro rata as to each of such
holders on the basis of the respective amounts of Senior Indebtedness held by
them) until all such Senior Indebtedness has been paid in full, after giving
effect to any concurrent payment or distribution or provision therefor to the
holders of such Senior Indebtedness.
6.3 DEBENTURES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR INDEBTEDNESS
ON DISSOLUTION, WINDING UP, LIQUIDATION OR REORGANIZATION. Upon any distribution
of assets of the Company upon any dissolution, winding up, liquidation or
reorganization of the Company (whether in bankruptcy, insolvency, receivership
or similar proceedings relating to the Company or its property or upon an
assignment for the benefit of creditors or any marshalling of the Company's
assets or liabilities or otherwise):
a. the holders of all Senior Indebtedness will first be entitled to
receive payment in full of the principal of and interest due on Senior
Indebtedness (including interest accruing after the commencement of a bankruptcy
or insolvency at the rate specified in the applicable Senior Indebtedness
documents and including, without limitation, in respect of premiums, indemnities
or otherwise, before the Holders are entitled to receive any payment or
distribution on account of the principal of or interest on the Debentures;
b. any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (except that the Holders may
receive securities that are subordinated at least to the same extent as the
Debentures to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness), to which the Holders would be entitled except for the
provisions of this Section 6.3 will be paid by the liquidating trustee or agent
or other Persons make such a payment or distribution directly to the holders of
Senior Indebtedness (pro rata as to each of such holders on the basis of the
respective amounts of Senior Indebtedness held by such holders) or their
representatives to the extent necessary to make or provide for payment in full
in cash of all Senior Indebtedness remaining unpaid, after giving effect to any
concurrent payment or distribution to the holders of such Senior Indebtedness or
provision for that payment or distribution; and
c. if, notwithstanding the foregoing, any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities (except that the
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Holders may receive securities that are subordinated at least to the same extent
as the Debentures to Senior Indebtedness and any securities issued in exchange
for Senior Indebtedness) is received by the Holders on account of the principal
of or interest on the Debentures before all Senior Indebtedness is paid in full,
such payment or distribution will be received and held in trust for and will be
forthwith paid over to the holders of the Senior Indebtedness remaining unpaid
or unprovided for or their representatives for application (in the case of cash)
to, or as collateral (in the case of non-cash property or securities) for, the
payment of such Senior Indebtedness until all such Senior Indebtedness has been
paid in full, after giving effect to any concurrent payment or distribution or
provision therefor to the holders of such Senior Indebtedness.
The Company will give prompt written notice to the Holders of any
dissolution, winding up, liquidation or reorganization of it or any assignment
for the benefit of its creditors.
6.4 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject to
the payment in full of all Senior Indebtedness, the Holders shall be subrogated
to the rights of the holders of Senior Indebtedness to receive payments or
distributions of cash, property or securities of the Company applicable to the
Senior Indebtedness until all amounts owing on the Debentures shall be paid in
full; and, for the purposes of such subrogation:
a. no payments or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holders would be
entitled except for the provisions of this Article VI and no payment pursuant to
the provisions of this Article VI to the holders of Senior Indebtedness by the
Holders shall, as between the Company, its creditors (other than holders of
Senior Indebtedness) and the Holders, be deemed to be a payment by the Company
to or on account of the Senior Indebtedness; and
b. no payment or distributions of cash, property or securities to or
for the benefit of the Holders pursuant to the subrogation provision of this
Article VI, which would otherwise have been paid to the holders of Senior
Indebtedness, shall be deemed to be a payment by the Company to or for the
account of the Holders of the Debentures.
6.5 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of this
Article VI are and are intended solely for the purpose of defining the relative
rights of the Holders on the one hand and the holders of Senior Indebtedness on
the other hand. Nothing contained in this Article VI or elsewhere in this
Debenture or in the Debentures is intended to or shall (a) impair, as among the
Company, its creditors other than holders of Senior Indebtedness and the Holders
of the Debentures, the obligation of the Company, which is absolute and
unconditional to pay to the Holders of the Debentures the principal of (any
premium, if any) and interest on the Debentures as and when the same shall
become due and payable in accordance with their terms, (b) affect the relative
rights against the Company of the Holders of the Debentures and creditors of the
Company other than the holders of Senior Indebtedness or (c) prevent the Holder
of any Debenture from exercising all remedies otherwise permitted by applicable
law upon default under this Debenture, subject to the rights, if any, under this
Article VI of the holders of Senior Indebtedness to receive cash, property or
securities otherwise payable or deliverable to the Holder upon the exercise of
any such remedy.
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6.6 RIGHT TO FILE PROOF OF CLAIM. In the event of any dissolution,
winding up, liquidation or reorganization of the Company (whether in bankruptcy,
insolvency, receivership or similar proceedings relating to the Company or its
property or upon any assignment for the benefit of creditors or any marshalling
of the Company's assets or liabilities or otherwise) tending towards liquidation
of the business and assets of the Company, with respect to the filing of a claim
for the unpaid balance of any Holder's Debentures in the form required in those
proceedings, if the Holder does not file a proper claim or proof of debt in the
form required in such proceeding at least thirty (30) days before the expiration
of the time to file such claim or claims, then the holders of Senior
Indebtedness and their agents, trustees, or other representatives are hereby
authorized to have the right to file, and are hereby authorized to file, an
appropriate claim for and on behalf of each such Holder.
6.7 NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present or
future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Debenture, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Holders of the Debentures, without
incurring responsibility to the Holders of the Debentures and without impairing
or releasing the subordination provided in this Article VI or the obligations
hereunder of the Holders of the Debentures to the holders of Senior
Indebtedness, do any one or more of the following: (i) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness
or any instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with
any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii)
release any Person liable in any manner for the collection of Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.
6.8 NOTICE TO HOLDERS. The Company shall give prompt written notice to
the Holders of any fact known to the Company which would prohibit the making of
any payment to or by the Holders in respect of the Debentures. Notwithstanding
the provisions of this Article VI or any other provision of this Debenture, the
Holders shall not be charged with knowledge of the existence of any facts which
would prohibit the making of any payment to the Holders in respect of the
Debentures, unless and until the Holders shall have received written notice
thereof from the Company or a holder of Senior Indebtedness; and, prior to the
receipt of any such written notice, the Holders shall be entitled in all
respects to assume that no such facts exist; provided, however, that if the
Holders shall not have received the notice provided for in this Section 6.8 at
least two (2) Business Days prior to the date upon which by the terms hereof any
money may become payable for any purpose (including, without limitation, the
payment of the principal of, and premium, if any, or interest on any Debenture),
then, anything herein contained to the
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contrary notwithstanding, the Holders shall have full power and authority to
receive such money and to apply the same to the purpose for which such money was
received and shall not be affected by any notice to the contrary which may be
received by it within two (2) Business Days prior to such date.
The Holders shall be entitled to rely on the delivery to them of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a representative thereof) to establish that such notice has
been given by a holder of Senior Indebtedness (or representative thereof). In
the event that the Holders determine in good faith that further evidence is
required with respect to the right of any Person as a holder of Senior
Indebtedness (or a representative thereof) to participate in any payment or
distribution pursuant to this Article VI, the Holders may request such Person to
furnish evidence to the reasonable satisfaction of the Holders as to the amount
of Senior Indebtedness held by such Person, the extent to which such Person is
entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Article VI, and if such
evidence is not furnished, the Holders may defer any payment or distribution to
such Person pending judicial determination as to the right of such Person to
receive such payment or distribution.
6.9 RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.
Upon the payment or distribution of assets of the Company referred to in this
Article VI, the Holders of the Debentures shall be entitled to rely upon any
order or decree entered by any court of competent jurisdiction in which such
proceeding is pending, or a certificate of the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee for the benefit of the creditors, agent
or other Person making such payment or distribution, delivered to the Holders of
Debentures, for the purpose of ascertaining the Persons entitled to participate
in such payment or distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article VI.
6.10 NO ADVERSE MODIFICATION TO DEBENTURE. Neither the Holders nor the
Company shall enter into any modification of the Debentures that is in any way
adverse to the holders of the Senior Indebtedness.
6.11 NOTICE TO HOLDERS OF SENIOR INDEBTEDNESS. The Company will furnish
to the holders of Senior Indebtedness no less frequently than once per fiscal
quarter, or at any time upon request therefor, a true and correct copy of the
then most current Register setting forth the names and addresses of the Holders
as of such date.
ARTICLE VII
MISCELLANEOUS
7.1 MODIFICATION OF DEBENTURES. This Debenture may be modified without
prior notice to any Holder upon the written consent of the Issuer and the
Holders of more than seventy-five percent (75%) of the principal amount of the
Debentures then outstanding. The
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Holders of more than seventy-five percent (75%) of the principal amount of the
Debentures then outstanding may waive compliance by the Issuer with any
provision of this Debenture without prior notice to any Holder. However, without
the consent of each Holder affected, an amendment, supplement or waiver may not
(i) reduce the amount of Debentures whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal amount of or extend the fixed
maturity of any Debenture or (iii) make any Debenture payable in money or
property other than as stated in the Debentures.
7.2 GOVERNING LAW. This Debenture 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. Each party hereby
irrevocably submits to the nonexclusive jurisdiction of the state and federal
courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. The parties hereto, including all
guarantors or endorsers, hereby waive presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Debenture, except as specifically provided
herein, and assent to extensions of the time of payment, or forbearance or other
indulgence without notice. The Holder of this Debenture by acceptance of this
Debenture agrees to be bound by the provisions of this Debenture which are
expressly binding on such Holder.
7.3 RANK AND SUBORDINATION. Except as expressly provided herein, no
provision of this Debenture shall alter or impair the obligation of the Issuer,
which is absolute and unconditional, to pay the principal of, interest and
liquidated damages (if any) on, this Debenture at the time, place, and rate, and
in the coin or currency (or, as provided herein, in Common Stock), herein
prescribed. This Debenture is a direct obligation of the Issuer and is
subordinate to the Senior Indebtedness. Except as otherwise provided herein, the
Issuer may not voluntarily prepay the outstanding principal amount of this
Debenture.
7.4 DEBENTURES OWNED BY ISSUER DEEMED NOT OUTSTANDING. In determining
whether the holders of the requisite aggregate principal amount of Debentures
have concurred in any direction, consent or waiver under this Debenture,
Debentures which are owned by the Issuer or any other obligor on the Debentures
or by any Person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Issuer or any other obligor on the
Debentures shall be disregarded and deemed not to be outstanding for the purpose
of any such determination; provided that any Debentures owned by the Purchasers
shall be deemed outstanding for purposes of making such a determination.
Debentures so owned which have been pledged in good faith may be regarded as
outstanding if the pledgee establishes to the satisfaction of the Issuer the
pledgee's right so to act with respect to such Debentures and that the pledgee
is not the Issuer or any other obligor on the Debentures or any Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with the Issuer or any other obligor on the Debentures.
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7.5 EFFECT OF TITLES AND HEADINGS; REFERENCES. The titles and headings
herein are for convenience only and shall not affect the construction hereof.
References herein to Sections and Articles are to Sections and Articles of this
Debenture, unless otherwise expressly provided.
7.6 NO RIGHTS AS STOCKHOLDER. This Debenture shall not entitle the
Holder to any rights as a stockholder of the Issuer, including without
limitation, the right to vote, to receive dividends and other distributions, or
to receive notice of, or to attend, meetings of stockholders or any other
proceedings of the Issuer, unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.
7.7 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed under its corporate seal.
eSOFT, INC.
By /s/ Jeffrey Finn
---------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive
Officer
Dated: June 10, 1999
Attest:
/s/ Amy Beth Hansman
- ---------------------------------
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EXHIBIT A
eSOFT, INC.
CONVERSION NOTICE
Reference is made to the Debenture issued by eSOFT, Inc. (the "Debenture"). In
accordance with and pursuant to the Debenture, the undersigned hereby
irrevocably elects to convert the principal amount of the Debenture, indicated
below into shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of the Issuer, by tendering the Debenture specified below as of the
date specified below.
Date of Conversion:
-----------------------------------------------------------
Aggregate Principal Amount to be converted:
-----------------------------------
Debenture no(s). of Debenture to be converted:
---------------------------------
Please confirm the following information:
Conversion Price:
--------------------------------------------------------------
Number of shares of Common Stock to be issued:
--------------------------------
Please issue the Common Stock into which the Debenture is being converted and,
if applicable, any check drawn on an account of the Issuer in the following name
and to the following address:
Issue to:
----------------------------------------------------------------------
Facsimile Number:
--------------------------------------------------------------
Authorization: By:
-------------------------------------------------------------
Title:
------------------------------------
Dated:
-----------------------------------
Account Number (if electronic book entry transfer):
---------------------------
Transaction Code Number (if electronic book entry transfer):
-------------------
<PAGE> 1
EXHIBIT 4.2
5% CONVERTIBLE DEBENTURE
THE DEBENTURE REPRESENTED HEREBY HAS NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION 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, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT.
No. 2 $1,100,000
eSOFT, INC.
5% CONVERTIBLE DEBENTURES DUE JUNE 10, 2002
eSOFT, Inc., a Delaware corporation (the "Issuer"), for value received
hereby promises to pay to Brown Simpson Strategic Growth Fund, L.P., or its
registered assigns ("Holder") the principal sum of One Million One Hundred
Thousand Dollars ($1,100,000) at the Issuer's office or agency for said purpose
in New York, New York on June 10, 2002 in such coin or currency (or, as
provided herein, at the Holder's option in Common Stock) of the United States
of America as at the time of payment shall be legal tender for the payment of
public and private debts at the last address of the Holder last appearing on
the Register (as defined herein).
This Debenture is one of a duly authorized issue of 5% Convertible
Debentures, due June 10, 2002 of the Issuer (the "Debenture") referred to in
the Securities Purchase Agreement (the "Purchase Agreement"), dated as of June
10, 1999, by and among the Issuer and the Purchasers listed on Schedule I
thereto. The Debentures are subject to the terms and conditions of the Purchase
Agreement. The Issuer agrees to issue from time to time replacement Debentures
in the form hereof to facilitate any transfers and assignments. In addition,
after delivery of an indemnity in form and substance reasonably satisfactory to
the Issuer, the Issuer also agrees to issue replacement Debentures for
securities which have been lost, stolen, mutilated or destroyed.
The Issuer shall keep at its principal office a register (the
"Register") in which shall be entered the names and addresses of the registered
holders of the Debentures and particulars of the respective Debentures held by
them and of all transfers of such Debentures. References to the "Holder" or
"Holders" shall mean the Person listed in the Register as the payee of any
Debenture unless the payee shall have presented such Debenture to the Issuer
for transfer and the transferee shall have been entered in the Register as a
subsequent holder, in which case the term shall mean such subsequent holder.
The ownership of the Debentures shall be proven by the Register, absent
manifest error. For the purpose of paying interest and principal on the
Debentures, the Issuer shall be entitled to rely on the names and addresses in
the Register.
<PAGE> 2
No provision of this Debenture shall alter or impair the obligations
of the Issuer, which are absolute and unconditional, to pay the principal of
and interest on this Debenture at the place, times, rate, and in the currency,
herein prescribed.
The principal of this Debenture shall bear interest at the rate of 5%
per annum (the "Interest Rate"). The interest shall accrue daily 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 hereof until
payment in full of the principal amount has been made. Interest is payable in
cash or an equivalent value of the Issuer's Common Stock calculated based upon
the Average Price, at the Issuer's option, subject to certain conditions
contained herein, quarterly on January 15, April 15, July 15, and October 15 of
each year (each, an "Interest Payment Date"), commencing on October 15, 1999,
to the Holder hereof until the principal amount is paid or made available for
payment. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will be paid or delivered to the Holder of this
Debenture at the close of business on the Record Date for the interest payable
on such Interest Payment Date. The "Record Date" for any interest payment is
the close of business on January 1, April 1, July 1 or October 1, as the case
may be, whether or not a Business Day, immediately preceding the Interest
Payment Date on which such Interest is payable.
Any amounts that have become due and payable hereunder and remain
unpaid by the Issuer shall accrue interest thereafter until payment in full of
such amount at the rate of twenty percent (20%) (the "Default Rate") per annum
and shall be payable upon demand by the Holder.
Interest, whether at the Interest Rate or the Default Rate, will be
computed on the basis of a fraction, the denominator of which is 365 (or 366
for any leap year) and the numerator of which is the actual number of days
elapsed from the date such interest begins to accrue, in the case of the
Interest Rate, or becomes due and payable, in the case of the Default Rate.
Each of the Interest Rate and the Default Rate shall be effective both
before and after any judgment may be rendered in a court of competent
jurisdiction, provided, however, that if either the Interest Rate or Default
Rate is deemed to be in excess of the amount permitted to be charged by the
Issuer under applicable laws, the Holder shall be entitled to collect an
Interest Rate or Default Rate, as the case may be, only at the highest rate
permitted by law, and any interest collected by the Holder in excess of such
lawful amount shall be deemed a payment in reduction of the principal amount
then outstanding under this Debenture and shall be so applied.
The principal of, and any interest paid in cash on, this Debenture are
payable in coin or currency of the United States of America as at the time of
payment is legal tender for payment of public or private debts, at the last
address of the Holder last appearing on the Register, except that interest due
on the principal amount, if any (but not interest overdue for more than five
(5) days), may, at the Issuer's option be paid in shares of Common Stock
calculated based upon the Average Price on the date such interest was due. It
shall be assumed that the Company shall elect to make all payments of interest
in Common Stock, unless the Company shall have given written notice to each
Holder not less than one (1) calendar month
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prior to the applicable Interest Payment Date of its intention to pay such
interest in cash. Notwithstanding anything to the contrary contained herein,
the Issuer may not issue shares of Common Stock in payment of the interest on
principal if: (i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all other purposes is insufficient to pay interest
hereunder in shares of Common Stock or there is an insufficient number of
authorized shares of Common Stock reserved (pursuant to Section 3.6(b) of the
Purchase Agreement) for issue for full conversion of all of the Debentures
issued pursuant to the Purchase Agreement; (ii) such shares are not either
registered for resale pursuant to the Registration Statement (as defined in the
Registration Rights Agreement) or freely transferable without volume
restrictions pursuant to Rule 144(k) promulgated under the Securities Act, as
determined by counsel to the Issuer pursuant to a written opinion letter
addressed and in form and substance acceptable to the Holder and the transfer
agent for such shares, subject to receipt from the Holder of a representation
from such Holder that it is not an Affiliate of the Issuer; (iii) such shares
are not listed or quoted on Nasdaq or a Subsequent Market; (iv) the issuance of
such shares would result in the recipient thereof beneficially owning more than
4.99% of the issued and outstanding shares of Common Stock as determined in
accordance with Section 4.6; or (v) an Event of Default has occurred and is
continuing or an event that, with the passage of time or giving of notice or
both would constitute an Event of Default, has occurred and is continuing.
ARTICLE I
DEFINITIONS
1.1 CERTAIN TERMS DEFINED. The following terms (except as otherwise
expressly provided or unless the context otherwise clearly requires) for all
purposes of this Debenture shall have the respective meanings specified below.
All accounting terms used herein and not expressly defined shall have the
meanings given to them in accordance with generally accepted accounting
principles. Capitalized terms not otherwise defined herein shall have the
meanings assigned to them in the Purchase Agreement. The terms defined in this
Section 1.1 include the plural as well as the singular.
"Acceleration Notice" has the meaning set forth in Section 3.1.
"Affiliate" has the meaning set forth in Rule 12b-2 of the Exchange
Act.
"Appraiser" means a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of recognized
standing.
"Authorization Date" has the meaning set forth in Section 4.8.
"Average Price" on any date means (i) the sum of the Per Share Market
Value for the ten (10) Trading Days immediately preceding such date minus (ii)
the highest and lowest Per Share Market Value during the ten (10) Trading Days
immediately preceding such date, divided by (iii) eight (8), or a similar
calculation if another figure for the number of Trading Days is set forth for
clause (i) of this definition.
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"Board of Directors" means either the Board of Directors of the Issuer
or any committee of such Board duly authorized to act hereunder.
"Business Day" means any day except a 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
governmental actions to close.
"Buy-In" has the meaning set forth in Section 4.4(d).
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's capital stock whether now outstanding or issued after the Original
Issue Date, including, without limitation, all Common Stock and all Preferred
Stock.
"Change of Control" means the occurrence of any of (i) an acquisition
after the date hereof by an individual or legal entity or "group" (as described
in Section 13d-5(b)(1) promulgated under the Exchange Act), other than the
Purchasers or their Affiliates, of in excess of 50% of the voting securities of
the Issuer, (ii) a replacement of more than one-half of the members of the
Board of Directors that is not approved by a majority of those individuals who
are members of the Board of Directors on the date hereof, or their duly elected
successors who are directors immediately prior to such transaction, in one or a
series of related transactions, (iii) the merger of the Issuer with or into
another Person, unless following such transaction, the stockholders of the
Issuer prior to such transaction hold at least 51% of the voting securities of
the surviving or resulting entity following such transaction, (iv) the
consolidation or sale of all or substantially all of the assets of the Issuer
in one or a series of related transactions or (v) the execution by the Issuer
of an agreement to which the Issuer is a party or by which it is bound,
providing for any of the events set forth above in clauses (i), (ii), (iii) or
(iv).
"Closing Date" has the meaning set forth for the "First Closing Date"
in the Purchase Agreement.
"Common Stock" means the common stock, par value $0.01 per share, of
the Issuer.
"Converted Debentures" has the meaning set forth in Section 3.1.
"Convertible Securities" has the meaning set forth in Section
4.5(h)(i)(A).
"Conversion Date" has the meaning set forth in Section 4.4(a).
"Conversion Default" has the meaning set forth in Section 4.8.
"Conversion Default Date" has the meaning set forth in Section 4.8.
"Conversion Default Payments" has the meaning set forth in Section
4.8.
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"Conversion Price" has the meaning set forth in Section 4.2.
"Convertible Securities" has the meaning set forth in Section
4.5(h)(i).
"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,
(iii) all obligations of such Person in respect of letters of credit or
bankers' acceptance or other similar instruments (or reimbursement obligations
with respect thereto), (iv) all obligations of such Person to pay the deferred
purchase price of property or services, (v) all obligations of such Person as
lessee under capitalized leases, (vi) all Debt of others secured by a Lien on
any asset of such Person, whether or not such Debt is assumed by such Person,
provided that for purposes of determining the amount of any Debt of the type
described in this clause, if recourse with respect to such Debt is limited to
such asset, the amount of such Debt shall be limited to the fair market value
of such asset, (vii) all Debt of others guaranteed by such Person and (viii)
all redeemable stock valued at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends.
"Debenture" or "Debentures" has the meaning set forth in the second
paragraph hereof.
"Debenture Shares" has the meaning set forth in the Purchase
Agreement.
"Default Rate" has the meaning set forth in the sixth paragraph
hereof.
"Determination Date" has the meaning set forth in Section 4.14.
"Event of Default" has the meaning set forth in Section 3.1.
"Excess Shares" has the meaning set forth in Section 4.14.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" or "generally accepted accounting principles" means generally
accepted accounting principles in the United States, including, without
limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession.
"Holder", "Holder of Debentures", "Debentureholder" or other similar
terms means the registered holder of any Debenture.
"Incurrence" or "incurrence" means the incurrence, creation,
assumption or in any other manner becoming liable with respect to, or the
extension of the maturity of or becoming responsible for the payment of, any
Debt. "Incur" or "incur" shall have a comparable meaning.
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"Interest Payment Date" has the meaning set forth in the fifth
paragraph hereof.
"Interest Rate" has the meaning set forth in the fifth paragraph
hereof.
"Issuable Maximum" has the meaning set forth in Section 4.14.
"Issuer" has the meaning set forth in the first paragraph hereof.
"Mandatory Conversion" has the meaning set forth in Section 5.1(a).
"Mandatory Conversion Date" has the meaning set forth in Section 5.2.
"Mandatory Conversion Event" has the meaning set forth in Section
5.1(a).
"Mandatory Conversion Notice" has the meaning set forth in Section
5.1(b).
"Mandatory Conversion Notice Date" has the meaning set forth in
Section 5.2.
"Mandatory Prepayment Amount" for any Debenture means the greater of
(i) the sum of (x) 110% of the principal amount of the Debenture to be prepaid
and (y) all other amounts, costs, interest, expenses and liquidated damages due
in respect of such principal amount or (ii) the sum of (x) at the option of the
Holder, either (I) the principal amount of the Debenture to be repaid, plus all
accrued and unpaid interest thereon, divided by the Conversion Price on the
date the Mandatory Prepayment Amount is demanded or otherwise due, multiplied
by the Per Share Market Value on the date the Mandatory Prepayment Amount is
demanded or otherwise due or (II) the principal amount of the Debenture to be
prepaid, plus all accrued and unpaid interest thereon, divided by the
Conversion Price on the Trading Day immediately prior to the date the Mandatory
Prepayment Amount is paid in full, multiplied by the Per Share Market Value on
the Trading Day immediately prior to the date the Mandatory Prepayment Amount
is paid in full, and (y) all other amounts, costs, interest, expenses and
liquidated damages due in respect of such principal amount.
"Maturity Date" means the date on which the principal of a Debenture
becomes due and payable as herein provided, whether on the Stated Maturity Date
or pursuant to acceleration upon an Event of Default.
"Nasdaq" means the Nasdaq Smallcap Market.
"Notice of Conversion" has the meaning set forth in Section 4.2(c).
"Options" has the meaning set forth in Section 4.5(h)(i)(A).
"Original Issue Date" of any Debenture (or portion thereof) means the
earlier of (i) the date of such Debenture and (ii) the date of any Debenture
(or portion thereof) for which such security was issued (directly or
indirectly) on registration of transfer, exchange or substitution.
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"Payment Blockage Notice" has the meaning set forth in Section 6.2(b).
"Payment Due Date" has the meaning set forth in Section 4.5(i).
"Per Share Market Value" means on any particular date (i) the closing
bid price per share of the Common Stock on such date (as reported by Bloomberg
Information Services, Inc., or any successor reporting service) on Nasdaq or,
if the Common Stock is not then quoted on Nasdaq, any Subsequent Market on
which the Common Stock is then listed or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, (ii) if the Common Stock is not listed then
on Nasdaq or any Subsequent Market, the closing bid price for a share of Common
Stock in the over-the-counter market, as reported by the National Quotation
Bureau Incorporated (or similar organization or agency succeeding to its
functions of reporting prices) at the close of business on such date or (iii)
if the Common Stock is not then publicly traded the fair market value of a
share of Common Stock as determined by an Appraiser selected in good faith by
the holder of this Debenture, whose fees and expenses shall be borne by the
Company; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select, in good faith,
an additional Appraiser, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser; and provided, further
that all determinations of the Per Share Market Value shall be appropriately
adjusted for any stock dividends, stock splits or other similar transactions
during such period.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the date of this Debenture, and includes, without limitation, all classes
and series of preferred or preference stock.
"Prepayment Amount" has the meaning set forth in Section 4.14.
"Principal" or "principal" wherever used with reference to the
Debentures or any Debenture or any portion thereof, shall be deemed to include
"and premium or interest, if any."
"Property" or "property" of any Person means all types of real,
personal, tangible, intangible or mixed property owned by such Person whether
or not included in the most recent consolidated balance sheet of such Person
under generally accepted accounting principles.
"Purchase Agreement" has the meaning set forth in the second paragraph
hereof.
"Purchase Price" means, with respect to any Debenture, the purchase
price paid to the Issuer upon issuance of such Debenture.
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"Record Date" has the meaning set forth in the fifth paragraph hereof.
"Redemption Date" has the meaning set forth in Section 4.5(f).
"Redemption Event" has the meaning set forth in Section 4.5(f).
"Redemption Price" has the meaning set forth in Section 4.5(f).
"Redemption Right" has the meaning set forth in Section 4.5(f).
"Register" has the meaning set forth in the third paragraph hereof.
"Registrable Securities" has the meaning set forth in the Registration
Rights Agreement.
"Registration Rights Agreement" means that certain Registration Rights
Agreement, dated as of June 10, 1999, among the Issuer and the Purchasers.
"Reserved Amount" has the meaning set forth in Section 4.8.
"Reset Date" has the meaning set forth in Section 4.2(b).
"Reverse Stock Split" has the meaning set forth in Section4.5(a).
"Senior Indebtedness" has the meaning set forth in Section 6.1.
"Shareholder Approval" has the meaning set forth in Section 4.14.
"Stated Maturity Date" means June 10, 2002.
"Stock Option Plan" means any contract, plan or agreement which has
been approved by the Board of Directors, pursuant to which the Issuer's
securities may be issued to any employee, officer, director or consultant.
"Subscription Rights" has the meaning set forth in Section 4.5(c).
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the Capital Stock or other ownership
interests having ordinary voting power to elect a majority of the Board of
Directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person.
"Subsequent Market" means the New York Stock Exchange, American Stock
Exchange or Nasdaq National Market.
"Trading Day" means (i) a day on which the Common Stock is traded or
quoted on Nasdaq or, if the Common Stock is not then designated on Nasdaq, on
such Subsequent
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Market on which the Common Stock is then listed or quoted, (ii) if the Common
Stock is not listed on Nasdaq or a Subsequent Market, a day on which the Common
Stock is traded in the over-the-counter Market, as reported by the OTC Bulletin
Board or (iii) if the Stock is not quoted on the OTC Bulletin Board, a day on
which the Common Stock is quoted in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding its functions or reporting prices); provided, however that in
any event that the Common Stock is not listed or quoted as set forth in (i),
(ii) or (iii) hereof, then a Trading Day shall mean any Business Day.
"Underlying Shares" has the meaning set forth in Section 4.5(h)(i).
"Valuation Event" has the meaning set forth in Section
4.5(h)(i)(D)(I).
ARTICLE II
PAYMENT; THE SECURITIES
2.1 PAYMENT OF PRINCIPAL AND INTEREST. The Issuer covenants and agrees
that it will duly and punctually pay or cause to be paid the principal and
interest on overdue principal and interest (to the extent enforceable under
applicable law), with respect to each of the Debentures at the place or places,
at the respective times and in the manner provided in the Debentures.
2.2 MUTILATED, DEFACED, DESTROYED, LOST AND STOLEN DEBENTURES. In case
any temporary or definitive Debenture shall become mutilated, defaced or be
apparently destroyed, lost or stolen, the Issuer shall execute and deliver a
new Debenture, bearing a number not contemporaneously outstanding, in exchange
and substitution for the mutilated or defaced Debenture or in substitution for
the apparently destroyed, lost or stolen Debenture. In every case the applicant
for a substitute Debenture shall furnish to the Issuer such security or
indemnity as the Issuer may reasonably require to indemnify and defend and to
save the Issuer harmless from all risks, however remote, and, in every case of
destruction, loss or theft evidence to the Issuer's reasonable satisfaction of
the apparent destruction, loss or theft of such Debenture and of the ownership
thereof.
Upon the issuance of any substitute Debenture, the Issuer may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses connected
therewith. In case any Debenture which has matured or is about to mature, or
has been called for redemption in full, or is being surrendered for conversion
in full shall become mutilated or defaced or be apparently destroyed, lost or
stolen, the Issuer may, instead of issuing a substitute Debenture, with the
holder's consent, pay or authorize the payment or conversion of the same
(without surrender thereof except in the case of a mutilated or defaced
Debenture), if the applicant for such payment shall furnish to the Issuer such
security or indemnity as the Issuer may reasonably require to indemnify and
defend and to save the Issuer harmless from all risks, however remote, and, in
every case of apparent destruction, loss or theft, the applicant shall also
furnish to the Issuer evidence to the Issuer's
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reasonable satisfaction of the apparent destruction, loss or theft of such
Debenture and of the ownership thereof.
Every substitute Debenture issued pursuant to the provisions of this
Section by virtue of the fact that any Debenture is apparently destroyed, lost
or stolen shall constitute an additional contractual obligation of the Issuer,
whether or not the apparently destroyed, lost or stolen Debenture shall be at
any time enforceable by anyone and shall be entitled to all the benefits of
(but shall be subject to all the limitations of rights set forth in) this
Debenture equally and proportionately with any and all other Debentures duly
authenticated and delivered hereunder. All Debentures shall be held and owned
upon the express condition that, to the extent permitted by law, the foregoing
provisions are exclusive with respect to the replacement or payment or
conversion of mutilated, defaced, or apparently destroyed, lost or stolen
Debentures and shall preclude any and all other rights or remedies
notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement or payment of negotiable instruments
or other securities without their surrender.
2.3 CANCELLATION OF DEBENTURES; DESTRUCTION THEREOF. All Debentures
surrendered for payment, redemption, registration of transfer or exchange shall
be delivered to the Issuer for cancellation, and no Debentures shall be issued
in lieu thereof except as expressly permitted by any of the provisions of this
Debenture. The Issuer shall destroy canceled Debentures held by it and deliver
a certificate of destruction to the Holder, unless otherwise required. If the
Issuer shall acquire any of the Debentures, such acquisition alone shall not
operate as a redemption or satisfaction of the indebtedness represented by such
Debentures unless and until such indebtedness is satisfied.
ARTICLE III
DEFAULTS
3.1 EVENT OF DEFAULT DEFINED; ACCELERATION OF MATURITY; WAIVER OF
DEFAULT. In case one or more of the following events (each, an "Event of
Default") (whatever the reason for such Event of Default and whether it shall
be voluntary or involuntary or be 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) shall have occurred and be continuing:
a. a default in the payment of all or any part of the principal of or
interest on overdue principal on any of the Debentures as and when the same
shall become due and payable either at maturity, upon any redemption, by
declaration or otherwise; provided, however, that if such default is in the
payment of interest in cash, such default such not be deemed an Event of
Default until it shall have occurred and be continuing for a period of ten (10)
Business Days; or
b. a failure on the part of the Issuer to duly observe or perform any
of the covenants or agreements on the part of the Issuer (or the making by the
Issuer of any written announcement, statement or threat that it does not intend
to honor the obligations described in
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this paragraph) contained in this Debenture (including the failure to issue
Common Stock upon conversion of this Debenture in accordance with the terms
hereof), the Purchase Agreement or the Registration Rights Agreement for a
period of two (2) Business Days (other than with respect to an announcement,
statement or threat) after the earlier of (x) the date on which any officer of
the Issuer shall have obtained actual knowledge of such failure (or such
announcement, statement or threat) or (y) the date on which written notice
thereof has been given to the Issuer by the Holder; or
c. there shall have occurred with respect to any issue or issues of
Debt of the Issuer and/or one or more Subsidiaries having an outstanding
principal amount of $1,000,000 or more in the aggregate for all such issues of
all such Persons, whether such Debt now exists or shall hereafter be created,
an event of default which has caused the holder thereof to declare such debt to
be due and payable prior to its stated maturity; or
d. a judgment or order (not covered by insurance) for the payment of
money shall be rendered against the Issuer or any Subsidiary of the Issuer in
excess of $1,000,000 in the aggregate for all such judgments or orders against
all such Persons (treating any deductibles, self insurance or retention as not
so covered) that shall not be discharged, and all such judgments and orders
remain outstanding and there shall be any period of sixty (60) consecutive days
following entry of the judgment or order in excess of $1,000,000 or the
judgment or order which causes the aggregate amount described above to exceed
$1,000,000 during which a stay of enforcement of such judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; or
e. a court having jurisdiction in the premises shall enter a decree or
order for relief in respect of the Issuer or any of its Subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Issuer or any of
its Subsidiaries or for any substantial part of the property of the Issuer or
any of its Subsidiaries or ordering the winding up or liquidation of the
affairs of the Issuer or any of its Subsidiaries, and such decree or order
shall remain unstayed and in effect for a period of sixty (60) consecutive
days; or
f. the Issuer or any of its Subsidiaries shall commence a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Issuer or any of its Subsidiaries or
for any substantial part of the property of the Issuer or any of its
Subsidiaries, or the Issuer or any of its Subsidiaries shall make any general
assignment for the benefit of creditors; or
g. any representation, warranty, certification or statement made by
the Issuer in the Purchase Agreement or in any certificate, financial statement
or other document delivered pursuant to the Purchase Agreement shall prove to
have been incorrect in any material respect when made; or
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h. the Common Stock shall be delisted from Nasdaq or shall be
suspended from trading on Nasdaq without resuming trading and/or being relisted
thereon or on a Subsequent Market or having such suspension lifted, as the case
may be, within five (5) Business Days; or
i. a Registration Statement (as defined in the Registration Rights
Agreement) for the Underlying Shares shall not have been declared effective by
the Commission on or prior to the 30th day after the Effectiveness Date (as
defined in the Registration Rights Agreement), or after its initial
effectiveness, such Registration Statement lapses in effect or sales of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
otherwise cannot be made thereunder (whether by reason of the Issuer's failure
to amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise, unless such failure is excused
pursuant to Section 3(k) of the Registration Rights Agreement) for more than
five (5) consecutive Business Days or forty-five (45) Business Days in any
twelve (12) month period; or
j. a Change of Control shall occur; or
k. an Event of Default has occurred and is continuing under any of the
other Debentures issued pursuant to the Purchase Agreement; or
l. any material failure on the part of the Issuer to comply with any
of its obligations in connection with the Second Closing or Third Closing which
failure continues for more than five Business Days.
then, in each and every such case (other than an Event of Default specified in
Section 3.1(e) or 3.1(f)), unless the principal shall have already become due
and payable, by notice in writing to the Issuer (the "Acceleration Notice"), a
Holder may declare the entire principal amount of the Debentures owned by such
Holder and any interest accrued thereon (and the aggregate amounts described
below) to be due and payable immediately, and upon any such declaration the
same shall become immediately due and payable. If an Event of Default specified
in Section 3.1(e) or 3.1(f) occurs, the principal of and any accrued interest
on the Debentures (and the aggregate amounts described below) shall become and
be immediately due and payable without any declaration or other act on the part
of any Holder of Debentures. In the event that the Issuer shall not have
promptly, but in any event within five (5) Business Days upon receipt of an
Acceleration Notice, paid the Holder the amount specified below with respect to
an Event of Default under Section 3.1(e) or 3.1(f), the Conversion Price shall
automatically be adjusted to equal the Average Price for the date of
computation; provided, that such Average Price is lower than the Conversion
Price.
The aggregate principal amount payable on each Event of Default shall
be equal to the sum of (i) the Mandatory Prepayment Amount plus (ii) at the
option of the Holder, the Mandatory Prepayment Amount for the Converted
Debentures that would then be held by such Holder had the principal amount of
Debentures converted into Underlying Shares that are then held by the Holder
not been so converted; provided, that the Holder shall not be entitled to a
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Mandatory Prepayment Amount with respect to Converted Debentures if prior to
the occurrence of an Event of Default, the Underlying Shares into which the
Converted Debentures were converted had been held by the Holder for more than
five (5) Trading Days.
For purposes of this Section 3.1, principal amount of the Debentures
are outstanding until such date as the Holder shall have been issued Underlying
Shares upon a conversion (or attempted conversion) thereof. Interest shall
accrue on the Mandatory Prepayment Amount hereunder from the day after such
amount is due (being the date of an Event of Default) through the date of
payment in full thereof at the rate of twenty percent (20%) per annum, accruing
daily from the date such payment is due until such amount, plus any interest
thereon, if any, is paid in full. Payment of the Mandatory Prepayment Amount
pursuant to this Section 3.1 shall be in addition to any other amounts that may
be due to the Holder pursuant to this Debenture. Within five (5) Business Days
of receipt by the Holder of payments of amounts due to the Holder, (i) the
Holder shall return the Debentures to the Issuer and (ii) in the event the
Mandatory Prepayment Amount relates to the Converted Debentures, the Holder
shall return the Underlying Shares into which such Converted Debentures were
converted. In the event of the occurrence of an Event of Default, the Holder
need not provide and the Issuer hereby waives any presentment, demand, protest
or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Any
demand for payment may be rescinded and annulled by the 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.
Upon delivery of any Acceleration Notice to the Issuer, the Issuer
shall provide a copy of such notice to the other Holders, if any, within three
(3) Business Days of the Issuer's receipt thereof. Failure to deliver such
notice shall not affect the validity of the notice delivered by the Holders in
accordance with the provisions referred to above.
3.2 POWERS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER OF
DEFAULT. No right or remedy herein conferred upon or reserved to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at
law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
No delay or omission of the Holders to exercise any right or power
accruing upon any Event of Default occurring and continuing as aforesaid shall
impair any such right or power or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein; and every power and remedy given
by the Debentures or by law may be exercised from time to time, and as often as
shall be deemed expedient, by the Holders.
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ARTICLE IV
EXCHANGE; CONVERSION
4.1 RIGHT OF DEBENTUREHOLDERS TO EXCHANGE DEBENTURES. Subject to and
upon compliance with the provisions of this Article IV, this Debenture is
exchangeable for an equal principal amount of Debentures of different
authorized denominations, as requested by the Holder surrendering the same. No
service charge will be made for such registration of transfer or exchange.
4.2 RIGHT OF DEBENTUREHOLDERS TO CONVERT DEBENTURES INTO COMMON STOCK.
a. Conversion Price. Subject to and upon compliance with the
provisions of this Section 4.2, the principal amount of this Debenture, or any
portion thereof (and any accrued but unpaid interest thereon) may, at any time
and at or before the close of business on the Maturity Date be converted into
duly authorized, validly issued, fully paid and nonassessable shares of Common
Stock at $3.9125 and shall be adjusted as set forth in Section 4.2(b), and
subject to the provisions of this Article IV (the "Conversion Price").
b. Optional Adjustment of Conversion Price. Unless the Holder elects
otherwise or consummates the Second Closing, if the Issuer's revenue from its
Internet Access Products Unit reported in the third quarter of its 1999 fiscal
year is less than $1,750,000, then, at 5:00 p.m. EST on the date of the
announcement of such revenue (the "Reset Date"), subject to the last sentence
of this Section 4.2(b), the Conversion Price shall be adjusted to be equal to
ninety percent (90%) of the average of the Per Share Market Value for the five
(5) consecutive Trading Days prior to the date of the Notice of Conversion. The
Holder shall send written notice to the Issuer of the Conversion Price, as
adjusted pursuant to this paragraph, together with computation of such adjusted
Conversion Price and the computation of the average Per Share Market Value for
such five (5) day period. The Conversion Price shall be deemed to be adjusted
to such new Conversion Price unless the Issuer notifies the Holder within two
(2) Business Days after receipt of such written notice from the Holder that the
Issuer disagrees with the computation of such adjustment. If the Holder and the
Issuer fail to agree upon the adjusted Conversion Price within one (1) Business
Day after the Issuer has given such notice, the Conversion Price shall be
computed promptly by a securities firm (the fees and expenses of which shall be
paid by the Company) acceptable to both the Holder and the Issuer, and such
computation shall be final and binding; provided, however, that the Conversion
Price shall always be greater than or equal to $2.00 per share but in no event
shall the Conversion Price exceed $3.9125.
c. Notice of Conversion. If an adjustment in the Conversion Price and,
if applicable, a change in the securities or other property issuable upon
conversion has taken place pursuant to Articles III, IV or V, then the
conversion described in Section 4.2(a) shall be at the applicable Conversion
Price and in such securities or other property as so adjusted. The Holder
desiring to make a conversion shall deliver to the Issuer, during usual
business hours of the
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Issuer's office, or, at the Holder's option, to the Issuer's transfer agent
during its usual business hours (with a copy to the Issuer), a written notice
of election to convert, as provided in the form attached hereto as Exhibit A (a
"Notice of Conversion"), accompanied, if required, by this Debenture or the
Debentures, the principal amount of which is (are) to be converted.
4.3 ADJUSTMENT FOR DIVIDENDS; INTEREST PAYMENT AFTER CONVERSION. No
payment or adjustment will be made for dividends on any Common Stock except as
provided herein. On conversion of a Debenture, that portion of interest accrued
and unpaid attributable to the period from the Original Issuance Date to the
Conversion Date with respect to the converted Debenture shall not be canceled,
extinguished or forfeited, but rather shall be paid in full to the Holder
thereof by the payment of an amount of shares of Common Stock valued at the
Average Price equal thereto; provided, however, that the Company may pay such
amount in cash if it provides the Holder with not less than ten (10) days'
prior written notice of such intention. If the Holder converts more than one
Debenture at the same time, the number of shares of Common Stock issuable upon
the conversion shall be based on the total principal amount of the Debentures
converted.
4.4 ISSUANCE OF SHARES UPON CONVERSION.
a. As promptly as practicable, but in any event no later than three
(3) Trading Days after delivery of a Notice of Conversion and, if required, the
surrender, as herein provided, of any Debenture or Debentures for conversion,
the Issuer shall deliver or cause to be delivered to the Holder of this
Debenture or the Debentures delivering such Notice of Conversion, or such
Holder's designee, a certificate or certificates representing the number of
duly authorized, validly issued, fully paid and nonassessable shares of Common
Stock, into which such Debenture or Debentures may be converted in accordance
with the provisions of this Article IV. Such conversion shall be deemed to have
been made at the time and on the date the Notice of Conversion is delivered to
the Issuer, as long as, if required, this Debenture or the Debentures being
converted are promptly delivered to the Issuer, the rights of the Holder of
such Debenture or Debentures as a Holder (subject to the Issuer's satisfaction
of its obligations hereunder with respect to such conversion) shall cease at
such time with respect to the Converted Debentures, the Person or Persons
entitled to receive the shares of Common Stock, upon conversion of such
Debenture or Debentures, shall be treated for all purposes as having become the
record holder or holders of such shares of Common Stock at such time, and such
conversion shall be at the Conversion Price in effect at such time (the
"Conversion Date"). Subject to paragraph 4.4(b), if any Debenture is converted
in part only, upon such conversion the Issuer shall execute and deliver to the
Holder thereof, as requested by such Holder, a new Debenture or Debentures of
authorized denominations in aggregate principal amount equal to the unconverted
portion of such Debenture. Without in any way limiting the Holder's right to
pursue other remedies, including actual damages and/or equitable relief, the
parties hereto agree that if the Issuer fails to deliver the shares of Common
Stock required to be issued upon the conversion of such Debenture or Debentures
under this Section 4.4 within the three (3) Trading Day period referred above,
the Issuer shall pay to the Holder upon demand an amount of cash (at the
Holder's option) equal to: (i) the commissions, discounts and similar expenses
charged to the Holder in purchasing a
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number of shares of Common Stock no greater than the number of shares of Common
Stock required to be issued upon the conversion of this Debenture or the
Debentures or (ii) the product of (A) the number of shares of Common Stock
required to be issued upon the conversion of this Debenture or the Debentures,
(B) the Per Share Market Value of such shares on the Conversion Date, (C) the
number of days after such three (3) Trading Day period that such shares are not
delivered to the Holder and (z) 0.005.
b. Notwithstanding anything to the contrary set forth herein, upon
conversion of a Debenture in accordance with the terms thereof, the Holder
shall not be required to physically surrender this Debenture to the Issuer
unless the entire unpaid principal amount of this Debenture is so converted.
The Holder and the Issuer shall maintain records showing the principal amount
already converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder and the Issuer, so as not to
require physical surrender of this Debenture upon each such conversion. In the
event of any dispute or discrepancy, such records of the Issuer shall be
controlling and determinative in the absence of manifest error. Notwithstanding
the foregoing, if any portion of this Debenture is converted, the Holder may
not transfer this Debenture unless the Holder first physically surrenders this
Debenture to the Issuer, whereupon the Issuer shall promptly issue and deliver
upon the order of the Holder a new Debenture of like tenor, registered as the
Holder (upon payment by the Holder of any applicable transfer taxes) may
request, representing in the aggregate the remaining unpaid principal amount of
this Debenture. The Holder and any assignee, by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of a Debenture, the unpaid and unconverted
principal amount of such Debenture represented by such Debenture may be less
than the amount stated on the face thereof.
c. In lieu of delivering physical certificates representing the
Debenture Shares, provided the Issuer's transfer agent is participating in the
Depository Trust Issuer Fast Automated Securities Transfer (FAST) program, upon
request of the Holder and in compliance with the provisions of Sections 4.1,
4.2 and 4.4, the Issuer shall use its commercially reasonable best efforts to
cause its transfer agent to electronically transmit the shares of Common Stock
issuable upon conversion of this Debenture to the Holder by crediting the
account of the Holder's Prime Broker with the Depository Trust Company through
its Deposit Withdrawal Agent Commission system. The time period for delivery
described in Section 4.4(a) shall apply to the electronic transmittals
described herein.
d. In addition to any other rights available to the Holder, if the
Issuer fails to deliver to the Holder such certificate or certificates pursuant
to Section 4.4(a), including for purposes hereof, any shares of Common Stock to
be issued on the Conversion Date on account of accrued but unpaid interest
hereunder, by the third (3rd) Trading Day after the Conversion Date, and if
after such third (3rd) Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
such Holder of the Underlying Shares which the Holder was entitled to receive
upon such conversion (a "Buy-In"), then the Issuer shall (i) pay in cash to the
Holder (in addition to any remedies available to or elected by the Holder) the
amount by which (A) the Holder's total purchase price (including
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brokerage commissions, if any) for the Common Stock so purchased exceeds (B)
the product of (1) the aggregate number of shares of Common Stock that such
Holder was entitled to receive from the conversion at issue multiplied by (2)
the market price of the Common Stock at the time of the sale giving rise to
such purchase obligation and (ii) at the option of the Holder, either return
the Debentures for which such conversion was not honored or deliver to such
Holder the number of shares of Common Stock that would have been issued had the
Issuer timely complied with its conversion and delivery obligations under
Section 4.4(a). For example, if the Holder purchases Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with respect to which the market price of the
Underlying Shares on the date of conversion totaled $10,000, under clause (i)
of the immediately preceding sentence the Issuer shall be required to pay the
Holder $1,000. The Holder shall provide the Issuer written notice indicating
the amounts payable to the Holder in respect of the Buy-In.
4.5 ADJUSTMENT OF CONVERSION PRICE. In addition to any adjustment to
the Conversion Price provided elsewhere in this Debenture, the Conversion Price
in effect at any time shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
a. Common Stock Dividends; Common Stock Splits; Reverse Common Stock
Splits. If the Issuer, at any time while this Debenture is outstanding, (a)
shall pay a stock dividend on its Common Stock, (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine outstanding
shares of Common Stock into a smaller number of shares or (d) issue by
reclassification of shares of Common Stock any shares of Capital Stock of the
Issuer, the Conversion Price thereafter shall be determined by multiplying the
Conversion Price by a fraction the numerator of which shall be the number of
shares of Common Stock (excluding treasury shares, if any) 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
paragraph 4.5(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 re-classification.
b. Rights; Warrants. If the Issuer, at any time while this Debenture
is outstanding, shall issue rights or warrants to all of the holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Conversion Price, the Conversion Price thereafter
shall be determined by multiplying the Conversion Price by a fraction, the
denominator of which shall be the number of shares of Common Stock (excluding
treasury shares, if any) 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) 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 the Conversion Price. Such adjustment shall be made
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whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of shareholders
entitled to receive such rights or warrants. Upon the expiration of any right
or warrant to purchase Common Stock the issuance of which resulted in an
adjustment in the Conversion Price pursuant to this Section 4.5, if any right
or warrant shall expire and shall not have been exercised, the Conversion Price
shall immediately upon such expiration be recomputed to the Conversion Price
which would have been in effect had the adjustment of the Conversion Price made
upon the issuance of such rights or warrants been made on the basis of (i) that
number of shares of Common Stock actually purchased upon the exercise of such
rights or warrants actually exercised and (ii) such number of shares of Common
Stock that were issued and sold for the consideration actually received by the
Company upon the actual exercise of such rights and warrants plus the
consideration, if any, actually received by the Company for the issuance, sale
or grant of all such rights or warrants.
c. Subscription Rights. If the Issuer, at any time while this
Debenture is outstanding, shall distribute to all of the holders of Common
Stock evidence of its indebtedness or assets or rights or warrants to subscribe
for or purchase any security (excluding those referred to in Sections 4.5(a)
and (b) above) ("Subscription Rights"), then in each such case the Conversion
Price at which this Debenture shall thereafter be exercisable shall be
determined by multiplying the Conversion Price in effect immediately prior to
the record date fixed for determination of shareholders entitled to receive
such distribution by a fraction, the denominator of which shall be the Per
Share Market Value of Common Stock determined as of the record date mentioned
above, and the numerator of which 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 evidence 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 net assets of the Issuer, such
fair market value shall be determined by an Appraiser selected in good faith by
the Holder, whose fees and expenses shall be paid by the Company; and provided,
further, that the Issuer, after receipt of the determination by such Appraiser
shall have the right to select an additional Appraiser meeting the same
qualifications, in good faith, in which case the fair market value shall be
equal to the average of the determinations by each such Appraiser. Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above. Upon the
expiration or termination of any such Subscription Rights, the Conversion Price
of this Debenture to the extent in any way affected by or computed using such
Subscription Rights, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of such Subscription
Rights.
d. Rounding. All calculations under this Section 4.5 shall be made to
the nearest cent or the nearest l/l00th of a share, as the case may be.
e. Notice of Adjustment. Whenever the Conversion Price is adjusted
pursuant to paragraphs 4.5(a), (b) or (c), the Issuer shall promptly deliver to
the Holder a notice
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setting forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
f. Redemption Events.
(i) The following are "Redemption Events" under this Section 4.5(f):
(A) any reclassification of the Common Stock; (B) any Change of Control;
(C) any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property; (D) any suspension from
listing or delisting of the Common Stock from Nasdaq or any Subsequent
Market on which the Common Stock is listed for a period of five (5)
consecutive days; (E) the Issuer's notice to any Holder of the Debentures,
including by way of public announcement, at any time, of its intention,
for any reason, not to comply with proper requests for the conversion of
any such Debentures; or (F) a breach by the Issuer of any representation,
warranty, covenant or other term or condition of the Purchase Agreement,
the Registration Rights Agreement, the Warrants, this Debenture, or any
other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby or hereby, except to
the extent that such breach would not have a Material Adverse Effect (as
defined in Section 2.1(a) of the Purchase Agreement) and except, in the
case of a breach of a covenant which is curable, only if such breach
continues for a period of at least twenty (20) Business Days after the
Issuer knows or reasonably should have known of the existence of such
breach. On and after the date of any Redemption Event, the Holder shall
have the option to require the Issuer to redeem (the "Redemption Right")
in cash and subject to the terms of payment provisions set forth in below,
from funds legally available therefor at the time of such redemption, this
Debenture at a price (the "Redemption Price") equal to the product of (i)
the Average Price immediately preceding the effective date, the date of
the closing, date of occurrence or the date of the notice, as the case may
be, of the Redemption Event triggering such Redemption Right and (ii) the
number of shares of Common Stock of the Issuer into which this Debenture
could have been converted immediately prior to such Redemption Event.
After the occurrence of a Redemption Event specified in clauses (A), (B)
or (C), the Holder shall have the right at his or its option, in lieu of
the Redemption Right, to convert this Debenture for shares of stock or
other securities, cash or property receivable upon or deemed to be held by
holders of Common Stock following such Redemption Event; the Holder shall
be entitled upon such Redemption Event to receive such amount of
securities, cash or property as if the Holder had held the shares of the
Common Stock into which this Debenture could have been converted
immediately prior to such Redemption Event (without taking into account
any limitations or restrictions on the convertibility of this Debenture).
In the case of a Redemption Event specified in clause (B) in which holders
of the Common Stock receive cash, the Holder shall have the right at his
or its option, in lieu of the Redemption Right, to convert this Debenture
for such number of shares of the surviving company equal to the amount of
cash into which this Debenture is convertible divided by the fair market
value of the shares of the surviving company on the effective date of the
Change of Control. In the case of a Redemption Event specified in clauses
(A), (B) or
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(C), the Issuer shall not effect any such Redemption Event unless, prior
to the consummation thereof, each Person (other than the Issuer) which may
be required to deliver any stock, securities, cash or property following
the conversion of this Debenture as provided herein shall assume, by
written instrument delivered and reasonably satisfactory to, the Holder of
this Debenture, (x) the obligations of the Issuer under this Debenture
(and if the Issuer shall survive the consummation of such transaction,
such assumption shall be in addition to, and shall not release the Issuer
from, any continuing obligations of the Issuer under this Debenture), (y)
the obligations of the Issuer under this Debenture, and (z) the obligation
to deliver to the Holder such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions of this Section
4.5(f), the Holder may be entitled to receive. Nothing in this Section
4.5(f) shall be deemed to authorize the Issuer to enter into any
transaction not otherwise permitted by the Purchase Agreement. This
provision shall similarly apply to successive Redemption Events.
(ii) Payment of Redemption Price. The Company shall pay the
applicable Redemption Price to the Holder of the Debentures being redeemed
in cash on the date which is not more than three (3) Business Days after
the Holder exercises its Redemption Right by written notice to the Issuer
(the "Redemption Date"). If the Issuer shall fail to pay the applicable
Redemption Price to such Holder on the Redemption Date, in addition to any
remedy such Holder may have under this Debenture and the Purchase
Agreement, such unpaid amount shall bear interest at the rate of 1.25% per
month until it is paid in full. Until the Issuer pays such unpaid
applicable Redemption Price in full to each Holder, each Holder of
Debentures submitted for redemption pursuant to this Section 4.5(f) and
for which the applicable Redemption Price has not been paid, shall have
the option, in lieu of redemption, (A) to require the Issuer to promptly
return to such Holder all of the Debentures that were submitted for
redemption by such Holder under this Section 4.5(f) and for which the
applicable Redemption Price has not been paid or (B) to convert those
Debentures for which the applicable Redemption Price has not been paid at
the then applicable Conversion Price.
g. Reclassification, Etc. If:
(i) the Company shall declare a dividend (or any other distribution)
on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash dividend
on or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to the holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
Capital Stock of any class or any rights; or
(iv) the approval of any shareholders of the Company shall be
required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of
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the assets of the Company, or any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or other 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 filed at each office or agency
maintained for the purpose of conversion of this Debenture, and shall
cause to be delivered to the Holder, at least ten (10) Business Days prior
to the applicable record or effective date hereinafter specified, a notice
(provided such notice shall not include any material non-public
information) stating (x) the date on which a record is to be taken for the
purpose of such dividend, distribution, 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, 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 or
close, 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, cash 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.
h. Adjustment to Conversion Price. If the Issuer, at any time while
this Debenture is outstanding, takes any of the actions described in this
Section 4.5(h), then, in order to prevent dilution of the rights granted under
this Debenture, at any time prior to the Maturity Date, the Conversion Price
will be subject to adjustment from time to time as provided in this Section
4.5(h).
(i) Adjustment of Conversion Price upon Issuance of Additional
Securities. If at any time while this Debenture is outstanding the Company
issues or sells, or is deemed to have issued or sold, any shares of Common
Stock, or in any manner grants any rights or options to subscribe for or
to purchase Common Stock ("Options"), or in any manner issues or sells any
stock or other securities convertible into or exercisable or exchangeable
for Common Stock ("Convertible Securities", and collectively with the
Common Stock and Options, "Additional Securities") (other than (1) the
Underlying Shares or shares of Common Stock reserved for issuance or
deemed to have been issued by the Company in connection with an Approved
Stock Plan, (2) the shares of Common Stock issuable upon the exercise of
any options or warrants outstanding on the date hereof and listed in
Schedule 2.1(c) of the Purchase Agreement, (3) the securities to be issued
in the transactions set forth on such Schedule 2.1(c), (4) the shares of
Common Stock issued or deemed to have been issued as consideration for an
acquisition by the Company of a division, assets or business (or stock
constituting any portion thereof) from another Person, (5) the shares of
Common Stock issued or deemed
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to have been issued in connection with collaborative or strategic partner
transactions, provided such issuances are for other than primarily equity
financing purposes, (6) the shares of Common Stock issued or deemed to
have been issued in connection with any equipment leasing arrangement or
debt financing from a bank or similar financial institution or (7) the
shares of Common Stock issued to the holders of the Debentures in lieu of
cash interest payments) for an effective consideration per share of Common
Stock less than the Conversion Price in effect immediately prior to such
issuance, sale or grant, then immediately after such issuance, sale or
grant, the Conversion Price then in effect shall be reduced to equal the
Conversion Price determined by dividing (x) the sum of (I) the product
derived by multiplying the Conversion Price in effect immediately prior to
such issue, sale or grant by the number of shares of Common Stock
outstanding and deemed outstanding (pursuant to this Section 4.5(h))
immediately prior to such issue, sale, or grant, plus (II) the
consideration, if any, received by the Company upon such issue, sale or
grant, by (y) the number of shares of Common Stock outstanding and deemed
outstanding (pursuant to this Section 4.5(h)) immediately after such
issue, sale or grant. For the purpose of determining the adjusted
Conversion Price under this Section 4.5(h)(i), the following shall be
applicable:
(A) Change in Option Price or Rate of Conversion. If there is
a change at any time in (i) the Purchase Price provided for in any
Options, (ii) the additional consideration, if any, payable upon the
issuance, conversion or exchange of any Convertible Securities or
(iii) the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock, then immediately after such
change in option price or rate of conversion the Conversion Price in
effect at the time of such change shall be readjusted to the
Conversion Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed Purchase Price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or
sold; provided that no adjustment shall be made if such adjustment
would result in an increase of the Conversion Price then in effect.
(B) Expiration of Options or Convertible Securities. Upon the
expiration of any Options or Convertible Securities the issuance of
which resulted in an adjustment in the Conversion Price pursuant to
this Section 4.5(h), if any Option or Convertible Security shall
expire and shall not have been exercised, the Conversion Price shall
immediately upon such expiration be recomputed to the Conversion Price
which would have been in effect had the adjustment of the Conversion
Price made upon the issuance of such Options or Convertible Securities
been made on the basis that (1) the only shares of Common Stock so
issued were that number of shares of Common Stock actually purchased
upon the exercise of such Options and the conversion of such
Convertible Securities and (2) such shares of Common Stock were issued
and sold for the consideration actually received by the Company upon
such exercise or conversion plus the
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consideration, if any, actually received by the Company for the
issuance, sale or grant of all such Options or Convertible Securities.
(C) Effect on Conversion Price of Certain Events. For
purposes of determining the adjusted Conversion Price under this
Section 4.5(h)(i), the following shall be applicable:
(I) Calculation of Consideration Received. In the case of
the issuance of any Options or Convertible Securities
constituting Additional Securities, the aggregate consideration
received therefor shall be deemed to be the consideration
received by the Company for the issuance of such Options or
Convertible Securities plus the additional minimum
consideration, if any, to be received by the Company upon the
exercise, conversion or exchange thereof. If any Additional
Securities are issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor will be
deemed to be the amount of such cash, without any deduction
being made for any commissions, discounts or other expenses
incurred by the Company for any underwriting of the issue or
otherwise in connection therewith. In case any Additional
Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received
by the Issuer will be the fair value of such consideration,
except where such consideration consists of securities, in which
case the amount of consideration received by the Issuer will be
the Average Price of such security on the Trading Day
immediately preceding the date of receipt thereof. In case any
Additional Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the
Issuer is the surviving entity the amount of consideration
therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is
attributable to such Additional Securities. The fair value of
any consideration other than cash or securities will be
determined jointly by the Issuer and the Holders of Debentures
representing a majority of the aggregate principal amount of
Debentures then outstanding. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event
requiring valuation (the "Valuation Event"), the fair value of
such consideration will be determined within forty-eight (48)
hours of the tenth (10th) day following the Valuation Event by
an Appraiser selected in good faith by the Issuer and agreed
upon by the Holders of Debentures representing a majority of the
aggregate principal amount of Debentures then outstanding. The
determination of such Appraiser shall be binding upon all
parties absent manifest error.
(II) Integrated Transactions. In case any Option is issued
in connection with the issue or sale of other securities of the
Issuer,
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together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued
for an aggregate consideration of $0.01.
(III) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or
held by or for the account of the Issuer, and the disposition of
any shares so owned or held will be considered an issue or sale
of Common Stock.
(IV) Record Date. If the Issuer takes a record of the
holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Additional
Securities or (2) to subscribe for or purchase Additional
Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to
have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case
may be.
(D) Certain Events. If any event occurs of the type
contemplated by the provisions of Section 4.5(h) (subject to the
exceptions stated therein) but not expressly provided for by such
provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), then the Board of Directors will make an appropriate
adjustment in the Conversion Price so as to protect the rights of the
Holder, or assigns, of this Debenture; provided, however, that no such
adjustment will increase the Conversion Price as otherwise determined
pursuant to this Section 4.5(h).
(E) Notices. The Issuer shall give the Holder written notice
of the occurrence of any of the events specified in this Section
4.5(h) as soon as practicable, but in no event later than three (3)
Business Days, after such event and shall publicly disclose such event
prior to or concurrently with the giving of such notice. Such notice
shall contain at least: (1) a description of the even; (2) the
adjusted Conversion Price with a reference to the applicable paragraph
in Section 4.5(h); and (3) the dates of the five (5) Trading Day
period during which the adjusted Conversion Price is in effect.
4.6 RESTRICTION ON CONVERSION BY EITHER THE HOLDER OR THE ISSUER.
Notwithstanding anything herein to the contrary, in no event shall any Holder
or the Issuer have the right or be required to convert any or all of the
aggregate principal amount and interest accrued thereon of this Debenture if as
a result of such conversion the aggregate number of shares of Common Stock
beneficially owned by such Holder and its Affiliates would exceed 4.99% of the
outstanding shares of the Common Stock following such conversion. For purposes
of this Section 4.6, beneficial ownership shall be calculated in accordance
with Section 13(d) of
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the Exchange Act. The provisions of this Section 4.6 may be waived by a
Holder as to itself (and solely as to itself) upon not less than sixty-five
(65) days' prior written notice to the Issuer, and the provisions of this
Section 4.6 shall continue to apply until such 65th day (or later, if stated in
the notice of waiver).
4.7 OFFICER'S CERTIFICATE. Whenever the number of shares purchasable
upon conversion shall be adjusted as required by the provisions of Section 4.5,
the Issuer shall forthwith file in the custody of its secretary or an assistant
secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted number of shares determined as
herein provided, setting forth in reasonable detail the facts requiring such
adjustment and the manner of computing such adjustment. Each such officer's
certificate shall be signed by the chairman, president or chief financial
officer of the Issuer and by the secretary or any assistant secretary of the
Issuer. Each such officer's certificate shall be made available at all
reasonable times for inspection by any Holder of the Debentures and the Issuer
shall, forthwith after each such adjustment, deliver a copy of such certificate
to the each of the Holders.
4.8 RESERVATION OF SHARES. The Issuer covenants that it will at all
times reserve and keep available out of its authorized shares of Common Stock,
free from preemptive rights, solely for the purpose of issue upon conversion of
the Debentures as herein provided, such number of shares of the Common Stock as
shall then be issuable upon the conversion of all outstanding Debentures into
Common Stock under the Debentures (the "Reserved Amount"). The Issuer covenants
that all shares of the Common Stock issued upon conversion of this Debenture
which shall be so issuable shall, when issued, be duly and validly issued and
fully paid and nonassessable.
If, at any time a Holder of this Debenture submits a Notice of
Conversion, and the Issuer does not have sufficient authorized but unissued
shares of Common Stock available to effect such conversion in accordance with
the provisions of this Article IV (a "Conversion Default"), subject to Section
4.14, the Issuer shall issue to the Holder all of the shares of Common Stock
which are then available to effect such conversion. The portion of this
Debenture which the Holder included in its Notice of Conversion and which
exceeds the amount which is then convertible into available shares of Common
Stock shall, notwithstanding anything to the contrary contained herein, not be
convertible into Common Stock in accordance with the terms hereof until (and at
the Holder's option at any time after) the date additional shares of Common
Stock are authorized by the Issuer to permit such conversion at which time the
Conversion Price in respect thereof shall be the lesser of (i) the Per Share
Market Value on the Conversion Default Date and (ii) the Per Share Market Value
on the Conversion Date thereafter elected by the Holder in respect thereof. In
addition, the Issuer shall pay to the Holder payments ("Conversion Default
Payments") for a Conversion Default in the amount of (x) the sum of (1) the
then outstanding principal amount of this Debenture plus (2) accrued and unpaid
interest on the unpaid principal amount of this Debenture through the
Authorization Date plus (3) default interest, if any, on the amounts referred
to in clauses (1) and/or (2), multiplied by (y) .24, multiplied by (z) (N/365),
where N equals the number of days from the day the holder submits a Notice of
Conversion giving rise to a Conversion Default (the "Conversion Default Date")
to the
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date (the "Authorization Date") that the Issuer authorizes a sufficient number
of shares of Common Stock to effect conversion of the full outstanding
principal balance of this Debenture. The Issuer shall use its best efforts to
authorize a sufficient number of shares of Common Stock as soon as practicable
following the earlier of (i) such time that the Holder notifies the Issuer or
that the Issuer otherwise becomes aware that there are or likely will be
insufficient authorized and unissued shares to allow full conversion thereof
and (ii) a Conversion Default. The Issuer shall send notice to the Holder of
the authorization of additional shares of Common Stock, the Authorization Date
and the amount of Holder's accrued Conversion Default Payments. The accrued
Conversion Default Payments for each calendar month shall be paid in cash or
shall be convertible into Common Stock (at such time as there are sufficient
authorized shares of Common Stock following the Authorization Date) at the
applicable Conversion Price, at the Holder's option, as follows:
a. In the event the Holder elects to take such payment in cash, cash
payment shall be made to the Holder by the fifth (5th) Business Day of the
month following the month in which it has accrued; and
b. In the event the Holder elects to take such payment in Common
Stock, the Holder may convert such payment amount into Common Stock at the
lesser of the Conversion Price (as in effect at the time of conversion) and the
Per Share Market Value (on the fifth (5th) day of the month referred to below)
at any time after the fifth (5th) day of the month following the month in which
it has accrued in accordance with the terms of this Article IV (so long as
there is then a sufficient number of authorized shares of Common Stock).
The Holder's election shall be made in writing to the Issuer at any
time prior to 9:00 p.m., New York City time, on the third (3rd) day of the
month following the month in which Conversion Default Payments have accrued. If
no election is made, the Holder shall be deemed to have elected to receive
cash. Nothing herein shall limit the Holder's right to pursue actual damages
(to the extent in excess of the Conversion Default Payments) for the Issuer's
failure to maintain a sufficient number of authorized shares of Common Stock,
and each Holder shall have the right to pursue all remedies available at law or
in equity (including decree of specific performance and/or injunctive relief).
4.9 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The Issuer covenants
that if any shares of Common Stock required to be reserved for purposes of
conversion of Debentures hereunder require registration with or approval of any
governmental authority under any federal or state law, or any national
securities exchange or quotation system, before such shares may be issued upon
conversion, the Issuer will use its best efforts to cause such shares to be
duly registered or approved, as the case may be.
4.10 FRACTIONAL SHARES. Upon a conversion hereunder, the Issuer shall
not be required to issue stock certificates representing fractions of shares of
the 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 Issuer elects not, or is unable, to make such a
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cash payment, the holder shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
4.11 PAYMENT OF TAX UPON ISSUE OR TRANSFER. The issuance of
certificates for shares of the Common Stock on conversion of the Debentures
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 Issuer shall not be required to pay any tax
that may be payable in respect of any transfer involving the issuance and
delivery of any such certificate upon conversion in a name other than that of
the Holder of such Debentures so converted and the Issuer 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 Issuer the amount of
such tax or shall have established to the satisfaction of the Issuer that such
tax has been paid.
4.12 NOTICES. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement shall be in
writing and shall be deemed to have been delivered (a) upon receipt, when
delivered personally, (b) upon receipt, when sent by facsimile, provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party (if received before 7:00 p.m. EST where such
notice is received) or the first business day following such delivery (if
received on or after 7:00 p.m. EST where such notice is received) or (c) one
(1) business day after deposit with a nationally recognized overnight courier,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
(i) If to the Issuer:
eSOFT, Inc.
295 Interlocken Blvd., #500
Broomfield, Colorado 80012
Attention: Mr. Jeffrey F. Finn
President and Chief Executive Officer
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
with a copy to:
Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Boulder, Colorado 80302
Attention: James H. Carroll, Esq.
Telephone: (303) 546-4000
Facsimile: (303) 546-4099
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(ii) If to the Holder:
Brown Simpson Strategic Growth Fund, L.P.
152 West 57th Street, 40th Floor
New York, New York 10029
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, New York 10022
Attention: James E. Kaye, Esq.
Telephone: (212) 872-1000
Facsimile: (212) 872-1002
Each party shall provide written notice to the other parties of any
change in address or facsimile number in accordance with the provisions hereof.
4.13 ALLOCATIONS OF RESERVED AMOUNT. The Reserved Amount shall be
allocated pro rata among the Holders based on the principal amount of
Debentures issued to each Holder. Each increase to the Reserved Amount shall be
allocated pro rata among the Holders based on the principal amount of
Debentures held by each Holder at the time of the increase in the Reserved
Amount. In the event a Holder shall sell or otherwise transfer any of such
Holder's Debentures, each transferee shall be allocated a pro rata portion of
such transferor's Reserved Amount. Any portion of the Reserved Amount which
remains allocated to any Person which does not hold any Debentures shall be
allocated to the remaining Holders, pro rata, based on the principal amount of
such Debentures then held by such Holders.
4.14 NASDAQ LIMITATION. If on any date (the "Determination Date") (a)
the Common Stock is listed for trading or quoted on the Nasdaq National Market
or the Nasdaq SmallCap Market, (b) the Conversion Price then in effect is such
that the aggregate number of shares of Common Stock that would then be issuable
upon exercise in full of the then outstanding Debentures as if all such
Debentures were exercised on such Determination Date (without regard to any
limitations on conversion) together with all other shares of Common Stock that
would be integrated with such shares would equal or exceed twenty percent (20%)
of the number of shares of the Common Stock outstanding immediately prior to
the Closing Date (the "Issuable Maximum") and (c) the Company shall not have
previously obtained the vote of the shareholders of the Company (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of the Nasdaq National Market or the Nasdaq SmallCap Market (or any
successor entity) to approve the issuance of shares of Common Stock in excess
of the Issuable Maximum in a private placement whereby shares of Common Stock
are deemed to have been issued at a price that is less than the greater of book
value or fair market value of the
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Common Stock, then with respect to the Debentures then held by the Holders for
which a conversion would result in an issuance of shares of Common Stock in
excess of such Holder's pro rata allocation (as described below) or the
Issuable Maximum (the "Excess Shares") the Company may elect to repurchase such
Excess Shares by payment in cash to the Holders an amount equal to the product
of (i) the Average Price less the Conversion Price and (ii) the number of
outstanding Debenture Shares underlying the Excess Shares (the "Repurchase
Amount"). Any such election by the Company must be made in writing to the
Holders within two (2) Trading Days after the first such Determination Date and
the payment of such Repurchase Amount shall be made in full to the Holders
within ten (10) Business Days after the date such notice is delivered. If the
Company does not deliver timely a notice of its election to repurchase under
this Section or shall, if it shall have delivered such a notice, fail to pay
the Repurchase Amount hereunder within ten (10) Business Days thereafter, then
the holders of a majority of the principal amount of the Debentures then
outstanding shall have the option by written notice to the Company, if
applicable, to declare any such notice given by the Company, if given, to be
null and void and require the Company to either: (A) use its best efforts to
obtain the Shareholder Approval applicable to such issuance as soon as is
possible, but in any event not later than the sixtieth (60th) day after such
request unless the Company has previously used its best efforts, but has
failed, to obtain such approval (provided, that if the Company shall fail to
obtain the Shareholder Approval during such 60-day period, the Holder may
demand the cash payment set forth in (B)) herein or (B) pay cash to such
Holder, within five (5) Business Days of such Holder's notice, in an amount
equal to the Repurchase Amount for such Holder's portion of the Excess Shares.
The payment of the Repurchase Amount to each Holder pursuant to this Section
shall be determined on a pro rata basis based upon the number of Debentures
held by such Holder on the Determination Date which is in excess of the pro
rata allocation of the Issuable Maximum. If the Company fails to pay such
Repurchase Amount in full pursuant to this Section 4.14 within five (5)
Business Days after the date payable, the Company will pay interest thereon at
a rate of twenty percent (20%) per annum to the exercising Holder, accruing
interest daily from the date of conversion until such amount, plus all such
interest thereon, if any, is paid in full. Until the Company has received the
Shareholder Approval no Holder of the Debentures shall be issued, upon
conversion of the Debentures, shares of Common Stock in an amount greater than
such Holder's allocated portion of the Issuable Maximum.
In no event shall the Issuer be required to issue shares of Common
Stock upon the conversion of a Debenture if such issuance would violate the
rules of Nasdaq.
ARTICLE V
MANDATORY CONVERSION
5.1 MANDATORY CONVERSION.
a. Mandatory Conversion. This Debenture is convertible in whole at the
option of the Issuer from time to time, subject to the following conditions,
including the conditions set forth in Section 5.1(b) (the "Mandatory
Conversion"), if the average Per Share
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Market Value over thirty (30) consecutive Trading Days exceeds two hundred
percent (200%) of the then applicable Exercise Price for the Warrants issued at
the First Closing (the "Mandatory Conversion Event").
b. Mandatory Conversion Notice. Subject to the conditions set forth in
Section 5.1(a), so long as (i) no Event of Default (or any event that with the
passage of time or giving of notice or both would constitute an Event of
Default) shall have occurred and be continuing, (ii) any Registration Statement
required to be filed and be effective pursuant to the Registration Rights
Agreement is then in effect and has been in effect and sales of all of the
Registrable Securities can be made thereunder for at least twenty (20) days
prior to the Mandatory Conversion Notice Date (as defined below) and (iii) the
Issuer has a sufficient number of authorized shares of Common Stock reserved
for issuance upon full conversion of the Debentures, upon ten (10) Business
Days' prior written notice to the Holder (a "Mandatory Conversion Notice"), the
entire principal amount of this Debenture may be converted by the Issuer in
whole into shares of Common Stock at the Conversion Price.
5.2 MECHANICS OF MANDATORY CONVERSION. The Issuer shall exercise its
right to cause a Mandatory Conversion hereunder by delivering its Mandatory
Conversion Notice by facsimile and overnight courier to each Holder (such date
that the Mandatory Conversion Notice is given on, the "Mandatory Conversion
Notice Date"), no later than two (2) Business Days after the occurrence of the
Mandatory Conversion Event. Such Mandatory Conversion Notice shall indicate (a)
the Conversion Price, (b) the number of shares of Common Stock that each Holder
shall receive as a result of the Mandatory Conversion and (c) a confirmation of
the date that the Issuer shall effect the Mandatory Conversion and issue shares
of Common Stock to the Holders (the "Mandatory Conversion Date"), which shall
be within two (2) Business Days of the receipt of the Mandatory Conversion
Notice by the Holder, unless there is a disagreement as described below. The
Issuer shall issue the Common Stock on the Mandatory Conversion Date unless the
Holder notifies the Issuer within two (2) Business Days after receipt of the
Mandatory Conversion Notice from the Issuer that the Holder disagrees with the
occurrence of the Mandatory Conversion Event or any other matter contained in
the Mandatory Conversion Notice. If the Holder and the Issuer fail to agree
upon the occurrence of the Mandatory Conversion Event or any other matter
contained in the Mandatory Conversion Notice within one (1) Business Day after
the Holder has given such notice, the matter shall be determined promptly by a
securities firm (the fees and expenses of which shall be paid by the Company)
acceptable to both the Holder and the Issuer, and such computation shall be
final and binding. The Mandatory Conversion shall be subject to the provisions
set forth in Section 4.4, mutatis mutandis.
ARTICLE VI
SUBORDINATION OF DEBENTURES
6.1 DEBENTURES SUBORDINATE TO SENIOR INDEBTEDNESS. The Company
covenants and agrees, and each Holder of a Debenture, by his or its acceptance
thereof, likewise covenants and agrees, that, to the extent and in the manner
hereinafter set forth in this Article VI,
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the payment of the principal of (and premium, if any) and interest on each and
all of the Debentures are hereby expressly made subordinate and subject in
right of payment to the prior payment in full of all existing or future
indebtedness in an aggregate amount at any time outstanding of up to
$2,5000,000 of debt for borrowed money, including principal and interest and
premium (if any) and all other amounts outstanding on such debt (and any
extensions or refinancings thereof) with financial or other institutions for
working capital purposes ("Senior Indebtedness").
6.2 NO PAYMENT ON DEBENTURES IN CERTAIN CIRCUMSTANCES.
a. No payment or distribution of cash, property or securities (other
than Common Stock of the Company or other securities of the Company that are
subordinated to Senior Indebtedness to at least the same extent as the
Debentures) of the Company shall be made by the Company with respect to the
principal of or interest on the Debentures, or to defease or acquire any of the
Debentures, or on account of the redemption provisions of the Debentures and no
action shall be taken (judicial or otherwise) to collect any such payment or
distribution (i) upon the maturity of any Senior Indebtedness by lapse of time,
acceleration or otherwise, unless and until all Senior Indebtedness shall first
be paid in full in cash, or such payment duly made in a manner satisfactory to
the holders of such Senior Indebtedness or (ii) in the event that the Company
defaults in the payment of any principal of, premium, if any, or interest on or
any other amounts payable on or due in connection with any Senior Indebtedness
when it becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration or otherwise, unless and until such default has
been waived in writing by the holders of the Senior Indebtedness.
b. If any default other than a default contemplated by Section
6.2(a)(ii) above shall have occurred and be continuing that would permit the
holders of the Senior Indebtedness to accelerate the maturity of Senior
Indebtedness, upon written notice (a "Payment Blockage Notice") of the default
given to the Company and the Holders by the holders of, or an agent, trustee or
other representative for, such Senior Indebtedness, then, unless and until such
default has been waived in writing, no payment or distribution of cash or
property (other than Common Stock of the Company or other securities of the
Company that are subordinated to Senior Indebtedness to at least the same
extent as the Debentures) of the Company shall be made by the Company with
respect to the principal of or interest on the Debentures, or on account of
redemption provisions of the Debentures or to acquire or repurchase any of the
Debentures for cash or property other than Common Stock of the Company, and no
action shall be taken (judicial or otherwise) to collect any such payment or
distribution. If such Senior Indebtedness is not declared due and payable
within one hundred eighty (180) days after written notice of the event of
default is given, promptly after the end of the 180-day period, the Company
shall pay all sums due in respect of the Debentures and not paid during the
180-day period. Payments on the Debentures may and shall be resumed in the case
of a payment default only upon the date on which such default is waived in
writing by the holders of the Senior Indebtedness or their agent. During any
360-day consecutive period, only one such period during which payment with
respect to the Debentures may not be made as the result of a Payment Blockage
Notice may
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commence and the duration of such period may not exceed one hundred eighty
(180) days. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Holders shall be, or be made,
the basis for a subsequent Payment Blockage Notice unless such default shall
have been waived for a period of not less than ninety (90) days.
c. If any payment or distribution of assets of the Company is received
by any Holder in respect of the Debentures at a time when that payment or
distribution should not have been made because of paragraph (a) or (b) of this
Section 6.2, and provided that prior to the Company's disbursement of such
payment or distribution, the Holders shall have received a written notice from
the Company or from an agent or representative for one or more holders of
Senior Indebtedness, such payment or distribution shall be received and held
and shall be paid over to the holders of Senior Indebtedness (pro rata as to
each of such holders on the basis of the respective amounts of Senior
Indebtedness held by them) until all such Senior Indebtedness has been paid in
full, after giving effect to any concurrent payment or distribution or
provision therefor to the holders of such Senior Indebtedness.
6.3 DEBENTURES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, WINDING UP, LIQUIDATION OR REORGANIZATION. Upon
any distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company (whether in bankruptcy,
insolvency, receivership or similar proceedings relating to the Company or its
property or upon an assignment for the benefit of creditors or any marshalling
of the Company's assets or liabilities or otherwise):
a. the holders of all Senior Indebtedness will first be entitled to
receive payment in full of the principal of and interest due on Senior
Indebtedness (including interest accruing after the commencement of a
bankruptcy or insolvency at the rate specified in the applicable Senior
Indebtedness documents and including, without limitation, in respect of
premiums, indemnities or otherwise, before the Holders are entitled to receive
any payment or distribution on account of the principal of or interest on the
Debentures;
b. any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (except that the Holders may
receive securities that are subordinated at least to the same extent as the
Debentures to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness), to which the Holders would be entitled except for the
provisions of this Section 6.3 will be paid by the liquidating trustee or agent
or other Persons make such a payment or distribution directly to the holders of
Senior Indebtedness (pro rata as to each of such holders on the basis of the
respective amounts of Senior Indebtedness held by such holders) or their
representatives to the extent necessary to make or provide for payment in full
in cash of all Senior Indebtedness remaining unpaid, after giving effect to any
concurrent payment or distribution to the holders of such Senior Indebtedness
or provision for that payment or distribution; and
c. if, notwithstanding the foregoing, any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities (except that the
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Holders may receive securities that are subordinated at least to the same
extent as the Debentures to Senior Indebtedness and any securities issued in
exchange for Senior Indebtedness) is received by the Holders on account of the
principal of or interest on the Debentures before all Senior Indebtedness is
paid in full, such payment or distribution will be received and held in trust
for and will be forthwith paid over to the holders of the Senior Indebtedness
remaining unpaid or unprovided for or their representatives for application (in
the case of cash) to, or as collateral (in the case of non-cash property or
securities) for, the payment of such Senior Indebtedness until all such Senior
Indebtedness has been paid in full, after giving effect to any concurrent
payment or distribution or provision therefor to the holders of such Senior
Indebtedness.
The Company will give prompt written notice to the Holders of any
dissolution, winding up, liquidation or reorganization of it or any assignment
for the benefit of its creditors.
6.4 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject
to the payment in full of all Senior Indebtedness, the Holders shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of cash, property or securities of the Company
applicable to the Senior Indebtedness until all amounts owing on the Debentures
shall be paid in full; and, for the purposes of such subrogation:
a. no payments or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holders would be
entitled except for the provisions of this Article VI and no payment pursuant
to the provisions of this Article VI to the holders of Senior Indebtedness by
the Holders shall, as between the Company, its creditors (other than holders of
Senior Indebtedness) and the Holders, be deemed to be a payment by the Company
to or on account of the Senior Indebtedness; and
b. no payment or distributions of cash, property or securities to or
for the benefit of the Holders pursuant to the subrogation provision of this
Article VI, which would otherwise have been paid to the holders of Senior
Indebtedness, shall be deemed to be a payment by the Company to or for the
account of the Holders of the Debentures.
6.5 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of
this Article VI are and are intended solely for the purpose of defining the
relative rights of the Holders on the one hand and the holders of Senior
Indebtedness on the other hand. Nothing contained in this Article VI or
elsewhere in this Debenture or in the Debentures is intended to or shall (a)
impair, as among the Company, its creditors other than holders of Senior
Indebtedness and the Holders of the Debentures, the obligation of the Company,
which is absolute and unconditional to pay to the Holders of the Debentures the
principal of (any premium, if any) and interest on the Debentures as and when
the same shall become due and payable in accordance with their terms, (b)
affect the relative rights against the Company of the Holders of the Debentures
and creditors of the Company other than the holders of Senior Indebtedness or
(c) prevent the Holder of any Debenture from exercising all remedies otherwise
permitted by applicable law upon default under this Debenture, subject to the
rights, if any, under this Article VI of the holders of Senior Indebtedness to
receive cash, property or securities otherwise payable or deliverable to the
Holder upon the exercise of any such remedy.
33
<PAGE> 34
6.6 RIGHT TO FILE PROOF OF CLAIM. In the event of any dissolution,
winding up, liquidation or reorganization of the Company (whether in
bankruptcy, insolvency, receivership or similar proceedings relating to the
Company or its property or upon any assignment for the benefit of creditors or
any marshalling of the Company's assets or liabilities or otherwise) tending
towards liquidation of the business and assets of the Company, with respect to
the filing of a claim for the unpaid balance of any Holder's Debentures in the
form required in those proceedings, if the Holder does not file a proper claim
or proof of debt in the form required in such proceeding at least thirty (30)
days before the expiration of the time to file such claim or claims, then the
holders of Senior Indebtedness and their agents, trustees, or other
representatives are hereby authorized to have the right to file, and are hereby
authorized to file, an appropriate claim for and on behalf of each such Holder.
6.7 NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present or
future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Debenture, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Holders of the Debentures, without
incurring responsibility to the Holders of the Debentures and without impairing
or releasing the subordination provided in this Article VI or the obligations
hereunder of the Holders of the Debentures to the holders of Senior
Indebtedness, do any one or more of the following: (i) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Indebtedness, or otherwise amend or supplement in any manner Senior
Indebtedness or any instrument evidencing the same or any agreement under which
Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise
deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (iii) release any Person liable in any manner for the collection
of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights
against the Company and any other Person.
6.8 NOTICE TO HOLDERS. The Company shall give prompt written notice to
the Holders of any fact known to the Company which would prohibit the making of
any payment to or by the Holders in respect of the Debentures. Notwithstanding
the provisions of this Article VI or any other provision of this Debenture, the
Holders shall not be charged with knowledge of the existence of any facts which
would prohibit the making of any payment to the Holders in respect of the
Debentures, unless and until the Holders shall have received written notice
thereof from the Company or a holder of Senior Indebtedness; and, prior to the
receipt of any such written notice, the Holders shall be entitled in all
respects to assume that no such facts exist; provided, however, that if the
Holders shall not have received the notice provided for in this Section 6.8 at
least two (2) Business Days prior to the date upon which by the terms hereof
any money may become payable for any purpose (including, without limitation,
the payment of the principal of, and premium, if any, or interest on any
Debenture), then, anything herein contained to the
34
<PAGE> 35
contrary notwithstanding, the Holders shall have full power and authority to
receive such money and to apply the same to the purpose for which such money
was received and shall not be affected by any notice to the contrary which may
be received by it within two (2) Business Days prior to such date.
The Holders shall be entitled to rely on the delivery to them of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a representative thereof) to establish that such notice has
been given by a holder of Senior Indebtedness (or representative thereof). In
the event that the Holders determine in good faith that further evidence is
required with respect to the right of any Person as a holder of Senior
Indebtedness (or a representative thereof) to participate in any payment or
distribution pursuant to this Article VI, the Holders may request such Person
to furnish evidence to the reasonable satisfaction of the Holders as to the
amount of Senior Indebtedness held by such Person, the extent to which such
Person is entitled to participate in such payment or distribution and any other
facts pertinent to the rights of such Person under this Article VI, and if such
evidence is not furnished, the Holders may defer any payment or distribution to
such Person pending judicial determination as to the right of such Person to
receive such payment or distribution.
6.9 RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.
Upon the payment or distribution of assets of the Company referred to in this
Article VI, the Holders of the Debentures shall be entitled to rely upon any
order or decree entered by any court of competent jurisdiction in which such
proceeding is pending, or a certificate of the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee for the benefit of the creditors,
agent or other Person making such payment or distribution, delivered to the
Holders of Debentures, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article VI.
6.10 NO ADVERSE MODIFICATION TO DEBENTURE. Neither the Holders nor the
Company shall enter into any modification of the Debentures that is in any way
adverse to the holders of the Senior Indebtedness.
6.11 NOTICE TO HOLDERS OF SENIOR INDEBTEDNESS. The Company will
furnish to the holders of Senior Indebtedness no less frequently than once per
fiscal quarter, or at any time upon request therefor, a true and correct copy
of the then most current Register setting forth the names and addresses of the
Holders as of such date.
ARTICLE VII
MISCELLANEOUS
7.1 MODIFICATION OF DEBENTURES. This Debenture may be modified without
prior notice to any Holder upon the written consent of the Issuer and the
Holders of more than seventy-five percent (75%) of the principal amount of the
Debentures then outstanding. The
35
<PAGE> 36
Holders of more than seventy-five percent (75%) of the principal amount of the
Debentures then outstanding may waive compliance by the Issuer with any
provision of this Debenture without prior notice to any Holder. However,
without the consent of each Holder affected, an amendment, supplement or waiver
may not (i) reduce the amount of Debentures whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal amount of or extend
the fixed maturity of any Debenture or (iii) make any Debenture payable in
money or property other than as stated in the Debentures.
7.2 GOVERNING LAW. This Debenture 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. Each party hereby
irrevocably submits to the nonexclusive jurisdiction of the state and federal
courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or
that such suit, action or proceeding is improper. The parties hereto, including
all guarantors or endorsers, hereby waive presentment, demand, notice, protest
and all other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Debenture, except as specifically provided
herein, and assent to extensions of the time of payment, or forbearance or
other indulgence without notice. The Holder of this Debenture by acceptance of
this Debenture agrees to be bound by the provisions of this Debenture which are
expressly binding on such Holder.
7.3 RANK AND SUBORDINATION. Except as expressly provided herein, no
provision of this Debenture shall alter or impair the obligation of the Issuer,
which is absolute and unconditional, to pay the principal of, interest and
liquidated damages (if any) on, this Debenture at the time, place, and rate,
and in the coin or currency (or, as provided herein, in Common Stock), herein
prescribed. This Debenture is a direct obligation of the Issuer and is
subordinate to the Senior Indebtedness. Except as otherwise provided herein,
the Issuer may not voluntarily prepay the outstanding principal amount of this
Debenture.
7.4 DEBENTURES OWNED BY ISSUER DEEMED NOT OUTSTANDING. In determining
whether the holders of the requisite aggregate principal amount of Debentures
have concurred in any direction, consent or waiver under this Debenture,
Debentures which are owned by the Issuer or any other obligor on the Debentures
or by any Person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Issuer or any other obligor on the
Debentures shall be disregarded and deemed not to be outstanding for the
purpose of any such determination; provided that any Debentures owned by the
Purchasers shall be deemed outstanding for purposes of making such a
determination. Debentures so owned which have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Issuer the pledgee's right so to act with respect to such Debentures and that
the pledgee is not the Issuer or any other obligor on the Debentures or any
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Issuer or any other obligor on the Debentures.
36
<PAGE> 37
7.5 EFFECT OF TITLES AND HEADINGS; REFERENCES. The titles and headings
herein are for convenience only and shall not affect the construction hereof.
References herein to Sections and Articles are to Sections and Articles of this
Debenture, unless otherwise expressly provided.
7.6 NO RIGHTS AS STOCKHOLDER. This Debenture shall not entitle the
Holder to any rights as a stockholder of the Issuer, including without
limitation, the right to vote, to receive dividends and other distributions, or
to receive notice of, or to attend, meetings of stockholders or any other
proceedings of the Issuer, unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.
7.7 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed under its corporate seal.
eSOFT, INC.
By /s/ Jeffrey Finn
----------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive
Officer
Dated: June 10, 1999
Attest:
/s/ Amy Beth Hansman
- ---------------------------------
37
<PAGE> 38
EXHIBIT A
eSOFT, INC.
CONVERSION NOTICE
Reference is made to the Debenture issued by eSOFT, Inc. (the "Debenture"). In
accordance with and pursuant to the Debenture, the undersigned hereby
irrevocably elects to convert the principal amount of the Debenture, indicated
below into shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of the Issuer, by tendering the Debenture specified below as of the
date specified below.
Date of Conversion:
-------------------------------------------------------------
Aggregate Principal Amount to be converted:
-------------------------------------
Debenture no(s). of Debenture to be converted:
----------------------------------
Please confirm the following information:
Conversion Price:
---------------------------------------------------------------
Number of shares of Common Stock to be issued:
----------------------------------
Please issue the Common Stock into which the Debenture is being converted and,
if applicable, any check drawn on an account of the Issuer in the following
name and to the following address:
Issue to:
-----------------------------------------------------------------------
Facsimile Number:
---------------------------------------------------------------
Authorization: By:
--------------------------------------------------------------
Title:
-----------------------------------
Dated:
-----------------------------------
Account Number (if electronic book entry transfer):
-----------------------------
Transaction Code Number (if electronic book entry transfer):
--------------------
<PAGE> 1
EXHIBIT 10.1
===============================================================================
SECURITIES PURCHASE AGREEMENT
among
eSOFT, INC.
and
THE PURCHASERS LISTED ON SCHEDULE I
Dated as of June 10, 1999
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. PURCHASE AND SALE......................................................................................1
1.1 Purchase and Sale.......................................................................................1
1.2 Closings................................................................................................2
ARTICLE II. REPRESENTATIONS AND WARRANTIES........................................................................5
2.1 Representations, Warranties and Agreements of the Company...............................................5
2.2 Representations and Warranties of the Purchasers.......................................................15
ARTICLE III. OTHER AGREEMENTS....................................................................................17
3.1 Transfer Restrictions; Legend..........................................................................17
3.2 Stop Transfer Instruction..............................................................................18
3.3 Furnishing of Information..............................................................................18
3.4 Blue Sky Laws..........................................................................................19
3.5 Integration............................................................................................19
3.6 Listing and Reservation of Debenture Shares and Warrant Shares.........................................19
3.7 Notice of Breaches and Violations; Purchaser Default...................................................21
3.8 Form D.................................................................................................21
3.9 Future Financings......................................................................................22
3.10 Use of Proceeds........................................................................................23
3.11 Transactions with Affiliates...........................................................................23
3.12 Transfer Agent Instructions............................................................................23
3.13 Press Release; Filing of Form 8-K......................................................................24
3.14 Information............................................................................................24
3.15 Ordinary Course Brokerage and Trading..................................................................24
3.16 Best Efforts...........................................................................................24
3.17 Corporate Existence....................................................................................24
3.18 No Violation of Applicable Law.........................................................................25
3.19 Trading Restrictions...................................................................................25
ARTICLE IV. CONDITIONS...........................................................................................25
4.1 First Closing..........................................................................................25
4.2 Second Closing.........................................................................................28
4.3 Third Closing..........................................................................................32
ARTICLE V. INDEMNIFICATION.......................................................................................35
5.1 Indemnification........................................................................................36
ARTICLE VI. MISCELLANEOUS........................................................................................36
6.1 Entire Agreement.......................................................................................36
6.2 Notices................................................................................................36
6.3 Amendments; Waivers....................................................................................38
6.4 Titles and Headings....................................................................................38
6.5 References.............................................................................................38
6.6 Successors and Assigns.................................................................................38
6.7 No Third-Party Beneficiaries...........................................................................39
6.8 Governing Law..........................................................................................39
6.9 Survival...............................................................................................39
6.10 Counterparts...........................................................................................39
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
6.11 Publicity..............................................................................................39
6.12 Severability...........................................................................................40
6.13 Remedies...............................................................................................40
6.14 Independent Nature of Purchasers' Obligations and Rights...............................................40
6.15 Payment Set Aside......................................................................................41
6.16 Further Assurances.....................................................................................41
6.17 Fees and Expenses......................................................................................41
</TABLE>
<PAGE> 4
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is dated as of
June 10, 1999 among eSOFT, Inc., a Delaware corporation (the "Company"), and
the various purchasers identified and listed on Schedule I hereto (each
referred to herein as a "Purchaser", and collectively as the "Purchasers.").
WHEREAS, the Company and the Purchasers are executing and delivering
this Agreement in reliance upon the exemption from securities registration
afforded by Rule 506 under Regulation D as promulgated by the United States
Securities and Exchange Commission (the "Commission") under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act");
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 from the Company, an aggregate of up to $8,000,000
principal amount of the Company's 5% convertible debentures (the "Debentures",
each of which is a "Debenture"), substantially in the form of Exhibit A annexed
hereto, and a stock purchase warrant or warrants (each, a "Warrant"),
substantially in the form of Exhibit B annexed hereto, to purchase shares of
the Company's common stock, par value $0.01 per share (the "Common Stock");
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration
Rights Agreement substantially in the form of Exhibit C attached hereto (the
"Registration Rights Agreement") pursuant to which the Company has agreed to
provide certain registration rights under the Securities Act and the rules and
regulations promulgated thereunder, and applicable state securities laws; and
WHEREAS, at each of the Second Closing and the Third Closing (as
defined in Sections 1.2(b) and 1.2(c)), the parties hereto shall execute and
deliver a Registration Rights Agreement substantially in the form of Exhibit C
attached hereto pursuant to which the Company shall agree to provide certain
registration rights under the Securities Act and the rules and regulations
promulgated thereunder, and applicable state securities laws.
NOW, THEREFORE, in consideration of the promises and mutual covenants
and agreements hereinafter, the Company and the Purchasers hereby agree as
follows:
ARTICLE I.
PURCHASE AND SALE
1.1 Purchase and Sale.
a. Purchase and Sale on First Closing Date. On the First Closing Date
(as defined below), subject to the terms and conditions set forth herein, the
Company shall issue and sell to each Purchaser and each Purchaser, severally
and not jointly, shall purchase from the
<PAGE> 5
Company (i) the principal amount of Debentures as set forth on Schedule I and
(ii) a Warrant or Warrants exercisable for the amount of Common Stock as set
forth on Schedule I for such Purchaser. The aggregate principal amount of
Debentures purchased by the Purchasers shall be $3,000,000 and the aggregate
number of shares of Common Stock for which the Warrant or Warrants will be
exercisable shall be 766,773 shares of Common Stock.
b. Purchase and Sale on Second Closing Date. On the Second Closing
Date (as defined below), subject to the terms and conditions set forth herein,
the Company shall issue and sell to the Purchasers (i) an additional $2,000,000
principal amount of the Debentures and (ii) an additional Warrant exercisable
for an aggregate amount of 511,182 shares of Common Stock.
c. Purchase and Sale on Third Closing Date. On the Third Closing Date
(as defined below), subject to the terms and conditions set forth herein, the
Company shall issue and sell to the Purchasers (i) an additional $3,000,000
principal amount of Debentures and (ii) an additional Warrant for shares of
Common Stock.
1.2 Closings.
a. The First Closing. The closing of the purchase and sale of the
initial $3,000,000 aggregate principal amount of Debentures and Warrants for an
aggregate of 766,773 shares of Common Stock (the "First Closing") shall take
place at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 590 Madison
Avenue, New York, New York 10022, or by transmission by facsimile and/or
overnight courier, immediately following the execution hereof or such later
date or different location as the parties shall agree, but not prior to the
date that the conditions set forth in Section 4.1 have been satisfied or waived
by the appropriate party (the "First Closing Date"). At the First Closing:
(i) Each Purchaser shall deliver, as directed by the Company, its
portion of the purchase price as set forth next to its name on Schedule I in
United States dollars in immediately available funds to an account or accounts
designated in writing by the Company;
(ii) The Company shall deliver a Debenture, substantially in the
form of Exhibit A hereto, representing the principal amount purchased by each
Purchaser as set forth next to such Purchaser's name on Schedule I and with a
Conversion Price (as defined therein) equal to $3.9125, registered in the name
of such Purchaser;
(iii) The Company shall deliver a Warrant(s), substantially in the
form of Exhibit B hereto and with the Exercise Price (as defined therein) equal
to $4.499375, representing the Warrant(s) being purchased by each Purchaser as
set forth next to such Purchaser's name on the Schedule I, registered in the
name of such Purchaser; and
(iv) The parties shall execute and deliver each of the documents
referred to in Section 4.1.
2
<PAGE> 6
b. Second Closing. Subject to the terms and conditions set forth in
Section 4.2 and elsewhere in this Agreement, the closing and sale of an
additional $2,000,000 aggregate principal amount of Debentures and Warrants for
an aggregate of 511,182 shares of Common Stock (the "Second Closing") shall
take place on a date mutually acceptable to the parties in the same manner as
the First Closing but in no event later than ten (10) business days after the
release of the Company's earnings for the fiscal quarter ended September 30,
1999 (the "Second Closing Date"); provided, that in no case shall the Second
Closing take place unless and until the conditions listed in Section 4.2 have
been satisfied or waived by the appropriate party; provided, further, that if a
Change of Control shall have occurred, the Company shall not be obligated to
sell more than $1,000,000 aggregate principal amount of Debentures and Warrants
at the Second Closing. At the Second Closing:
(i) Each Purchaser shall deliver, as directed by the Company, its
portion of the purchase price as set forth next to its name on a schedule
similar to Schedule I (the "Second Closing Schedule"), to be delivered to the
Company by the Purchasers two (2) days before the Second Closing Date, in
United States dollars in immediately available funds to an account or accounts
designated in writing by the Company;
(ii) The Company shall deliver a Debenture, substantially in the
form of Exhibit A hereto, except that Section 4.2(b) thereof shall be omitted,
with a Conversion Price (as defined therein) equal to $3.9125, representing the
principal amount purchased by each Purchaser as set forth next to such
Purchaser's name on the Second Closing Schedule, registered in the name of such
Purchaser;
(iii) The Company shall deliver a Warrant(s), substantially in the
form of Exhibit B hereto and with the Exercise Price (as defined therein) equal
to $4.499375, representing the Warrant(s) being purchased by each Purchaser as
set forth next to such Purchaser's name on the Second Closing Schedule,
registered in the name of such Purchaser; and
(iv) The parties shall execute and deliver each of the documents
referred to in Section 4.2.
c. Third Closing. Subject to the terms and conditions set forth in
Section 4.3 and elsewhere in this Agreement, the Purchasers shall have the
right (the "Purchasers' Call Option") at any time within a two (2) year period
commencing on the First Closing Date to deliver a written notice to the Company
(a "Purchasers' Call Option Notice") requiring the Company to issue and sell on
the same terms and conditions as at the First Closing, except that the
Conversion Price shall be equal to the lesser of (x) $5.50 per share of Common
Stock and (y) the five (5) day average closing bid price of the Common Stock
(as reported by Bloomberg Information Services, Inc., or any successor
reporting service) for the five (5) Trading Days (as defined below) immediately
preceding the Second Closing Date, but in any event no lower than the
Conversion Price at the First Closing, (1) an additional principal amount of
Debentures of up to $3,000,000 and (2) an additional Warrant with an Exercise
Price equal to 115% of the Conversion Price at the Third Closing. The closing
of the purchase and sale of the additional Debentures and Warrant(s) (the
"Third Closing") under the Purchasers' Call Option Notice shall
3
<PAGE> 7
take place in the same manner as the First Closing, within five (5) business
days of the date after delivery of the Purchasers' Call Option Notice (the
"Third Closing Date"); provided, that in no case shall the Third Closing take
place unless and until the conditions listed in Section 4.3 have been satisfied
or waived by the appropriate party, and provided, further that, if the Company
has filed a registration statement under the Securities Act relating to an
Underwritten Offering (as defined in the Registration Rights Agreement) and if
the Company, after consultation with the managing underwriter(s) or
underwriter(s), should reasonably determine that the Third Closing would
materially adversely affect the offering contemplated in such registration
statement, then the Third Closing shall be delayed until sixty (60) days after
the closing of such offering or until after the cancellation of such offering.
If a Change of Control shall have occurred prior to the Second Closing, then
the Company shall not be obligated to sell more than one-half ($1,500,000
aggregate principal amount of Debentures) of the amount of Debentures and
Warrants described above; provided, that if the Change of Control occurs after
the Second Closing, the Company shall be required to sell the full amount
($3,000,000 aggregate principal amount of Debentures) of Debentures and
Warrants described above. At the Third Closing:
(i) Each Purchaser shall deliver, as directed by the Company, its
portion of the purchase price as set forth next to its name on a schedule
similar to Schedule I (the "Third Closing Schedule"), to be attached to the
Purchasers' Call Option Notice, in United States dollars in immediately
available funds to an account or accounts designated in writing by the Company;
(ii) The Company shall deliver a Debenture, substantially in the
form of Exhibit A hereto, except that Section 4.2(b) thereof shall be omitted,
with a Conversion Price equal to the lesser of (A) $5.50 per share of Common
Stock and (B) the five (5) day average closing bid price of the Common Stock
(as reported by Bloomberg Information Services, Inc., or any successor
reporting service) for the five (5) Trading Days immediately preceding the
Second Closing Date (provided, that in no event shall such Conversion Price be
lower than the Conversion Price at the First Closing), representing the
principal amount purchased by each Purchaser as set forth next to such
Purchaser's name on the Third Closing Schedule, registered in the name of such
Purchaser;
(iii) The Company shall deliver a Warrant(s), substantially in the
form of Exhibit B hereto and with an Exercise Price equal to 115% of the
Conversion Price at the Third Closing, representing the Warrant(s) being
purchased by each Purchaser as set forth next to such Purchaser's name on the
Third Closing Schedule, registered in the name of such Purchaser; and
(iv) The parties shall execute and deliver each of the documents
referred to in Section 4.3.
d. Purchasers' Damages. In addition to any other rights available to
the Purchasers, if the Company fails to deliver to each Purchaser the
Debentures and the Warrants required to be delivered at the Second Closing or
the Third Closing, the Company shall pay each Purchaser, upon any Purchaser's
demand, an amount calculated according to the formula below
4
<PAGE> 8
as liquidated damages by cash or wire transfer in immediately available funds
to the account of such Purchaser, or as otherwise directed by such Purchaser:
[(MP-CP) x CSD] + [(MP-EP) x CSW]
where MP is the Per Share Market Price (as defined in the Registration Rights
Agreement) on the applicable Closing Date;
where CSD is the number shares of Common Stock into which the Debentures that
should have been delivered at the applicable Closing could have been converted;
where CSW is the number of shares of Common Stock for which the Warrants that
should have been delivered at the applicable Closing could have been exercised;
where CP is the Conversion Price (as defined in the Debentures) of the
Debentures; and
where EP is the Exercise Price (as defined in the Warrants) of the Warrants.
In the event of any payment of liquidated damages pursuant to this Section
1.2(d), CP of the Debentures and EP of the Warrants to be issued at the related
Closing shall be increased to MP.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. Except
as set forth or disclosed in (i) the Company's annual report on Form 10-KSB for
the year ended December 31, 1998, (ii) the Company's annual report on Form
10-KSB/A for the year ended December 31, 1998, (iii) the Company's quarterly
report on Form 10-QSB for the three month period ended March 31, 1999, (iii)
the Company's registration statement on Form S-4 (file no. 333-74675), as
amended (collectively, the "SEC Documents") or (iv) a Schedule of Exceptions
delivered by the Company to the Purchasers, the Company hereby represents and
warrants to each of the Purchasers as follows:
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. Except as set forth on Schedule 2.1(a), the Company has no
subsidiaries (collectively, the "Subsidiaries"). Each of the Subsidiaries
(which for purposes of this Agreement means any Person (as defined below) in
which the Company, directly or indirectly, owns the majority of such entity's
capital stock or holds an equivalent equity or similar interest) is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization (as applicable),
with the requisite 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 its Subsidiaries is duly qualified as a
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foreign corporation 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
(i) adversely affect the legality, validity or enforceability of this Agreement
or any of the Transaction Documents (as defined in Section 2.1(b)) or any of
the transactions contemplated hereby or thereby, (ii) have or result in a
material adverse effect on the business, results of operations, assets,
prospects, or financial condition of the Company and its Subsidiaries, taken as
a whole or (iii) impair the Company's ability to perform fully on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or
(iii), being a "Material Adverse Effect"). The Company has furnished to each of
the Purchasers true and correct copies of the Company's Certificate of
Incorporation, as amended and as in effect on the date hereof (the "Certificate
of Incorporation"), and the Company's Bylaws, as in effect on the date hereof
(the "Bylaws"), and true, complete and accurate copies of all documents
evidencing all classes of securities convertible into or exchangeable or
exercisable for Common Stock and the material rights of the holders thereof in
respect thereto.
b. Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by this Agreement, the Debentures, the Warrants and the
Registration Rights Agreement (collectively, the "Transaction Documents"), and
otherwise to carry out its obligations hereunder and thereunder. The execution
and delivery of this Agreement and each of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action and no
further action is required by the Company, its Board of Directors or its
stockholders in connection therewith. The Company has full corporate power and
authority to issue, sell and deliver the Debentures, the Debenture Shares, the
Warrants and the Warrant Shares pursuant to this Agreement and the Transaction
Documents. This Agreement and each of the Transaction Documents have been duly
executed by the Company and when delivered in accordance with the terms hereof
or thereof will constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by 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, and except that rights to
indemnification and contribution may be limited by applicable law or public
policy relating thereto.
c. Capitalization. As of the date hereof, the authorized capital
stock of the Company is as set forth in Schedule 2.1(c). All of such
outstanding shares of capital stock have been, or upon issuance will be, duly
authorized and validly issued, fully paid and nonassessable and were issued in
accordance with the registration or qualification provisions of the Securities
Act, or pursuant to valid exemptions therefrom. Except as disclosed in Schedule
2.1(c), (i) no shares of the Company's capital stock are subject to preemptive
rights or any other similar rights or any liens, claims or encumbrances
suffered or permitted by the Company, 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 any Transaction Document, (ii)
there are no outstanding options, warrants, scrip rights to subscribe to, calls
or commitments of any character
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<PAGE> 10
whatsoever relating to, or securities or rights convertible into or
exchangeable or exercisable for, or giving any Person any right to subscribe
for or acquire, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings, agreements or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable or exercisable for, any shares of capital
stock of the Company or any of its Subsidiaries, (iii) there are no outstanding
debt securities of the Company or any of its Subsidiaries, (iv) there are no
contracts, commitments, understandings, agreements or arrangements under which
the Company or any of its Subsidiaries is obligated to register the sale of any
of their securities under the Securities Act (except the Registration Rights
Agreement), (v) there are no outstanding securities of the Company or any of
its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings, agreements or arrangements by
which the Company or any of its Subsidiaries is or may become bound to redeem a
security of the Company or any of its Subsidiaries, (vi) there are no
securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the shares of Common Stock as contemplated
by this Agreement, (vii) the Company does not have any stock appreciation
rights or "phantom stock" plans or agreements or any similar plan or agreement
and (viii) except as specifically disclosed in the SEC Documents (as defined in
Section 2.1(k)), no Person or group of related Persons beneficially owns (as
determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) or has the right to acquire by
agreement with or by obligation binding upon the Company beneficial ownership
of in excess of 5% of the Common Stock. As used herein, "Person" means an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any kind.
d. Authorization and Validity; Issuance of Shares. The shares of
Common Stock issuable upon conversion of the Debentures and exercise of the
Warrants (collectively, the "Underlying Shares") are and will at all times
hereafter continue to be duly authorized and reserved for issuance and the
shares of Common Stock issued upon conversion of the Debentures (the "Debenture
Shares") and exercise of the Warrants (the "Warrant Shares") will be validly
issued, fully paid and nonassessable, free and clear of all liens, claims,
encumbrances and Company rights of first refusal, other than liens, claims and
encumbrances created by the Purchasers (collectively, "Liens") and will not be
subject to any preemptive or similar rights. When issued by the Company in
accordance with the terms of this Agreement, the Debentures and the Warrants
will be validly issued, fully paid and nonassessable.
e. No Conflicts. The execution, delivery and performance of this
Agreement and each of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including the issuance of the Underlying Shares) do not and will not (i)
conflict with or violate any provision of the Certificate of Incorporation,
Bylaws or other organizational documents of the Company or any of its
Subsidiaries, (ii) subject to obtaining the consents referred to in Section
2.1(f), conflict with, or
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constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to other Persons any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture, patent, license or instrument (evidencing a Company or Subsidiary
debt or otherwise) to which the Company or any of its Subsidiaries is a party
or by which any property or asset of the Company or any of its Subsidiaries is
bound or affected or (iii) to the best of the Company's knowledge, 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 any of its Subsidiaries is subject (including federal and state securities
laws and regulations and the rules and regulations of the principal market or
exchange on which the Common Stock is traded or listed), applicable to the
Company or any of its Subsidiaries, or by which any material property or asset
of the Company or any of its Subsidiaries is bound or affected.
f. Consents and Approvals. Except as specifically set forth on
Schedule 2.1(f), neither the Company nor any of its Subsidiaries is required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority, regulatory or self regulatory agency, or other
Person in connection with the execution, delivery and performance by the
Company of this Agreement and the Transaction Documents, other than (i) the
filing of a registration statement with the Commission, which shall be filed in
accordance with and in the time periods set forth in the Registration Rights
Agreement, (ii) the application(s) or any letter(s) acceptable to the Nasdaq
SmallCap Market ("Nasdaq") for the listing or quoting of the Underlying Shares
on Nasdaq (and with any other national securities exchange or market on which
the Common Stock is then listed or quoted), (iii) the filing of a Form D with
the Commission and (iv) any filings, notices or registrations under applicable
state securities laws (together with the consents, waivers, authorizations,
orders, notices and filings referred to on Schedule 2.1(f), the "Required
Approvals").
g. Litigation; Proceedings. Except as specifically set forth on
Schedule 2.1(g), there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, currently threatened
in writing against or affecting the Company or any of its Subsidiaries or any
of their respective assets or properties before or by any court, governmental
or administrative agency or regulatory authority (federal, state, county, local
or foreign) or any arbitrator, which (i) materially adversely affects or
challenges the legality, validity or enforceability of this Agreement or any of
the Transaction Documents, (ii) could reasonably be expected to have a Material
Adverse Effect or (iii) if adversely decided, could reasonably be expected to
have a Material Adverse Effect on the issuance or conversion of the Debentures
or the Debenture Shares, or the issuance or exercise of the Warrants or the
Warrant Shares, or the consummation of the transactions contemplated by this
Agreement and the Transaction Documents.
h. No Default or Violation. Neither the Company nor any of its
Subsidiaries is (i) in default under or in material violation of any indenture,
loan or other credit agreement or any other agreement or instrument to which it
is a party or by which it or any of its assets or properties is bound and which
is required to be included as an exhibit to any SEC Document or
8
<PAGE> 12
will be required to be included as an exhibit to the Company's next filing
under either the Securities Act or the Exchange Act, (ii) to the Company's
knowledge, in violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court, arbitrator or
governmental authority applicable to it, (iii) to the Company's knowledge, in
violation of any law, statute, ordinance, rule or regulation of any
governmental authority to which it is subject, (iv) in default under or in
violation of its certificate of incorporation, bylaws or other organizational
documents or (v) in default under or in violation of any of the listing or
quotation requirements of Nasdaq as in effect on the date hereof and the
Company is not aware of any facts which would reasonably lead to delisting or
suspension of the Common Stock by Nasdaq in the foreseeable future, which
violations or defaults would materially and adversely affect the business,
results of operations, assets, prospects, or financial condition of the Company
and its Subsidiaries. The business of the Company and its Subsidiaries is not
being conducted, and shall not be conducted, in violation of any law, statute,
ordinance, rule or regulation of any governmental authority, except where such
violations have not resulted or would not reasonably result in a Material
Adverse Effect.
i. Disclosure; Absence of Certain Changes. None of this Agreement,
the Schedules to this Agreement, the Transaction Documents, the SEC Documents
or any other written or formally presented information, report, financial
statement, exhibit, schedule or document furnished by or on behalf of the
Company in connection with the negotiation of the transactions contemplated
hereby contained, contains, or will contain at the time it was or is so
furnished any untrue statement of a material fact or omitted, omits or will
omit at such time to state any material fact necessary in order to make the
statements made herein and therein, in light of the circumstances under which
they were made, not materially misleading. Except as disclosed on Schedule
2.1(i) or in the SEC Documents filed on EDGAR at least five (5) business days
prior to the date hereof, since December 31, 1998, there has been no material
adverse change and no material adverse development in the business, properties,
operations, financial condition, liabilities or results of operations or,
insofar as can reasonably be foreseen, prospects of the Company or the
Subsidiaries. The Company has not taken any steps, and does not currently
expect to take any steps, to seek protection pursuant to any bankruptcy law nor
does the Company or any of its Subsidiaries have any knowledge that their
respective creditors intend to initiate involuntary bankruptcy proceedings. No
event, liability, development or circumstance has occurred or exists, or is
contemplated to occur, with respect to the Company or its Subsidiaries or their
respective businesses, properties, operations or financial condition or,
insofar as can reasonably be foreseen, prospects, that would be required to be
disclosed by the Company under applicable securities laws on a registration
statement (including by way of incorporation by reference) filed with the
Commission, on the date this representation is made or deemed to be made,
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly disclosed.
j. Private Offering. The Company and all Persons acting on its
behalf have not made, directly or indirectly, and will not make, offers or
sales of any securities, or solicited any offers to buy any securities under
circumstances that would require registration of the Debentures, the Warrants,
the Debenture Shares, the Warrant Shares or the Underlying Shares or the
issuance of such securities under the Securities Act. The offer, issuance and
sale of the
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Debentures, the Warrants, the Debenture Shares and the Warrant Shares to the
Purchasers will not be integrated with any other offer, sale and issuance of
the Company's securities (past or current) under the Securities Act or any
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated or for purposes of any
stockholder approval provision applicable to the Company or its securities.
Subject to the accuracy and completeness of the representations and warranties
of the respective Purchasers contained in Section 2.2, the offer, issuance and
sale by the Company to the Purchasers of the Debentures, the Warrants and the
Underlying Shares is exempt from the registration requirements of the
Securities Act.
k. SEC Documents; Financial Statements. The Common Stock of the
Company is registered pursuant to Section 12(g) of the Exchange Act. Since
December 31, 1997, the Company has filed all reports, schedules, forms,
statements and other documents required to be filed by it with the Commission
pursuant to the reporting requirements of the Exchange Act, including pursuant
to Sections 13, 14 or 15(d) thereof (the foregoing materials and all exhibits
included therein and financial statements and schedules thereto and documents
(other than exhibits to such documents) incorporated by reference therein being
collectively referred to herein as the "SEC Filings"), on a timely basis or has
received a valid extension of such time of filing and has filed any such SEC
Filings prior to the expiration of any such extension. The Company has
delivered to each of the Purchasers or its representatives true, complete and
accurate copies of the SEC Documents. As of their respective dates, the SEC
Filings complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Filings, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. All agreements to which the Company or any of its Subsidiaries
is a party or to which the property or assets of the Company or any of its
Subsidiaries are subject and which are required to be filed as exhibits to the
SEC Filings have been filed as exhibits to the SEC Filings. As of their
respective dates, the financial statements of the Company included in the SEC
Filings comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission with
respect thereto as in effect at the time of filing. Such financial statements
have been prepared in accordance with United States generally accepted
accounting principles applied on a consistent basis during the periods
involved, except as may be otherwise specified in such financial statements or
the notes thereto, and fairly present in all material respects the financial
position of the Company as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial year-end audit adjustments. No
other information provided by or on behalf of the Company to the Purchasers
which is not included in the SEC Filings, including, without limitation,
information referred to in Section 2.1(i) of this Agreement, contains any
untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in light of the
circumstances under which they are or were made, not misleading. The Company
shall publicly disclose within one hundred twenty (120) days of the First
Closing Date any material nonpublic information that has been disclosed to the
Purchasers. The Company acknowledges that the Purchasers will be trading in the
securities of
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the Company in reliance on the foregoing representation and warranty. The
Company shall include in the S-3 registration statement or otherwise publicly
disclose any information disclosed to the Purchasers on or prior to the First
Closing Date to the extent (and only to the extent) that such information
continues to constitute material, nonpublic information as of the 120th day
following the First Closing Date.
l. Investment Company. The Company is not, and is not controlled by
or under common control with an Affiliate (as defined below) of an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
m. Broker's Fees. No fees or commissions or similar payments with
respect to the transactions contemplated by this Agreement and the Transaction
Documents have been paid or will be payable by the Company to any broker,
financial advisor, finder, investment banker or bank, other than as set forth
in Schedule 2.1(m). The Purchasers shall have no obligation with respect to any
fees or with respect to any claims made by or on behalf of other Persons for
fees of a type contemplated in this Section 2.1(m) that may be due in
connection with the transactions contemplated by this Agreement and the
Transaction Documents.
n. Form S-3 Eligibility. The Company is, and at each Closing Date
hereunder will be, eligible to register securities (including the Underlying
Shares) for resale with the Commission on Form S-3 (or any successor form) as
currently promulgated under the Securities Act.
o. Listing and Maintenance Requirements Compliance. The principal
market on which the Common Stock is currently traded is Nasdaq. Except as
disclosed on Schedule 2.1(o), the Company has not in the three (3) years
preceding the date hereof received notice (written or oral) from Nasdaq (or any
stock exchange, market or trading facility on which the Common Stock is or has
been listed (or on which it has been quoted)) to the effect that the Company is
not in compliance with the listing or maintenance requirements of such market,
exchange or trading facility. Except for the transactions contemplated by the
Transaction Documents, the Company is not aware of any facts that would
reasonably lead to delisting or suspension of the Common Stock by Nasdaq.
Immediately after the First Closing, the Company is and will be in compliance
with all such maintenance requirements.
p. Intellectual Property Rights. The Company and each of its
Subsidiaries own or possess adequate rights or licenses to use all trademarks,
trademark applications, trade names and service marks, whether or not
registered, and all patents, patent applications, copyrights, inventions,
licenses, approvals, governmental authorizations, trade secrets and
intellectual property rights (collectively, "Intellectual Property Rights")
which are necessary for use in connection with their respective businesses as
now conducted and as described in the SEC Filings. Neither the Company nor any
of its Subsidiaries has received any communications alleging that the Company
or any of its Subsidiaries has violated, or by conducting their respective
businesses as now conducted, would violate any of the patents, trademarks,
service marks, trade names, copyrights or trade secrets or other proprietary
rights of any other Person. Except as set forth on Schedule 2.1(p), there is no
claim, action or proceeding which has been
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made or brought against, or to the Company's knowledge, is currently threatened
in writing against the Company or any of its Subsidiaries regarding the
infringement of any of the Intellectual Property Rights, and the Company and
its Subsidiaries are unaware of any facts or circumstances which might give
rise to any of the foregoing, except where any of the foregoing would not have
a Material Adverse Effect. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.
q. Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any union or labor dispute nor, to the knowledge of
the Company or any of its Subsidiaries, is any such dispute currently
threatened. Neither the Company nor any of its Subsidiaries is a party to a
collective bargaining agreement, and the Company and its Subsidiaries believe
that relations with their employees are good. Except as set forth on Schedule
2.1(q), since December 31, 1998, no executive officer (as defined in Rule
501(f) under the Securities Act) has notified the Company that such officer
intends to leave the Company or otherwise terminate such officer's employment
with the Company.
r. Registration Rights; Rights of Participation. Except as
described on Schedule 2.1(r), (i) the Company has not granted or agreed to
grant to any Person any rights (including "piggy-back" registration rights) to
have any securities of the Company registered with the Commission or any other
governmental authority which have not been satisfied and (ii) no Person,
including, but not limited to, current or former stockholders of the Company,
underwriters, brokers or agents, has any right of first refusal, preemptive
right, right of participation, or any similar right to participate in the
transactions contemplated by this Agreement or any Transaction Document.
s. Title. Except as disclosed on Schedule 2.1(s), the Company and
each of its Subsidiaries have good and marketable title to all real property
and personal property owned by them which is material to the business of the
Company and its Subsidiaries, in each case free and clear of all Liens, except
for Liens that do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its Subsidiaries. Any real property and facilities held under lease
by the Company and its Subsidiaries are held by them under valid, subsisting
and, to the Company's best knowledge, enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to be
made of such property and facilities by the Company and its Subsidiaries.
t. Permits. The Company and each of its Subsidiaries possess all
certificates, authorizations, licenses, easements, consents, approvals, orders
and permits necessary to own, lease and operate their respective properties and
to conduct their respective businesses as currently conducted except where the
failure to possess such permits would not have a Material Adverse Effect
("Material Permits"), and there is no claim, action or proceeding pending, or,
to the knowledge of the Company, currently threatened in writing relating to
the revocation, modification, suspension or cancellation of any Material
Permit. Neither the
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Company nor any of its Subsidiaries is in conflict with, in default under or in
material violation of any Material Permit.
u. Insurance. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as management of the Company believes to be prudent
and customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverages as and when
such coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business, at a cost that would not materially
and adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its Subsidiaries, taken as a whole.
v. Internal Accounting Controls. The Company and each of the
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with United States generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorizations and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
w. Tax Status; Firpta. Except as set forth on Schedule 2.1(w), the
Company and each of its Subsidiaries have made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith (which are set forth
on Schedule 2.1(w)), and have set aside on their books provisions reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in
any material amount claimed to be due from the Company or any of its
Subsidiaries by the taxing authority of any jurisdiction, and the officers of
the Company know of no basis for any such claim. The Company is not a "United
States real property holding corporation" within the meaning of Section
847(c)(2) of the Internal Revenue Code of 1986, as amended.
x. Transactions With Affiliates. Except as set forth on Schedule
2.1(c) or Schedule 2.1(x), none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company or any of its
Subsidiaries (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real property or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such
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employee or, to the knowledge of the Company, any Person in which any officer,
director or any such employee has a substantial interest or is an officer,
director, trustee or partner.
y. Application of Takeover Protection. The Company and its Board of
Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under the Certificate of Incorporation, Bylaws
or the laws of the state of incorporation of the Company which is or could
become applicable to the Purchasers or the Transaction Documents as a result of
the transactions contemplated by this Agreement and the Transaction Documents.
None of the transactions contemplated by this Agreement and the Transaction
Documents, including the conversion of the Debentures and the exercise of the
Warrants, will trigger any poison pill provisions of any of the Company's
stockholders' rights or similar agreements.
z. Environmental Laws. Except as set forth on Schedule 2.1(z), to
the best of the Company's knowledge, the Company and its Subsidiaries (i) are
in compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment and hazardous and toxic substances and wastes, and pollutants and
contaminants ("Environmental Laws"), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permits, licenses or other approvals except where
the failure to comply with any of the foregoing would not result in a Material
Adverse Effect.
aa. Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other Person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company (i) used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity, (ii) made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds, (iii)
violated or is in violation of any provision of the United States Foreign
Corrupt Practices Act of 1977, as amended or (iv) made any unlawful bribe,
rebate, payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government official or employee.
bb. Solicitation Materials. The Company has not (i) distributed any
offering materials in connection with the offering and sale of the Debentures
or the Warrants, other than the SEC Documents, the Schedules to this Agreement,
any amendments and supplements thereto and the materials listed on Schedule
2.1(bb) or (ii) solicited any offer to buy or sell the Debentures or the
Warrants by means of any form of general solicitation or advertising. Neither
the Company, nor any of its Affiliates, nor any Person acting on its or their
behalf, has engaged or will engage in any form of general solicitation or
general advertising (within the meaning of Regulation D under the Securities
Act) in connection with the offer or sale of the Debentures or the Warrants.
cc. Acknowledgment of Dilution. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the
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Debenture Shares and Warrant Shares upon conversion of the Debentures or
exercise of the Warrants. The Company further acknowledges that its obligation
to issue Debenture Shares and Warrant Shares upon conversion of the Debentures
or exercise of the Warrants in accordance with this Agreement, the Debentures
and the Warrants is absolute and unconditional regardless of the dilutive
effect that such issuance may have on the ownership interests of other
stockholders of the Company.
dd. Acknowledgment Regarding Purchasers' Purchase of Securities.
The Company acknowledges and agrees that the Purchasers are acting solely in
the capacity of arm's length purchasers with respect to this Agreement and the
transactions contemplated hereby. The Company further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any statement made by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation and is
merely incidental to the Purchasers' purchase of the securities. The Company
further represents to each Purchaser that the Company's decision to enter into
this Agreement has been based solely on the independent evaluation of the
Company and its representatives.
ee. Solvency. The Company (both before and immediately after giving
effect to the transactions contemplated by this Agreement) is solvent (i.e.,
its assets have a fair market value in excess of the amount required to pay its
probable liabilities on its existing debts as they become absolute and
matured).
ff. Seniority; Exclusivity. No class of equity securities of the
Company will be senior to the Debentures in right of payment, whether upon
liquidation, dissolution or otherwise. So long as any Debentures issued
hereunder remain outstanding, the Company shall not exchange, redeem or convert
any of the Company's capital stock for or into indebtedness, including
convertible debt, of the Company. The Company shall not issue and sell any
Debentures, other than to the Purchasers pursuant to this Agreement, without
the prior written consent of each of the Purchasers.
gg. Other Agreements. The Company has not, directly or indirectly,
made any agreements with any Purchasers relating to the terms and conditions of
the transactions contemplated by the Transaction Documents except as set forth
in the Transaction Documents.
2.2 Representations and Warranties of the Purchasers. Each of the
Purchasers, severally and not jointly, hereby represents and warrants to the
Company (as to itself) as follows:
a. Organization; Authority. Such Purchaser is a corporation or a
limited duration company or a limited liability company or limited partnership
duly formed, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, organization or formation with the requisite
power and authority, corporate or otherwise, to enter into and to consummate
the transactions contemplated hereby and by the Transaction Documents and
otherwise to carry out its obligations hereunder and thereunder. The purchase
by such Purchaser of the Debentures and the Warrants hereunder has been duly
authorized by all necessary action
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on the part of such Purchaser. Each of this Agreement and the Registration
Rights Agreement has been duly executed and delivered by such Purchaser and
constitutes the valid and legally binding obligation of such Purchaser,
enforceable against such Purchaser 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, and except that rights to
indemnification and contribution may be limited by federal or state securities
laws or public policy relating thereto.
b. Investment Intent. Such Purchaser is acquiring the Debentures
and the Warrants for its own account and not with a present view to or for
distributing or reselling the Debentures, the Warrants, the Debenture Shares or
the Warrant Shares or any part thereof or interest therein in violation of the
Securities Act; provided, however, that by making the representations herein,
such Purchaser does not agree to hold any of the Debentures, the Warrants, the
Debenture Shares or the Warrant Shares for any minimum or other specific term
and reserves the right to dispose of the Debentures at any time in accordance
with or pursuant to a registration statement or an exemption under the
Securities Act.
c. Purchaser Status. At the time such Purchaser was offered the
Debentures and the Warrants, and at the Closing Date, (i) it was and will be an
"accredited investor" as defined in Rule 501 under the Securities Act and (ii)
such Purchaser, either alone or together with its representatives, had and will
have such knowledge, sophistication and experience in business and financial
matters so as to be capable of evaluating the merits and risks of the
prospective investment in the Debentures and the Warrants.
d. Reliance. Such Purchaser understands and acknowledges that (i)
the Debentures and the Warrants are being offered and sold to such Purchaser
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 or Regulation D promulgated thereunder and (ii) the
availability of such exemption depends in part on, and the Company will rely
upon the accuracy and truthfulness of, the representations set forth in this
Section 2.2 and such Purchaser hereby consents to such reliance.
e. Information. Such Purchaser and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Debentures
and the Warrants which have been requested by such Purchaser or its advisors.
Such Purchaser and its advisors, if any, have been afforded the opportunity to
ask questions of the Company. Neither such inquiries nor any other due
diligence investigation conducted by such Purchaser or any of its advisors or
representatives shall modify, amend or affect such Purchaser's right to rely on
the Company's representations and warranties contained in Section 2.1 above or
representations and warranties of the Company contained in any other
Transaction Document. Such Purchaser understands that its investment in the
Debentures and the Warrants involves a significant degree of risk.
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f. Governmental Review. Such Purchaser understands that no United
States federal or state agency or any other government or governmental agency
or authority has passed upon or made any recommendation or endorsement of the
Debentures or the Warrants.
g. Residency. Such Purchaser is a resident of the jurisdiction set
forth immediately below such Purchaser's name on Schedule II hereto.
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 2.2.
ARTICLE III.
OTHER AGREEMENTS
3.1 Transfer Restrictions; Legend.
a. Transfer Restrictions. If any Purchaser should decide to
transfer or dispose of the Debentures, the Warrants, the Debenture Shares or
the Warrant Shares held by it, such Purchaser understands and agrees that it
may do so only pursuant to an effective registration statement under the
Securities Act, pursuant to an available exemption from the registration
requirements of the Securities Act or Rule 144 promulgated under the Securities
Act ("Rule 144") or to the Company. Except pursuant to the Company's rights
under Section 3(k) of the Registration Rights Agreement, the Company shall
announce any material non-public information that it legally is required to
announce on or prior to the Effectiveness Date (as defined in the Registration
Rights Agreement) of the registration statement filed pursuant to the
Registration Rights Agreement and shall not enter into any subsequent
non-disclosure agreements that would prevent it from announcing any such
information that otherwise legally could have been announced on or prior to the
Effectiveness Date, unless confidential treatment for such information is
granted by the Commission. In connection with any transfer or disposition of
any Debentures, Warrants, Debenture Shares or Warrant Shares other than
pursuant to an effective registration statement or to the Company, the Company
may require the transferor thereof to provide to the Company a written opinion
of counsel experienced in the area of United States securities laws selected by
the transferor, the form and substance of which opinion shall be customary for
opinions of counsel in comparable transactions, to the effect that such
transfer or disposition does not require registration of such transferred
securities under the Securities Act; provided, however, that if the Debentures,
Warrants, Debenture Shares or Warrant Shares may be sold pursuant to Rule
144(k), no written opinion of counsel shall be required from the Purchaser if
such Purchaser provides reasonable assurances (in the Company's reasonable
belief) that such security can be sold pursuant to Rule 144(k). If a Purchaser
provides the Company with an opinion of counsel, the form and substance of
which opinion shall be customary for opinions of counsel in comparable
transactions, to the effect that a public sale, assignment or transfer of the
Debentures, the Debenture Shares, the Warrants and/or the Warrant Shares may be
made without registration under the Securities Act, the Company shall permit
the transfer, and, in the case of the Debenture Shares and the Warrant Shares,
promptly instruct its
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transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Purchaser and without any restrictive
legend. Notwithstanding the foregoing or anything else contained herein to the
contrary, the Debentures, the Warrants, the Debenture Shares and the Warrant
Shares may be pledged as collateral in connection with a bona fide margin
account or other lending arrangement.
b. Legend. Each Purchaser agrees to the imprinting, so long as is
required by this Section 3.1(b), of the following legend on the Debentures, the
Warrants, the Debenture Shares and the Warrant Shares:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION 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, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT.
Neither the Debentures, the Warrants, the Debenture Shares, nor the
Warrant Shares shall contain the legend set forth above (or any other legend)
if in the written opinion of counsel to the Company experienced in the area of
United States securities laws such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission). The Company agrees that
it will provide each Purchaser, upon request, with a certificate or
certificates representing the Debentures, the Warrants, the Debenture Shares or
the Warrant Shares, free from such legend at such time as such legend is no
longer required hereunder. If such certificate or certificates had previously
been issued with such a legend or any other legend, the Company shall, upon
request, receive such certificate or certificates free of any legend.
3.2 Stop Transfer Instruction. The Company may not make any notation
on its records or give instructions to any transfer agent of the Company which
enlarge the restrictions on transfer set forth in Section 3.1.
3.3 Furnishing of Information. As long as any Purchaser owns any
Debentures, Warrants, Debenture Shares or Warrant Shares, the Company will
cause the Common Stock to continue at all times to be registered under Section
12(g) of the Exchange Act, will timely file (or obtain extensions in respect
thereof and file within the applicable grace period) all reports required to be
filed by the Company after the date hereof pursuant to Sections 13, 14 or 15(d)
of the Exchange Act and will not take any action or file any document (whether
or not permitted by the Exchange Act or the rules thereunder) to terminate or
suspend such reporting and filing obligations, and will make and keep public
information available, as those terms are defined in Rule 144. The Company
further covenants that it will take such further action as any holder of the
Debentures, the Warrants, the Debenture Shares or the Warrant Shares may
reasonably
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request, all to the extent required from time to time to enable such Person to
sell the Debentures, the Warrants, the Debenture Shares or the Warrant Shares
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 promulgated under the Securities Act, including
delivering the legal opinion referenced above in Section 3.1(b). Upon the
request of any such Person, the Company shall deliver to such Person a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
3.4 Blue Sky Laws. In accordance with the Registration Rights
Agreement, the Company shall (a) qualify the Debenture Shares and the Warrant
Shares under the state securities or "blue sky" laws of such jurisdictions as
the Purchasers may request (or to obtain an exemption from such qualification),
(b) provide evidence of any such action so taken to each Purchaser on or before
the Effectiveness Date and (c) continue such qualification at all times through
the resale of all Debenture Shares or Warrant Shares, but in any event not past
the fourth (4th) anniversary of the last Closing Date.
3.5 Integration. Except for (a) the sale of 156,250 shares of Common
Stock to Marion Jack Rickard and (b) an offer and sale of shares of Common
Stock to certain foreign investors in an aggregate amount of up to $3,000,000,
with no more than a twenty percent (20%) discount to the market price and which
may include warrant coverage at no more than twenty-five percent (25%) of the
shares of Common Stock sold (which offer and sale shall be made in accordance
with Regulation S under the Securities Act (the "Reg S Financing")), the
Company shall not 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 Debentures, the
Warrants, the Debenture Shares or the Warrant Shares in a manner that would
require the registration under the Securities Act of the sale of the
Debentures, the Warrants, the Debenture Shares or the Warrant Shares to any
Purchaser or cause the offering of such securities to be integrated with any
other offering of securities by the Company for the purpose of any stockholder
approval provision applicable to the Company or its securities.
3.6 Listing and Reservation of Debenture Shares and Warrant Shares.
a. Listing of Shares. The Company shall (i) not later than fifteen
(15) business days after the applicable Closing Date prepare and file with
Nasdaq (as well as any other national securities exchange or market on which
the Common Stock is then listed or quoted) additional shares listing
applications or letters acceptable to Nasdaq covering and listing a number of
shares of Common Stock which is at least equal to 110% of the maximum number of
Underlying Shares then issuable, assuming that the payment of all future
dividends on such shares then outstanding were made in shares of Common Stock,
(ii) take all steps necessary to cause the Underlying Shares to be approved for
listing or quotation on Nasdaq (as well as on any other national securities
exchange or market on which the Common Stock is then listed or quoted) as soon
as possible thereafter, (iii) maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all such Underlying Shares and (iv)
provide to the Purchasers evidence of such listing. Neither the Company nor any
of its Subsidiaries shall take any action that may result in the delisting or
suspension of the Common Stock on Nasdaq. The Company shall promptly provide to
each Purchaser copies of any notices it receives from Nasdaq
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regarding the continued eligibility of the Common Stock for listing on such
automated quotation system, so long as such notice does not include material,
non-public information. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 3.6(a).
b. Reservation of Shares. The Company at all times shall reserve a
sufficient number of shares of its authorized but unissued Common Stock to
provide for 1.1 times the full conversion of the outstanding Debentures
(including the payment of all interest thereon) and exercise of the outstanding
Warrants. The shares of Common Stock reserved for issuance upon conversion of
the Debentures and the exercise of the Warrants shall be allocated pro rata to
each of the Purchasers in accordance with the number of Debentures and Warrants
issued and delivered to such Purchaser at the applicable Closing. If at any
time the number of shares of Common Stock authorized and reserved for issuance
is insufficient to cover 100% of the number of Debenture Shares and Warrant
Shares issued and issuable upon conversion of the Debentures and exercise of
the Warrants (based on the Conversion Price (as defined in the Debenture) of
the Debentures in effect from time to time and the Exercise Price (as defined
in the Warrants) of the Warrants in effect from time to time) without regard to
any limitation on conversions or exercises, the Company will promptly take all
corporate action necessary to authorize and reserve 110% of such shares
pursuant to Section 3(b) of the Registration Rights Agreement, including,
without limitation, calling a special meeting of stockholders to authorize
additional shares to meet the Company's obligations under this Section 3.6(b),
in the case of an insufficient number of authorized shares, and using its best
efforts to obtain stockholder approval of an increase in such authorized number
of shares. In addition, if, at any time within the 45-day period preceding a
reset or adjustment (a "reset") of the Conversion Price pursuant to the terms
of the Debentures, the closing bid price per share of the Common Stock on
Nasdaq (or any Subsequent Market (as defined in the Debentures) on which the
Common Stock is then listed or quoted, or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date) is less than $3.00 for any consecutive five
(5) Trading Day period, the Company shall be required to file within ten (10)
business days after such fifth (5th) Trading Day a registration statement
covering the greater of (i) the product of (A) 1.2 and (B) the aggregate number
of Underlying Shares that would be issuable based on a Conversion Price equal
to the average closing bid price during such five (5) Trading Day period, less
the number of Underlying Shares for which a registration statement is then
effective and (ii) the aggregate number of Underlying Shares, calculated as if
the Conversion Price was reset on such fifth (5th) day pursuant to the terms of
the Debenture, less the number of Underlying Shares for which a registration
statement is then effective; provided, however, that if on the actual reset
date (pursuant to the Debentures) the registration statements are insufficient
to register all Underlying Shares (after giving effect to such reset), the
Company shall immediately, but in no more than ten (10) business days
thereafter, file a registration statement sufficient to register such
additional shares of Common Stock. All calculations of the above amount shall
be made without regard to any limitation on conversions of Debentures or
exercises of Warrants.
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3.7 Notice of Breaches and Violations; Purchaser Default.
a. Notice of Breach. The Company and each Purchaser shall give
prompt written notice to each other of any breach by it of any representation,
warranty or other agreement contained in this Agreement or in the Transaction
Documents, as well as any events or occurrences arising after the date hereof
and prior to the applicable 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 the applicable
Closing Date, provided such notice will not constitute material non-public
information. However, no disclosure by any party pursuant to this Section 3.7
shall be deemed to cure any breach of any representation, warranty or other
agreement contained herein or in the Transaction Documents.
b. Notice of Violation. Notwithstanding the generality of Section
3.7(a), the Company shall promptly notify (provided, such notification will not
constitute material non-public information) each Purchaser of any notice or
claim (written or oral) that it receives from any lender of the Company or any
of its Subsidiaries to the effect that the consummation of the transactions
contemplated hereby and by the Registration Rights Agreement violates or would
violate any written agreement or understanding between such lender and the
Company or any of its Subsidiaries, and the Company shall promptly furnish by
facsimile to the Purchasers a copy of any written statement in support of or
relating to such claim or notice.
c. Purchaser Default. The default by any Purchaser of any of its
obligations, representations or warranties under this Agreement or the
Transaction Documents shall not be imputed to, and shall have no effect upon,
any other Purchaser or affect the Company's obligations under this Agreement or
any Transaction Document to any non-defaulting Purchaser.
3.8 Form D. The Company agrees to file a Form D with respect to the
Debentures and the Warrants as required by Rule 506 under Regulation D under
the Securities Act and to provide a copy thereof to each Purchaser promptly
after such filing.
3.9 Future Financings. Except for (i) the Reg S Financing, (ii) the
issuance of the Underlying Shares and any shares issued in lieu of cash
interest payments on the Debentures, (iii) shares of Common Stock reserved for
issuance by the Company in connection with any plan which has been approved by
the Board of Directors of the Company, pursuant to which the Company's
securities may be issued to any employee, officer, director or consultant of
the Company, (iv) shares of Common Stock issuable upon the exercise of any
options or warrants outstanding on the date hereof and listed in Schedule
2.1(c), (v) the securities to be issued in the transactions set forth on such
Schedule 2.1(c), (vi) shares of Common Stock issued or deemed to have been
issued as consideration for an acquisition by the Company of a division, assets
or business (or stock constituting any portion thereof) from another Person, if
the Company agrees to issue shares of Common Stock or other securities
convertible into or exchangeable or exercisable for Common Stock, (vii) shares
of Common Stock issued pursuant to any equipment leasing arrangement, or debt
financing from a bank or similar financial institution or (viii) shares of
Common Stock issued pursuant to a strategic alliance, provided such issuances
are for other
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than primarily equity financing purposes (the "New Security") while any
Debentures are outstanding at (A) an effective price per share which is less or
may be less (including, without limitation, any security which is convertible
into or exchangeable or exercisable for Common Stock at a price which may
change with the market price of the Common Stock) than the Conversion Price (as
defined in the Debenture) of the Debentures as of the date thereof or (B) an
effective price per share greater than the Conversion Price but less than the
Average Price (as defined in the Debenture) on the date of such issuance or
sale (either of (A) or (B), a "Future Financing"), the Company shall provide to
the Purchasers by 5:00 p.m. (New York time) on or before the third (3rd)
Trading Day after the decision to issue the New Security has been made, written
notice of the Future Financing containing in reasonable detail (x) the proposed
terms of the Future Financing, (y) the amount of the proceeds that will be
raised and (z) the Person with whom such Future Financing shall be effected,
and attached to which shall be a term sheet or similar document relating
thereto (the "Future Financing Notice"). Upon receiving the Future Financing
Notice, each Purchaser shall have the pro rata right (based on the principal
amount of the Debentures held by such Purchaser relative to the aggregate
principal amount of Debentures outstanding) to purchase, on the same terms as
the Future Financing, an amount of New Securities having a purchase price which
shall not exceed the sum of (1) the outstanding principal amount of and any
interest owing on such Purchaser's Debenture and (2) the aggregate purchase
price for the Warrants purchased by such Purchaser. In the event a Purchaser
desires to exercise the right granted under this Section 3.9, such Purchaser
must notify the Company on or prior to the fifth (5th) Trading Day after such
Purchaser has received the Future Financing Notice. In the event the terms and
conditions of a proposed Future Financing are amended in any respect after
delivery of the Future Financing Notice but prior to the closing of the
proposed Future Financing to which such Future Financing Notice relates, the
Company shall deliver a new notice to each Purchaser describing the amended
terms and conditions of the proposed Future Financing and each Purchaser
thereafter shall have an option during the five (5) Trading Days following
delivery of such new notice to purchase its pro rata share (based on the
Purchaser's percentage ownership of the principal amount of the then
outstanding Debentures such Purchaser owns) of the New Securities being offered
on the same terms as contemplated by such proposed Future Financing, as
amended. The foregoing sentence shall apply to successive amendments to the
terms and conditions of any proposed Future Financing. In the event one or more
Purchasers elect not to exercise their rights granted hereby, the Company shall
permit those Purchasers electing to exercise the right granted under this
Section 3.9 to purchase, on a pro rata basis equal to its percentage ownership
of the principal amount of the then outstanding Debentures, the sum of the
number of New Securities that the other Purchaser(s) were eligible to purchase,
if they had exercised their right hereunder. Those Purchasers desiring to
purchase additional New Securities must notify the Company of their intention
to do so within five (5) Trading Days after the Company has informed the
Purchasers of their right to purchase additional New Securities. Within five
(5) Trading Days of the termination of the final notice period, the
transactions contemplated by this Section 3.9 shall close, subject to the
completion of mutually satisfactory documentation, and the Company shall tender
to each Purchaser certificates representing the New Securities that it agreed
to purchase and the Purchasers shall make payment for the entire purchase price
in immediately available funds at the closing of such sale; provided, however,
that each Purchaser, in lieu of providing cash as consideration for the
purchase price, may retire all or a portion of the outstanding principal amount
of and any interest
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owing on the Debentures as payment of the purchase price for the New Securities
that it desires to purchase pursuant to this Section 3.9. As used herein,
"Trading Day" shall mean a day on which Nasdaq (or in the event the Common
Stock is not traded on Nasdaq, such other securities market on which the Common
Stock is listed or quoted) is open for trading.
3.10 Use of Proceeds. The Company shall use the proceeds from the sale
of the Debentures and the Warrants and the exercise of the Warrants to acquire
assets, reduce debt and for working capital.
3.11 Transactions with Affiliates. So long as any Debentures or
Warrants are outstanding, the Company shall not, and shall cause each of its
Subsidiaries not to, enter into, amend, modify or supplement, or permit any of
its Subsidiaries to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any Subsidiary's
officers, directors or persons who were officers or directors at any time
during the previous two (2) years, stockholders who beneficially own 5% or more
of the Common Stock, or Affiliates or any individual related by blood, marriage
or adoption to any such individual or with any Person in which any such Person
owns a 5% or more beneficial interest (each, a "Related Party"), except for (a)
customary employment arrangements and benefit programs on reasonable terms, (b)
any agreement, transaction, commitment or arrangement on an arm's length basis
on terms no less favorable than terms which would have been obtainable from a
Person other than such Related Party or (c) any agreement, transaction,
commitment or arrangement which is approved by a majority of the disinterested
directors of the Company. For purposes hereof, any director who is also an
officer of the Company or any of its Subsidiaries shall not be a disinterested
director with respect to any such agreement, transaction, commitment or
arrangement. "Affiliate" for purposes of this Agreement means, with respect to
any Person, another Person that, directly or indirectly, (i) has a 5% or more
equity interest in that Person, (ii) has 5% or more common ownership with that
Person, (iii) controls that Person or (iv) shares common control with that
Person. "Control" for purposes of this Agreement, 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 "affiliated", "controlling" and "controlled" have meanings correlative to
the foregoing.
3.12 Transfer Agent Instructions. At each Closing the Company shall
issue irrevocable instructions to its transfer agent (and shall issue to any
subsequent transfer agent as required), to issue certificates, registered in
the name of each such Purchaser or its respective nominee(s), for the Debenture
Shares and/or the Warrant Shares in such amounts as specified from time to time
by each Purchaser to the Company in a form acceptable to such Purchasers (the
"Irrevocable Transfer Agent Instructions"). So long as required pursuant to
Section 3.1(b), all such certificates shall bear the restrictive legend
specified in Section 3.1(b) of this Agreement. The Company warrants that no
instruction other than (i) instructions for blackout periods described in
Section 3(k) of the Registration Rights Agreement, (ii) the Irrevocable
Transfer Agent Instructions referred to in this Section 3.12 and (iii) stop
transfer instructions to give effect to Section 3.1 (in the case of the
Debenture Shares and the Warrant Shares, prior to registration of the Debenture
Shares and the Warrant Shares under the Securities Act) will be given by the
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Company to its transfer agent and that the Debentures, the Warrants, the
Debenture Shares and the Warrant Shares shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement and the Transaction Documents. If a Purchaser provides the Company
with an opinion of counsel experienced in the area of United States securities
laws, the form and substance of which opinion shall be customary for opinions
of counsel in comparable transactions, to the effect that a public sale,
assignment or transfer of the Debentures, the Debenture Shares, the Warrants
and/or the Warrant Shares may be made without registration under the Securities
Act, the Company shall permit the transfer, and, in the case of the Debenture
Shares and the Warrant Shares, promptly instruct its transfer agent to issue
one or more certificates in such name and in such denominations as specified by
such Purchaser and without any restrictive legend. The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to
the Purchasers by violating the intent and purpose of the transactions
contemplated hereby. Accordingly, the Company acknowledges that the remedy at
law for a breach of its obligations under this Section 3.12 will be inadequate
and agrees, in the event of a beach or threatened breach by the Company of the
provisions of this Section 3.12, that the Purchasers, shall be entitled, in
addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
3.13 Press Release; Filing of Form 8-K. Subject to the provisions of
Section 6.11, prior to the opening of Nasdaq on June 11, 1999, the Company
shall file a press release in form and substance acceptable to the Purchasers.
On or before the fifth (5th) business day following the Closing Date, the
Company shall file a Form 8-K with the Commission describing the terms of the
transaction contemplated by this Agreement and the Transaction Documents in the
form required by the Exchange Act.
3.14 Information. The Company agrees to send to each Purchaser prior
to and during the Effectiveness Period copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
3.15 Ordinary Course Brokerage and Trading. Subject to compliance with
all applicable securities laws and Nasdaq regulations, no Purchaser shall be
prohibited from engaging in its ordinary course brokerage and trading
activities in respect of the Common Stock.
3.16 Best Efforts. Each of the parties hereto shall use its
commercially reasonable best efforts to satisfy each of the conditions to be
satisfied by it as provided in Article IV of this Agreement.
3.17 Corporate Existence. Until such time as all of the Purchasers
provide the Company with written notice that they do not beneficially own any
Debentures or Warrants, the Company shall maintain its corporate existence and
shall not sell all or substantially all of the Company's assets, except in the
event of a merger or consolidation or sale of all or substantially all of the
Company's assets, where the surviving or successor Person in such transaction
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(i) assumes the Company's obligations hereunder and under the agreements and
instruments entered into in connection herewith and (ii)(A) is a publicly
traded corporation whose common stock is listed for trading or quoted on
Nasdaq, the New York Stock Exchange or the American Stock Exchange or (B) pays
all cash in such transaction such that the Purchasers and all other
stockholders of the Company are fully cashed out of their holdings of
securities of the Company.
3.18 No Violation of Applicable Law. Notwithstanding any provision of
this Agreement to the contrary, if the redemption of the Debentures or
Underlying Shares otherwise required under this Agreement or the Transaction
Documents 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.
3.19 Trading Restrictions. Prior to the Company's announcement of its
1999 third quarter earnings (but in any event, no later than November 15,
1999), the Purchasers agree that they shall not sell the Common Stock at or
below the Conversion Price of the Debentures.
ARTICLE IV.
CONDITIONS
4.1 First Closing.
a. Conditions Precedent to the Obligation of the Company to Sell
the Debentures and Warrants at the First Closing. The obligation of the Company
to sell the Debentures and Warrants at the First Closing is subject to the
satisfaction or waiver (with prior written notice to each Purchaser) by the
Company, at or before the First Closing Date, of each of the following
conditions:
(i) Accuracy of the Purchasers' Representations and Warranties.
The representations and warranties of each Purchaser set forth in this
Agreement shall be true and correct in all material respects as of the date
when made and as of the First Closing Date;
(ii) Performance by the Purchasers. Each Purchaser shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement and the Transaction
Documents to be performed, satisfied or complied with by such Purchaser at or
before the First Closing Date; and
(iii) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated, endorsed or threatened or is pending by or before any court or
governmental authority of competent jurisdiction which prohibits or threatens
to prohibit the consummation of any of the transactions contemplated by this
Agreement and the Transaction Documents.
b. Conditions Precedent to the Obligation of the Purchasers to
Purchase the Debentures and Warrants at the First Closing. The obligation of
each Purchaser to acquire and pay for the Debentures and Warrants at the First
Closing is subject to the satisfaction or waiver
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(with prior written notice to the Company and each other Purchaser) by such
Purchaser, at or before the First Closing Date, of each of the following
conditions:
(i) Accuracy of the Company's Representations and Warranties.
The representations and warranties of the Company set forth in this Agreement
and in the Registration Rights Agreement shall be true and correct in all
respects as of the date when made and as of the First Closing Date;
(ii) Performance by the Company. The Company shall have
performed, satisfied and complied in all respects with all covenants,
agreements and conditions required by this Agreement and the Transaction
Documents to be performed, satisfied or complied with by the Company at or
before the First Closing Date;
(iii) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated, endorsed or threatened or is pending by or before any court or
governmental authority of competent jurisdiction which prohibits or threatens
to prohibit the consummation of any of the transactions contemplated by this
Agreement and the Transaction Documents;
(iv) No Suspensions of Trading in Common Stock. The trading in
the Common Stock shall not have been suspended by the Commission, on Nasdaq
(except for any suspension of trading of limited duration solely to permit
dissemination of material information regarding the Company);
(v) Listing of Common Stock. The Common Stock shall have been at
all times since the date of this Agreement and on the First Closing Date listed
for trading or quoted on Nasdaq;
(vi) Required Approvals. All Required Approvals, other than
those relating solely to Closing Dates other than the First Closing Date, shall
have been obtained and copies thereof delivered to the Purchasers other than
those relating solely to Closing Dates other than the First Closing Date;
(vii) Shares of Common Stock. The Company shall have duly
reserved the number of Underlying Shares required by this Agreement and the
Transaction Documents to be reserved for issuance upon the exercise of the
Warrants or the conversion of the Debentures acquired by the Purchaser on the
First Closing Date;
(viii) 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 has had a Material Adverse Effect shall have
occurred which is not disclosed on any Schedule hereto (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);
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(ix) Litigation. No action, proceeding or litigation shall have
been instituted or threatened in writing against the Company which could
reasonably be expected to have a Material Adverse Effect;
(x) Change of Control. No Change of Control shall have occurred
between the date hereof and the First Closing Date. As used herein, "Change of
Control" means the occurrence of any of (i) an acquisition after the date
hereof by an individual or legal entity or "group" (as described in Rule
13d-5(b)(1) promulgated under the Exchange Act), other than the Purchasers or
any of their Affiliates, of in excess of 40% 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 that is not approved by a majority of those
individuals who are members of the Board of Directors on the date hereof, or
their duly elected successors who are directors immediately prior to such
transaction, in one or a series of related transactions, (iii) the merger of
the Company with or into another Person, unless following such transaction, the
holders of the Company's securities continue to hold at least a majority of
such securities following such transaction, (iv) the consolidation or sale of
all or substantially all of the assets of the Company in one or a series of
related transactions or (v) 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 clauses (i), (ii), (iii) or (iv); and
(xi) Transfer Agent Instructions. The Irrevocable Transfer Agent
Instructions, in a form acceptable to the Purchasers, shall have been delivered
to and acknowledged in writing by the Company's transfer agent with a copy
forwarded to each Purchaser.
c. Documents and Certificates. At the First Closing, the Company
shall have delivered to the Purchasers, the following in form and substance
reasonably satisfactory to the Purchasers:
(i) Opinion. An opinion of the Company's legal counsel,
substantially in the form attached hereto as Exhibit D dated as of the First
Closing Date;
(ii) Debenture. A Debentures(s), substantially in the form of
Exhibit A hereto, representing the principal amount of Debentures purchased by
each Purchaser as set forth next to such Purchaser's name on Schedule I,
registered in the name of such Purchaser, with a Conversion Price equal to
$3.9125;
(iii) Warrant. A Warrant(s), substantially in the form of
Exhibit B hereto, with the Exercise Price equal to $4.499375, representing the
Warrant(s) being purchased by each Purchaser as set forth next to such
Purchaser's name on the Schedule I, registered in the name of such Purchaser;
(iv) Registration Rights Agreement. The Company shall have
executed and delivered the Registration Rights Agreement, substantially in the
form of Exhibit C here to;
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(v) Officer's Certificate. An Officer's Certificate dated the
First Closing Date and signed by an executive officer of the Company to the
effect that the conditions specified in Section 4.1(b)(i) and 4.1(b)(ii) have
been satisfied as of the First Closing Date;
(vi) Secretary's Certificate. A Secretary's Certificate dated
the First Closing Date and signed by the Secretary or Assistant Secretary of
the Company certifying (A) that attached thereto is a true and complete copy of
the Certificate of Incorporation of the Company, as in effect on the First
Closing Date, (B) that attached thereto is a true and complete copy of the
Bylaws of the Company, as in effect on the First Closing Date and (C) that
attached thereto is a true and complete copy of the resolutions duly adopted by
the Board of Directors of the Company authorizing the execution, delivery and
performance of this Agreement and of the Transaction Documents, and that such
resolutions have not been modified, rescinded or revoked;
(vii) Certificates of Incorporation. The Company shall have
delivered to each of the Purchasers a copy of a certificate evidencing the
incorporation and good standing of the Company and each Subsidiary, in such
corporation's state of incorporation issued by the Secretary of State of such
state of incorporation as of a date within ten (10) days of the First Closing
Date. The Company shall have delivered to each of the Purchasers a copy of its
Certificate of Incorporation as certified by the Secretary of State of the
State of Delaware and the State of Idaho, respectively, within ten (10) days of
the First Closing Date;
(viii) Transfer Agent Letter. The Company shall have delivered
to each Purchaser a letter from the Company's transfer agent certifying the
number of shares of Common Stock outstanding as of a date within five (5) days
of the First Closing Date; and
(ix) Other Documents. The Company shall have delivered to each
Purchaser such other documents relating to the transactions contemplated by
this Agreement and the Transaction Documents as the Purchasers or their counsel
may reasonably request.
4.2 Second Closing.
a. Conditions Precedent to the Obligation of the Company to Sell
the Debentures and Warrants at the Second Closing. The obligation of the
Company to sell the Debentures and Warrants at the Second Closing is subject to
the satisfaction or waiver (with prior written notice to each Purchaser) by the
Company, at or before the Second Closing Date, of each of the following
conditions:
(i) Accuracy of the Purchasers' Representations and Warranties.
The representations and warranties of each Purchaser in this Agreement shall be
true and correct in all material respects as of the date when made and as of
the Second Closing Date;
(ii) Performance by the Purchasers. Each Purchaser shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement and the Transaction
Documents to be performed, satisfied or complied with by such Purchaser at or
before the Second Closing Date; and
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(iii) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated, endorsed or threatened or is pending by or before any court or
governmental authority of competent jurisdiction which prohibits or threatens
to prohibit the consummation of any of the transactions contemplated by this
Agreement and the Transaction Documents.
b. Conditions Precedent to the Obligation of the Purchasers to
Purchase the Debentures and Warrants at the Second Closing. The obligation of
each Purchaser to acquire and pay for the Debentures and Warrants at the Second
Closing is subject to the satisfaction or waiver (with prior written notice to
the Company and each other Purchaser) by such Purchaser, at or before the
Second Closing Date, of each of the following conditions:
(i) First Closing. The First Closing shall have occurred;
(ii) Accuracy of the Company's Representations and Warranties.
The representations and warranties of the Company set forth in this Agreement
and in the Registration Rights Agreement shall be true and correct in all
material respects as of the date when made and as of the Second Closing Date as
though made at that time (except for representations and warranties made as of
a specific date);
(iii) 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 Transaction
Documents to be performed, satisfied or complied with by the Company at or
before the Second Closing Date;
(iv) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated, endorsed or threatened or is pending by or before any court or
governmental authority of competent jurisdiction which prohibits or threatens
to prohibit the consummation of any of the transactions contemplated by this
Agreement and the Transaction Documents;
(v) Registration Statements for Underlying Shares of Debentures
and Warrants issued at First Closing. The registration statement with respect
to the Underlying Shares of the Warrants and the Debentures sold at the First
Closing shall have been declared effective under the Securities Act by the
Commission; and on the Second Closing Date such registration statement shall be
effective, not subject to any stop order and shall not be subject to any
suspension pursuant to Sections 3(k) and/or 3(p) of the Registration Rights
Agreement, and shall have been effective and shall not have been subject to any
stop order for the thirty (30) business days prior to the Second Closing Date
and no stop order shall be pending or threatened as at the Second Closing Date;
(vi) 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 has had a Material Adverse Effect shall have occurred
which is not disclosed on any Schedule hereto or otherwise in writing to each
of the Purchasers;
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(vii) Litigation. No action, proceeding or litigation shall have
been instituted or threatened in writing against the Company which could
reasonably be expected to have a Material Adverse Effect;
(viii) Management. There shall have been no substantial changes
in the position or responsibilities of the Chief Executive Officer or the Chief
Financial Officer of the Company;
(ix) No Suspensions of Trading in Common Stock. The trading in
the Common Stock shall not have been suspended by the Commission on Nasdaq
(except for any suspension of trading of limited duration solely to permit
dissemination of material information regarding the Company);
(x) Listing of Common Stock. The Common Stock shall have been at
all times since the date of this Agreement and on the Second Closing Date
listed for trading or quoted on Nasdaq. The Underlying Shares shall on the
Second Closing Date be listed for trading or quoted on Nasdaq or other exchange
acceptable to the Purchasers;
(xi) Required Approvals. All Required Approvals shall have been
obtained and copies thereof delivered to the Purchasers;
(xii) Shares of Common Stock. The Company shall have duly
reserved the number of Underlying Shares required by this Agreement and the
Transaction Documents to be reserved for issuance upon exercise of the Warrants
purchased on the First Closing Date and on the Second Closing Date or the
conversion of the Debentures purchased on the First Closing Date and on the
Second Closing Date;
(xiii) Performance of Conversion/Exercise Obligations. The
Company shall have delivered Underlying Shares upon any demand for conversion
of any of the Debenture(s) or exercise of the Warrant(s) and otherwise
performed its obligations in accordance with the terms, conditions and timing
requirements of this Agreement and the Transaction Documents;
(xiv) Change of Control. No Change of Control in the Company
shall have occurred;
(xv) Transfer Agent Instructions. The Irrevocable Transfer Agent
Instructions, in a form acceptable to the Purchasers, shall have been delivered
to and acknowledged in writing by the Company's transfer agent with a copy
forwarded to each Purchaser; and
(xvi) Revenue. The Company's revenue from its Internet Access
Products Unit reported in the third quarter of its 1999 fiscal year equals or
exceeds One Million Seven Hundred Fifty Thousand Dollars ($1,750,000).
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c. Documents and Certificates. At the Second Closing, the Company
shall have delivered to the Purchasers, the following in form and substance
reasonably satisfactory to the Purchasers:
(i) Opinion. An opinion of the Company's legal counsel,
substantially in the form attached hereto as Exhibit D dated as of the Second
Closing Date;
(ii) Debenture. A Debenture(s), substantially in the form of
Exhibit A hereto, representing the principal amount of Debentures purchased by
each Purchaser as set forth next to such Purchaser's name on the Second Closing
Schedule, registered in the name of such Purchaser, with a Conversion Price
equal to $3.9125;
(iii) Warrant. A Warrant(s), substantially in the form of
Exhibit B hereto, with the Exercise Price equal to $4.499375, representing the
Warrant(s) being purchased by each Purchaser as set forth next to such
Purchaser's name on the Second Closing Schedule, registered in the name of such
Purchaser;
(iv) Registration Rights Agreement. The Company and each of the
Purchasers shall have executed and delivered a Registration Rights Agreement,
substantially in the form of Exhibit C attached hereto;
(v) Officer's Certificate. An Officer's Certificate dated the
Second Closing Date and signed by an executive officer of the Company to the
effect that the conditions specified in Section 4.2(b)(i) and 4.2(b)(ii) have
been satisfied as of the Second Closing Date;
(vi) Secretary's Certificate. A Secretary's Certificate dated
the Second Closing Date and signed by the Secretary or Assistant Secretary of
the Company certifying (A) that attached thereto is a true and complete copy of
the Certificate of Incorporation of the Company, as in effect on the Second
Closing Date, (B) that attached thereto is a true and complete copy of the
Bylaws of the Company, as in effect on the Second Closing Date and (C) that
attached thereto is a true and complete copy of the resolutions duly adopted by
the Board of Directors of the Company authorizing the execution, delivery and
performance of this Agreement and the Transaction Documents, and that such
resolutions have not been modified, rescinded or revoked;
(vii) Certificates of Incorporation. The Company shall have
delivered to each of the Purchasers a copy of a certificate evidencing the
incorporation and good standing of the Company and each Subsidiary, in such
corporation's state of incorporation issued by the Secretary of State of such
state of incorporation as of a date within ten (10) days of the Second Closing
Date. The Company shall have delivered to each of the Purchasers a copy of its
Certificate of Incorporation as certified by the Secretary of State of the
State of Delaware and the State of Idaho, respectively, within ten (10) days of
the Second Closing Date;
(viii) Transfer Agent Letter. The Company shall have delivered
to each Purchaser a letter from the Company's transfer agent certifying the
number of shares of Common Stock outstanding as of a date within five (5) days
of the Second Closing Date; and
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(ix) Other Documents. The Company shall have delivered to each
Purchaser such other documents relating to the transactions contemplated by
this Agreement and the Transaction Documents as the Purchasers or their counsel
may reasonably request.
4.3 Third Closing.
a. Conditions Precedent to the Obligation of the Company to Sell
the Debentures and Warrants at the Third Closing. The obligation of the Company
to sell the Debentures and Warrants at the Third Closing is subject to the
satisfaction or waiver (with prior written notice to each Purchaser) by the
Company, at or before the Third Closing Date, of each of the following
conditions:
(i) Accuracy of the Purchasers' Representations and Warranties.
The representations and warranties of each Purchaser in this Agreement shall be
true and correct in all material respects as of the date when made and as of
the Third Closing Date;
(ii) Performance by the Purchasers. Each Purchaser shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement and the Transaction
Documents to be performed, satisfied or complied with by such Purchaser at or
before the Third Closing Date; and
(iii) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated, endorsed or threatened or is pending by or before any court or
governmental authority of competent jurisdiction which prohibits or threatens
to prohibit the consummation of any of the transactions contemplated by this
Agreement and the Transaction Documents.
b. Conditions Precedent to the Obligation of the Purchasers to
Purchase the Debentures and Warrants at the Third Closing. The obligation of
each Purchaser to acquire and pay for the Debentures and Warrants at the Third
Closing is subject to the satisfaction or waiver (with prior written notice to
the Company and each other Purchaser) by such Purchaser, at or before the Third
Closing Date, of each of the following conditions:
(i) First Closing and Second Closing. The First Closing and
Second Closings shall have occurred;
(ii) Accuracy of the Company's Representations and Warranties.
The representations and warranties of the Company set forth in this Agreement
and the Registration Rights Agreement shall be true and correct in all material
respects as of the date when made and as of the Third Closing Date as though
made at that time (except for representations and warranties made as of a
specific date);
(iii) 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 Transaction
Documents to be performed, satisfied or complied with by the Company at or
before the Third Closing Date;
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(iv) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated, endorsed or threatened or is pending by or before any court or
governmental authority of competent jurisdiction which prohibits or threatens
to prohibit the consummation of any of the transactions contemplated by this
Agreement and the Transaction Documents;
(v) Registration Statements for Underlying Shares of Debentures
and Warrants issued at First Closing and Second Closing. The registration
statement with respect to the Underlying Shares of the Warrants and the
Debentures sold at the First Closing and the Second Closing shall have been
declared effective under the Securities Act by the Commission; and on the Third
Closing Date such registration statement shall be effective, not subject to any
stop order and shall not be subject to any suspension pursuant to Sections 3(k)
and/or 3(p) of the Registration Rights Agreement, and shall have been effective
and shall not have been subject to any stop order for the thirty (30) business
days prior to the Third Closing Date and no stop order shall be pending or
threatened as at the Third Closing Date;
(vi) 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 has had a Material Adverse Effect shall have occurred
which is not disclosed on any Schedule hereto or otherwise in writing to each
of the Purchasers;
(vii) Litigation. No action, proceeding or litigation shall have
been instituted or threatened in writing against the Company which could
reasonably be expected to have a Material Adverse Effect;
(viii) Management. There shall have been no substantial changes
in the position or responsibilities of the Chief Executive Officer or the Chief
Financial Officer of the Company;
(ix) No Suspensions of Trading in Common Stock. The trading in
the Common Stock shall not have been suspended by the Commission on Nasdaq
(except for any suspension of trading of limited duration solely to permit
dissemination of material information regarding the Company);
(x) Listing of Common Stock. The Common Stock shall have been at
all times since the date of this Agreement and on the Third Closing Date listed
for trading or quoted on Nasdaq. The Underlying Shares shall on the Third
Closing Date be listed for trading on or quoted on Nasdaq or other exchange
acceptable to the Purchasers;
(xi) Required Approvals. All Required Approvals shall have been
obtained and copies thereof delivered to the Purchasers;
(xii) Shares of Common Stock. The Company shall have duly
reserved the number of Underlying Shares required by this Agreement and the
Transaction Documents to be reserved for issuance upon exercise of the Warrants
purchased on the First Closing Date, the
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Second Closing Date and the Third Closing Date, and the conversion of
Debentures purchased on the First Closing Date, the Second Closing Date and the
Third Closing Date;
(xiii) Performance of Conversion/Exercise Obligations. The
Company shall have delivered Underlying Shares upon any demand for conversion
of any of the Debenture(s) or exercise of the Warrant(s) and otherwise
performed its obligations in accordance with the terms, conditions and timing
requirements of this Agreement and the Transaction Documents;
(xiv) Change of Control. No Change of Control in the Company
shall have occurred; and
(xv) Transfer Agent Instructions. The Irrevocable Transfer Agent
Instructions, in a form acceptable to the Purchasers, shall have been delivered
to and acknowledged in writing by the Company's transfer agent with a copy
forwarded to each Purchaser.
c. Documents and Certificates. At the Third Closing, the Company
shall have delivered to the Purchasers, the following in form and substance
reasonably satisfactory to the Purchasers:
(i) Opinion. An opinion of the Company's legal counsel,
substantially in the form attached hereto as Exhibit D dated as of the Third
Closing Date;
(ii) Debenture. A Debenture(s), substantially in the form of
Exhibit A hereto, representing the principal amount of Debentures purchased by
each Purchaser as set forth next to such Purchaser's name on the Third Closing
Schedule, registered in the name of such Purchaser, with a Conversion Price
equal to the lesser of (A) $5.50 per share of Common Stock and (B) the five (5)
day average closing bid price of the Common Stock (as reported by Bloomberg
Information Services, Inc., or any successor reporting service) for the five
(5) Trading Days immediately preceding the Second Closing Date (provided, that
in no event shall such Conversion Price be lower than the Conversion Price at
the First Closing);
(iii) Warrant. A Warrant(s), substantially in the form of
Exhibit B hereto, with an Exercise Price equal to 115% of the Conversion Price
at the Third Closing, representing the Warrant(s) being purchased by each
Purchaser as set forth next to such Purchaser's name on the Third Closing
Schedule, registered in the name of such Purchaser;
(iv) Registration Rights Agreement. The Company and each of the
Purchasers shall have executed and delivered a Registration Rights Agreement,
substantially in the form of Exhibit C attached hereto;
(v) Officer's Certificate. An Officer's Certificate dated the
Third Closing Date and signed by an executive officer of the Company to the
effect that the conditions specified in Section 4.3(b)(i) and 4.3(b)(ii) have
been satisfied as of the Third Closing Date;
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(vi) Secretary's Certificate. A Secretary's Certificate dated
the Third Closing Date and signed by the Secretary or Assistant Secretary of
the Company certifying (A) that attached thereto is a true and complete copy of
the Certificate of Incorporation of the Company, as in effect on the Third
Closing Date, (B) that attached thereto is a true and complete copy of the
Bylaws of the Company, as in effect on the Third Closing Date and (C) that
attached thereto is a true and complete copy of the resolutions duly adopted by
the Board of Directors of the Company authorizing the execution, delivery and
performance of this Agreement and the Transaction Documents, and that such
resolutions have not been modified, rescinded or revoked;
(vii) Certificates of Incorporation. The Company shall have
delivered to each of the Purchasers a copy of a certificate evidencing the
incorporation and good standing of the Company and each Subsidiary, in such
corporation's state of incorporation issued by the Secretary of State of such
state of incorporation as of a date within ten (10) days of the Third Closing
Date. The Company shall have delivered to each of the Purchasers a copy of its
Certificate of Incorporation as certified by the Secretary of State of the
State of Delaware and the State of Idaho, respectively, within ten (10) days of
the Third Closing Date;
(viii) Transfer Agent Letter. The Company shall have delivered
to each Purchaser a letter from the Company's transfer agent certifying the
number of shares of Common Stock outstanding as of a date within five (5) days
of the Third Closing Date; and
(ix) Other Documents. The Company shall have delivered to each
Purchaser such other documents relating to the transactions contemplated by
this Agreement and the Transaction Documents as the Purchasers or their counsel
may reasonably request.
ARTICLE V.
INDEMNIFICATION
5.1 Indemnification. Except to the extent that matters which could be
covered by this Article V are covered by Section 5 of the Registration Rights
Agreement, in consideration of the Purchasers' execution and delivery of this
Agreement and the Transaction Documents and acquiring the Debentures, the
Debenture Shares, the Warrants and the Warrant Shares thereunder and in
addition to all of the Company's other obligations under this Agreement and the
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless each Purchaser, its past and present Affiliates and their successors
and assigns (in accordance with the provisions of Section 6.6), each other
holder of the Underlying Shares and all of their stockholders, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons' agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against any and all actions, causes
of action, suits, claims, losses, proceedings, costs (as incurred), penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including interest, penalties and
attorneys' fees, expenses and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a
35
<PAGE> 39
result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company in this Agreement
or in any of the Transaction Documents, or in any other certificate, instrument
or document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in this Agreement or in any of
the Transaction Documents, or in any other certificate, instrument or document
contemplated hereby or thereby or (c) any cause of action, suit or claim
brought or made, other than by the Company, against such Indemnitee and arising
out of or resulting from (i) the execution, delivery, performance or
enforcement of this Agreement or any of the Transaction Documents, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Debentures or the Warrants
or (iii) solely the status of such Purchasers or holder of the Debentures, the
Debenture Shares, the Warrants or the Warrant Shares as an investor in the
Company. The indemnification obligations of the Company under this paragraph
shall be in addition to any liability which the Company may otherwise have,
shall extend upon the same terms and conditions to any Affiliate of the
Purchasers and partners, directors, agents, employees and controlling Persons
(if any), as the case may be, of the Purchasers and of any such Affiliate, and
shall be binding upon and inure to the benefit of any successors, assigns,
heirs and personal representatives of the Company, the Purchasers and any such
Affiliate and any such Person. To the extent that the foregoing undertakings by
the Company may be unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
ARTICLE VI.
MISCELLANEOUS
6.1 Entire Agreement. This Agreement, together with the Exhibits and
Schedules hereto and the Transaction Documents, contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral or written, with
respect to such matters.
6.2 Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement shall be in
writing and shall be deemed to have been delivered (a) upon receipt, when
delivered personally, (b) upon receipt, when sent by facsimile, provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party (if received before 7:00 p.m. EST where such
notice is received) or the first business day following such delivery (if
received on or after 7:00 p.m. EST where such notice is received) or (c) one
(1) business day after deposit with a nationally recognized overnight courier,
in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
(i) If to the Company:
eSOFT, Inc.
295 Interlocken Blvd., #500
36
<PAGE> 40
Broomfield, Colorado 80021
Attention: Mr. Jeffrey F. Finn
President and Chief Executive Officer
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
with a copy to:
Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Boulder, Colorado 80302
Attention: James H. Carroll, Esq.
Telephone: (303) 546-4024
Facsimile: (303) 546-4099
(ii) If to the Transfer Agent:
The Trust Company of Bank of Montreal
129 St. Jacques Street
B Level North
Montreal, Quebec
Canada H2Y1L6
Attention: Ms. Susan LaLande
Telephone: (514) 877-8198
Facsimile: (514) 877-9696
(iii) If to the Purchasers:
Brown Simpson Strategic Growth Fund, Ltd.
152 West 57th Street, 40th Floor
New York, New York 10029
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
and
Brown Simpson Strategic Growth Fund, L.P.
152 West 57th Street, 40th Floor
New York, New York 10029
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
37
<PAGE> 41
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, New York 10022
Attention: James E. Kaye, Esq.
Telephone: (212) 872-1000
Facsimile: (212) 872-1002
Each party shall provide written notice to the other parties of any change in
address or facsimile number in accordance with the provisions hereof.
6.3 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 each of 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 any party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter. Notwithstanding the
foregoing, no such amendment shall be effective to the extent that it applies
to less than all of the holders of the Debentures outstanding. The Company
shall not offer or pay any consideration to a Purchaser for consenting to such
an amendment or waiver unless the same consideration is offered to each
Purchaser and the same consideration is paid to each Purchaser which consents
to such amendment or waiver.
6.4 Titles and Headings. The titles and 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.
6.5 References. References herein to Articles or Sections are to
Articles or Sections of this Agreement, unless otherwise expressly provided.
6.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of each of the Purchasers. The
Purchasers may assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Company; provided that any assignees
must make the representations and warranties set forth in Section 2.2 and
otherwise comply with the terms of this Agreement otherwise applicable to its
assignor; and provided, further, that no such assignment shall relieve any
Purchaser of its obligations hereunder. This provision shall not limit a
Purchaser's right to transfer securities in accordance with all of the terms of
this Agreement or the Transaction Documents.
38
<PAGE> 42
6.7 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.
6.8 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. Each party hereby
irrevocably submits to the nonexclusive jurisdiction of the state and federal
courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or
that such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY
TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN.
6.9 Survival. The representations and warranties of the Company and
the Purchasers contained in Sections 2.1 and 2.2, the agreements and covenants
set forth in Article III, and the indemnification provisions set forth in
Article V, shall survive the Closing and any conversion of the Debentures or
exercise of the Warrants regardless of any investigation made by or on behalf
of the Purchasers or by or on behalf of the Company, except that, in the case
of representations and warranties such survival shall be limited to the period
of four (4) years following the Closing Date on which they were made or deemed
to have been made (other than with respect to any claim by a third party
against the party to this Agreement who seeks to assert a claim based on such
representations and warranties). This Section shall have no effect on the
survival of the indemnification provisions of the Registration Rights
Agreement.
6.10 Counterparts. 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 parties, it being understood that the
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 an original thereof.
6.11 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 no party shall issue any
such press release or otherwise make any such public statement without the
prior written consent of the other parties which consent shall not be
39
<PAGE> 43
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 parties with prior notice of such
public statement. The Company shall not publicly or otherwise disclose the
names of any of the Purchasers without each such Purchaser's prior written
consent; provided, however, that each Purchaser hereby consents to being named
in the Company's registration statement relating to the transactions
contemplated hereby. The Purchasers and their affiliated companies shall,
without further cost, have the right to use in their advertising, marketing or
other similar materials all or parts of the Company's press releases that focus
on the transactions contemplated hereby forming the subject matter of this
Agreement or which make reference to the transactions contemplated hereby. The
Purchasers understand that this grant by the Company only waives objections
that the Company might have to the use of such materials by the Purchasers and
in no way constitutes a representation by the Company that references in such
materials to the activities of third-parties have been cleared or constitute a
fair use.
6.12 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 provisions of this Agreement shall
not in any way be affected or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
6.13 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the
Purchasers will be entitled to specific performance of the obligations of the
Company under this Agreement and the Transaction Documents without the showing
of economic loss and without any bond or other security being required. The
Company and each of the Purchasers (severally and not jointly) agree that
monetary damages would not be adequate compensation for any loss incurred by
reason of any breach of the obligations described in the foregoing sentence and
hereby agree to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.
6.14 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser hereunder are several and not joint with the
obligations of the other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any Closing, and no action taken by any Purchaser
pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of Person, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.
40
<PAGE> 44
6.15 Payment Set Aside. To the extent that the Company makes a payment
or payments to the Purchasers hereunder or pursuant to the Transaction
Documents or the Purchasers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared fraudulent
or preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other Person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action), then to
the extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and
effect as if such payment had not been made or such enforcement or setoff had
not occurred.
6.16 Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other parties may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
6.17 Fees and Expenses. Except as set forth in the Registration Rights
Agreement, 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; provided, however, that the Company shall pay
the Purchasers an aggregate fee of $25,000 at the First Closing. The Company
shall pay all stamp and other taxes and duties levied in connection with the
issuance of the Debentures, the Warrants and the Underlying Shares pursuant
hereto.
[SIGNATURE PAGES FOLLOW]
41
<PAGE> 45
IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized persons
as of the date first indicated above.
eSOFT, INC.
By: /s/ Jeffrey Finn
------------------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive Officer
<PAGE> 46
BROWN SIMPSON STRATEGIC GROWTH FUND, LTD.
By: /s/ Evan Levine
------------------------------------------
Name: Evan Levine
Title: Principal
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.
By: /s/ Evan Levine
------------------------------------------
Name: Evan Levine
Title: Principal
<PAGE> 47
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Debentures at Number of shares
Name of Purchaser First Closing Purchase Price underlying Warrant
- ----------------- ------------- -------------- ------------------
<S> <C> <C> <C>
Brown Simpson $ 1,100,000 $ 1,100,000 281,150
Strategic Growth
Fund, L.P.
Brown Simpson $ 1,900,000 $ 1,900,000 485,623
Strategic Growth
Fund, Ltd.
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
Name of Purchaser Address
- ----------------- -------
<S> <C>
Brown Simpson Strategic Growth Fund, Ltd. 152 West 57th Street, 40th Floor
New York, New York 10019
Attention: Paul Gustus
Facsimile: (212) 247-1329
Residence: Grand Cayman, Cayman Islands
Brown Simpson Strategic Growth Fund, L.P. 152 West 57th Street, 40th Floor
New York, New York 10019
Attention: Paul Gustus
Facsimile: (212) 247-1329
Residence: New York, New York
</TABLE>
<PAGE> 49
Exhibit A
[Form of Convertible Debenture]
<PAGE> 50
Exhibit B
[Form of Warrant]
<PAGE> 51
Exhibit C
[Registration Rights Agreement]
<PAGE> 52
Exhibit D
[Company's Legal Opinion]
1. Each of the Company(1) and its Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of
the jurisdiction of its incorporation, 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 the Subsidiaries. Each of the Company and its
Subsidiaries is duly qualified as a foreign corporation 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.
2. The Company has the requisite corporate power and authority to enter
into and to consummate the transactions contemplated by each of the
Transaction Documents(2) and otherwise to carry out its obligations
thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all
necessary corporate action on the part of the Company and no further
action is required by the Company, its Board of Directors or its
stockholders in connection therewith. Each of the Transaction
Documents has been duly executed and delivered by the Company and
constitutes 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.
3. The execution, delivery and performance of each of the Transaction
Documents by the Company and the consummation by the Company of the
transactions contemplated by the Transaction Documents (including the
issuance of the Underlying Shares) do not and will not (a) conflict
with or violate any provision of the Certificate of Incorporation,
Bylaws, or other organizational documents of the Company or any of its
Subsidiaries, (b) 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 other Persons any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture, patent,
license or instrument to which the Company or any of its Subsidiaries
is a party and which is required to be included as an exhibit to the
SEC Documents (as defined below) or (c) 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 any of its Subsidiaries is subject (including federal and
state securities laws and regulations), or by which any material
property or asset of the Company or any of its
- ------------
(1) The opinion letter should state that capitalized terms not otherwise defined
have the meanings assigned to them in the Securities Purchase Agreement.
(2) The term Transaction Documents means the Securities Purchase Agreement, the
Registration Rights Agreement, the Debentures and the Warrants.
1
<PAGE> 53
Subsidiaries is bound or affected. The business of the Company is not
being conducted in violation of any law, ordinance or regulation of
any governmental authority.
4. Neither the Company nor any of its Subsidiaries is required to obtain
any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal,
state, local or other governmental authority, regulatory or self
regulatory agency, or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents.
Based on the representations and warranties of the Company set forth
in Section 2.1 of the Securities Purchase Agreement and assuming the
accuracy of the representations and warranties of the Purchasers set
forth in Section 2.2 of the Securities Purchase Agreement, the offer,
issuance and sale of the Debentures, the Warrants and the Underlying
Shares by the Company to the Purchasers pursuant to the Securities
Purchase Agreement, are exempt from the registration requirements of
the Securities Act.
5. To our knowledge, the Company has filed all reports, schedules, forms,
statements and other documents required to be filed by it with the
Commission pursuant to the reporting requirements of the Exchange Act,
including pursuant to Sections 13, 14 or 15(d) thereof, for the three
(3) years preceding the date hereof (the "SEC Documents") on a timely
basis. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations of the Commission
promulgated thereunder.
6. There is no action, suit, notice of violation, proceeding or
investigation pending or, to our knowledge, threatened against the
Company or any of its Subsidiaries or affecting the Company or any of
their respective assets or properties before any court, governmental
or administrative agency or regulatory authority or any arbitrator,
which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents, (ii) could
reasonably be expected to, individually or in the aggregate, have a
Material Adverse Effect or (iii) if adversely decided, could
reasonably be expected to have a material adverse effect on the
issuance or conversion of the Debentures or the Debenture Shares, or
the issuance or exercise of the Warrants or the Warrant Shares, or the
consummation of the transactions contemplated by the Transaction
Documents.
7. All of the Company's issued and outstanding capital stock has been
duly authorized, validly issued and is fully paid and nonassessable as
of the date hereof.
8. The Company has full corporate power and authority to issue, sell and
deliver the Debentures, the Debenture Shares, the Warrants and the
Warrant Shares pursuant to the Transaction Documents.
9. The Company has duly authorized and reserved for issuance such number
of shares of Common Stock as are issuable upon conversion of the
Debentures and exercise of the
2
<PAGE> 54
Warrants (the "Underlying Shares") in accordance with the terms of the
Debentures and the Warrants. When issued by the Company in accordance
with the terms of the Debentures and the Warrants, the Underlying
Shares will be validly issued, fully paid and nonassessable. When
issued by the Company in accordance with the terms of the Securities
Purchase Agreement, the Debentures and the Warrants will be validly
issued, fully paid and nonassessable.
3
<PAGE> 1
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of June 10, 1999, among eSOFT, Inc., a Delaware corporation
(the "Company"), and the parties who have executed this Agreement and whose
names appear on Schedule I hereto (each party listed on Schedule I hereto is
sometimes individually referred to herein as a "Purchaser" and all such parties
are sometimes collectively referred to herein as the "Purchasers").
This Agreement is made pursuant to the Securities Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers (the
"Purchase Agreement").
The Company 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" has the meaning set forth in Section 3(p).
"Affiliate" has the meaning set forth in Rule 12b-2 of the
Exchange Act.
"Aggregate Price" has the meaning set forth in Section 2(d).
"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 Date" shall mean the First Closing Date as such term
is defined in the Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$0.01 per share.
"Debentures" means the Company's 5% convertible debentures
issuable at the First Closing pursuant to the Purchase Agreement.
"Effectiveness Date" means the earlier of (i) the 120th day
following the Closing Date, or (ii) the tenth (10th) day after the Company has
received notice (written or oral) from the Commission that the Commission Staff
will not be reviewing the Registration Statement or has no further comments on
the Registration Statement.
"Effectiveness Period" has the meaning set forth in Section
2(a).
<PAGE> 2
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Event" has the meaning set forth in Section 2(d).
"Filing Date" means as soon as practicable but in no event
later than the twenty-fifth (25th) day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" has the meaning set forth in Section 5(c).
"Indemnifying Party" has the meaning set forth in Section
5(c).
"Initial Registration Statement" has the meaning set forth in
Section 2(a).
"Losses" has the meaning set forth in Section 5(a).
"Material Condition" has the meaning set forth in Section
3(k).
"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.
"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 in such Prospectus.
"Registrable Securities" means the shares of Common Stock
issued or issuable upon (i) conversion of or with respect to the Debentures,
(ii) payment of dividends or any other payments in respect of the Debentures,
(iii) exercise of the Warrants and (iv) any shares of the Company's capital
stock issued with respect to (i), (ii) or (iii) as a result of any stock split,
stock dividend, recapitalization, exchange or similar event or otherwise.
"Registration Delay Payment" has the meaning set forth in
Section 2(d).
2
<PAGE> 3
"Registration Statement" means the Initial Registration
Statement and any additional registration statements contemplated by Sections
2(a), 2(b) and 7(d), including (in each case) 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 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.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means one special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.
"Trading Day" means a day on which Nasdaq (or such other
securities market on which the Common Stock is listed) is open for trading.
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of the Debentures and exercise of the Warrants.
"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 warrants issuable pursuant to the
Purchase Agreement.
2. Registration Requirements.
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a Registration Statement (the "Initial Registration
Statement") which shall cover all Registrable Securities for an offering to be
made on a continuous basis pursuant to a "Shelf" registration statement under
Rule 415. The Initial Registration Statement shall be on Form S-3 or any
successor form (except if the Company is not then eligible to register for
resale the Registrable Securities on Form S-3, in which case such registration
shall be on another
3
<PAGE> 4
appropriate form in accordance herewith, subject to the reasonable consent of
the original Holders of the Registrable Securities). The Company shall (i) not
permit any securities other than the Registrable Securities to be included in
the Initial Registration Statement and (ii) use its best efforts to cause the
Initial Registration Statement to be declared effective under the Securities Act
as promptly as possible after the filing thereof, but in any event on or prior
to the Effectiveness Date, and to keep such Initial Registration Statement
continuously effective under the Securities Act until the date which is four (4)
years after the date that such Initial Registration Statement is declared
effective by the Commission or such earlier date when all Registrable Securities
covered by such Initial Registration Statement have been sold or may be sold
without volume restrictions pursuant to Rule 144 as determined by counsel to the
Company pursuant to a written opinion letter, addressed to the Holders and the
Company's transfer agent to such effect (the "Effectiveness Period"). The number
of shares of Common Stock initially included in the Initial Registration
Statement shall be no less than 120% of the aggregate number of shares of Common
Stock that are then issuable upon conversion of the Debentures (based on the
Conversion Price (as defined in the Debentures) as would then be in effect at
such time) and the exercise of the Warrants, without regard to any limitation on
the Purchasers' ability to convert the Debentures or exercise the Warrants. If,
at any time within the 45-day period preceding a reset or adjustment
(hereinafter in this Section 2(a), a "reset") of the Conversion Price pursuant
to the terms of the Debentures, the closing bid price per share of the Common
Stock on Nasdaq (or any Subsequent Market (as defined in the Debentures) on
which the Common Stock is then listed or quoted, or if there is no such price on
such date, then the closing bid price on such exchange or quotation system on
the date nearest preceding such date) is less than $3.00 for any consecutive
five (5) Trading Day period, the Company shall be required to file within ten
(10) Business Days after such fifth (5th) Trading Day a Registration Statement
covering the greater of (A) the product of (i) 1.2 and (ii) the aggregate number
of Underlying Shares that would be issuable based on a Conversion Price equal to
the average closing bid price during such five (5) Trading Day period, less the
number of Underlying Shares for which a Registration Statement is then effective
and (B) the aggregate number of Underlying Shares, calculated as if the
Conversion Price was reset on such fifth (5th) day pursuant to the terms of the
Debentures, less the number of Underlying Shares for which a Registration
Statement is then effective; provided, however, that if on the actual reset date
(pursuant to the Debentures) the Registration Statements are insufficient to
register all Underlying Shares (after giving effect to such reset), the Company
shall immediately, but in no more than ten (10) Business Days thereafter, file a
Registration Statement sufficient to register such additional shares of Common
Stock.
(b) In addition to the Initial Registration Statement, if the
Holders of a majority of the Registrable Securities covered by a Registration
Statement so elect on or after November 1, 1999 an offering of Registrable
Securities pursuant to such Registration Statement may be effected on no more
than two (2) occasions 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 Underwritten Offering exceeds the amount of Registrable Securities which
can be sold in such Underwritten 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
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<PAGE> 5
such Underwritten Offering. In case the Company shall receive from any Holder or
the Holders of Registrable Securities a written request or requests pursuant to
this Section 2(b) that the Company effect a registration on Form S-3 (or any
successor to Form S-3) or any similar short-form registration statement and any
related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:
(i) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders of Registrable
Securities; and
(ii) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 2(b):
(A) if Form S-3 (or any successor or similar form) is
not available for such offering by the Holders;
(B) if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public of less than
one million dollars ($1,000,000);
(C) if within thirty (30) days of receipt of a
written request from any Holder or Holders pursuant to this Section
2(b), the Company gives notice to such Holder or Holders of the
Company's intention to make a public offering within ninety (90) days;
(D) if the Company shall furnish to the Holders a
certificate signed by the Chairman of the Board of Directors of the
Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the
Company and its shareholders for such Form S-3 registration to be
effected at such time, in which event the Company shall have the right
to defer the filing of the Form S-3 Registration Statement for a period
of not more than ninety (90) days after receipt of the request of the
Holder or the Holders under this Section 2(b); provided, that such
right to delay a request shall be exercised by the Company not more
than once in any twelve (12) month period; or
(E) if the Company has, within the nine (9) month
period preceding the date of such request, already effected one (1)
registration on Form S-3 for the Holders pursuant to this Section 2(b).
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by
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<PAGE> 6
the Holders of a majority of the Registrable Securities included in such
offering, and such investment banker shall be reasonably acceptable to the
Company. No Holder may participate in any Underwritten Offering hereunder unless
such Holder (i) agrees to sell its Registrable Securities on the basis provided
in any 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.
(d) If (i) the Initial Registration Statement covering all the
applicable Registrable Securities and required to be filed by the Company
pursuant to this Agreement is not (A) filed with the Commission on or before the
Filing Date or (B) declared effective by the Commission on or before the
applicable Effectiveness Date, (ii) on any day after the Registration Statement
has been declared effective by the Commission (A) sales of all the Registrable
Securities required to be included on a Registration Statement cannot be made
pursuant to the Registration Statement (including, without limitation, because
of a failure to keep the Registration Statement effective, but not including any
days on which sales may not be made due to the application of Section 3(k)
hereof, to disclose such information as is necessary for sales to be made
pursuant to the Registration Statement, or to register sufficient shares of
Common Stock) or (B) the Common Stock is not listed or included for quotation on
the Nasdaq SmallCap Market or the Nasdaq National Market of the Nasdaq Stock
Market ("Nasdaq"), the New York Stock Exchange ("NYSE") or the American Stock
Exchange (the "AMEX") after being so listed or included for quotation or (iii)
the Company shall otherwise fail to file a Registration Statement required by
Section 2(a), (each such event specified in (i), (ii) and (iii) above, an
"Event"), then, as liquidated damages and not as a penalty, the Company shall
pay to each Holder an amount in cash (a "Registration Delay Payment") equal to
the purchase price of the Debentures as set forth in Schedule I of the Purchase
Agreement (the "Aggregate Price") multiplied by two hundredths (.020) times the
sum of: (i) the number of months (prorated for partial months) after the end of
the Effectiveness Date and prior to the date the Registration Statement is
declared effective by the Commission; (ii) the number of months (prorated for
partial months) that sales cannot be made pursuant to the Registration Statement
after the Registration Statement has been declared effective (including, without
limitation, when sales cannot be made by reason of the Company's failure to
properly supplement or amend the Prospectus in accordance with the terms of this
Agreement, or otherwise, but not including any days on which sales may not be
made due to the application of Section 3(k) hereof and also not including any
days when the direct, proximate cause of said Event was the act or failure to
act of one or more Holders); and (iii) the number of months (prorated for
partial months) that the Common Stock is not listed or included for quotation on
Nasdaq, NYSE or AMEX or that trading thereon is halted after the Registration
Statement has been declared effective. Notwithstanding the foregoing, the
parties hereto agree that an Event shall be deemed not to have occurred to the
extent the direct, proximate cause of said Event was the act or failure to act
of one or more of the Holders. The Company shall pay any Registration Delay
Payments to each Holder in cash on the last Business Day of each month during
which an Event has occurred and is continuing. In the event the Company fails to
make a Registration Delay Payment in a timely manner, such Registration Delay
Payment shall bear interest at the rate of 2.0% per month (prorated for partial
months) until paid in full. The parties hereto agree that the Registration Delay
Payments provided for in this Section 2(d) constitute a
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<PAGE> 7
reasonable estimate of the damages that may be incurred by upon the occurrence
of an Event. The provisions of this Section 2(d) shall in no way be deemed to
limit the rights of the Holders to pursue all legal and equitable remedies and
to recover full damages in the event of a breach by the Company of its
obligations under this Agreement. In the event of such breach, the Holders shall
be permitted to pursue all remedies as provided for in Section 7(a) below. If,
however, an Event occurs and the direct, proximate cause of said Event was not
the act or failure to act by the Company or its agents, the Holders' remedies
shall be limited to enforcement of the payment of the applicable Registration
Delay Payments.
(e) The Company represents and warrants that it meets the
registrant eligibility and transaction requirements for the use of Form S-3 for
the registration of the resale of Registrable Securities by the Purchasers and
any other Holders and the Company shall file all reports required to be filed by
the Company with the Commission in a timely manner so as to maintain such
eligibility for the use of Form S-3.
3. Registration Procedures.
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date a Registration Statement on Form S-3 or its successor form (or if
the Company is not then eligible to register for resale the Registrable
Securities on Form S-3 such registration shall be on another appropriate form in
accordance herewith (which shall include a Plan of Distribution substantially in
the form of Exhibit A annexed hereto, unless in connection with an Underwritten
Offering) or in connection with an Underwritten Offering hereunder, such other
form agreed to by the Company and by a majority-in-interest of Holders of
Registrable Securities to be covered by such Registration Statement) (except if
otherwise directed by the Holders), and cause the Registration Statement to
become effective and (subject to Section 3(k) hereof) to remain effective as
provided herein; provided, however, that not less than three (3) Business 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 therein by reference), the Company shall, if reasonably practicable
(i) furnish to the Holders, their Special Counsel and any managing underwriters,
copies of all such documents proposed to be filed (including documents
incorporated by reference), which documents 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
reasonable opinion of respective counsel to such Holders and such underwriters,
to conduct a reasonable investigation within the meaning of the Securities Act.
The Company shall not file the Registration Statement or any such Prospectus or
any amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities, their Special Counsel or any managing underwriters shall
reasonably object, and will not request acceleration of such Registration
Statement without prior notice to such counsel. The sections of such
Registration Statement covering information with respect to the Holders, the
Holders' beneficial ownership of securities of the Company or the Holders'
intended method of
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<PAGE> 8
disposition of Registrable Securities shall conform to the information provided
to the Company by each of the Holders.
(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 (subject to Section 3(k) hereof)
continuously effective for the Effectiveness Period and prepare and file with
the Commission such additional Registration Statements in order to register for
resale under the Securities Act all of the Registrable Securities; (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 reasonably possible to any comments received from
the Commission with respect to the Registration Statement or any amendment
thereto and as promptly as reasonably possible provide the Holders true and
complete copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply in all material respects 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. In the event the number of
shares available under a Registration Statement filed pursuant to this Agreement
is insufficient to cover 100% of the Registrable Securities issued or issuable
upon conversion of the Debentures and exercise of the Warrants, the Company
shall amend the Registration Statement, or file a new Registration Statement (on
the short form available therefore, if applicable), or both, so as to cover 110%
of the Registrable Securities, in each case, as soon as reasonably practicable,
but in any event within twenty (20) Business Days after the necessity therefor
arises (based on the Conversion Price of the Debentures and other relevant
factors on which the Company reasonably elects to rely). The Company shall use
its commercially reasonable best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as reasonably practicable
following the filing thereof. The provisions of Section 2(d) above shall be
applicable with respect to such obligation, with the one hundred twenty (120)
days running from the day after the date on which the Company reasonably first
determines (or reasonably should have determined) the need therefor.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than ten (10) days prior to
such filing and, in the case of (i)(C) below, not later than the first Business
Day after effectiveness) and (if requested by any such Person) confirm such
notice in writing no later than two (2) Business Days 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; (B) when the Commission
notifies the Company whether there will be a "review" of such Registration
Statement and whenever the Commission comments in writing on such Registration
Statement and (C) 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
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<PAGE> 9
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 qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; (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; and (vii) of the occurrence of a Material Condition (as
defined in Section 3(k) below).
(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 in interest 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 the Company reasonably agrees 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 3(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 conformed 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
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<PAGE> 10
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, their Special Counsel, and any underwriters in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the state
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things reasonably 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 pursuant to a Registration Statement, which
certificates shall be free, to the extent permitted by applicable law and the
Purchase Agreement, 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 (2) Business Days
prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as possible, 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) Subject to the last sentence of this Section 3(k), the
Company may by written notice require that the Holders immediately cease sales
of Registrable Securities (for a period not to exceed twenty-two (22)
consecutive Trading Days in any one instance and for a period not to exceed
forty-four (44) Trading Days in any twelve-month period) pursuant to a
Registration Statement at any time that (i) the Company becomes engaged in a
business activity or negotiation which is not disclosed in a Registration
Statement (or the prospectus included therein) which the Company reasonably
believes must be disclosed therein under applicable law and which the Company
desires to keep confidential for business purposes, (ii) the Company determines
that a particular disclosure so determined to be required to be disclosed
therein would be premature or would adversely affect the Company or its business
or prospects or (iii) the Registration Statement can no longer be used under the
existing rules and regulations
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<PAGE> 11
promulgated under the Securities Act (each of (i), (ii) or (iii), a "Material
Condition"). The Company shall not be required to disclose to the Holders which
of the reasons specified in (i), (ii) or (iii) above is the basis for requiring
a suspension of sales due to the occurrence of a Material Condition. The Company
will use its commercially reasonable best efforts to ensure that the use of the
Registration Statement (and the prospectus included therein) may be resumed as
soon as it is practicable. The Company may not suspend sales of Registrable
Securities under a Registration Statement pursuant to this Section 3(k) more
than twice during any twelve-month period.
(l) Cause all Registrable Securities relating to such
Registration Statement to be listed or included for quotation on Nasdaq and any
other securities exchange, quotation system, market or over-the-counter bulletin
board, if any, on which similar securities issued by the Company are then listed
as and when required pursuant to the Purchase Agreement.
(m) 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) in the case of an Underwritten Offering obtain and
deliver copies thereof to the managing underwriters, if any, or in the case of
non-Underwritten Offerings, if reasonably requested by the selling Holders,
obtain and deliver copies thereof to such selling Holders, of opinions of
counsel to the Company and updates thereof addressed to 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, and, in the case of
non-Underwritten Offerings, at such time as the selling Holders may reasonably
request, obtain and deliver copies to the 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 required, 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 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 5 (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
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<PAGE> 12
and warranties made pursuant to clause 3(1)(i) above and to evidence compliance
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(n) 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 reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that if any information is determined
in good faith by the Company in writing to be of a confidential nature at the
time of delivery of such information, then prior to delivery of such
information, the Company and the Holders shall enter into a confidentiality
agreement reasonably acceptable to the Company and the Holders providing that
such information shall be kept confidential, unless (i) disclosure of such
information is required by court or administrative order or is necessary to
respond to inquiries of regulatory authorities (provided, however, that the
Company shall be given notice of any such pending disclosure so that the Company
may seek a protective order); (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.
(o) Comply in all material respects with all applicable rules
and regulations of the Commission and make generally available to its
securityholders 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
conform to the requirements of Rule 158.
(p) The Company may require each selling Holder to furnish to
the Company information regarding such Holder and 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.
The Company shall hold in confidence and not make any
disclosure of information concerning a Holder provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration
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<PAGE> 13
Statement, (iii) the release of such information is ordered pursuant to a
subpoena or other order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this or any other agreement. The
Company agrees that it shall, upon learning that disclosure of such information
concerning a Holder is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Holder prior to
making such disclosure, and allow the Holder, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
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 (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 Holder covenants and agrees that (i) it will not 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 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it 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 notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v), 3(c)(vi) or 3(c)(vii), such Holder will forthwith discontinue
disposition of such Registrable Securities under the Registration Statement
until such Holder's receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement contemplated by Section 3(j) or Section 3(k), 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.
Notwithstanding anything to the contrary contained herein, the Company shall
cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of a Holder in accordance with the terms of the Securities Purchase
Agreement in connection with any sale of Registrable Securities with respect to
which a Holder has entered into a contract for sale prior to the Holder's
receipt of a notice from the Company of the happening of any event of the kind
described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v), 3(c)(vi) or
3(c)(vii) and for which the Holder has not yet settled.
(q) The Company agrees to respond fully and completely to any
and all comments on a Registration Statement received from the Commission staff
as promptly as possible but, for non-Underwritten Offerings, in no event later
than ten (10) Business Days of the receipt of such comments, regardless of
whether such comments are in oral or written form.
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<PAGE> 14
(r) Within two (2) Business Days after a Registration
Statement which covers applicable Registrable Securities is ordered effective by
the Commission, the Company shall deliver, and shall cause legal counsel for the
Company to deliver, to the transfer agent for such Registrable Securities (with
copies to the Holders whose Registrable Securities are included in such
Registration Statement) confirmation that such Registration Statement has been
declared effective by the Commission in the form attached hereto as Exhibit B.
4. Registration Expenses.
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 pursuant to an Underwritten Offering and 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 Nasdaq
and each other securities exchange or market on which Registrable Securities are
required hereunder to be listed and (B) in compliance with state securities or
Blue Sky laws (including, without limitation, reasonable fees and disbursements
of counsel for the 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 the 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, (v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) 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, 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, and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder. The Holders shall pay all
underwriting discounts, brokerage fees, selling commissions and all fees and
disbursements of counsel for the Holders.
5. Indemnification.
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person
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<PAGE> 15
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 joint or several losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, together with actions,
proceedings or inquiries by any regulatory or self-regulatory organization,
whether commenced or threatened, "Losses"), as incurred, arising out of or
relating to (i) 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 (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made),
except to the extent, but only to the extent, that such untrue statements or
omissions are based solely upon and in conformity with information regarding
such Holder furnished in writing to the Company by such Holder expressly for use
therein, which information was reasonably relied on by the Company for use
therein or to the extent that 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 or in any
amendment or supplement thereto (provided that the Company amended any
disclosure with respect to the method of distribution upon written notice from
the Holders that such section of the Prospectus should be revised in any way) or
(ii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, or any other law, rule or regulation (including, without
limitation, any state securities law) relating to the offer or sale of
Registrable Securities. The Company shall not, however, be liable for any Losses
arising from any sale of Registrable Securities by a Holder with respect to any
untrue or alleged untrue statement of material fact or omission or alleged
omission of material fact if such statement or omission was made in a
preliminary Prospectus and the applicable purchaser did not receive a copy of
the final Prospectus (or any amendment or supplement thereto) at or prior to the
confirmation of the sale of the Registrable Securities in any case where such
delivery is required by the Securities Act and the untrue or alleged untrue
statement of material fact or omission or alleged omission of material fact
contained in such preliminary Prospectus was corrected in the final Prospectus
(or any amendment or supplement thereto), unless the failure to deliver such
final Prospectus (as amended or supplemented) was a result of noncompliance by
the Company with Section 3(g) of this Agreement. 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 the Holders. Each Holder shall,
severally and not jointly, indemnify and hold harmless the Company, its
officers, directors, 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 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, as incurred, arising solely out of or based solely
upon any untrue statement of a
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<PAGE> 16
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 to the extent, but only to the extent, that
such untrue statement or omission is contained in any information so furnished
in writing by such Holder to the Company specifically for inclusion in the
Registration Statement or such Prospectus and that such information was
reasonably relied upon by the Company for use in the Registration Statement,
such Prospectus or such form of prospectus or to the extent that 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; provided, however, that the indemnity
agreement contained in this Section 5(b) shall not apply to amounts paid in
settlement of any Losses if such settlement is effected without the prior
written consent of such Holder, which consent shall not be unreasonably
withheld. 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 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 indemnification
hereunder (an "Indemnified Party"), such Indemnified Party promptly shall notify
the Person from whom indemnification 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, however, 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 Indemnified Parties unless: (i) the Indemnifying Party has
agreed in writing to pay such fees and expenses; (ii) 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 (iii) 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). It is
understood that the Indemnifying Parties shall not, in respect of the legal fees
and expenses of any Indemnified Party in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any
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<PAGE> 17
local counsel) for all Indemnified Parties under Section 5(a) or 5(b) hereof who
are parties to such proceeding or proceedings. 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 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 by the Indemnifying Party to the
Indemnified Party, as incurred, within ten (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
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a court of competent jurisdiction to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), 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, in such proportion as is appropriate to reflect 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 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 5(c), any reasonable attorneys' or other reasonable 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 were available to such party in
accordance with its terms. In no event shall any selling Holder be required to
contribute an amount under this Section 5(d) in excess of the net proceeds
received by such Holder upon sale of the Registrable Securities pursuant to the
Registration Statement giving rise to such contribution obligation.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(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. No Person guilty of fraudulent misrepresentation (within the
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<PAGE> 18
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 indemnification and contribution agreements contained in
this Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties.
6. Rule 144.
As long as any Holder owns Registrable Securities, the Company
covenants to timely file (or obtain extensions in respect thereof and file
within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to Section 13(a) or l5(d) of the Exchange
Act and to make and keep public information available, as those terms are
defined in Rule 144 promulgated under the Securities Act. 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 Person to
sell Underlying Shares without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 promulgated under the
Securities Act, including providing any legal opinions referred to in the
Purchase Agreement. 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.
7. 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 agree 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. Neither 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.
Except as disclosed in Schedule 2.1(r) of the Purchase Agreement, 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 subordinated in all respects to the rights in
full of the Holders set forth in Section 2 herein, and are not otherwise in
conflict or inconsistent with the provisions of this Agreement. This Agreement,
together with the Purchase Agreement, contains the entire
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<PAGE> 19
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral or written, with
respect to such matters.
(c) No Piggyback on Registrations. Except as disclosed on
Schedule 2.1(r) of the Purchase Agreement, neither the Company nor any of its
securityholders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statements and the Company
shall not after the date hereof enter into any agreement providing such right to
any of its securityholders, unless the right so granted is subordinated in all
respects to the rights in full of the Holders set forth herein, and is not
otherwise in conflict or inconsistent with the provisions of this Agreement.
(d) Piggy-Back Registrations. Except as provided herein if, at
any time when there is not an effective Registration Statement covering the
Registrable Securities, the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than a registration relating solely to (i) equity securities
issuable in connection with stock option or other employee benefit plans, (ii)
equity or debt securities other than Common Stock or (iii) equity securities to
be issued solely in connection with any acquisition of any Person, the Company
shall send to each Holder of Registrable Securities written notice of such
determination and, if within ten (10) days after receipt of such notice, any
such Holder shall so request in writing (which request shall specify the
Registrable Securities intended to be disposed of by the Purchasers), the
Company will use reasonable efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by the Holder, to the extent requisite to permit the
disposition of the Registrable Securities so to be registered, provided that if
at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration statement filed
in connection with such registration, the Company shall determine for any reason
not to register or to delay registration of such securities, the Company may, at
its election, give written notice of such determination to such Holder and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay expenses in accordance with
Section 4), and (ii) in the case of a determination to delay registering, shall
be permitted to delay registering any Registrable Securities being registered
pursuant to this Section 7(d) for the same period as the delay in registering
such other securities. The Company shall include in such registration statement
all or any part of such Registrable Securities such Holder requests to be
registered; provided, however, that the Company shall not be required to
register any Registrable Securities pursuant to this Section 7(d) that are
eligible for sale pursuant to Rule 144(k) of the Securities Act. In the case of
an Underwritten Offering, if the managing underwriter should reasonably object
to the inclusion of the Registrable Securities in such registration statement,
then if the Company after consultation with the managing underwriter's
representative should reasonably determine that the inclusion of such
Registrable Securities would adversely affect the offering contemplated in such
registration statement, and based on such determination recommends inclusion in
such registration statement of fewer Registrable Securities then proposed to be
sold by the Holders, then (x) the number of Registrable Securities of the
Holders included in such registration statement shall be reduced pro rata among
such Holders (based upon the number of
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<PAGE> 20
Registrable Securities owned by such Holders) or (y) none of the Registrable
Securities of the Holders shall be included in such registration statement if
the Company, after consultation with the managing underwriter, recommends the
inclusion of none of such Registrable Securities; provided, however, that if
securities are being offered for the account of other Persons as well as the
Company, such reduction shall not represent a greater fraction of the number of
Registrable Securities owned by the Holders than the fraction of similar
reductions imposed on such other Persons (other than the Company).
Notwithstanding the foregoing, the Company shall not file any registration
statement under the Securities Act (other than on Form S-4 or Form S-8 or Form
S-3 for resale of private placement securities) relating to the offer and sale
of any equity securities of the Company, or offer or sell any equity securities
of the Company in a transaction exempt from registration pursuant to Regulation
S under the Securities Act, until such time as the Initial Registration
Statement has been effective for a period of thirty (30) days, which period
shall be tolled if the effectiveness of the Initial Registration Statement is
suspended for any reason whatsoever. No Holder shall be entitled to exercise any
right provided for in this Section 7(d) after five (5) years following the First
Closing Date.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds (2/3) of the then outstanding Registrable
Securities; provided, however, that for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company (other than any Holder or transferees or
successors or assigns thereof if such Holder is deemed to be an Affiliate solely
by reason of its holdings of such Registrable Securities) are not deemed
outstanding. Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(f) Notices. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement shall be in writing and shall be deemed to have been delivered (a)
upon receipt, when delivered personally, (b) upon receipt, when sent by
facsimile, provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party (if received
before 7:00 p.m. EST where such notice is received) or the first Business Day
following such delivery (if received on or after 7:00 p.m. EST where such notice
is received) or (c) one (1) Business Day after deposit with a nationally
recognized overnight courier, in each case properly addressed to the party to
receive the same. The address and facsimile numbers for such communications
shall be:
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<PAGE> 21
(i) if to the Company :
eSOFT, Inc.
295 Interlocken Blvd. #500
Broomfield, Colorado 80021
Attention: Mr. Jeffrey F. Finn
President and Chief Executive Officer
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
with a copy to:
Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Boulder, Colorado 80302
Attention: James H. Carroll, Esq.
Telephone: (303) 546-4024
Facsimile: (303) 546-4099
(ii) if to the Purchasers:
Brown Simpson Strategic Growth Fund, Ltd.
152 West 57th Street, 40th Floor
New York, New York 10029
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
and
Brown Simpson Strategic Growth Fund, L.P.
152 West 57th Street, 40th Floor
New York, New York 10029
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, New York 10022
Attention: James E. Kaye, Esq.
Telephone: (212) 872-1000
Facsimile: (212) 872-1002
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<PAGE> 22
Each party shall provide written notice to the other parties
of any change in address or facsimile number in accordance with the provisions
hereof.
(g) 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. Each Holder may assign its rights hereunder in the manner and to
the Persons as permitted under the Purchase Agreement. In addition, the rights
of each Holder hereunder, including the right to have the Company register for
resale Registrable Securities in accordance with the terms of this Agreement,
shall be automatically assignable by each Holder if: (i) the Holder agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment; (ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (A) the name and address of such
transferee or assignee and (B) the securities with respect to which such
registration rights are being transferred or assigned; (iii) following such
transfer or assignment the further disposition of such securities by the
transferee or assignees is restricted under the Securities Act and applicable
state securities laws; (iv) at or before the time the Company receives the
written notice contemplated by clause (ii) of this Section, the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
of this Agreement; and (v) such transfer or assignment shall have been made in
accordance with the applicable requirements of the Purchase Agreement. The
rights to assignment shall apply to the Holders (and to subsequent) successors
and assigns.
(h) 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 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 were the original
thereof.
(i) Governing Law. The corporate laws of the State of Delaware
shall govern all issues concerning the relative rights of the Company and the
Purchasers as its stockholders. All other questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of New York,
without regard to principles of conflicts of law. Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
the City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, or that such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing
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<PAGE> 23
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.
(j) Cumulative Remedies. Except as expressly provided in
Section 2(d) hereof, the remedies provided herein are cumulative and not
exclusive of any remedies provided by law.
(k) 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.
(l) Titles and Headings; References. The titles and headings
in this Agreement are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof. References in this Agreement to Sections
are to Sections of this Agreement, unless otherwise expressly provided.
(m) 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 any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
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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<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
eSOFT, INC.
By: /s/ Jeffrey Finn
-----------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive
Officer
BROWN SIMPSON STRATEGIC GROWTH FUND, LTD.
By: /s/ Evan Levine
-----------------------------------
Name: Evan Levine
Title: Principal
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.
By: /s/ Evan Levine
-----------------------------------
Name: Evan Levine
Title: Principal
<PAGE> 25
SCHEDULE I
Company:
eSOFT, INC.
295 Interlocken Blvd., #500
Broomfield, Colorado 80021
Attention: Mr. Jeffrey F. Finn
President and Chief Executive Officer
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
Purchasers:
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.
152 West 57th Street, 40th Floor
New York, New York 10019
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
BROWN SIMPSON STRATEGIC GROWTH FUND, LTD.
152 West 57th Street, 40th Floor
New York, New York 10019
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
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EXHIBIT A
PLAN OF DISTRIBUTION
The Company is registering the Registrable Securities on
behalf of the Holder. As used herein, the term Holder means the holder of the
Registrable Securities and includes donees and pledgees selling Registrable
Securities received from a named Holder after the date of this Prospectus. All
costs, expenses and fees in connection with the registration of the Registrable
Securities offered hereby will be borne by the Company. Brokerage commissions
and similar selling expenses, if any, attributable to the sale of Registrable
Securities will be borne by the Holders. Sales of Registrable Securities may be
effected by Holders from time to time in one or more types of transactions
(which may include block transactions) on Nasdaq, in the over-the-counter
market, in negotiated transactions, through put or call options transactions
relating to the Registrable Securities, through short sales of Registrable
Securities, or a combination of such methods of sale, at market prices
prevailing at the time of sale, or at negotiated prices. Such transactions may
or may not involve brokers or dealers. The Holders have advised the Company that
they have not entered into any agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their securities, nor
is there an underwriter or coordinated broker acting in connection with the
proposed sale of Registrable Securities by the Holders.
The Holders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in short
sales of the Registrable Securities or of securities convertible into or
exchangeable for the Registrable Securities in the course of hedging positions
they assume with the Holders. The Holders may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealers or other financial institutions of
Registrable Securities offered by this Prospectus, which Registrable Securities
such broker-dealer or other financial institution may resell pursuant to this
Prospectus (as amended or supplemented to reflect such transaction).
The Holders may effect such transactions by selling
Registrable Securities directly to purchasers or to or through broker-dealers,
which may act as agents or principals. Such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Holders and/or the purchasers of Registrable Securities for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The Holders and any broker-dealers that act in connection with
the sale of Registrable Securities might be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, and any commissions received
by such broker-dealers and any profit on the resale of the Registrable
Securities sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. The Company has
agreed to indemnify each Holder against certain liabilities, including
liabilities arising under the Securities Act. The Holders may agree to indemnify
any agent, dealer or broker-dealer that
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participates in transactions involving sales of the Registrable Securities
against certain liabilities, including liabilities arising under the Securities
Act.
The Holders will be subject to the prospectus delivery
requirements of the Securities Act. The Company has informed the Holders that
the anti-manipulative provisions of Regulation M promulgated under the Exchange
Act may apply to their sales in the market.
The Holders also may resell all or a portion of the
Registrable Securities in open market transactions in reliance upon Rule 144
under the Securities Act, provided they meet the criteria and conform to the
requirements of such Rule.
Upon the Company being notified by a Holder that any material
arrangement has been entered into with a broker-dealer for the sale of
Registrable Securities through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer, a
supplement to this Prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act, disclosing (i) the name of each such Holder and
of the participating broker-dealer(s), (ii) the number of Registrable Securities
involved, (iii) the initial price at which such Registrable Securities were
sold, (iv) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this Prospectus and (vi) other facts material to the transactions.
In addition, upon the Company being notified by a Holder that a donee or pledgee
intends to sell more than 500 Registrable Securities, a supplement to this
Prospectus will be filed.
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EXHIBIT B
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
Attention:
Re: eSOFT, Inc.
Ladies and Gentlemen:
We are counsel to eSOFT, Inc., a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "Purchase Agreement") entered into by and
among the Company and the buyers named therein (collectively, the "Holders")
pursuant to which the Company issued to the Holders its 5% convertible
debentures (the "Debentures"), convertible into shares of the Company's common
stock, par value $0.01 per share (the "Common Stock"), and Warrants (the "the
Warrants") to acquire shares of Common Stock. Pursuant to the Purchase
Agreement, the Company also has entered into a Registration Rights Agreement
with the Holders (the "Registration Rights Agreement") pursuant to which the
Company agreed, among other things, to register the Registrable Securities (as
defined in the Registration Rights Agreement), including the shares of Common
Stock issuable upon conversion of the Debentures and exercise of the Warrants,
under the Securities Act of 1933, as amended (the "1933 Act"). In connection
with the Company's obligations under the Registration Rights Agreement, on
_______________, 1999, the Company filed a Registration Statement on Form S-3
(File No. 333-_____________) (the "Registration Statement") with the Securities
and Exchange Commission (the "SEC") relating to the Registrable Securities which
names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member
of the SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS].
Very truly yours,
[ISSUER'S COUNSEL]
CC: [LIST NAMES OF HOLDERS]
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EXHIBIT 10.3
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION 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,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT.
JUNE 10, 1999
485,623 shares Warrant No. 1
eSOFT, INC.
STOCK PURCHASE WARRANT
Registered Owner: Brown Simpson Strategic Growth Fund, Ltd.
This certifies that, for value received, eSOFT, Inc., a Delaware
corporation, the ("Company") grants the following rights to the Registered
Owner, or assigns, of this Warrant:
1. ISSUE. Upon tender (as defined in Section 5) to the Company, the
Company, within three (3) Business Days of the date thereof, shall issue to the
Registered Owner, or assigns, up to the number of shares specified in Section 2
of fully paid and nonassessable shares of Common Stock that the Registered
Owner, or assigns, is otherwise entitled to purchase.
2. NUMBER OF SHARES. The total number of shares of Common Stock that the
Registered Owner, or assigns, of this Warrant is entitled to receive upon
exercise of this Warrant (the "Warrant Shares") is 485,623 shares, subject to
adjustment from time to time as set forth in Section 6. The Company shall at all
times reserve and hold available sufficient shares of Common Stock to satisfy
all exercise, conversion and purchase rights represented by outstanding
convertible securities, options and warrants, including this Warrant. The
Company covenants and agrees that all shares of Common Stock that may be issued
upon the exercise of this Warrant shall, upon issuance, be duly and validly
issued, fully paid and nonassessable, free from all taxes, liens and charges
with respect to the purchase and the issuance of the shares, and shall not have
any legend or restrictions on resale, except as required by Section 3.1(b) of
the Purchase Agreement.
3. EXERCISE PRICE. The initial per share exercise price of this Warrant,
representing the price per share at which the shares of stock issuable upon
exercise of this Warrant may be purchased, is $4.499375 (the "Exercise Price").
4. EXERCISE PERIOD. This Warrant may be exercised from the Closing Date (as
defined in the Purchase Agreement) up to and including June 10, 2002 (the
"Exercise Period").
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Except as otherwise provided herein, if this Warrant is not exercised during the
Exercise Period, this Warrant and all rights granted under this Warrant shall
expire and lapse.
5. TENDER; ISSUANCE OF CERTIFICATES.
a. This Warrant may be exercised, in whole or in part, by (i) actual
delivery of (a) the Exercise Price in cash, (b) a duly executed Warrant
Exercise Form, a copy of which is attached to this Warrant as Exhibit A,
properly executed by the Registered Owner, or assigns, of this Warrant, and
(c) by surrender of this Warrant, or (ii) if the resale of the Warrant
Shares by the Registered Owner is not then registered pursuant to an
effective registration statement under the Securities Act, delivery to the
Company of a written notice of an election to effect a Cashless Exercise
(as defined below) for the Warrant Shares specified in the Warrant Exercise
Form. The Warrant Shares so purchased shall be deemed to be issued to the
Registered Owner as of the close of business on the date on which this
Warrant shall have been surrendered, the completed Warrant Exercise Form
shall have been delivered and payment shall have been made for such shares
as set forth above. The payment and Warrant Exercise Form must be delivered
to the registered office of the Company either in person or as set forth in
Section 14.
b. Commencing one hundred twenty (120) days from the Filing Date (as
defined in the Registration Rights Agreement), if, and only if, at the time
of exercise of this Warrant, the Warrant Shares are not saleable pursuant
to an effective registration statement, then in addition to the exercise of
all or any part of this Warrant by payment of the Exercise Price in cash as
provided above, and in lieu of such payment, the Registered Owner shall
have the right to effect a cashless exercise (a "Cashless Exercise"). In
the event of a Cashless Exercise, the Registered Owner may exercise this
Warrant in whole or in part by surrendering this Warrant in exchange for
the number of shares of Common Stock equal to the product of (x) the number
of shares as to which this Warrant is being exercised multiplied by (y) a
fraction, the numerator of which is the Per Share Market Value of the
Common Stock less the Exercise Price then in effect and the denominator of
which is the Per Share Market Value (in each case adjusted for fractional
shares as herein provided).
c. In lieu of physical delivery of this Warrant, provided the
Company's transfer agent is participating in the Depositary Trust Company
("DTC") Fast Automated Securities Transfer (FAST) program, upon request of
the Registered Owner and in compliance with the provisions hereof, the
Company shall use its best efforts to cause its transfer agent to
electronically transmit the Warrant Shares to the Registered Owner by
crediting the account of the Registered Owner's Prime Broker with DTC
through its Deposit Withdrawal Agent Commission system. The time period for
delivery described herein shall apply to the electronic transmittals
described herein.
d. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Warrant Exercise Form, shall be
delivered to
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<PAGE> 3
the Registered Owner within a reasonable time, not exceeding three (3)
Business Days, after this Warrant shall have been so exercised. The
certificates so delivered shall be in such denominations as may be
requested by the Registered Owner and shall be registered in the name of
the Registered Owner or such other name as shall be designated by such
Registered Owner. If this Warrant shall have been exercised only in part,
then, unless this Warrant has expired, the Company shall, at its expense,
at the time of delivery of such certificates, deliver to the Registered
Owner a new Warrant representing the number of shares with respect to which
this Warrant shall not then have been exercised.
6. ADJUSTMENT OF EXERCISE PRICE.
a. Common Stock Dividends; Common Stock Splits; Reverse Common Stock
Splits. If the Company, at any time while this Warrant is outstanding, (a)
shall pay a stock dividend on its Common Stock, (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine
outstanding shares of Common Stock into a smaller number of shares or (d)
issue by reclassification of shares of Common Stock any shares of capital
stock of the Company, then (i) the Exercise Price thereafter shall be
determined by multiplying the Exercise Price by a fraction the numerator of
which shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and the denominator of which
shall be the number of shares of Common Stock outstanding after such event
and (ii) the number of Warrant Shares shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding after such event and the
denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event. Any
adjustment made pursuant to this Section 6(a) shall become effective
immediately after the record date for the determination of shareholders
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. Rights; Warrants. If the Company, at any time while this Warrant is
outstanding, shall issue rights or warrants to all of the holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at
a price per share less than the Exercise Price, the Exercise Price shall
thereafter be determined by multiplying the Exercise Price by a fraction,
the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) 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) 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 the Exercise Price. 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
shareholders entitled to receive such rights or warrants. Upon the
expiration of any right or warrant to
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purchase Common Stock the issuance of which resulted in an adjustment in
the Exercise Price pursuant to this Section 6(b), if any right or warrant
shall expire and shall not have been exercised, the Exercise Price shall
immediately upon such expiration be recomputed to the Exercise Price which
would have been in effect had the adjustment of the Exercise Price made
upon the issuance of such rights or warrants been made on the basis of (i)
that number of shares of Common Stock actually purchased upon the exercise
of such rights or warrants actually exercised and (ii) such number of
shares of Common Stock were issued and sold for the consideration actually
received by the Company upon the actual exercise of such rights and
warrants plus the consideration, if any, actually received by the Company
for the issuance, sale or grant of all such rights or warrants.
c. Subscription Rights. If the Company, at any time while this Warrant
is outstanding, shall distribute to all of the holders of Common Stock
evidence of its indebtedness or assets or rights or warrants to subscribe
for or purchase any security (excluding those referred to in Sections 6(a)
and (b) above) ("Subscription Rights"), then in each such case the Exercise
Price at which the Warrant shall thereafter be exercisable shall be
determined by multiplying the Exercise Price in effect immediately prior to
the record date fixed for determination of shareholders entitled to receive
such distribution by a fraction, the denominator of which shall be the Per
Share Market Value of Common Stock determined as of the record date
mentioned above, and the numerator of which 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 evidence 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 net assets of the Company, such fair market value shall be determined
by an Appraiser selected in good faith by the Registered Owner of this
Warrant, whose fees and expenses shall be paid by the Company; and
provided, further, that the Company, after receipt of the determination by
such Appraiser shall have the right to select in good faith an additional
Appraiser meeting the same qualifications in which case the fair market
value shall be equal to the average of the determinations by each such
Appraiser. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above. Upon the expiration or termination of any such Subscription Rights,
the Exercise Price of this Warrant to the extent in any way affected by or
computed using such Subscription Rights, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such Subscription Rights.
d. Rounding. All calculations under this Section 6 shall be made to
the nearest cent or the nearest l/l00th of a share, as the case may be.
e. Notice of Adjustment. Whenever the Exercise Price is adjusted
pursuant to Sections 6(a), (b) or (c), the Company shall promptly deliver
to the Registered Owner
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a notice setting forth the Exercise Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.
f. Redemption Events.
(i) The following are "Redemption Events" under this
Section 6(f): (A) any reclassification of the Common Stock;
(B) any Change of Control (as such term is defined in the
Purchase Agreement); (C) any compulsory share exchange
pursuant to which the Common Stock is converted into other
securities, cash or property; (D) any suspension from
listing or delisting of the Common Stock from the Nasdaq or
any Subsequent Market (as defined in the Debentures) on
which the Common Stock is listed for a period of five (5)
consecutive days; (E) the Company's notice to any registered
owner of the Warrants, including by way of public
announcement, at any time, of its intention, for any reason,
not to comply with proper requests for the exercise of any
such Warrants; or (F) a breach by the Company of any
representation, warranty, covenant or other term or
condition of the Purchase Agreement, the Registration Rights
Agreement, the Debentures, this Warrant or any other
agreement, document, certificate or other instrument
delivered in connection with the transactions contemplated
thereby or hereby, except to the extent that such breach
would not have a Material Adverse Effect (as defined in
Section 2.1(a) of the Purchase Agreement) and except, in the
case of a breach of a covenant which is curable, only if
such breach continues for a period of at least twenty (20)
Business Days after the Company knows or reasonably should
have known of the existence of such breach. On and after the
date of any Redemption Event, the Registered Owner shall
have the option to require the Company to redeem (the
"Redemption Right") in cash and subject to the terms of
payment provisions set forth below, from funds legally
available therefor at the time of such redemption, this
Warrant at an aggregate price (the "Redemption Price") equal
to the product of (i) the Average Price immediately
preceding the effective date, the date of the closing, date
of occurrence or the date of the notice, as the case may be,
of the Redemption Event triggering such Redemption Right
minus the Exercise Price in effect immediately prior to such
date and (ii) the number of shares of Common Stock of the
Company for which this Warrant could have been exercised
immediately prior to such Redemption Event. After the
occurrence of a Redemption Event specified in clauses (A),
(B) or (C), the Registered Owner shall have the right at his
or its option, in lieu of the Redemption Right, to exercise
this Warrant for shares of stock or other securities, cash
or property receivable upon or deemed to be held by holders
of Common Stock following such Redemption Event; the
Registered Owner shall be entitled following such Redemption
Event (upon exercise of this Warrant and payment of the
applicable Exercise Price) to receive such amount of
securities, cash or property as if the Registered Owner had
held the shares of the Common Stock for which this Warrant
could have been exercised immediately prior to such
Redemption Event (without taking into account any
limitations or restrictions on
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the exercisability of this Warrant). In the case of a
Redemption Event specified in clauses (A), (B) or (C), the
Company shall not effect any such Redemption Event unless,
prior to the consummation thereof, each Person (other than
the Company) which may be required to deliver any stock,
securities, cash or property upon the exercise of this
Warrant as provided herein shall assume, by written
instrument delivered and reasonably satisfactory to, the
Registered Owner of this Warrant, (x) the obligations of the
Company under this Warrant (and if the Company shall survive
the consummation of such transaction, such assumption shall
be in addition to, and shall not release the Company from,
any continuing obligations of the Company under this
Warrant), (y) the obligations of the Company under this
Warrant and (z) the obligation to deliver to the Registered
Owner such shares of stock, securities, cash or property as,
in accordance with the foregoing provisions of this Section
6(f), the Registered Owner may be entitled to receive.
Nothing in this Section 6(f) shall be deemed to authorize
the Company to enter into any transaction not otherwise
permitted by the Purchase Agreement. This provision shall
similarly apply to successive Redemption Events.
(ii) Payment of Redemption Price. The Company shall pay
the applicable Redemption Price to the Registered Owner of
the Warrants being redeemed in cash on the date which is not
more than three (3) Business Days after the Registered Owner
exercises its Redemption Right by written notice to the
Company (the "Redemption Date"). If the Company shall fail
to pay the applicable Redemption Price to such Registered
Owner on the Redemption Date, in addition to any remedy such
Registered Owner may have under this Warrant and the
Purchase Agreement, such unpaid amount shall bear interest
at the rate of 1.25% per month until it is paid in full.
Until the Company pays such unpaid applicable Redemption
Price in full to each Registered Owner, each Registered
Owner of Warrants submitted for redemption pursuant to this
Section 6(f) and for which the applicable Redemption Price
has not been paid, shall have the option, in lieu of
redemption, (A) to require the Company to promptly return to
such Registered Owner all of the Warrants that were
submitted for redemption by such Registered Owner under this
Section 6(f) and for which the applicable Redemption Price
has not been paid or (B) to exercise those Warrants for
which the applicable Redemption Price has not been paid at
the then applicable Exercise Price.
g. Reclassification, Etc. If:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common Stock; or
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(iii) the Company shall authorize the granting to the
holders of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class or
any rights; or
(iv) the approval of any shareholders of the Company
shall be required in connection with any reclassification of
the 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 other 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 filed at each office or agency
maintained for the purpose of exercise of this Warrant, and shall cause to
be delivered to the Registered Owner, at least ten (10) Business Days prior
to the applicable record or effective date hereinafter specified, a notice
(provided such notice shall not include any material non-public
information) stating (x) the date on which a record is to be taken for the
purpose of such dividend, distribution, 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, 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 or
close, 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, cash 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.
h. Adjustment to Exercise Price. If the Company, at any time while
this Warrant is outstanding, takes any of the actions described in this
Section 6(h), then, in order to prevent dilution of the rights granted
under this Warrant, the Exercise Price will be subject to adjustment from
time to time as provided in this Section 6(h).
(i) Adjustment of Exercise Price upon Issuance of Additional
Securities. If at any time while this Warrant is outstanding the
Company issues or sells, or is deemed to have issued or sold, or in
any manner grants any shares of Common Stock, rights or options to
subscribe for or to purchase Common Stock ("Options"), or in any
manner issues or sells any stock or other securities convertible into
or exercisable or exchangeable for Common Stock ("Convertible
Securities", and collectively with the Common Stock and Options,
"Additional Securities") (other than (1) the Underlying Shares or
shares of Common Stock reserved for issuance or deemed to have been
issued by the Company in
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connection with an Approved Stock Plan, (2) the shares of Common Stock
issuable upon the exercise of any options or warrants outstanding on
the date hereof and listed in Schedule 2.1(c) of the Purchase
Agreement, (3) the securities to be issued in the transactions set
forth on such Schedule 2.1(c), (4) the shares of Common Stock issued
or deemed to have been issued as consideration for an acquisition by
the Company of a division, assets or business (or stock constituting
any portion thereof) from another Person, (5) the shares of Common
Stock issued or deemed to have been issued in connection with
collaborative or strategic partner transactions, provided such
issuances are for other than primarily equity financing purposes, (6)
the shares of Common Stock issued or deemed to have been issued in
connection with any equipment leasing arrangement or debt financing
from a bank or similar financial institution or (7) the shares of
Common Stock issued to the holders of the Debentures in lieu of cash
interest payments) for an effective consideration per share of Common
Stock less than the Exercise Price in effect immediately prior to such
issuance, sale or grant, then immediately after such issue, sale or
grant, the Exercise Price then in effect shall be reduced to equal the
Exercise Price determined by dividing (x) the sum of (I) the product
derived by multiplying the Exercise Price in effect immediately prior
to such issue, sale or grant by the number of shares of Common Stock
outstanding and deemed outstanding (pursuant to this Section 6(h))
immediately prior to such issue, sale or grant, plus (II) the
consideration, if any, received or deemed to be received by the
Company upon such issue, sale or grant, by (y) the number of shares of
Common Stock outstanding and deemed outstanding (pursuant to this
Section 6(h)) immediately after such issue, sale or grant.
(A) Change in Option Price or Rate of Conversion. If there is a
change at any time in (i) the purchase price provided for in any
Options, (ii) the additional consideration, if any, payable upon the
issuance, conversion or exchange of any Convertible Securities or
(iii) the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock, then the Exercise Price in
effect at the time of such change shall be readjusted to the Exercise
Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or changed conversion rate,
as the case may be, at the time initially granted, issued or sold;
provided that no adjustment shall be made if such adjustment would
result in an increase of the Exercise Price then in effect.
(B) Expiration of Options or Convertible Securities. Upon the
expiration of any Options or Convertible Securities the issuance of
which resulted in an adjustment in the Exercise Price pursuant to this
Section 6(h), if any Option or Convertible Security shall expire and
shall not have been exercised, the Exercise Price shall immediately
upon such expiration be recomputed to the Exercise Price which would
have been in effect had the adjustment of the Exercise Price made upon
the issuance of such Options or Convertible Securities
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been made on the basis that (1) the only shares of Common Stock so
issued were that number of shares of Common Stock actually purchased
upon the exercise of such Options and the conversion of such
Convertible Securities and (2) such shares of Common Stock were issued
and sold for the consideration actually received by the Company upon
such exercise or conversion plus the consideration, if any, actually
received by the Company for the issuance, sale or grant of all such
Options or Convertible Securities.
(C) Effect on Exercise Price of Certain Events. For purposes of
determining the adjusted Exercise Price under this Section 6(h)(i),
the following shall be applicable:
(I) Calculation of Consideration Received. In the case of
the issuance of any Options or Convertible Securities
constituting Additional Securities, the aggregate consideration
received therefor shall be deemed to be the consideration
received by the Company for the issuance of such Options or
Convertible Securities plus the additional minimum consideration,
if any, to be received by the Company upon the exercise,
conversion or exchange thereof. If any Additional Securities are
issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the
amount of such cash, without any deduction being made for any
commissions, discounts or other expenses incurred by the Company
for any underwriting of the issue or otherwise in connection
therewith. In case any Additional Securities are issued or sold
for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the
fair value of such consideration, except where such consideration
consists of securities, in which case the amount of consideration
received by the Company will be the Average Price of such
security on the Trading Day immediately preceding the date of
receipt thereof. In case any Additional Securities are issued to
the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity the amount of
consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving
entity as is attributable to such Additional Securities. The fair
value of any consideration other than cash or securities will be
determined jointly by the Company and the registered owners of a
majority of the Underlying Shares of Warrants then outstanding.
If such parties are unable to reach agreement within ten (10)
days after the occurrence of an event requiring valuation (the
"Valuation Event"), the fair value of such consideration will be
determined within forty-eight (48) hours of the tenth (10th) day
following the Valuation Event by an Appraiser selected in good
faith by the Company and agreed upon in good faith by the holders
of a majority of the Underlying Shares of Warrants then
outstanding. The
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determination of such Appraiser shall be final and binding upon
all parties absent manifest error.
(II) Integrated Transactions. In case any Option is issued
in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which
no specific consideration is allocated to such Options by the
parties thereto, the Options will be deemed to have been issued
for an aggregate consideration of $0.01.
(III) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or
held by or for the account of the Company, and the disposition of
any shares so owned or held will be considered an issue or sale
of Common Stock.
(IV) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Additional
Securities or (2) to subscribe for or purchase Additional
Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the
making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
(V) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 6(h)(i) (subject
to the exceptions stated therein) but not expressly provided for
by such provisions (including, without limitation, the granting
of stock appreciation rights, phantom stock rights or other
rights with equity features), then the Company's Board of
Directors will make an appropriate adjustment in the Exercise
Price so as to protect the rights of the Registered Owner, or
assigns, of this Warrant; provided, however, that no such
adjustment will increase the Exercise Price as otherwise
determined pursuant to this Section 6(h).
(ii) Adjustment of Number of Shares. Upon each adjustment of
the Exercise Price as a result of the calculations made in this
Section 6, this Warrant shall thereafter evidence the right to
receive, at the adjusted Exercise Price, that number of shares of
Common Stock (calculated to the nearest one-hundredth) obtained
by dividing (A) the product of the aggregate number of shares
covered by this Warrant immediately prior to such adjustment and
the Exercise Price in effect immediately prior to such adjustment
of the Exercise Price by (B) the Exercise Price in effect
immediately after such adjustment of the Exercise Price.
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<PAGE> 11
7. COMPANY CALL OPTION.
a. Company Call Option. This Warrant may be called in whole or in part
at the option of the Company from time to time, subject to the following
conditions, including the conditions set forth in Section 7(b) (the
"Company Call Option"), if the Per Share Market Value of the Common Stock
for thirty (30) consecutive Trading Days exceeds two hundred percent (200%)
of the then effective Exercise Price.
b. Company Call Option Notice. Subject to the conditions set forth in
Section 7(a), so long as (i) no Event of Default (or any event that with
the passage of time or giving of notice or both would constitute an Event
of Default) shall have occurred and be continuing, (ii) any Registration
Statement required to be filed and be effective pursuant to the
Registration Rights Agreement is then in effect and (iii) the Company has a
sufficient number of authorized shares of Common Stock reserved for
issuance upon full exercise of the outstanding Warrants, the Company may
call the Warrants by delivering a written notice to the Registered Owner (a
"Company Call Option Notice"). Forty (40) days after delivery to the
Registered Owner of the Company Call Option Notice by the Company, the
Warrants will expire unless previously exercised by the Registered Owner by
such date.
8. NASDAQ LIMITATION. If on any date (the "Determination Date") (a) the
Common Stock is listed for trading on the Nasdaq National Market or the Nasdaq
SmallCap Market, (b) the Exercise Price then in effect is such that the
aggregate number of shares of Common Stock that would then be issuable upon
exercise in full of the then outstanding Warrants as if all such Warrants were
exercised on such Determination Date (without regard to any limitations on
exercise) together with all other shares of Common Stock that would be
integrated with such shares would equal or exceed twenty percent (20%) of the
number of shares of the Common Stock outstanding immediately prior to the
Closing Date (the "Issuable Maximum") and (c) the Company shall not have
previously obtained the vote of the shareholders of the Company (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of the Nasdaq National Market or the Nasdaq SmallCap Market (or any
successor entity) to approve the issuance of shares of Common Stock in excess of
the Issuable Maximum in a private placement whereby shares of Common Stock are
deemed to have been issued at a price that is less than the greater of book
value or fair market value of the Common Stock, then with respect to the
Warrants then held by the Registered Owners for which an exercise would result
in an issuance of shares of Common Stock in excess of such Registered Owner's
pro rata allocation (as described below) or the Issuable Maximum (the "Excess
Shares") the Company may elect to repurchase such Excess Shares by payment in
cash to the Registered Owners an amount equal to the product of (i) the Average
Price less the Exercise Price and (ii) the number of outstanding Warrant Shares
underlying the Excess Shares (the "Repurchase Amount"). Any such election by the
Company must be made in writing to the Registered Owners within two (2) Trading
Days after the first such Determination Date and the payment of such Repurchase
Amount shall be made in full to the Registered Owners with ten (10) Business
Days after the date such notice is delivered. If the Company does not deliver
timely a notice of its election to repurchase under this Section or shall, if it
shall have delivered such a notice, fail to pay the Repurchase Amount hereunder
within ten (10) Business Days thereafter, then the holders of a majority of the
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<PAGE> 12
Warrants then outstanding shall have the option by written notice to the
Company, if applicable, to declare any such notice given by the Company, if
given, to be null and void and require the Company to either: (A) use its best
efforts to obtain the Shareholder Approval applicable to such issuance as soon
as is possible, but in any event not later than the sixtieth (60th) day after
such request unless the Company has previously used its best efforts, but has
failed, to obtain such approval (provided, that if the Company shall fail to
obtain the Shareholder Approval during such 60-day period, the Registered Owner
may demand the cash payment set forth in (B)) herein or (B) pay cash to such
Registered Owner, within five (5) Business Days of such Registered Owner's
notice, in an amount equal to the Repurchase Amount for such Registered Owner's
portion of the Excess Shares. The payment of the Repurchase Amount to each
Registered Owner pursuant to this Section shall be determined on a pro rata
basis based upon the number of Warrants held by such Registered Owner on the
Determination Date which is in excess of the pro rata allocation of the Issuable
Maximum. If the Company fails to pay such Repurchase Amount in full pursuant to
this Section 8 within five (5) Business Days after the date payable, the Company
will pay interest thereon at a rate of twenty percent (20%) per annum to the
exercising Registered Owner, accruing interest daily from the date of exercise
until such amount, plus all such interest thereon, if any, is paid in full.
Until the Company has received the Shareholder Approval no Registered Owner of
the Warrants shall be issued, upon exercise of the Warrants, shares of Common
Stock in an amount greater than such Registered Owner's allocated portion of the
Issuable Maximum.
In no event shall the Company be required to issue shares of Common Stock
upon the exercise of a Warrant if such issuance would violate the rules of the
Nasdaq.
9. RESTRICTION ON EXERCISE BY EITHER THE REGISTERED OWNER OR THE COMPANY.
Notwithstanding anything herein to the contrary, in no event shall any
Registered Owner or the Company have the right or be required to exercise this
Warrant if as a result of such exercise the aggregate number of shares of Common
Stock beneficially owned by such Registered Owner and its Affiliates would
exceed 4.99% of the outstanding shares of the Common Stock following such
exercise. For purposes of this Section 9, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended. The provisions of this Section 9 may be waived by a Registered
Owner as to itself (and solely as to itself) upon not less than sixty-five (65)
days, prior written notice to the Company, and the provisions of this Section 9
shall continue to apply until such 65th day (or later, if stated in the notice
of waiver).
10. OFFICER'S CERTIFICATE. Whenever the number of shares purchasable upon
exercise shall be adjusted as required by the provisions of Section 6, the
Company shall forthwith file in the custody of its secretary or an assistant
secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted number of shares determined as herein
provided, setting forth in reasonable detail the facts requiring such adjustment
and the manner of computing such adjustment. Each such officer's certificate
shall be signed by the chairman, president or chief financial officer of the
Company and by the secretary or any assistant secretary of the Company. Each
such officer's certificate shall be made available at all
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<PAGE> 13
reasonable times for inspection by any Registered Owner of the Warrants and the
Company shall, forthwith after each such adjustment, deliver a copy of such
certificate to the each of the Registered Owners.
11. DEFINITIONS. Capitalized terms used herein and not otherwise defined
herein shall have the meanings given to such terms in the Purchase Agreement. As
used in this Warrant, the following terms have the following meanings:
"Additional Securities" has the meaning assigned to it in Section 6(h)(i).
"Affiliate" has the meaning set forth in Rule 12b-2 of the Exchange Act.
"Appraiser" means a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of recognized
standing.
"Approved Stock Plan" shall mean any contract, plan or agreement which has
been approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, officer, director or
consultant.
"Average Price" has the meaning set forth in the Debentures.
"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.
"Cashless Exercise" has the meaning assigned to it in Section 5(b).
"Closing" has the meaning set forth for "First Closing" as in Section
1.2(a) of the Purchase Agreement.
"Common Stock" means the shares of the Company's Common Stock, par value
$0.01 per share.
"Company" means eSOFT, Inc., a Delaware corporation.
"Company Call Option" has the meaning assigned to it in Section 7(a).
"Company Call Option Notice" has the meaning assigned to it in Section
7(b). "Convertible Securities" has the meaning assigned to it in Section
6(h)(i).
"Debentures" means the 5% convertible debentures sold pursuant to the
Purchase Agreement.
"Determination Date" has the meaning assigned to it in Section 8.
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<PAGE> 14
"Distribution Date" has the meaning assigned to it in Section 22.
"DTC" has the meaning assigned to it in Section 5(c).
"Event of Default" has the meaning assigned to it in Section 3.1 of the
Debenture.
"Excess Shares" has the meaning assigned to it in Section 8.
"Exercise Period" has the meaning assigned to it the Section 4.
"Exercise Price" has the meaning assigned to it in Section 3.
"Issuable Maximum" has the meaning assigned to it in Section 8.
"Options" has the meaning assigned to it in Section 6(h)(i).
"Per Share Market Value" means on any particular date (i) the closing bid
price per share of the Common Stock on such date (as reported by Bloomberg
Information Services, Inc., or any successor reporting service) on the Nasdaq
or, if the Common Stock is not then quoted on the Nasdaq, any Subsequent Market
on which the Common Stock is then listed or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, (ii) if the Common Stock is not listed then on
the Nasdaq or any Subsequent Market, the closing bid price for a share of Common
Stock in the over-the-counter market, as reported by the National Quotation
Bureau Incorporated (or similar organization or agency succeeding to its
functions of reporting prices) at the close of business on such date or (iii) if
the Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the holder
of this Warrant, whose fees and expenses shall be borne by the Company;
provided, however, that the Company, after receipt of the determination by such
Appraiser, shall have the right to select, in good faith, an additional
Appraiser, in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser; and provided, further that all
determinations of the Per Share Market Value shall be appropriately adjusted for
any stock dividends, stock splits or other similar transactions during such
period.
"Purchase Agreement" means that certain Securities Purchase Agreement,
dated as of June 10, 1999, among the Company and the Purchasers.
"Purchaser" has the meaning set forth in the Purchase Agreement.
"Redemption Date" has the meaning assigned to it in Section 6(f).
"Redemption Event" has the meaning assigned to it in Section 6(f).
"Redemption Price" has the meaning assigned to it in Section 6(f).
"Redemption Right" has the meaning assigned to it in Section 6(f).
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<PAGE> 15
"Registered Owner" means the person identified on the face of this Warrant
as the registered owner hereof or such other person as shown on the records of
the Company as being the registered owner of this Warrant.
"Registrable Securities" has the meaning assigned to it in the Registration
Rights Agreement.
"Registration Rights Agreement" means that certain Registration Rights
Agreement, dated as of June 10, 1999, among the Company and the Purchasers.
"Repurchase Amount" has the meaning assigned to it in Section 8.
"Rights" has the meaning assigned to it in Section 22.
"Shareholder Approval" has the meaning assigned to it in Section 8.
"Subscription Rights" has the meaning assigned to it in Section 6(c).
"Subsequent Market" means the New York Stock Exchange, American Stock
Exchange or Nasdaq National Market.
"Trading Day(s)" means any day on which the primary market on which shares
of Common Stock are listed is open for trading.
"Underlying Shares" has the meaning assigned to it in Section 2.1(d) of the
Purchase Agreement.
"Valuation Event" has the meaning assigned to it in Section 6(h)(i)(C)(I).
"Warrant(s)" means the warrants issuable at the Closing.
"Warrant Shares" has the meaning assigned to it in Section 2.
12. REGISTRATION RIGHTS. The Company will undertake the registration of the
Common Stock into which the Warrants are exercisable at such times and upon such
terms pursuant to the provisions of the Registration Rights Agreement.
13. RESERVATION OF WARRANT SHARES; LISTING. The Company covenants that it
will at all times reserve and keep available out of its authorized shares of
Common Stock, free from preemptive rights, solely for the purpose of issue upon
exercise of the Warrants as herein provided, such number of shares of the Common
Stock as shall then be issuable upon the exercise of all outstanding Warrants
into Common Stock. As set forth in the Purchase Agreement, the Company shall
take all steps necessary to cause the shares of Common Stock issuable upon
exercise of this Warrant to be listed upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance upon exercise of this Warrant)
and shall maintain, so long as any
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<PAGE> 16
other shares of Common Stock shall be so listed, such listing of all shares of
Common Stock from time to time issuable upon the exercise of this Warrant; and
the Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
14. NOTICES. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement shall be in
writing and shall be deemed to have been delivered (a) upon receipt, when
delivered personally, (b) upon receipt, when sent by facsimile, provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party (if received before 7:00 p.m. EST where such
notice is received) or the first business day following such delivery (if
received on or after 7:00 p.m. EST where such notice is received) or (c) one (1)
business day after deposit with a nationally recognized overnight courier, in
each case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
(i) If to the Company:
eSOFT, Inc.
295 Interlocken Blvd., #500
Broomfield, Colorado 80021
Attention: Mr. Jeffrey F. Finn
President and Chief Executive Officer
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
with a copy to:
Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Boulder, Colorado 80302
Attention: James H. Carroll, Esq.
Telephone: (303) 546-4024
Facsimile: (303) 546-4099
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(ii) If to the Registered Owner:
Brown Simpson Strategic Growth Fund, Ltd.
152 West 57th Street, 40th Floor
New York, New York 10029
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, New York 10022
Attention: James E. Kaye, Esq.
Telephone: (212) 872-1000
Facsimile: (212) 872-1002
Each party shall provide written notice to the other parties of any change in
address or facsimile number in accordance with the provisions hereof.
15. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The Company covenants that
if any shares of Common Stock required to be reserved for purposes of the
exercise of Warrants hereunder require registration with or approval of any
governmental authority under any federal or state law, or any national
securities exchange or automated quotation system, before such shares may be
issued upon exercise, the Company will use its best efforts to cause such shares
to be duly registered or approved, as the case may be.
16. FRACTIONAL SHARES. Upon any exercise hereunder, the Company shall not
be required to issue stock certificates representing fractions of shares of the
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, or is unable, to make such a cash payment, the
Registered Owner shall be entitled to receive, in lieu of the final fraction of
a share, one whole share of Common Stock.
17. PAYMENT OF TAX UPON ISSUE OF TRANSFER. The issuance of certificates for
shares of the Common Stock upon exercise of the Warrants shall be made without
charge to the Registered Owners 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 involving the issuance and delivery of
any such certificate upon exercise in a name other than that of the Registered
Owner of such Warrant 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.
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<PAGE> 18
18. WARRANTS OWNED BY COMPANY DEEMED NOT OUTSTANDING. In determining
whether the holders of the outstanding Warrants have concurred in any direction,
consent or waiver under this Warrant, Warrants which are owned by the Company or
any of its Affiliates (other than any holder or transferees or successors or
assigns thereof if such holder is deemed to be an Affiliate solely by reason of
its holding of such Warrants) shall be disregarded and deemed not to be
outstanding for the purpose of any such determination; provided that any
Warrants owned by the Purchasers shall be deemed outstanding for purposes of
making such a determination. Any Warrants so owned which have been pledged in
good faith may be regarded as outstanding if the pledgee establishes to the
satisfaction of the Company the pledgee's right so to act with respect to such
Warrants and that the pledgee is not the Company or any of its Affiliates (other
than any holder or transferees or successors or assigns thereof if such holder
is deemed to be an Affiliate solely by reason of its holding of such Warrants).
19. EFFECT OF TITLES AND HEADINGS; REFERENCES. The titles and headings
herein are for convenience only and shall not affect the construction hereof.
References herein to Sections are to Sections of this Warrant, unless otherwise
expressly provided. 20. NO RIGHTS AS STOCKHOLDER. This Warrant shall not entitle
the Registered Owner to any rights as a stockholder of the Company, including
without limitation, the right to vote, to receive dividends and other
distributions, or to receive notice of, or to attend, meetings of stockholders
or any other proceedings of the Company, unless and to the extent exercised for
shares of Common Stock in accordance with the terms hereof.
21. CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment of its
charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
22. SHAREHOLDER RIGHTS PLAN. Notwithstanding the foregoing, in the event
that the Company shall distribute "poison pill" rights pursuant to a "poison
pill" shareholder rights plan (the "Rights"), the Company shall, in lieu of
making any adjustment pursuant to Section 6, make proper provision so that each
Registered Owner who exercises a Warrant after the record date for such
distribution and prior to the expiration or redemption of the Rights shall be
entitled to receive upon such exercise, in addition to the shares of Common
Stock issuable upon such exercise, a number of Rights to be determined as
follows: (i) if such exercise occurs on or prior to the date for the
distribution to the holders of Rights of separate certificates evidencing such
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<PAGE> 19
Rights (the "Distribution Date"), the same number of Rights to which a holder of
a number of shares of Common Stock equal to the number of shares of Common Stock
issuable upon such exercise at the time of such exercise would be entitled in
accordance with the terms and provisions of and applicable to the Rights; and
(ii) if such exercise occurs after the Distribution Date, the same number of
Rights to which a holder of the number of shares of Common Stock into which this
Warrant was exercisable immediately prior to the Distribution Date would have
been entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights, and in each case subject to the
terms and conditions of the Rights.
23. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and inure to
the benefit of the Registered Owner and its assigns, and shall be binding upon
any Person succeeding to the Company by merger or acquisition of all or
substantially all of the assets of the Company. The Company may not assign this
Warrant or any rights or obligations hereunder without the prior written consent
of the Registered Owner. The Registered Owner may assign this Warrant without
the prior written consent of the Company.
24. GOVERNING LAW. 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. Each party hereby
irrevocably submits to the nonexclusive jurisdiction of the state and federal
courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Warrant and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION
CONTEMPLATED HEREBY OR DISCUSSED HEREIN.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its duly authorized officer as of the date first set forth above.
eSOFT, INC.
By: /s/ Jeffrey Finn
----------------------------------------
Name: Jeffrey Finn
--------------------------------------
Title: President and Chief Executive
Officer
-------------------------------------
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EXHIBIT A
Warrant Exercise Form
TO: eSOFT, INC.
The undersigned hereby: (1) irrevocably elects to subscribe for and
offers to purchase _______ shares of Common Stock of eSOFT, Inc., pursuant to
Warrant No. ___ heretofore issued to ___________________ on ____________, 1999;
(2) encloses a payment of $__________ for these shares at a price of $____ per
share (as adjusted pursuant to the provisions of the Warrant); and (3) requests
that a certificate for the shares be issued in the name of the undersigned and
delivered to the undersigned at the address specified below; or
The undersigned hereby: (1) irrevocably elects to exchange Warrant(s)
to purchase _______ shares of Common Stock of eSOFT, Inc., pursuant to Warrant
No. ___ heretofore issued to ___________________ on ____________, 1999; (2)
encloses Warrant(s) as a payment of $__________ for these shares at a price of
$____ per share (as adjusted pursuant to the provisions of the Warrant); and (3)
requests that a certificate for the shares be issued in the name of the
undersigned and delivered to the undersigned at the address specified below.
Date:
--------------------------------
Investor Name:
--------------------------------
Taxpayer Identification
--------------------------------
Number:
--------------------------------
By:
--------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------
Address:
--------------------------------
Note: The above signature should correspond exactly with the name on
the face of this Warrant Certificate or with the name of assignee
appearing in assignment form below.
AND, if said number of shares shall not be all the shares purchasable under the
within Warrant, a new Warrant Certificate is to be issued in the name of said
undersigned for the balance
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remaining of the shares purchasable thereunder less any fraction of a share paid
in cash and delivered to the address stated above.
21
<PAGE> 1
EXHIBIT 10.4
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION 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,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT.
JUNE 10, 1999
281,150 shares Warrant No. 2
eSOFT, INC.
STOCK PURCHASE WARRANT
Registered Owner: Brown Simpson Strategic Growth Fund, L.P.
This certifies that, for value received, eSOFT, Inc., a Delaware
corporation, the ("Company") grants the following rights to the Registered
Owner, or assigns, of this Warrant:
1. ISSUE. Upon tender (as defined in Section 5) to the Company, the
Company, within three (3) Business Days of the date thereof, shall issue to the
Registered Owner, or assigns, up to the number of shares specified in Section 2
of fully paid and nonassessable shares of Common Stock that the Registered
Owner, or assigns, is otherwise entitled to purchase.
2. NUMBER OF SHARES. The total number of shares of Common Stock that
the Registered Owner, or assigns, of this Warrant is entitled to receive upon
exercise of this Warrant (the "Warrant Shares") is 281,150 shares, subject to
adjustment from time to time as set forth in Section 6. The Company shall at all
times reserve and hold available sufficient shares of Common Stock to satisfy
all exercise, conversion and purchase rights represented by outstanding
convertible securities, options and warrants, including this Warrant. The
Company covenants and agrees that all shares of Common Stock that may be issued
upon the exercise of this Warrant shall, upon issuance, be duly and validly
issued, fully paid and nonassessable, free from all taxes, liens and charges
with respect to the purchase and the issuance of the shares, and shall not have
any legend or restrictions on resale, except as required by Section 3.1(b) of
the Purchase Agreement.
3. EXERCISE PRICE. The initial per share exercise price of this
Warrant, representing the price per share at which the shares of stock issuable
upon exercise of this Warrant may be purchased, is $4.499375 (the "Exercise
Price").
4. EXERCISE PERIOD. This Warrant may be exercised from the Closing Date
(as defined in the Purchase Agreement) up to and including June 10, 2002 (the
"Exercise Period").
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Except as otherwise provided herein, if this Warrant is not exercised during the
Exercise Period, this Warrant and all rights granted under this Warrant shall
expire and lapse.
5. TENDER; ISSUANCE OF CERTIFICATES.
a. This Warrant may be exercised, in whole or in part, by (i)
actual delivery of (a) the Exercise Price in cash, (b) a duly executed
Warrant Exercise Form, a copy of which is attached to this Warrant as
Exhibit A, properly executed by the Registered Owner, or assigns, of
this Warrant, and (c) by surrender of this Warrant, or (ii) if the
resale of the Warrant Shares by the Registered Owner is not then
registered pursuant to an effective registration statement under the
Securities Act, delivery to the Company of a written notice of an
election to effect a Cashless Exercise (as defined below) for the
Warrant Shares specified in the Warrant Exercise Form. The Warrant
Shares so purchased shall be deemed to be issued to the Registered
Owner as of the close of business on the date on which this Warrant
shall have been surrendered, the completed Warrant Exercise Form shall
have been delivered and payment shall have been made for such shares as
set forth above. The payment and Warrant Exercise Form must be
delivered to the registered office of the Company either in person or
as set forth in Section 14.
b. Commencing one hundred twenty (120) days from the Filing Date
(as defined in the Registration Rights Agreement), if, and only if, at
the time of exercise of this Warrant, the Warrant Shares are not
saleable pursuant to an effective registration statement, then in
addition to the exercise of all or any part of this Warrant by payment
of the Exercise Price in cash as provided above, and in lieu of such
payment, the Registered Owner shall have the right to effect a cashless
exercise (a "Cashless Exercise"). In the event of a Cashless Exercise,
the Registered Owner may exercise this ------------------- Warrant in
whole or in part by surrendering this Warrant in exchange for the
number of shares of Common Stock equal to the product of (x) the number
of shares as to which this Warrant is being exercised multiplied by (y)
a fraction, the numerator of which is the Per Share Market Value of the
Common Stock less the Exercise Price then in effect and the denominator
of which is the Per Share Market Value (in each case adjusted for
fractional shares as herein provided).
c. In lieu of physical delivery of this Warrant, provided the
Company's transfer agent is participating in the Depositary Trust
Company ("DTC") Fast Automated Securities Transfer (FAST) program, upon
request of the Registered Owner and in compliance with the provisions
hereof, the Company shall use its best efforts to cause its transfer
agent to electronically transmit the Warrant Shares to the Registered
Owner by crediting the account of the Registered Owner's Prime Broker
with DTC through its Deposit Withdrawal Agent Commission system. The
time period for delivery described herein shall apply to the electronic
transmittals described herein.
d. Certificates for the Warrant Shares so purchased, representing
the aggregate number of shares specified in the Warrant Exercise Form,
shall be delivered to
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<PAGE> 3
the Registered Owner within a reasonable time, not exceeding three (3)
Business Days, after this Warrant shall have been so exercised. The
certificates so delivered shall be in such denominations as may be
requested by the Registered Owner and shall be registered in the name
of the Registered Owner or such other name as shall be designated by
such Registered Owner. If this Warrant shall have been exercised only
in part, then, unless this Warrant has expired, the Company shall, at
its expense, at the time of delivery of such certificates, deliver to
the Registered Owner a new Warrant representing the number of shares
with respect to which this Warrant shall not then have been exercised.
6. ADJUSTMENT OF EXERCISE PRICE.
a. Common Stock Dividends; Common Stock Splits; Reverse Common
Stock Splits. If the Company, at any time while this Warrant is
outstanding, (a) shall pay a stock dividend on its Common Stock, (b)
subdivide outstanding shares of Common Stock into a larger number of
shares, (c) combine outstanding shares of Common Stock into a smaller
number of shares or (d) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, then (i) the Exercise
Price thereafter shall be determined by multiplying the Exercise Price
by a fraction the numerator of which shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding before
such event and the denominator of which shall be the number of shares
of Common Stock outstanding after such event and (ii) the number of
Warrant Shares shall be multiplied by a fraction, the numerator of
which shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event and the denominator of
which shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event. Any adjustment made
pursuant to this Section 6(a) shall become effective immediately after
the record date for the determination of shareholders 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. Rights; Warrants. If the Company, at any time while this Warrant
is outstanding, shall issue rights or warrants to all of the holders of
Common Stock entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Exercise Price, the
Exercise Price shall thereafter be determined by multiplying the
Exercise Price by a fraction, the denominator of which shall be the
number of shares of Common Stock (excluding treasury shares, if any)
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) 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 the Exercise Price. 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
shareholders entitled to receive such rights or warrants.
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<PAGE> 4
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 6(b), if any right or warrant shall expire and
shall not have been exercised, the Exercise Price shall immediately
upon such expiration be recomputed to the Exercise Price which would
have been in effect had the adjustment of the Exercise Price made upon
the issuance of such rights or warrants been made on the basis of (i)
that number of shares of Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised and (ii) such
number of shares of Common Stock were issued and sold for the
consideration actually received by the Company upon the actual exercise
of such rights and warrants plus the consideration, if any, actually
received by the Company for the issuance, sale or grant of all such
rights or warrants.
c. Subscription Rights. If the Company, at any time while this
Warrant is outstanding, shall distribute to all of the holders of
Common Stock evidence of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those
referred to in Sections 6(a) and (b) above) ("Subscription Rights"),
then in each such case the Exercise Price at which the Warrant shall
thereafter be exercisable shall be determined by multiplying the
Exercise Price in effect immediately prior to the record date fixed for
determination of shareholders entitled to receive such distribution by
a fraction, the denominator of which shall be the Per Share Market
Value of Common Stock determined as of the record date mentioned above,
and the numerator of which 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 evidence 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 net assets of the Company, such fair market value
shall be determined by an Appraiser selected in good faith by the
Registered Owner of this Warrant, whose fees and expenses shall be paid
by the Company; and provided, further, that the Company, after receipt
of the determination by such Appraiser shall have the right to select
in good faith an additional Appraiser meeting the same qualifications
in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above. Upon the expiration
or termination of any such Subscription Rights, the Exercise Price of
this Warrant to the extent in any way affected by or computed using
such Subscription Rights, shall be recomputed to reflect the issuance
of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon
the exercise of such Subscription Rights.
d. Rounding. All calculations under this Section 6 shall be made to
the nearest cent or the nearest l/l00th of a share, as the case may be.
e. Notice of Adjustment. Whenever the Exercise Price is adjusted
pursuant to Sections 6(a), (b) or (c), the Company shall promptly
deliver to the Registered Owner
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<PAGE> 5
a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
f. Redemption Events.
(i) The following are "Redemption Events" under this Section
6(f): (A) any reclassification of the Common Stock; (B) any Change
of Control (as such term is defined in the Purchase Agreement); (C)
any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property; (D) any
suspension from listing or delisting of the Common Stock from the
Nasdaq or any Subsequent Market (as defined in the Debentures) on
which the Common Stock is listed for a period of five (5)
consecutive days; (E) the Company's notice to any registered owner
of the Warrants, including by way of public announcement, at any
time, of its intention, for any reason, not to comply with proper
requests for the exercise of any such Warrants; or (F) a breach by
the Company of any representation, warranty, covenant or other term
or condition of the Purchase Agreement, the Registration Rights
Agreement, the Debentures, this Warrant or any other agreement,
document, certificate or other instrument delivered in connection
with the transactions contemplated thereby or hereby, except to the
extent that such breach would not have a Material Adverse Effect
(as defined in Section 2.1(a) of the Purchase Agreement) and
except, in the case of a breach of a covenant which is curable,
only if such breach continues for a period of at least twenty (20)
Business Days after the Company knows or reasonably should have
known of the existence of such breach. On and after the date of any
Redemption Event, the Registered Owner shall have the option to
require the Company to redeem (the "Redemption Right") in cash and
subject to the terms of payment provisions set forth below, from
funds legally available therefor at the time of such redemption,
this Warrant at an aggregate price (the "Redemption Price") equal
to the product of (i) the Average Price immediately preceding the
effective date, the date of the closing, date of occurrence or the
date of the notice, as the case may be, of the Redemption Event
triggering such Redemption Right minus the Exercise Price in effect
immediately prior to such date and (ii) the number of shares of
Common Stock of the Company for which this Warrant could have been
exercised immediately prior to such Redemption Event. After the
occurrence of a Redemption Event specified in clauses (A), (B) or
(C), the Registered Owner shall have the right at his or its
option, in lieu of the Redemption Right, to exercise this Warrant
for shares of stock or other securities, cash or property
receivable upon or deemed to be held by holders of Common Stock
following such Redemption Event; the Registered Owner shall be
entitled following such Redemption Event (upon exercise of this
Warrant and payment of the applicable Exercise Price) to receive
such amount of securities, cash or property as if the Registered
Owner had held the shares of the Common Stock for which this
Warrant could have been exercised immediately prior to such
Redemption Event (without taking into account any limitations or
restrictions on
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<PAGE> 6
the exercisability of this Warrant). In the case of a Redemption
Event specified in clauses (A), (B) or (C), the Company shall not
effect any such Redemption Event unless, prior to the consummation
thereof, each Person (other than the Company) which may be required
to deliver any stock, securities, cash or property upon the
exercise of this Warrant as provided herein shall assume, by
written instrument delivered and reasonably satisfactory to, the
Registered Owner of this Warrant, (x) the obligations of the
Company under this Warrant (and if the Company shall survive the
consummation of such transaction, such assumption shall be in
addition to, and shall not release the Company from, any continuing
obligations of the Company under this Warrant), (y) the obligations
of the Company under this Warrant and (z) the obligation to deliver
to the Registered Owner such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions of this
Section 6(f), the Registered Owner may be entitled to receive.
Nothing in this Section 6(f) shall be deemed to authorize the
Company to enter into any transaction not otherwise permitted by
the Purchase Agreement. This provision shall similarly apply to
successive Redemption Events.
(ii) Payment of Redemption Price. The Company shall pay the
applicable Redemption Price to the Registered Owner of the Warrants
being redeemed in cash on the date which is not more than three (3)
Business Days after the Registered Owner exercises its Redemption
Right by written notice to the Company (the "Redemption Date"). If
the Company shall fail to pay the applicable Redemption Price to
such Registered Owner on the Redemption Date, in addition to any
remedy such Registered Owner may have under this Warrant and the
Purchase Agreement, such unpaid amount shall bear interest at the
rate of 1.25% per month until it is paid in full. Until the Company
pays such unpaid applicable Redemption Price in full to each
Registered Owner, each Registered Owner of Warrants submitted for
redemption pursuant to this Section 6(f) and for which the
applicable Redemption Price has not been paid, shall have the
option, in lieu of redemption, (A) to require the Company to
promptly return to such Registered Owner all of the Warrants that
were submitted for redemption by such Registered Owner under this
Section 6(f) and for which the applicable Redemption Price has not
been paid or (B) to exercise those Warrants for which the
applicable Redemption Price has not been paid at the then
applicable Exercise Price.
g. Reclassification, Etc. If:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
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<PAGE> 7
(iii) the Company shall authorize the granting to the holders
of the Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class or any rights; or
(iv) the approval of any shareholders of the Company shall be
required in connection with any reclassification of the 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 other 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 filed at each office or agency
maintained for the purpose of exercise of this Warrant, and shall cause
to be delivered to the Registered Owner, at least ten (10) Business
Days prior to the applicable record or effective date hereinafter
specified, a notice (provided such notice shall not include any
material non-public information) stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution,
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, 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 or close, 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, cash 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.
h. Adjustment to Exercise Price. If the Company, at any time while
this Warrant is outstanding, takes any of the actions described in this
Section 6(h), then, in order to prevent dilution of the rights granted
under this Warrant, the Exercise Price will be subject to adjustment
from time to time as provided in this Section 6(h).
(i) Adjustment of Exercise Price upon Issuance of Additional
Securities. If at any time while this Warrant is outstanding the
Company issues or sells, or is deemed to have issued or sold, or in
any manner grants any shares of Common Stock, rights or options to
subscribe for or to purchase Common Stock ("Options"), or in any
manner issues or sells any stock or other securities convertible
into or exercisable or exchangeable for Common Stock ("Convertible
Securities", and collectively with the Common Stock and Options,
"Additional Securities") (other than (1) the Underlying Shares or
shares of Common Stock reserved for issuance or deemed to have been
issued by the Company in
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<PAGE> 8
connection with an Approved Stock Plan, (2) the shares of Common
Stock issuable upon the exercise of any options or warrants
outstanding on the date hereof and listed in Schedule 2.1(c) of the
Purchase Agreement, (3) the securities to be issued in the
transactions set forth on such Schedule 2.1(c), (4) the shares of
Common Stock issued or deemed to have been issued as consideration
for an acquisition by the Company of a division, assets or business
(or stock constituting any portion thereof) from another Person,
(5) the shares of Common Stock issued or deemed to have been issued
in connection with collaborative or strategic partner transactions,
provided such issuances are for other than primarily equity
financing purposes, (6) the shares of Common Stock issued or deemed
to have been issued in connection with any equipment leasing
arrangement or debt financing from a bank or similar financial
institution or (7) the shares of Common Stock issued to the holders
of the Debentures in lieu of cash interest payments) for an
effective consideration per share of Common Stock less than the
Exercise Price in effect immediately prior to such issuance, sale
or grant, then immediately after such issue, sale or grant, the
Exercise Price then in effect shall be reduced to equal the
Exercise Price determined by dividing (x) the sum of (I) the
product derived by multiplying the Exercise Price in effect
immediately prior to such issue, sale or grant by the number of
shares of Common Stock outstanding and deemed outstanding (pursuant
to this Section 6(h)) immediately prior to such issue, sale or
grant, plus (II) the consideration, if any, received or deemed to
be received by the Company upon such issue, sale or grant, by (y)
the number of shares of Common Stock outstanding and deemed
outstanding (pursuant to this Section 6(h)) immediately after such
issue, sale or grant.
(A) Change in Option Price or Rate of Conversion. If there is
a change at any time in (i) the purchase price provided for in any
Options, (ii) the additional consideration, if any, payable upon
the issuance, conversion or exchange of any Convertible Securities
or (iii) the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock, then the
Exercise Price in effect at the time of such change shall be
readjusted to the Exercise Price which would have been in effect at
such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at
the time initially granted, issued or sold; provided that no
adjustment shall be made if such adjustment would result in an
increase of the Exercise Price then in effect.
(B) Expiration of Options or Convertible Securities. Upon the
expiration of any Options or Convertible Securities the issuance of
which resulted in an adjustment in the Exercise Price pursuant to
this Section 6(h), if any Option or Convertible Security shall
expire and shall not have been exercised, the Exercise Price shall
immediately upon such expiration be recomputed to the Exercise
Price which would have been in effect had the adjustment of the
Exercise Price made upon the issuance of such Options or
Convertible Securities
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<PAGE> 9
been made on the basis that (1) the only shares of Common Stock so
issued were that number of shares of Common Stock actually
purchased upon the exercise of such Options and the conversion of
such Convertible Securities and (2) such shares of Common Stock
were issued and sold for the consideration actually received by the
Company upon such exercise or conversion plus the consideration, if
any, actually received by the Company for the issuance, sale or
grant of all such Options or Convertible Securities.
(C) Effect on Exercise Price of Certain Events. For purposes
of determining the adjusted Exercise Price under this Section
6(h)(i), the following shall be applicable:
(I) Calculation of Consideration Received. In the case of
the issuance of any Options or Convertible Securities
constituting Additional Securities, the aggregate
consideration received therefor shall be deemed to be the
consideration received by the Company for the issuance of such
Options or Convertible Securities plus the additional minimum
consideration, if any, to be received by the Company upon the
exercise, conversion or exchange thereof. If any Additional
Securities are issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor will be
deemed to be the amount of such cash, without any deduction
being made for any commissions, discounts or other expenses
incurred by the Company for any underwriting of the issue or
otherwise in connection therewith. In case any Additional
Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received
by the Company will be the fair value of such consideration,
except where such consideration consists of securities, in
which case the amount of consideration received by the Company
will be the Average Price of such security on the Trading Day
immediately preceding the date of receipt thereof. In case any
Additional Securities are issued to the owners of the
non-surviving entity in connection with any merger in which
the Company is the surviving entity the amount of
consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the
non-surviving entity as is attributable to such Additional
Securities. The fair value of any consideration other than
cash or securities will be determined jointly by the Company
and the registered owners of a majority of the Underlying
Shares of Warrants then outstanding. If such parties are
unable to reach agreement within ten (10) days after the
occurrence of an event requiring valuation (the "Valuation
Event"), the fair value of such consideration will be
determined within forty-eight (48) hours of the tenth (10th)
day following the Valuation Event by an Appraiser selected in
good faith by the Company and agreed upon in good faith by the
holders of a majority of the Underlying Shares of Warrants
then outstanding. The
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<PAGE> 10
determination of such Appraiser shall be final and binding
upon all parties absent manifest error.
(II) Integrated Transactions. In case any Option is
issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated
transaction in which no specific consideration is allocated to
such Options by the parties thereto, the Options will be
deemed to have been issued for an aggregate consideration of
$0.01.
(III) Treasury Shares. The number of shares of Common
Stock outstanding at any given time does not include shares
owned or held by or for the account of the Company, and the
disposition of any shares so owned or held will be considered
an issue or sale of Common Stock.
(IV) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (1)
to receive a dividend or other distribution payable in
Additional Securities or (2) to subscribe for or purchase
Additional Securities, then such record date will be deemed to
be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or the
date of the granting of such right of subscription or
purchase, as the case may be.
(V) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 6(h)(i)
(subject to the exceptions stated therein) but not expressly
provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom
stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate
adjustment in the Exercise Price so as to protect the rights
of the Registered Owner, or assigns, of this Warrant;
provided, however, that no such adjustment will increase the
Exercise Price as otherwise determined pursuant to this
Section 6(h).
(ii) Adjustment of Number of Shares. Upon each adjustment of
the Exercise Price as a result of the calculations made in this
Section 6, this Warrant shall thereafter evidence the right to
receive, at the adjusted Exercise Price, that number of shares of
Common Stock (calculated to the nearest one-hundredth) obtained by
dividing (A) the product of the aggregate number of shares covered
by this Warrant immediately prior to such adjustment and the
Exercise Price in effect immediately prior to such adjustment of
the Exercise Price by (B) the Exercise Price in effect immediately
after such adjustment of the Exercise Price.
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7. COMPANY CALL OPTION.
a. Company Call Option. This Warrant may be called in whole or in
part at the option of the Company from time to time, subject to the
following conditions, including the conditions set forth in Section
7(b) (the "Company Call Option"), if the Per Share Market Value of the
Common Stock for thirty (30) consecutive Trading Days exceeds two
hundred percent (200%) of the then effective Exercise Price.
b. Company Call Option Notice. Subject to the conditions set forth
in Section 7(a), so long as (i) no Event of Default (or any event that
with the passage of time or giving of notice or both would constitute
an Event of Default) shall have occurred and be continuing, (ii) any
Registration Statement required to be filed and be effective pursuant
to the Registration Rights Agreement is then in effect and (iii) the
Company has a sufficient number of authorized shares of Common Stock
reserved for issuance upon full exercise of the outstanding Warrants,
the Company may call the Warrants by delivering a written notice to the
Registered Owner (a "Company Call Option Notice"). Forty (40) days
after delivery to the Registered Owner of the Company Call Option
Notice by the Company, the Warrants will expire unless previously
exercised by the Registered Owner by such date.
8. NASDAQ LIMITATION. If on any date (the "Determination Date") (a) the
Common Stock is listed for trading on the Nasdaq National Market or the Nasdaq
SmallCap Market, (b) the Exercise Price then in effect is such that the
aggregate number of shares of Common Stock that would then be issuable upon
exercise in full of the then outstanding Warrants as if all such Warrants were
exercised on such Determination Date (without regard to any limitations on
exercise) together with all other shares of Common Stock that would be
integrated with such shares would equal or exceed twenty percent (20%) of the
number of shares of the Common Stock outstanding immediately prior to the
Closing Date (the "Issuable Maximum") and (c) the Company shall not have
previously obtained the vote of the shareholders of the Company (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of the Nasdaq National Market or the Nasdaq SmallCap Market (or any
successor entity) to approve the issuance of shares of Common Stock in excess of
the Issuable Maximum in a private placement whereby shares of Common Stock are
deemed to have been issued at a price that is less than the greater of book
value or fair market value of the Common Stock, then with respect to the
Warrants then held by the Registered Owners for which an exercise would result
in an issuance of shares of Common Stock in excess of such Registered Owner's
pro rata allocation (as described below) or the Issuable Maximum (the "Excess
Shares") the Company may elect to repurchase such Excess Shares by payment in
cash to the Registered Owners an amount equal to the product of (i) the Average
Price less the Exercise Price and (ii) the number of outstanding Warrant Shares
underlying the Excess Shares (the "Repurchase Amount"). Any such election by the
Company must be made in writing to the Registered Owners within two (2) Trading
Days after the first such Determination Date and the payment of such Repurchase
Amount shall be made in full to the Registered Owners with ten (10) Business
Days after the date such notice is delivered. If the Company does not deliver
timely a notice of its election to repurchase under this Section or shall, if it
shall have delivered such a notice, fail to pay the Repurchase Amount hereunder
within ten (10) Business Days thereafter, then the holders of a majority of the
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Warrants then outstanding shall have the option by written notice to the
Company, if applicable, to declare any such notice given by the Company, if
given, to be null and void and require the Company to either: (A) use its best
efforts to obtain the Shareholder Approval applicable to such issuance as soon
as is possible, but in any event not later than the sixtieth (60th) day after
such request unless the Company has previously used its best efforts, but has
failed, to obtain such approval (provided, that if the Company shall fail to
obtain the Shareholder Approval during such 60-day period, the Registered Owner
may demand the cash payment set forth in (B)) herein or (B) pay cash to such
Registered Owner, within five (5) Business Days of such Registered Owner's
notice, in an amount equal to the Repurchase Amount for such Registered Owner's
portion of the Excess Shares. The payment of the Repurchase Amount to each
Registered Owner pursuant to this Section shall be determined on a pro rata
basis based upon the number of Warrants held by such Registered Owner on the
Determination Date which is in excess of the pro rata allocation of the Issuable
Maximum. If the Company fails to pay such Repurchase Amount in full pursuant to
this Section 8 within five (5) Business Days after the date payable, the Company
will pay interest thereon at a rate of twenty percent (20%) per annum to the
exercising Registered Owner, accruing interest daily from the date of exercise
until such amount, plus all such interest thereon, if any, is paid in full.
Until the Company has received the Shareholder Approval no Registered Owner of
the Warrants shall be issued, upon exercise of the Warrants, shares of Common
Stock in an amount greater than such Registered Owner's allocated portion of the
Issuable Maximum.
In no event shall the Company be required to issue shares of
Common Stock upon the exercise of a Warrant if such issuance would violate the
rules of the Nasdaq.
9. RESTRICTION ON EXERCISE BY EITHER THE REGISTERED OWNER OR THE
COMPANY. Notwithstanding anything herein to the contrary, in no event shall any
Registered Owner or the Company have the right or be required to exercise this
Warrant if as a result of such exercise the aggregate number of shares of Common
Stock beneficially owned by such Registered Owner and its Affiliates would
exceed 4.99% of the outstanding shares of the Common Stock following such
exercise. For purposes of this Section 9, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended. The provisions of this Section 9 may be waived by a Registered
Owner as to itself (and solely as to itself) upon not less than sixty-five (65)
days, prior written notice to the Company, and the provisions of this Section 9
shall continue to apply until such 65th day (or later, if stated in the notice
of waiver).
10. OFFICER'S CERTIFICATE. Whenever the number of shares purchasable
upon exercise shall be adjusted as required by the provisions of Section 6, the
Company shall forthwith file in the custody of its secretary or an assistant
secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted number of shares determined as herein
provided, setting forth in reasonable detail the facts requiring such adjustment
and the manner of computing such adjustment. Each such officer's certificate
shall be signed by the chairman, president or chief financial officer of the
Company and by the secretary or any assistant secretary of the Company. Each
such officer's certificate shall be made available at all
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<PAGE> 13
reasonable times for inspection by any Registered Owner of the Warrants and the
Company shall, forthwith after each such adjustment, deliver a copy of such
certificate to the each of the Registered Owners.
11. DEFINITIONS. Capitalized terms used herein and not otherwise
defined herein shall have the meanings given to such terms in the Purchase
Agreement. As used in this Warrant, the following terms have the following
meanings:
"Additional Securities" has the meaning assigned to it in Section
6(h)(i).
"Affiliate" has the meaning set forth in Rule 12b-2 of the Exchange
Act.
"Appraiser" means a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of recognized
standing.
"Approved Stock Plan" shall mean any contract, plan or agreement which
has been approved by the Board of Directors of the Company, pursuant to which
the Company's securities may be issued to any employee, officer, director or
consultant.
"Average Price" has the meaning set forth in the Debentures.
"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.
"Cashless Exercise" has the meaning assigned to it in Section 5(b).
"Closing" has the meaning set forth for "First Closing" as in Section
1.2(a) of the Purchase Agreement.
"Common Stock" means the shares of the Company's Common Stock, par
value $0.01 per share.
"Company" means eSOFT, Inc., a Delaware corporation.
"Company Call Option" has the meaning assigned to it in Section 7(a).
"Company Call Option Notice" has the meaning assigned to it in Section
7(b).
"Convertible Securities" has the meaning assigned to it in Section
6(h)(i).
"Debentures" means the 5% convertible debentures sold pursuant to the
Purchase Agreement.
"Determination Date" has the meaning assigned to it in Section 8.
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<PAGE> 14
"Distribution Date" has the meaning assigned to it in Section 22.
"DTC" has the meaning assigned to it in Section 5(c).
"Event of Default" has the meaning assigned to it in Section 3.1 of the
Debenture.
"Excess Shares" has the meaning assigned to it in Section 8.
"Exercise Period" has the meaning assigned to it the Section 4.
"Exercise Price" has the meaning assigned to it in Section 3.
"Issuable Maximum" has the meaning assigned to it in Section 8.
"Options" has the meaning assigned to it in Section 6(h)(i).
"Per Share Market Value" means on any particular date (i) the closing
bid price per share of the Common Stock on such date (as reported by Bloomberg
Information Services, Inc., or any successor reporting service) on the Nasdaq
or, if the Common Stock is not then quoted on the Nasdaq, any Subsequent Market
on which the Common Stock is then listed or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, (ii) if the Common Stock is not listed then on
the Nasdaq or any Subsequent Market, the closing bid price for a share of Common
Stock in the over-the-counter market, as reported by the National Quotation
Bureau Incorporated (or similar organization or agency succeeding to its
functions of reporting prices) at the close of business on such date or (iii) if
the Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the holder
of this Warrant, whose fees and expenses shall be borne by the Company;
provided, however, that the Company, after receipt of the determination by such
Appraiser, shall have the right to select, in good faith, an additional
Appraiser, in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser; and provided, further that all
determinations of the Per Share Market Value shall be appropriately adjusted for
any stock dividends, stock splits or other similar transactions during such
period.
"Purchase Agreement" means that certain Securities Purchase Agreement,
dated as of June 10, 1999, among the Company and the Purchasers.
"Purchaser" has the meaning set forth in the Purchase Agreement.
"Redemption Date" has the meaning assigned to it in Section 6(f).
"Redemption Event" has the meaning assigned to it in Section 6(f).
"Redemption Price" has the meaning assigned to it in Section 6(f).
"Redemption Right" has the meaning assigned to it in Section 6(f).
14
<PAGE> 15
"Registered Owner" means the person identified on the face of this
Warrant as the registered owner hereof or such other person as shown on the
records of the Company as being the registered owner of this Warrant.
"Registrable Securities" has the meaning assigned to it in the
Registration Rights Agreement.
"Registration Rights Agreement" means that certain Registration Rights
Agreement, dated as of June 10, 1999, among the Company and the Purchasers.
"Repurchase Amount" has the meaning assigned to it in Section 8.
"Rights" has the meaning assigned to it in Section 22.
"Shareholder Approval" has the meaning assigned to it in Section 8.
"Subscription Rights" has the meaning assigned to it in Section 6(c).
"Subsequent Market" means the New York Stock Exchange, American Stock
Exchange or Nasdaq National Market.
"Trading Day(s)" means any day on which the primary market on which
shares of Common Stock are listed is open for trading.
"Underlying Shares" has the meaning assigned to it in Section 2.1(d) of
the Purchase Agreement.
"Valuation Event" has the meaning assigned to it in Section
6(h)(i)(C)(I).
"Warrant(s)" means the warrants issuable at the Closing.
"Warrant Shares" has the meaning assigned to it in Section 2.
12. REGISTRATION RIGHTS. The Company will undertake the registration of
the Common Stock into which the Warrants are exercisable at such times and upon
such terms pursuant to the provisions of the Registration Rights Agreement.
13. RESERVATION OF WARRANT SHARES; LISTING. The Company covenants that
it will at all times reserve and keep available out of its authorized shares of
Common Stock, free from preemptive rights, solely for the purpose of issue upon
exercise of the Warrants as herein provided, such number of shares of the Common
Stock as shall then be issuable upon the exercise of all outstanding Warrants
into Common Stock. As set forth in the Purchase Agreement, the Company shall
take all steps necessary to cause the shares of Common Stock issuable upon
exercise of this Warrant to be listed upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance upon exercise of this Warrant)
and shall maintain, so long as any
15
<PAGE> 16
other shares of Common Stock shall be so listed, such listing of all shares of
Common Stock from time to time issuable upon the exercise of this Warrant; and
the Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
14. NOTICES. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement shall be in
writing and shall be deemed to have been delivered (a) upon receipt, when
delivered personally, (b) upon receipt, when sent by facsimile, provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party (if received before 7:00 p.m. EST where such
notice is received) or the first business day following such delivery (if
received on or after 7:00 p.m. EST where such notice is received) or (c) one (1)
business day after deposit with a nationally recognized overnight courier, in
each case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
(i) If to the Company:
eSOFT, Inc.
295 Interlocken Blvd., #500
Broomfield, Colorado 80021
Attention: Mr. Jeffrey F. Finn
President and Chief Executive Officer
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
with a copy to:
Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Boulder, Colorado 80302
Attention: James H. Carroll, Esq.
Telephone: (303) 546-4024
Facsimile: (303) 546-4099
16
<PAGE> 17
(ii) If to the Registered Owner:
Brown Simpson Strategic Growth Fund, L.P.
152 West 57th Street, 40th Floor
New York, New York 10029
Attention: Paul Gustus
Telephone: (212) 247-8200
Facsimile: (212) 247-1329
with a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, New York 10022
Attention: James E. Kaye, Esq.
Telephone: (212) 872-1000
Facsimile: (212) 872-1002
Each party shall provide written notice to the other parties of any change in
address or facsimile number in accordance with the provisions hereof.
15. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The Company covenants
that if any shares of Common Stock required to be reserved for purposes of the
exercise of Warrants hereunder require registration with or approval of any
governmental authority under any federal or state law, or any national
securities exchange or automated quotation system, before such shares may be
issued upon exercise, the Company will use its best efforts to cause such shares
to be duly registered or approved, as the case may be.
16. FRACTIONAL SHARES. Upon any exercise hereunder, the Company shall
not be required to issue stock certificates representing fractions of shares of
the 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, or is unable, to make such a cash payment, the
Registered Owner shall be entitled to receive, in lieu of the final fraction of
a share, one whole share of Common Stock.
17. PAYMENT OF TAX UPON ISSUE OF TRANSFER. The issuance of certificates
for shares of the Common Stock upon exercise of the Warrants shall be made
without charge to the Registered Owners 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 involving the issuance and delivery of
any such certificate upon exercise in a name other than that of the Registered
Owner of such Warrant 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.
17
<PAGE> 18
18. WARRANTS OWNED BY COMPANY DEEMED NOT OUTSTANDING. In determining
whether the holders of the outstanding Warrants have concurred in any direction,
consent or waiver under this Warrant, Warrants which are owned by the Company or
any of its Affiliates (other than any holder or transferees or successors or
assigns thereof if such holder is deemed to be an Affiliate solely by reason of
its holding of such Warrants) shall be disregarded and deemed not to be
outstanding for the purpose of any such determination; provided that any
Warrants owned by the Purchasers shall be deemed outstanding for purposes of
making such a determination. Any Warrants so owned which have been pledged in
good faith may be regarded as outstanding if the pledgee establishes to the
satisfaction of the Company the pledgee's right so to act with respect to such
Warrants and that the pledgee is not the Company or any of its Affiliates (other
than any holder or transferees or successors or assigns thereof if such holder
is deemed to be an Affiliate solely by reason of its holding of such Warrants).
19. EFFECT OF TITLES AND HEADINGS; REFERENCES. The titles and headings
herein are for convenience only and shall not affect the construction hereof.
References herein to Sections are to Sections of this Warrant, unless otherwise
expressly provided.
20. NO RIGHTS AS STOCKHOLDER. This Warrant shall not entitle the
Registered Owner to any rights as a stockholder of the Company, including
without limitation, the right to vote, to receive dividends and other
distributions, or to receive notice of, or to attend, meetings of stockholders
or any other proceedings of the Company, unless and to the extent exercised for
shares of Common Stock in accordance with the terms hereof.
21. CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment of
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
22. SHAREHOLDER RIGHTS PLAN. Notwithstanding the foregoing, in the
event that the Company shall distribute "poison pill" rights pursuant to a
"poison pill" shareholder rights plan (the "Rights"), the Company shall, in lieu
of making any adjustment pursuant to Section 6, make proper provision so that
each Registered Owner who exercises a Warrant after the record date for such
distribution and prior to the expiration or redemption of the Rights shall be
entitled to receive upon such exercise, in addition to the shares of Common
Stock issuable upon such exercise, a number of Rights to be determined as
follows: (i) if such exercise occurs on or prior to the date for the
distribution to the holders of Rights of separate certificates evidencing such
18
<PAGE> 19
Rights (the "Distribution Date"), the same number of Rights to which a holder of
a number of shares of Common Stock equal to the number of shares of Common Stock
issuable upon such exercise at the time of such exercise would be entitled in
accordance with the terms and provisions of and applicable to the Rights; and
(ii) if such exercise occurs after the Distribution Date, the same number of
Rights to which a holder of the number of shares of Common Stock into which this
Warrant was exercisable immediately prior to the Distribution Date would have
been entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights, and in each case subject to the
terms and conditions of the Rights.
23. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and
inure to the benefit of the Registered Owner and its assigns, and shall be
binding upon any Person succeeding to the Company by merger or acquisition of
all or substantially all of the assets of the Company. The Company may not
assign this Warrant or any rights or obligations hereunder without the prior
written consent of the Registered Owner. The Registered Owner may assign this
Warrant without the prior written consent of the Company.
24. GOVERNING LAW. 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. Each party hereby
irrevocably submits to the nonexclusive jurisdiction of the state and federal
courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Warrant and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION
CONTEMPLATED HEREBY OR DISCUSSED HEREIN.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its duly authorized officer as of the date first set forth above.
eSOFT, INC.
By: /s/ Jeffrey Finn
--------------------------------------------
Name: Jeffrey Finn
------------------------------------------
Title: President and Chief Executive Officer
-----------------------------------------
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<PAGE> 20
EXHIBIT A
Warrant Exercise Form
TO: eSOFT, INC.
The undersigned hereby: (1) irrevocably elects to subscribe for and
offers to purchase _______ shares of Common Stock of eSOFT, Inc., pursuant to
Warrant No. ___ heretofore issued to ___________________ on ____________, 1999;
(2) encloses a payment of $__________ for these shares at a price of $____ per
share (as adjusted pursuant to the provisions of the Warrant); and (3) requests
that a certificate for the shares be issued in the name of the undersigned and
delivered to the undersigned at the address specified below; or
The undersigned hereby: (1) irrevocably elects to exchange Warrant(s)
to purchase _______ shares of Common Stock of eSOFT, Inc., pursuant to Warrant
No. ___ heretofore issued to ___________________ on ____________, 1999; (2)
encloses Warrant(s) as a payment of $__________ for these shares at a price of
$____ per share (as adjusted pursuant to the provisions of the Warrant); and (3)
requests that a certificate for the shares be issued in the name of the
undersigned and delivered to the undersigned at the address specified below.
Date:
---------------------------------
Investor Name:
---------------------------------
Taxpayer Identification
---------------------------------
Number:
---------------------------------
By:
---------------------------------
Printed Name:
---------------------------------
Title:
---------------------------------
Address:
---------------------------------
---------------------------------
---------------------------------
Note: The above signature should correspond exactly with the
name on the face of this Warrant Certificate or with the name
of assignee appearing in assignment form below.
AND, if said number of shares shall not be all the shares purchasable under the
within Warrant, a new Warrant Certificate is to be issued in the name of said
undersigned for the balance remaining of the shares purchasable thereunder less
any fraction of a share paid in cash and delivered to the address stated above.
20
<PAGE> 1
EXHIBIT 99.1
[eSOFT LOGO]
FOR IMMEDIATE RELEASE
Contacts:
Casey Jones or Robyn Phipps Amy Beth Hansman
Metzger Associates eSoft Inc.
303-786-7000 303-444-1600 ext. 224
[email protected] [email protected]
[email protected]
ESOFT COMPLETES FINANCING
BROOMFIELD, Colo., June 11, 1999 -- eSoft Inc. (NASDAQ Small Caps: ESFT), the
company that develops Internet access solutions for small businesses, today
announced it has received an aggregate of $3.5 million from two private
placements -- $500,000 from a placement of 156,250 shares of common stock and
$3,000,000 from a placement of convertible subordinated debentures. Under the
debenture agreement, the investor has the option to invest up to an additional
$5 million in convertible debentures in two additional tranches. Under certain
circumstances, the Company may require the investor to purchase $2 million of
additional debentures.
The debenture financing consists of an initial $3 million of 5% convertible
subordinated debentures due in June 2002. Interest is payable in cash or, at the
Company's option, in shares of common stock. The debentures are convertible at
any time at the investor's option into a fixed number of shares of eSoft common
stock at $3.9125 per share, subject to certain antidilution provisions and
adjustments. The investor also received warrants to purchase 766,773 shares of
common stock with an exercise price of $4.4994 per common share. The warrants
have a three year term. The Company has the ability, under certain
circumstances, to obligate the investor to convert the debentures into common
stock and to exercise the warrants.
As part of the debenture financing, the investor has the option to purchase an
additional $5 million of debentures, together with associated warrants, in two
subsequent tranches. Under certain circumstances, the Company may require the
investor to purchase $2 million of additional debentures, which would be
convertible at $3.9125 per share, together with warrants to purchase 511,182
shares of common stock with an exercise price of $4.4994 per common share. The
third tranche of $3 million of debentures would be convertible at the lower of
(i) the Company's then current market price or (ii) $5.50, but in no event less
than $3.9125 per share. The third tranche of debentures would be accompanied by
warrants with an exercise price of 115% of the third tranche debenture
conversion price. A.G. Edwards & Sons, Inc. acted as the placement agent for the
debentures.
As part of the private placements, the Company has agreed to file a form S-3
Registration Statement with the Securities and Exchange Commission relating to
the resale of the common stock issued in the completed private placement and
issuable upon the conversion of the debentures or the exercise of the warrants.
The securities offered in these two private placements have not been registered
under the Securities Act of 1933, as amended, and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements.
<PAGE> 2
ABOUT eSOFT INC.
eSoft Inc. was founded in 1984 with headquarters in Broomfield, Colo. eSoft
provides a family of Internet appliances and services that enable small to
medium-sized business to harness the full power of the Internet. The TEAM
Internet family of products is designed for businesses with up to 200
workstations and provides low-cost, LAN-to-Internet connectivity and includes a
range of features, including e-mail, Web browsing, firewall security, a Web
server, remote access and virtual private network (VPN) functionality. Contact
eSoft at 295 Interlocken Blvd., #500, Broomfield, Colo., 80021, USA;
303-444-1600 phone; 303-444-1640 fax; www.esoft.com. TEAM Internet is a
registered trademark of eSoft Inc.
###
This release does not explain all of the details of the private placements
described herein, and investors should read the Current Report on Form 8-K to be
filed with the Securities and Exchange Commission regarding the financings to
obtain additional information. In addition, statements made in this Press
Release that are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of Section 27A of the
Securities Act of 1933 ("The Act") and Section 21E of the Securities Exchange
Act of 1934. These statements often can be identified by the use of terms such
as "may," "will," "expect," "believes," "anticipate," "estimate," "approximate"
or "continue," or the negative thereof. The Company intends that such
forward-looking statements be subject to the safe harbors for such statements.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond the control of the Company that could
cause actual results and events to differ materially from historical results of
operations and events and those presently anticipated or projected. These
factors include adverse economic conditions, entry of new and stronger
competitors, inadequate capital, unexpected costs, and failure to gain product
approval in foreign countries and failure to capitalize upon access to new
markets. Additional risks and uncertainties which may affect forward-looking
statements about the Company's TEAM Internet business and prospects include
risks associated with the integration of the recently acquired Apexx Technology
Inc., the possibility that a competitor will develop a more comprehensive or
less expensive TEAM Internet solution, delays in market awareness of eSoft and
its products, possible delays in eSoft's marketing strategy, all of which could
have an immediate and material adverse effect by placing eSoft behind its
competitors. The Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statement or to reflect the occurrence of anticipated or unanticipated
events.
###
