UNITED STATES
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) May 8, 1998
INTELECT COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-11630 76-0471342
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1100 Executive Drive, Richardson, Texas 75081
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 367-2100
N/A
(Former name or former address, if changed since last report.)
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ITEM 5. OTHER EVENTS.
Intelect Communications, Inc. (the "Company") completed a $5 million
private placement of equity on May 8, 1998. The private placement involved the
sale of $5 million of the Company's Series D Convertible Preferred Stock to four
investment entities advised by Citadel Investment Group, L.L.C. or its
affiliates (collectively, "Citadel"). Citadel purchased 5,000 shares of the
Series D Preferred Stock at a price of $1,000 per share for an aggregate
offering price of $5 million. The proceeds from the offering will be used by the
Company for working capital and general corporate purposes. The Series D
Preferred Stock has a 4% annual premium which is payable upon the conversion of
the Series D Preferred Stock. Further, the premium is payable in additional
shares of common stock of the Company ("Common Stock"), or cash at the option of
the Company. The Series D Preferred Stock has no voting rights. The Series D
Preferred Stock is convertible upon the earlier of (i) 90 days from the issuance
date or (ii) upon the effective date of a registration statement relating to the
resale of the Common Stock issuable upon the conversion of the Series D
Preferred Stock. Such conversion restrictions do not apply upon the occurrence
of certain Extraordinary Events (generally certain transactions resulting in a
change in control of the Company or certain private placements of equity of the
Company within 90 days of the closing date). The shares of Series D Preferred
Stock will automatically convert into Common Stock on the second anniversary of
the issuance to the extent any Series D Preferred Stock remains outstanding.
Each share of Series D Preferred Stock is convertible into that number of shares
of Common Stock equal to the quotient of (i) $1,000 (the "Stated Value"), plus
any accrued premium divided by (ii) the Conversion Price. The Conversion Price
is the lesser of (a) $9.082 per share (which amount shall be reset on the sixth
day following the filing of the Company's Form 10-Q for the period ending June
30, 1998 at the lesser of (x) $9.082 per share, or (y) the 5 day average daily
volume weighted average trading price of the Common Stock for the 5 trading days
immediately before the sixth day following the filing of such Form 10-Q), or
(ii) 97% of the market price of the Common Stock, where the market price is the
arithmetic average of the three lowest Closing Bid Prices for the Common Stock
for the 10 consecutive trading days immediately preceding such date of
determination. If for any 20 of 30 consecutive trading days the daily volume
weighted average trading price (as reported by Bloomberg) of the Common Stock
equals or exceeds twelve ($12), then the Company may elect for the Conversion
Price to equal the lesser of $9.082 or such reset amount. The Conversion Price
is subject to adjustment in the event of certain dilutive transactions by the
Company.
The minimum number of shares that all holders of the Series D Preferred
Stock may convert on any one day is at least 200 shares which is the same
restriction the holders of the Company's Series C Convertible Preferred Stock
now have. Upon conversion, the holders of such Common Stock may not sell, in the
aggregate, on any single day a number of shares of Common Stock equal to more
than 20% of the trading volume for the Common Stock as reported by Bloomberg on
the date of such determination. This limitation shall not apply (i) in the event
that the daily trading volume is in excess of 200% of the average trading volume
for the Common Stock for the six month period which ends on the date before the
date of such proposed sale, or (ii) upon the occurrence of a "Triggering Event"
(i.e., generally the failure of the Company to
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have the registration statement covering the resale of the Common Stock declared
effective within 180 days of closing or the lapse of the effectiveness of such
registration statement, the delisting of the Company from NASDAQ, a failure to
properly effect a conversion, or a breach of certain material representations,
warranties and covenants in the operative transaction documents) or an
"Extraordinary Transaction" (i.e., generally transactions which result in a
transfer or purchase of more than 49.9% of the Common Stock of the Company or a
sale of all or substantially all of its assets).
The holders of the Series D Preferred Stock and their affiliates have
agreed to not engage in any short sales of the Company's Common Stock, other
than for sales on the date a conversion notice is submitted entitling the holder
to receive the number of shares of Common Stock at least equal to the number of
shares sold.
In connection with the offering, the Company agreed to file a registration
statement within 30 days of the closing of the transaction governing the resale
of the securities issuable upon conversion of the Series D Preferred Stock. The
Company is restricted from making certain private equity offerings until such
registration statement is declared effective by the Securities and Exchange
Commission.
In addition, so long as at least 25% of the Series D Preferred Stock is
outstanding, the Company has agreed to provide the holders notice of any future
draw downs under the Company's credit facility with St. James Capital Corp. The
holders will have the opportunity to purchase additional shares of Series D
Preferred Stock of the Company in an amount equal to the draw down amount,
subject to the Company obtaining required waivers of rights of preemption and
first refusal of the holders of its Series A and Series B Convertible Preferred
Stock.
The Series D Preferred Stock is redeemable at the option of the Company at
a price of 110% of the sum of the Stated Value per share plus any accrued
premium, if the average of the daily volume weighted average trading price as
reported by Bloomberg for the prior ten (10) consecutive trading days is less
than $3 per share. The holder of the Series D Preferred Stock can require the
Company to redeem the shares upon the occurrence of a "Triggering Event" or upon
the consummation of an "Extraordinary Transaction". The redemption price upon
such events will be the greater of (i) 120% of the Stated Value of such share,
or (ii) the product of the Conversion Rate and the closing sales price of the
Common Stock of the Company.
The shares of Series D Preferred Stock will not be convertible into more
than 20% of the Common Stock of the Company without first obtaining shareholder
approval in accordance with NASDAQ listing requirements. The Company has no
obligation to seek such approval until either the holders of the Series D
Preferred Stock notify the Company, or the Company notifies such holders, that
the number of shares applicable to the NASDAQ 20% cap exceeds 15% of the number
of shares of Common Stock of the Company outstanding, subject to certain
conditions.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business to Be N/Auired:
(b) Pro Forma Financial Information of the Business to Be Acquired: N/A
(c) Exhibits:
EXHIBIT DESCRIPTION OF EXHIBIT
3.1 Certificate of Designations establishing the rights and
preferences of the Series D Preferred Stock
4.1 Registration Rights Agreement among the Company and the Buyers,
dated May 8, 1998
10.1 Securities Purchase Agreement among the Company and the Buyers,
dated May 8, 1998
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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.
INTELECT COMMUNICATIONS, INC.
(Registrant)
Date: May 11, 1998 By: /s/ HERMAN M. FRIETSCH
(Signature)
Herman M. Frietsch
Chairman of the Board
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
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3.1 Certificate of Designations establishing the rights and
preferences of the Series D Preferred Stock
4.1 Registration Rights Agreement among the Company and the Buyers,
dated May 8, 1998
10.1 Securities Purchase Agreement among the Company and the Buyers,
dated May 8, 1998
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EXHIBIT 3.1
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES D CONVERTIBLE PREFERRED STOCK
OF
INTELECT COMMUNICATIONS, INC.
INTELECT COMMUNICATIONS, INC. (the "COMPANY"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that, pursuant to authority conferred upon the Board of Directors of the
Company by the Certificate of Incorporation, as amended, of the Company, and
pursuant to Section 151 of the General Corporation Law of the State of Delaware,
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, and (ii) providing for the
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions thereof, of Ten Thousand
(10,000) shares of Series D Convertible Preferred Stock of the Company, as
follows:
RESOLVED, that the Company is authorized to issue 10,000 shares of
Series D Convertible Preferred Stock (the "PREFERRED SHARES"), par value
$0.01 per share, which shall have the following powers, designations,
preferences and other special rights:
(1) DIVIDENDS. The Preferred Shares shall not bear any dividends.
(2) CONVERSION OF PREFERRED SHARES. Preferred Shares shall be
convertible into shares of the Company's common stock, par value $0.01 per
share (the "COMMON STOCK"), on the terms and conditions set forth in this
Section 2.
(a) CERTAIN DEFINED TERMS. For purposes of this Certificate of
Designations, 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 and the Floating Conversion Price, each in effect as of
such date and subject to adjustment as provided herein. Notwithstanding
the foregoing, if for any 20 of 30 consecutive trading days beginning on
or after the Conversion Effective Date (as defined
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below) the daily volume weighted average trading price (as reported by
Bloomberg (as defined below)) of the Common Stock equals or exceeds the
lesser of 150% of the Fixed Conversion Price (as defined below) or twelve
dollars ($12), then the Company may, at its sole option, by delivering
written notice to the Holders of Preferred Stock, elect for the
"CONVERSION PRICE" to mean the Fixed Conversion Price and thereafter the
Conversion Price shall equal the Fixed Conversion Price in effect as of
any Conversion Date or other date of determination and subject to
adjustment as provided herein.
(ii) "STATED VALUE" means $1,000.
(iii) "CONVERSION AMOUNT" means the sum of (A) the
Additional Amount (as defined below), provided that the Company has not
elected to pay the Additional Amount in cash as described in Section 2(b)
below, and (B) the Stated Value.
(iv) "ADDITIONAL AMOUNT" means the result of the
following formula: (.04)(N/365)(Stated Value).
(v) "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.
(vi) "FIXED CONVERSION PRICE" means (A) prior to the
Reset Date (as defined below) $9.082 and (B) on and after the Reset Date
the lower of (I) $9.082 or (II) the 5 day average daily volume-weighted
average trading price (as reported by Bloomberg) of the Common Stock for
the 5 trading days immediately preceding the Reset Date, each as subject
to adjustment as provided herein.
(vii) "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 Market Price for the Common
Stock.
(viii)"CONVERSION PERCENTAGE" means ninety-seven percent
(97%), subject to adjustment as provided herein.
(ix) "MARKET PRICE" means, with respect to any security,
that price which shall be computed as the arithmetic average of the three
lowest Closing Bid Prices for such security for the 10 consecutive trading
days immediately preceding such date of determination. (All such
determinations to be appropriately adjusted for any stock dividend, stock,
split or other similar transaction during such period).
(x) "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 securities
exchange or trading market for such security, the last closing bid price
of such security on the principal securities exchange or trading market
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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
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(e)(iii) below 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).
(xi) "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
Bloomberg, or, if no last closing trade price is reported for such
security by Bloomberg, the last closing bid price of such security as
reported by Bloomberg, or, if no last closing bid 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 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(e)(iii) below with the term "Closing Sale
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).
(xii) "ISSUANCE DATE" means, with respect to each
Preferred Share, the date of issuance of the applicable Preferred Share.
(xiii)"MANDATORY CONVERSION DATE" means the date which
is two (2) years after the applicable Issuance Date unless extended
pursuant to Section 3(u) of the Registration Rights Agreement (as defined
below) which extension shall be equal to the aggregate number of days of
all Grace Periods (as defined in Section 3(u) of the Registration Rights
Agreement).
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(xiv) "RESET DATE" means the 6th trading day following
the date on which the Company files with the Securities and Exchange
Commission its quarterly report on Form 10-Q for the period ending June
30, 1998.
(xv) "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.
(xvi) "PRINCIPAL MARKET" means the Nasdaq National
Market.
(b) HOLDER'S CONVERSION RIGHT; MANDATORY CONVERSION. Subject
to the provisions of Section 2(d) below, at any time or times on or after
the Issuance Date, any holder of Preferred Shares shall be entitled to
convert any whole number of Preferred Shares into fully paid and
nonassessable shares of Common Stock in accordance with Section 2(e), at
the Conversion Rate (as defined below). If any Preferred Shares remain
outstanding on the Mandatory Conversion Date, then all such Preferred
Shares shall be converted at the Conversion Rate as of such date in
accordance with Section 2(e). 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.
The Company shall have the right to elect to pay the Additional
Amount in cash, in lieu of conversion to Common Stock in accordance with
this Section 2. If the Company elects to pay the Additional Amount in
cash, such cash shall be paid simultaneously with the delivery to the
holder of the certificates representing the Common Stock issuable upon
conversion in accordance with Section 2(e) below. The Company shall advise
each holder of Preferred Shares in writing (the "CASH DIVIDEND NOTICE")
that (i) until such time as the Company shall terminate the Cash Dividend
Notice, by providing written notice (the "TERMINATION NOTICE"), the
Additional Amount shall be paid in cash and (ii) the effective date of
such Cash Dividend Notice, which date shall be at least 5 business days
after the date such Cash Dividend Notice is deemed to have been delivered
pursuant to Section 9(f) of the Securities Purchase Agreement (as defined
below). The Termination Notice shall be effective one (1) business day
after the date such Termination Notice is deemed to have been delivered
pursuant to Section 9(f) of the Securities Purchase Agreement unless a
later date shall be specified in such Termination Notice.
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(c) CONVERSION RATE. The number of shares of Common Stock
issuable upon conversion of each Preferred Share pursuant to Section 2(b)
shall be determined according to the following formula (the "CONVERSION
RATE"):
CONVERSION AMOUNT
Conversion Price
(d) LIMITATIONS ON CONVERSION.
(i) LIMITATION ON BENEFICIAL OWNERSHIP. The Company
shall not effect any conversion of Preferred Shares and no holder of
Preferred Shares shall have the right to convert any Preferred Shares
pursuant to Section 2(b) to the extent that after giving effect to such
conversion such Person (together with such Person's affiliates) would
beneficially own in excess of 5% of the outstanding shares of the Common
Stock following such conversion. For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by a Person 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 sentence 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 such
Person 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) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by such Person and its affiliates. Except as set forth
in the preceding sentence, for purposes of this Section 2(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d)
of the Securities Exchange Act of 1934, as amended. A holder of Preferred
Shares may waive the restrictions of this paragraph only upon not less
than 61 days prior written notice to the Company (with such waiver taking
effect only upon the expiration of such 61 day notice period).
Notwithstanding anything to the contrary contained herein, each Conversion
Notice (as defined below) shall constitute a representation by the holder
submitting such Conversion Notice that, after giving effect to such
Conversion Notice, the holder will not beneficially own (as determined in
accordance with this Section 2(d)(i)) more than 5% of the outstanding
shares of Common Stock as reflected in the Company's most recent Form 10-Q
or Form 10-K, as the case may be, or more recent public press release or
other public notice by the Company setting forth the number of shares of
Common Stock outstanding.
(ii) CONVERSION RESTRICTIONS. The right of a holder of
Preferred Shares to convert Preferred Shares pursuant to this Section 2
shall be limited as set forth below. Without the prior consent of the
Company, a holder of Preferred Shares shall not be entitled to convert
such Preferred Shares until on or after the date (the "CONVERSION
EFFECTIVE DATE") which is the earlier of (i) 90 days after the Issuance
Date and (ii) the date that the Registration Statement (as defined below)
is declared effective by the United States Securities and Exchange
Commission (the "SEC"). Notwithstanding the foregoing, the conversion
restriction set forth in this Section 2(d)(ii) shall not apply
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if there shall have occurred an Extraordinary Event (as defined below).
For purposes of this Section 2(d)(ii), "EXTRAORDINARY EVENT" means (i) an
announcement of a change in control (a consolidation, merger, other
business combination or transaction such as a sale of assets) resulting in
the holders of the majority of the voting power of the Company holding
less than a majority of the voting power of the surviving entity, (ii) the
Company completes an equity offering pursuant to an exemption from the
registration requirements of the Securities Act of 1933 within 90 days of
the Issuance Date (excluding any equity which may be issued upon the
exercise or conversion of securities outstanding on the Issuance Date,
which securities include, without limitation the following: (a) any
conversion to equity by St. James Capital Corp. or its Affiliates ("ST.
JAMES") of all or part of the existing debt or future debt incurred by the
Company under the Agreement of Purchase and Sale with St. James, in the
aggregate principal amount of $15,000,000, at a conversion price at or
above the Fixed Conversion Price, and any additional warrants issued to
St. James in connection with such debts, such warrants to have an exercise
price at or above $7.50 per share, subject to adjustment as provided in
the Agreement of Purchase and Sale, (b) a bona fide loan from a commercial
lender which does not have an equity feature, (c) the issuance of
securities upon exercise or conversion of the Company's options, warrants
or other convertible securities or debt outstanding as of the date hereof
or to be issued, upon the issuance of the Preferred Shares, to placement
agents or advisors in connection with the transactions contemplated
hereby, (d) any equipment loans or financings which do not have an equity
feature, (e) the grant of additional options or warrants, or the issuance
of additional securities, under any Company stock option plan, restricted
stock plan or stock purchase plan for the benefit of the Company's
employees, officers or directors or (f) the issuance of the Additional
Preferred Shares (as defined in the Securities Purchase Agreement)
pursuant to Section 4(g) of the Securities Purchase Agreement), (iii) the
suspension or delisting of the Common Stock or (iv) an announcement of a
bankruptcy filing or similar event.
(iii) CONVERSION CAP. The Company shall not effect any
conversion of Preferred Shares and no holder of Preferred Shares shall
have the right to convert any Preferred Shares pursuant to Section 2(b) to
the extent that after giving effect to such conversion such Person
(together with such Person's affiliates) would beneficially own in excess
of 15% of the outstanding shares of the Common Stock following such
conversion. For purposes of the foregoing sentence, the number of shares
of Common Stock beneficially owned by a Person 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
sentence 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 such Person 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) subject to a limitation on conversion or
exercise analogous to the limitation contained herein beneficially owned
by such Person and its affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 2(d)(i), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended. The
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restrictions contained in this Section 2(d)(iii) may be waived by written
consent of the Company. Notwithstanding the foregoing the restrictions
contained in this Section 2(d)(iii) shall not be applicable to the holders
of Preferred Shares upon the occurrence of a Triggering Event (as defined
below).
(e) MECHANICS OF CONVERSION. The conversion of Preferred
Shares shall be conducted in the following manner:
(i) HOLDER'S DELIVERY REQUIREMENTS. To convert Preferred
Shares into 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 8:00 p.m., Central Time on such date, a copy of
a fully executed notice of conversion in the form attached hereto as
Exhibit I (the "CONVERSION NOTICE") to the Company's designated transfer
agent (the "TRANSFER AGENT") with a copy thereof to the Company and (B)
surrender to a common carrier for delivery to the Transfer Agent as soon
as practicable following such date the original certificates representing
the Preferred Shares being converted (or an indemnification undertaking
with respect to such shares in the case of their loss, theft or
destruction) (the "PREFERRED STOCK CERTIFICATES") and the originally
executed Conversion Notice.
(ii) COMPANY'S RESPONSE. Upon receipt by the Company of
a copy of a Conversion Notice, the Company shall prior to 12:00 p.m.,
Central Time, on the next business day send, via facsimile, a confirmation
of receipt of such Conversion Notice to such holder and the Transfer
Agent, which confirmation shall constitute an instruction to the Transfer
Agent to process such Conversion Notice in accordance with the terms
herein. Upon receipt by the Transfer Agent of the Preferred Stock
Certificates to be converted pursuant to a Conversion Notice, together
with the originally executed Conversion Notice, the Transfer Agent shall,
on the next business day following the date of receipt (or the second
business day following the date of receipt if received after 11:00 a.m.
local time of the Transfer Agent), (A) issue and surrender to a common
carrier for overnight delivery to the address as 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 (B) 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 Transfer Agent shall, as soon
as practicable and in no event later than three business days after
receipt of the Preferred Stock 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 instruct the Transfer Agent to issue to
the holder the number of shares of Common Stock that is not disputed and
shall submit the disputed determinations or
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arithmetic calculations to the holder via facsimile within one (1)
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 approved by the
Company and by the holders of a majority of the Preferred Shares then
outstanding or (B) the disputed arithmetic calculation of the Conversion
Rate to the Company's 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 seventy-two (72) 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.
(A) CASH DAMAGES. If within three business days
after the Transfer Agent's receipt of the Preferred Stock Certificates to
be converted and the original Conversion Notice (the "SHARE DELIVERY
PERIOD"), which Conversion Notice is in compliance with Section 4(p) of
the Securities Purchase Agreement, the Transfer Agent shall fail to issue
a certificate to a holder or credit such holder's balance account with The
Depository Trust Company for the number of shares of Common Stock to which
such holder is entitled upon such holder's conversion of Preferred Shares
or to issue a new Preferred Stock Certificate representing the number of
Preferred Shares to which such holder is entitled pursuant to Section
2(e)(ii) (a "CONVERSION FAILURE"), in addition to all other available
remedies which such holder may pursue hereunder and under the Securities
Purchase Agreement between the Company and the initial holders of the
Preferred Shares (the "SECURITIES PURCHASE AGREEMENT") (including
indemnification pursuant to Section 8 thereof), the Company shall pay
additional damages to such holder on each date after such third (3rd)
business day such conversion is not timely effected and/or such Preferred
Stock Certificate is not delivered in an amount equal to 1.0% of the
product of (I) the sum of (a) the number of shares of Common Stock not
issued to the holder on a timely basis pursuant to Section 2(e)(ii) and to
which such holder is entitled and (b) in the event the Company has failed
to deliver a Preferred Stock Certificate to the holder on a timely basis
pursuant to Section 2(e)(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
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which the Company could have issued such Preferred Stock Certificate to
such holder without violating Section 2(e)(ii) and (II) the Closing Sale
Price of the Common Stock on the last possible date which the Company
could have issued such Common Stock and such Preferred Stock Certificate,
as the case may be, to such holder without violating Section 2(e)(ii). If
the Company fails to pay the additional damages set forth in this Section
2(e)(v) within five 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 such cash damages,
the number of shares of Common Stock equal to the quotient of (X) the
aggregate amount of the damages payments described herein divided by (Y)
the Conversion Price in effect on such Conversion Date as specified by the
holder in the Conversion Notice.
(B) VOID CONVERSION NOTICE; ADJUSTMENT TO
CONVERSION PRICE. If for any reason a holder has not received all of the
shares of Common Stock prior to the tenth (10th) business day after the
expiration of the Share Delivery Period with respect to a conversion of
Preferred Shares, then the holder, upon written notice to the Transfer
Agent, with a copy to the Company, may void its Conversion Notice with
respect to, and retain or have returned, as the case may be, any Preferred
Shares that have not been converted pursuant to such holder's Conversion
Notice; provided that the voiding of a holder's Conversion Notice shall
not effect the Company's obligations to make any payments which have
accrued prior to the date of such notice pursuant to Section 2(e)(v)(A) or
otherwise. Thereafter, the Fixed Conversion Price of any Preferred Shares
returned or retained by the holder for failure to timely convert shall be
adjusted to the lesser of (I) the Fixed Conversion Price as in effect on
the date on which the holder voided the Conversion Notice and (II) the
lowest Closing Bid Price during the period beginning on the Conversion
Date and ending on the date such holder voided the Conversion Notice.
(vi) PRO RATA CONVERSION AND REDEMPTION. In the event
the Company receives a Conversion Notice from more than one holder of
Preferred Shares for the same Conversion Date and the Company can convert
some, but not all, of such Preferred Shares, the Company shall convert
from each holder of Preferred Shares electing to have Preferred Shares
converted at such time a pro rata amount of such holder's Preferred Shares
submitted for conversion based on the number of Preferred Shares submitted
for conversion on such date by such holder relative to the number of
Preferred Shares submitted for conversion on such date.
(vii) MECHANICS OF MANDATORY CONVERSION. On the
Mandatory Conversion Date, all holders of Preferred Shares shall surrender
all Preferred Stock Certificates, duly endorsed for cancellation, to the
Transfer Agent and all outstanding Preferred Shares shall be converted as
of such date as if the holders of such Preferred Shares had given the
Conversion Notice for all such shares on the Mandatory Conversion Date;
provided that the Mandatory Conversion Date shall be extended for any
Preferred Shares for as long as (A) the conversion of such Preferred
Shares would violate the provisions of Section 2(d), (B) a Triggering
Event shall have occurred and be continuing or (C) any event shall have
occurred and be continuing which with the passage of time
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and the failure to cure would result in a Triggering Event. 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(e).
(f) TAXES. The Company shall pay any and all stamp and
transfer taxes that may be payable with respect to the issuance and
delivery of Common Stock upon the conversion of Preferred Shares.
(g) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price will
be subject to adjustment from time to time as provided in this Section
2(g).
(i) ADJUSTMENT OF FIXED CONVERSION PRICE UPON ISSUANCE
OF COMMON STOCK. So long as at least 20% of the Preferred Shares issued
are outstanding, if and whenever on or after the date of issuance of the
Preferred Shares, the Company issues or sells (other than in a firm
commitment underwritten public offering which complies with the rules and
regulations of the Securities Act of 1933, as amended, and except for the
Preferred Shares and any Common Stock issued upon the exercise, exchange
or conversion of the Excluded Securities (as defined below)), or in
accordance with this Section 2(g) 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 (as defined below) or upon
conversion of the Preferred Shares and except for Common Stock issued upon
the exercise, exchange or conversion of the Excluded Securities) for a
consideration per share less than 95% of the average of the Closing Bid
Price of the Common Stock for the five trading days immediately preceding
the date of such issuance or sale (the "APPLICABLE PRICE"), then
immediately after such issue or sale, the Fixed Conversion Price 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 of (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, divided by (2) the
product of (I) the Applicable Price multiplied by (II) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or
sale. For purposes of determining the adjusted Fixed Conversion Price
under this Section 2(g)(i), the following shall be applicable:
(A) ISSUANCE OF OPTIONS. If the Company in any
manner grants or sells 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 at a fixed conversion price of any
Convertible Securities issuable upon exercise of 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
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Section 2(g)(i)(A), 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 such Option" 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 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 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 after the
Issuance Date and the lowest price per share for which one share of Common
Stock is issuable upon such conversion or exchange thereof at a fixed
conversion price 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 of sale of such
Convertible Securities for such price per share. For the purposes of this
Section 2(g)(i)(B), the "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 any one share of Common Stock upon the
issuance or sale of the Convertible Security and upon the conversion or
exchange of such Convertible Security. No further adjustment of the Fixed
Conversion Price shall be made upon the actual issuance 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(g)(i), no further adjustment of the Fixed Conversion Price shall be made
by reason of such issue or sale. Notwithstanding the foregoing, no
adjustment shall be made pursuant to this Section 2(g)(i)(B) 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.
(C) 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 Fixed Conversion Price in effect at the time of such
change shall be adjusted to the Fixed Conversion 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. For purposes of this Section 2(g)(i)(C), if the
terms of any Option or Convertible Security that was outstanding as of the
date of issuance of the Preferred Shares are changed in the manner
described in the immediately
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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 Fixed Conversion Price then in effect.
(D) 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 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 Market Price of such
securities on 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 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 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 a majority of the Preferred Shares then outstanding. The
determination of such appraiser shall be deemed binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be
borne by the Company.
(E) 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.
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(F) CERTAIN DEFINITIONS. For purposes of this
Section 2(g)(i), the following terms have the respective meanings set
forth below:
(I) "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.
(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(g)(i)(A) and 2(g)(i)(B) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock owned
or held by or for the account of the Company or issuable upon conversion
of the Preferred Shares.
(III) "OPTIONS" means any rights, warrants
or
options to subscribe for or purchase Common Stock or Convertible
Securities other than those issued pursuant to an Approved Plan.
(IV) "CONVERTIBLE SECURITIES" means any
stock or
securities (other than Options) directly or indirectly convertible into or
exchangeable for Common Stock.
(V) "EXCLUDED SECURITIES" means any Common
Stock or equity which may be issued upon the exercise or conversion of
securities outstanding on the Issuance Date which securities include,
without limitation the following: (a) the $2.0145, 10% Cumulative
Convertible Preferred Shares, Series A of the Company (the "SERIES A
PREFERRED"), (b) the $4.375, 10% Cumulative Convertible Preferred Stock,
Series B of the Company (the "SERIES B PREFERRED"), (c) any options or
warrants issued on or prior to the date hereof and the issuance of Common
Stock on the exercise thereof or to be issued following the Closing to
placement agents and advisors in connection with the transactions
contemplated hereby, (d) any conversion to equity by St. James of all or
part of the existing debt or future debt incurred by the Company under the
Agreement or Purchase and Sale with St. James, in the aggregate principal
amount of $15,000,000, at a conversion price at or above the Fixed
Conversion Price, and any additional warrants issued to St. James in
connection with such debt, such warrants to have an exercise price at or
above $7.50 per share, subject to adjustment as provided in the Agreement
of Purchase and Sale, (e) the Series C Convertible Preferred Stock of the
Company (the "Series C Preferred") and (f) the issuance of the Additional
Preferred Shares pursuant to Section 4(g) of the Securities Purchase
Agreement.
(ii) ADJUSTMENT OF FIXED CONVERSION PRICE UPON
SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time
subdivides (by any stock
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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) Intentionally Omitted.
(iv) HOLDER'S RIGHT OF ALTERNATIVE FLOATING CONVERSION
PRICE FOLLOWING ISSUANCE OF 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 and which either (A) is at a 5% or greater
discount to such market price or (B) is at less than a 5% discount to the
market price and such market price is calculated using terms more
favorable than those used to calculate the Floating Conversion Price (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. From and after the date the Company issues
any such Convertible Securities with a Variable Price, a holder of
Preferred Shares shall have the right, but not the obligation, in its sole
discretion to substitute the Variable Price for the Floating Conversion
Price upon conversion of any Preferred Shares by designating in the
Conversion Notice delivered upon conversion of such Preferred Shares that
solely for purposes of such conversion the holder is relying on the
Variable Price rather than the Floating Conversion Price then in effect. A
holder's election to rely on a Variable Price for a particular conversion
of Preferred Shares shall not obligate the holder to rely on a Variable
Price for any future conversions of Preferred Shares.
(v) OTHER EVENTS; EXCLUDED SECURITIES. If any event
occurs of the type contemplated by the provisions of this Section 2(g) 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
that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 2(g). Notwithstanding anything in this
Section 2 to the contrary, there shall be no adjustment of the Fixed
Conversion Price upon the issuance, exercise, exchange, or conversion into
Common Stock or equity of any of the Excluded Securities.
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(vi) NOTICES.
(A) Immediately upon any adjustment of the
Conversion Price, the Company will give written notice thereof to each
holder of 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 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 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.
(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 (as defined below), 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.
(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, upon
the consummation 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) 120% of the
Stated Value of such share and (ii) the product of (A) the Conversion Rate
on such date and (B) the Closing Sale Price of the Common Stock on the
date immediately preceding such date on which the Principal Market is open
for trading ("MAJOR TRANSACTION REDEMPTION PRICE").
(b) REDEMPTION OPTION UPON TRIGGERING EVENT. In addition to
all other rights of the holders of Preferred Shares contained herein,
after a Triggering Event, 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) 120% of the Stated Value and (ii) the product
of (A) the Conversion Rate in effect at such time as such holder delivers
a Notice of Redemption at Option of Buyer Upon a Triggering Event (as
defined below) and (B) the Closing Sale Price of the Common Stock on the
date immediately preceding such Triggering Event on which the Principal
Market is open for trading ("TRIGGERING EVENT REDEMPTION PRICE" and,
collectively with "MAJOR TRANSACTION REDEMPTION PRICE," the "REDEMPTION
PRICE").
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(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) involving the issuance,
exchange or sale of more than 49.9% of the shares of Common Stock then
outstanding;
(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 the
holders of more than 49.9% 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 180 days
after the Scheduled Effective Date;
(ii) subject to Section 3(u) of the Registration Rights
Agreement between the Company and the Buyers referred to therein (the
"REGISTRATION RIGHTS AGREEMENT"), 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 all 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 seven (7) consecutive trading days, provided that the
cause of such lapse or unavailability is not due to factors solely within
the control of such holder of Preferred Shares;
(iii) the failure of the Common Stock to be listed on
the Nasdaq National Market, The NASDAQ Small-Cap Market, The New York
Stock Exchange, Inc. or The American Stock Exchange, Inc. for a period of
seven (7) consecutive trading days (provided that such failure shall not
constitute a Triggering Event if caused by holders of Preferred Shares
pursuant to Section 4(c) below);
(iv) the Company's or the Transfer Agent's notice to any
holder of Preferred Shares, including by way of public announcement, at
any time, of its intention not to comply with a request for conversion of
any Preferred Shares into shares of Common Stock that is tendered in
accordance with the provisions of this Certificate of Designations, or the
failure of the Transfer Agent to comply with a Conversion Notice
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tendered in accordance with the provisions of this Certificate of
Designations and Section 4(p) of the Securities Purchase Agreement within
10 business days after the receipt by the Transfer Agent of the Conversion
Notice; or
(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 hereof.
(vi) the Company breaches any representation, warranty,
covenant or other term or condition of the Securities Purchase Agreement,
the Registration Rights Agreement, this Certificate of Designations or any
other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby and hereby, except
to the extent that such breach would not have a Material Adverse Effect
(as defined in Section 3(a) of the Securities Purchase Agreement) and
except, in the case of a breach of a covenant which is curable, only if
such breach continues for a period of at least twenty (20) days.
(e) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON MAJOR
TRANSACTION. No sooner than 15 days nor later than 10 days prior to the
consummation of a Major Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier ("NOTICE OF MAJOR
TRANSACTION") to each holder of Preferred Shares, which notice shall
include the date by which a holder receiving a Notice of Major Transaction
must provide the Company with notice of its intent to exercise its
redemption rights hereunder (which date shall not be sooner than five
business days after the date of the Notice of Major Transaction (the
"MAJOR TRANSACTION RESPONSE DATE")). The Company shall make a public
announcement disclosing all material facts about such Major Transaction
prior to providing the Notice of Major Transaction, such public
announcement to be made no later than 10 days prior to the consummation of
such Major Transaction. At any time after receipt of a Notice of Major
Transaction and prior to the Major Transaction Response Date (or, in the
event a Notice of Major Transaction is not delivered at least ten days
prior to a Major Transaction, at any time prior to the consummation of a
Major Transaction) any holder of Preferred Shares then outstanding may
require the Company to redeem all of the holder's Preferred Shares then
outstanding by delivering written notice thereof via facsimile and
overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER UPON MAJOR
TRANSACTION") to the Company, which Notice of Redemption at Option of
Buyer Upon Major Transaction shall indicate (i) the number of Preferred
Shares that such holder is electing to redeem and (ii) the applicable
Major Transaction Redemption Price, as calculated pursuant to Section
3(a).
(f) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON TRIGGERING
EVENT. Within one (1) day after the occurrence of a Triggering Event, the
Company shall deliver written notice thereof via facsimile and overnight
courier ("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 Preferred Shares then outstanding may require the
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Company to redeem all of the Preferred Shares by delivering written notice
thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION AT
OPTION OF BUYER UPON TRIGGERING EVENT") to the Company, which Notice of
Redemption at Option of Buyer Upon Triggering Event shall indicate (i) the
number of Preferred Shares that such holder is electing to redeem and (ii)
the applicable Triggering Event Redemption Price, as calculated pursuant
to Section 3(b) above.
(g) PAYMENT OF REDEMPTION PRICE. Upon the Company's receipt of
a Notice(s) of Redemption at Option of Buyer Upon Major Transaction or a
Notice(s) of Redemption at Option of Buyer Upon Triggering Event, as the
case may be, 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 notices and each holder which has sent such a
notice shall promptly submit to the Transfer Agent such holder's Preferred
Stock Certificates which such holder has elected to have redeemed. The
Company shall deliver the applicable Redemption Price to such holder
within five business days after the Company's receipt of a Notice of
Redemption at Option of Buyer Upon Triggering Event or concurrently with
the consummation of a Major Transaction if the Company shall have received
a Notice of Redemption at Option of Buyer Upon Major Transaction; provided
that a holder's Preferred Stock Certificates shall have been so delivered
to the Transfer Agent. If the Company is unable to redeem all of the
Preferred Shares submitted for redemption, the Company shall (i) redeem a
pro rata amount from each holder of Preferred Shares based on the number
of Preferred Shares submitted for redemption by such holder relative to
the total number of Preferred Shares submitted for redemption by all
holder of Preferred Shares and (ii) in addition to any remedy such holder
of Preferred Shares may have under this Certificate of Designations and
the Securities Purchase Agreement, pay to each holder interest at the rate
of 2.5% per month (prorated for partial months) in respect of each
unredeemed Preferred Share until paid in full.
(h) VOID REDEMPTION. In the event that the Company does not
pay the Redemption Price within the time period set forth in Section 3(g),
at any time thereafter and until the Company pays such unpaid applicable
Redemption Price in full, a holder of Preferred Shares shall have the
option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of redemption,
require the Company to promptly return to such holder any or all of the
Preferred Shares that were submitted for redemption by such holder under
this Section 3 and for which the applicable Redemption Price (together
with any interest thereon) 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, (i) the Notice of Redemption at Option of Buyer Upon Triggering
Event or the Notice of Redemption at Option of Buyer Upon Major
Transaction, as the case may be, shall be null and void with respect to
those Preferred Shares subject to the Void Optional Redemption Notice,
(ii) the Company shall immediately return any Preferred Shares subject to
the Void Optional Redemption Notice, (iii) the Fixed Conversion Price of
such returned Preferred Shares shall be adjusted to the lesser of (A) the
Fixed Conversion Price as in effect on the date on which
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the Void Optional Redemption Notice is delivered to the Company and (B)
the lowest Closing Bid Price during the period beginning on the date on
which the Notice of Redemption at Option of Buyer Upon Major Transaction
or the Notice of Redemption at Option of Buyer Upon Triggering event, as
the case may be, is delivered to the Company and ending on the date on
which the Void Optional Redemption Notice is delivered to the Company, and
(iv) the Conversion Percentage in effect at such time shall be reduced by
a number of percentage points equal to the product of (A) .25 and (B) the
number of days in the period beginning on the date which is five business
days after the date on which the Notice of Redemption at Option of Buyer
Upon Major Transaction or the Notice of Redemption at Option of Buyer Upon
Triggering Event, as the case may be, is delivered to the Company and
ending on the date on which the Void Optional Redemption Notice is
delivered to the Company.
(i) DISPUTES; MISCELLANEOUS. In the event of a dispute as to
the determination of the Closing Bid Price, the Closing Sale Price or the
arithmetic calculation of the Redemption Price, such dispute shall be
resolved pursuant to Section 2(e)(iii) above with the term "Closing Bid
Price" and/or Closing Sale Price, as the case may be, 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 holders of capital
stock which is ranked junior to the Preferred Shares in connection with a
Major Transaction and shall be PARI PASSU with any Pari Passu Shares (as
defined in Section 8) which have redemption rights in the event of a Major
Transaction similar to the Preferred Shares. In the event of a redemption
pursuant to this Section 3 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 redeemed.
(4) OTHER RIGHTS OF HOLDERS.
(a) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. 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 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 a
majority of the Preferred Shares then outstanding) to deliver to each
holder of Preferred Shares in
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exchange for such shares, a security of the Acquiring Entity evidenced by
a written instrument substantially similar in form and substance to the
Preferred Shares and satisfactory to the holders of a majority of the
Preferred Shares then outstanding, including, without limitation, having a
stated value and liquidation preference equal to the Stated Value and the
Liquidation Preference of the Preferred Shares held by such holder. Prior
to the consummation of any other Organic Change, the Company shall 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 immediately theretofore 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 as of the
date of such Organic Change (without taking into account any limitations
or restrictions on the convertibility of the Preferred Shares).
(b) PURCHASE RIGHTS. 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 holders of
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 convertibility
of the Preferred Shares) 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.
(c) FORCED DELISTING. If a redemption voided pursuant to
Section 3(h) was caused by a Triggering Event involving the Company's
inability to issue Conversion Shares (as defined in the Securities
Purchase Agreement) because of the Exchange Cap (as defined in Section
12), and if so directed by the holders of at least two-thirds (2/3) of the
Preferred Shares then outstanding, including shares of Preferred Shares
submitted for redemption pursuant to Section 3 with respect to which the
applicable Redemption Price has not been paid, in a Void Optional
Redemption Notice, the Company shall immediately delist the Common Stock
from exchange or automated quotation system on which the Common Stock is
traded and have the Common Stock, at such holders' option, traded on the
electronic bulletin board or the "pink sheets".
(5) COMPANY'S RIGHT TO REDEEM AT ITS ELECTION.
(a) COMPANY'S RIGHT TO REDEEM AT ITS ELECTION. Notwithstanding
Section 2(e) or anything herein to the contrary but subject to Sections
5(a)(iv) below,
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after 90 days following the Issuance Date if a Company's Election
Redemption Event (as defined below) should occur, the Company shall have
the right, in its sole discretion, to redeem ("REDEMPTION AT THE COMPANY'S
ELECTION"), any or all of the Preferred Shares in accordance with Section
5(a)(ii) below 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 an amount from each holder of
Preferred Shares 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. For
purposes of this Section 5, a "COMPANY'S ELECTION REDEMPTION EVENT" shall
mean any trading day when the average of the daily volume-weighted average
trading price, as reported by Bloomberg, for the prior ten (10)
consecutive trading days is less than $3 per share.
(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 Stated Value plus the Additional Amount plus
an amount equal to 10% of the Stated Value plus the Additional Amount, per
annum, measured from the Issuance Date to the date of such Redemption.
(ii) MECHANICS OF REDEMPTION AT THE COMPANY'S ELECTION.
The Company shall effect a redemption no later than 4 trading days after
delivering 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 may only send such Notice of Redemption at the
Company's Election either (i) on any trading day which is a Company's
Election Redemption Event and where the daily volume-weighted average
trading price is less than $3 per share on such trading date, (ii) within
five (5) days of a Company's Election Redemption Event or (iii) within
fifteen (15) business days of a Company's Election Redemption Event if any
holder of Preferred Shares has converted such Preferred Shares at a
Conversion Price below $3 per share during the 90 days prior to such
Company's Election Redemption Event. 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. From
and after the Date of Redemption at the Company's Election (unless default
shall be made by the Company in payment of the Redemption Price at the
Company's Election) all dividends on the shares of Preferred Shares
designated for redemption in such notice shall cease to accrue, and all
rights of the holders thereof as stockholders of the Company, except the
right to receive the Redemption Price at the Company's Election upon the
surrender of certificates, shall cease and terminate and such shares shall
not thereafter be transferred (except with the consent of the Company) on
the books of the Company, and such shares shall not be deemed to be
outstanding for any purpose whatsoever. At its election the Company, prior
to the Date of Redemption at the Company's Election, may deposit the
Redemption Price at the Company's Election in trust for the holders
thereof with a bank or trust
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company (having a capital, surplus and undivided profits aggregating not
less than $50,000,000) in the Borough of Manhattan, City and State of New
York, the City of Dallas, State of Texas, or in any other city in which
the Company at the time shall maintain a transfer agency with respect to
such stock, in which case the Notice of Redemption at the Company's
Election shall state the date of such deposit, shall specify the office of
such bank or trust company as the place of payment of the Redemption Price
at the Company's Election, and shall call upon the holders of the
Preferred Shares to surrender the certificates representing such shares on
or after the date fixed in such redemption notice (which shall not be
later than the Date of Redemption at the Company's Election) against
payment of the Redemption Price at the Company's Election. Any interest
accrued on such funds shall be paid to the Company from time to time. Any
monies so deposited which shall remain unclaimed by the holders of such
Preferred Shares at the end of two years after the Date of Redemption at
the Company's Election shall be returned by such bank or trust company to
the Company. From and after the making of such deposit, the shares of
Preferred Shares so designated for redemption shall not be deemed to be
outstanding for any purpose whatsoever, and the rights of the holders of
such shares shall be limited to the right to receive the redemption price
of such shares (including all accrued and unpaid dividends up to the Date
of Redemption at the Company's Election), without interest, upon surrender
of the certificates representing the same to the Corporation at said
office of such bank or trust company.
(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
three 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 this
Certificate of Designations and the Securities Purchase Agreement, such
unpaid amount shall bear interest at the rate of 2.5% per month until paid
in full. 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(e)(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:
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(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;
(C) a written agreement with a standby underwriter
or qualified buyer ready, willing and able to purchase from the Company a
sufficient number of shares of stock to provide proceeds necessary to
redeem any stock that is not converted prior to a Redemption at the
Company's Election; or
in default
in any material respect under this Certificate of Designations, the
Securities Purchase Agreement and the Registration Rights Agreement.
(6) 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 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; provided that the number of
shares of Common Stock so reserved shall at no time be less than 150% 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,
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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 allocated to any Person which ceases to 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 holders.
(7) VOTING RIGHTS. Holders of Preferred Shares shall have no voting
rights, except as required by applicable law, including but not limited to
the General Corporation Law of the State of Delaware, and as expressly
provided in this Certificate of Designations.
(8) 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 "LIQUIDATION
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) the Additional
Amount (such sum being referred to as the "LIQUIDATION PREFERENCE");
provided that, if the Liquidation 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 Liquidation Funds
(the "PARI PASSU SHARES"), then each holder of Preferred Shares and Pari
Passu Shares shall receive a percentage of the Liquidation Funds equal to
the full amount of Liquidation Funds payable to such holder as a
liquidation preference, in accordance with their respective Certificate of
Designations, Preferences and Rights, as a percentage of the full amount
of Liquidation Funds payable to all holders of Preferred Shares and Pari
Passu Shares. In addition to the receipt of the Liquidation Preference, 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 Liquidation Funds distributed to holders of Common
Stock, after the Liquidation Preference has been paid, 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 conversions herein
or elsewhere) and had held such shares of Common Stock on the record date
for such distribution of the remaining Liquidation Funds. 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
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for herein; provided that a holder of Preferred Shares shall be entitled
to all amounts previously accrued with respect to amounts owed hereunder.
(9) PREFERRED RANK. 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 to the Preferred Shares in respect of the preferences as
to distributions and payments upon the liquidation, dissolution and
winding up of the Company. 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 Certificate of Incorporation or bylaws, or file
any resolution of the board of directors of the Company with the Delaware
Secretary of State or enter into any agreement 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. The Preferred Shares shall rank pari
passu with the Series C Preferred in respect to the preferences as to
distributions and payments upon the liquidation, dissolution and winding
up of the Company.
(10) INTENTIONALLY OMITTED.
(11) RESTRICTION ON REDEMPTION AND DIVIDENDS. So long as at least
20% of the Preferred Shares issued are outstanding, the Company shall not,
directly or indirectly, redeem, or declare or pay any dividend or
distribution on its Common Stock without the prior express written consent
of the holders of a majority of the then outstanding Preferred Shares,
except that no such consent shall be required for the Company to adopt, as
approved by its directors, a shareholder rights plan and to effect any
dividend or distribution of a right, junior preferred stock, or other
similar security in connection with such plan to the extent that the
rights, stock or similar security attach equally to all such Common Stock
including the Conversion Shares issued upon conversion.
(12) LIMITATION ON NUMBER OF CONVERSION SHARES. 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 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 the applicable rules of the Principal Market (or any successor rule or
regulation) for
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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 a majority of the Preferred Shares then outstanding. 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 (i) the Exchange Cap amount multiplied
by (ii) 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 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 any change to
this Certificate of Designations or the Company's Certificate of
Incorporation which would amend, alter, change or repeal any of the
powers, designations, preferences and rights of the Preferred Shares.
(14) LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of
evidence reasonably 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
any indemnification undertaking by the holder to the Company in customary
form 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 this Certificate of
Designations shall be cumulative and in addition to all other remedies
available under this Certificate of Designations, 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 this Certificate of
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Designations. 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 this Certificate of Designations shall limit or
modify any more general provision contained herein. This Certificate of
Designations shall be deemed to be jointly drafted by the Company and all
Buyers 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, 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.
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by Herman M. Freitsch, its Chief Executive Officer, as
of the __th day of __________ 1998.
INTELECT COMMUNICATIONS, INC.
By:
Name: Herman M. Frietsch
Its: Chief Executive Officer
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<PAGE>
EXHIBIT I
ISSUER CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
INTELECT COMMUNICATIONS, INC. (the "CERTIFICATE OF DESIGNATIONS"). In accordance
with and pursuant to the Certificate of Designations, the undersigned hereby
elects to convert the number of shares of Series D Convertible Preferred Stock,
par value $0.01 per share (the "PREFERRED SHARES"), of INTELECT COMMUNICATIONS,
INC., a Delaware corporation (the "COMPANY"), indicated below into shares of
Common Stock, par value $0.01 per share (the "COMMON STOCK"), of the Company, by
tendering the stock certificate(s) representing the share(s) of 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:
By:
Title:
Dated:
Account Number:
(if electronic book entry transfer):
Transaction Code Number (if electronic book entry transfer):
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of May 7, 1998,
by and among INTELECT COMMUNICATIONS, INC., a Delaware corporation, with
headquarters located at 1100 Executive Drive, Richardson, Texas, 75081 (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, to issue and sell to the Buyers shares of the
Company's Series D Convertible Preferred Stock, par value $0.01 per share, (the
"PREFERRED SHARES"), which will 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 Certificate
of Designations, Preferences and Rights of the Preferred Shares (the
"CERTIFICATE OF DESIGNATIONS"); and
B. 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.
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.
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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 the Conversion Shares issued or
issuable upon conversion of the Preferred Shares and any shares of capital stock
issued or issuable with respect to the Conversion Shares 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. "REGISTRATION STATEMENT" means a registration statement of the
Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. MANDATORY REGISTRATION. The Company shall prepare, and, as soon
as practicable but in no event later than 30 days after the date of issuance of
the relevant Preferred Shares, file with the SEC a Registration Statement or
Registration Statements (as is necessary) on Form S-3 covering the resale of all
the Registrable Securities as set forth herein. In the event that Form S-3 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).
The 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) 1.75 and (y) the number of Registrable Securities as of the date immediately
preceding the date the Registration Statement is initially filed with the SEC.
The Company shall use its reasonable best efforts to have the Registration
Statement declared effective by the SEC as soon as practicable, but in no event
later than 60 days after the issuance of the relevant Preferred Shares.
b. PIGGY-BACK REGISTRATIONS. Unless the Registrable Securities have
been registered pursuant to Section 2(a) and for so long as such registration is
effective, subject to the provisions of Section 3(u) hereof, and sufficient to
cover all Registrable Securities pursuant to Section 2(g) hereof, then, 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
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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 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 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 comment on 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
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Securities. The Company shall reasonably cooperate with Legal Counsel in
performing the Company's obligations under this Agreement.
e. INELIGIBILITY FOR FORM S-3. In the event that Form S-3 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 S-3 as
soon as such form is available, provided that the Company shall maintain the
effectiveness of the Registration Statement then in effect until such time as a
Registration Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.
f. RULE 416. 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
Certificate of Designations) 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 Certificate of Designations) to decrease as
the closing bid 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 (x) provide to each Investor written evidence setting forth the
basis for the Company's position and the authority therefor and (y) 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) of this Agreement is insufficient to cover all of the Registrable
Securities or an Investor's allocated portion of such 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 150% of such Registrable
Securities (based on the market price of the Common Stock), in each case, as
soon as practicable, but in any event within twenty (20) 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
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Registrable Securities" if at any time and continuing for a period of ten (10)
consecutive trading days the number of Registrable Securities issued or issuable
upon conversion of the Preferred Shares, at the then prevailing Conversion Rate
as defined in the Company's Certificate of Designation, is greater than the
quotient determined by dividing (i) the number of shares of Common Stock
available for resale under such Registration Statement other than in reliance on
the provision of Rule 416 described in clause (ii) of Section 2(f) by (ii) 1.5.
For purposes of the calculation set forth in the foregoing sentence, any
restrictions on the convertibility of the Preferred Shares shall be disregarded
and such calculation shall assume that the Preferred Shares are then convertible
into shares of Common Stock at the then prevailing Conversion Rate (as defined
in the Company's Certificate of Designations).
h. EFFECT OF FAILURE TO OBTAIN AND MAINTAIN EFFECTIVENESS OF
REGISTRATION STATEMENT. If the Registration Statement covering the Registrable
Securities and required to be filed by the Company pursuant to this Agreement is
not (i) filed within 45 days of the first Issuance Date (as defined in the
Certificate of Designation) of any Preferred Shares (the "SCHEDULED FILING
DATE"), (ii) declared effective by the SEC on or before 90 days after the first
Issuance Date for any Preferred Shares (the "SCHEDULED EFFECTIVE DATE"), or
(iii) except to the extent permitted by Section 3(u) hereof, if after such
Registration Statement has been declared effective by the SEC, sales of all such
shares of Common Stock cannot be made pursuant to such Registration Statement
(whether because of a failure to keep such Registration Statement effective, to
disclose such information as is necessary for sales to be made pursuant to such
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 equal to the product
of (i) $1,000 multiplied by (ii) .015 multiplied by (iii) the quotient of (x)
the sum of (A) the number of days after the Scheduled Filing Date and prior to
the date that such Registration Statement is filed with the SEC, (B) the number
of days after the Scheduled Effective Date and prior to the date that such
Registration Statement is declared effective by the SEC and (C) the number of
days that sales cannot be made pursuant to such Registration Statement after
such Registration Statement has been declared effective by the SEC, divided by
(y) 30. 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 2.0% 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
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Dividend Conversion Price (as defined in the Certificate of Designation) in
effect on such 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:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the forty-fifth (45th) day after the date of issuance of any Preferred Shares
for the registration of Registrable Securities pursuant to Section 2(a)) and use
its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as possible after such filing
(but in no event later than 90 days after the issuance of any Preferred Shares
for the registration of Registrable Securities pursuant to Section 2(a)), 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 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 and (B) none of the
Preferred Shares is 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.
b. Subject to Section 3(u), 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.
c. The Company shall permit Legal Counsel to review and comment upon
a Registration Statement and all amendments and supplements thereto at least
five (5) business days prior to their filing with the SEC, and not file any
document in a form to which Legal Counsel reasonably objects. In the event of a
good faith disagreement as to the reasonableness of the comments or objections
of Legal Counsel, the deadline for filing the Registration Statement or any
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<PAGE>
amendments or supplements thereto shall be extended for the period of such
bona-fide disagreement. 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 at least 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, the prospectus included in such Registration Statement (including
each preliminary prospectus) 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 and
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.
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<PAGE>
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.
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. Subject to Section 3(u) hereof, 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.
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<PAGE>
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 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, or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq National Market System or, if, despite the
Company's best efforts to satisfy the preceding clause (i) or (ii), the Company
is unsuccessful in satisfying the preceding clause (i) or (ii), to secure the
inclusion for quotation on The Nasdaq SmallCap Market for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market
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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.
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.
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s. Within two (2) business days after the Registration Statement
which includes the 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 the 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. Notwithstanding anything to the contrary in Section 3(g), at any
time after the Registration Statement has been declared effective, the Company
may delay the disclosure of material non-public information concerning the
Company the disclosure of which at the time is not, in the good faith opinion of
the Board of Directors of the Company and its counsel, in the best interest of
the Company and, in the opinion of counsel to the Company, otherwise required (a
"GRACE PERIOD"); provided, that the Company shall promptly (i) notify the
Investors in writing of the existence of material non-public information giving
rise to a Grace Period and the date on which the Grace Period will begin, and
(ii) notify the Investors in writing of the date on which the Grace Period ends;
and, provided further, that during any consecutive 365 day period, there shall
be only one Grace Period, such Grace Period not to exceed 30 days (an "ALLOWABLE
GRACE PERIOD"). For purposes of determining the length of a Grace Period above,
the Grace Period shall begin on and include the date the holders receive the
notice referred to in clause (i) and shall end on and include the date the
holders receive the notice referred to in clause (ii). The provisions of
Sections 2(h) and 3(h) hereof and Section 3(d)(ii) of the Certificate of
Designations shall not be applicable during the period of any Allowable Grace
Period. Upon expiration of the Grace Period, the Company shall again be bound by
the first sentence of this Section 3(u) with respect to the information giving
rise thereto. In the event of any Grace Period, the Mandatory Conversion Date
(as defined in the Certificate of Designations) shall be delayed one day for
each day in the Grace Period as provided in Section 2(g) of the Certificate of
Designations.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated filing
date of the 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.
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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(b), 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
under Section 2(b) hereof 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.
5. EXPENSES OF REGISTRATION.
All reasonable fees and 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 (such fees and disbursements of Legal Counsel not to exceed
$3,000), shall be paid by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
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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 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,
in light of the circumstances under which the statements therein were made, 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 by the Company (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
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim 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
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<PAGE>
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
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
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<PAGE>
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.
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<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.
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<PAGE>
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall not be assignable by the
Investors without the prior written consent of the Company. Notwithstanding the
foregoing, the rights under this Agreement shall be assignable by the Investors,
without the consent of the Company, to any Affiliated Transferee (as defined
below) upon the transfer of all or any portion of Registrable Securities if: (i)
the Investor agrees in writing with the Affiliated Transferee 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 Affiliated Transferee, 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 Affiliated Transferee 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
Affiliated Transferee 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. Any attempted assignment, other than to an Affiliated Transferee
shall be void and without effect. An "AFFILIATED TRANSFEREE" shall mean (i) an
Affiliate (as such term is defined in the Securities Purchase Agreement) of the
Investor, (ii) any holder of Preferred Shares and (iii) any Affiliate of a
holder of Preferred Shares.
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 (2/3) 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
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<PAGE>
to have been delivered (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided a confirmation of transmission is
mechanically generated and kept on file by the sending party); or (iii) one (1)
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:
INTELECT COMMUNICATIONS, INC.
1100 Executive Drive
Richardson, Texas 75081
Telephone: (972) 376-2100
Facsimile: (972) 376-2271
Attention: CEO
With a copy to:
RYAN & SUDAN, L.L.P.
Two Houston Center
909 Fannin Street, 39th Floor
Houston, Texas 77010
Telephone: (713) 652-0501
Facsimile: (713) 652-0503
Attention: Philip P. Sudan, Jr., 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) provided by a courier or
overnight service or (C) mechanically generated by the sender's facsimile
machine containing the time, date, recipient facsimile number
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<PAGE>
and an image of such transmission shall be rebuttable evidence of personal
delivery, overnight or courier delivery or transmission by facsimile in
accordance with clause (i), (iii) or (ii) 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 Delaware 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, 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.
e. This Agreement, the Securities Purchase Agreement and the
Certificate of Designations 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 and the Certificate of Designations 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.
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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 Agreement and the consummation of the transactions contemplated
hereby.
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 then outstanding have been
converted into Registrable Securities without regard to any limitation on
conversions of Preferred Shares.
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.
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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:
INTELECT COMMUNICATIONS, INC. WINGATE CAPITAL LTD.
By: By:
Name: ____________________ Name: Kenneth A. Simpler
Its: Chief Executive Officer Its: Vice President
FISHER CAPITAL LTD.
By:
Name: Kenneth A. Simpler
Its: Vice President
CCG INVESTMENT FUND LTD.
By:
Name: Kenneth A. Simpler
Its: Vice President
CCG CAPITAL LTD.
By:
Name: Kenneth A. Simpler
Its: Vice President
<PAGE>
SCHEDULE OF BUYERS
INVESTOR'S ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER
------------- --------------------
Wingate Capital Ltd. c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Michael J. Hughes
Facsimile: (312) 368-4347
Telephone: (312) 696-2165
Fisher Capital Ltd. c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Michael J. Hughes
Facsimile: (312) 368-4347
Telephone: (312) 696-2165
CCG Investment Fund Ltd. c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Michael J. Hughes
Facsimile: (312) 368-4347
Telephone: (312) 696-2165
CCG Capital Ltd. c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Michael J. Hughes
Facsimile: (312) 368-4347
Telephone: (312) 696-2165
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
ATTN:
RE: INTELECT COMMUNICATIONS, INC.
Ladies and Gentlemen:
We are counsel to Intelect Communications, Inc., a Delaware corporation
(the "COMPANY"), and have represented the Company in connection with that
certain Securities Purchase Agreement (the "PURCHASE AGREEMENT") entered into by
and among the Company and the buyers named therein (collectively, the "HOLDERS")
pursuant to which the Company issued to the Holders shares of its Series D
Convertible Preferred Stock, par value $0.01 per share, (the "PREFERRED SHARES")
convertible into shares of the Company's common stock, par value $0.01 per share
(the "COMMON STOCK"). Pursuant to the Purchase Agreement, the Company also has
entered into a Registration Rights Agreement with the Holders (the "REGISTRATION
RIGHTS AGREEMENT") pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the
Preferred Shares, 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 S-3 (File No. 333-_____________) (the "REGISTRATION STATEMENT") with the
Securities and Exchange Commission (the "SEC") relating to the Registrable
Securities which names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] 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]
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of May 8, 1998,
by and among INTELECT COMMUNICATIONS, INC., a Delaware corporation, with
headquarters located at 1100 Executive Drive, Richardson, Texas, 75081 (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 $0.01 per share: the Company's Series D 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"), in
accordance with the terms of the Company's Certificate of Designations,
Preferences and Rights of the Preferred Stock, substantially in the form
attached hereto as EXHIBIT A (the "CERTIFICATE OF DESIGNATIONS");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, an aggregate of 5,000 shares of the Preferred Stock (the
"PREFERRED SHARES") in the respective amounts set forth opposite each Buyer's
name on the Schedule of Buyers, which Preferred Shares are convertible into
Shares of Common Stock (as converted, the "Conversion Shares"); and
D. 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 the satisfaction (or
waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall
issue and sell to each Buyer and each Buyer severally agrees to purchase from
the Company the respective number of Preferred Shares set forth opposite such
Buyer's name on the Schedule of Buyers (the "CLOSING"). The purchase price (the
"PURCHASE PRICE") of the Preferred Shares at the Closing shall be $5,000,000.
<PAGE>
b. CLOSING DATE. The date of the Closing (the "CLOSING DATE") shall
be within one (1) business day following the date hereof, subject to
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 6 and 7 below (or such later date as is mutually agreed to by
the Company and the Buyers). The Closing shall occur on the Closing Date at the
offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago,
Illinois 60661-3693.
c. FORM OF PAYMENT. On the Closing Date, (i) each Buyer shall pay
the Purchase Price to the Company for the Preferred Shares to be issued and sold
to such Buyer at the 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 "PREFERRED 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) hereunder, 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 (ii) upon conversion of the Preferred Shares, will acquire the
Conversion Shares then issuable (the Preferred Shares and the Conversion 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)(3) 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 such securities.
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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 representations and warranties contained
in Section 3 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.
In addition to the foregoing, each Buyer, severally and not jointly,
and its advisors, if any, acknowledge that
(i) it has access to copies of (and acknowledges that the
Company has offered to provide, upon its request, copies of) the SEC
Documents (as defined in Section 3(f) hereof) of the Company and the
Registration Statement of the Company on Form S-3 as filed with the
SEC on April 3, 1998 (collectively, the "Public Documents");
(ii) it has not been furnished with any oral representation or
warranty in connection with the offering of the Preferred Shares by
the Company or any officer, employee, agent, Affiliate or
Subsidiary, which is not contained in or contemplated by the
Transaction Documents (as defined below) or the Certificate of
Designation;
(iii) understands that the purchase of the Preferred Shares
entails various risks including, but not limited to, those outlined
in the Public Documents and in this Agreement, and has determined
that the Preferred Shares are a suitable investment and that at this
time it could bear a complete loss of its investment; and
(iv) any information which such Buyers has heretofore
represented or furnished to the Company with respect to its
financial position and business experience is correct and complete
as of the date of this Agreement.
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
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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 such 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, as amended, (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.
g. LEGENDS. Such Buyer understands that the certificates or other
instruments representing the Preferred Shares and, until such time as the sale
of the Conversion Shares have been registered under the 1933 Act as contemplated
by the Registration Rights Agreement, the stock certificates representing the
Conversion 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 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.
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 the Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that the
Securities can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
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immediately sold. To the extent that the above legend is removed pursuant to (i)
above, the Buyers shall satisfy the prospectus delivery requirements of the 1933
Act.
h. VALIDITY; ENFORCEMENT. This Agreement has been duly and validly
authorized, executed and delivered on behalf of such Buyer and is a valid and
binding agreement of such Buyer enforceable against such Buyer in accordance
with its 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. Each Buyer is a resident of and is organized under the
laws of the 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), except
for non-operating Subsidiaries or Subsidiaries in dissolution or winding up,
each as described in SCHEDULE 3(A), which do not have any material assets or
liabilities ("NONMATERIAL SUBSIDIARIES")), 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,
except where the failure to be in good standing, either individually or in the
aggregate, would not have a Material Adverse Effect (as defined below). Each of
the Company and its Subsidiaries is duly qualified as a foreign corporation to
do business and is in 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.
b. AUTHORIZATION; ENFORCEMENT; VALIDITY. (i) The Company has the
requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement, the Irrevocable Transfer Agent
Instructions (as defined in Section 5) 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
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Transaction Documents and the Certificate of Designations 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
reservation for issuance and the issuance of the Conversion Shares issuable upon
conversion 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, (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 the Closing Date, the Certificate of Designations has been filed with
the Secretary of State of the State of Delaware and will be in full force and
effect, enforceable against the Company in accordance with its terms.
c. CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company consists of (i) 50,000,000 shares of Common Stock, of which
as of the date hereof, 24,177,190 shares are issued and outstanding, 4,158,000
shares are reserved for issuance pursuant to the Company's stock option and
purchase plans and 11,798,000 shares are issuable and reserved for issuance
pursuant to securities (other than the Preferred Shares) exercisable or
exchangeable for, or convertible into, shares of Common Stock, (ii) 10,000
shares of Preferred Stock, of which as of the date hereof, no shares are issued
and outstanding and (iii) 49,990,000 shares of preferred stock (other than
shares of the Preferred Stock), of which as of the date hereof 5,143,695 shares
are 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
debt securities, (iii) other than the stock option plans of the Company set
forth in the SEC Documents, 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, (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 or instruments 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
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stock" plans or agreements or any similar plan or agreement. The Company has
furnished to the Buyer true and correct copies of the Company's Certificate of
Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE
OF INCORPORATION"), and the Company's By-laws, as amended and 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 Certificate of Designations. 1,306,803 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. Upon conversion in accordance with the
Certificate of Designations the Conversion 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 holder of Common Stock. Assuming the accuracy of the representations made by
the Buyers in Section 2 hereof, 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 Certificate of
Designations 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) will not (i) result in a
violation of the Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the By-laws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of its Subsidiaries is a party, or result in a violation of any
law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the Principal
Market (as defined below)) 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 for such violations, conflicts or defaults which shall
be waived or corrected as of the Closing and which are set forth on SCHEDULE
3(E). Except as disclosed in SCHEDULE 3(E), neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Certificate
of Incorporation, any Certificate of Designation, Preferences and Rights of any
outstanding series of preferred stock of the Company or By-laws or their
organizational charter or by-laws, respectively, except for such violations,
conflicts or defaults which shall be waived or corrected as of the Closing and
which are set forth on SCHEDULE 3(E). Except as disclosed in SCHEDULE 3(E),
neither the Company or any of its Subsidiaries is in violation or any term of or
in default under any contract, agreement, mortgage, indebtedness, indenture,
instrument, judgment, decree or
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order or any statute, rule or regulation applicable to the Company or its
Subsidiaries, except for such violations or defaults which would not have a
Material Adverse Effect. 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 such violations or defaults
which would 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 to perform
its obligations under the Certificate of Designations, in each case 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 are unaware of any facts or circumstances which might reasonably be
expected to give rise to any of the foregoing. The Company is not in violation
of the listing requirements of the Principal Market (as defined below),
including, without limitation, the requirements set forth in Rule 4460 of the
Principal Market.
f. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since December 31, 1996, the
Company or its predecessor Intelect Communications Systems Limited, a Bermuda
corporation, 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"). 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
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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, except for the knowledge of the existence of the transactions
contemplated by the Transaction Documents.
g. ABSENCE OF CERTAIN CHANGES. Except as disclosed in SCHEDULE 3(G)
or in the SEC Documents, since December 31, 1997 there has been no material
adverse change and no material adverse development in the business, properties,
operations, financial condition, 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. Except as disclosed in SCHEDULE 3(G), since December 31,
1997 the Company has not declared or paid any dividends on its Common Stock,
sold any assets in excess of $1 million outside of the ordinary course of
business or had capital expenditures in excess of $5 million.
h. ABSENCE OF LITIGATION. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the
Company or any of its Subsidiaries, threatened against or affecting the Company,
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,
where an adverse order, holding, finding or mandate would have a Material
Adverse Effect, except as set forth in SCHEDULE 3(H) or in the SEC Documents.
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
and the transactions contemplated hereby and 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 and the transactions contemplated hereby and thereby and any advice
given by any of the Buyers or any of their respective representatives or agents
in connection with the Transaction Documents and the transactions contemplated
hereby and 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. Except as set forth on SCHEDULE 3(J) or for liabilities incurred
in the ordinary course of business and consistent with past practices, no
material 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
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statement filed with the SEC relating to an issuance and sale by the Company of
its Common Stock and which has not been publicly announced or previously
disclosed in the Public Documents.
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, except as set forth in schedule 3(l),
cause this offering of the 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
any exchange or automated quotation system on which any of the securities of the
Company are listed or designated, nor will the Company or any of its
Subsidiaries take any action or steps that would require registration of any of
the Securities under the 1933 Act or cause the offering of the Securities to be
integrated with other offerings for purposes of any applicable shareholder
approval requirement of the Principle Market.
m. DILUTIVE EFFECT. The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Preferred Shares
will increase in certain circumstances. The Company further acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred
Shares in accordance with this Agreement and the Certificate of Designations, is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company.
n. 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. None of the
Company's or its Subsidiaries' employees is a member of a union, neither the
Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their 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.
o. INTELLECTUAL PROPERTY RIGHTS. The Company and its Subsidiaries
own or possess adequate rights or licenses to use all material trademarks, trade
names, service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on SCHEDULE 3(O), none of the
Company's material trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, government
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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. 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 secret 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(O) or in the SEC Documents, 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 trademark, trade name,
patents, patent rights, invention, copyright, license, service names, service
marks, service mark registrations, trade secret or other infringement; and the
Company and its Subsidiaries are unaware of any facts or circumstances which
might reasonably be expected to 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.
p. ENVIRONMENTAL LAWS. The Company and its Subsidiaries (i) are in
compliance in all material respects 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 in all material respects with all terms and conditions of any such
permit, license or approval.
q. TITLE. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in SCHEDULE 3(Q) or such as do not
materially affect the value of such property or do not interfere with the use
made and proposed to be made of such property by the Company and any of its
Subsidiaries. Any real property and facilities held under lease by the Company
and 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.
r. 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 sought or applied for and neither the Company nor any such
Subsidiary 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
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affect the condition, financial or otherwise, or the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole.
s. 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.
t. 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.
u. 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. Except as specifically disclosed in the SEC Documents
or as set forth in SCHEDULE 3(G), neither the Company nor any of its
Subsidiaries is a 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.
v. TAX STATUS. 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.
w. TRANSACTIONS WITH AFFILIATES. Except as set forth on SCHEDULE
3(W), in the Definitive 14A Proxy Materials filed on April 28, 1998 or in the
SEC Documents filed at least ten days prior to the date hereof 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,
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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.
x. 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.
y. NONMATERIAL SUBSIDIARIES. The Nonmaterial Subsidiaries have no
(i) liabilities, contingent or otherwise, whether known or unknown, which would
have a Material Adverse Effect or (ii) material assets.
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 AND BLUE SKY. 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 the Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the Closing 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 the Closing Date. The Company shall make all filings and reports
relating the offer and sale of the Securities required under applicable
securities or "Blue Sky" laws of the states of the United States following the
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 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 (B) none of the Preferred Shares 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 working capital and general corporate purposes.
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e. FINANCIAL INFORMATION. The Company agrees to send the following
to each Investor (as that term is defined in the Registration Rights Agreement)
during the Registration Period: (i) within two (2) days after the filing thereof
with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports
on Form 10-Q, any Current Reports on Form 8-K and any registration statements
(other than on Form S-8) or amendments filed pursuant to the 1933 Act, provided
that if any such report is not filed with the SEC through EDGAR then the Company
shall deliver a copy of such report to each Investor by facsimile on the same
day it is filed with the SEC and (ii) 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 than 150% of the number of shares of Common Stock needed to
provide for the issuance of the shares of Common Stock issuable upon conversion
of the Preferred Shares.
g. ADDITIONAL FINANCING; RIGHT OF FIRST REFUSAL. Subject to the
exceptions described below, the Company agrees that during the period beginning
on the date hereof and ending on the day a Registration Statement (as defined in
the Registration Rights Agreement) on Form S-3, registering the Registrable
Securities (as defined in the Registration Rights Agreement) becomes effective,
neither the Company nor its Subsidiaries will, without the prior written consent
of a majority of the Preferred Shares then outstanding, 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 (the limitations referred to in this sentence
shall be referred to as the "CAPITAL RAISING LIMITATIONS"). The Capital Raising
Limitations shall not apply to (i) the issuance of warrants or options to
placement agents or advisers in connection with the transactions contemplated
hereby, (ii) a bona-fide loan from a commercial lender which does not have any
equity feature, (iii) the issuance of securities upon exercise or conversion of
the Company's options, warrants or other convertible securities or debt
outstanding as of the date hereof or to be issued following the Closing to
placement agents and advisers in connection with the transactions contemplated
hereby, (iv) the grant of additional options or warrants, or the issuance of
additional securities, under any Company stock option plan, restricted stock
plan or stock purchase plan for the benefit of the Company's employees or
directors, (v) any registered firm commitment underwritten public offering of
securities of the Company, (vi) any transaction intended to be made in reliance
upon Rule 144A under the Securities Act, (vii) any conversion to equity by St.
James Capital Corp. or its Affiliates ("ST. JAMES") of all or part of the
existing debt or future debt incurred by the Company under the Agreement of
Purchase and Sale dated February 12, 1998 (the "CREDIT FACILITY") in the
aggregate principal amount of $15,000,000, at a conversion price at or above the
Fixed Conversion Price, and any additional warrants issued to St. James in
connection with such debt, such warrants to have an exercise price at or above
$7.50 per share, subject to adjustment as provided in the Agreement of Purchase
and Sale or (viii) any equipment loans or
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financing which do not have an equity feature. In addition, so long as at least
25% of the Preferred Shares initially issued pursuant to this Agreement shall be
outstanding, the Company and its Subsidiaries shall not draw down additional
financing pursuant to the Credit Facility, unless it shall have first delivered
to each Buyer or a designee appointed by such Buyer written notice (the "FUTURE
OFFERING NOTICE") detailing the dollar amount the Company proposes to draw down
from the Credit Facility (the "DRAW DOWN AMOUNT") and providing each Buyer an
option to purchase up to that number of shares of Series D Convertible Preferred
Stock (the "ADDITIONAL PREFERRED SHARES"), on the same terms and conditions
contained herein, in dollar amount equal to the Draw Down Amount multiplied by
such Buyers Aggregate Percentage (as defined below). The Company shall, prior to
delivering the Future Offering Notice to the Buyers, request a consent and
waiver from all the holders of the Series A Convertible Preferred Stock of the
Company and the Series B Convertible Preferred Stock of the Company waiving any
and all preemptive rights or rights of first refusal to acquire Additional
Preferred Shares (as defined below) issued pursuant to this Section 4(g). In the
event the Company does not obtain such consents and waivers, the Company shall
not be barred from drawing down additional financing from the Credit Facility.
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
aggregate number of the Preferred Shares initially issued to such Buyer by (ii)
the aggregate number of the Preferred Shares initially issued to all the Buyers.
A Buyer can exercise its option to participate by delivering written notice
thereof to the Company within five (5) business days after receipt of a Future
Offering Notice, which notice shall state the quantity of Additional Preferred
Shares that such Buyer will purchase, up to its Aggregate Percentage, and that
number of securities it is willing to elect 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 within such five-day
period, each Buyer which has indicated that it is willing to purchase Additional
Preferred Shares 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 such Additional Preferred Shares which one or more of the
Buyers have not elected to purchase. In the event that the Buyers fail to fully
exercise their right to purchase that number of shares of Preferred Stock
equivalent in dollar value to the Draw Down Amount, the Company shall not be
obligated to sell any Additional Preferred Shares to the Buyers. Upon the
determination that the Buyers have failed to fully exercise their options, the
Company shall have 45 days thereafter to draw down from the Credit Facility an
amount equal to the Draw Down Amount. In the event the Company has not drawn
down such amount from the Credit Facility within such 45-day period, the Company
shall not thereafter drawn down additional financing from the Credit Facility
without first offering the Buyers the option to purchase additional shares of
Preferred Stock in the manner provided in this Section 4(g). In the event that
there are an insufficient number of shares of Preferred Stock, the Company will
authorize a new series of Convertible Preferred on substantially the same terms
and conditions contained herein. The Closing of the issuance of the Additional
Preferred Shares and the Purchase thereof shall be conducted in substantially
the same manner as the Closing of the initial purchase of Preferred Shares. For
the purposes of this Agreement upon the closing of the Additional Preferred
Shares the term Preferred Shares shall include the Additional Preferred Shares.
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h. LISTING. The Company shall promptly but in no event later than
the earlier of (i) the date the Registration Statement on Form S-3 registering
the Registrable Securities is declared effective by the SEC or (ii) 30 days
after the Closing Date, secure the listing of all of the Registrable Securities
(as defined in the Registration Rights Agreement) upon each national securities
exchange and automated quotation system, if any, upon which shares of Common
Stock are then listed (subject to official notice of issuance) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all Registrable Securities from time to time issuable under the terms
of the Transaction Documents and the Certificate of Designations. The Company
shall maintain the Common Stock's authorization for quotation on the Nasdaq
National Market or the Nasdaq Small Cap (the "PRINCIPAL MARKET"). Neither the
Company nor any of its Subsidiaries shall take any action which would be
reasonably expected to result in the delisting or suspension of the Common Stock
on the Principal Market. The Company shall promptly, and in no event later than
the following business day, provide to each Buyer copies of any notices it
receives from the Principal Market regarding the continued eligibility of the
Common Stock for listing on such automated quotation system 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, within one (1) business
day of the Closing, the Company shall pay a nonaccountable expense allowance of
Fifteen Thousand Dollars ($15,000) to the Buyers or their designee(s).
j. FILING OF FORM 8-K. On or before the fifth (5th) business day
following the Closing Date, the Company shall file a Form 8-K with the SEC
describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the 1934 Act.
k. TRANSACTIONS WITH AFFILIATES. So long as any Preferred Shares 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 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) benefits
under any Company stock option plan, restricted stock plan or stock purchase
plan for the benefit of the Company's employees, officers or directors, (b)
customary employment arrangements and benefit programs on reasonable terms, (c)
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 (d) any agreement, transaction,
commitment or arrangement which is approved by a majority of the disinterested
directors of the Company, as determined under the Delaware General Corporation
Law. "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
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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.
l. CAPITAL AND SURPLUS; SPECIAL RESERVES. The Company agrees that
the capital of the Company (as such term is used in Section 154 of the General
Corporation Law of Delaware) in respect of the Preferred Shares shall be equal
to the aggregate par value of such Preferred Shares and that it shall not
increase the capital of the Company with respect to any shares of the Company's
capital stock at anytime on or after the date of this Agreement. The Company
also agrees that it shall not create any special reserves under Section 171 of
the General Corporation Law of Delaware without the prior written consent of
each holder of Preferred Shares.
m. REDUCTION OF CAPITAL. So long as any Preferred Shares remain
outstanding, the Company shall not account for as surplus or transfer to or
otherwise allocate to the Company's surplus account for purposes of the Delaware
General Corporation Law any of the capital represented by the Preferred Shares,
including, without limitation, for the purpose of reducing any of its capital
stock as contemplated by Section 244 of the Delaware General Corporation Law.
n. PROXY STATEMENT. The Company shall use its best efforts to obtain
within 60 days of the date hereof, written confirmation from the Principal
Market that the issuance of Common Stock upon the Conversion of the Company's
Series B Convertible Preferred Stock (the "SERIES B PREFERRED") will not be
integrated with the issuance of the Combined Conversion Shares (as defined
below) for the purposes of applying the shareholder approval requirements of the
Principal Market ("WRITTEN CONFIRMATION"). Regardless of the Company's efforts
pursuant to the above, if in the event that at the close of trading on any
trading day the Proxy Statement Triggering Shares (as defined below) exceeds 15%
of the number of shares of Common Stock issued and outstanding immediately prior
to the Closing (the "PROXY CRITERIA"), the Company shall provide written notice
of such occurrence to the holders of Preferred Shares (the "COMPANY PROXY
NOTICE") no later than one (1) business day following such trading day on which
such event occurs. Any holder of Preferred Shares may provide written notice to
the Company (a "HOLDER PROXY NOTICE") upon such holder becoming aware of the
satisfaction of the Proxy Criteria. "PROXY STATEMENT TRIGGERING SHARES" shall
mean as of any date that number of shares of Common Stock equal to the sum of
(A) the number of shares of Common Stock previously issued upon conversion of
any of the shares of Preferred Stock, (B) the number of shares of Common Stock
issuable upon conversion of all the outstanding shares of Preferred Stock based
on the Conversion Price in effect on the day of such determination (without
regard to any limitation upon the conversion of any shares of Preferred Stock
except for those set forth in Section 2(d)(ii) of the Certificate of
Designation) ((A) and (B) together, the "COMBINED CONVERSION SHARES") and (C)
the number of shares of Common Stock issued or, in the case of securities which
are convertible or exercisable into or exchangeable for shares of Common Stock,
the number of shares of Common Stock issuable upon conversion, exercise or
exchange of such securities as of the date of such determination, in any
transaction which the holders of a majority of the shares of Preferred Stock
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outstanding advise the Company by written notice that such holders have a
reasonable belief there exists a bona fide question regarding whether the
issuance of such other securities would be integrated with the issuance of the
Combined Conversion Shares pursuant to the Principal Market's rules and
regulations (the "OTHER SECURITIES"). The Series B Preferred will not be
included as Other Securities for the purpose of determining the number or
percent of Proxy Statement Triggering Shares unless after 60 days from the date
hereof the Company has not obtained Written Confirmation from the Principal
Market regarding the Series B Preferred. The Company hereby acknowledges that
the issuance of Common Stock upon the conversion of the Series C Convertible
Preferred Stock of the Company (the "SERIES C PREFERRED") shall be included in
the definition of "OTHER SECURITIES" without being so advised by the holders of
a majority of the shares of Preferred Stock, PROVIDED HOWEVER, nothing herein
shall be construed as to prohibit the Company from obtaining Written
Confirmation from the Principal Market that the number of shares of Common Stock
issuable upon conversion of the Series C Preferred shall not be integrated with
the issuance of the Combined Conversion Shares the Company, and upon receipt of
such Written Confirmation such shares shall not be included in the definition of
"Other Securities." Notwithstanding the foregoing, the term Other Securities
(other than the Series B Preferred and the Series C Preferred) shall not include
any security with respect to which the Company has indicated that in its
reasonable belief the issuance of such securities will not be integrated with
the issuance of the Combined Conversion Shares unless and until the Company has
failed to obtain a Written Confirmation within 30 days of the Company's receipt
of the notice referred to in clause (C) in the immediately preceding sentence.
Upon the earlier to occur of (i) the date the Company Proxy Notice is given or
(ii) the date a Holder Proxy Notice is deemed delivered (pursuant to Section
9(f) hereof) (the "APPROVAL DEADLINE"), the Company shall use its best efforts
to obtain within 60 days, either (I) the written waiver from the Principal
Market of the requirements of its shareholder approval requirements as it
applies to the Proxy Statement Triggering Shares ("WRITTEN WAIVER") or (II) the
approval of the Company's Stockholders, in accordance with the requirements of
the applicable Principal Market, to allow for the issuance of greater than 20%
of its outstanding Common Stock upon issuance of the Proxy Statement Triggering
Shares and to recommend such proposal to its stockholders ("STOCKHOLDER
APPROVAL"). If at any time after a Company Proxy Notice or a Holder Proxy Notice
has been given, but prior to the receipt of Written Waiver or Stockholder
Approval, the Company receives a Written Confirmation with respect to a number
of Other Securities which, had such Other Securities been excluded from the
Proxy Statement Triggering Shares as of the date the Company was required to
deliver the Company Proxy Notice (the "COMPANY PROXY NOTICE DATE"), then if on
each day during the period beginning on the Company Proxy Notice Date and ending
on the date the Company received Written Confirmation, the Proxy Criteria would
not have been satisfied, then the Company shall no longer be obligated to seek
Stockholder Approval or Written Waiver until such future time as the Proxy
Criteria is satisfied. The Company shall be obligated to provide each Buyer with
written notice within three (3) business days of the closing of any transaction
which involves the issuance of any equity security or security which is
convertible, exchangeable, or exercisable into or for Common Stock of the
Company, and a statement by the Company as to whether it believes the issuance
of the Other Securities will be integrated with the issuance of the
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Combined Conversion Shares under the rules of the Principal Market relating to
stockholder approval requirements.
o. RESTRICTIONS ON SALES OF CONVERSION SHARES. So long as a Buyer
holds any Preferred Shares, the Buyers shall not sell, on any single day, a
number of shares of Common Stock issued pursuant to the conversion of Preferred
Shares in excess of that number of shares of Common Stock equal to 20% of the
daily trading volume for the Common Stock (as reported by Bloomberg) on such
date of determination. Notwithstanding the foregoing, the sales restriction set
forth in this Section 2(o) shall not apply (i) on any day (the "RESTRICTION
RELEASE DATE") where such daily trading volume, excluding any trading volume in
the Common Stock by an individual holder of Preferred Shares who would seek to
apply this exclusion to Section 2(o), is in excess of 200% of the average daily
trading volume for the Common Stock (as reported by Bloomberg) for the six (6)
month period which ends on, and includes, the day prior to the Restriction
Release Date and begins on, and includes, the day which is six months prior to
such Restriction Release Date or (ii) at any time on or after an Extraordinary
Event, a Major Transaction or a Triggering Event (each as defined in the
Certificate of Designation).
p. CONVERSION RESTRICTION. A Buyer will not submit a Conversion
Notice (as defined in the Certificate of Designation) unless, individually or in
the aggregate, Buyer(s) have submitted one or more Conversion Notices for the
conversion of at least 200 shares of Preferred Stock on the same day.
Notwithstanding the foregoing, nothing shall restrict an individual Buyer from
submitting a Conversion Notice for the Conversion of less than 200 shares of
Preferred Stock if (i) such Buyer on the Conversion Date holds less than 200
shares of Preferred Stock and (ii) such Buyer submits a Conversion Notice for
all Preferred Shares held by such Buyer.
q. LIMITATION ON SHORT SALES OF COMMON STOCK. Each Buyer agrees
that, for as long as such Buyer owns any Preferred Shares, neither such Buyer
nor its Affiliates will enter into a "short sale" (as such term is defined in
Rule 3b-3 of the 1934 Act) of Common Stock; provided, however, that a sale which
would otherwise be deemed a short sale shall not be prohibited by this Agreement
so long as the selling Buyer submits on the date of such sale a Conversion
Notice of Preferred Shares entitling such Buyer to receive a number of shares of
Common Stock at least equal to the number of shares so sold.
r. ADDITIONAL ISSUANCE OF PREFERRED STOCK. So long as a Buyer or any
of its Affiliates beneficially owns Preferred Shares, the Company shall not
issue or agree to issue any additional shares of Preferred Stock other than in
accordance with this Agreement.
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
in such amounts as specified from time to time by each Buyer to the Company upon
conversion of the Preferred Shares (the "IRREVOCABLE
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TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the Conversion 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 referred to
in this Section 5, and stop transfer instructions to give effect to Sections
2(f) and 4(p) hereof (in the case of the Conversion Shares, prior to
registration of the Conversion 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 or any of its obligations in
this Agreement, the Certificate of Designation or the Registration Rights
Agreement. If a Buyer provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of the Securities may be made without registration under the 1933 Act
or the Buyer provides the Company with reasonable assurances that the Securities
can be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold,
the Company shall permit the transfer, and, in the case of the Conversion
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 legend. Each party acknowledges that a breach by it of its
obligations under this Section 5 will cause irreparable harm to the other party
by vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, each party acknowledges that the remedy at law for a breach of its
obligations under this Section 5 will be inadequate and agrees, in the event of
a breach or threatened breach by such party of the provisions of this Section 5,
that the other party shall be entitled, in addition to all other available
remedies, to an order and/or injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Preferred Shares to each Buyer at the Closing is subject to the satisfaction, at
or before the 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:
a. Such Buyer shall have executed each of the Transaction Documents
to which it is a party and delivered the same to the Company.
b. The Certificate of Designations shall have been filed with the
Secretary of State of the State of Delaware.
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c. Such Buyer shall have delivered to the Company the Purchase Price
for the Preferred Shares being purchased by such Buyer at the Closing by wire
transfer of immediately available funds pursuant to the wire instructions
provided by the Company.
d. 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
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 in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Buyer at or prior to the Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the Preferred
Shares at the Closing is subject to the satisfaction, at or before the 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 by providing the Company with prior written notice thereof:
a. The Company shall have executed each of the Transaction Documents
and delivered the same to such Buyer.
b. The Certificate of Designations, shall have been filed with the
Secretary of State of the State of Delaware, and a copy thereof certified by
such Secretary of State shall have been delivered to such Buyer.
c. The Common Stock shall be authorized for quotation on the
Principal Market, trading in the Common Stock shall not have been suspended by
the SEC or the Principal Market.
d. The representations and warranties of the Company shall be true
and correct as of the date when made and as of the Closing Date as though made
at that time (except for representations and warranties that speak as of a
specific date) and the Company 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 the Company at or prior to the
Closing Date. Such Buyer shall have received a certificate, executed by the
Chief Executive Officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested by
such Buyer including, without limitation, an update as of the Closing Date
regarding the representation contained in Section 3(c) above, in the form
attached here to as EXHIBIT E.
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e. Such Buyer shall have received the opinion of the Company's
counsel dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to such Buyer and in substantially the form of EXHIBIT C attached
hereto.
f. The Company shall have executed and delivered to such Buyer the
Preferred Stock Certificates (in such denominations as such Buyer shall request)
for the Preferred Shares being purchased by such Buyer at the Closing.
g. 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.
h. As of the 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, at least 1,306,803 shares of Common
Stock.
i. 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.
j. The Company shall have delivered to such Buyer a certificate
evidencing the incorporation of the Company and each Subsidiary and good
standing of the Company in such corporation's state of incorporation issued by
the Secretary of State of such state of incorporation as of a date within 10
days of the Closing Date.
k. The Company shall have delivered to such Buyer a certified copy
of the Articles of Incorporation as certified by the Secretary of State of the
State of Delaware within ten days of the Closing Date.
l. The Company shall have delivered to such Buyer a secretary's
certificate, dated as the Closing Date, as to (i) the resolutions described in
Section 7(g), (ii) the Certificate of Incorporation and (iii) the Bylaws, each
as in effect at the Closing.
m. The Company shall have made all filings necessary, if any, under
all applicable federal and state securities laws to consummate the issuance of
the Securities pursuant to this Agreement in compliance with such laws.
n. The Company shall provide all documentation relating to the
waiver or cure of any violation, conflict or default of any material agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party.
o. 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.
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<PAGE>
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 Certificate of Designations, 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 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 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 or
the Certificate of Designations 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 Certificate of Designations or any other certificate, instrument or document
contemplated hereby or thereby and attributable to a breach or misrepresentation
or alleged breach or misrepresentation set forth in (a) or (b) above. 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. The corporate laws of the State of Delaware 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, 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
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<PAGE>
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.
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.
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 generated and kept on file by the
sending party); or (iii) one 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:
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<PAGE>
If to the Company:
INTELECT COMMUNICATIONS, INC.
1100 Executive Drive
Richardson, Texas 75081
Telephone: (972)367-2100
Facsimile: (972) 367-2771
Attention: CEO
With a copy to:
RYAN & SUDAN, L.L.P.
Two Houston Center
909 Fannin Street, 39th Floor
Houston, Texas 77010
Telephone: (713) 652-0501
Facsimile: (713) 652-0503
Attention: Philip P. Sudan, Jr., Esq.
If to the Transfer Agent:
AMERICAN STOCK TRANSFER & TRUST COMPANY
6201 15th Avenue, 3rd Floor
Brooklyn, NY 11219
Telephone: (718) 921-8247
Facsimile: (718) 921-8323
Attention: Wilbert Myles
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 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) provided by a courier or
overnight courier service or (C) mechanically generated by the sender's
facsimile machine containing the time, date, recipient facsimile number and an
image of such transmission shall be rebuttable evidence of personal delivery,
overnight or courier delivery or transmission by facsimile in accordance with
clause (i), (iii) or (ii) above, respectively.
g. SUCCESSORS AND ASSIGNS. The rights under this Agreement shall not
be assignable by the holders of Preferred Shares without the prior written
consent of the Company. Notwithstanding the foregoing, the rights under this
Agreement shall be assignable by the holders of Preferred Shares, without the
consent of the Company, to any Affiliated Transferee (as defined
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<PAGE>
below) upon the transfer of all or any portion of Preferred Shares if: (i) the
holders of Preferred Shares agrees in writing with the Affiliated Transferee 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 the name and address of such Affiliated Transferee; (iii) immediately
following such transfer or assignment the further disposition of such securities
by the Affiliated Transferee 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 Affiliated
Transferee 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 Transaction Documents. Any
attempted assignment without the prior written consent of the Company, other
than to an Affiliated Transferee shall be void and without effect. An
"AFFILIATED TRANSFEREE" shall mean (i) an Affiliate (as such term is defined in
the Securities Purchase Agreement) of a Buyer, (ii) any holder of Preferred
Shares and (iii) any Affiliate of a holder of Preferred Shares.
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 the
Closing. 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 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 Closing shall not have
occurred with respect to a Buyer on or before five (5) 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
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<PAGE>
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 nonbreaching Buyers for the expenses described in
Section 4(i) above.
m. PLACEMENT AGENT. The Company acknowledges that it has engaged
Lifeline Industries Inc. as placement agent in connection with the sale of the
Preferred Shares, which placement agent may have formally or informally engaged
other agents on its behalf. 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 which agents or brokers have been or are
alleged to have been engaged by the Company. 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. Each Buyer, severally and not jointly, represents and
warrants that it has not engaged any placement agent or broker in connection
with the acquisition of the Securities. Each buyer, severally and not jointly,
shall pay and hold the Company harmless from any liability, loss or expense
(including, without limitation, attorneys' fees and out-of-pocket expense)
arising in connection with any claims for placement agent fees or broker
commissions which agents or brokers have been or are alleged to have been
engaged by such Buyer.
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.
o. REMEDIES. Each Buyer and each holder of Preferred Shares and
Conversion Shares shall have all rights and remedies set forth in this Agreement
and the Certificate of Designation and all rights and remedies which such
holders have been granted at any time under any other agreement or contract 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 Certificate of
Designations 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.
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<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:
INTELECT COMMUNICATIONS, INC. WINGATE CAPITAL LTD.
By: By:
Name: Herman M. Frietsch Name: Kenneth A. Simpler
Its: Chief Executive Officer Its: Vice President
FISHER CAPITAL LTD.
By:
Name: Kenneth A. Simpler
Its: Vice President
CCG INVESTMENT FUND LTD.
By:
Name: Kenneth A. Simpler
Its: Vice President
CCG CAPITAL LTD.
By:
Name: Kenneth A. Simpler
Its: Vice President
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
NUMBER
INVESTOR ADDRESS PREFERRED INVESTOR'S LEGAL REPRESENTATIVES'
INVESTOR'S NAME AND FACSIMILE NUMBER RESIDENCE SHARES ADDRESS AND FACSIMILE NUMBER
--------------- -------------------- --------- ------ ----------------------------
<S> <C> <C> <C> <C>
Wingate Capital Ltd. c/o Citadel Investment Group, L.L.C. Bermuda 1610 Katten Muchin & Zavis
225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Michael J. Hughes Attention: Robert J. Brantman, Esq.
Facsimile: (312) 368-4347 Facsimile: (312) 902-1061
Telephone: (312) 696-2165 Telephone: (312) 902-5200
Fisher Capital Ltd. c/o Citadel Investment Group, L.L.C. Bermuda 2990 Katten Muchin & Zavis
225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Michael J. Hughes Attention: Robert J. Brantman, Esq.
Facsimile: (312) 368-4347 Facsimile: (312) 902-1061
Telephone: (312) 696-2165 Telephone: (312) 902-5200
CCG Investment Fund Ltd. c/o Citadel Investment Group, L.L.C. Cayman 200 Katten Muchin & Zavis
225 West Washington Street Islands 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Michael J. Hughes Attention: Robert J. Brantman, Esq.
Facsimile: (312) 368-4347 Facsimile: (312) 902-1061
Telephone: (312) 696-2165 Telephone: (312) 902-5200
CCG Capital Ltd. c/o Citadel Investment Group, L.L.C. Cayman Katten Muchin & Zavis
225 West Washington Street Islands 200 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Michael J. Hughes Attention: Robert J. Brantman, Esq.
Facsimile: (312) 368-4347 Facsimile: (312) 902-1061
Telephone: (312) 696-2165 Telephone: (312) 902-5200
</TABLE>
<PAGE>
EXHIBIT A
FORM OF CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF THE PREFERRED SHARES
Attached hereto.
<PAGE>
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
Attached hereto.
<PAGE>
EXHIBIT C
FORM OF COMPANY COUNSEL OPINION
Attached hereto.
<PAGE>
EXHIBIT D
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
Attached hereto.
<PAGE>
EXHIBIT E
FORM OF OFFICERS CERTIFICATE
Attached hereto.
