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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 28, 1998
________________________________________________________________________________
GoodNoise Corporation
(Exact name of registrant as specified in charter)
________________________________________________________________________________
Florida 0-24671 65-0207877
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
________________________________________________________________________________
719 Colorado Ave., Palo Alto, CA 94303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 322-8910
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Not applicable
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
On October 28, 1998, the Registrant completed the initial closing (the
"Initial Closing") of a privately placed equity financing. The agreements (the
"Financing Agreements") with the investor (the "Investor") contemplate several
closings of sales of Series A Preferred Stock (the "Series A Shares") and
warrants to purchase Common Stock (the "Warrants") which closings are subject to
various conditions. At the Initial Closing, the Registrant raised proceeds of
approximately $0.5 million through the sale of 500 Series A Shares and Warrants
to purchase 100,000 shares of the Registrant's Common Stock. Each Series A Share
is initially convertible, at the option of its holder, into shares of Common
Stock of the Registrant based upon a conversion price equal to the lower of 85%
of the average of the four lowest closing prices of the Registrant's Common
Stock during the twenty trading days before the conversion date or $7.91. The
Warrants have an initial exercise price of $7.10 per share. Subject to various
conditions, the Financing Agreements provide for the issuance of an additional
500 Series A Shares and Warrants to purchase 100,000 shares of the Registrant's
Common Stock. The Series A Shares and Warrants issued upon exercise of the
Investor Call Option will have the same terms and rights as the Series A Shares
and Warrants issued at the Initial Closing except that the Warrant exercise
price will be based upon the market price of the Registrant's Common Stock at
the time of the issuance of such Warrant.
Subject to various additional conditions, the Investor has the right to
require that the Registrant sell to it additional Series A Shares and Warrants
("Investor Call Option"). The maximum number of additional Series A Shares which
the Investor may require that the Registrant sell to it under the Investor Call
Option is 1,000 Series A Shares, for a purchase price of $1 million, and the
number of shares subject to additional Warrants would be 200,000. The Series A
Shares and Warrants issued upon exercise of the Investor Call Option will have
the same terms and rights as the Series A Shares and Warrants issued at the
Initial Closing except that the Warrant exercise price will be based upon the
market price of the Registrant's Common Stock at the time of the issuance of
such Warrant.
TERMS OF THE SERIES A SHARES
The following is a summary of the rights, preferences and privileges of the
Series A Shares and the rights granted pursuant to the Financing Agreements:
Dividends. The Series A Shares are not entitled to any preference with
respect to dividend payments.
Voting Rights. The holders of the Series A Shares have no voting rights
except as required by law.
Liquidation Preference. Upon any liquidation, dissolution or winding up of
the affairs of the Registrant, the holder of each Series A Share shall be
entitled to be paid $1,000 per share (the amount initially paid for such shares)
plus an amount calculated at the rate of six percent per annum of such price per
share. If the assets of the Registrant upon such event are insufficient to make
such payment in full, then the holders of Series A Shares shall be entitled to
pro rata
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distribution of all the assets of the Registrant. After payment in full of the
liquidation preference to the holders of Series A Shares, such holders are
entitled to no further distributions.
Conversion. The Series A Shares are convertible into shares of Common
Stock at the election of the holder of such Series A Shares at a price (the
"Conversion Rate") equal to the lower of (i) $7.91, (ii) 110% the closing price
on the day 180 days following October 28, 1998 or (iii) the market price when a
holder of Series A Shares delivers notice of his election to convert such
shares. "Market price" is generally determined by the average of the four
lowest closing prices for the 20 trading days prior to the applicable date.
Any Series A Shares outstanding three years after the date such shares were
initially issued automatically convert into shares of the Registrant's Common
Stock at the then applicable Conversion Rate.
Adjustments to Conversion Rate. The Conversion Rate is subject to
proportional adjustment upon any stock split, stock dividend or other similar
change to the capital stock of the Registrant and certain other adjustments upon
future issuances of Common Stock or rights to acquire Common Stock at a price
less than the then applicable Conversion Rate.
Redemption. Under certain circumstances the Company has the right to
redeem the Series A Shares. Under certain other circumstances the Investor has
the right to require the Company to redeem the Series A Shares.
Registration Rights. The Registrant is obligated to promptly (and in any
event prior to December 12, 1998) file a registration statement (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") to cover the resale of the Registrant's Common Stock issuable upon the
conversion of the Series A Shares and exercise of the Warrants as well as
subsequently issuable Series A Shares and Warrants. The Registrant is obligated
to use its reasonable best efforts to have the Registration Statement declared
effective by the SEC and remain effective until the Registrant's Common Stock
subject to the Registration Statement may otherwise be freely traded without
registration. The Registrant is also obligated to list such shares on the OTC
Bulletin Board and to take certain actions to comply with applicable state
securities laws and regulations.
TERMS OF THE WARRANTS
For each Series A Share purchased by an Investor, the Registrant is
obligated to grant to such Investor Warrants to purchase 100 shares of the
Registrant's Common Stock. The Warrants have a four year term and an exercise
price equal to the equal to the lower of (i) the closing price the day prior to
the date of issuance of such warrant or (ii) the closing price on the day six
months following the original date of issuance of such share. The exercise price
of the Warrants is subject to customary adjustments on stock splits, stock
dividends, any merger or acquisition involving the Registrant and similar
transactions, such as to permit the Investors to receive upon exercise of the
Warrants that which they would have received had they exercised the Warrants
immediately prior to any such transaction. The exercise price of the Warrants is
also subject to
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certain other adjustments upon future issuances of Common Stock or rights to
acquire Common Stock at a price less than the then applicable exercise price.
EFFECT ON RIGHTS OF EXISTING SECURITY HOLDERS
There is no change to the rights, preferences or privileges of the holders
of the Registrant's Common Stock as a result of the transactions which are the
subject of the Financing Agreements. However, in addition to the dilutive impact
of the issuance of additional shares of capital stock, the Series A Shares have
a liquidation preference which entitles the holders thereof to receive payment
upon any dissolution or liquidation of the Registrant in preference to the
holders of Common Stock.
ITEM 7. EXHIBITS.
(a) Financial statements of business acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits.
Exhibit No. Description
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3.1 Articles of Amendment for Series A Preferred Stock
10.1 Securities Purchase Agreement dated October 28, 1998
10.2 Registration Rights Agreement dated October 28, 1998
10.3 Form of Warrant
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GOODNOISE CORPORATION
Date: October 29, 1998 By: /s/ Joseph Howell
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Joseph Howell, Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
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3.1 Articles of Amendment for Series A Preferred Stock
10.1 Securities Purchase Agreement dated October 28, 1998
10.2 Registration Rights Agreement dated October 28, 1998
10.3 Form of Warrant
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EXHIBIT 3.1
ARTICLES OF AMENDMENT TO
ARTICLES OF INCORPORATION OF
GOODNOISE CORPORATION
(Pursuant to Sections 607.1006 and 607.0602 of the Florida Business
Corporation Act)
GoodNoise Corporation (the "Company"), a corporation organized and existing
under the Florida Business Corporation Act bearing Document Number L13154, does
hereby certify that, pursuant to authority conferred upon the Company's Board of
Directors by the Articles of Incorporation, as amended, of the Company, the
Board of Directors of the Company at a meeting duly held, adopted resolutions
(i) authorizing a series of the Company's previously authorized preferred stock,
par value $0.01 per share (the "Preferred Stock"), and (ii) providing for the
amendment of Article III of the Company's Articles of Incorporation, as follows:
RESOLVED, that the Company is authorized to issue 2,000
shares of Preferred Stock par value $0.01 per share to be
designated as the Series A Convertible Preferred Stock, and amend
Article III of the Company's Articles of Incorporation to include
the following which states the designation and number of shares,
and fixes the relative rights:
The following shall be added to Article III of the Company's Articles of
Incorporation, and shall be inserted at the end of such article:
ARTICLE III
Series A Convertible Stock:
(1) Designation, Amount and Dividends. The designation of this series,
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which consists of 2,000 shares of Preferred Stock, is the Series A Convertible
Preferred Stock (the "Preferred Shares") and the stated value shall be One
Thousand dollars ($1,000) per share (the "Stated Value"). The Preferred Shares
shall not bear any dividends.
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(2) Holder's Conversion of Preferred Shares. A holder of Preferred Shares
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shall have the right, at such holder's option, to convert the Preferred Shares
into shares of the Company's common stock, $0.01 par value per share (the
"Common Stock"), on the following terms and conditions:
(a) Conversion Right. Subject to the provisions of Section 2(j), at
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any time or times on or after the Issuance Date (as defined below), any holder
of Preferred Shares shall be entitled to convert any whole number of Preferred
Shares into fully paid and nonassessable shares (rounded to the nearest whole
share in accordance with Section 2(h)) of Common Stock, at the Conversion Rate
(as defined below); provided, however, that in no event shall any holder be
entitled to convert Preferred Shares in excess of that number of Preferred
Shares which, upon giving effect to such conversion, would cause the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such conversion. For purposes of the foregoing proviso, the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of the Preferred Shares with respect to which the determination of
such proviso is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (i) conversion of the remaining, nonconverted
Preferred Shares beneficially owned by the holder and its affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company (including, without limitation, any warrants or
convertible preferred stock) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the holder
and its affiliates. Except as set forth in the preceding sentence, for purposes
of this Section 2(a), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended.
(b) Conversion Rate and Other Definitions. The number of shares of
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Common Stock issuable upon conversion of each of the Preferred Shares pursuant
to Sections (2)(a) and 2(g) shall be determined according to the following
formula (the "Conversion Rate"):
(.06)(N/365)(1,000) + 1,000
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Conversion Price
For purposes of these Articles of Amendment, the following terms shall have
the following meanings:
(i) "Conversion Price" means, as of any Conversion Date (as
defined below) or other date of determination, the lower of the Fixed
Conversion Price (as defined below) and the Floating Conversion Price (as
defined below), each in effect as of such date and subject to adjustment as
provided herein;
(ii) "Fixed Conversion Price" means with regard to any Preferred
Shares issued hereunder, (A) on any date prior to the date which is 180
days after the Issuance Date of the Initial Preferred Shares (as defined in
the Securities Purchase Agreement, 110% of the Closing Bid Price (as
defined below) of the Common Stock on the trading day immediately preceding
such Issuance Date (the "Initial Fixed Conversion Price") and (B) on any
date on or after the date which is 180 days after the Issuance Date of the
Initial Preferred Shares the lesser of (I) the Initial Fixed Conversion
Price then in effect and (II) 110% of the Closing Bid Price of the Common
Stock on the date which is 180 days after the Issuance Date of the Initial
Preferred Shares, subject to adjustment as provided herein;
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(iii) "Floating Conversion Price" means, as of any date of
determination, the amount obtained by multiplying the Conversion Percentage
in effect as of such date by the lower of (i) the Market Price as of such
date or (ii) the Closing Bid Price on the Conversion Date (as defined
below), subject to adjustment as provided herein;
(iv) "Conversion Percentage" means (i) from the date beginning
on the Issuance Date of the applicable Preferred Shares and ending on the
date which is 180 days after such Issuance Date, 85% and (ii) after the
date which is 180 days after such Issuance Date, 80%, in each case subject
to adjustment as provided herein;
(v) "Market Price" means, with respect to shares of Common
Stock for any date of determination, the price which shall be computed as
the arithmetic average of the four lowest Closing Bid Prices of the shares
of Common Stock during the 20 consecutive trading days immediately
preceding such date;
(vi) "Closing Bid Price" means, for any security as of any
date, the last closing bid price for such security on the Nasdaq SmallCap
Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the
Nasdaq SmallCap Market is not the principal trading market for such
security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price is reported for such security by Bloomberg, the
last closing trade price of such security as reported by Bloomberg, or, if
no last closing trade price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security as
reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on
any of the foregoing bases, the Closing Bid Price of such security on such
date shall be the fair market value as mutually determined by the Company
and the holders of a majority of the outstanding Preferred Shares including
for purposes of this determination any Preferred Shares with respect to
which the Closing Bid Price is being determined. If the Company and the
holders of Preferred Shares are unable to agree upon the fair market value
of the Common Stock, then such dispute shall be resolved pursuant to
Section 2(f)(iii) with the term "Closing Bid Price" being substituted for
the term "Market Price." (All such determinations to be appropriately
adjusted for any stock dividend, stock, split or other similar transaction
during such period);
(vii) "N" means the number of days from, but excluding, the
Issuance Date through and including the Conversion Date for the Preferred
Shares for which conversion is being elected;
(viii) "Issuance Date" means, with respect to each Preferred
Share, the date of issuance of the applicable Preferred Share;
(ix) "SEC" means the Securities and Exchange Commission;
(x) "Registration Rights Agreement" means that certain
Registration Rights Agreement among the Company and the initial purchasers
of the Preferred Shares; and
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(xi) "Registration Statement" means a Registration Statement
(as defined in the Registration Rights Agreement).
(c) INTENTIONALLY OMITTED.
(d) Adjustment to Conversion Price -- Dilution and Other Events. In
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order to prevent dilution of the rights granted under these Articles of
Amendment, the Conversion Price will be subject to adjustment from time to time
as provided in this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon Issuance of
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Common Stock. If and whenever on or after the Issuance Date, the Company
------------
issues or sells, or is deemed to have issued or sold, any shares of Common
Stock (other than (1) the Conversion Shares (as defined in the Securities
Purchase Agreement between the Company and the initial holders of the
Preferred Shares (the "Securities Purchase Agreement"), (2) any New Equity
Securities (as defined below), (3) any Approved Acquisition (as defined
below) and (4) shares of Common Stock deemed to have been issued by the
Company in connection with an Approved Stock Plan (as defined below)), for
a consideration per share less than a price (the "Applicable Price") equal
to the greater of (A) the average of the Closing Bid Price of the Common
Stock on the five consecutive trading days immediately preceding the date
of such issuance or sale and (B) Fixed Conversion Price in effect
immediately prior to such issuance or sale, then immediately after such
issue or sale, the Fixed Conversion Price then in effect shall be reduced
to an amount equal to the product of (x) the Fixed Conversion Price in
effect immediately prior to such issue or sale and (y) the quotient
determined by dividing (1) the sum of (I) the product of the Applicable
Price and the number of shares of Common Stock Deemed Outstanding (as
defined below) immediately prior to such issue or sale, and (II) the
consideration, if any, received by the Company upon such issue or sale, by
(2) the product of (I) the Applicable Price and (II) the number of shares
of Common Stock Deemed Outstanding (as defined below) immediately after
such issue or sale. For purposes of determining the adjusted Fixed
Conversion Price under this Section 2(d)(i), the following shall be
applicable:
(A) Issuance of Options. If the Company in any manner
-------------------
grants any rights or options to subscribe for or to purchase Common Stock
(other than pursuant to an Approved Stock Plan or upon conversion of the
Preferred Shares or exercise of the Warrants) or any stock or other
securities convertible into or exchangeable for Common Stock (such rights
or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is issuable
upon the exercise of such Options or upon conversion or exchange of such
Convertible Securities is less than the Applicable Price, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to be outstanding and to have been issued and sold by the Company
for such price per share. For purposes of this Section 2(d)(i)(A), the
"price per share for which Common Stock is issuable upon exercise of such
Options or upon conversion or exchange of such Convertible Securities" is
determined by dividing (I) the total amount, if any, received or receivable
by the Company as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the Company
upon the exercise of all such Options, plus in the case of such Options
which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the issuance
or sale of such Convertible Securities and the conversion or exchange
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thereof, by (II) the total maximum number of shares of Common Stock
issuable upon exercise of such Options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such
Options. No adjustment of the Fixed Conversion Price shall be made upon the
actual issuance of such Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such Common
Stock upon conversion or exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If the Company
----------------------------------
in any manner issues or sells any Convertible Securities and the price per
share for which Common Stock is issuable upon such conversion or exchange
is less than the Applicable Price, then the maximum number of shares of
Common Stock issuable upon conversion or exchange of such Convertible
Securities shall be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For the purposes of this
Section 2(d)(i)(B), the "price per share for which Common Stock is issuable
upon such conversion or exchange" is determined by dividing (I) the total
amount received or receivable by the Company as consideration for the issue
or sale of such Convertible Securities, plus the minimum aggregate amount
of additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (II) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities. No adjustment of the Fixed Conversion Price shall
be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustment of the Fixed Conversion Price had been or are to be made
pursuant to other provisions of this Section 2(d)(i), no further adjustment
of the Fixed Conversion Price shall be made by reason of such issue or
sale.
(C) Change in Option Price or Rate of Conversion. If the
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purchase price provided for in any Options, the additional consideration,
if any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Fixed
Conversion Price in effect at the time of such change shall be readjusted
to the Fixed 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 Fixed Conversion Price then in effect.
(D) Certain Definitions. For purposes of determining the
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adjusted Fixed Conversion Price under this Section 2(d)(i), the following
terms have meanings set forth below:
(I) "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, consultant or other service provider.
(II) "Common Stock Deemed Outstanding" means, at any
given time, the number of shares of Common Stock actually outstanding at
such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof
regardless of whether the Options or Convertible
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Securities are actually exercisable at such time, but excluding any shares
of Common Stock issuable upon conversion of the Preferred Shares.
(III) "New Equity Securities" means, the issuance by
the Company on or prior to the 90th day after the Issuance Date of the
Initial Preferred Shares of any equity securities or any instrument
convertible into or exercisable or exchangeable for equity securities of
the Company.
(IV) "Approved Acquisition means the issuance of
securities pursuant to that certain Agreement and Plan of Reorganization by
and among the Company, Creative Fulfillment, Inc. and certain other parties
dated as of October 8, 1998 without amendment or waiver and that certain
Agreement and Plan of Reorganization by and among the Company and Nordic
Entertainment Worldwide, Inc. and certain other parties dated as of October
8, 1998 without amendment or waiver.
(E) Effect on Fixed Conversion Price of Certain Events. For
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purposes of determining the adjusted Fixed Conversion Price under this
Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If any
-------------------------------------
Common Stock, Options or Convertible 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 net amount received by the Company
therefor. In case any Common Stock, Options or Convertible 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 arithmetic average of the Closing Bid Prices of such
security for the five (5) consecutive trading days immediately preceding
the date of receipt. In case any Common Stock, Options or Convertible
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 Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares 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 independent, reputable
appraiser selected by the Company. 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
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 a consideration of $.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
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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
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the holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Common Stock, Options
or in Convertible Securities or (2) to subscribe for or purchase Common
Stock, Options or Convertible 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.
(ii) Adjustment of Fixed Conversion Price upon Subdivision or
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Combination of Common Stock. If the Company at any time subdivides (by any
---------------------------
stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Fixed Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time
combines (by combination, reverse stock split or otherwise) one or more
classes of its outstanding shares of Common Stock into a smaller number of
shares, the Fixed Conversion Price in effect immediately prior to such
combination will be proportionately increased.
(iii) Adjustment of Floating Conversion Price upon Issuance of
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Convertible Securities. If the Company in any manner issues or sells
----------------------
Convertible Securities that are convertible into or exchangeable for Common
Stock at a price which varies with the market price of the Common Stock
(the formulation for such variable price being herein referred to as, the
"VARIABLE PRICE") and such Variable Price is not calculated using the same
formula used to calculate the Floating Conversion Price in effect
immediately prior to the time of such issue or sale, the Company shall
provide written notice thereof via facsimile and overnight courier to each
holder of the Preferred Shares ("VARIABLE NOTICE") on the date of issuance
of such Convertible Securities. If the holders of Preferred Shares
representing at least two-thirds (2/3) of the Preferred Shares then
outstanding provide written notice via facsimile and overnight courier (the
"VARIABLE PRICE ELECTION NOTICE") to the Company within five (5) business
days of receiving a Variable Notice that such holders desire to replace the
Floating Conversion Price then in effect with the Variable Price described
in such Variable Notice, then from and after the date of the Company's
receipt of the Variable Price Election Notice the Floating Conversion Price
will automatically be replaced with the Variable Price (together with such
modifications to these Articles of Amendment as may be required to give
full effect to the substitution of the Variable Price for the Floating
Conversion Price). A holder's delivery of a Variable Price Election Notice
shall serve as the consent required to amend these Articles of Amendment
pursuant to Section 13. In the event that a holder delivers a Conversion
Notice at any time after the Company's issuance of Convertible Securities
with a Variable Price but before such holder's receipt of the Company's
Variable Notice, then such holder shall have the option by written notice
to the Company to rescind such Conversion Notice or to have the Conversion
Price be equal to such Variable Price for the conversion effected by such
Conversion Notice.
(iv) Reorganization, Reclassification, Consolidation, Merger or
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Sale. Any recapitalization, reorganization, reclassification,
----
consolidation, merger, sale of all or substantially all of the Company's
assets to another Person (as defined below) or other transaction which is
effected in such a way that holders of Common Stock are entitled to
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receive (either directly or upon subsequent liquidation) stock, securities
or assets with respect to or in exchange for Common Stock (other than a
merger effected solely to change the Company's state of incorporation) is
referred to herein as "Organic Change." Prior to the consummation of any
Organic Change, the Company will make appropriate provision (in form and
substance satisfactory to the holders of a majority of the Preferred Shares
then outstanding) to insure that each of the holders of the Preferred
Shares will thereafter have the right to acquire and receive in lieu of or
in addition to (as the case may be) the shares of Common Stock otherwise
acquirable and receivable upon the conversion of such holder's Preferred
Shares, such shares of stock, securities or assets that would have been
issued or payable in such Organic Change with respect to or in exchange for
the number of shares of Common Stock which would have been acquirable and
receivable upon the conversion of such holder's Preferred Shares had such
Organic Change not taken place (without taking into account any limitations
or restrictions on the timing or amount of conversions). In any such case,
the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Preferred
Shares then outstanding) with respect to such holders' rights and interests
to insure that the provisions of this Section 2(d) and Section 2(e) will
thereafter be applicable to the Preferred Shares (including, in the case of
any such consolidation, merger or sale in which the successor entity or
purchasing entity is other than the Company, an immediate adjustment of the
Fixed Conversion Price to the value for the Common Stock reflected by the
terms of such consolidation, merger or sale, if the value so reflected is
less than the Fixed Conversion Price in effect immediately prior to such
consolidation, merger or sale). The Company will not effect any such
consolidation, merger or sale, unless prior to the consummation thereof,
the successor entity (if other than the Company) resulting from
consolidation or merger or the entity purchasing such assets assumes, by
written instrument (in form and substance reasonably satisfactory to the
holders of a majority of the Preferred Shares then outstanding), the
obligation to deliver to each holder of Preferred Shares such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire. "Person" shall mean an
individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or
any department or agency thereof.
(v) Certain Events. If any event occurs of the type
--------------
contemplated by the provisions of this Section 2(d) 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 Conversion Price so as to protect the rights
of the holders of the Preferred Shares; provided, however, that no such
adjustment will increase the Conversion Price as otherwise determined
pursuant to this Section 2(d).
(vi) Notices.
--------
(A) Promptly following any adjustment of the Conversion
Price, the Company will give written notice thereof to each holder of the
Preferred Shares, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(B) The Company will give written notice to each holder
of the Preferred Shares at least twenty (20) days prior to the date on
which the Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II) with respect to
any pro rata subscription offer to holders of Common Stock or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or
-8-
<PAGE>
liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(C) The Company will also give written notice to each
holder of Preferred Shares at least twenty (20) days prior to the date on
which any Organic Change, dissolution or liquidation will take place and in
no event shall such notice be provided to such holder prior to such
information being made known to the public.
(e) Purchase Rights. In addition to any adjustments of the Conversion
---------------
Price pursuant to Section 2(d), if at any time after the Issuance Date the
Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the "Purchase Rights"), then the holders
of the Preferred Shares will be entitled to acquire, upon the terms applicable
to such Purchase Rights, the aggregate Purchase Rights which such holder could
have acquired if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Preferred Shares (without taking into
account any limitations or restrictions on the timing or amount of conversions)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of the Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(f) Mechanics of Conversion. Subject to the Company's inability to
-----------------------
fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 4:
(i) Holder's Delivery Requirements. To convert Preferred Shares
------------------------------
into full shares of Common Stock on any date (the "Conversion Date"), the
holder thereof shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., Eastern Time on such date, a copy of a
fully executed notice of conversion as described in Section 19 (the
"Conversion Notice"), to the Company and (B) surrender to a common carrier
for delivery to the Company or its designated transfer agent (the "Transfer
Agent"), as soon as practicable following such date, the original
certificate(s) representing the Preferred Shares being converted (or an
indemnification undertaking in customary form with respect to such shares
in the case of their loss, theft or destruction) (the "Preferred Stock
Certificate(s)").
(ii) Company's Response. Upon receipt by the Company of a
------------------
facsimile copy of a Conversion Notice, the Company shall as soon as
practicable, but in any event no later than the next business day, send,
via facsimile, a confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Company or the Transfer Agent of the Preferred
Stock Certificate(s) to be converted pursuant to a Conversion Notice, the
Company or the Transfer Agent (as applicable) shall, on the next business
day following the date of receipt, (I) issue and surrender to a common
carrier for overnight delivery to the address specified in the Conversion
Notice, a certificate, registered in the name of the holder or its
designee, for the number of shares of Common Stock to which the holder
shall be entitled, or (II) credit such aggregate number of shares of Common
Stock to which the holder shall be entitled to the holder's or its
designee's balance account with The Depository Trust Company. If the
number of Preferred Shares represented by the Preferred Stock
Certificate(s) submitted for conversion is greater than the number of
Preferred Shares being converted, then the Company or Transfer Agent, as
the case may be, shall, as soon as practicable and in no event later than
two business days after receipt of the Preferred Stock
-9-
<PAGE>
Certificate(s) and at its own expense, issue and deliver to the holder a
new Preferred Stock Certificate representing the number of Preferred Shares
not converted.
(iii) Dispute Resolution. In the case of a dispute as to the
------------------
determination of the Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall promptly issue to the holder the number
of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via
facsimile within one business day of receipt of such holder's Conversion
Notice. If such holder and the Company are unable to agree upon the
determination of the Market Price or arithmetic calculation of the
Conversion Rate within one (1) business day of such disputed determination
or arithmetic calculation being submitted to the holder, then the Company
shall within one (1) business day submit via facsimile (A) the disputed
determination of the Market Price to an independent, reputable investment
bank or (B) the disputed arithmetic calculation of the Conversion Rate to
its independent, outside accountant. The Company shall cause the investment
bank or the accountant, as the case may be, to perform the determinations
or calculations and notify the Company and the holder of the results no
later than forty-eight (48) hours from the time it receives the disputed
determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all
parties absent manifest error.
(iv) Record Holder. The person or persons entitled to receive
-------------
the shares of Common Stock issuable upon a conversion of Preferred Shares
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within five (5)
-----------------------------------
business days after the Company's or the Transfer Agent's receipt of the
Preferred Stock Certificates to be converted the Company shall fail (I) to
issue a certificate for the number of shares of Common Stock to which a
holder is entitled or to credit the holder's balance account with The
Depository Trust Company for such number of shares of Common Stock to which
the holder is entitled upon such holder's conversion of Preferred Shares or
(II) to issue a new Preferred Stock Certificate representing the number of
Preferred Shares to which such holder is entitled pursuant to Section
2(f)(ii), in addition to all other available remedies which such holder may
pursue hereunder and under the Securities Purchase Agreement (including
indemnification pursuant to Section 7 thereof), the Company shall pay
additional damages to such holder on each date after the fifth business day
that such conversion or delivery of such Preferred Stock Certificates, as
the case may be, is not timely effected in an amount equal to 0.5% of the
product of (A) the sum of the number of shares of Common Stock not issued
to the holder on a timely basis pursuant to Section 2(f)(ii) and to which
such holder is entitled and, in the event the Company has failed to deliver
a Preferred Stock Certificate to the holder on a timely basis pursuant to
Section 2(f)(ii), the number of shares of Common Stock issuable upon
conversion of the Preferred Shares represented by such Preferred Stock
Certificate, as of the last possible date which the Company could have
issued such Preferred Stock Certificate to such holder without violating
Section 2(f)(ii) and (B) the Closing Bid Price of the Common Stock on the
last possible date which the Company could have issued such Common Stock
and the Preferred Stock Certificate, as the case may be, to such holder
without violating Section 2(f)(ii).
(g) Mandatory Conversion at Maturity. If any Preferred Shares remain
--------------------------------
outstanding on the Maturity Date (as defined below), then all such Preferred
Shares shall be converted as of such date in accordance with this Section 2 as
if the holders of such Preferred Shares
-10-
<PAGE>
had given the Conversion Notice on the Maturity Date; provided, however, that if
a Triggering Event (other than a Triggering Event resulting from the Section
3(d)(vi) due to the Company's breach of a representation) has occurred and is
continuing on the Maturity Date, then the Company shall, within five business
days following the Maturity Date (unless otherwise notified in writing by the
holder of its request to have the Preferred Shares converted into Common Stock),
pay to each holder of Preferred Shares then outstanding, in immediately
available funds, an amount equal to the Triggering Event Redemption Price as of
the Maturity Date. All holders of Preferred Shares shall thereupon surrender all
Preferred Stock Certificates, duly endorsed for cancellation, to the Company or
the Transfer Agent, provided that the Company has complied with its obligations
under this Section 2(g). "Maturity Date" means the date which is three years
after the applicable Issuance Date for the Preferred Shares.
(h) Fractional Shares. The Company shall not issue any fraction of a
-----------------
share of Common Stock upon any conversion. All shares of Common Stock (including
fractions thereof) issuable upon conversion of more than one Preferred Share by
a holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of a fraction of a share of Common
Stock. If, after the aforementioned aggregation, the issuance would result in
the issuance of a fraction of a share of Common Stock, the Company shall round
such fraction of a share of Common Stock up or down to the nearest whole share.
(i) Taxes. The Company shall pay any and all taxes that may be
-----
payable with respect to the issuance and delivery of Common Stock upon the
conversion of Preferred Shares.
(3) Redemption at Option of Holders.
-------------------------------
(a) Redemption Option Upon Major Transaction. In addition to all
----------------------------------------
other rights of the holders of Preferred Shares contained herein, simultaneous
with or after the occurrence of a Major Transaction (as defined below), each
holder of Preferred Shares shall have the right, at such holder's option, to
require the Company to redeem all or a portion of such holder's Preferred Shares
at a price per Preferred Share equal to the greater of (i) 130% of the
Liquidation Value (as defined in Section 9) and (ii) the product of (A) the
Conversion Rate on the date the Notice of Redemption at Option of Buyer Upon
Major Transaction is given and (B) the Closing Bid Price on the date of the
public announcement of such Major Transaction or the next date on which the
exchange or market on which the Common Stock is traded is open if such public
announcement is made (X) after 12:00 p.m., Central Time, time on such date or
(Y) on a date on which the exchange or market on which the Common Stock is
traded is closed ("Major Transaction Redemption Price").
(b) Redemption Option Upon Triggering Event. In addition to all other
---------------------------------------
rights of the holders of Preferred Shares contained herein, simultaneous with or
after the occurrence of a Triggering Event (as defined below), each holder of
Preferred Shares shall have the right, at such holder's option, to require the
Company to redeem all or a portion of such holder's Preferred Shares at a price
per Preferred Share equal to the greater of (i) 130% of the Liquidation Value
and (ii) the product of (A) the Conversion Rate on the date of such holder's
delivery of a Notice of Redemption at Option of Holder Upon Triggering Event (as
defined below) and (B) the greater of (I) the Closing Bid Price on the trading
day immediately preceding such Triggering Event or (II) the Closing Bid Price on
the date of the holder's delivery to the Company of a Notice of Redemption at
Option of Holder Upon Triggering Event (as defined below) or, if such date of
delivery is not a trading day, the next date on which the exchange or market on
which the Common Stock is traded is open ("Triggering Event Redemption Price"
and, collectively with "Major Transaction Redemption Price," the "Redemption
Price").
-11-
<PAGE>
(c) "Major Transaction". A "Major Transaction" shall be deemed to
-------------------
have occurred at such time as any of the following events:
(i) the consolidation, merger or other business combination of
the Company with or into another Person (other than pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company);
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to and accepted
by the holders of more than 30% of the outstanding shares of Common Stock.
(d) "Triggering Event". A "Triggering Event" shall be deemed to have
------------------
occurred at such time as any of the following events:
(i) the failure of the Registration Statement to be declared
effective by the SEC on or prior to the date that is 135 days after the
Issuance Date to which such Registration Statement is related;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Preferred Shares for sale of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of at least five consecutive
days or for an aggregate of at least ten days in any 365 day period;
(iii) the suspension from trading or quotation or failure of the
Common Stock to be listed or quoted on the over-the-counter market on the
electronic bulletin board (the "OTC"), the Nasdaq SmallCap Market, the
Nasdaq National Market, The New York Stock Exchange, Inc. or The American
Stock Exchange, Inc. for a period of five consecutive days or for an
aggregate of at least ten days in any 365 day period;
(iv) the Company's notice to any holder of Preferred Shares,
including by way of public announcement, at any time, of its intention not
to comply with proper requests for conversion of any Preferred Shares into
shares of Common Stock, including due to any of the reasons set forth in
Section 4(a), or the Company's failure to deliver Conversion Shares within
ten days of the Conversion Date;
(v) upon the Company's receipt of a Conversion Notice, the
Company shall not be obligated to issue the Conversion Shares due to the
provisions of Section 12; or
(vi) any representation or warranty by the Company was not true
and correct at the time made (including the Issuance Date) or the Company
breaches any covenant or other term or condition of the Securities Purchase
Agreement, the Registration Rights Agreement, these Articles of Amendment,
the Irrevocable Transfer Agent Instructions (as defined in the Securities
Purchase Agreement), or any other agreement, document, certificate or other
instrument delivered in connection with the transactions contemplated
thereby or hereby, except (i) to the extent that such breach would not have
a
-12-
<PAGE>
Material Adverse Effect (as defined in Section 3(a) of the Securities
Purchase Agreement), and (ii) in the case of a breach of a covenant which
is curable, such breach continues for a period of less than ten days.
(e) Mechanics of Redemption at Option of Holder Upon Major
------------------------------------------------------
Transaction. No sooner than fifteen days nor later than ten days prior to the
consummation of a Major Transaction, but not prior to the public announcement of
such Major Transaction, the Company shall deliver written notice thereof via
facsimile and overnight courier (a "Notice Of Major Transaction") to each holder
of Preferred Shares. At any time after receipt of a Notice of Major Transaction
(or, in the event a Notice of Major Transaction is not delivered at least ten
days prior to a Major Transaction, at any time on or after the date which is ten
days prior to a Major Transaction), any holder of the Preferred Shares then
outstanding may require the Company to redeem all or a portion of the holder's
Preferred Shares, which redemption shall be effective concurrent with the
consummation of the Major Transaction, then outstanding by delivering written
notice thereof via facsimile and overnight courier (a "Notice of Redemption at
Option of Holder Upon Major Transaction") to the Company, which Notice of
Redemption at Option of Holder Upon Major Transaction shall indicate (i) the
number of Preferred Shares that such holder is submitting for redemption and
(ii) the applicable Major Transaction Redemption Price, as calculated pursuant
to Section 3(a).
(f) Mechanics of Redemption at Option of Holder Upon Triggering
-----------------------------------------------------------
Event. Within one business day after the occurrence of a Triggering Event, the
- -----
Company shall deliver written notice thereof via facsimile and overnight courier
(a "Notice of Triggering Event") to each holder of Preferred Shares. At any time
after the earlier of a holder's receipt of a Notice of Triggering Event and such
holder becoming aware of a Triggering Event, any holder of the Preferred Shares
then outstanding may require the Company to redeem all or a portion of the
holder's Preferred Shares then outstanding by delivering written notice thereof
via facsimile and overnight courier (a "Notice Of Redemption at Option of Holder
Upon Triggering Event") to the Company, which Notice of Redemption at Option of
Holder Upon Triggering Event shall indicate (i) the number of Preferred Shares
that such holder is submitting for redemption and (ii) the applicable Triggering
Event Redemption Price, as calculated pursuant to Section 3(b).
(g) Payment of Redemption Price. Upon the Company's receipt of a
---------------------------
Notice(s) of Redemption at Option of Holder Upon Triggering Event or a Notice(s)
of Redemption at Option of Holder Upon Major Transaction from any holder of
Preferred Shares, the Company shall immediately notify each holder of Preferred
Shares by facsimile of the Company's receipt of such Notice(s) of Redemption at
Option of Holder Upon Triggering Event or Notice(s) of Redemption at Option of
Holder Upon Major Transaction and each holder which has sent such a notice shall
promptly submit to the Company or its Transfer Agent such holder's Preferred
Stock Certificates which such holder has elected to have redeemed. The Company
shall deliver the applicable Triggering Event Redemption Price, in the case of a
redemption pursuant to Section 3(f), to such holder within five business days
after the Company's receipt of a Notice of Redemption at Option of Holder Upon
Triggering Event and, in the case of a redemption pursuant to Section 3(e), the
Company shall deliver the applicable Major Transaction Redemption Price
concurrent with the consummation of the Major Transaction; provided that a
holder's Preferred Stock Certificates shall have been so delivered to the
Company; and provided further that if the Company is unable to redeem all of the
Preferred Shares to be redeemed, the Company shall redeem an amount from each
holder of Preferred Shares being redeemed equal to such holder's pro rata amount
(based on the number of Preferred Shares held by such holder relative to the
number of Preferred Shares outstanding) of all Preferred Shares being redeemed.
If the Company shall fail to redeem all of the Preferred Shares submitted for
redemption in addition to any remedy such holder of Preferred
-13-
<PAGE>
Shares may have under these Articles of Amendment, the Securities Purchase
Agreement and the Registration Rights Agreement, the applicable Redemption Price
payable in respect of such unredeemed Preferred Shares shall bear interest at
the rate of 2.5% per month (prorated for partial months) until paid in full.
Until the Company pays such unpaid applicable Redemption Price in full to a
holder of Preferred Shares submitted for redemption, such holder shall have the
option (the "Void Optional Redemption Option") to, in lieu of redemption,
require the Company to promptly return to such holder(s) all of the Preferred
Shares that were submitted for redemption by such holder(s) under this Section 3
and for which the applicable Redemption Price has not been paid, by sending
written notice thereof to the Company via facsimile (the "Void Optional
Redemption Notice"). Upon the Company's receipt of such Void Optional Redemption
Notice(s) and prior to payment of the full applicable Redemption Price to such
holder, (i) the Notice(s) of Redemption at Option of Holder Upon Triggering
Event or the Notice(s) of Redemption at Option of Holder Upon Major Transaction,
as the case may be, shall be null and void with respect to those Preferred
Shares submitted for redemption and for which the applicable Redemption Price
has not been paid, (ii) the Company shall immediately return any Preferred
Shares submitted to the Company by each holder for redemption under this Section
3(g) and for which the applicable Redemption Price has not been paid and (iii)
if the redemption was caused by a Triggering Event involving the Company's
inability to issue Conversion Shares because of the Exchange Cap (as defined in
Section 12), the holders of at least two-thirds of the Preferred Shares then
outstanding, including Preferred Shares submitted for redemption pursuant to
this Section 3 with respect to which the applicable Redemption Price has not
been paid, may direct the Company to immediately delist the Common Stock from
the exchange or automated quotation system on which the Common Stock is traded
and have the Common Stock, at such holders' option, traded in the electronic
bulletin board or the "pink sheets." Notwithstanding the foregoing, in the event
of a dispute as to the determination of the Closing Bid Price or the arithmetic
calculation of the Redemption Price, such dispute shall be resolved pursuant to
Section 2(f)(iii) above with the term "Closing Bid Price" being substituted for
the term "Market Price" and the term "Redemption Price" being substituted for
the term "Conversion Rate". A holder's delivery of a Void Optional Redemption
Notice and exercise of its rights following such notice shall not effect the
Company's obligations to make any payments which have accrued prior to the date
of such notice. Payments provided for in this Section 3 shall have priority to
payments to other stockholders in connection with a Major Transaction.
(4) Inability to Fully Convert.
--------------------------
(a) Holder's Option if Company Cannot Fully Convert. If, upon the
-----------------------------------------------
Company's receipt of a Conversion Notice or on the Maturity Date, the Company
cannot issue shares of Common Stock registered for resale under the Registration
Statement (or which are exempt from the registration requirements under the 1933
Act pursuant to Rule 144(k) under the 1933 Act) for any reason, including,
without limitation, because the Company (x) does not have a sufficient number of
shares of Common Stock authorized and available, (y) is otherwise prohibited by
applicable law or by the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Company or its Securities, including without limitation the Exchange Cap (as
defined below), from issuing all of the Common Stock which is to be issued to a
holder of Preferred Shares pursuant to a Conversion Notice or (z) fails to have
a sufficient number of shares of Common Stock registered for resale under the
Registration Statement, then the Company shall issue as many shares of Common
Stock as it is able to issue in accordance with such holder's Conversion Notice
and pursuant to Section 2(f) and, with respect to the unconverted Preferred
Shares, the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such
-14-
<PAGE>
holder's Conversion Notice ("Mandatory Redemption") at a price per
Preferred Share (the "Mandatory Redemption Price") equal to the Triggering
Event Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z), require the Company to issue
restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(f);
(iii) void its Conversion Notice and retain or have returned, as
the case may be, the nonconverted Preferred Shares that were to be
converted pursuant to such holder's Conversion Notice (provided that a
holder's voiding its Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of
such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(y), require the Company to issue shares
of Common Stock in accordance with such holder's Conversion Notice and
pursuant to Section 2(f) at a Conversion Price equal to the average of the
Closing Bid Prices of the Common Stock on the five consecutive trading days
immediately preceding such holder's Notice in Response to Inability to
Convert (as defined below).
(b) Mechanics of Fulfilling Holder's Election. The Company shall
-----------------------------------------
immediately send via facsimile to a holder of Preferred Shares, upon receipt of
a facsimile copy of a Conversion Notice from such holder which cannot be fully
satisfied as described in Section 4(a), a notice of the Company's inability to
fully satisfy such holder's Conversion Notice (the "Inability to Fully Convert
Notice"). Such Inability to Fully Convert Notice shall indicate (i) the reason
why the Company is unable to fully satisfy such holder's Conversion Notice, (ii)
the number of Preferred Shares which cannot be converted and (iii) the
applicable Mandatory Redemption Price. Such holder shall notify the Company of
its election pursuant to Section 4(a) above by delivering written notice via
facsimile to the Company ("Notice in Response to Inability to Convert").
(c) Payment of Mandatory Redemption Price. If such holder shall elect
-------------------------------------
to have its shares redeemed pursuant to Section 4(a)(i), the Company shall pay
the Mandatory Redemption Price in cash to such holder within five (5) days of
the Company's receipt of the holder's Notice in Response to Inability to
Convert. If the Company shall fail to pay the applicable Mandatory Redemption
Price to such holder on a timely basis as described in this Section 4(c) (other
than pursuant to a dispute as to the determination of the arithmetic calculation
of the Redemption Price), in addition to any remedy such holder of Preferred
Shares may have under these Articles of Amendment, the Securities Purchase
Agreement and the Registration Rights Agreement, such unpaid amount shall bear
interest at the rate of 2.5% per month (prorated for partial months) until paid
in full. Until the full Mandatory Redemption Price is paid in full to such
holder, such holder may void the Mandatory Redemption with respect to those
Preferred Shares for which the full Mandatory Redemption Price has not been paid
and receive back such Preferred Shares. Notwithstanding the foregoing, if the
Company fails to pay the applicable Mandatory Redemption Price within such five
(5) days time period due to a dispute as to the determination of the Mandatory
Redemption Price, such dispute shall be resolved pursuant to Section 2(f)(iii)
with the term "Mandatory Redemption Price" being substituted for the term
"Conversion Rate".
(d) Pro-rata Conversion and Redemption. In the event the Company
----------------------------------
receives a Conversion Notice, Notice of Redemption at Option of Holder Upon
Major Transaction or Notice of Redemption at Option of Holder Upon Triggering
Event from more than one holder of
-15-
<PAGE>
Preferred Shares on the same day and the Company can convert and/or redeem some,
but not all, of the Preferred Shares pursuant to this Section 4, the Company
shall convert and/or redeem from each holder of Preferred Shares electing to
have Preferred Shares converted and redeemed at such time an amount equal to
such holder's pro-rata amount (based on the number of Preferred Shares held by
such holder relative to the number of Preferred Shares outstanding) of all
Preferred Shares being converted and redeemed at such time.
(5) Company's Right to Redeem.
-------------------------
(a) Right to Redeem. Subject to Sections 5(a)(iv) and 5(a)(v) below,
---------------
if the Company shall have issued any New Equity Securities during the 90 day
period following the Issuance Date of the Initial Preferred Shares, the Company
shall have the right, in its sole discretion, to redeem ("Redemption at the
Company's Election"), from time to time, any or all of the Preferred Shares at
the Redemption Price at the Company's Election (as defined below). If the
Company elects to redeem some, but not all, of the Preferred Shares, the Company
shall redeem a pro rata amount from each holder of Preferred Shares based on the
number of Preferred Shares held by such holder relative to the number of
Preferred Shares outstanding.
(i) Redemption Price at the Company's Election. The
------------------------------------------
"Redemption Price at the Company's Election" shall be an amount per
Preferred Share equal to the product of (A) 1.15 multiplied by (B) the sum
of (I) (.06)(P/365)(Stated Value) plus (II) Stated Value; where "P" means
the number of days from, but excluding, the Issuance Date through and
including the Date of Redemption at the Company's Election (as defined in
Section 5(a)(ii)).
(ii) Mechanics of Redemption at the Company's Election. The
-------------------------------------------------
Company shall have a period of two trading days beginning on the day
following the expiration of any Exchange Offer Notice Period (as defined in
the Securities Purchase Agreement) during which it may at its election
deliver written notice of its Redemption at the Company's Election via
facsimile and overnight courier ("Notice of Redemption at the Company's
Election") to (A) each holder of the Preferred Shares and (B) the Transfer
Agent. The Company shall effect any Redemption at the Company's Election
on the 10th trading days after delivering the Notice of Redemption of the
Company's Election. Such Notice of Redemption at the Company's Election
shall indicate (I) the number of Preferred Shares that have been selected
for redemption, (II) the date that such redemption is to become effective
(the "Date of Redemption at the Company's Election") and (III) the
applicable Redemption Price at the Company's Election. Notwithstanding the
above, any holder may convert into Common Stock pursuant to Section 2, on
or prior to the date immediately preceding the Date of Redemption at the
Company's Election, any Preferred Shares held by such holder, including
Preferred Shares that have been selected for Redemption at the Company's
Election pursuant to this Section 5(a).
(iii) Payment of Redemption Price. Each holder submitting
---------------------------
Preferred Shares being redeemed under this Section 5(a) shall send such
holder's Preferred Stock Certificates so redeemed to the Transfer Agent
within five (5) business days after the Date of Redemption at the Company's
Election, and the Company shall pay the applicable Redemption Price at the
Company's Election to that holder in cash within two business days after
such holder's Preferred Stock Certificates are delivered to the Company or
its Transfer Agent. If the Company shall fail to pay the applicable
Redemption Price at the Company's Election to such holder on a timely basis
as described in this Section 5(a)(iii), in addition to any remedy such
holder of Preferred Shares may have under these Articles of Amendment
-16-
<PAGE>
and the Securities Purchase Agreement including but not limited to
declaring such Redemption at the Company's Election null and void, such
holder shall be entitled to interest at the rate of 2.5% per month until
the Redemption Price at the Company's Election is paid in full or until
such Redemption at the Company's Election shall be declared null and void
with respect to any such holder. Notwithstanding the foregoing, if the
Company fails to pay the applicable Redemption Price at the Company's
Election to a holder within the time period described in this Section 5(a)
due to a dispute as to the arithmetic calculation of the Redemption Price
at the Company's Election, such dispute shall be resolved pursuant to
Section 2(f)(iii) above with the term "Redemption Price at the Company's
Election" being substituted for the term "Conversion Rate."
(iv) Company Must Have Immediately Available Funds or Credit
-------------------------------------------------------
Facilities. The Company shall not be entitled to send any Notice of
----------
Redemption at the Company's Election pursuant to Section 5(a)(ii) above and
begin the redemption procedure under this Section 5(a), unless it has:
(A) the full amount of the Redemption Price at the
Company's Election in cash, available in a demand or other immediately
available account in a bank or similar financial institution;
(B) credit facilities, with a bank or similar financial
institutions that are immediately available and unrestricted for use in
redeeming the Preferred Shares, in the full amount of the Redemption Price
at the Company's Election; or
(C) a combination of the items set forth in the preceding
clauses (A) and (B), aggregating the full amount of the Redemption Price at
the Company's Election.
(v) Certain Conditions During Notice Period. The Company shall
---------------------------------------
not be entitled to redeem the Preferred Shares on a Date of Redemption at
the Election of the Company, unless each of the following conditions are
satisfied as of the date of the Notice of Redemption at the Company's
Election and on each day from such date until and including the later of
the Date of Redemption at the Company's Election and the date on which the
Company pays the applicable Redemption Price:
(A) The Company has delivered Conversion Shares upon
conversion of the Preferred Shares and Warrant Shares upon exercise of the
Warrants to the Buyers on a timely basis as set forth in Section 2(f)(ii)
of this Articles of Amendment and Sections 2(a) and 2(b) of the Warrants,
respectively; and
(B) The Company otherwise has satisfied its obligations
and is not in default under these Articles of Amendment, the Securities
Purchase Agreement, the Warrants and the Registration Rights Agreement.
(6) Reissuance of Certificates. In the event of a conversion or redemption
--------------------------
pursuant to these Articles of Amendment of less than all of the Preferred Shares
represented by a particular Preferred Stock Certificate, the Company shall
promptly cause to be issued and delivered to the holder of such Preferred Shares
a preferred stock certificate representing the remaining Preferred Shares which
have not been so converted or redeemed.
(7) Reservation of Shares. The Company shall, so long as any of the
---------------------
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely
-17-
<PAGE>
for the purpose of effecting the conversion of the Preferred Shares, such number
of shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Preferred Shares then outstanding (without regard to
any limitations on conversions); provided that the number of shares of Common
Stock so reserved shall at no time be less than 200% of the number of shares of
Common Stock for which the Preferred Shares are at any time convertible. The
initial number of shares of Common Stock reserved for conversions of the
Preferred Shares and each increase in the number of shares so reserved shall be
allocated pro rata among the holders of the Preferred Shares based on the number
of Preferred Shares held by each holder at the time of issuance of the Preferred
Shares or increase in the number of reserved shares, as the case may be. In the
event a holder shall sell or otherwise transfer any of such holder's Preferred
Shares, each transferee shall be allocated a pro rata portion of the number of
reserved shares of Common Stock reserved for such transferor. Any shares of
Common Stock reserved and which remain allocated to any person or entity which
does not hold any Preferred Shares shall be allocated to the remaining holders
of Preferred Shares, pro rata based on the number of Preferred Shares then held
by such holder.
(8) Voting Rights. Holders of Preferred Shares shall have no voting
-------------
rights, except as required by law, including but not limited to the Florida
Business Corporation Act, and as expressly provided in these Articles of
Amendment.
(9) Liquidation, Dissolution, Winding-Up. In the event of any voluntary or
------------------------------------
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Preferred Shares shall be entitled to receive in cash out of the assets
of the Company, whether from capital or from earnings available for distribution
to its stockholders (the "Preferred Funds"), before any amount shall be paid to
the holders of any of the capital stock of the Company of any class junior in
rank to the Preferred Shares in respect of the preferences as to the
distributions and payments on the liquidation, dissolution and winding up of the
Company, an amount per Preferred Share equal to the sum of (i) $1,000 and (ii)
an amount equal to the product of (.06) (N/365) ($1,000) (such sum being
referred to as the "Liquidation Value"); provided that, if the Preferred Funds
are insufficient to pay the full amount due to the holders of Preferred Shares
and holders of shares of other classes or series of preferred stock of the
Company that are of equal rank with the Preferred Shares as to payments of
Preferred Funds (the "Pari Passu Shares"), then each holder of Preferred Shares
and Pari Passu Shares shall receive a percentage of the Preferred Funds equal to
the full amount of Preferred Funds payable to such holder as a liquidation
preference, in accordance with their respective Articles of Amendment, as a
percentage of the full amount of Preferred Funds payable to all holders of
Preferred Shares and Pari Passu Shares. The purchase or redemption by the
Company of stock of any class, in any manner permitted by law, shall not, for
the purposes hereof, be regarded as a liquidation, dissolution or winding up of
the Company. Neither the consolidation or merger of the Company with or into
any other Person, nor the sale or transfer by the Company of less than
substantially all of its assets, shall, for the purposes hereof, be deemed to be
a liquidation, dissolution or winding up of the Company. No holder of Preferred
Shares shall be entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Company other than the amounts
provided for herein; provided that a holder of Preferred Shares shall be
entitled to all amounts previously accrued with respect to amounts owed
hereunder.
(10) Preferred Rank; Participation.
-----------------------------
-18-
<PAGE>
(a) All shares of Common Stock shall be of junior rank to all
Preferred Shares in respect to the preferences as to distributions and payments
upon the liquidation, dissolution and winding up of the Company. The rights of
the shares of Common Stock shall be subject to the preferences and relative
rights of the Preferred Shares. Without the prior express written consent of
the holders of not less than two-thirds (2/3) of the then outstanding Preferred
Shares, the Company shall not hereafter authorize or issue additional or other
capital stock that is of senior or equal rank to the Preferred Shares in respect
of the preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company other than New Equity Securities for
which a New Financing Notice (as defined in the Securities Purchase Agreement )
has been given which may rank equal to (but not senior to) the Preferred Shares.
Without the prior express written consent of the holders of not less than two-
thirds (2/3) of the then outstanding Preferred Shares, the Company shall not
hereafter authorize or make any amendment to the Company's Articles of
Incorporation or bylaws, or file any resolution of the board of directors of the
Company with the Florida Secretary of State containing any provisions, which
would adversely affect or otherwise impair the rights or relative priority of
the holders of the Preferred Shares relative to the holders of the Common Stock
or the holders of any other class of capital stock. In the event of the merger
or consolidation of the Company with or into another corporation, the Preferred
Shares shall maintain their relative powers, designations and preferences
provided for herein and no merger shall result inconsistent therewith.
(b) Subject to the rights of the holders, if any, of the Pari Passu
Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the holders
of Common Stock to the same extent as if such holders of Preferred Shares had
converted the Preferred Shares into Common Stock (without regard to any
limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.
(11) Restriction on Redemption and Cash Dividends with respect to Other
------------------------------------------------------------------
Capital Stock. Until all of the Preferred Shares have been converted or
- -------------
redeemed as provided herein, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, its Common Stock
without the prior express written consent of the holders of not less than two-
thirds (2/3) of the then outstanding Preferred Shares.
(12) Limitation on Number of Conversion Shares. Notwithstanding any other
-----------------------------------------
provision herein, the Company shall not be obligated to issue any shares of
Common Stock upon conversion of the Preferred Shares if the issuance of such
shares of Common Stock would exceed that number of shares of Common Stock which
the Company may issue upon Conversion of the Preferred Shares (the "Exchange
Cap") without breaching the Company's obligations under the rules or
regulations, if any, of OTC or any national securities or automated quotation
system on which the Common Stock is quoted or listed requiring the approval of
the Company's stockholders for the issuance of a certain number of shares of
Common Stock, except that such limitation shall not apply in the event that the
Company (i) obtains the approval of its stockholders as required by applicable
rules and regulations, if any, of OTC or any national securities or automated
quotation system on which the Common Stock is quoted or listed for issuances of
Common Stock in excess of the Exchange Cap or (ii) obtains a written opinion
from outside counsel to the Company that such approval is not required, which
opinion shall be reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding. To the extent that the above limitation is
applicable to the Company, until such approval or written opinion is obtained,
no purchaser of Preferred Shares pursuant to the Securities Purchase Agreement
(the "Purchasers") shall be issued, upon conversion of Preferred Shares, shares
of Common Stock in an amount greater than the product of (x) the
-19-
<PAGE>
Exchange Cap amount multiplied by (y) a fraction, the numerator of which is the
number of Preferred Shares issued to such Purchaser pursuant to the Securities
Purchase Agreement and the denominator of which is the aggregate amount of all
the Preferred Shares issued to the Purchasers pursuant to the Securities
Purchase Agreement (the "Cap Allocation Amount"). In the event that any
Purchaser shall sell or otherwise transfer any of such Purchaser's Preferred
Shares, the transferee shall be allocated a pro rata portion of such Purchaser's
Cap Allocation Amount. In the event that any holder of Preferred Shares shall
convert all of such holder's Preferred Shares into a number of shares of Common
Stock which, in the aggregate, is less than such holder's Cap Allocation Amount,
then the difference between such holder's Cap Allocation Amount and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares on a pro rata basis in proportion to the number of Preferred Shares then
held by each such holder.
(13) Vote to Change the Terms of or Issue Preferred Shares. The
-----------------------------------------------------
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, shall be required for (a) any change to
these Articles of Amendment or the Company's Articles of Incorporation which
would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares, or (b) any issuance of Preferred
Shares other than pursuant to the Securities Purchase Agreement.
(14) Lost or Stolen Certificates. Upon receipt by the Company of evidence
---------------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing the Preferred Shares, and, in the case
of loss, theft or destruction, of an indemnification undertaking by the holder
to the Company and, in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Company shall execute and deliver new
preferred stock certificate(s) of like tenor and date; provided, however, the
Company shall not be obligated to re-issue preferred stock certificates if the
holder contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
(15) Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in these Articles of Amendment shall
- -----------------
be cumulative and in addition to all other remedies available under these
Articles of Amendment, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of these Articles of Amendment.
The Company covenants to each holder of Preferred Shares that there shall be no
characterization concerning this instrument other than as expressly provided
herein. Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the holder thereof and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of the Preferred Shares and
that the remedy at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or threatened breach, the
holders of the Preferred Shares shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
(16) Specific Shall Not Limit General; Construction. No specific provision
----------------------------------------------
contained in these Articles of Amendment shall limit or modify any more general
provision contained herein.
-20-
<PAGE>
These Articles of Amendment shall be deemed to be jointly drafted by the Company
and the initial holders of the Preferred Shares and shall not be construed
against any person as the drafter hereof.
(17) Failure or Indulgence Not Waiver. No failure or delay on the part of
--------------------------------
a holder of Preferred Shares in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof (except to the extent that such
power, right or privilege must, in accordance with the terms of these Articles
of Amendment, be exercised within a specified period of time and such period of
time has lapsed without such power, right or privilege being exercised), 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.
(18) Notices. Any notice required to be delivered pursuant to the terms of
-------
these Articles of Amendment shall be delivered, unless otherwise provided in
these Articles of Amendment, in accordance with the terms, and subject to the
notice provisions of, the Securities Purchase Agreement.
(19) Conversion Notice.
-----------------
Reference is made to these Articles of Amendment, of the Series A
Convertible Preferred Stock (the "Articles Of Amendment"). In accordance with
and pursuant to the Articles of Amendment, the undersigned hereby elects to
convert the number of shares of Series A Convertible Preferred Stock, par value
$0.01 per share (the "Preferred Shares"), of GoodNoise Corporation, a Florida
corporation (the "Company"), indicated below into shares of Common Stock, par
value $.01 per share (the "Common Stock"), of the Company, by tendering the
stock certificate(s) representing the Preferred Shares specified below as of the
date specified below.
Date of Conversion: _______________________________________________________
Number of Preferred Shares to be converted: _______________________________
Stock certificate no(s). of Preferred Shares 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 Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to: _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Facsimile Number: _______________________________________________________
Authorization: _______________________________________________________
-21-
<PAGE>
By: ___________________________________________________
Title: ________________________________________________
Dated: _______
Account Number:
(if electronic book entry transfer): _____________________________________
Transaction Code Number
(if electronic book entry transfer): _____________________________________
-22-
<PAGE>
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment to
be signed by Gene Hoffman, its President , as of the 20th day of October, 1998.
GOODNOISE CORPORATION
By: /s/
-----------------------------------------------
Name: Gene Hoffman
Its: President
<PAGE>
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of October 28,
1998, by and among GoodNoise Corporation, a Florida corporation, with
headquarters located at 719 Colorado Avenue, Palo Alto, California 94303 (the
"COMPANY"), and the investors listed on the Schedule of Buyers attached hereto
(individually, a "BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("REGULATION D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 ACT");
B. The Company has authorized the following new series of its Preferred
Stock, par value $.001 per share: the Company's Series A Convertible Preferred
Stock (the "PREFERRED STOCK"), which shall be convertible into shares of the
Company's Common Stock, par value $0.01 per share (the "COMMON STOCK") (as
converted, the "CONVERSION SHARES"), in accordance with the terms of the
Company's Articles of Amendment setting forth the Designation, Preferences and
Rights of the Preferred Stock, substantially in the form attached hereto as
Exhibit A (the "ARTICLES OF AMENDMENT");
- ---------
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, initially an aggregate of 500 shares of Preferred Stock (the
"INITIAL PREFERRED SHARES") in the respective amounts set forth opposite each
Buyer's name on the Schedule of Buyers and warrants, in substantially the form
attached hereto as Exhibit E (the "INITIAL WARRANTS"), to acquire up to 200
shares of Common Stock for each Initial Preferred Share at the Warrant Exercise
Price (as defined in the Warrant) (as exercised, collectively, the "INITIAL
WARRANTS SHARES");
D. Subject to the terms and conditions set forth in this Agreement, each
Buyer shall have the obligation to purchase an aggregate of 500 shares of
Preferred Stock (pro rata based on the number of Initial Preferred Shares each
Buyer purchased in relation to the total number of Initial Preferred Shares)
(the "MANDATORY PREFERRED SHARES") along with Warrants, in substantially the
form attached hereto as Exhibit E (the "MANDATORY WARRANTS"), to acquire up to
200 shares of Common Stock for each Mandatory Preferred Share at the Warrant
Exercise Price (as exercised, collectively, the "MANDATORY WARRANT SHARES");
E. Subject to the terms and conditions set forth in this Agreement, each
Buyer may have the right to purchase, at its sole option, an aggregate of 1,000
shares of Preferred Stock (pro rata based on the number of Initial Preferred
Shares each Buyer purchased in relation to the total number of Initial Preferred
Shares) (the "ADDITIONAL PREFERRED SHARES") (the Initial Preferred
1
<PAGE>
Shares, the Mandatory Preferred Shares and the Additional Preferred Shares
collectively are referred to in this Agreement as the "PREFERRED SHARES") along
with warrants, in substantially the form attached hereto as Exhibit E (the
"ADDITIONAL WARRANTS") (the Initial Warrants, the Mandatory Warrants and the
Additional Warrants, collectively are referred to in this Agreement as the
"WARRANTS"), to acquire up to 200 shares of Common Stock for each Additional
Preferred Share at the Warrant Exercise Price (as exercised, collectively the
"ADDITIONAL WARRANT SHARES") (the Initial Warrant Shares, the Mandatory Warrant
Shares and the Additional Warrant Shares collectively are referred to in this
Agreement as the "WARRANT SHARES"); and
F. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS
---------
AGREEMENT") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
-------------------------------------
a. Purchase of Preferred Shares. Subject to satisfaction (or waiver)
----------------------------
of the conditions set forth in Sections 6(a) and 7(a) below, the Company shall
issue and sell to the Buyers and the Buyers severally shall purchase from the
Company an aggregate of 500 Initial Preferred Shares, in the respective amounts
set forth opposite each Buyer's name on the Schedule of Buyers along with the
related Initial Warrants (the "Initial Closing"). Subject to the satisfaction
(or waiver) of the conditions set forth in Sections 1(c), 6(b) and 7(b) below,
the Company shall issue and sell to each Buyer and each Buyer shall purchase
from the Company that number of Mandatory Preferred Shares equal to the number
of Initial Preferred Shares each Buyer purchased along with the related
Mandatory Warrants (the "Mandatory Closing"). Subject to the satisfaction (or
waiver) of the conditions set forth in Sections 1(d), 6(c) and 7(c) below, at
the option of each Buyer, the Company shall issue and sell to each such Buyer
and each such Buyer may purchase from the Company an aggregate of up to that
number of Additional Preferred Shares equal to twice the number of Initial
Preferred Shares each Buyer purchased along with the related Additional Warrants
(the "Additional Closing") (the Initial Closing, the Mandatory Closing and the
Additional Closing collectively are referred to in this Agreement as the
"Closings"). The purchase price (the "Purchase Price") of each Preferred Share
at each of the Closings shall be $1,000.
b. The Initial Closing Date. The date and time of the Initial
------------------------
Closing (the "INITIAL CLOSING DATE") shall be 10:00 a.m. Central Time, within
three (3) business days following the date hereof, subject to satisfaction (or
waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and
7(a) below (or such later date as is mutually agreed to by the Company and the
Buyers). The Initial Closing shall occur on the Initial
2
<PAGE>
Closing Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street,
Suite 1600, Chicago, Illinois 60661-3693.
c. The Mandatory Closing Date. The date and time of the Mandatory
--------------------------
Closing (the "MANDATORY CLOSING DATE") shall be 10:00 a.m. Central Time, on the
fifth business day after the Buyers have received written notice from the
Company that the Initial Registration Statement (as defined in the Registration
Rights Agreement) covering 200% of the Conversion Shares issuable upon
conversion of the Initial Preferred Shares and Mandatory Preferred Shares and
100% of the Initial Warrant Shares and Mandatory Warrant Shares upon exercise of
the Additional Warrants and Mandatory Warrants, as the case may be, has been
declared effective by the SEC and subject to satisfaction (or waiver) of the
conditions to the Mandatory Closing set forth in Sections 6(b) and 7(b) and the
conditions set forth in this paragraph (or such other date as is mutually agreed
to by the Company and the Buyers). The Mandatory Closing shall occur on the
Mandatory Closing Date at the offices of Katten Muchin & Zavis, 525 West Monroe
Street, Suite 1600, Chicago, Illinois 60661-3693.
d. The Additional Closing Date. The date and time of the Additional
---------------------------
Closing (the "ADDITIONAL CLOSING DATE") shall be 10:00 a.m. Central Time, on the
fifth business day after the Buyers have received written notice from the
Company that the Registration Statement (as defined in the Registration Rights
Agreement) covering 200% of the Conversion Shares issuable upon conversion of
the Additional Preferred Shares and Additional Warrant Shares upon exercise of
the Additional Warrant to be issued at such Additional Closing has been declared
effective by the SEC and subject to satisfaction (or waiver) of the conditions
to the Additional Closing set forth in Sections 6(c) and 7(c) and the conditions
set forth in this paragraph (or such other date as is mutually agreed to by the
Company and the Buyers). At any time beginning on the Initial Closing Date and
ending on the earlier of (i) the date which is 365 days after the date that the
Registration Statement covering the Conversion Shares issuable upon conversion
of the Initial Preferred Shares has been declared effective by the SEC and (ii)
the date which is on the second anniversary of the Initial Closing Date (the
"ADDITIONAL NOTICE PERIOD"), but subject to the requirements of Sections 6(c)
and 7(c), the Buyers may purchase Additional Preferred Shares by delivering
written notice to the Company (the "ADDITIONAL SHARE NOTICE") on any date during
the Additional Notice Period (an "ADDITIONAL SHARE NOTICE DATE"). The Additional
Share Notice shall set forth (i) the number of Additional Preferred Shares to be
purchased by each Buyer at the Additional Closing and (ii) the aggregate
Purchase Price for such Buyer's Additional Preferred Shares. The Company shall
file the Registration Statement referred to in the first sentence of this
Section 1(d) within 20 days after the Additional Share Notice Date and shall
notify each Buyer in writing on the same day that such Registration Statement is
declared effective by the SEC. Notwithstanding the foregoing, no Buyer shall be
entitled to deliver an Additional Share Notice if any Buyer shall have
previously consummated an Additional Share Closing. The Additional Closing shall
occur on the Additional Closing Date at the offices of Katten Muchin & Zavis,
525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693.
3
<PAGE>
e. Form of Payment. On each of the Closing Dates, (i) each Buyer
---------------
shall pay the Purchase Price to the Company for the Preferred Shares and
Warrants to be issued and sold to such Buyer at the respective Closing, by wire
transfer of immediately available funds in accordance with the Company's written
wire instructions, and (ii) the Company shall deliver to each Buyer, stock
certificates (in the denominations as such Buyer shall request) (the "STOCK
CERTIFICATES") representing such number of the Preferred Shares which such Buyer
is then purchasing (as indicated opposite such Buyer's name on the Schedule of
Buyers) along with the Warrants such Buyer is purchasing (as indicated opposite
such Buyer's name on the Schedule of Buyers), duly executed on behalf of the
Company and registered in the name of such Buyer or its designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
--------------------------------------
Each Buyer represents and warrants with respect to only itself that:
a. Investment Purpose. Such Buyer (i) is acquiring the Preferred
------------------
Shares and the Warrants, (ii) upon conversion of the Preferred Shares, will
acquire the Conversion Shares then issuable and (iii) upon exercise of the
Warrants, will acquire the Warrant Shares issuable upon exercise thereof (the
Preferred Shares, the Conversion Shares, the Warrants and the Warrant Shares
collectively are referred to herein as the "SECURITIES"), for its own account
for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act.
b. Accredited Investor Status. Such Buyer is an "accredited
--------------------------
investor" as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. Such Buyer understands that the
----------------------
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.
d. Information. Such Buyer 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 Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's
4
<PAGE>
representations and warranties contained in Sections 3 and 9(m) below. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Securities.
e. No Governmental Review. Such Buyer understands that no United
----------------------
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. Transfer or Resale. Such Buyer understands that except as
------------------
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that the Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such Securities can be sold,
assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act (or
a successor rule thereto) ("RULE 144"); (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder. Notwithstanding the foregoing, the Securities may be
pledged in connection with a bona fide margin account.
g. Legends. Such Buyer understands that the certificates or other
-------
instruments representing the Preferred Shares and the Warrants and, until such
time as the sale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares and the
Warrant Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION
5
<PAGE>
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL,
IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the 1933 Act, (ii) in connection with a
sale transaction, such holder provides the Company with an opinion of counsel,
in a generally acceptable form, to the effect that a public sale, assignment or
transfer of such Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that such
Securities can be sold without restriction pursuant to Rule 144(k). Each Buyer
acknowledges, covenants and agrees to sell the Securities represented by a
certificate(s) from which the legend has been removed, only pursuant to (i) a
registration statement effective under the 1933 Act, or (ii) advice of counsel
that such sale is exempt from registration required by Section 5 of the 1933
Act.
h. Authorization; Enforcement. This Agreement and the Registration
--------------------------
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of such Buyer and constitute valid and binding agreements of such
Buyer enforceable in accordance with their terms, subject as to enforceability
to general principles of equity and to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors' rights and
remedies.
i. Residency. Such Buyer is a resident of that country or
---------
jurisdiction specified in the Schedule of Buyers.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that:
a. Organization and Qualification. The Company and its
------------------------------
"SUBSIDIARIES" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) (a complete list of which is set forth in Schedule 3(a)) are
-------------
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own their properties and to carry on their
business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign corporation to do business and is in
6
<PAGE>
good standing in every jurisdiction in which its ownership of property or the
nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not have a Material Adverse Effect. As used in this Agreement, "MATERIAL
ADVERSE EFFECT" means any material adverse effect on the business, properties,
assets, operations, results of operations, financial condition or prospects of
the Company and its Subsidiaries, if any, taken as a whole, or on the
transactions contemplated hereby or by the agreements and instruments to be
entered into in connection herewith, or on the authority or ability of the
Company to perform its obligations under the Transaction Documents (as defined
below) or the Articles of Amendment.
b. Authorization; Enforcement; Compliance with Other Instruments.
-------------------------------------------------------------
(i) The Company has the requisite corporate power and authority to enter into
and perform its obligations under this Agreement, the Registration Rights
Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section
5), the Warrants and each of the other agreements entered into by the parties
hereto in connection with the transactions contemplated by this Agreement
(collectively, the "TRANSACTION DOCUMENTS"), and to issue the Securities in
accordance with the terms hereof and thereof; (ii) the execution and delivery of
the Transaction Documents and the Articles of Amendment by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including without limitation the issuance of the Preferred Shares and the
Warrants and the reservation for issuance and the issuance of the Conversion
Shares and the Warrant Shares issuable upon conversion or exercise thereof),
have been duly authorized by the Company's Board of Directors and no further
consent or authorization is required by the Company, its Board of Directors or
its stockholders, except for, if required by the Principal Market (as defined
below), approval by its stockholders prior to the issuance of a number of shares
of Common Stock equal to or in excess of 20% of the number of shares of Common
Stock outstanding immediately prior to the Initial Closing Date; (iii) the
Transaction Documents have been duly executed and delivered by the Company; (iv)
the Transaction Documents 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 general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies; and (v) prior to each of the Closing Dates, the Articles of
Amendment have been filed with the Secretary of State of the State of Florida
and will be in full force and effect, enforceable against the Company in
accordance with its terms. The "PRINCIPAL MARKET" shall mean the securities or
trading market upon which the Common Stock is listed or quoted provided that
such market is one of the following: the over-the-counter market on the
electronic bulletin board (the "OTC"), The Nasdaq SmallCap Market, The Nasdaq
National Market, The American Stock Exchange, Inc. or The New York Stock
Exchange, Inc.
7
<PAGE>
c. Capitalization. As of October 13, 1998, the authorized capital
--------------
stock of the Company consists of (i) 200,000,000 shares of Common Stock, of
which, 11,015,300 shares were issued and outstanding, 3,000,000 shares are
reserved and available for issuance pursuant to the Company's stock option and
purchase plans, and (ii) 500,000 shares of Preferred Stock of which, as of the
date hereof, no shares were issued and outstanding. All of such outstanding
shares have been, or upon issuance will be, validly issued and are fully paid
and nonassessable. Except as disclosed in Schedule 3(c), (i) no shares of the
-------------
Company's capital stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company, (ii)
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings 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, any
shares of capital stock of the Company or any of its Subsidiaries, (iii) there
are no outstanding debt securities, (iv) there are no 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 1933 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 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 Securities as described in this Agreement; and
(vii) the Company does not have any stock appreciation rights or "phantom stock"
plans or agreements or any similar plan or agreement. The Company has furnished
to the Buyers true and correct copies of the Company's Articles of
Incorporation, as amended and as in effect on the date hereof (the "ARTICLES OF
INCORPORATION"), and the Company's By-laws, as in effect on the date hereof (the
"BY-LAWS"), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.
d. Issuance of Securities. The Preferred Shares are duly authorized
----------------------
and, upon issuance in accordance with the terms hereof, shall be (i) validly
issued, fully paid and non-assessable, (ii) free from all taxes, liens and
charges with respect to the issue thereof and (iii) entitled to the rights and
preferences set forth in the Articles of Amendment. 1,000,000 shares of Common
Stock (subject to adjustment pursuant to the Company's covenant set forth in
Section 4(f) below) have been duly authorized and reserved for issuance upon
conversion of the Preferred Shares and upon exercise of the Warrants. Upon
conversion or exercise in accordance with the Articles of Amendment or the
Warrants, as the case may be, the Conversion Shares and the Warrant Shares will
be validly issued, fully paid and nonassessable and free from all taxes, liens
and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a
8
<PAGE>
holder of Common Stock. The issuance by the Company of the Securities is exempt
from registration under the 1933 Act.
e. No Conflicts. Except as disclosed in Schedule 3(e), the
------------ -------------
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Articles of
Amendment and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the reservation for issuance
and issuance of the Conversion Shares and the Warrant Shares) will not (i)
result in a violation of the Articles of Incorporation, any Articles of
Amendment of any outstanding series of Preferred Stock of the Company or the By-
laws, (ii) conflict with, or constitute a default (or an event which with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (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 property or asset of the
Company or any of its Subsidiaries is bound or affected. Except as disclosed in
Schedule 3(e), neither the Company nor its Subsidiaries is in violation of any
- -------------
term of or in default under (x) the Articles of Incorporation, any Articles of
Amendment of any outstanding series of Preferred Stock or the By-laws or their
organizational charter or by-laws, respectively, or (y) any contract, agreement,
mortgage, indebtedness, indenture, instrument, judgment, decree or order or any
statute, rule or regulation applicable to the Company or its Subsidiaries. The
business of the Company and its Subsidiaries is not being conducted, and shall
not be conducted, in violation of any law, ordinance, regulation of any
governmental entity, except for any violations which individually or in the
aggregate do not and will not have a Material Adverse Effect. Except as
specifically contemplated by this Agreement and as required under the 1933 Act,
the Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency or any
regulatory or self-regulatory agency in order for it to execute, deliver or
perform any of its obligations under or contemplated by the Transaction
Documents or the Articles of Amendment in accordance with the terms hereof or
thereof. Except as disclosed in Schedule 3(e), all consents, authorizations,
------------
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to
the date hereof. The Company and its Subsidiaries have no knowledge of any facts
or circumstances which might give rise to any of the foregoing. The Company
complies with and is not in violation of the listing requirements or shall
maintain the requirements to be accepted for trading on, as the case may be, the
Principal Market as in effect on the date hereof and on each of the Closing
Dates and is not aware of any facts which would reasonably lead to delisting,
suspension or the rejection for trading of the Common Stock by the Principal
Market in the foreseeable future.
9
<PAGE>
f. SEC Documents; Financial Statements. The Company has filed all
-----------------------------------
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 ACT") (all of the foregoing filed
prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the "SEC DOCUMENTS"). The Company has delivered
to each Buyer or its respective representatives true and complete copies of the
SEC Documents. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
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. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(d) 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 the light of the
circumstance under which they are or were made, not misleading. Neither the
Company nor any of its Subsidiaries or any of their officers, directors,
employees or agents have provided the Buyers with any material, nonpublic
information.
g. Absence of Certain Changes. Except as disclosed in Schedule 3(g)
-------------------------- -------------
or the SEC Documents filed on EDGAR at least five business days prior to the
date hereof, since the end of the last fiscal year there has been no material
adverse change and no material adverse development in the business, properties,
operations, financial condition, liabilities, results of operations or prospects
of the Company or its 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 or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings.
h. Absence of Litigation. There is no action, suit, proceeding,
---------------------
inquiry or investigation before or by any court, public board, government
agency, self-regulatory
10
<PAGE>
organization or body pending or, to the knowledge of the Company or any of its
Subsidiaries, threatened against or affecting the Company, the Common Stock or
any of the Company's Subsidiaries or any of the Company's or the Company's
Subsidiaries' officers or directors in their capacities as such, except as
expressly set forth in Schedule 3(h).
-------------
i. Acknowledgment Regarding Buyers' Purchase of Preferred Shares.
-------------------------------------------------------------
The Company acknowledges and agrees that each of the Buyers is acting solely in
the capacity of arm's length purchaser with respect to the Transaction
Documents, the Articles of Amendment and the transactions contemplated thereby.
The Company further acknowledges that each Buyer is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
the Transaction Documents, the Articles of Amendment and the transactions
contemplated thereby and any advice given by any of the Buyers or any of their
respective representatives or agents in connection with the Transaction
Documents, the Articles of Amendment and the transactions contemplated thereby
is merely incidental to such Buyer's purchase of the Securities. The Company
further represents to each Buyer that the Company's decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.
j. No Undisclosed Events, Liabilities, Developments or
---------------------------------------------------
Circumstances. 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 business, properties, prospects, operations or
financial condition, 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 SEC relating to an issuance and sale
by the Company of its Common Stock and which has not been publicly disclosed.
k. No General Solicitation. Neither the Company, nor any of its
-----------------------
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
l. No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of the Principal Market, nor will the Company or
any of its Subsidiaries take any action or steps that would require registration
of the Securities under the 1933 Act or cause the offering of the Securities to
be integrated with other offerings.
11
<PAGE>
m. Employee Relations. Neither the Company nor any of its
------------------
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute 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. No executive officer (as defined in Rule 501(f) of the
1933 Act) has notified the Company that such officer intends to leave the
Company or otherwise terminate such officer's employment with the Company.
n. Intellectual Property Rights. The Company and its Subsidiaries
----------------------------
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights needed to conduct their respective
businesses as now conducted. Except as set forth on Schedule 3(n), none of the
-------------
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights have expired or terminated, or are expected to expire or
terminate within two years from the date of this Agreement, where the result of
such expiration or termination would have, individually or in the aggregate, a
Material Adverse Effect. The Company and its Subsidiaries do not have any
knowledge of any infringement by the Company or its Subsidiaries of trademark,
trade name rights, patents, patent rights, copyrights, inventions, licenses,
service names, service marks, service mark registrations, trade secrets or other
similar rights of others, or of any such development of similar or identical
trade secrets or technical information by others and, except as set forth on
Schedule 3(n), there is no claim, action or proceeding being made or brought
- -------------
against, or to the Company's knowledge, being threatened against, the Company or
its Subsidiaries regarding trademarks, trade names, patents, patent rights,
inventions, copyrights, licenses, service names, service marks, service mark
registrations, trade secret or other infringement; and the Company and its
Subsidiaries have no knowledge of any facts or circumstances which might give
rise to any of the foregoing. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties.
o. Environmental Laws. 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 or hazardous or toxic substances or wastes, pollutants or
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 permit, license or approval except where the lack of such
compliance or receipt would not have a Material Adverse Effect.
12
<PAGE>
p. Title. The Company and its Subsidiaries have good and marketable
-----
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, except to the extent that the failure to have good and
marketable title would not have a Material Adverse Effect, in each case free and
clear of all liens, encumbrances and defects except such as are described in
Schedule 3(p) or such as do not materially affect the value of such property and
- -------------
do not interfere with the use made and proposed to be made of such property by
the Company or any of its Subsidiaries. Any real property and facilities held
under lease by the Company or any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.
q. 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 been refused any
insurance coverage bought or applied for and neither the Company nor any such
Subsidiaries has any reason to believe that it will not be able to renew its
existing insurance coverage 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.
r. Regulatory Permits. The Company and its Subsidiaries possess all
------------------
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
s. Internal Accounting Controls. The Company and each of its
----------------------------
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 generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization 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.
t. No Materially Adverse Contracts, Etc. Neither the Company nor any
-------------------------------------
of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the
13
<PAGE>
Company nor any of its Subsidiaries is party to any contract or agreement which
in the judgment of the Company's officers has or is reasonably expected to have
a Material Adverse Effect.
u. Tax Status. Except as set forth on Schedule 3(u), the Company and
---------- -------------
each of its Subsidiaries has 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 and has set aside on its books provision
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 by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
v. Dilutive Effect. The Company understands and acknowledges that
---------------
the number of Conversion Shares issuable upon conversion of the Preferred Shares
and the Warrant Shares issuable upon exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Preferred Shares and Warrant
Shares issuable upon exercise of the Warrants in accordance with this Agreement,
the Warrant and the Articles of Amendment is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.
w. No Other Agreements. The Company has not, directly or indirectly,
-------------------
made any agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents.
x. Certain Transactions. Except as set forth on Schedule 3(x) and
-------------------- -------------
except for arm's length transactions pursuant to which the Company makes
payments in the ordinary course of business upon terms no less favorable than
the Company could obtain from third parties and other than the grant of stock
options disclosed on Schedule 3(c), 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
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.
14
<PAGE>
4. COVENANTS.
---------
a. Best Efforts. Each party shall use its best efforts timely to
------------
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
b. Form D. The Company agrees to file a Form D with respect to the
------
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before each of the
Closing Dates, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for, or obtain exemption for the Securities
for, sale to the Buyers at each of the Closings pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of any such action so taken to the Buyers on or prior to
such Closing Dates. The Company shall make all filings and reports relating to
the offer and sale of the Securities to the Buyers required under applicable
securities or "Blue Sky" laws of the states of the United States following the
Initial Closing Date.
c. Reporting Status. Until the earlier of (i) the date which is one
----------------
year after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares and the
Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the
1933 Act (or successor thereto), or (ii) the date on which (A) the Investors
shall have sold all the Conversion Shares and Warrant Shares and (B) none of the
Preferred Shares or Warrants is outstanding (the "REGISTRATION PERIOD"), the
Company shall file all reports required to be filed with the SEC pursuant to the
1934 Act, and the Company shall not terminate its status as an issuer required
to file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale
---------------
of the Preferred Shares for substantially the same purposes and in substantially
the same amounts as indicated in Schedule 4(d).
-------------
e. Financial Information. The Company agrees to send the following
---------------------
to each Investor during the Registration Period: (i) within two (2) days after
the filing with the SEC, a copy of its Annual Reports on Form 10-K (or its
equivalent), its Quarterly Reports on Form 10-Q (or its equivalent), any
registration statements or amendments (other than on Form S-8) filed pursuant to
the 1933 Act and any Current Reports on Form 8-K (or its equivalent); (ii) on
the same day as the release thereof, facsimile copies of all press releases
issued by the Company or any of its Subsidiaries; and (iii) 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.
f. Reservation of Shares. The Company shall take all action
---------------------
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less
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<PAGE>
than 200% of the number of shares of Common Stock needed to provide for the
issuance of the Conversion Shares (without regard to any limitations on
conversions) and 100% of the number of shares of Common Stock needed to provide
for the issuance of the Warrant Shares.
g. Right of First Refusal. Subject to the exceptions described
----------------------
below, the Company and its Subsidiaries shall not negotiate or contract with any
party for any equity financing (including any debt financing with an equity
component) or issue any equity securities of the Company or any Subsidiary or
securities convertible or exchangeable into or for equity securities of the
Company or any Subsidiary (including debt securities with an equity component)
in any form ("FUTURE OFFERINGS") during the period beginning on the Initial
Closing Date and ending on and including the date which is 365 days after the
Initial Closing Date, unless it shall have first delivered to each Buyer or a
designee appointed by such Buyer written notice (the "FUTURE OFFERING NOTICE")
describing the proposed Future Offering, including the terms and conditions
thereof, and providing each Buyer an option to purchase up to its Aggregate
Percentage (as defined below), as of the date of delivery of the Future Offering
Notice on the same terms and conditions set forth in the Future Offering Notice
(the limitations referred to in this sentence are collectively referred to as
the "CAPITAL RAISING LIMITATION"). For purposes of this Section 4(g), "AGGREGATE
PERCENTAGE" at any time with respect to any Buyer shall mean the percentage
obtained by dividing (i) the number of Preferred Shares purchased by such Buyer
at the Initial Closing by (ii) the aggregate number of Preferred Shares
purchased by all the Buyers at the Initial Closing. A Buyer can exercise its
option to participate in a Future Offering by delivering written notice thereof
to participate to the Company within ten (10) business days of receipt of a
Future Offering Notice, which notice shall state the quantity of securities
being offered in the Future Offering that such Buyer will purchase, up to its
Aggregate Percentage, and that number of securities it is willing to purchase in
excess of its Aggregate Percentage. In the event that one or more Buyers fail to
elect to purchase up to each such Buyer's Aggregate Percentage then each Buyer
which has indicated that it is willing to purchase a number of securities in
excess of its Aggregate Percentage shall be entitled to purchase its pro rata
portion (determined in the same manner as described in the preceding sentence)
of the securities in the Future Offering which one or more Buyers have not
elected to purchase. In the event the Buyers fail to elect to fully participate
in the Future Offering within the periods described in this Section 4(g), the
Company shall have 30 days thereafter to sell the securities of the Future
Offering for which such Buyer's rights were not exercised, upon terms and
conditions (including the amount thereof), no more favorable to the purchasers
thereof than specified in the Future Offering Notice. In the event the Company
has not sold such securities of the Future Offering within such 30 day period,
the Company shall not thereafter issue or sell such securities without first
offering such securities to the Buyers in the manner provided in this Section
4(g). The Capital Raising Limitation shall not apply to (i) a loan from a
commercial bank which does not have any equity feature, (ii) any transaction
involving the Company's issuances of securities (A) as consideration in a merger
or consolidation, (B) in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), or (C) as
consideration for the
16
<PAGE>
acquisition of a business, product or license by the Company, (iii) the issuance
of Common Stock in a firm commitment underwritten public offering, (iv) the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof, (v)
the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan for the
benefit of the Company's employees, directors or consultants, (vi) on or prior
to the 90th day after the Initial Closing Date, the issuance of New Equity
Securities (as defined in Section 4(n) hereof), provided that the Company fully
complies with its obligations under Section 4(n) hereof. The Buyers shall not be
required to participate or exercise their right of first refusal with respect to
a particular Future Offering in order to exercise their right of first refusal
with respect to later Future Offerings or (vii) the sale of the Company's equity
securities pursuant to that certain Agreement and Plan of Reorganization by and
among the Company, Creative Fulfillment, Inc. and certain other parties dated as
of October 8, 1998 as attached as Exhibit F and that certain Agreement and Plan
of Reorganization by and among the Company and Nordic Entertainment Worldwide,
Inc. and certain other parties dated as of October 8, 1998 as attached as
Exhibit G, in each case, without regard to any amendments or supplements
thereto.
h. Listing. The Company shall promptly secure the listing or
-------
quotation of all of the Registrable Securities upon each national securities
exchange and automated quotation system (including the OTC, the Nasdaq SmallCap
Market and the Nasdaq National Market), upon which shares of Common Stock are
then listed or quoted (subject to official notice of issuance) and shall
maintain, so long as any other shares of Common Stock shall be so listed or
quoted, such listing or quotation of all Registrable Securities from time to
time issuable under the terms of the Transaction Documents and the Articles of
Amendment. The Company shall maintain the Common Stock's authorization for
listing or quotation on the Principal Market. Neither the Company nor any of its
Subsidiaries shall take any action which may result in the delisting or
suspension of the Common Stock from the Principal Market (other than to switch
listings from the OTC to the Nasdaq SmallCap Market, the nasdaq National Market,
AMEX or NYSE). The Company shall promptly provide to each Buyer copies of any
notices it receives from the Principal Market regarding the continued
eligibility of the Common Stock for listing or quotation on such trading market
or securities exchange. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(h).
i. Expenses. Subject to Section 9(l) below, following the Initial
--------
Closing, the Company shall reimburse the Buyers for the Buyers' expenses
(including attorneys' fees and expenses) in connection with negotiating and
preparing the Transaction Documents and consummating the transactions
contemplated thereby up to an aggregate of $35,000.
j. Filing of Form 8-K. On or before the second (2nd) business day
------------------
following each of the Closing Dates and the Additional Share Notice Date, the
Company
17
<PAGE>
shall file a Form 8-K with the SEC describing the terms of the transaction
contemplated by the Transaction Documents and attaching each of the Transaction
Documents as exhibits thereto and consummated at such Closing in each case, in
the form required by the 1934 Act.
k. Shareholder Approval/Proxy Statement. If the Principal Market
------------------------------------
upon which the Registrable Securities are traded requires that the Company
receive the approval of its shareholders prior to issuing shares of Common
Stock, upon conversion of the Preferred Shares or exercise of the Warrants,
equal to or greater than 20% of the number of shares of Common Stock outstanding
immediately prior to the issuance of such Preferred Shares and Warrants, then
the Company shall provide each stockholder entitled to vote at the next meeting
of stockholders of the Company, which meeting shall not be later than 60 days
after any date after the Initial Closing Date on which the sum of (A) the number
of Conversion Shares and Warrant Shares issued and (B) the number of Conversion
Shares and Warrant Shares issuable as of such date pursuant to the conversion of
all outstanding Preferred Shares and exercise of Warrants, as the case may be
(without regard to any limitations on conversions or exercise), exceeds 15% of
the number of shares of Common Stock outstanding immediately prior to the
Initial Closing (the "STOCKHOLDER MEETING DEADLINE"), a proxy statement, which
has been previously reviewed by the Buyers and a counsel of their choice,
soliciting each such stockholder's affirmative vote at such stockholder meeting
for approval of the Company's issuance of all of the Securities as described in
this Agreement, and the Company shall use its best efforts to solicit its
stockholders' approval of such issuance of the Securities and cause the Board of
Directors of the Company to recommend to the stockholders that they approve such
proposal. Such proxy statement shall not seek approval of any matters other than
(i) the approval described in the preceding sentence and (ii) the election of
directors, (iii) the ratification of certified public accountants. If the
Company fails to hold a meeting of its stockholders by the Stockholder Meeting
Deadline, then, as partial relief (which remedy shall not be exclusive of any
other remedies available at law or in equity), the Company shall pay to each
holder of Preferred Shares an amount in cash per Preferred Share equal to the
product of (i) $1,000; multiplied by (ii) .025; multiplied by (iii) the quotient
of (x) the number of days after the Stockholder Meeting Deadline that a meeting
of the Company's stockholders is not held, divided by (y) 30. The Company shall
make the payments referred to in the immediately preceding sentence within five
days of the earlier of (I) the holding of the meeting of the Company's
stockholders, the failure of which resulted in the requirement to make such
payments, and (II) the last day of each 30-day period beginning on the
Stockholder Meeting Deadline. In the event the Company fails to make such
payments in a timely manner, such payments shall bear interest at the rate of
2.5% per month (pro rated for partial months) until paid in full.
l. Transactions With Affiliates. So long as any Preferred Shares 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
subsidiary to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any subsidiary's
officers, directors, person who were officers or
18
<PAGE>
directors at any time during the previous two years, stockholders who
beneficially own 5% or more of the Common Stock, or affiliates or with any
individual related by blood, marriage or adoption to any such individual or with
any entity in which any such entity or individual 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 arms-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
subsidiary of the Company shall not be a disinterested director with respect to
any such agreement, transaction, commitment or arrangement. "AFFILIATE" for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) has a 5% or more equity interest in
that person or entity, (ii) has 5% or more common ownership with that person or
entity, (iii) controls that person or entity, or (iv) shares common control with
that person or entity. "CONTROL" or "CONTROLS" for purposes hereof means that a
person or entity has the power, direct or indirect, to conduct or govern the
policies of another person or entity.
m. Corporate Existence. So long as a Buyer beneficially owns any
-------------------
Preferred Shares or Warrants, the Company shall maintain its corporate existence
and shall not sell all or substantially all of the Company's assets, except (a)
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 entity in such
transaction (i) assumes the Company's obligations hereunder and under the
agreements and instruments entered into in connection herewith, (ii) is a
publicly traded corporation whose common stock is listed for trading or quoted
on the Principal Market and (iii) has complied with and has required the Company
to comply with (to the extent the Company is different from the surviving or
successor entity) the terms and conditions contained in Section 2(d)(iv) of the
Articles of Amendment and (b) the Company is in compliance with and shall have
satisfied its obligations under Section 3 of the Articles of Amendment
including, but not limited to, the payment of the redemption price contained in
such section.
n. Right to Exchange Preferred Shares. If on or prior to the 90th
----------------------------------
day after the Initial Closing Date the Company issues or agrees to issue any
equity securities or any instrument convertible into or exercisable or
exchangeable for equity securities of the Company ("NEW EQUITY SECURITIES"), the
Company shall provide written notice thereof via facsimile and overnight courier
to each holder of Preferred Shares ("NEW FINANCING NOTICE") on any date that the
Company enters into any agreement with respect to any New Equity Securities or
issues any New Equity Securities. Within two business days after each issuance
of New Equity Securities, the Company shall make an irrevocable exchange offer
to each holder of Preferred Shares on such terms and conditions as each such
holder shall reasonably require to exchange any or all of such holder's
Preferred Shares for a like amount (based on the following formula to value each
Preferred Share: (.06) (N/365) (1,000) + (1,000)) of the New Equity Securities.
If the
19
<PAGE>
New Financing Notice is received prior to the Mandatory Closing, the Buyers
shall have the option to subscribe for an additional$500,000 principal amount of
New Equity Securities on th esame terms and conditions as provided to all other
investors in the New Equity Securities. Each such exchange offer shall remain
open for at least 15 business days or until such time as all of the holders of
Preferred Shares accept or reject, in writing, such exchange offer (the
"EXCHANGE OFFER NOTICE PERIOD"). "N" means the number of days from, but
excluding, the Issuance Date (as defined in the Articles of Amendment) through
and including the Conversion Date (as defined in the Articles of Amendment) for
the Preferred Shares for which conversion is being elected. In the event that
the Preferred Shares are exchanged as provided for in this Section 4(n) or
redeemed in accordance with the terms of the Articles of Amendment, the
following rights and obligations of the parties shall terminate upon the
completion of such exchange or redemption: (i) rights and obligations with
respect to the issuance of the Mandatory Preferred Shares and the Mandatory
Warrants (if not already issued) and the Additional Preferred Shares and
Additional Warrants (if not already issued) and (ii) the rights of first refusal
set forth in Section 4(g) hereof.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
and the Warrant Shares in such amounts as specified from time to time by each
Buyer to the Company upon conversion of the Preferred Shares or exercise of the
Warrants (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration
of the Conversion Shares and the Warrant Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions, and stop transfer instructions permitted by the
Irrevocable Transfer Agent Instructions to give effect to Section 2(f) hereof
(in the case of the Conversion Shares and Warrant Shares, prior to registration
of the Conversion Shares and Warrant Shares under the 1933 Act) will be given by
the Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section 5 shall affect in any way each Buyer's obligations and agreements
set forth in Section 2(g) to comply with all applicable prospectus delivery
requirements, if any, upon resale of the Securities. If a Buyer provides the
Company with an opinion of counsel, in a generally acceptable form, that
registration of a resale by such Buyer of any of such Securities is not required
under the 1933 Act, the Company shall permit the transfer, and, in the case of
the Conversion Shares and Warrant Shares, promptly instruct its transfer agent
to issue one or more certificates in such name and in such denominations as
specified by such Buyer and without any restrictive legends. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5
20
<PAGE>
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 5, that the Buyers shall be
entitled, in addition to all other available remedies, to an 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.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
a. Initial Closing Date. The obligation of the Company hereunder to
--------------------
issue and sell the Initial Preferred Shares and the related Initial Warrants to
each Buyer at the Initial Closing is subject to the satisfaction, at or before
the Initial Closing Date, of each of the following conditions, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion by providing each Buyer with prior
written notice thereof:
(i) Such Buyer shall have executed each of this Agreement and
the Registration Rights Agreement and delivered the same to the Company.
(ii) The Articles of Amendment shall have been filed with the
Secretary of State of the State of Florida.
(iii) Such Buyer shall have delivered to the Company the Purchase
Price for the Preferred Shares and the related Initial Warrants being purchased
by such Buyer at the Initial Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.
(iv) The representations and warranties of such Buyer shall be
true and correct as of the date when made and as of the Initial Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and such Buyer shall have performed, satisfied and
complied with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by such Buyer
at or prior to the Initial Closing Date.
b. Mandatory Closing Date. The obligation of the Company hereunder
----------------------
to issue and sell the Mandatory Preferred Shares and the related Mandatory
Warrants to each Buyer at the Mandatory Closings is subject to the satisfaction,
at or before the respective Mandatory Closing Date, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion by providing
each Buyer with prior written notice thereof:
(i) Such Buyer shall have delivered to the Company the Purchase
Price for the Mandatory Preferred Shares and the related Mandatory Warrants
being purchased by such Buyer at the Mandatory Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company.
21
<PAGE>
(ii) The representations and warranties of such Buyer shall be
true and correct in all material respects as of the date when made and as of the
Mandatory Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by such Buyer at or prior to the Mandatory Closing Date.
c. Additional Closing Date. The obligation of the Company hereunder
-----------------------
to issue and sell the Additional Preferred Shares and the related Additional
Warrants to each Buyer at the Additional Closing is subject to the satisfaction,
at or before the Additional Closing Date, of each of the following conditions,
provided that these conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion by providing each Buyer
with prior written notice thereof:
(i) Such Buyer shall have complied with the requirements of
Section 1(d).
(ii) Such Buyer shall have delivered to the Company the Purchase
Price for the Additional Preferred Shares and the related Additional Warrants
being purchased by such Buyer at the Additional Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company.
(iii) The representations and warranties of such Buyer shall be
true and correct in all material respects as of the date when made and as of the
Additional Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by such Buyer at or prior to the Additional Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
-------------------------------------------------
a. Initial Closing Date. The obligation of each Buyer hereunder to
--------------------
purchase the Initial Preferred Shares and the related Initial Warrants at the
Initial Closing is subject to the satisfaction, at or before the Initial Closing
Date, of each of the following conditions, provided that these conditions are
for each Buyer's sole benefit and may be waived by such Buyer at any time in its
sole discretion:
(i) The Company shall have executed each of the Transaction
Documents, and delivered the same to such Buyer.
(ii) The Articles of Amendment shall have been filed with the
Secretary of State of the State of Florida, and a copy thereof certified by such
Secretary of State shall have been delivered to counsel for such Buyer.
22
<PAGE>
(iii) The Common Stock shall be authorized for quotation,
listing or trading on the Principal Market, trading in the Common Stock issuable
upon conversion of the Initial Preferred Shares to be traded on the Principal
Market shall not have been suspended by the SEC or the Principal Market and all
of the Conversion Shares and Warrant Shares issuable upon conversion of the
Initial Preferred Shares or exercise of the Initial Warrants, as the case may
be, to be sold at the Initial Closing shall be listed or quoted upon the
Principal Market.
(iv) The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Initial Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied with the covenants, agreements and conditions required by the
Transaction Documents or the Articles of Amendment to be performed, satisfied or
complied with by the Company at or prior to the Initial Closing Date. Such Buyer
shall have received a certificate, executed by the Chairman (so long as the
Chairman is an executive officer of the Company) or the Chief Executive Officer
of the Company, dated as of the Initial Closing Date, to the foregoing effect
and as to such other matters as may be reasonably requested by such Buyer
including, without limitation, an update as of the Initial Closing Date
regarding the representation contained in Section 3(c) above.
(v) Such Buyer shall have received the opinion of the
Company's outside counsel dated as of the Initial Closing Date, in form, scope
and substance reasonably satisfactory to such Buyer and in substantially the
form of Exhibit C attached hereto.
---------
(vi) The Company shall have executed and delivered to such
Buyer the Initial Warrants and the Stock Certificates (in such denominations as
such Buyer shall request) for the Initial Preferred Shares being purchased by
such Buyer at the Initial Closing.
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer (the "RESOLUTIONS").
(viii) As of the Initial Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the Preferred Shares and the exercise of the
Initial Warrants, at least 1,000,000 shares of Common Stock.
(ix) The Irrevocable Transfer Agent Instructions, in the form
of Exhibit D attached hereto, shall have been delivered to and acknowledged in
---------
writing by the Company's transfer agent with a copy forwarded to the Buyers.
(x) The Company shall have delivered to such Buyer a
certificate evidencing the incorporation and good standing of the Company and
each
23
<PAGE>
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 days of the
Initial Closing Date.
(xi) The Company shall have delivered to such Buyer a
secretary's certificate certifying as to (a) the Resolutions, (b) the Articles
of Incorporation and (c) Bylaws, each as in effect at the Initial Closing.
(xii) The Company shall have delivered to such Buyer a certified
copy of its Articles of Incorporation as certified by the Secretary of State of
the State of Florida within ten days of the Initial Closing Date.
(xiii) The Company shall have delivered to such Buyer a letter
from the Company's transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five days of the Initial Closing Date.
(xiv) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by the Transaction Documents
as such Buyer or its counsel may reasonably request.
b. Mandatory Closing Dates. The obligation of each Buyer hereunder
-----------------------
to purchase the Mandatory Preferred Shares and the related Mandatory Warrants at
the Mandatory Closing is subject to the satisfaction, at or before the Mandatory
Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer's sole benefit and may be waived by such Buyer at
any time in its sole discretion:
(i) The Articles of Amendment shall be in full force and
effect and shall not have been amended since the Initial Closing Date, and a
copy thereof certified by the Secretary of State of the State of Florida shall
have been delivered to such Buyer.
(ii) The Common Stock shall be authorized for quotation,
listing or trading on the Principal Market, trading in the Common Stock issuable
upon conversion of the Mandatory Preferred Shares to be traded on the Principal
Market shall not have been suspended by the SEC or the Principal Market at any
time afer the Initial Closing Date and all of the Conversion Shares and Warrant
Shares issuable upon conversion of the Mandatory Preferred Shares or exercise of
the Mandatory Warrants, as the case may be, to be sold at the Mandatory Closing
shall be listed or quoted upon the Principal Market.
(iii) The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Mandatory Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied with the covenants, agreements and conditions required by the
Transaction Documents or the Articles of Amendment to be performed, satisfied or
complied with by the Company at or prior to the Mandatory Closing Date. Such
Buyer shall have received a certificate,
24
<PAGE>
executed by the Chairman ( so long as the Chairman is an executive officer of
the Company) or the Chief Executive Officer of the Company, dated as of the
Mandatory Closing Date, to the foregoing effect and as to such other matters as
may be reasonably requested by such Buyer including, without limitation, an
update as of the Mandatory Closing Date regarding the representation contained
in Section 3(c) above.
(iv) Such Buyer shall have received the opinion of the
Company's outside counsel dated as of the Mandatory Closing Date, in scope and
substance substantially in the form of Exhibit C attached hereto.
---------
(v) The Company shall have executed and delivered to such
Buyer the Mandatory Warrants and the Stock Certificates (in such denominations
as such Buyer shall request) for the Mandatory Preferred Shares being purchased
by such Buyer at the Mandatory Closing.
(vi) The Board of Directors of the Company shall have adopted,
and shall not have amended, the Resolutions.
(vii) As of the Mandatory Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the Preferred Shares and the exercise of the
Mandatory Warrants, a number of shares of Common Stock equal to at least (A)
200% of the number of shares of Common Stock which would be issuable upon
conversion in full of the then outstanding Preferred Shares and (B) 100% of the
number of shares of Common Stock which would be issuable upon exercise in full
of the then outstanding Warrants, including for such purposes any Preferred
Shares and Warrants to be issued at the Mandatory Closing.
(viii) The Irrevocable Transfer Agent Instructions, in the form
of Exhibit D attached hereto, shall have been delivered to and acknowledged in
---------
writing by the Company's transfer agent and shall be in effect as of the
Mandatory Closing Date.
(ix) The Company shall have delivered to such Buyer 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 Florida as of a date within ten days of the Mandatory
Closing Date.
(x) The Company shall have delivered to such Buyer a
secretary's certificate certifying as to (a) the Resolutions, (b) the Articles
of Incorporation and (c) Bylaws, each as in effect at the Mandatory Closing.
(xi) During the period beginning on the Initial Closing Date
and ending on and including the Mandatory Closing Date, the Company shall have
delivered Conversion Shares upon conversion of the Preferred Shares on a timely
basis as set forth in Section 2(f)(ii) of the Articles of Amendment.
25
<PAGE>
(xii) The Company shall have delivered to such Buyer a certified
copy of its Articles of Incorporation as certified by the Secretary of State of
the State of Florida within ten days of the Mandatory Closing Date.
(xiii) The Company shall have delivered to such Buyer a letter
from the Company's transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five days of the Mandatory Closing Date.
(xiv) The Registration Statement covering the Conversion Shares
issuable upon conversion of the Mandatory Preferred Shares to be issued at the
Mandatory Closing has been declared effective by the SEC within 90 days of the
Initial Closing, shall be available for resales of the Conversion Shares and
Warrant Shares on the Mandatory Closing Date and shall cover at least (A) 200%
of the number of shares of Common Stock which would be issuable upon conversion
in full of the then outstanding Preferred Shares and (B) 100% of the number of
shares of Common Stock which would be issuable upon exercise in full of the then
outstanding Warrants, including for such purposes any Preferred Shares and
Warrants to be issued at the Mandatory Closing.
(xv) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as such
Buyer or its counsel may reasonably request.
c. Additional Closing Date. The obligation of each Buyer hereunder
-----------------------
to purchase the Additional Preferred Shares and the related Additional Warrants
at the Additional Closing is subject to the satisfaction, at or before the
Additional Closing Date, of each of the following conditions, provided that
these conditions are for each Buyer's sole benefit and may be waived by such
Buyer at any time in its sole discretion:
(i) The Articles of Amendment shall be in full force and effect and
shall not have been amended since the Initial Closing Date, and a copy
thereof certified by the Secretary of State of the State of Florida shall
have been delivered to such Buyer.
(ii) The Common Stock shall be authorized for quotation, listing or
trading on the Principal Market, trading in the Common Stock issuable upon
conversion of the Additional Preferred Shares to be traded on the Principal
Market shall not have been suspended by the SEC or the Principal Market at
any time after the Initial Closing Date and all of the Conversion Shares
and Warrant Shares issuable upon conversion of the Additional Preferred
Shares or exercise of the Additional Warrants, as the case may be, to be
sold at the Additional Closing shall be listed or quoted upon the Principal
Market.
(iii) The representations and warranties of the Company shall be true
and correct as of the date when made and as of the Additional Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed,
satisfied and
26
<PAGE>
complied with the covenants, agreements and conditions required by the
Transaction Documents or the Articles of Amendment to be performed,
satisfied or complied with by the Company at or prior to the respective
Additional Closing Date. Such Buyer shall have received a certificate,
executed by the Chairman ( so long as the Chairman is an executive officer)
or the Chief Executive Officer of the Company, dated as of the Additional
Closing Date, to the foregoing effect and as to such other matters as may
be reasonably requested by such Buyer including, without limitation, an
update as of the Additional Closing Date regarding the representation
contained in Section 3(c) above.
(iv) Such Buyer shall have received the opinion of the Company's
outside counsel dated as of such Additional Closing Date, in scope and
substance substantially in the form of Exhibit C attached hereto.
---------
(v) The Company shall have executed and delivered to such Buyer the
Additional Warrants and the Stock Certificates (in such denominations as
such Buyer shall request) for the Additional Preferred Shares being
purchased by such Buyer at the Additional Closing.
(vi) The Board of Directors of the Company shall have adopted, and
shall not have amended, the Resolutions.
(vii) As of the Additional Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares and the
exercise of the Additional Warrants, a number of shares of Common Stock
equal to at least (A) 200% of the number of shares of Common Stock which
would be issuable upon conversion in full of the then outstanding Preferred
Shares and (B) 100% of the number of shares of Common Stock which would be
issuable upon exercise in full of the then outstanding Warrants, including
for such purposes any Preferred Shares and Warrants to be issued at the
Additional Closing.
(viii) The Irrevocable Transfer Agent Instructions, in the form of
Exhibit D attached hereto, shall have been delivered to and acknowledged in
---------
writing by the Company's transfer agent and shall be in effect as of the
Additional Closing Date.
(ix) The Company shall have delivered to such Buyer 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 Florida as of a date within ten days of the
Additional Closing Date.
27
<PAGE>
(x) The Company shall have delivered to such Buyer a secretary's
certificate certifying as to (a) the Resolutions, (b) the Articles of
Incorporation and (c) Bylaws, each as in effect at the Additional Closing.
(xi) During the period beginning on the Additional Share Notice Date
and ending on and including the respective Additional Closing Date, the
Company shall have delivered Conversion Shares upon conversion of the
Preferred Shares on a timely basis as set forth in Section 2(f)(ii) of the
Articles of Amendment.
(xii) The Company shall have delivered to such Buyer a certified copy
of its Articles of Incorporation as certified by the Secretary of State of
the State of Florida within ten days of the Additional Closing Date.
(xiii) The Company shall have delivered to such Buyer a letter from
the Company's transfer agent certifying the number of shares of Common
Stock outstanding as of a date within five days of the Additional Closing
Date.
(xiv) The Company shall have complied with the conditions of Section
1(d).
(xv) The Registration Statement covering the Conversion Shares
issuable upon conversion of the Additional Preferred Shares to be issued at
the Additional Closing shall have been declared effective by the SEC within
90 days of the Company's receipt of the Additional Share Notice, shall be
available for resale of the Conversion Shares and Warrant Shares on the
Additional Closing Date and shall cover at least (A) 200% of the number of
shares of Common Stock which would be issuable upon conversion in full of
the then outstanding Preferred Shares and (B) 100% of the number of shares
of Common Stock which would be issuable upon exercise in full of the then
outstanding Warrants, including for such purposes any Preferred Shares and
Warrants to be issued at the Additional Closing.
(xvi) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as
such Buyer or its counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and
---------------
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents and the Articles of Amendment, the Company shall defend, protect,
indemnify and hold harmless each Buyer and each other holder of the Securities
and all of their stockholders, officers, directors, employees and direct or
indirect investors and any of the foregoing person's 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
28
<PAGE>
action, suits, claims, losses, costs, 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 reasonable attorneys' fees and disbursements (the
"INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents, the
Articles of Amendment or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in the Transaction Documents, the Articles
of Amendment or any other certificate, instrument or document contemplated
hereby or thereby, or (c) any cause of action, suit or claim brought or made
against such Indemnitee and arising out of or resulting from the execution,
delivery, performance or enforcement of the Transaction Documents or the
Articles of Amendment, (d) any transaction financed or to be financed in whole
or in part, directly or indirectly, with the proceeds of the issuance of the
Securities or (e) the status of such Buyer or holder of the Securities as an
investor in the Company. To the extent that the foregoing undertaking 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.
9. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. Governing Law; Jurisdiction; Jury Trial. The corporate laws of
---------------------------------------
the State of Florida shall govern all issues concerning the relative rights of
the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting 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, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of 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
29
<PAGE>
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 ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.
b. Counterparts. This Agreement may be executed in two or more
------------
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
c. Headings. The headings of this Agreement are for convenience of
--------
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid
------------
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all other
----------------------------
prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought.
No such amendment shall be effective to the extent that it applies to less than
all of the holders of the Preferred Shares then outstanding. No consideration
shall be offered or paid to any person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents or the
Articles of Amendment unless the same
30
<PAGE>
consideration also is offered to all of the parties to the Transaction Documents
or holders of Preferred Shares, as the case may be.
f. Notices. Any notices, consents, waivers or other communications
-------
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); (iii) one business day after deposit with a
nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
GoodNoise
Corporation
719 Colorado Avenue
Palo Alto, California 94303
Telephone: (650) 470-2969
Facsimile: (650) 322-8919
Attention: Gene Hoffman
With a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301-1825
Telephone: 650-328-6561
------------
Facsimile: 650-327-3699
Attention: Peter M. Astiz, Esq.
If to the Transfer Agent:
Interwest Transfer Co., Inc.
1981 East, 4800 South
Suite 100
Salt Lake City, Utah 84117
Telephone: (801) 272-9294
Facsimile: (801) 277-3147
Attention: Ms. Mershi Siquere
31
<PAGE>
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers.
Each party shall provide five (5) days' prior written notice to the other
party of any change in address or facsimile number.
g. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Preferred Shares. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of two-thirds (2/3) of the Preferred Shares then
outstanding including by merger or consolidation except pursuant to a Major
Transaction (as defined in the Articles of Amendment) with respect to which the
Company is in compliance with Sections 2(d)(iv) and 3 of the Articles of
Amendment. A Buyer may assign some or all of its rights hereunder without the
consent of the Company; provided, however, that any such assignment shall not
release such Buyer from its obligations hereunder unless such obligations are
assumed by such assignee and the Company has consented to such assignment and
assumption. Notwithstanding anything to the contrary contained in the
Transaction Documents, each Buyer shall be entitled to pledge the securities in
connection with a bona fide margin account.
h. 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.
i. Survival. Unless this Agreement is terminated under Section 9(l),
--------
the representations and warranties of the Company and the Buyers contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive each of
the Closings. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Buyer shall have the right to
---------
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be
32
<PAGE>
entitled, without the prior approval of any Buyer, to make any press release or
other public disclosure with respect to such transactions as is required by
applicable law and regulations (although each Buyer shall be consulted by the
Company in connection with any such press release or other public disclosure
prior to its release and shall be provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to
------------------
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Initial Closing shall not have
-----------
occurred with respect to a Buyer on or before three (3) business days from the
date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated pursuant to
this Section 9(l), the Company shall remain obligated to reimburse the non-
breaching Buyers for the expenses described in Section 4(i) above.
m. Placement Agent. The Company acknowledges that it has not engaged
---------------
any placement agent in connection with the sale of the Preferred Shares and the
related Warrants. The Company shall be responsible for the payment of any
placement agent's fees or broker's commissions relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorneys' fees and out of pocket expenses) arising in connection with any such
claim.
n. No Strict Construction. The language used in this Agreement will
----------------------
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
33
<PAGE>
o. Remedies. Each Buyer and each holder of Preferred Shares or
--------
Conversion Shares shall have all rights and remedies set forth in the
Transaction Documents and the Articles of Amendment and all rights and remedies
which such holders have been granted at any time under any other agreement or
contract relating to the subject matter hereof and all of the rights which such
holders have under any law. Any person having any rights under any provision of
this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by law.
p. Payment Set Aside. To the extent that the Company makes a payment
-----------------
or payments to the Buyers hereunder or pursuant to the Articles of Amendment or
Warrants or the Buyers 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 to be 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.
34
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY: BUYERS:
GOODNOISE CORPORATION HFTP INVESTMENT LLC
By: Promethean Investment
Group L.L.C.
Its: Investment Manager
By: /s/ By: /s/
Name: Gene Hoffman Name: James F. O'Brien, Jr.
Its: President Its: President
35
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
Number of
Initial
Investor Address Preferred Investor's Representatives' Address
Investor Name and Facsimile Number Shares and Facsimile Number
- ---------------------- --------------------------------------- -------------------------------------------------------
<S> <C> <C> <C>
HFTP Investment LLC Promethean Investment Group, L.L.C. 500 Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Residence: New York Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
</TABLE>
36
<PAGE>
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of October 28,
1998, by and among GoodNoise Corporation, a Florida corporation, with
headquarters located at 719 Colorado Avenue, Palo Alto, California 94303 (the
"COMPANY"), and the undersigned buyers (each, a "BUYER" and collectively, the
"BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties hereto of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the
Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, (i) to issue and sell to the Buyers shares of the
Company's Series A Convertible Preferred Stock (the "INITIAL PREFERRED SHARES"),
which will be convertible into shares of the Company's common stock, $0.01 par
value per share (the "COMMON STOCK") in accordance with the terms of the
Company's Articles of Amendment of the Series A Preferred Stock (the "ARTICLES
OF AMENDMENT") and (ii) issue warrants (the "INITIAL WARRANTS") which will be
exercisable to purchase shares of Common Stock (the "INITIAL WARRANT SHARES");
B. In connection with the Securities Purchase Agreement, each Buyer may be
obligated, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to (i) purchase shares of the Company's Series A Convertible
Preferred Stock (the "MANDATORY PREFERRED SHARES"), which will be convertible
into Common Stock in accordance with the Articles of Amendment and (ii) issue
warrants (the "MANDATORY WARRANTS") which will be exercisable to purchase shares
of Common Stock (the "MANDATORY WARRANTS SHARES");
C. In connection with the Securities Purchase Agreement, each Buyer may
have the right, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to (i) require the Company to issue and sell shares of the
Company's Series A Convertible Preferred Stock (the "ADDITIONAL PREFERRED
SHARES"), which will be convertible into Common Stock in accordance with the
Articles of Amendment (the Initial Preferred Shares, the Mandatory Preferred
Shares and the Additional Preferred Shares are collectively referred to as the
"PREFERRED SHARES" and as converted, the "CONVERSION SHARES") and (ii) issue
warrants (the "ADDITIONAL WARRANTS") which will be exercisable to purchase
shares of Common Stock (the "ADDITIONAL WARRANTS SHARES") (the Initial Warrants,
the Mandatory Warrants and the Additional Warrants, collectively are referred to
in this Agreement as the "WARRANTS" and the Initial Warrant Shares, the
Mandatory Warrant Shares and the Additional Warrant Shares, collectively are
referred to in this Agreement as the "WARRANT SHARES"); and
D. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws.
1
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyers hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "INVESTOR" means a Buyer, any transferee or assignee thereof to
whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9 and any
transferee or assignee thereof to whom a transferee or assignee assigns its
rights under this Agreement and who agrees to become bound by the provisions of
this Agreement in accordance with Section 9.
b. "PERSON" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous basis ("RULE 415"), and the declaration or ordering
of effectiveness of such Registration Statement(s) by the United States
Securities and Exchange Commission (the "SEC").
d. "REGISTRABLE SECURITIES" means (i) the Conversion Shares and the
Warrant Shares issued or issuable upon conversion of the Preferred Shares and
exercise of the Warrants, respectively, and (ii) any shares of capital stock
issued or issuable with respect to either the Conversion Shares, the Warrant
Shares, the Warrants or the Preferred Shares as a result of any stock split,
stock dividend, recapitalization, exchange or similar event or otherwise,
without regard to any limitation on conversions of Preferred Shares.
e. "INITIAL REGISTRATION STATEMENT" means a registration statement or
registration statements of the Company filed under the 1933 Act covering
Registrable Securities relating to the Initial Preferred Shares and the Initial
Warrant Shares.
f. "ADDITIONAL REGISTRATION STATEMENT" means a registration statement
or registration statements of the Company filed under the 1933 Act covering
Registrable Securities relating to the Additional Preferred Shares and the
Additional Warrant Shares.
g. "REGISTRATION STATEMENT" means the Initial Registration Statement
and the Additional Registration Statement.
2
<PAGE>
2. REGISTRATION.
a. MANDATORY REGISTRATION.
(i) INITIAL MANDATORY REGISTRATION. The Company shall prepare,
and, as soon as practicable but in no event later than 45 days after the Initial
Closing Date (as defined in the Securities Purchase Agreement), file with the
SEC an Initial Registration Statement or Initial Registration Statements (as is
necessary) on Form SB-2 covering only the resale of all of the Registrable
Securities issuable pursuant to the Initial Preferred Shares, the Initial
Warrant, the Mandatory Preferred Shares and the Mandatory Warrants (the "INITIAL
REGISTRABLE SECURITIES"). In the event that Form SB-2 is unavailable for such a
registration, the Company shall use such other form as is available for such a
registration, subject to the provisions of Section 2(e). Any initial
Registration Statement prepared pursuant hereto shall register for resale at
least that number of shares of Common Stock equal to the product of (x) 2.0 and
(y) the number of Initial Registrable Securities as of the date immediately
preceding the date the Registration Statement is initially filed with the SEC,
subject to adjustment as provided in Section 3(b). The Company shall use its
best efforts to have the Initial Registration Statement declared effective by
the SEC as soon as practicable, but in no event later than 90 days after the
Initial Closing Date.
(ii) ADDITIONAL MANDATORY REGISTRATION. The Company shall
prepare, and, as soon as practicable but in no event later than 20 days after
the Company's receipt of an Additional Share Notice (as defined in the
Securities Purchase Agreement), file with the SEC an Additional Registration
Statement or Additional Registration Statements (as is necessary) on Form SB-2
covering the resale of all of the Registrable Securities issuable pursuant to
the Additional Preferred Shares and the Additional Warrants covered by such
Additional Share Notice (the "ADDITIONAL REGISTRABLE SECURITIES"). In the event
that Form SB-2 is unavailable for such a registration, the Company shall use
such other form as is available for such a registration, subject to the
provisions of Section 2(e). Any Additional Registration Statement prepared
pursuant hereto shall register for resale at least that number of shares of
Common Stock equal to the product of (x) 2.0 and (y) the number of Additional
Registrable Securities as of the date immediately preceding the date the
Additional Registration Statement is initially filed with the SEC, subject to
adjustment as provided in Section 3(b). The Company shall use its best efforts
to have the Additional Registration Statement declared effective by the SEC as
soon as practicable, but in no event later than 90 days after the Company's
receipt of such Additional Share Notice.
b. PIGGY-BACK REGISTRATIONS. If at any time prior to the expiration
of the Registration Period (as hereinafter defined) the Company proposes to file
with the SEC a Registration Statement relating to an offering for its own
account or the account of others under the 1933 Act of any of its securities
(other than on Form S-4 or Form S-8 (or their equivalents at such time) relating
to securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with stock option
or other employee benefit plans) the Company shall promptly send to each
Investor written notice of the Company's intention to file a Registration
Statement and of such Investor's rights under this Section 2(b) and, if within
twenty (20) days after receipt of such notice, such Investor shall so request in
writing, the Company shall include in such Registration Statement all or any
part of
3
<PAGE>
the Registrable Securities such Investor requests to be registered, subject to
the priorities set forth in Section 2(b) below. No right to registration of
Registrable Securities under this Section 2(b) shall be construed to limit any
registration required under Section 2(a). The obligations of the Company under
this Section 2(b) may be waived by Investors holding a majority of the
Registrable Securities. If an offering in connection with which an Investor is
entitled to registration under this Section 2(b) is an underwritten offering,
then each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed to by the Company, offer
and sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering. If a registration pursuant to this Section 2(b) is to be
an underwritten public offering and the managing underwriter(s) advise the
Company in writing, that in their reasonable good faith opinion, marketing or
other factors dictate that a limitation on the number of shares of Common Stock
which may be included in the Registration Statement is necessary to facilitate
and not adversely affect the proposed offering, then the Company shall include
in such registration: (1) first, all securities the Company proposes to sell for
its own account, (2) second, up to the full number of securities proposed to be
registered for the account of the holders of securities entitled to inclusion of
their securities in the Registration Statement by reason of demand registration
rights, and (3) third, the securities requested to be registered by the
Investors and other holders of securities entitled to participate in the
registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration.
c. ALLOCATION OF REGISTRABLE SECURITIES. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time the Registration Statement covering such initial
number of Registrable Securities or increase thereof is declared effective by
the SEC. In the event that an Investor sells or otherwise transfers any of such
Person's Registrable Securities, each transferee shall be allocated a pro rata
portion of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any shares of Common Stock included
in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities shall be allocated to the remaining
Investors, pro rata based on the number of Registrable Securities then held by
such Investors.
d. LEGAL COUNSEL. Subject to Section 5 hereof, the Buyers holding a
majority of the Registrable Securities shall have the right to select one legal
counsel to review and oversee any offering pursuant to this Section 2 ("LEGAL
COUNSEL"), which shall be Katten Muchin & Zavis or such other counsel as
thereafter designated by the holders of a majority of Registrable Securities.
The Company shall reasonably cooperate with Legal Counsel in performing the
Company's obligations under this Agreement.
e. INELIGIBILITY FOR FORM SB-2. In the event that Form SB-2 is not
available for any registration of Registrable Securities hereunder, the Company
shall (i) register the sale of the Registrable Securities on another appropriate
form and (ii) undertake to register the Registrable Securities on Form SB-2 as
soon as such form is available, provided that the
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Company shall maintain the effectiveness of the Registration Statement then in
effect until such time as a Registration Statement on Form SB-2 covering the
Registrable Securities has been declared effective by the SEC.
f. RULE 416. To the extent permitted by the SEC, the Company and the
Investors each acknowledge that each Registration Statement prepared in
accordance hereunder shall include an indeterminate number of Registrable
Securities pursuant to Rule 416 under the 1933 Act so as to cover any and all
Registrable Securities which may become issuable (i) to prevent dilution
resulting from stock splits, stock dividends or similar transactions and (ii) if
permitted by law, by reason of certain antidilution provisions or reductions in
the Conversion Price (as defined in the Articles of Amendment) of the Preferred
Stock in accordance with the terms thereof, including, without limitation, the
terms which cause the Floating Conversion Price (as defined in the Articles of
Amendment) to decrease as the price of the Common Stock decreases (collectively,
the "RULE 416 SECURITIES"). In this regard, the Company agrees to use all
reasonable efforts to ensure that the maximum number of Registrable Securities
which may be registered pursuant to Rule 416 under the 1933 Act are covered by
each Registration Statement and, absent guidance from the SEC or other
definitive authority to the contrary, the Company shall use all reasonable
efforts to affirmatively support and to not take any position adverse to the
position that each Registration Statement filed hereunder covers all of the Rule
416 Securities. If the Company determines that the Registration Statement filed
hereunder does not cover all of the Rule 416 Securities, the Company shall
immediately (i) provide to each Investor written evidence setting forth the
basis for the Company's position and the authority therefor and (ii) prepare and
file an amendment to such Registration Statement or a new Registration Statement
in accordance with Section 2(g).
g. SUFFICIENT NUMBER OF SHARES REGISTERED. In the event the number
of shares available under a Registration Statement filed pursuant to Section
2(a) is insufficient to cover all of the Registrable Securities which such
Registration Statement is required to cover or an Investor's allocated portion
of the Registrable Securities pursuant to Section 2(c), the Company shall amend
the Registration Statement, or file a new Registration Statement (on the short
form available therefor, if applicable), or both, so as to cover at least 200%
of such Registrable Securities (based on the market price of the Common Stock),
in each case, as soon as practicable, but in any event not later than fifteen
(15) days after the necessity therefor arises. The Company shall use it best
efforts to cause such amendment and/or new Registration Statement to become
effective as soon as practicable following the filing thereof. For purposes of
the foregoing provision, the number of shares available under a Registration
Statement shall be deemed "insufficient to cover all of the Registrable
Securities" if at any time the number of Registrable Securities issued or
issuable upon conversion of the Preferred Shares and exercise of the Warrants
covered by such Registration Statement is greater than the quotient determined
by dividing (i) the number of shares of Common Stock available for resale under
such Registration Statement by (ii) 1.5. For purposes of the calculation set
forth in the foregoing sentence, any restrictions on the convertibility of the
Preferred Shares or exercisability of the Warrants shall be disregarded and such
calculation shall assume that the Preferred Shares and the Warrants are then
convertible and exercisable, respectively, into shares of Common Stock at the
then prevailing Conversion Rate (as defined in the Company's Articles of
Amendment) and the Warrant Exercise Prices (as defined in the Warrant).
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h. EFFECT OF FAILURE TO OBTAIN AND MAINTAIN EFFECTIVENESS OF
REGISTRATION STATEMENT. If the Registration Statement covering the resale of all
of the shares of Common Stock issuable upon conversion of the Preferred Shares
and exercise of Warrants covered by such Registration Statement and required to
be filed by the Company pursuant to this Agreement is not (i) filed within 45
days of the Initial Closing Date or within 20 days of the Company's receipt of
an Additional Share Notice as the case may be, (ii) declared effective by the
SEC on or before the date which is 90 days after the Initial Closing Date on or
before 90 days after the Company's receipt of an Additional Share Notice (each,
a "SCHEDULED EFFECTIVE DATE"), or (iii) if after the Registration Statement has
been declared effective by the SEC, sales of all such shares of Common Stock
cannot be made pursuant to the respective Registration Statement (whether
because of a failure to keep the Registration Statement effective, to disclose
such information as is necessary for sales to be made pursuant to the
Registration Statement, to register sufficient shares of Common Stock or
otherwise), then, as partial relief for the damages to any holder by reason of
any such delay in or reduction of its ability to sell the underlying shares of
Common Stock (which remedy shall not be exclusive of any other remedies
available at law or in equity), the Company shall pay to each holder of
Preferred Shares an amount in cash per Preferred Share held (which relates to a
Registration Statement which was not declared effective on or before its
Scheduled Effective Date or pursuant to which sales cannot be made) equal to the
product of (i) $1,000 multiplied by (ii) the sum of (A) .02, if the Registration
Statement is not filed by the Scheduled Filing Date, plus (B) .02, if the
Registration Statement is not declared effective by the Scheduled Effective
Date, plus (C) the product of (I) .00083 multiplied by (III) the quotient of
(II) the sum of (x) the number of days after the Scheduled Filing Date that such
Registration Statement is not filed with the SEC, plus (y) the number of days
after the Scheduled Effective Date that the Registration Statement is not
declared effective by the SEC, plus (z) the number of days that sales cannot be
made pursuant to the Registration Statement after the Registration Statement has
been declared effective by the SEC. The payments to which a holder shall be
entitled pursuant to this Section 2(h) are referred to herein as "REGISTRATION
DELAY PAYMENTS." Registration Delay Payments shall be paid within five business
days of the date incurred. In the event the Company fails to make Registration
Delay Payments in a timely manner, such Registration Delay Payments shall bear
interest at the rate of 2.5% per month (prorated for partial months) until paid
in full. If the Company fails to pay the Registration Delay Payments, including
any interest thereon, within 15 business days of the date incurred, then the
holder entitled to such payments shall have the right at any time, so long as
the Company continues to fail to make such payments, to require the Company,
upon written notice, to immediately issue, in lieu of the Registration Delay
Payments, including any interest thereon, the number of shares of Common Stock
equal to the quotient of (X) the sum of the Registration Delay Payments and all
interest accrued thereon divided by (Y) the Conversion Price in effect on such
Conversion Date as is specified by the holder in writing to the Company.
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(b) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a) or 2(g),
the Company will use its best efforts to effect the registration of the
Registrable Securities in accordance with the intended method of disposition
thereof and, pursuant thereto, the Company shall have the following obligations:
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a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Initial Registrable Securities (on or
prior to the forty-fifth (45th) day after the Initial Closing Date) and any
Additional Registrable Securities (on or prior to the date which is 20 days
after the Company's receipt of an Additional Share Notice) for the registration
of Registrable Securities pursuant to Section 2(a) and use its best efforts to
cause such Registration Statements relating to the Registrable Securities to
become effective as soon as possible after such filing (but, in the case of the
Initial Registration Statement, in no event later than 90 days after the Initial
Closing Date and, in the case of an Additional Registration Statement, in no
event later than 90 days after the Company's receipt of an Additional Share
Notice), and keep such Registration Statement effective pursuant to Rule 415 at
all times until the earlier of (i) the date as of which the Investors may sell
all of the Registrable Securities covered by such Registration Statement without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto) or (ii) the date on which (A) the Investors shall have sold all the
Registrable Securities covered by such Registration Statement and (B) none of
the Preferred Shares or Warrants are outstanding (the "REGISTRATION PERIOD"),
which Registration Statement (including any amendments or supplements thereto
and prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading. The term "best efforts" shall mean, among other
things, that the Company shall submit to the SEC, within three business days
after the Company learns that no review of a particular Registration Statement
will be made by the staff of the SEC or that the staff has no further comments
on the Registration Statement, as the case may be, a request for acceleration of
effectiveness of such Registration Statement to a time and date not later than
48 hours after the submission of such request.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b)) by
reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any
analogous report under the Securities Exchange Act of 1934, as amended (the
"1934 ACT"), the Company shall file such amendments or supplements with the SEC
on the same day on which the 1934 Act report is filed which created the
requirement for the Company to amend or supplement the Registration Statement.
c. The Company shall (a) permit Legal Counsel to review and comment
upon (i) the Initial Registration Statement at least seven (7) days prior to its
filing with the SEC and (ii) all other Registration Statements and all
amendments and supplements to all Registration Statements within a reasonable
number of days prior to the their filing with the SEC and (b) not
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<PAGE>
file any document in a form to which Legal Counsel reasonably objects. The
Company shall not submit a request for acceleration of the effectiveness of a
Registration Statement or any amendment or supplement thereto without the prior
approval of Legal Counsel, which consent shall not be unreasonably withheld. The
Company shall furnish to Legal Counsel, without charge, (i) any correspondence
from the SEC or the staff of the SEC to the Company or its representatives
relating to any Registration Statement, (ii) promptly after the same is prepared
and filed with the SEC, one copy of any Registration Statement and any
amendment(s) thereto, including financial statements and schedules, all
documents incorporated therein by reference and all exhibits and (iii) upon the
effectiveness of any Registration Statement, one copy of the prospectus included
in such Registration Statement and all amendments and supplements thereto.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference, all
exhibits and each preliminary prospectus, (ii) upon the effectiveness of any
Registration Statement, ten (10) copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) and (iii) such other
documents, including copies of any preliminary or final prospectus, as such
Investor may reasonably request from time to time in order to facilitate the
disposition of the Registrable Securities owned by such Investor.
e. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as Legal Counsel or any Investor reasonably requests, (ii) prepare and
file in those jurisdictions, such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(e), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
Legal Counsel and each Investor who holds Registrable Securities of the receipt
by the Company of any notification with respect to the suspension of the
registration or qualification of any of the Registrable Securities for sale
under the securities or "blue sky" laws of any jurisdiction in the United States
or its receipt of actual notice of the initiation or threatening of any
proceeding for such purpose.
f. In the event Investors who hold a majority of the Registrable
Securities being offered in the offering select underwriters for the offering,
the Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering.
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g. As promptly as practicable after becoming aware of such event, the
Company shall notify Legal Counsel and each Investor in writing of the happening
of any event as a result of which the prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to Legal Counsel and each
Investor (or such other number of copies as Legal Counsel or such Investor may
reasonably request). The Company shall also promptly notify Legal Counsel and
each Investor in writing (i) when a prospectus or any prospectus supplement or
post-effective amendment has been filed, and when a Registration Statement or
any post-effective amendment has become effective (notification of such
effectiveness shall be delivered to Legal Counsel and each Investor by facsimile
on the same day of such effectiveness and by overnight mail), (ii) of any
request by the SEC for amendments or supplements to a Registration Statement or
related prospectus or related information, and (iii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement would
be appropriate.
h. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify Legal Counsel and each Investor who holds Registrable
Securities being sold (and, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
i. At the request of any Investor, the Company shall furnish to such
Investor, on the date of the effectiveness of the Registration Statement and
thereafter from time to time on such dates as an Investor may reasonably request
(i) if required by an underwriter, a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters, and (ii) an
opinion, dated as of such date, of counsel representing the Company for purposes
of such Registration Statement, in form, scope and substance as is customarily
given in an underwritten public offering, addressed to the underwriters and the
Investors.
j. The Company shall make available for inspection by (i) any
Investor, (ii) Legal Counsel, (iii) any underwriter participating in any
disposition pursuant to a Registration Statement, (iv) one firm of accountants
or other agents retained by the Investors, and (v) one firm of attorneys
retained by such underwriters (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
provided, however, that each Inspector shall hold in strict confidence and shall
not make any disclosure (except to an Investor) or use of any Record
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or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement or is otherwise required
under the 1933 Act, (b) the release of such Records is ordered pursuant to a
final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement of which the Inspector has knowledge. Each Investor
agrees that it shall, upon learning that disclosure of such Records is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential.
k. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable 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 Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
l. The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by a Registration Statement to be listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, (ii) secure the
designation and quotation of all the Registrable Securities covered by the
Registration Statement on The Nasdaq SmallCap Market or Nasdaq National Market,
or (iii) secure the inclusion for quotation on the over-the-counter market on
the electronic bulletin board for such Registrable Securities and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable Securities. The Company shall
pay all fees and expenses in connection with satisfying its obligation under
this Section 3(l).
m. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any managing
underwriter or underwriters, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any, or
the Investors may request.
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n. The Company shall provide a transfer agent and registrar of all
such Registrable Securities not later than the effective date of such
Registration Statement.
o. If requested by the managing underwriters or an Investor, the
Company shall (i) immediately incorporate in a prospectus supplement or post-
effective amendment such information as the managing underwriters and the
Investors agree should be included therein relating to the sale and distribution
of Registrable Securities, including, without limitation, information with
respect to the number of Registrable Securities being sold to such underwriters,
the purchase price being paid therefor by such underwriters and any other terms
of the underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement
if requested by a shareholder or any underwriter of such Registrable Securities.
p. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
q. The Company shall make generally available to its security holders
as soon as practical, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the 1933 Act) covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement.
r. The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder.
s. Within two (2) business days after a Registration Statement which
covers applicable Registrable Securities is ordered effective by the SEC, 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
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as EXHIBIT A.
t. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
u. If the Company, while any Registration Statement registering any
Registrable Securities is effective, becomes eligible to use form S-3 then the
Company shall as soon as practicable update each existing Registration Statement
to take advantage of Form S-3 and each new Registration Statement filed pursuant
to this Agreement shall be on Form S-3, so long as the Company remains eligible
to use such form.
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4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) business days prior to the first anticipated
filing date of a Registration Statement, the Company shall notify each Investor
in writing of the information the Company requires from each such Investor if
such Investor elects to have any of such Investor's Registrable Securities
included in such Registration Statement. It shall be a condition precedent to
the obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. In the event any Investor elects to participate in an underwritten
public offering pursuant to Section 2, each such Investor agrees to enter into
and perform such Investor's obligations under an underwriting agreement, in
usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of the Registrable Securities.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(h) or
the first sentence of 3(g), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to any Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the copies
of the supplemented or amended prospectus contemplated by Section 3(h) or the
first sentence of 3(g).
e. No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions.
f. Each Investor agrees not to take any action to cause such Investor
to become a registered broker dealer as defined under the 1934 Act or to effect
any change to such Investor's status that would preclude the Company from using
Form S-3 for the Registration Statement.
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5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company and fees and disbursements of Legal Counsel, shall be
paid by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents,
representatives of, and each Person, if any, who controls any Investor within
the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended
(the "1934 ACT"), and any underwriter (as defined in the 1933 Act) for the
Investors, and the directors and officers of, and each Person, if any, who
controls, any such underwriter within the meaning of the 1933 Act or the 1934
Act (each, an "INDEMNIFIED PERSON"), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, attorneys' fees,
amounts paid in settlement or expenses, joint or several, (collectively,
"CLAIMS") incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("BLUE SKY FILING"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, (iii) any violation or alleged violation by the Company of
the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities pursuant to a Registration Statement or
(iv) any material violation of this Agreement (the matters in the foregoing
clauses (i) through (iv) being, collectively, "VIOLATIONS"). The Company shall
reimburse the Investors and each such underwriter or controlling person,
promptly as such expenses are incurred and are due and payable, for any legal
fees or other expenses reasonably incurred by them in connection with
13
<PAGE>
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(d); (ii) with respect to any preliminary prospectus, shall
not inure to the benefit of any such person from whom the person asserting any
such Claim purchased the Registrable Securities that are the subject thereof (or
to the benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(d), and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it; (iii) shall not be available to
the extent such Claim is based on a failure of the Investor to deliver or to
cause to be delivered the prospectus made available by the Company, if such
prospectus was timely made available by the Company pursuant to Section 3(d);
and (iv) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement, each Person, if any, who controls
the Company within the meaning of the 1933 Act or the 1934 Act (collectively and
together with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim
or Indemnified Damages to which any of them may become subject, under the 1933
Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages
arise out of or are based upon any Violation, in each case to the extent, and
only to the extent, that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and, subject
to Section 6(d), such Investor will reimburse any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) and the agreement with respect to contribution contained in Section
7 shall not apply to amounts paid in settlement of any Claim if such settlement
is effected without the prior written consent of such Investor, which consent
shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Section 6(b) for only that amount of a Claim
or Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with
14
<PAGE>
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay reasonable fees for only one separate legal counsel for the Investors, and
such legal counsel shall be selected by the Investors holding a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim or proceeding effected without its written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the consent of the Indemnified Party or Indemnified Person, consent to entry of
any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from all liability
in respect to such claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
15
<PAGE>
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that: (i) no
seller of Registrable Securities guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any seller of Registrable Securities who was not guilty of fraudulent
misrepresentation; and (ii) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the investors to
sell such securities pursuant to Rule 144 without registration.
16
<PAGE>
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company 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) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with the written consent of the Company and Investors
who then hold two-thirds () of the Registrable Securities. Any amendment or
waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company. No such amendment shall be effective to the extent
that it applies to less than all of the holders of the Registrable Securities.
No consideration shall be offered or paid to any Person to amend or consent to a
waiver or modification of any provision of any of this Agreement unless the same
consideration also is offered to all of the parties to this Agreement.
11. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or
election received from the registered owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
17
<PAGE>
If to the Company:
GoodNoise Corporation
719 Colorado Avenue
Palo Alto, California 94303
Telephone: (650) 470-2969
Facsimile: (650) 322-8919
Attention: Gene Hoffman
With a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301-1825
Telephone: 650-328-6561
Facsimile: 650-327-3699
Attention: Peter M. Astiz, Esq.
If to Legal Counsel:
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
Telephone: 312-902-5200
Facsimile: 312-902-1061
Attention: Robert J. Brantman, Esq.
If to a Buyer, to its address and facsimile number on the Schedule of Buyers
attached hereto, with copies to such Buyer's representatives as set forth on the
Schedule of Buyers or to such other address and/or facsimile number and/or to
the attention of such other person as the recipient party has specified by
written notice given to each other party five days prior to the effectiveness of
such change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically generated by
the sender's facsimile machine containing the time, date, recipient facsimile
number and an image of such transmission or (C) provided by a courier or
overnight courier service shall be rebuttable evidence of personal service,
overnight or courier delivery or transmission by facsimile in accordance with
clause (i), (ii) or (iii) above, respectively.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. The corporate laws of the State of Florida shall govern all issues
concerning the relative rights of the Company and its stockholders. All other
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of New York or any other
18
<PAGE>
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York. Each party hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting the City of
New York, 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, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of 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.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction. 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 ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.
e. This Agreement, the Securities Purchase Agreement, the Warrants
and the Articles of Amendment constitute the entire agreement among the parties
hereto with respect to the subject matter hereof and thereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein and therein. This Agreement, the Securities Purchase
Agreement, the Warrants and the Articles of Amendment supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agree ment and the consummation of the transactions
contemplated hereby.
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j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities,
determined as if all of the Preferred Shares and Warrants then outstanding have
been converted into or exercised for Registrable Securities without regard to
any limitation on conversions of the Preferred Shares or exercise of the
Warrants.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
l. 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.
* * * * * *
20
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
GOODNOISE CORPORATION HFTP INVESTMENT LLC
___________________________________________
By: Promethean Investment Group L.L.C
Its: Investment Manager
By: /s/ By: /s/
------------------------------ ----------------------------------------
Name: Gene Hoffman Name: James F. O'Brien, Jr.
Its: President Its: President
21
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
INVESTOR ADDRESS INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER AND FACSIMILE NUMBER
- ------------------------------ -------------------------------------- ----------------------------------------
<S> <C> <C>
HFTP Investment LLC Promethean Investment Group, L.L.C. Promethean Investment Group, L.L.C.
40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520
New York, New York 10019 New York, New York 10019
Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr.
Facsimile: 212-698-0505 Facsimile: 212-698-0505
Katten Muchin & Zavis
525 West Monroe, Suite 1600
Chicago, Illinois 60661-3693
Attn: Robert J. Brantman, Esq.
Facsimile: 312-902-1061
</TABLE>
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
ATTN.:
Re: GoodNoise Corporation
Ladies and Gentlemen:
We are counsel to GoodNoise Corporation, a Florida 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 shares of its Series A
Preferred Stock, $0.01 par value per share, (the "PREFERRED SHARES") convertible
into shares of the Company's common stock, $0.01 par value per share (the
"COMMON STOCK"), and warrants to purchase an aggregate of up to 500 shares of
the Common Stock, subject to adjustment (the "WARRANTS"). 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 Preferred Shares 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 ___________ ___, 1998, the Company filed a
Registration Statement on Form___ (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] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[ISSUER'S COUNSEL]
By:_____________________________
cc: [LIST NAMES OF HOLDERS]
<PAGE>
EXHIBIT 10.3
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO
COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS. NOTWITHSTANDING THE
FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT.
GOODNOISE CORPORATION
Warrant To Purchase Common Stock
Warrant No.: __________________ Number of Shares: _________
Date of Issuance: _____________ __, 199__
GoodNoise Corporation, a Florida corporation (the "Company"), hereby certifies
that, for Ten United States Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
____________________, the registered holder hereof or its permitted assigns, is
entitled, subject to the terms set forth below, to purchase from the Company
upon surrender of this Warrant, at any time or times on or after the date
hereof, but not after 11:59 P.M. Central Time on the Expiration Date (as defined
herein) _______________ (______________) [INSERT 200 for each Preferred Share]
fully paid nonassessable shares of Common Stock (as defined herein) (the
"Warrant Shares") at the purchase price per share provided in Section 1(b)
below; provided, however, that in no event shall the holder be entitled to
exercise this Warrant for a number of Warrant Shares in excess of that number of
Warrant Shares which, upon giving effect to such exercise, would cause the
aggregate number of shares of Common Stock beneficially owned by the holder and
its affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such exercise. For purposes of the foregoing proviso, the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such proviso
is being made, but shall exclude shares of Common Stock which would be issuable
upon (i) exercise of the remaining,
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<PAGE>
unexercised Warrants beneficially owned by the holder and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company beneficially owned by the holder and its
affiliates (including, without limitation, any convertible notes or preferred
stock) subject to a limitation on conversion or exercise analogous to the
limitation contained herein. Except as set forth in the preceding sentence, for
purposes of this paragraph, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended.
Section 1.
(a) Securities Purchase Agreement. This Warrant is one of the
-----------------------------
Initial Warrants or the Additional Warrants (collectively, the "Preferred Share
Warrants") issued pursuant to the terms of that certain Securities Purchase
Agreement dated as of ___________, 1998, among the Company and the Buyers
referred to therein (the "Securities Purchase Agreement").
(b) Definitions. The following words and terms as used in this
-----------
Warrant shall have the following meanings:
(i) "Closing Bid Price" means, for any security as of any
date, the last closing bid price for such security on the Principal Market (as
defined below) as reported by Bloomberg Financial Markets ("Bloomberg"), or, if
the Principal Market is not the principal trading market for such security, the
last closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price for such security as
reported by Bloomberg, or, if no last closing trade price is reported for such
security by Bloomberg, the average of the bid prices of any market makers for
such security as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually determined by the Company
and the holders of the Preferred Shares. If the Company and the holders of the
Preferred Shares are unable to agree upon the fair market value of the Common
Stock, then such dispute shall be resolved pursuant to Section 2(a) below. (All
such determinations to be appropriately adjusted for any stock dividend, stock
split or other similar transaction during such period.)
(ii) "Closing Sale Price" means, for any security as of any
date, the last closing trade price for such security on the Principal Market (as
defined below) as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing trade price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing trade price of such security
in the over-the-counter market on the electronic bulletin board for such
security as reported by
2
<PAGE>
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the last closing ask price of such security as reported by Bloomberg,
or, if no last closing ask price is reported for such security by Bloomberg, the
average of the ask prices of any market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Sale
Price cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Sale Price of such security on such date shall be
the fair market value as mutually determined by the Company and the holders of
Preferred Shares. If the Company and the holders of Preferred Shares are unable
to agree upon the fair market value of the Common Stock, then such dispute shall
be resolved pursuant to Section 2(a) below. (All such determinations to be
appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period).
(iii) "Approved Stock Plan" shall mean any employee benefit 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,
consultant or other service provider for services provided to the Company.
(iv) "Articles of Amendment" means the Company's Articles of
Amendment to Articles of Incorporation setting forth the designations,
preferences and rights of the Preferred Shares.
(v) "Common Stock" means (i) the Company's common stock, no
par value, and (ii) any capital stock into which such Common Stock shall have
been changed or any capital stock resulting from a reclassification of such
Common Stock.
(vi) "Convertible Securities" means any stock or securities
(other than Options) directly or indirectly convertible into or exchangeable for
Common Stock.
(vii) "Common Stock Deemed Outstanding" means, at any given
time, the number of shares of Common Stock actually outstanding at such time,
plus the number of shares of Common Stock deemed to be outstanding pursuant to
Sections 8(b)(i) and 8(b)(ii) hereof regardless of whether the Options (as
defined below) or Convertible Securities (as defined below) are actually
exercisable or convertible at such time, but excluding any shares of Common
Stock owned or held by or for the account of the Company or issuable upon
exercise of the Preferred Share Warrants.
(viii) "Expiration Date" means ___________ __, 200_ [date which
is four years after the date of original issuance] or, if such date falls on a
Saturday, Sunday or other day on which banks are required or authorized to be
closed in the City of New York or the State of New York or on which trading does
not take place on the principal exchange, market or automated quotation system
on which the Common Stock is traded (a "Holiday"), the next date that is not a
Holiday.
(ix) "Options" means any rights, warrants or options to
subscribe for or purchase Common Stock or Convertible Securities.
3
<PAGE>
(x) "Other Securities" means (i) those warrants of the Company
issued prior to, and outstanding on, the date of issuance of this Warrant, (ii)
the Preferred Shares and (iii) the shares of Common Stock issued upon conversion
of the Preferred Shares.
(xi) "Person" means an individual, a limited liability company,
a partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(xii) "Preferred Shares" means the shares of the Company's
Series A Preferred Stock issued pursuant to the Securities Purchase Agreement.
(xiii) "Principal Market" means the securities or trading market
upon which the Common Stock is listed or quoted, provided that such market is
one of the following; the over-the-counter market on the electronic bulleting
board ("OTC"), The Nasdaq SmallCap Market, Nasdaq National Market, The American
Stock Exchange, Inc. or The New York Stock Exchange, Inc.
(xiv) "Securities Act" means the Securities Act of 1933, as
amended.
(xv) "Warrant" means this Warrant and all Warrants issued in
exchange, transfer or replacement of any thereof.
(xvi) "Warrant Exercise Price" shall be equal to (A) on any date
prior to the date which is 180 days after the date of this Warrant, the Closing
Bid Price on the trading day immediately preceding the date of this Warrant,
subject to adjustment as provided herein (the "Initial Warrant Exercise Price")
and (B) on any date on or after the date which is 180 days after the date of
this Warrant, the lesser of (I) the Initial Warrant Exercise Price then in
effect and (II) the Closing Bid Price on the date which is 180 days after the
date of this Warrant, subject to adjustment as hereinafter provided and as
provided in the Articles of Amendment.
Section 2. Exercise of Warrant.
-------------------
(a) Subject to the terms and conditions hereof, this Warrant
may be exercised by the holder hereof then registered on the books of the
Company, in whole or in part, at any time on any business day on or after the
opening of business on the date hereof and prior to 11:59 P.M. Central Time on
the Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto (the "Exercise Notice"), of
such holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, (ii) payment to the Company of an
amount equal to the Warrant Exercise Price multiplied by the number of Warrant
Shares as to which this Warrant is being exercised (plus any applicable issue or
transfer taxes) (the "Aggregate Exercise Price") in cash or by check or wire
transfer, and (iii) the surrender to a common carrier for delivery to the
Company as soon as practicable following such date, this Warrant (or an
indemnification undertaking with respect to this Warrant in the case of its
loss, theft or destruction); provided, that if such Warrant Shares are
4
<PAGE>
to be issued in any name other than that of the registered holder of this
Warrant, such issuance shall be deemed a transfer and the provisions of Section
7 shall be applicable. In the event of any exercise of the rights represented by
this Warrant in compliance with this Section 2(a), a certificate or certificates
for the Warrant Shares so purchased, in such denominations as may be requested
by the holder hereof and registered in the name of, or as directed by, the
holder, shall be delivered at the Company's expense to, or as directed by, such
holder as soon as practicable, and in no event later than two business days,
after the Company's receipt of the Exercise Notice, the Aggregate Exercise Price
and this Warrant (or an indemnification undertaking in customary form with
respect to this Warrant in the case of its loss, theft or destruction). Upon
delivery of the Exercise Notice and Aggregate Exercise Price referred to in
clauses (i) and (ii) above, the holder of this Warrant shall be deemed for all
corporate purposes to have become the holder of record of the Warrant Shares
with respect to which this Warrant has been exercised, irrespective of the date
of delivery of this Warrant as required by clause (iii) above or the
certificates evidencing such Warrant Shares. In the case of a dispute as to the
determination of the Warrant Exercise Price, the last reported sale price (as
reported by Bloomberg) or the Closing Bid Price of a security or the arithmetic
calculation of the Warrant Shares, the Company shall promptly issue to the
holder the number of shares of Common Stock that is not disputed and shall
submit the disputed determinations or arithmetic calculations to the holder via
facsimile within one business day of receipt of the holder's subscription
notice. If the holder and the Company are unable to agree upon the determination
of the Warrant Exercise Price, the last reported sale price (as reported by
Bloomberg) or Closing Bid Price or arithmetic calculation of the Warrant Shares
within one day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall immediately submit via facsimile
(i) the disputed determination of the Warrant Exercise Price, the last reported
sale price (as reported by Bloomberg) or the Closing Bid Price to an
independent, reputable investment banking firm or (ii) the disputed arithmetic
calculation of the Warrant Shares to its independent, outside accountant. The
Company shall cause the investment banking firm or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the holder of the results no later than forty-eight (48) hours from the time it
receives the disputed determinations or calculations. Such investment banking
firm's or accountant's determination or calculation, as the case may be, shall
be deemed conclusive absent manifest error.
(b) Unless the rights represented by this Warrant shall have expired
or shall have been fully exercised, the Company shall, as soon as practicable
and in no event later than five business days after any exercise and at its own
----
expense, issue a new Warrant identical in all respects to this Warrant exercised
except it shall represent rights to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under this Warrant exercised,
less the number of Warrant Shares with respect to which such Warrant is
exercised.
(c) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.
(d) If the Company shall fail for any reason or for no reason to issue
to the holder on a timely basis as described in this Section 2, a certificate
for the number of shares
5
<PAGE>
of Common Stock to which the holder is entitled upon the holder's exercise of
this Warrant or a new Warrant for the number of shares of Common Stock to which
such holder is entitled pursuant to Section 2(b) hereof, the Company shall, in
addition to any other remedies under this Warrant or the Securities Purchase
Agreement or otherwise available to such holder, including any indemnification
under Section 8 of the Securities Purchase Agreement, pay as additional damages
in cash to such holder on each day the issuance of such Common Stock certificate
or new Warrant, as the case may be, is not timely effected an amount equal to
.0025 of the product of (A) the sum of the number of shares of Common Stock not
issued to the holder on a timely basis and to which the holder is entitled
and/or, the number of shares represented by the portion of this Warrant which is
not being converted, as the case may be, and (B) the average of the Closing Sale
Price of the Common Stock for the three consecutive trading days immediately
preceding the last possible date which the Company could have issued such Common
Stock or Warrant, as the case may be, to the holder without violating this
Section 2.
(e) Notwithstanding anything contained herein to the contrary, the
holder of this Warrant may, at its election exercised in its sole discretion,
exercise this Warrant in whole or in part and, in lieu of making the cash
payment otherwise contemplated to be made to the Company upon such exercise in
payment of the Aggregate Exercise Price, elect instead to receive upon such
exercise the "Net Number" of shares of Common Stock determined according to the
following formula:
Net Number = (A x B) - (A x C)
-----------------
B
For purposes of the foregoing formula:
A= the total number shares with respect to which this Warrant
is then being exercised.
B= the Closing Sale Price of the Common Stock on the date
immediately preceding the date of the subscription notice.
C= the Warrant Exercise Price then in effect at the time of
such exercise.
Section 3. Covenants as to Common Stock. The Company hereby covenants
----------------------------
and agrees as follows:
(a) This Warrant is, and any Preferred Share Warrants issued
in substitution for or replacement of this Warrant will upon issuance be, duly
authorized and validly issued.
(b) All Warrant Shares which may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof.
6
<PAGE>
(c) During the period within which the rights represented by
this Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company shall promptly secure the listing of the shares
of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, 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 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.
(e) The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms 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. No impairment of the designations, preferences and rights of the
Preferred Shares contained in the Company's Articles of Amendment or any waiver
thereof which has an adverse effect on the rights granted hereunder shall be
given effect until the Company has taken appropriate action (satisfactory to the
holders of Preferred Share Warrants representing a majority of the shares of
Common Stock issuable upon the exercise of such Preferred Share Warrants then
outstanding) to avoid such adverse effect with respect to 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 Warrant 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.
(f) This Warrant will be binding upon any entity succeeding to
the Company by merger, consolidation or acquisition of all or substantially all
of the Company's assets.
Section 4. Taxes. The Company shall pay any and all taxes which may be
-----
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.
7
<PAGE>
Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise
---------------------------------------
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 5, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
Section 6. Representations of Holder. The holder of this Warrant, by the
-------------------------
acceptance hereof, represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment only and not with a view towards, or
for resale in connection with, the public sale or distribution of this Warrant
or the Warrant Shares, except pursuant to sales registered or exempted under the
Securities Act; provided, however, that by making the representations herein,
the holder does not agree to hold this Warrant or any of the Warrant Shares for
any minimum or other specific term and reserves the right to dispose of this
Warrant and the Warrant Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the Securities Act. The holder of
this Warrant further represents, by acceptance hereof, that, as of this date,
such holder is an "accredited investor" as such term is defined in Rule
501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act (an "Accredited Investor"). Upon exercise of this
Warrant, the holder shall, if requested by the Company, confirm in writing, in a
form satisfactory to the Company, that the Warrant Shares so purchased are being
acquired solely for the holder's own account and not as a nominee for any other
party, for investment, and not with a view toward distribution or resale and
that such holder is an Accredited Investor. If such holder cannot make such
representations because they would be factually incorrect, it shall be a
condition to such holder's exercise of this Warrant that the Company receive
such other representations as the Company considers reasonably necessary to
assure the Company that the issuance of its securities upon exercise of this
Warrant shall not violate any United States or state securities laws.
Section 7. Ownership and Transfer.
----------------------
(a) The Company shall maintain at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee. The Company may
treat the person in whose name any Warrant is registered on the register as
8
<PAGE>
the owner and holder thereof for all purposes, notwithstanding any notice to the
contrary, but in all events recognizing any transfers made in accordance with
the terms of this Warrant.
(b) This Warrant and the rights granted to the holder hereof
are transferable, in whole or in part, upon surrender of this Warrant, together
with a properly executed warrant power in the form of Exhibit B attached hereto;
provided, however, that any transfer or assignment shall be subject to the
conditions set forth in Section 7(c) below.
(c) The holder of this Warrant understands that this Warrant
has not been and is not expected to be, registered under the Securities Act or
any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (a) subsequently registered thereunder, or (b) such holder
shall have delivered to the Company an opinion of counsel, in generally
acceptable form, to the effect that the securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration; provided that (i) any sale of such securities made in
reliance on Rule 144 promulgated under the Securities Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (ii)
neither the Company nor any other person is under any obligation to register the
Preferred Share Warrants under the Securities Act or any state securities laws
or to comply with the terms and conditions of any exemption thereunder.
(d) The Company is obligated to register the Warrant Shares for
resale under the Securities Act pursuant to the Registration Rights Agreement
dated __________, 199__ by and between the Company and the Buyers listed on the
signature page thereto (the "Registration Rights Agreement") and the initial
holder of this Warrant (and certain assignees thereof) is entitled to the
registration rights in respect of the Warrant Shares as set forth in the
Registration Rights Agreement.
Section 8. Adjustment of Warrant Exercise Price and Number of Shares. The
---------------------------------------------------------
Warrant Exercise Price and the number of shares of Common Stock issuable upon
exercise of this Warrant shall be adjusted from time to time as follows:
(a) Adjustment of Warrant Exercise Price and Number of Shares
---------------------------------------------------------
upon Issuance of Common Stock. If and whenever on or after the date of issuance
- -----------------------------
of this Warrant, the Company issues or sells, or in accordance with Section 8(b)
is deemed to have issued or sold, any shares of Common Stock (including the
issuance or sale of shares of Common Stock owned or held by or for the account
of the Company, but excluding shares of Common Stock deemed to have been issued
by the Company in connection with an Approved Stock Plan or upon exercise or
conversion of the Other Securities) for a consideration per share less than a
price (the "Applicable Price") equal to the greater of (i) the average of the
Closing Bid Prices of the Common Stock on the five consecutive trading days
immediately preceding the date of such issue or sale and (ii) the Warrant
Exercise Price in effect immediately prior to such time, then
9
<PAGE>
immediately after such issue or sale the Warrant Exercise Price then in effect
shall be reduced to an amount equal to the product of (x) the Warrant Exercise
Price in effect immediately prior to such issue or sale and (y) the quotient
determined by dividing (1) the sum of (I) the product derived by multiplying the
Applicable Price by the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (II) the consideration, if any,
received by the Company upon such issue or sale, by (2) the product derived by
multiplying the (I) Applicable Price by (II) the number of shares of Common
Stock Deemed Outstanding immediately after such issue or sale. Upon each such
adjustment of the Warrant Exercise Price hereunder, the number of shares of
Common Stock acquirable upon exercise of this Warrant shall be adjusted to the
number of shares determined by multiplying the Warrant Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
acquirable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Warrant Exercise Price resulting from
such adjustment.
(b) Effect on Warrant Exercise Price of Certain Events. For purposes
--------------------------------------------------
of determining the adjusted Warrant Exercise Price under Section 8(a) above, the
following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants any
-------------------
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion or exchange of
any Convertible Securities issuable upon exercise of any such Option is less
than the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 8(b)(i), the "lowest price per share for which one share of Common Stock
is issuable upon exercise of such Options or upon conversion or exchange of such
Convertible Securities" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion or exchange of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Warrant
Exercise Price shall be made upon the actual issuance of such Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon such conversion or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 8(b)(ii), the "lowest price per
share for which one share of Common Stock is issuable upon such conversion or
exchange" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion
or exchange of such Convertible Security. No further adjustment of the Warrant
Exercise Price shall be made upon the actual issuance of such
10
<PAGE>
Common Stock upon conversion or exchange of such Convertible Securities, and if
any such issue or sale of such Convertible Securities is made upon exercise of
any Options for which adjustment of the Warrant Exercise Price had been or are
to be made pursuant to other provisions of this Section 8(b), no further
adjustment of the Warrant Exercise Price shall be made by reason of such issue
or sale. Notwithstanding the foregoing, no adjustment shall be made pursuant to
this Section 8(b)(ii) to the extent that such adjustment is based solely on the
fact that such Convertible Securities are convertible into or exchangeable for
Common Stock at a price which varies with the market price of the Common Stock.
(iii) Change in Option Price or Rate of Conversion. If the
--------------------------------------------
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for Common Stock changes at any time, the Warrant Exercise Price
in effect at the time of such change shall be adjusted to the Warrant Exercise
Price which would have been in effect at such time had such Options or
Convertible Securities 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 and the number of shares of Common Stock
acquirable hereunder shall be correspondingly readjusted. For purposes of this
Section 8(b)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of this Warrant are changed in the manner
described in the immediately preceding sentence, then such Option or Convertible
Security and the Common Stock deemed issuable upon exercise, conversion or
exchange thereof shall be deemed to have been issued as of the date of such
change. No adjustment shall be made if such adjustment would result in an
increase of the Warrant Exercise Price then in effect.
(c) Effect on Warrant Exercise Price of Certain Events. For
--------------------------------------------------
purposes of determining the adjusted Warrant Exercise Price under Sections 8(a)
and 8(b), the following shall be applicable:
(i) Calculation of Consideration Received. 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 a consideration of $.01. If any Common
Stock, Options or Convertible 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 net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of such consideration 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 of the Closing Bid Prices of the Common Stock on the five
consecutive trading days immediately preceding the date of receipt. If any
Common Stock, Options or Convertible 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 Common Stock, Options or
11
<PAGE>
Convertible Securities, as the case may be. The fair value of any consideration
other than cash or securities will be determined jointly by the Company and the
holders of Preferred Share Warrants representing a majority of the shares of
Common Stock obtainable upon exercise of the Preferred Share 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 five business
days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the holders of Preferred
Share Warrants representing a majority of the shares of Common Stock obtainable
upon exercise of the Preferred Share Warrants then outstanding. The
determination of such appraiser shall be final and binding upon all parties and
the fees and expenses of such appraiser shall be borne by the Company.
(ii) 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 Common Stock, Options or in
Convertible Securities or (2) to subscribe for or purchase Common Stock, Options
or Convertible 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) Adjustment of Warrant Exercise Price upon Subdivision or
--------------------------------------------------------
Combination of Common Stock. If the Company at any time after the date of
- ---------------------------
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time after the date of
issuance of this Warrant combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Warrant Exercise Price in effect immediately prior
to such combination will be proportionately increased and the number of shares
of Common Stock obtainable upon exercise of this Warrant will be proportionately
decreased.
(e) Distribution of Assets. If the Company shall declare or
----------------------
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a partial liquidating dividend, by way or return of capital
or otherwise (including any dividend or distribution to the Company's
stockholders of cash or shares (or rights to acquire shares) of capital stock of
a subsidiary) (a "Distribution"), at any time after the issuance of this
Warrant, then the holder of this Warrant shall be entitled upon exercise of this
Warrant for the purchase of any or all of the shares of Common Stock subject
hereto, after the record date for determining shareholders entitled to receive
such Distribution, to receive the amount of such assets (or rights) which would
have been payable to the holder had such holder been the holder of such shares
of Common Stock on the record date for determination of stockholders entitled to
such Distribution.
12
<PAGE>
(f) Certain Events. If any event occurs of the type
--------------
contemplated by the provisions of this Section 8 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
Warrant Exercise Price and the number of shares of Common Stock obtainable upon
exercise of this Warrant so as to protect the rights of the holders of the
Preferred Share Warrants; provided that no such adjustment will increase the
Warrant Exercise Price or decrease the number of shares of Common Stock
obtainable as otherwise determined pursuant to this Section 8.
(g) Notices.
-------
(i) Immediately upon any adjustment of the Warrant
Exercise Price, the Company will give written notice thereof to the holder of
this Warrant, setting forth in reasonable detail, and certifying, the
calculation of such adjustment.
(ii) The Company will give written notice to the holder of
this Warrant at least twenty (20) days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Organic Change (as defined below), dissolution or
liquidation, provided that such information shall be made known to the public
prior to or in conjunction with such notice being provided to such holder.
(iii) The Company will also give written notice to the
holder of this Warrant at least twenty (20) days prior to the date on which any
Organic Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.
Section 9. Purchase Rights; Reorganization, Reclassification,
--------------------------------------------------
Consolidation, Merger or Sale. (a) In addition to any adjustments pursuant to
- -----------------------------
Section 8 above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then the holder of this Warrant will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete exercise of this Warrant
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(b) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction which is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as "Organic Change." Prior to
the
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consummation of any (i) sale of all or substantially all of the Company's assets
to an acquiring Person or (ii) other Organic Change following which the Company
is not a surviving entity, the Company will secure from the Person purchasing
such assets or the successor resulting from such Organic Change (in each case,
the "Acquiring Entity") written agreement (in form and substance satisfactory to
the holders of Preferred Share Warrants representing a majority of the shares of
Common Stock obtainable upon exercise of the Preferred Share Warrants then
outstanding) to deliver to each holder of Preferred Share Warrants in exchange
for such Warrants, a security of the Acquiring Entity evidenced by a written
instrument substantially similar in form and substance to this Warrant and
satisfactory to the holders of the Preferred Share Warrants (including, an
adjusted warrant exercise price equal to the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, and exercisable
for a corresponding number of shares of Common Stock acquirable and receivable
upon exercise of the Preferred Share Warrants, if the value so reflected is less
than the Warrant Exercise Price in effect immediately prior to such
consolidation, merger or sale). Prior to the consummation of any other Organic
Change, the Company shall make appropriate provision (in form and substance
satisfactory to the holders of Preferred Share Warrants representing a majority
of the shares of Common Stock obtainable upon exercise of the Preferred Share
Warrants then outstanding) to insure that each of the holders of the Preferred
Share Warrants will thereafter have the right to acquire and receive in lieu of
or in addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the exercise of such holder's
Preferred Share Warrants, such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the exercise of such holder's Warrant as of the
date of such Organic Change (without taking into account any limitations or
restrictions on the exerciseability of this Warrant).
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
--------------------------------------------
is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an
indemnification undertaking, issue a new Warrant of like denomination and tenor
as this Warrant so lost, stolen, mutilated or destroyed.
Section 11. Notice. Any notices, consents, waivers or other
------
communications required or permitted to be given under the terms of this Warrant
must be in writing and will be deemed to have been delivered: (i) upon receipt,
when delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one business day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
GoodNoise Corporation
719 Colorado Avenue
Palo Alto, California 94303
Telephone: (650) 322-8910
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Facsimile: (650) 322-8919
Attention: President
With copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301-1825
Telephone: (650) 328-6561
Facsimile: (650) 327-3699
Attention: Peter M. Astiz, Esq.
If to a holder of this Warrant, to it at the address and facsimile number set
forth on the Schedule of Buyers to the Securities Purchase Agreement, with
copies to such holder's representatives as set forth on such Schedule of Buyers,
or at such other address and facsimile as shall be delivered to the Company upon
the issuance or transfer of this Warrant. Each party shall provide five days'
prior written notice to the other party of any change in address or facsimile
number. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically generated by
the sender's facsimile machine containing the time, date, recipient facsimile
number and an image of such transmission or (C) provided by a courier or
overnight courier service shall be rebuttable evidence of personal service,
overnight or courier delivery or transmission by facsimile in accordance with
clause (i), (ii) or (iii) above, respectively.
Section 12. Amendments. This Warrant and any term hereof may be changed,
----------
waived, discharged, or terminated only by an instrument in writing signed by the
party or holder hereof against which enforcement of such change, waiver,
discharge or termination is sought.
Section 13. Limitation on Number of Warrant Shares. Notwithstanding any
--------------------------------------
other provision herein, the Company shall not be obligated to issue any Warrant
Shares upon exercise of this Warrant if the issuance of such shares of Common
Stock would cause the Company to exceed that number of shares of Common Stock
which the Company may issue upon exercise of this Warrant (the "Exchange Cap")
without breaching the Company's obligations under the rules or regulations, if
any, of the Principal Market, except that such limitation shall not apply in the
event that the Company (a) obtains the approval of its stockholders as required
by applicable rules or regulations, if any, of the Principal Market (or any
successor rule or regulation) for issuances of Common Stock in excess of such
amount or (b) obtains a written opinion from outside counsel to the Company that
such approval is not required, which opinion shall be reasonably satisfactory to
the holders of Warrants representing a majority of the Warrant Shares then
issuable upon exercise of outstanding Warrants. Until such approval or written
opinion is obtained, the holder of this Warrant shall not be issued, upon
exercise of this Warrant, Warrant Shares in an amount greater than such holder's
Cap Allocation Amount (as defined in the Articles of Amendment). In the event
the Company is prohibited from issuing Warrant Shares as a result of the
operation of this Section 13, the Company shall redeem for cash those Warrant
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Shares which can not be issued, at a price equal to the difference between the
Closing Sale Price and the Warrant Exercise Price of such Warrant Shares as of
the date of the attempted exercise.
Section 14. Date. The date of this Warrant is __________, 199__. This
----
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
Section 15. Amendment and Waiver. Except as otherwise provided herein,
--------------------
the provisions of the Preferred Share Warrants may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of Preferred Share Warrants representing a majority of
the shares of Common Stock obtainable upon exercise of the Preferred Share
Warrants then outstanding; provided that no such action may increase the Warrant
Exercise Price of the Preferred Share Warrants or decrease the number of shares
or class of stock obtainable upon exercise of any Preferred Share Warrants
without the written consent of the holder of such Preferred Share Warrant.
Section 16. Descriptive Headings; Governing Law. The descriptive headings
-----------------------------------
of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of Florida shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of New York, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.
* * * * *
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GOODNOISE CORPORATION
By:______________________________
Name:____________________________
Title:___________________________
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EXHIBIT A TO WARRANT
--------------------
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
GOODNOISE CORPORATION
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("Warrant Shares") of GoodNoise
Corporation, a Florida corporation (the "Company"), evidenced by the attached
Warrant (the "Warrant"). Capitalized terms used herein and not otherwise
defined shall have the respective meanings set forth in the Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of
the Warrant Exercise Price shall be made as:
_______________ a "Cash Exercise" with respect to Warrant
Shares; and/or
______________ a "Cashless Exercise" with respect to
___________________ Warrant Shares (to the
extent permitted by the terms of the
Warrant).
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of $___________________ to
the Company in accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
Name of Registered Holder
By:_________________________________
Name:
Title:
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EXHIBIT B TO WARRANT
--------------------
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of GoodNoise Corporation, a Florida
corporation, represented by warrant certificate no. _____, standing in the name
of the undersigned on the books of said corporation. The undersigned does
hereby irrevocably constitute and appoint ______________, attorney to transfer
the warrants of said corporation, with full power of substitution in the
premises.
Dated: _________, 199_
__________________________________
By:_______________________________
Its:______________________________
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