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) February 9, 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 $25 million of
financings by closing a $10 million private placement of equity and a $15
million two-year credit facility.
A. $10 MILLION PRIVATE PLACEMENT. The private placement of equity closed
on February 9, 1998 and involved the sale of $10 million of Series C Convertible
Preferred Stock to four investment entities controlled by Citadel Investment
Group L.L.C. or its affiliates (collectively "Citadel"). Citadel purchased
10,000 shares of the Series C Preferred Stock at a price of $1,000 per share for
an aggregate offering price of $10 million. The proceeds from the offering will
be used by the Company for working capital and general corporate purposes. The
Series C Preferred Stock has a 4% annual dividend. The dividend is payable upon
the conversion of the Series C Preferred Stock. Further, the dividend is payable
in additional shares of common stock of the Company ("Common Stock"), or cash at
the option of the Company. The Series C Preferred Stock has no voting rights.
The Series C 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 C 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
C Preferred Stock will automatically convert into Common Stock on the second
anniversary of the issuance to the extent any Series C Preferred Stock remains
outstanding. Each share of Series C Preferred Stock is convertible into that
number of shares of Common Stock equal to the quotient of (i) $1,000, plus any
accrued dividends divided by (ii) the Conversion Price. The Conversion Price is
the lesser of (a) $9.082 per share, 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 $9.082. 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 C Preferred
Stock may convert on any one day is at least 500 shares. 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 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
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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 C 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 45 days of the closing of the transaction
governing the resale of the securities issuable upon conversion of the Series C
Preferred Stock. The Company is restricted in making certain private equity
offerings until such registration statement is declared effective by the
Securities and Exchange Commission.
The Series C 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
dividends, 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 C 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 C 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 the holders of the Series C Preferred
Stock notify the Company 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.
B. $15 MILLION CREDIT FACILITY. On February 12, 1998, the Company
executed an Agreement of Purchase and Sale with St. James Capital Partners,
L.P., a private lender (collectively, with St. James Capital Corporation and its
affiliated investment entities, "St. James Partners"), pursuant to which the
Company was issued a $15,000,000 credit facility from St. James Partners at a
fixed interest rate of 7% per annum. No payments of principal and interest are
due under the credit facility until maturity. The initial term of the credit
facility is one year and the Company has an unrestricted right to extend
maturity for another one year term in exchange for the issuance of warrants as
described below. Advances under the credit facility are to be used for the
purposes of the Company's working capital needs and for retiring debt.
The outstanding balance of principal and interest due from time to time
under the credit facility is convertible into shares of Common Stock of the
Company at the price of $9.082 per
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share at the election of St. James Partners, and at the Company's election if
the Common Stock has traded at a closing price equal to or greater than $13.50
per share for the previous 15 out of 17 consecutive days and at a price equal to
or greater than $13.50 per share as of the date written notice of conversion is
provided by the Company to St. James Partners.
The $15,000,000 credit facility is secured by all the outstanding shares
of three of the Company's wholly owned subsidiaries, DNA Enterprises, Inc.
("DNA"), Intelect Visual Communications Corp. ("IVC"), and Intelect Network
Technologies Company ("INT") (the pledged shares of DNA, IVC and INT, the
"Pledged Stock"). As to an initial advance of $3,000,000 under the credit
facility, St. James Partners has agreed to share collateral consisting of the
Pledged Stock in pari passu with two existing lenders having security interests
in the Pledged Stock on borrowings of the Company in the aggregate principal
amount of $9,000,000, each of those borrowings maturing on March 27, 1998.
Following such initial advance by St. James Partners, the aggregate borrowings
of the Company secured by the Pledged Stock are $12,000,000 of additional
principal. With respect to subsequent advances by St. James Partners under the
credit facility, the collateral consisting of the Pledged Stock would be shared
among the three parties in pari passu, conditioned on prior or contemporaneous
reduction of the aggregate debt to such other two secured lenders.
In connection with the $3,000,000 initial advance by St. James Partners
under the credit facility, the Company issued St. James Partners warrants to
purchase 450,000 shares of Common Stock, exercisable over a three year period
ending February 12, 2001 at the exercise price of $7.50 per share, subject to
certain anti-dilution adjustments. Under the terms of the Agreement of Purchase
and Sale, additional warrants are issuable to St. James Partners in amounts
equal to 15,000 shares of Common Stock for each $100,000 of any subsequent
advance under the credit facility. Each such warrant would be exercisable for a
three year period from its date of issue. Subject to certain anti-dilution
adjustments, the exercise price per share under any warrants issued in
conjunction with a subsequent advance under the credit facility will be equal to
$7.50 per share with respect to advances up to an aggregate of $10,000,000 in
principal borrowings under the credit facility, and in relation to subsequent
advances beyond $10,000,000 in aggregate principal borrowed under the credit
facility, at an exercise price of $1.50 over the weighted average closing price
of the Common Stock for the 10 day period prior to the date of such subsequent
advance.
Under the terms of the Agreement of Purchase and Sale, when the Company
elects to extend the maturity of the credit facility for an additional year,
additional warrants are issuable to St. James Partners in amounts equal to 5,000
shares of Common Stock for each $100,000 of the debt outstanding. Each such
warrant would be exercisable for a three year period from its date of issue.
Subject to certain anti-dilution adjustments, the exercise price per share under
any warrant issued in connection with the Company's election to extend the
maturity date of the credit facility would be equal to $1.50 over the weighted
average closing price of the Common Stock for the 10 day period prior to the
date of the Company's election to extend the maturity date specified under the
credit facility.
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Common Stock issued to St. James Partners in connection the conversion
of the outstanding debt under the credit facility and in connection with the
exercise by St. James Partners of any and all warrants issued under the credit
facility are subject to a one-time demand registration right granted by the
Company as well as piggy-back registration rights. Neither the demand
registration right nor the piggy-back registration rights can be exercised by
St. James Partners prior to May 31, 1998.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business to Be Acquired: N/A
(b) Pro Forma Financial Information of the Business to Be Acquired: N/A
(c) Exhibits:
EXHIBIT DESCRIPTION OF EXHIBIT
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3.1 Certificate of Designations establishing the rights and
preferences of the Series C Convertible Preferred Stock
4.1 Registration Rights Agreement among the Company and
the Buyers, dated February 6, 1998
4.2 Registration Rights Agreement dated February 12, 1998
between the Company and St. James Capital Partners, L.P.
4.3 Warrant to Purchase Common Stock of the Company dated
February 12, 1998 issued to St. James Capital Partners,
L.P. expiring on February 12, 2001
10.1 Securities Purchase Agreement among the Company and
the Buyers, dated February 6, 1998
10.2 Agreement of Purchase and Sale dated February 12, 1998
between the Company and St. James Capital Partners, L.P.
10.3 Convertible Promissory Note dated February 12, 1998 by the
Company in favor of St. James Capital Partners, L.P.
10.4 Pledge Agreement dated February 12, 1998 between the
Company and St. James Capital Partners, L.P.
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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.
INTELLECT COMMUNICATIONS, INC.
(Registrant)
Date: February 17, 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 C Convertible Preferred Stock
4.1 Registration Rights Agreement among the Company and
the Buyers, dated February 6, 1998
4.2 Registration Rights Agreement dated February 12, 1998
between the Company and St. James Capital Partners, L.P.
4.3 Warrant to Purchase Common Stock of the Company dated
February 12, 1998 issued to St. James Capital Partners,
L.P. expiring on February 12, 2001
10.1 Securities Purchase Agreement among the Company and
the Buyers, dated February 6, 1998
10.2 Agreement of Purchase and Sale dated February 12, 1998
between the Company and St. James Capital Partners, L.P.
10.3 Convertible Promissory Note dated February 12, 1998 by the
Company in favor of St. James Capital Partners, L.P.
10.4 Pledge Agreement dated February 12, 1998 between the
Company and St. James Capital Partners, L.P.
EXHIBIT 3.1
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES C 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 Twelve Thousand
Five Hundred (12,500) shares of Series C Convertible Preferred Stock of the
Company, as follows:
RESOLVED, that the Company is authorized to issue 12,500 shares of
Series C 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
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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 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 150% of the average
daily volume-weighted average trading price (as reported by Bloomberg) of
the Common Stock for the ten (10) trading days immediately preceding
February 5, 1998, 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).
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(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
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).
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(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).
(xiv) "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.
(xv) "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
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been delivered pursuant to Section 9(f) of the Securities Purchase
Agreement unless a later date shall be specified in such Termination
Notice.
(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
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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
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 in the principle amount of
$6,000,000 or any new credit facility from St. James, up to $15,000,000,
involving the issuance of convertible debt with a conversion price at or
above the Fixed Conversion Price or warrants which have an exercise price
at or above $6.50 per share, provided that such conversion or new credit
facility is consummated on or prior to the date which is 60 days after the
Issuance Date, (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), (iii) the suspension or delisting of the Common Stock, or (iv)
an announcement of a bankruptcy filing or similar event or (f) shares
issued pursuant to Section 4(r) of the Securities Purchase Agreement.
(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)
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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 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
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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 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
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<PAGE>
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 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.
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(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 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
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<PAGE>
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 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.
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<PAGE>
(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 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.
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<PAGE>
(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.
(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.
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<PAGE>
James of all or part of the existing debt in the principle amount of
$6,000,000 or any new credit facility from St. James up to $15,000,000
involving the issuance of convertible debt with a conversion price at or
above the Fixed Conversion Price or warrants which have an exercise price
at or above $6.50 per share, provided that such conversion or new credit
facility is consummated on or prior to the date which is 60 days after the
Issuance Date and (e) any Preferred Shares issued pursuant to Section 4(r)
of the Securities Purchase Agreement or the Common Stock issued upon the
conversion thereof.
(ii) ADJUSTMENT OF FIXED CONVERSION PRICE UPON
SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time
subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock
into a greater number of shares, the Fixed Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced. If
the Company at any time combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock
into a smaller number of shares, the Fixed Conversion Price in effect
immediately prior to such combination will be proportionately increased.
(iii) 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.
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(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.
(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").
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(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").
(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
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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 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
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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 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.
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(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 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
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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 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
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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, 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
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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 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
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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:
(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
(D) a combination of the items set forth in the
preceding clauses (A), (B) and (C), aggregating the full amount of the
Redemption Price at the Company's Election.
(E) complied with Section 4(n) of the Securities
Purchase Agreement;
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(F) designated the Common Stock for quotation on
the Principal Market and such Common Stock has not been suspended from
trading or delisted;
(G) delivered Conversion Shares upon conversion of
the Preferred Shares to the Buyers on a timely basis as set forth in
Section 2(e) of this Certificate of Designations; and
(H) satisfied its material obligations and is not
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,
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
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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 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
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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.
(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 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
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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 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
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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.
* * * * *
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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 6th day of February 1998.
INTELECT COMMUNICATIONS, INC.
By: /S/ HERMAN M. FRIETSCH
Name: Herman M. Frietsch
Its: Chief Executive Officer
<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 C 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 February 6,
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 C 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.
<PAGE>
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 45 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 90 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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<PAGE>
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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<PAGE>
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
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<PAGE>
divided by (Y) the 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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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
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<PAGE>
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(d), and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it; (iii) shall not be available to
the extent such Claim is based on a failure of the Investor to deliver or to
cause to be delivered the prospectus made available by the Company, if such
prospectus was timely made available by the Company pursuant to Section 3(d);
and (iv) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim or Indemnified Damages to which any of them may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or
Indemnified Damages arise out of or are based upon any Violation, in each case
to the extent, and only to the extent, that such Violation occurs in reliance
upon and in conformity with written information furnished to the Company by such
Investor expressly for use in connection with such Registration Statement; and,
subject to Section 6(d), such Investor will reimburse any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld; provided, further,
however, that the Investor shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds to
such Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
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
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<PAGE>
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.
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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<PAGE>
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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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
INTELECT COMMUNICATIONS, INC. NELSON PARTNERS
By: /S/ HERMAN M. FRIETSCH By: /S/ NITIN AGGARWAL
Name: Herman M. Frietsch Name: Nitin Aggarwal
Its: Chief Executive Officer Its: Officer
OLYMPUS SECURITIES, LTD.
By: /S/ NITIN AGGARWAL
Name: Nitin Aggarwal
Its: Director
CCG INTERNATIONAL FUND LTD.
By: /S/ KENNETH A. SIMPLER
Name: Kenneth A. Simpler
Its: Vice President
CCG CAPITAL LTD.
By: /S/ KENNETH A. SIMPLER
Name: Kenneth A. Simpler
Its: Vice President
<PAGE>
SCHEDULE OF BUYERS
INVESTOR'S ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER
- --------------- -----------------------------
Nelson Partners c/o Leeds Management Services
129 Front Street, 5th Floor
Hamilton HM12 Bermuda
Attn: Anne Dupuy
Facsimile: (441) 292-2239
Copy to:
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
Olympus Securities, Ltd. c/o Leeds Management Services
129 Front Street, 5th Floor
Hamilton HM12 Bermuda
Attn: Anne Dupuy
Facsimile: (441) 292-2239
Copy to:
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 International 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 C
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]
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Registration Rights Agreement")
is made as of February _, 1998, by and between Intelect Communications, Inc., a
Delaware corporation (the"Company"), and St. James Capital Partners, L.P., a
Delaware limited partnership ("Purchaser").
WHEREAS, on the date hereof, Purchaser acquired from the Company a
Convertible Promissory Note (the "Note") in the original principal amount of
$15,000,000 convertible pursuant to the terms thereof to a certain number of
shares of the Company's common stock, $.01 par value (the "Common Stock"),
subject to adjustment (the "Note Shares");
WHEREAS, on the date hereof, Purchaser received from the Company (a)
warrants to purchase shares of the Company's Common Stock (b) the right to
receive additional such warrants upon additional advances under the Note and (c)
the right to receive additional such warrants upon the extension of the maturity
date of the Note, each of which may be exercised to acquire a certain number of
shares of Common Stock, subject to adjustment (collectively, the "Warrant
Shares" and together with the Note Shares, the "Shares");
WHEREAS, the Company wishes to grant Purchaser certain registration rights
in respect of the Shares, as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth below:
"COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"PURCHASER" shall mean St. James Capital Partners, L.P., a Delaware
limited partnership.
"REGISTRABLE SECURITIES" shall mean (i) the Shares; and (ii) any Common
Stock issued or issuable at any time or from time to time in respect of the
Shares upon a conversion stock split, stock dividend, recapitalization or other
similar event involving the Company.
The terms "REGISTER", "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering by the
Commission of the effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses, other than Selling
Expenses (as defined below), incurred by the Company in complying with this
Registration Rights Agreement, including, without
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limitation, all registration, qualification and filing fees, exchange listing
fees, printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, the expense of any special audits incident
to or required by any such registration (but excluding the compensation of
regular employees of the Company which shall be paid in any event by the
Company).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the holders of the Registrable Securities and, except as set forth above, all
fees and disbursements of counsel for such holders.
"UNDERWRITTEN PUBLIC OFFERING" shall mean a public offering in which the
Common Stock is offered and sold on a firm commitment basis through one or more
underwriters, all pursuant to (i) an effective registration statement under the
Securities Act and (ii) an underwriting agreement between the Company and such
underwriters.
ARTICLE II
REGISTRATION RIGHTS
2.1 DEMAND REGISTRATION.
2.1.1 At any time and from time to time (but in no event before May
31, 1998), a holder or holders of Registrable Securities holding in the
aggregate at least 10% of the then existing Registrable Securities may
make a one-time written demand upon the Company, to file, within 60 days
after such written demand is made, with the Securities and Exchange
Commission a shelf registration statement covering the resale of all of
the Registrable Securities on Form S-1, S-2 or S-3 (the "Registration
Statement"). The Company shall use its reasonable best efforts to cause
such Registration Statement to become effective as soon as practicable and
to cause all of the Registrable Securities to be qualified in such state
jurisdictions as the holders may request.
2.1.2 Except as set forth herein, the Company shall take all
reasonable steps necessary to keep the Registration Statement current and
effective until the lesser of: (i) two years and (ii) until the
Registrable Securities are transferable pursuant to Rule 144 under the
Securities Act without the volume limitations set forth in such rule.
2.1.3 The Company shall be entitled to require that a holder or
holders of Registrable Securities refrain from effecting any public sales
or distributions of the Registrable Securities pursuant to a Registration
Statement that has been declared effective by the Commission or otherwise,
if the board of directors of the Company reasonably determines that such
public sales or distributions would interfere in any material respect with
any transaction involving the Company that the board of directors
reasonably determines to be material to the Company. The board of
directors shall, as promptly as practicable, give the holders of the
Registrable Securities written notice of any such development. In the
event of a request by the board of directors of the Company that the
holders of Registrable Securities refrain from effecting any public sales
or distributions of the Registrable Securities, the Company shall be
required to lift such restrictions regarding
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effecting public sales or distributions of the Registrable Securities as
soon as reasonably practicable after the board of directors shall
reasonably determine public sales or distributions by the holders of the
Registrable Securities shall not interfere with such transaction,
PROVIDED, that in no event shall any requirement that the holders of
Registrable Securities refrain from effecting public sales or
distributions in the Registrable Securities extend for more than 90 days.
2.1.4 Notwithstanding the foregoing, the one-time demand
registration rights provided in this Section 2.1 shall be subject to the
following additional limitations:
(i) Company shall not be obligated to file such Registration
Statement on a Form S-2 or S-3 if it does not then meet the
requirements (including the financial statement requirements) of
such Form, and if the Company is required to file a Form S-1, it
should not be obligated to file the Form S-1 until it shall have
prepared current financial statements as required by Form S-1;
(ii) If, upon receipt of any request for registration of
Registrable Securities pursuant to this Section 2.1, the Company is
then engaged by a reputable and nationally or regionally recognized
investment banking firm regarding a good faith proposed registered
public offering of shares of Common Stock, then the Company shall
give notice of such negotiations to all holders of Registrable
Securities within 15 days of the date upon which the Company
received such holder's request and the Company shall not, for 60
days after giving such notice to such holders, be required to
undertake a required registration of the Registrable Securities
pursuant to this Section 2.1 in response to such holder's request;
provided, however, that if such registration statement of such
proposed public offering is not filed within 60 days after the
Company gives such notice to holders of the Registrable Securities,
the Company shall respond to the holder's request for registration
of Registrable Securities and, unless otherwise required by the
provisions of this Section 2.1, register such Registrable
Securities, no later than 20 days after the expiration of such
60-day period and as provided herein.
2.2 PIGGYBACK REGISTRATION.
2.2.1 Subject to the terms hereof, if at any time or from time to
time (but in no event before May 31, 1998) the Company or any shareholder
of the Company shall determine to register any of its securities (except
for registration statements relating to employee benefit plans or exchange
offers), either for its own account or the account of a security holder,
the Company will promptly give to the holders of Registrable Securities
written notice thereof no less the 30 days prior to the filing of any
registration statement; and include in such registration (and any related
qualification under blue sky laws or other compliance), and in the
underwriting involved therein, if any, such Registrable Securities as such
holders may request in a writing delivered to the Company within 20 days
after the holders' receipt of Company's written notice.
2.2.2 The holders of Registrable Securities may participate in any
number of registrations until all of the Shares held by holders of
Registrable Securities have been registered or until the Shares are
transferable pursuant to Rule 144 under the Securities Act.
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2.2.3 If any registration statement is an Underwritten Public
Offering, the right of holders of Registrable Securities to registration
pursuant to this Section shall be conditioned upon each such holder's
participation in such reasonable underwriting arrangements as the Company
shall make regarding the offering, and the inclusion of Registrable
Securities in the underwriting shall be limited to the extent provided
herein. Holders of Registrable Securities and all other shareholders
proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their
securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such
underwriting by the Company. Notwithstanding any other provision of this
Section, if the managing underwriter concludes in its reasonable judgment
that the number of shares to be registered for selling shareholders
(including the holders of Registrable Securities) would materially
adversely effect such offering, the number of Shares to be registered,
together with the number of shares of Common Stock or other securities
held by other shareholders proposed to be registered in such offering,
shall be reduced on a pro rata basis based on the number of Shares
proposed to be sold by the holders of Registrable Securities as compared
to the number of shares proposed to be sold by all shareholders, except to
the extent there may be a conflict with the rights set forth in that
certain Registration Rights Agreement dated March 29, 1996 between the
Company and those certain purchasers therein. If any holder of Registrable
Securities disapproves of the terms of any such underwriting, it may elect
to withdraw therefrom by written notice to the Company and the managing
underwriter, delivered not less than 10 days before the effective date.
The Registrable Securities excluded by the managing underwriter or
withdrawn from such underwriting shall be withdrawn from such
registration, and shall not be transferred in a public distribution prior
to 120 days after the effective date of the registration statement
relating thereto, or such other shorter period of time as the underwriters
may require.
2.2.4 The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section prior to the effectiveness
of such registration whether or not the holders of Registrable Securities
have elected to include securities in such registration.
2.3 EXPENSES OF REGISTRATION. All Registration Expenses shall be borne by
the Company. Unless otherwise stated herein, all Selling Expenses relating to
securities registered on behalf of the holders of Registrable Securities shall
be borne by the holders of Registrable Securities.
2.4 [INTENTIONALLY LEFT BLANK]
2.5 REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep the holders of Registrable
Securities advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. At its expense,
the Company will:
2.5.1 Prepare and file with the Commission a registration statement
with respect to such securities and use its commercially reasonable
efforts to cause such registration statement to become and remain
effective until the distribution described in such registration statement
has been completed;
2.5.2 Furnish to each underwriter such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other
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documents as such underwriter may reasonably request in order to
facilitate the public sale of the shares by such underwriter, and promptly
furnish to each underwriter and the holders of Registrable Securities
notice of any stop-order or similar notice issued by the Commission or any
state agency charged with the regulation of securities, and notice of any
Nasdaq or securities exchange listing; and
2.5.3 Cause the Shares to be listed on the Nasdaq small-cap market
or a securities exchange on which the Common Stock is approved for
listing.
2.6 INDEMNIFICATION.
2.6.1 To the extent permitted by law, the Company will indemnify
each holder of Registrable Securities, each of its officers and directors
and partners, and each person controlling such holder within the meaning
of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement,
and each underwriter, if any, and each person who controls any underwriter
within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, to the extent such expenses, claims,
losses, damages or liabilities arise out of or are based on any untrue
statement (or alleged untrue statement) of a material fact contained in
any registration statement, prospectus, offering circular or other similar
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein 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, or any violation by
the Company of the Securities Act or any rule or regulation promulgated
under the Securities Act applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will
reimburse each holder of Registrable Securities, each of its officers and
directors and partners, and each person controlling each holder of
Registrable Securities, each such underwriter and each person who controls
any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action; provided, however, that the
indemnity contained herein shall not apply to amounts paid in settlement
of any claim, loss, damage, liability or expense if settlement is effected
without the consent of the Company (which consent shall not unreasonably
be withheld); provided, further, that the Company will not be liable in
any such case to the extent that any such claim, loss, damage, liability
or expense arises out of or is based on any untrue statement or omission
or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by a holder
of Registrable Securities, such controlling person or such underwriter
specifically for use therein; provided, however, that the indemnity
contained herein shall not apply to amounts paid in settlement of any
claim, loss, damage, liability, or expense if settlement is effected
without the consent of such holder of Registrable Securities (which
consent shall not be unreasonably withheld). Notwithstanding the
foregoing, insofar as the foregoing indemnity relates to any such untrue
statement (or alleged untrue statement) or omission (or alleged omission)
made in the preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the Commission at the time the
registration statement becomes effective or in the final prospectus filed
with the Commission pursuant to the applicable rules of the Commission or
in any supplement or addendum thereto, the indemnity agreement herein
shall not inure to the benefit of any
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underwriter if a copy of the final prospectus filed pursuant to such
rules, together with all supplements and addenda thereto, was not
furnished to the person or entity asserting the loss, liability, claim or
damage at or prior to the time such furnishing is required by the
Securities Act.
2.6.2 To the extent permitted by law, each holder of Registrable
Securities will, if securities held by such holder are included in the
securities as to which such registration, qualification or compliance is
being effected pursuant to terms hereof, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of Section 15
of the Securities Act, and each other person selling the Company's
securities covered by such registration statement, each of such person's
officers and directors and each person controlling such persons within the
meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by a holder of
Registrable Securities of any rule or regulation promulgated under the
Securities Act applicable to holders of Registrable Securities and
relating to action or inaction required of holders of Registrable
Securities in connection with any such registration, qualification or
compliance, and will reimburse the Company, such other persons, such
directors, officers, persons, underwriters or control persons for any
legal or other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering
circular or other document in reliance upon and in conformity with written
information furnished to the Company by such holder of Registrable
Securities specifically for use therein; provided, however, that the
indemnity contained herein shall not apply to amounts paid in settlement
of any claim, loss, damage, liability or expense if settlement is effected
without the consent of such holder of Registrable Securities (which
consent shall not be unreasonably withheld). Notwithstanding the
foregoing, the liability of such holder of Registrable Securities under
this subsection (b) shall be limited in an amount equal to the net
proceeds from the sale of the shares sold by such holder of Registrable
Securities, unless such liability arises out of or is based on willful
conduct by such holder of Registrable Securities. In addition, insofar as
the foregoing indemnity relates to any such untrue statement (or alleged
untrue statement) or omission (or alleged omission) made in the
preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the Commission at the time the registration
statement becomes effective or in the final prospectus filed pursuant to
applicable rules of the Commission or in any supplement or addendum
thereto, the indemnity agreement herein shall not inure to the benefit of
the Company or any underwriter, if a copy of the final prospectus filed
pursuant to such rules, together with all supplements and addenda thereto,
was not furnished to the person or entity asserting the loss, liability,
claim or damage at or prior to the time such furnishing is required by the
Securities Act.
2.6.3 Notwithstanding the foregoing paragraphs (a) and (b) of this
Section, each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be
sought, and
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shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval
shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under
this Agreement unless the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action and
provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or as to which the
Indemnifying Party is asserting separate or different defenses, which
defenses are inconsistent with the defenses of the Indemnified Party. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim
or litigation. No Indemnified Party shall consent to entry of any judgment
or enter into any settlement without the consent of each Indemnifying
Party.
2.6.4 If the indemnification provided for in this Section is
unavailable to an Indemnified Party in respect of any losses, claims,
damages or liabilities referred to therein, then each Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on
the one hand and all shareholders offering securities in the offering (the
"Selling Security Holders") on the other from the offering of the
Company's securities, or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company on the one
hand and the Selling Security Holders on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Selling
Security Holders on the other shall be the net proceeds from the offering
(before deducting expenses) received by the Company on the one hand and
the Selling Security Holders on the other. The relative fault of the
Company on the one hand and the Selling Security Holders on the other
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the Company or by the Selling Security Holders and the parties'
relevant intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Selling
Security Holders agree that it would not be just and equitable if
contribution pursuant to this Section were based solely upon the number of
entities from whom contribution was requested or by any other method of
allocation which does not take account of the equitable considerations
referred to above in this Section. The amount paid or payable by an
Indemnified Party as a result of the losses, claims, damages and
liabilities referred to above in this Section shall be deemed to include
any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim,
subject to the provisions hereof. Notwithstanding the provisions of this
Section, no Selling Shareholder shall be required to contribute any amount
or make any other payments under this Agreement which in the aggregate
exceed the proceeds received by such Selling Shareholder. No person guilty
of fraudulent misrepresentation (within the meaning of the Securities Act)
shall
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be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
2.7 CERTAIN INFORMATION.
2.7.1 The holders of Registrable Securities agree, with respect to
any Registrable Securities included in any registration, to furnish to the
Company such information regarding such holder, the Registrable Securities
and the distribution proposed by the such holder as the Company may
reasonably request in writing and as shall be required in connection with
any registration, qualification or compliance referred to herein.
2.7.2 The failure of the holder of Registrable Securities to furnish
the information requested pursuant to Section 2.7.1 shall not affect the
obligation of the Company to the other Selling Security Holders who
furnish such information unless, in the reasonable opinion of counsel to
the Company or the underwriters, such failure impairs or may impair the
legality of the Registration Statement or the underlying offering.
2.8 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of Restricted Securities (used herein as defined in Rule 144 under the
Securities Act) to the public without registration, the Company agrees to use
its best lawful efforts to:
2.8.1 Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times
during which the Company is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act");
2.8.2 File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at all times during which the Company is subject to such
reporting requirements); and
2.8.3 So long as any holder of Registrable Securities owns any
Restricted Securities (as defined in Rule 144 promulgated under the
Securities Act), to furnish to such holder forthwith upon request a
written statement by the Company as to its compliance with the reporting
requirements of said Rule 144 and with regard to the Securities Act and
the Exchange Act (at all times during which the Company is subject to such
reporting requirements), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents of the Company
and other information in the possession of or reasonably obtainable by the
Company as such holder of Registrable Securities may reasonably request in
availing itself of any rule or regulation of the Commission allowing such
holder to sell any such securities without registration.
2.9 TRANSFERABILITY. The rights conferred by this Agreement shall be
freely transferable to a recipient of Registrable Securities.
2.10 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of Texas.
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2.11 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject hereof. This Agreement, or any provision hereof, may be amended, waived,
discharged or terminated upon the written consent of the Company and the
Purchaser.
2.12 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger
including Federal Express or similar courier service, addressed (a) if to the
Purchaser: St. James Capital Partners, L.P., 1980 Post Oak Boulevard, Suite
2030, Houston, Texas 77056, or at such other address as the Purchaser shall have
furnished to the Company in writing, or (b) if to the Company: to Intelect
Communications, Inc., 1100 Executive Drive, Richardson, Texas 75081 or at such
other address as the Company shall have furnished to the Purchaser with a copy
to Philip P. Sudan, Jr., Ryan & Sudan, L.L.P., 909 Fannin, 39th Floor, Houston,
Texas 77010. Each such notice or other communication shall for all purposes of
this Agreement be treated as effective upon receipt.
2.13 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or
omission to exercise any right, power or remedy accruing to any party to this
Agreement shall impair any such right, power or remedy of such party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party to this Agreement, shall be cumulative and not alternative.
2.14 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
2.15 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
2.16 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not considered in construing or
interpreting this Agreement.
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THE COMPANY'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Company has executed this agreement effective upon
the date first set forth above.
INTELECT COMMUNICATIONS, INC.
By:
Name:
Title:
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THE PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Purchaser has signed this Agreement as of the date
first written above.
ST. JAMES CAPITAL PARTNERS, L.P.
By: St. James Capital Corp., its General
Partner
By:
Name:
Title:
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THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND, ACCORDINGLY, THE
SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
WARRANT
to Purchase Common Stock of
INTELECT COMMUNICATIONS, INC.
Expiring on February __, 2001
This Common Stock Purchase Warrant (the "Warrant") certifies that for
value received, St. James Capital Partners, L.P., a Delaware limited partnership
(the "Holder") or its assigns, is entitled to subscribe for and purchase from
the Company (as hereinafter defined), in whole or in part, 450,000 shares of
duly authorized, validly issued, fully paid and nonassessable shares of Common
Stock (as hereinafter defined) at an initial Exercise Price (as hereinafter
defined) per share of $7.50, subject, however, to the provisions and upon the
terms and conditions hereinafter set forth. The number of Warrants (as
hereinafter defined), the number of shares of Common Stock purchasable
hereunder, and the Exercise Price therefor are subject to adjustment as
hereinafter set forth. This Warrant and all rights hereunder shall expire at
5:00 p.m., Houston, Texas time, on February __, 2001.
As used herein, the following terms shall have the meanings set forth
below:
"COMPANY" shall mean Intelect Communications, Inc., a Delaware
corporation, and shall also include any successor thereto with respect to the
obligations hereunder, by merger, consolidation or otherwise.
"COMMON STOCK" shall mean and include the Company's Common Stock, par
value $0.01 per share, authorized on the date of the original issue of this
Warrant and shall also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale, transfer or
other disposition of assets of the character referred to in Section 3.5 hereof,
the stock, securities provided for in such Section 3.5, and (ii) any other
shares of common stock of the Company into which such shares of Common Stock may
be converted.
"EXERCISE PRICE" shall mean the initial purchase price of $7.50 per share
of Common Stock payable upon exercise of the Warrants, as adjusted from time to
time pursuant to the provisions hereof.
"MARKET PRICE" for any day, when used with reference to Common Stock,
shall mean the price of said Common Stock determined as follows: (x) the last
reported sale price for the Common Stock on such day on the principal securities
exchange on which the Common Stock is listed or admitted to trading or if
<PAGE>
no such sale takes place on such date, the average of the closing bid and asked
prices thereof as officially reported, or, if not so listed or admitted to
trading on any securities exchange, the last sale price for the Common Stock on
the National Association of Securities Dealers National Market on such date, or,
if there shall have been no trading on such date or if the Common Stock shall
not be listed on such system, the average of the closing bid and asked prices in
the over-the-counter market as furnished by any NASD member firm selected from
time to time by the Company for such purpose, in each such case, unless
otherwise provided herein, averaged over a period of ten (10) consecutive
Trading Days prior to the date as of which the determination is to be made; or
(y) if the Common Stock shall not be listed or admitted to trading as provided
in clause (x) above, the fair market value of the Common Stock as determined in
good faith by the Board of Directors of the Company.
"NOTE" shall mean the Convertible Promissory Note of the Company issued to
St. James Capital Partners, L.P. as of February __, 1998 in the principal amount
of $15,000,000.
"OUTSTANDING," when used with reference to Common Stock, shall mean
(except as otherwise expressly provided herein) at any date as of which the
number of shares thereof is to be determined, all issued shares of Common Stock,
except shares then owned or held by or for the account of the Company.
"TRADING DAYS" shall mean any days during the course of which the
principal securities exchange on which the Common Stock is listed or admitted to
trading is open for the exchange of securities.
"WARRANT" shall mean the right upon exercise to purchase one Warrant Share.
"WARRANT SHARES" shall mean the shares of Common Stock purchased or
purchasable by the holder hereof upon the exercise of the Warrants.
ARTICLE I
EXERCISE OF WARRANTS
1.1 METHOD OF EXERCISE. The Warrants represented hereby may be exercised
by the holder hereof, in whole or in part, at any time and from time to time on
or after the date hereof until 5:00 p.m., Houston, Texas time, on February __,
2001. To exercise the Warrants, the holder hereof shall deliver to the Company,
at the Warrant Office designated in Section 2.1 hereof, (i) a written notice in
the form of the Subscription Notice attached as an exhibit hereto, stating
therein the election of such holder to exercise the Warrants in the manner
provided in the Subscription Notice; (ii) payment in full of the Exercise Price
(A) in cash or by bank check for all Warrant Shares purchased hereunder, or (B)
if the Company and the holder mutually elect, through a "cashless" or
"net-issue" exercise of each such Warrant ("Cashless Exercise"); the holder
shall exchange each Warrant subject to a Cashless Exercise for that number of
Warrant Shares determined by multiplying the number of Warrant Shares issuable
hereunder by a fraction, the numerator of which shall be the difference between
(x) the Market Price and (y) the Exercise Price for each such Warrant, and the
denominator of which shall be the Market Price; the Subscription Notice shall
set forth the calculation upon which the Cashless Exercise is based, or (C) a
combination of (A) and (B) above; and (iii) this Warrant. The Warrants shall be
deemed to be exercised on the date of receipt by the Company of the Subscription
Notice, accompanied by payment for the Warrant Shares and surrender of this
Warrant, as aforesaid, and such date is referred to herein as the "Exercise
Date". Upon such exercise, the Company shall, as promptly as practicable and in
any event within ten (10) business days, issue and
<PAGE>
deliver to such holder a certificate or certificates for the full number of the
Warrant Shares purchased by such holder hereunder, and shall, unless the
Warrants have expired, deliver to the holder hereof a new Warrant representing
the number of Warrants, if any, that shall not have been exercised, in all other
respects identical to this Warrant. As permitted by applicable law, the Person
in whose name the certificates for Common Stock are to be issued shall be deemed
to have become a holder of record of such Common Stock on the Exercise Date and
shall be entitled to all of the benefits of such holder on the Exercise Date,
including without limitation the right to receive dividends and other
distributions for which the record date falls on or after the Exercise Date and
to exercise voting rights.
1.2 EXPENSES AND TAXES. The Company shall pay all expenses, and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) other than income taxes attributable to the preparation,
issuance or delivery of the Warrants and of the shares of Common Stock issuable
upon exercise of the Warrants.
1.3 RESERVATION OF SHARES. The Company shall reserve at all times so long
as the Warrants remain outstanding, free from preemptive rights, out of its
treasury Common Stock or its authorized but unissued shares of Common Stock, or
both, solely for the purpose of effecting the exercise of the Warrants, a
sufficient number of shares of Common Stock to provide for the exercise of the
Warrants.
1.4 VALID ISSUANCE. All shares of Common Stock that may be issued upon
exercise of the Warrants will, upon issuance by the Company, be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof and, without limiting the generality of the
foregoing, the Company shall take no action or fail to take any action which
will cause a contrary result (including, without limitation, any action that
would cause the Exercise Price to be less than the par value, if any, of the
Common Stock).
1.5 PURCHASE AGREEMENT. The Warrants represented hereby are part of a duly
authorized issuance and sale of warrants to purchase Common Stock issued and
sold pursuant to that certain Agreement of Purchase and Sale dated as of
February __, 1998 (the "Agreement"), between the Company and the holder hereof.
The holder hereof shall be entitled to registration under the Securities Act and
any applicable state securities or blue sky laws to the extent set forth in the
Registration Rights Agreement dated as of February __, 1998 between the Company
and the Holder (the "Registration Rights Agreement"). The terms of the Agreement
are hereby incorporated herein for all purposes and shall be considered a part
of this Warrant as if they had been fully set forth herein. Notwithstanding the
previous sentence, in the event of any conflict between the provisions of the
Agreement and of this Warrant, the provisions of this Warrant shall control.
1.6 ACKNOWLEDGMENT OF RIGHTS. At the time of the exercise of the Warrants
in accordance with the terms hereof and upon the written request of the holder
hereof, the Company will acknowledge in writing its continuing obligation to
afford to such holder any rights (including, without limitation, any right to
registration of the Warrant Shares) to which such holder shall continue to be
entitled after such exercise in accordance with the provisions of this Warrant;
PROVIDED, HOWEVER, that if the holder hereof shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.
1.7 NO FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If more than
one Warrant shall be presented for exercise
<PAGE>
at the same time by the same holder, the number of full shares of Common Stock
which shall be issuable upon such exercise shall be computed on the basis of the
aggregate number of whole shares of Common Stock purchasable on exercise of the
Warrants so presented. If any fraction of a share of Common Stock would, except
for the provisions of this Section 1.7, be issuable on the exercise of this
Warrant, the Company shall pay an amount in cash calculated by it to be equal to
the Market Price of one share of Common Stock at the time of such exercise
multiplied by such fraction computed to the nearest whole cent.
ARTICLE II
TRANSFER
2.1 WARRANT OFFICE. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's offices at 1100 Executive Drive, Richardson, Texas 75081, and
may subsequently be such other office of the Company or of any transfer agent of
the Common Stock in the continental United States as to which written notice has
previously been given to the holder hereof. The Company shall maintain, at the
Warrant Office, a register for the Warrants in which the Company shall record
the name and address of the Person in whose name this Warrant has been issued,
as well as the name and address of each permitted assignee of the rights of the
registered owner hereof.
2.2 OWNERSHIP OF WARRANTS. The Company may deem and treat the Person in
whose name the Warrants are registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Article II. Notwithstanding the foregoing, the Warrants
represented hereby, if properly assigned in compliance with this Article II, may
be exercised by an assignee for the purchase of Warrant Shares without having a
new Warrant issued.
2.3 RESTRICTIONS ON TRANSFER OF WARRANTS. The Company agrees to maintain
at the Warrant Office books for the registration and transfer of the Warrants.
Subject to the restrictions on transfer of the Warrants in this Section 2.3, the
Company, from time to time, shall register the transfer of the Warrants in such
books upon surrender of this Warrant at the Warrant Office properly endorsed or
accompanied by appropriate instruments of transfer and written instructions for
transfer satisfactory to the Company. Upon any such transfer and upon payment by
the holder or its transferee of any applicable transfer taxes, new Warrants
shall be issued to the transferee and the transferor (as their respective
interests may appear) and the surrendered Warrants shall be canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes
or income taxes) and all other expenses and charges payable in connection with
the transfer of the Warrants pursuant to this Section 2.3.
2.3.1 RESTRICTIONS IN GENERAL. The holder of the Warrants agrees
that it will neither (i) transfer the Warrants prior to delivery to the Company
of written notice of such transfer, nor (ii) transfer such Warrant Shares prior
to delivery to the Company of written notice of such transfer, or until
registration of such Warrant Shares under the Securities Act and any applicable
state securities or blue sky laws has become effective.
2.4 COMPLIANCE WITH SECURITIES LAWS. Subject to the terms of the
Registration Rights Agreement and notwithstanding any other provisions contained
in this Warrant, the holder hereof
<PAGE>
understands and agrees that the following restrictions and limitations shall be
applicable to all Warrant Shares and to all resales or other transfers thereof
pursuant to the Securities Act:
2.4.1 The holder hereof agrees that the Warrant Shares shall not be
sold or otherwise transferred unless the Warrant Shares are registered under the
Securities Act and applicable state securities or blue sky laws or are exempt
therefrom.
2.4.2 A legend in substantially the following form will be placed on
the certificate(s) evidencing the Warrant Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND,
ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH
ANY OTHER APPLICABLE SECURITIES LAWS."
2.4.3 Stop transfer instructions will be imposed with respect to the
Warrant Shares so as to restrict resale or other transfer thereof, subject to
this Section 2.4.
2.4.4 The holder understands that it must bear the economic risk of
the investment for an indefinite period of time because the Warrant Shares have
not been registered under the Securities Act and therefore cannot be sold unless
they are subsequently registered under the Securities Act or an exemption from
such registration is available. The holder acknowledges that the holder or the
holder's representative is familiar with the condition, financial and otherwise,
of the Company. The holder or the holder's representative has such knowledge and
experience in financial and business matters that the holder or the holder's
representative is able to weigh the information so received and to evaluate the
merits and risks of the holder's investment in the Warrant Shares.
ARTICLE III
ANTI-DILUTION
3.1 ANTI-DILUTION PROVISIONS. The Exercise Price shall be subject to
adjustment from time to time as hereinafter provided. Upon each adjustment of
the Exercise Price, the holder of this Warrant shall thereafter be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
shares of Common Stock obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
<PAGE>
3.2 ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF COMMON STOCK.
3.2.1 (A) If and whenever after the date hereof the Company shall
issue or sell any Common Stock for no consideration or for a consideration per
share less than the Exercise Price, then, forthwith upon such issue or sale, the
Exercise Price shall be reduced (but not increased, except as otherwise
specifically provided in Section 3.2.2 (C) hereof), to the price (calculated to
the nearest one-ten thousandth of a cent) determined by dividing (x) an amount
equal to the sum of (i) the aggregate number of shares of Common Stock
outstanding immediately prior to such issue or sale multiplied by the
consideration received by the Company upon such issuance or sale on a per share
basis plus (ii) the consideration received by the Company upon such issue or
sale by (y) the aggregate number of shares of Common Stock outstanding
immediately after such issue or sale.
(B) Notwithstanding the provisions of this Section 3.2, no
adjustment shall be made in the Exercise Price in the event that the Company
issues, in one or more transactions, (i) Common Stock or convertible securities
upon exercise of any options issued to officers, directors or employees of the
Company pursuant to a stock option plan or an employment, severance or
consulting agreement as now or hereafter in effect, in each case approved by the
Board of Directors (provided that the aggregate number of shares of Common Stock
which may be issuable, including options issued prior to the date hereof, under
all such employee plans and agreements shall at no time exceed the number of
such shares of Common Stock that are issuable under currently effective employee
plans and agreements); (ii) Common Stock upon exercise of the Warrants or any
other warrant issued pursuant to the terms of the Agreement or otherwise issued
to the Holder; (iii) Common Stock upon exercise of any stock purchase warrant or
option (other than the options referred to in clause (i) above) or other
convertible security outstanding on the date hereof; (iv) any conversion to
equity by St. James Capital Corp. or its affiliates ("St. James") of all or part
of the existing debt in the principal amount of $6,500,000; (v) any conversion
to equity by The Coastal Corporation Second Pension Trust of all or part of the
existing debt to Coastal in the principal amount of $3,500,000 or in connection
with a refinancing of such existing indebtedness by Coastal; (vi) Common Stock
upon conversion of the Note; (vii) Common Stock issued as consideration in
acquisitions; or (viii) warrants issued in one or more transactions effected in
any year ending on the anniversary date hereof where not exercisable for more
than an aggregate of one percent (1%) of the total Common Stock issued and
outstanding during such year. In addition, for purposes of calculating any
adjustment of the Exercise Price as provided in this Section 3.2, all of the
shares of Common Stock issuable pursuant to any of the foregoing shall be
assumed to be outstanding prior to the event causing such adjustment to be made.
3.2.2 For purposes of this Section 3.2, the following Sections
3.3.3(A) to 3.2.2(E) inclusive, shall be applicable:
(A) ISSUANCE OF RIGHTS OR OPTIONS. In case at any time after the
date hereof the Company shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such
convertible or exchangeable stock or securities being herein called
"Convertible Securities"), whether or not such rights or options or the
right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which shares of
Common Stock are issuable upon the exercise of such rights or options or
upon conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Company as consideration for the granting of such rights or options, plus
the minimum aggregate
<PAGE>
amount of additional consideration, if any, payable to the Company upon
the exercise of such rights or options, or plus, in the case of such
rights or options that relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common
Stock issuable upon the exercise of such rights or options or upon the
conversion or exchange of all such Convertible Securities issuable upon
the exercise of such rights or options) shall be less than the Exercise
Price in effect as of the date of granting such rights or options, then
the total maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon conversion or exchange of all
such Convertible Securities issuable upon the exercise of such rights or
options shall be deemed to be outstanding as of the date of the granting
of such rights or options and to have been issued for such price per
share, with the effect on the Exercise Price specified in Section 3.2.1
hereof. Except as provided in Section 3.2.2 hereof, no further adjustment
of the Exercise Price shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon exercise of such
rights or options or upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
(B) CHANGE IN OPTION PRICE OR CONVERSION RATE. Upon the happening of
any of the following events, namely, if the purchase price provided for in
any right or option referred to in Section 3.2.2, the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in Section 3.2.2, or the rate at which
any Convertible Securities referred to in Section 3.2.2, are convertible
into or exchangeable for Common Stock shall change (other than under or by
reason of provisions designed to protect against dilution), the Exercise
Price then in effect hereunder shall forthwith be readjusted (increased or
decreased, as the case may be) to the Exercise Price that would have been
in effect at such time had such rights, options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold. On the expiration of any such option or
right referred to in Section 3.2.2, or on the termination of any such
right to convert or exchange any such Convertible Securities referred to
in Section 3.2.2, the Exercise Price then in effect hereunder shall
forthwith be readjusted (increased or decreased, as the case may be) to
the Exercise Price that would have been in effect at the time of such
expiration or termination had such right, option or Convertible
Securities, to the extent outstanding immediately prior to such expiration
or termination, never been granted, issued or sold, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in Section 3.2.2 or the rate at which any
Convertible Securities referred to in Section 3.2.2 reduced at any time
under or by reason of provisions with respect thereto designed to protect
against dilution, then in case of the delivery of Common Stock upon the
exercise of any such right or option or upon conversion or exchange of any
such Convertible Securities, the Exercise Price then in effect hereunder
shall, if not already adjusted, forthwith be adjusted to such amount as
would have obtained had such right, option or Convertible Securities never
been issued as to such Common Stock and had adjustments been made upon the
issuance of the Common Stock delivered as aforesaid, but only if as a
result of such adjustment the Exercise Price then in effect hereunder is
thereby reduced.
(C) CONSIDERATION FOR STOCK. In case at any time Common Stock or
Convertible Securities or any rights or options to purchase any such
Common Stock or Convertible Securities shall be issued or sold for cash,
the consideration therefor shall be deemed to be the amount
<PAGE>
received by the Company therefor. In case at any time any Common Stock,
Convertible Securities or any rights or options to purchase any such
Common Stock or Convertible Securities shall be issued or sold for
consideration other than cash, the amount of the consideration other than
cash received by the Company shall be deemed to be the fair value of such
consideration, as determined reasonably and in good faith by the Board of
Directors of the Company. In case at any time any Common Stock,
Convertible Securities or any rights or options to purchase any Common
Stock or Convertible Securities shall be issued in connection with any
merger or consolidation in which the Company is the surviving corporation,
the amount of consideration received therefor shall be deemed to be the
fair value, as determined reasonably and in good faith by the Board of
Directors of the Company, of such portion of the assets and business of
the nonsurviving corporation as such Board of Directors may determine to
be attributable to such Common Stock, Convertible Securities, rights or
options as the case may be. In case at any time any rights or options to
purchase any shares of Common Stock or Convertible Securities shall be
issued in connection with the issuance and sale of other securities of the
Company, together consisting of one integral transaction in which no
consideration is allocated to such rights or options by the parties, such
rights or options shall be deemed to have been issued with consideration.
(D) RECORD DATE. In the case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock or
Convertible Securities, or (ii) to subscribe for or purchase Common Stock
or Convertible Securities, then such record date shall be deemed to be the
date of the issuance or sale of the Common Stock or Convertible Securities
deemed to have been issued or sold as a result of 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.
(E) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time shall not include shares owned directly by
the Company in treasury, and the disposition of any such shares shall be
considered an issuance or sale of Common Stock for the purpose of this
Section 3.2.
3.3 STOCK DIVIDENDS. In case the Company shall declare a dividend or make
any other distribution upon any shares of the Company, payable in Common Stock
or Convertible Securities, any Common Stock or Convertible Securities, as the
case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
3.4 STOCK SPLITS AND REVERSE SPLITS. In the event that the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of Warrant Shares
purchasable pursuant to this Warrant immediately prior to such subdivision shall
be proportionately increased, and conversely, in the event that the outstanding
shares of Common stock shall at any time be combined into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination shall
be proportionately increased and the number of Warrant Shares purchasable upon
the exercise of this Warrant immediately prior to such combination shall be
proportionately reduced. Except as provided in this Section 3.4, no adjustment
in the Exercise Price and no change in the number of Warrant Shares purchasable
shall be made under this Article III as a result of or by reason of any such
subdivision or combination.
<PAGE>
3.5 REORGANIZATIONS AND ASSET SALES. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that a holder of Common Stock of
the Company shall be entitled to receive capital stock, securities or assets
with respect to or in exchange for their shares, then the following provisions
shall apply:
3.5.1 As a condition of such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer or other disposition
(except as otherwise provided below in this Section 3.5), lawful and adequate
provisions shall be made whereby the holder of Warrants shall thereafter have
the right to purchase and receive upon the terms and conditions specified in
this Warrant and in lieu of the Warrant Shares immediately theretofore
receivable upon the exercise of the rights represented hereby, such shares of
capital stock, securities or assets as may be issued or payable with respect to
or in exchange for a number of outstanding shares of such Common Stock equal to
the number of Warrant Shares immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger, share exchange or sale
not taken place, and in any such case appropriate provision reasonably
satisfactory to such holder shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the Exercise Price and of the
number of Warrant Shares receivable upon the exercise) shall thereafter be
applicable, as nearly as possible, in relation to any shares of capital stock,
securities or assets thereafter deliverable upon the exercise of Warrants.
3.5.2 In the event of a merger, share exchange or consolidation of
the Company with or into another Person as a result of which a number of shares
of common stock or its equivalent of the successor Person greater or lesser than
the number of shares of Common Stock outstanding immediately prior to such
merger, share exchange or consolidation are issuable to holders of Common Stock,
then the Exercise Price in effect immediately prior to such merger, share
exchange or consolidation shall be adjusted in the same manner as though there
were a subdivision or combination of the outstanding shares of Common Stock.
3.5.3 The Company shall not effect any such consolidation, merger,
share exchange, sale, transfer or other disposition unless prior to or
simultaneously with the consummation thereof the successor Person (if other than
the Company) resulting from such consolidation, share exchange or merger or the
Person purchasing or otherwise acquiring such assets shall have assumed by
written instrument executed and mailed or delivered to the holder hereof at the
last address of such holder appearing on the books of the Company the obligation
to deliver to such holder such shares of capital stock, securities or assets as,
in accordance with the foregoing provisions, such holder may be entitled to
receive, and all other liabilities and obligations of the Company hereunder.
Upon written request by the holder hereof, such successor Person will issue a
new Warrant revised to reflect the modifications in this Warrant effected
pursuant to this Section 3.5.
3.5.4 If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of Common
Stock, the Company shall not effect any consolidation, merger, share exchange or
sale, transfer or other disposition of all or substantially all of the Company's
assets with the Person having made such offer or with any affiliate of such
Person, unless prior to the consummation of such consolidation, merger, share
exchange, sale, transfer or other disposition the holder hereof shall have been
given a reasonable opportunity to then elect to receive upon the exercise of the
<PAGE>
Warrants either the capital stock, securities or assets then issuable with
respect to the Common Stock or the capital stock, securities or assets, or the
equivalent, issued to previous holders of the Common Stock in accordance with
such offer.
3.6 ADJUSTMENT FOR ASSET DISTRIBUTION. If the Company declares a dividend
or other distribution payable to all holders of shares of Common Stock in
evidences of indebtedness of the Company or other assets of the Company
(including, cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, Convertible Securities or
options or rights thereto) or other property), the Exercise Price in effect
immediately prior to such declaration of such dividend or other distribution
shall be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash dividend
or distribution, or by the fair value of such dividend or distribution per share
of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is not taken, the date as of
which holders of record of Common Stock entitled to such dividend or
distribution are determined.
3.7 DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares of
Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon an exercise of each Warrant and no adjustment in the Exercise
Price shall be required unless such adjustment would require an increase or
decrease of at least $0.01 in the Exercise Price; provided, however, that any
adjustments which by reason of this Section 3.7 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest full share or nearest one
hundredth of a dollar, as applicable.
3.8 NOTICE OF ADJUSTMENT. Whenever the Exercise Price or the number of
Warrant Shares issuable upon the exercise of the Warrants shall be adjusted as
herein provided, or the rights of the holder hereof shall change by reason of
other events specified herein, the Company shall compute the adjusted Exercise
Price and the adjusted number of Warrant Shares in accordance with the
provisions hereof and shall prepare an Officer's Certificate setting forth the
adjusted Exercise Price and the adjusted number of Warrant Shares issuable upon
the exercise of the Warrants or specifying the other shares of stock, securities
or assets receivable as a result of such change in rights, and showing in
reasonable detail the facts and calculations upon which such adjustments or
other changes are based. The Company shall cause to be mailed to the holder
hereof copies of such Officer's Certificate together with a notice stating that
the Exercise Price and the number of Warrant Shares purchasable upon exercise of
the Warrants have been adjusted and setting forth the adjusted Exercise Price
and the adjusted number of Warrant Shares purchasable upon the exercise of the
Warrants.
3.9 NOTIFICATIONS TO HOLDERS. In case at any time the Company proposes:
(i) to declare any dividend upon its Common Stock payable in capital
stock or make any special dividend or other distribution (other than cash
dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the holders of its
Common Stock any additional shares of capital stock of any class or other
rights;
<PAGE>
(iii) to effect any capital reorganization, or reclassification of
the capital stock of the Company, or consolidation, merger or share
exchange of the Company with another Person, or sale, transfer or other
disposition of all or substantially all of its assets; or
(iv) to effect a voluntary or involuntary dissolution, liquidation
or winding up of the Company,
then, in any one or more of such cases, the Company shall give the holder hereof
(a) at least 10 days' (but not more than 90 days') prior written notice of the
date of which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of such issuance, reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition, dissolution,
liquidation or winding up, and (b) in the case of any such issuance,
reorganization, reclassification, consolidation, merger, share exchange, sale,
transfer, disposition, dissolution, liquidation or winding up, at least 10 days'
(but not more than 90 days') prior written notice of the date when the same
shall take place. Such notice in accordance with the foregoing clause (a) shall
also specify, in the case of any such dividend, distribution or subscription
rights, the date on which the holders of Common Stock shall be entitled thereto,
and such notice in accordance with the foregoing clause (b) shall also specify
the date on which the holders of Common Stock shall be entitled to exchange
their Common Stock, as the case may be, for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
share exchange, sale, transfer, disposition, dissolution, liquidation or winding
up, as the case may be.
3.10 COMPANY TO PREVENT DILUTION. If any event or condition occurs as to
which other provisions of this Article III are not strictly applicable or if
strictly applicable would not fairly protect the exercise or purchase rights of
the Warrants evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely affect the
exercise or purchase rights of the holder hereof under any provisions of this
Warrant, then the Company shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such exercise and purchase rights as aforesaid, and any adjustments
necessary with respect to the Exercise Price and the number of Warrant Shares
purchasable hereunder so as to preserve the rights of the holder hereunder. In
no event shall any such adjustment have the effect of increasing the Exercise
Price as otherwise determined pursuant to this Article III except in the event
of a combination of shares of the type contemplated in Section 3.4 hereof, and
then in no event to an amount greater than the Exercise Price as adjusted
pursuant to Section 3.4 hereof.
ARTICLE IV
MISCELLANEOUS
4.1 ENTIRE AGREEMENT. This Warrant, together with the Agreement, contain
the entire agreement between the holder hereof and the Company with respect to
the Warrant Shares purchasable upon exercise hereof and the related transactions
and supersedes all prior arrangements or understandings with respect thereto.
4.2 GOVERNING LAW. This warrant shall be governed by and construed in
accordance with the laws of the State of Texas.
<PAGE>
4.3 WAIVER AND AMENDMENT. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any time
by agreement of the holder hereof and the Company, except that any waiver of any
term or condition, or any amendment or supplementation, of this Warrant shall be
in writing. A waiver of any breach or failure to enforce any of the terms or
conditions of this Warrant shall not in any way effect, limit or waive a party's
rights hereunder at any time to enforce strict compliance thereafter with every
term or condition of this Warrant.
4.4 ILLEGALITY. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of this Warrant shall not, at the election of the party for whom the
benefit of the provision exists, be in any way impaired.
4.5 COPY OF WARRANT. A copy of this Warrant shall be filed among the
records of the Company.
4.6 NOTICE. Any notice or other document required or permitted to be given
or delivered to the holder hereof shall be in writing and delivered at, or sent
by certified or registered mail to such holder at, the last address shown on the
books of the Company maintained at the Warrant Office for the registration of
this Warrant or at any more recent address of which the holder hereof shall have
notified the Company in writing. Any notice or other document required or
permitted to be given or delivered to the Company, other than such notice or
documents required to be delivered to the Warrant Office, shall be delivered at,
or sent by certified or registered mail to, the offices of the Company at 1100
Executive Drive, Richardson, Texas 75081 or such other address within the
continental United States of America as shall have been furnished by the Company
to the holder of this Warrant, with a copy to Philip P. Sudan, Jr., Ryan &
Sudan, L.L.P., 909 Fannin, 39th Floor, Houston, Texas 77010.
4.7 LIMITATION OF LIABILITY; NOT STOCKHOLDERS. No provision of this
Warrant shall be construed as conferring upon the holder hereof the right to
vote, consent, receive dividends or receive notices (other than as herein
expressly provided) in respect of meetings of stockholders for the election of
directors of the Company or any other matter whatsoever as a stockholder of the
Company. No provision hereof, in the absence of affirmative action by the holder
hereof to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price of any shares of Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
4.8 EXCHANGE, LOSS, DESTRUCTION, ETC. OF WARRANT. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of
this Warrant, and in the case of any such loss, theft or destruction upon
delivery of a bond of indemnity or such other security in such form and amount
as shall be reasonably satisfactory to the Company, or in the event of such
mutilation upon surrender and cancellation of this Warrant, the Company will
make and deliver a new Warrant of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Warrant. Any Warrant issued under the provisions of this
Section 4.8 in lieu of any Warrant alleged to be lost, destroyed or stolen, or
in lieu of any mutilated Warrant, shall constitute an original contractual
obligation on the part of the Company. This Warrant shall be promptly canceled
by the Company upon the surrender hereof in connection with any exchange or
replacement. The Company shall pay all taxes (other than securities transfer
taxes or income taxes) and
<PAGE>
all other expenses and charges payable in connection with the preparation,
execution and delivery of Warrants pursuant to this Section 4.8.
4.9 REGISTRATION RIGHTS. The Warrant Shares shall be entitled to such
registration rights under the Securities Act and under applicable state
securities laws as are specified in the Registration Rights Agreement.
4.10 HEADINGS. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name.
Dated: February __, 1998
INTELECT COMMUNICATIONS, INC.
By:
Name: Herman M. Frietsch
Title: Chairman and CEO
<PAGE>
SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented thereby for and to purchase thereunder,
________ shares of the Common Stock covered by such Warrant, and herewith makes
payment in full for such shares pursuant to Section 1.1 of such Warrant, and
requests (a) that certificates for such shares (and any other securities or
other property issuable upon such exercise) be issued in the name of, and
delivered to _____________________________________ and (b), if such shares shall
not include all of the shares issuable as provided in such Warrant, that a new
Warrant of like tenor and date for the balance of the shares issuable thereunder
be delivered to the undersigned.
Date:
<PAGE>
ASSIGNMENT
For value received, _______________________, hereby sells, assigns, and
transfers unto _________________________ the within Warrant, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ________________________ attorney, to transfer such Warrant on the books
of the Company, with full power of substitution.
Date:
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of February 6,
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 C 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 10,000 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
<PAGE>
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 $10,000,000.
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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<PAGE>
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 December 23, 1997 (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 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
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<PAGE>
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
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.
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<PAGE>
h. VALIDITY; ENFORCEMENT. This Agreement has been duly and validly
authorized, execut ed 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 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
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<PAGE>
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, 23,954,978 shares are issued and outstanding, 3,818,334
shares are reserved for issuance pursuant to the Company's stock option and
purchase plans and 7,848,847 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) 12,500
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 5,133,695 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 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
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<PAGE>
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. 2,905,175 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 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
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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, 1995, 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
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, 1996 there has been no material
adverse change and no
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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, 1996 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 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.
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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 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
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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 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
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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) 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, 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.
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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.
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.
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g. ADDITIONAL FINANCING. Subject to Section 4(r) and 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 equipment loans or financings
which do not have an equity feature, (viii) any conversion to equity by St.
James Capital Corp. or its Affiliates ("ST. JAMES") of all or part of the
existing debt in the principal amount of $6,000,000 or any new credit facility
from St. James, up to $15,000,000, involving the issuance of convertible debt
with conversion price at or above the Fixed Conversion Price or warrants which
have an exercise price at or above $6.50 per share, provided that such equity is
not convertible into Common Stock or registered under the 1933 Act prior to June
1, 1998, or (ix) shares of Preferred Stock issued in accordance with Section
4(r) hereof.
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
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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
Twenty-Five Thousand Dollars ($25,000) 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 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
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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. 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
outstanding advise the Company in writing 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"). Notwithstanding the foregoing, the term Other Securities
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 (as defined below)
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) obtain 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. 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
shareholder 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 shareholder approval or Written Waiver until such
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future time as the Proxy Criteria is satisfied. "WRITTEN CONFIRMATION" shall
mean the written confirmation from the Principal Market that the issuance of the
Other Securities will not be integrated with the issuance of the Combined
Conversion Shares for the purposes of applying the shareholder approval
requirements of the Principal Market. 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
Combined Conversion Shares under the rules of the Principal Market relating to
shareholder 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 500 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 500 shares of
Preferred Stock if (i) such Buyer on the Conversion Date holds less than 500
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 Preferred Stock unless (i) the additional
purchaser of shares of Preferred Stock is The Coastal Corporation Second Pension
Trust or an affiliate of The Coastal Corporation Second Pension
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<PAGE>
Trust, (ii) the additional purchaser of the shares of Preferred Stock enters
into a securities purchase agreement and registration rights agreement in
substantially the form of and with terms no more favorable to such purchasers
than those set forth in this Agreement and the Registration Rights Agreement,
respectively, and (iii) the issuance of such additional shares of Preferred
Stock is consummated within 5 days of the Closing.
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 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
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<PAGE>
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.
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
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<PAGE>
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.
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 2,905,175 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.
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<PAGE>
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.
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
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<PAGE>
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.
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:
If to the Company:
INTELECT COMMUNICATIONS, INC.
1100 Executive Drive
Richardson, Texas 75081
Telephone: (972)367-2100
Facsimile: (972) 367-2771
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<PAGE>
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) 331-1852
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 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
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<PAGE>
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 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-
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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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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. NELSON PARTNERS
By: /S/ HERMAN M. FRIETSCH By: /S/ NITIN AGGARWAL
Name:Herman M. Frietsch Name:Nitin Aggarwal
Its: Chief Executive Officer Its: Officer
OLYMPUS SECURITIES, LTD.
By: /S/ NITIN AGGARWAL
Name: Nitin Aggarwal
ts: Director
CCG INTERNATIONAL FUND LTD.
By: /S/ KENNETH A. SIMPLER
Name: Kenneth A. Simpler
Its: Vice President
CCG CAPITAL LTD.
By: /S/ KENNETH A. SIMPLER
Name: Kenneth A. Simpler
Its: Vice President
<PAGE>
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
NUMBER OF
INVESTOR ADDRESS PREFERRED INVESTOR'S LEGAL REPRESENTATIVES'
INVESTOR'S NAME AND FACSIMILE NUMBER RESIDENCE SHARES ADDRESS AND FACSIMILE NUMBER
- --------------- ------------------------------ --------- --------- ---------------------------------
<S> <C>
Nelson Partners c/o Leeds Management Services Bermuda 3,421 Katten Muchin & Zavis
129 Front Street, 5th Floor 525 W. Monroe Street
Hamilton HM12 Bermuda Chicago, Illinois 60661-3693
Attn: Anne Dupuy Attention: Robert J. Brantman, Esq.
Facsimile: (441) 292-2239 Facsimile: (312) 902-1061
Residence: Bermuda Telephone: (312) 902-5200
With copy to:
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
Olympus Securities, Ltd. c/o Leeds Management Services Bermuda 6,354 Katten Muchin & Zavis
129 Front Street, 5th Floor 525 W. Monroe Street
Hamilton HM12 Bermuda Chicago, Illinois 60661-3693
Attn: Anne Dupuy Attention: Robert J. Brantman, Esq.
Facsimile: (441) 292-2239 Facsimile: (312) 902-1061
Residence: Bermuda Telephone: (312) 902-5200
With copy to:
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 International Fund Ltd. c/o Citadel Investment Group, L.L.C. Cayman 125 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 100 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
</TABLE>
AGREEMENT OF PURCHASE AND SALE
This Agreement of Purchase and Sale (the "Agreement"), is made and entered
into as of February ___, 1998, by and between INTELECT COMMUNICATIONS, INC., a
Delaware corporation (the "Seller"), and ST. JAMES CAPITAL PARTNERS, L.P., a
Delaware limited partnership (the "Purchaser"), and sets forth the terms and
conditions of the sale and purchase of a $15,000,000 Promissory Note,
substantially in the form attached hereto as EXHIBIT "A"(the "Note").
WHEREAS, the Seller desires to issue and sell to the Purchaser, and the
Purchaser desires to purchase and accept from the Seller, the Note in the form
of EXHIBIT "A", on the terms and subject to the conditions set forth herein, the
obligations of which of the Seller are secured by the Seller Pledge Agreement
dated as of the date hereof and attached as EXHIBIT "D" (the "Pledge
Agreement").
WHEREAS, the Seller and the Purchaser desire to make certain
representations, warranties and agreements in connection with the purchase and
sale of the Note contemplated hereby.
WHEREAS, the Seller desires to sell to the Purchaser warrants (the
"Warrants"), to purchase shares of Seller's common stock, par value $.01 per
share (the "Common Stock"), which Warrants shall have the terms and be subject
to the conditions set forth in the Form of Warrants attached hereto as EXHIBIT
"B"(the "Warrants").
WHEREAS, the Seller desires to grant to the Purchaser certain registration
rights in respect to the shares of Seller's Common Stock that may be acquired on
the exercise of the Warrants, which registration rights shall have the terms and
be subject to the conditions set forth in the Registration Rights Agreement
attached hereto as EXHIBIT "C"(the "Registration Rights Agreement"; this
Agreement, the Note, the Pledge Agreement, the Warrants and the Registration
Rights Agreement are collectively referred to as the "Transaction Documents").
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 PURCHASE AND SALE OF THE NOTE. Subject to the terms of this Agreement,
the Seller agrees to and does hereby issue, sell and deliver the Note to the
Purchaser at the Closing (as defined herein), and Purchaser agrees to and does
hereby purchase and accept the Note from the Seller.
1.2 CONSIDERATION FOR PURCHASE OF THE NOTE. Subject to the terms of this
Agreement, the Purchaser hereby agrees to pay to the Seller at Closing, by check
or wire transfer to the account of the Seller, $3,000,000 (the "Initial
Advance"), and agrees to make further advances of up to $12,000,000 pursuant to
the terms hereof, all as the consideration for the purchase of the Note (the
"Note Consideration").
1
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1.3 PURCHASE AND SALE OF THE WARRANTS; ADDITIONAL WARRANTS.
(a) Subject to the terms of this Agreement, the Seller agrees to and
does hereby issue, sell and deliver the Warrants to the Purchaser at the
Closing (as defined herein), and Purchaser agrees to and does hereby
purchase and accept the Warrants from the Seller. The Seller further
agrees to issue additional warrants, substantially in the form of EXHIBIT
"B" hereto to the Purchaser in connection with subsequent advances
hereunder up to an aggregate amount of $10,000,000 for a number of shares
equal to 15,000 shares for each additional $100,000 advanced by Purchaser
hereunder after the Initial Advance.
(b) The Seller further agrees to issue additional Warrants,
substantially in the form of EXHIBIT "B" hereto (subject to subsection (d)
of this Section 1.3), to the Purchaser in connection with advances
hereunder after an aggregate amount of $10,000,000 has been advanced, for
a number of shares equal to 15,000 shares for each additional $100,000
advanced by Purchaser hereunder after the Initial Advance.
(c) In the event the Seller elects to extend the maturity date of
the Note, the Seller will issue additional Warrants, substantially in the
form of EXHIBIT "B" hereto (subject to subsection (d) of this Section
1.3), to the Purchaser hereunder for a number of shares equal to 5,000
shares for each $100,000 then outstanding under the Note.
(d) The exercise price per share for the Warrants referenced in
Section 1.3(a) shall be $7.50 per share. The exercise price per share for
the Warrants referenced in Sections 1.3(b) and (c) above shall be equal to
$1.50 over the volume weighted average closing price of the Common Stock
for the ten (10) day period prior to date of the pertinent subsequent
advance or date of the Seller's election to extend the maturity date of
the Note, respectively.
1.4 CONSIDERATION FOR PURCHASE OF THE WARRANTS. Subject to the terms of
this Agreement, the Purchaser hereby agrees to pay to the Seller at Closing, by
check or wire transfer to the account of the Seller, $4,500, or $.01 per Warrant
at Closing for the Warrants issued in respect of the Initial Advance, and, upon
the issuance thereof, an amount equal to $.01 per Warrant for the Warrants
referenced in Section 1.3(b) hereof, as the consideration for the purchase of
the Warrants (the "Warrants Consideration"; the Note Consideration and the
Warrants Consideration are collectively referred to as the "Consideration"). The
Seller acknowledges that the Seller's Option to extend the Note for an
additional twelve (12) months pursuant to the terms thereof shall constitute the
Warrants Consideration for the Warrants referenced in Section 1.3(c) hereof.
1.5 FUTURE ADVANCES. The Purchaser shall make additional advances of the
Note Consideration and Warrant Consideration on the following terms and
conditions:
(a) The Seller shall provide to the Purchaser the following items
prior to any such advance:
(i) a written request for such advance at the address for the
Purchaser in Section 7.2 hereof, setting forth (1) the amount
requested, (2) the account to which such advance is to be
funded, (3) the date for which such advance is requested and
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(4) the proposed use of the proceeds of such advance as set
forth in this Agreement or other Transaction Document;
(ii) a certificate of an officer of Seller certifying that, as
of the date the advance is requested, no Default hereunder has
occurred, that Seller is in compliance with all covenants
herein and that all of the representations and warranties set
forth herein are true and correct as of such date;
(iii) per subsection 1.3(b) above, a Warrant in favor of
Purchaser, executed by Seller, for a number of shares of
Common Stock equal to 15,000 shares for each $100,000 advanced
by Purchaser;
(iv) such security documents or instruments respecting the
Pledged Securities as may be reasonably requested by Purchaser
and consistent with Purchaser's rights under the Pari Passu
Agreement executed of even date herewith by and among
Purchaser, Coastal and St. James Capital Corp.;
(v) such other documents, certificates, agreements or
instruments as may be reasonably requested by Purchaser in
connection with any or all of the foregoing;
(vi) payment by Seller of an origination fee equal to fifteen
hundredths of one percent (0.15%) of the principal amount of
such Advance which origination fee shall be deducted from the
amount of such Advance; and
(vii) payment by Seller of any and all expenses or other
amount due and owing to Purchaser.
(b) In addition, the Seller shall provide evidence to the Purchaser
of the repayment or payment of Seller's indebtedness that is PARI PASSU to
the indebtedness under the Note in connection with subsequent advances, as
may be required by Purchaser hereunder.
(c) For subsequent advances aggregating up to a principal amount of
$10,000,000, it shall be a further condition precedent to such advance
that the Purchaser shall be reasonably satisfied in its sole discretion
that (i) no Default has occurred and is continuing, and (ii) no Material
Effect has occurred.
(d) For subsequent advances in excess of an aggregate of $10,000,000
and aggregating up to a principal amount of $15,000,000, it shall be a
further condition precedent to such advance that the Purchaser shall be
reasonably satisfied in its sole discretion that (i) no Default has
occurred and is continuing, (ii) no Material Effect has occurred, and
(iii) Seller has provided Purchaser with reasonable access since the
Initial Advance to the financial and business records of the Seller and
that Purchaser is reasonably satisfied with the results of such due
diligence review.
(e) In no event shall the Purchaser be required to make any advances
hereunder after July 31, 1998.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Each of the Seller, as to itself and its Subsidiaries, hereby warrants and
represents to the Purchaser that:
2.1 ORGANIZATION, STANDING AND QUALIFICATION. Each of the Seller and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as it is now being conducted. Each of the Seller
and its Subsidiaries is licensed and qualified to do business as a foreign
corporation in each jurisdiction in which the character of Seller's or any
Subsidiary's properties, owned or leased, or the nature of its activities makes
such qualification or license necessary, except where failure to be so licensed
and qualified would not have a material adverse effect on the business or
financial condition of the Seller and its Subsidiaries taken as a whole.
2.2 AUTHORITY; NO DEFAULTS. The Seller has all requisite corporate power
and authority to enter into the Transaction Documents to which it is a party and
to consummate the transactions contemplated thereby. The execution and delivery
of the Transaction Documents to which the Seller is a party and the consummation
of the transactions contemplated thereby have been duly authorized by all
necessary corporate action on the part of the Seller. Each of the Transaction
Documents to which the Seller is a party has been duly executed and delivered by
the Seller and constitutes the valid and binding obligation of the Seller,
enforceable in accordance with its terms, except as enforceability thereof may
be limited by bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium or other similar laws relating to creditors' rights generally and by
general principles of equity which may limit the right to obtain equitable
remedies (regardless of whether such enforceability is considered in a
proceeding in equity or at law). Except for those transaction documents
evidencing loans from Coastal and St. James Capital Corp. the execution and
delivery by the Seller of the Transaction Documents to which the Seller is a
party do not, and the consummation of the transactions contemplated hereby and
thereby will not, conflict with or result in a breach of or the acceleration of
any obligation under, or constitute a default or event of default (or event
which, with notice or lapse of time or both, would constitute a default) under,
any provision of any charter, bylaw, indenture, mortgage, lien, lease,
agreement, contract, instrument, order, judgment, decree, ordinance or
regulation, or any restriction to which any property of the Seller or any of its
Subsidiaries is subject or by which the Seller or any of its Subsidiaries is
bound, and which would have a Material Effect on the Seller or its Subsidiaries.
Neither the Seller nor any of its Subsidiaries is in material violation or
default of any applicable law, statute, order, rule or regulation promulgated or
judgment entered by any court, administrative agency or commission or other
governmental agency or instrumentality, domestic or foreign (a "Governmental
Entity"), relating to or affecting the operation, conduct or ownership of the
property or business of the Seller or any of its Subsidiaries which would have a
Material Effect on the Seller and its Subsidiaries.
2.3 APPROVALS. (a) There is no legal impediment to (x) the valid
execution, delivery and performance by the Seller of this Agreement or any other
Transaction Document to which the Seller is a party or (y) the valid offer,
issue, sale and delivery of the Note or the Warrants pursuant to this Agreement.
No consent, approval or authorization of, or declaration or filing or
registration with, any Governmental Entity (including, without limitation, the
SEC or the Texas State Securities Board), stockholders or any other third party
is necessary or required for (x) the valid execution, delivery, or performance
by the Seller
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of this Agreement or any other Transaction Document to which the Seller is a
party or (y) the valid offer, issue, sale and delivery of the Note and the
Warrants pursuant to this Agreement.
2.4 SEC DOCUMENTS. The Seller has made all filings with the SEC that it
has been required to make under the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") since December 31, 1996. The Seller has provided to the
Purchaser a true, complete and correct copy of Seller's annual report on Form
10-K for the fiscal year ended December 31, 1996, together with all amendments
thereto, and any and all filings with the SEC made by Seller (including all
requested exhibits to such filings) since the filing of said Form 10-K (all such
documents that have been filed with the SEC, as amended, are referred to as the
"Seller SEC Documents"). As of their respective dates, and except as amended,
the Seller SEC Documents complied in all material respects with the requirements
of the Securities Act or the Exchange Act, as the case may be, and none of the
Seller SEC Documents contained any untrue statement of an material fact or
omitted to state a material fact required to be stated herein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The consolidated financial statements of the Seller and
its Subsidiaries included in the Seller SEC Documents comply as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q) and fairly present (subject, in
the case of the unaudited statements, to normal recurring audit adjustments) the
consolidated financial position of the Seller and its Subsidiaries as of the
dates thereof and the consolidated results of its operations and cash flows for
the periods then ended. Except as set forth in the Seller SEC Documents, since
December 31, 1996, (i) there have been no material adverse changes in the
business, operations or financial condition of each of the Seller and each of
its Subsidiaries and (ii) the operations of each of the Seller and each of its
Subsidiaries have been conducted in the ordinary course of business except as
previously disclosed in writing to the Purchaser.
2.5 LITIGATION. Except as set forth in the Seller SEC Documents, as of the
date of this Agreement, there is no suit, action, proceeding or investigation
pending or, to the best knowledge of the Seller, threatened against or affecting
the Seller or any of its Subsidiaries (or any of their respective officers or
directors in connection with the business of the Seller or any of such
Subsidiaries), nor any outstanding judgment, order, writ, injunction or decree
against the Seller or any of its Subsidiaries, which would have a material
adverse effect on the Seller and its Subsidiaries taken as a whole. Neither the
Seller nor any Subsidiary is subject to any court order, writ, injunction,
decree, settlement agreement or judgment that contains or orders any on-going
obligations, whether prohibitory or mandatory in nature, the performance of
which would have a material adverse effect on the Seller and its Subsidiaries
taken as a whole.
2.6 CAPITALIZATION. The Seller has authorized capital stock of 50,000,000
shares of Common Stock of which there are 23,997,524 shares issued and
outstanding as of February 9, 1998. All of the issued and outstanding shares of
Common Stock were duly and validly issued and are fully paid and non-assessable.
None of the outstanding shares of Common Stock have been issued in violation of
any preemptive rights of the current or past shareholders of the Seller. Except
as set forth on SCHEDULE 2.7, and except for shares that may be issued in
connection with completed or pending acquisitions and financings, there are no
outstanding options, warrants or rights to subscribe for, or commitments of any
character whatsoever relating to, or securities or rights convertible into or
exchangeable for, shares of the capital stock of the Seller or contracts,
commitments, understandings or arrangements by which the Seller is or may be
obligated to issue additional shares of its capital stock or options, warrants,
or rights to
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purchase or acquire any additional shares of its capital stock. All of the
Common Stock issued on the exercise of the Warrants will be fully paid,
non-assessable and free and clear of any preemptive rights and Encumbrances. As
used in this Agreement, the term "Encumbrance" means and includes (i) any
security interest, mortgage, deed of trust, lien, charge, pledge, proxy, adverse
claim, equity, power of attorney, or restriction of any kind, including but not
limited to, any restriction or servitude on the use, transfer, receipt of
income, or other exercise of any attributes of ownership, and (ii) any notice of
pledge registered with any financial intermediary or broker, any Uniform
Commercial Code financing statement or other public filing, notice or record
that by its terms purports to evidence or notify interested parties of any of
the matters referred to in clause (i) that has not been terminated or released
by another proper filing, notice or record.
2.7 SUBSIDIARIES. SCHEDULE 2.7 sets forth a true, complete and correct
list of each Subsidiary of the Seller, including state or country of
organization. Each Subsidiary of the Seller is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, has all requisite corporate power and authority to own, to lease
or to operate its properties and to carry on its business as it is now being
conducted and is duly qualified or licensed to do business in each jurisdiction
in which the character of its properties, owned or leased, or the nature of its
activities makes such qualification or license necessary, unless the failure to
be so licensed or qualified would not have a Material Effect on such Subsidiary
or the Seller and its Subsidiaries taken as a whole. Except as set forth in
SCHEDULE 2.7, all outstanding shares of capital stock of each Subsidiary of the
Seller were duly and validly issued and are fully paid, nonassessable and owned
by the Seller or a Subsidiary of the Seller, free and clear of all Encumbrances.
There are no options, warrants or other rights, agreements or commitments
(including preemptive rights) obligating the Seller or any of its Subsidiaries
to issue, to sell or to transfer any shares of capital stock or other securities
of any Subsidiary of the Seller.
2.8 LIABILITIES. Except as set forth in SCHEDULE 2.8, the Seller has no
knowledge of any liability that it reasonably believes would result in a
Material Effect on the value or business of Seller or any Subsidiary, other than
those (a) reflected or reserved against in the unaudited consolidated balance
sheet of the Seller and its consolidated Subsidiaries at December 31, 1997, or
disclosed in other Seller SEC Documents or (b) incurred in the ordinary course
of business since December 31, 1997.
2.9 LICENSES, PERMITS, AUTHORIZATIONS, ETC. The Seller and each of the
Subsidiaries holds all approvals, authorizations, consents, licenses, orders,
franchises, rights, registrations and permits of any type required to operate
its business as presently conducted, the failure of which to hold would have a
Material Effect on the Seller or its Subsidiaries. The execution, delivery and
performance by the Seller of this Agreement and the other Transaction Documents
will not result in any revocation, cancellation, suspension or modification of
any such approval, authorization, consent, license, order, franchise, right,
registration or permit.
2.10 TITLE TO ASSETS; ENCUMBRANCES.
2.10.1 Each of the Seller and its Subsidiaries has good and
indefeasible title to its assets, whether real, personal or intangible,
free and clear of all Encumbrances except (i) as reflected in the Seller
SEC Documents, (ii) liens for current taxes and assessments not yet due or
being contested in good faith by appropriate proceedings, (iii) mechanic's
liens arising under the operation of law for actions contested in good
faith or for which payment arrangements have been made, (iv) liens granted
or incurred by such Person in the ordinary course of its business or
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financing of equipment, office space, furniture and computers in the
ordinary course of its business, (v) easements, rights of way,
encroachments or other reductions or matters affecting title which do not
prevent the assets from being used for the purpose for which they are
currently being used and (vi) encumbrances on the Pledged Shares set forth
on SCHEDULE 2.6;
2.10.2 There are no parties in possession of any of the assets of
the Seller or its Subsidiaries other than (i) personal property held by
third parties in the reasonable and ordinary course of business and (ii)
the possession of the Pledged Shares by Coastal pursuant to the terms of
the Pari Passu Agreement between Coastal and SJ Corp., replaced on the
date hereof by that Pari Passu Agreement referenced in Paragraph 4.3.10
hereof. Each of the Seller and its Subsidiaries enjoys full, free and
exclusive use and quiet enjoyment of its assets and its rights pertaining
thereto. Each of the Seller and its Subsidiaries enjoys peaceful and
undisturbed possession under all leases under which it is a lessee, and
all such leases are legal, valid and binding obligations of such Person,
enforceable against such Person in accordance with its terms.
2.11 TAXES AND RETURNS. Seller has filed, and has caused each of its
Subsidiaries to file, all required tax returns and reports, except for where the
failure to file or pay would not have a Material Effect on Seller or its
Subsidiaries. Seller has paid, and has caused its Subsidiaries to pay, all
taxes, assessments and governmental charges and penalties which it or such
Subsidiary has incurred, except such as are being or may be contested in good
faith by appropriate proceedings except for where the failure to file or pay
would not have a Material Effect on Seller or its Subsidiaries. Neither the
Seller nor any Subsidiary is delinquent in the payment of any tax, assessment or
governmental charge. No deficiencies for any taxes have been proposed, asserted,
or assessed against either the Seller or any Subsidiary, and no requests for
waivers of the time to assess any such tax are pending. For the purposes of this
Agreement, the term "tax" (including, with correlative meaning, the terms
"taxes" and "taxable") shall include all federal, state, local and foreign
income, profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise and other taxes, duties or assessments of any
nature whatsoever, together with all interest, penalties and additions imposed
with respect to such amounts.
2.12 INSURANCE. Each policy of property, fire and casualty, product
liability, worker's compensation, professional liability and title insurance and
other forms of insurance (except group, health and life policies) and each bond
issued or posted by any person with respect to any operations or other
activities of either the Seller or any Subsidiary of the Seller is and, to
Seller's knowledge the legal, valid and binding obligation of the insurer or
bond issuer, enforceable in accordance with its terms.
2.13 HAZARDOUS WASTES AND SUBSTANCES. Except as set forth in the Seller
SEC Documents, to the best of Seller's knowledge neither the operations of
either the Seller or of any Subsidiary of the Seller, nor the use of such
Person's assets violates any applicable federal, state or local law, statute,
ordinance, rule, regulation, memorandum of understanding, order or notice
requirement pertaining to the collection, transportation, storage, treatment,
discharge, release or disposal of hazardous or non-hazardous waste or
substances, including without limitation (i) the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (42 U.S.C. ss.ss. 9601 ET
SEQ.), as amended from time to time on or before the Closing Date ("CERCLA")
(including, without limitation, as amended pursuant to the Superfund Amendments
and Reauthorization Act of 1986), and such regulations promulgated under CERCLA
on or before the Closing Date, (ii) the Resources Conservation and Recovery Act
of 1976 (42 U.S.C. ss.ss. 6901 ET SEQ.), as amended from time to time ("RCRA")
on or before the Closing Date, and such regulations promulgated under RCRA,
(iii) any applicable federal, state or local laws or regulations relating to the
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environment in effect on the Closing Date (collectively, the "Applicable
Environmental Laws"), which violation would have a Material Effect on the Seller
or its Subsidiaries. Except as set forth in the Seller SEC Documents or
otherwise disclosed in the Seller's Form 10-K for the periods ending 1992
through 1996 to the best of the Seller's knowledge, none of the operations of
the Seller or any Subsidiary has ever been conducted nor have any of such
Person's assets been used in such a manner as to constitute a violation of any
of the Applicable Environmental Laws, which violation would have a Material
Effect on the Seller or its Subsidiaries. Except as set forth in the Seller SEC
Documents, to the best of Seller's Knowledge, no notice has been served on the
Seller or any Subsidiary by any person or Governmental Entity regarding any
existing, pending or threatened investigation or inquiry related to violations
under any Applicable Environmental Law, which violation or claims could have a
Material Effect on the Seller or its Subsidiaries, or regarding any claims for
corrective action, remedial obligations or contribution for removal costs or
damages under any Applicable Environmental Law or regarding the designation of
the Seller or any of its Subsidiaries as a potentially responsible party for any
facility under the Applicable Environmental Laws which violations or claims
could have a Material Effect on the Seller or its Subsidiaries, nor, does any
fact or circumstance exist which, if disclosed publicly, would be reasonably
likely to result in the service on either the Seller or any Subsidiary of any
such notice. Except as set forth on the Seller SEC Documents, to the best of
Seller's knowledge there has been no action taken, or omitted to be taken by the
Seller or its Subsidiaries which has caused, or would be reasonably likely to
cause, a "release" of any "hazardous substance" at any "facility", without
limitation, within the meaning of such terms as defined in the Applicable
Environmental Laws.
2.14 USE OF PROCEEDS. The Seller shall use the consideration for purposes
of retiring certain short term debt and for the Seller's working capital needs
in connection with Seller's expansion of production, all as consented to by
Purchaser, which consent shall not be unreasonably withheld or delayed; provided
however, that Seller shall use advances after the Initial Advance for purposes
of repaying or prepaying indebtedness that is PARI PASSU to the indebtedness
under the Note (to the extent that such indebtedness has not already been repaid
or refinanced at the time of such advance) such that at any time, the
outstanding principal amount under the Note, when aggregated with such PARI
PASSU indebtedness, does not exceed $15,000,000.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser represents and warrants to the Seller, as follows:
3.1 INVESTMENT INTENT. The Note and the Warrants are being acquired for
Purchaser's own account and not with a view to public distribution and Purchaser
acknowledges that the purchase and sale of the Note and the Warrants is intended
to be exempt from registration under the Securities Act by virtue of Section
4(2) of the Securities Act.
3.2 ACCREDITED INVESTOR. The Purchaser is an accredited investor within
the meaning of Rule 501 under the Securities Act.
3.3 RESTRICTED SECURITIES. The Purchaser acknowledges that the Note and
the Warrants have not been registered under the Act and therefore cannot be sold
or transferred unless either they are subsequently registered under the Act (as
well as under any applicable state securities laws) or an
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exemption from such registration is available. The Note and the Warrants will be
"restricted securities" under Rule 144 promulgated under the Act, and unless and
until registered under the Act, the Note and the Warrants may be subject to
limitations on resale set forth in Rule 144 or in administrative interpretations
of the Securities Act by the SEC or in other rules and regulations in effect at
the time of the proposed sale or other disposition of the Note or the Warrants.
ARTICLE IV
THE CLOSING
4.1 TIME AND PLACE. The closing of the purchase and sale of the Note and
the Warrants (the "Closing") will take place on a date agreed to by the parties
(the "Closing Date"), at the offices of Gardere Wynne Sewell & Riggs, L.L.P.,
unless another time and place are agreed to by the parties.
4.2 CONDITIONS TO THE OBLIGATION OF THE SELLER. The obligation of the
Seller to effect the Closing is subject to the Purchaser delivering, or causing
to be delivered, to the Seller at the Closing the Consideration.
4.3 CONDITIONS TO THE OBLIGATION OF PURCHASER. The obligation of Purchaser
to effect the Closing is subject to the delivery by the Seller to Purchaser at
the Closing the following:
4.3.1 copies, certified by the Secretary of State of the State of
Delaware, of the Certificate of Incorporation of the Seller and all
amendments thereto;
4.3.2 copies, certified by the Secretary of the Seller as of the
Closing Date, of the bylaws of the Seller and all amendments thereto;
4.3.3 copies, certified by a certificate of the Secretary of the
Seller as of the Closing Date, of resolutions duly adopted by the board of
directors of the Seller, authorizing the execution and delivery by the
Seller of the Transaction Documents to which the Seller is a party and all
other agreements or other documents contemplated thereby, the completion
of the sale of the Note and the taking of all such other corporate action
as shall have been required as a condition to, or in connection with, the
sale of the Note and the Warrants;
4.3.4 the Note;
4.3.5 the Warrants;
4.3.6 the Pledge Agreement;
4.3.7 the Registration Rights Agreement;
4.3.8 an opinion of Ryan & Sudan, L.L.P. in substantially the form
attached hereto as EXHIBIT "F";
4.3.9 an origination fee equal to $4,500, permitted by Seller as an
offset against funds advanced by Purchaser; and
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4.3.10 the In Pari Passu Agreement among the Purchaser, SJ Corp. and
Coastal dated as of the date hereof.
ARTICLE V
COVENANTS
The Seller covenants and agrees with the Purchaser, so long as the Note is
outstanding or any fee, expense, compensation or any other amount payable by the
Seller shall remain unpaid or outstanding, as follows:
5.1 DEBT. The Seller shall not, nor shall the Seller permit any of its
Subsidiaries to, create, incur, assume or otherwise become or remain liable with
respect to, any Debt, except for:
5.1.1 Permitted Debt; and
5.1.2 Debt outstanding on the date hereof and described in filings
made with the Securities and Exchange Commission.
5.2 RESTRICTIONS ON DISTRIBUTIONS. The Seller shall not, nor shall the
Seller permit any of its Subsidiaries to, declare, make or pay any Distribution,
except that (i) any Subsidiary of Seller may make Distributions to the Seller,
(ii) Seller may make Distributions to holders of the Seller's preferred stock,
and (iii) Seller may make Distributions pursuant to a shareholder rights plan
duly adopted by Seller's Board of Directors and disclosed in Seller's filings
with the SEC.
5.3 NEGATIVE PLEDGE. The Seller shall not, nor shall the Seller permit any
of its Subsidiaries to, create, incur, assume or suffer to exist, any
Encumbrance on any asset of such Person other than Permitted Liens. The Seller
will not enter into or become subject to, nor will it permit any of its
Subsidiaries to enter into or become subject to, any agreement (other than this
Agreement) that prohibits or otherwise restricts the right of the Seller or its
Subsidiaries to create, incur, assume or suffer to exist any Lien in favor of
the Purchaser on any of the Seller's or any of its Subsidiaries' assets.
5.4 CONSOLIDATION, MERGERS AND ACQUISITIONS; FUNDAMENTAL CHANGES. Without
Purchaser's prior written consent, the Seller shall not, nor shall the Seller
permit any of its operating Subsidiaries to, merge or consolidate with or
acquire substantially all of the outstanding capital stock or assets of any
other Person unless the Seller or operating Subsidiary is the surviving
corporation in such transaction or liquidate, wind up or dissolve (or suffer any
liquidation or dissolution), or convey, lease, sell, transfer or otherwise
dispose of, in one transaction or series of transactions, all or any substantial
part of its business, property or assets, whether now or hereafter acquired
provided that nothing herein shall prohibit the sale or transfer of fixed assets
from a Subsidiary to the Seller or to another Subsidiary, provided that the
shares of such transferee Subsidiary are pledged to the Purchaser pursuant to
the Pledge Agreement. The Seller shall not, nor shall the Seller permit any of
its operating Subsidiaries to, purchase, redeem, retire or otherwise acquire for
value any of its capital stock now or hereafter outstanding, except for the
redemption of the Seller's preferred stock.
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5.5 INVESTMENTS. The Seller shall not, nor shall the Seller permit any of
its Subsidiaries to, make, directly or indirectly, any Investments, except:
5.5.1 Investments existing on the date hereof and disclosed on
SCHEDULE 5.5;
5.5.2 Investments consisting of Cash Equivalents;
5.5.3 Accounts receivable from customers in the ordinary course of
business; and
5.5.4 Investments by the Seller in wholly owned Subsidiaries.
5.6 TRANSACTIONS WITH AFFILIATES. The Seller shall not, nor shall the
Seller permit any of its Subsidiaries to, enter into, or be a party to any
transaction with any Affiliate, except for (i) the transactions provided for in
the Transactions Documents, (ii) transactions currently disclosed or disclosed
in the future in accordance with applicable securities laws in the Seller SEC
Documents, (iii) transactions referenced as Permitted Debt, (iv) customary
employment arrangements and benefit programs on reasonable terms, (v) 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 an Affiliate, or (vi) an agreement, transaction, commitment or
arrangement which is approved by a majority of the disinterested directors of
Seller.
5.7 SALES OF ASSETS. Except for sales of assets by a Subsidiary to Seller
or to another Subsidiary, the Seller shall not, nor shall the Seller permit any
of its Subsidiaries to, sell, assign, transfer, lease, convey or otherwise
dispose of any of its assets or properties, whether now owned or hereafter
acquired, or any income or profits therefrom, or enter into any agreement to do
so, except:
5.7.1 sales of inventory in the ordinary course of business;
5.7.2 the sale, discount or transfer of delinquent accounts
receivable in the ordinary course of business for purposes of collection;
5.7.3 occasional sales, leases or other dispositions of immaterial
assets for consideration not less than fair market value;
5.7.4 sales, leases or other dispositions of assets that are
obsolete or have negligible fair market value; and
5.7.5 sales of equipment for a fair and adequate consideration (but
if replacement equipment is necessary for the proper operation of the
business of the seller, the seller must promptly replace the sold
equipment).
5.8 SALES AND LEASEBACKS. The Seller shall not, nor shall the Seller
permit any of its Subsidiaries to, become liable, directly or by way of a
guaranty or accommodation obligation, with respect to any lease or any property
(whether real or personal or mixed) whether now owned or hereafter acquired, (i)
which the Seller or such Subsidiary has sold or transferred or is to sell or
transfer to any other Person or (ii) which the Seller or such Subsidiary intends
to use for substantially the same purposes as any other
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property which has been or is to be sold or transferred by the Seller or such
Subsidiary to any other Person in connection with such lease.
5.9 MARGIN REGULATION. The Seller shall not use or permit any other Person
to use any portion of the proceeds of the Note in any manner which might cause
the extension of credit or the application of such proceeds to violate the
Securities Act or the Exchange Act or to violate Regulation G, Regulation U, or
Regulation X, or any other regulation of the Federal Reserve Board.
5.10 AMENDMENT TO ORGANIZATIONAL DOCUMENTS. The Seller will not enter into
or permit any modification or amendment of, or waive any material right or
obligation of, the Purchaser or the rights of holders of Common Stock of the
Seller, under its certificate or articles of incorporation, bylaws or other
charter documents other than such modifications, amendments or waivers which
would not, singly or in the aggregate, result in a Material Effect.
5.11 FISCAL YEAR. The Seller shall not change its fiscal year.
5.12 COMPLIANCE WITH LAWS. The Seller shall, and shall cause each of its
Subsidiaries to, conduct its business and affairs and maintain its Properties in
all material respects in compliance with all applicable laws, rules,
regulations, judgments, orders, and decrees (including, without limitation, all
Applicable Environmental Laws, where non-compliance therewith would have a
Material Effect).
5.13 INSURANCE. The Seller shall, and shall cause each of its Subsidiaries
to, maintain insurance in full force and effect either with Seller's existing
insurance carriers in the current amounts of coverage or replacement insurance
with insurance companies of recognized standing on all of its Properties of an
insurable nature in such manner and amounts and against such casualties and
contingencies as are customarily insured by businesses of established reputation
which own similar assets. The Seller shall, and shall cause each of its
Subsidiaries to, also maintain in full force and effect either with Seller's
existing insurance carriers in the current amounts of coverage or replacement
insurance with insurance companies of recognized standing general liability and
worker's compensation. The Seller shall, and shall cause each of its
Subsidiaries to, at any time and from time to time, furnish evidence of all
insurance required by this SECTION 5.13 to the Purchaser promptly upon the
request of Purchaser.
5.14 PAYMENT AND PERFORMANCE. The Seller will pay all amounts due under
each Transaction Document to which it is a party in accordance with the terms
thereof and will observe, perform and comply with every covenant, term and
condition expressed or implied therein.
5.15 BOOKS, FINANCIAL STATEMENTS AND REPORTS. The Seller will at all times
maintain, and will cause its Subsidiaries to at all times maintain, full and
accurate books of account and records. The Seller will furnish, or cause to be
furnished, the following statements and reports to the Purchaser:
5.15.1 As soon as available, and in any event within ninety (90)
days after the end of each fiscal year, consolidated financial statements
of the Seller and its Subsidiaries together with all notes thereto,
prepared in accordance with GAAP, together with an opinion, based on an
audit using generally accepted auditing standards, by independent
certified public accountants selected by the Seller, stating that such
consolidated financial statements have been so prepared. These financial
statements shall contain a consolidated balance sheet as of the end of
such fiscal year and consolidated statements of earnings, of cash flows,
and of changes in owners' equity for such fiscal
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year, each setting forth in comparative form the corresponding figures for
the preceding fiscal year.
5.15.2 The Seller will maintain its Edgar filing status with the SEC
and will deliver to the Purchaser within 20 days after completing filings
with the SEC, copies of all information, documents, and other reports (or
copies of such portions of any of the foregoing as the SEC may by rules
and regulations prescribe) which the Seller is required to file with the
SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. The Seller will timely comply in all material respects with its
reporting and filing obligations under the applicable federal securities
laws.
5.15.3 The Seller will promptly notify the Purchaser in writing of
the occurrence of (i) any Event of Default and (ii) any event of default
(or if any event of default would result upon any payment with respect to
the Note) with respect to any Debt as such event of default is defined
therein or in the instrument under which it is outstanding, permitting
holders to accelerate the maturity of such Debt.
5.15.4 Promptly upon request, any information which the Purchaser
may from time to time reasonably request concerning any covenant,
provision or condition of the Transaction Documents or any matter in
connection with such Persons' businesses and operations, including without
limitation business plans, environmental compliance matters, budgets,
forecasts and sales reports. The Seller will permit representatives
appointed by the Purchaser to visit during normal business hours and
inspect any of such Person's Property, including its books of account,
other books and records, and any facilities or other business assets, and
to make extra copies therefrom and photocopies and photographs thereof,
and to write down and record any information such representatives obtain,
and the Seller shall permit the Purchaser or its representatives to
investigate and verify the accuracy of the information furnished to the
Purchaser in connection with the Transaction Documents and to discuss all
such matters with its officers, employees and representatives and
Purchaser agrees to keep any and all of such information in strictest
confidence and not to disclose such information to any outside party
except as may be required by law or compelled by judicial order.
5.16 MAINTENANCE OF EXISTENCE, QUALIFICATIONS AND ASSETS. The Seller
shall, and shall cause its Subsidiaries to, (i) maintain its corporate existence
and good standing and its authority to transact business in all states where
necessary; (ii) maintain all licenses, permits and franchises necessary for its
business; and (iii) keep all of its assets that are useful in and necessary to
its business in good working order and condition (ordinary wear and tear
excepted) and make all necessary repairs and replacements.
5.17 PAYMENT OF TRADE DEBT, TAXES, ETC. The Seller will, and will cause
each of its Subsidiaries to, (i) timely file all required tax returns; (ii)
timely pay all taxes, assessments, and other governmental charges or levies
imposed upon it or upon its income, profits or Property; (iii) within ninety
(90) days after the same becomes due pay all Debt owed by it on ordinary trade
terms to vendors, suppliers and other Persons providing goods and services used
by it in the ordinary course of its business; (iv) pay and discharge when due
all other Debt now or hereafter owed by it; and (v) maintain appropriate
accruals and reserves for all of the foregoing Debt in accordance with GAAP. The
Seller shall not be required to pay or discharge any such Debt prior to
institution of foreclosure proceedings if the validity thereof shall
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concurrently be contested in good faith by appropriate proceedings and if the
Seller shall have established reserves deemed by the Seller adequate therefor.
5.18 PAYMENT OF EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, the Seller will promptly (and in any event,
within thirty (30) calendar days after any invoice or other statement or notice)
pay (i) all reasonable costs and expenses incurred by or on behalf of the
Purchaser (including reasonable attorneys' fees and out-of-pocket expenses) in
connection with the negotiation, preparation, execution, and delivery of the
Transaction Documents (up to a $25,000 maximum aggregate amount), and any and
all consents, waivers or other documents or instruments relating thereto, and
any filing, recording, refiling and re-recording of any Transaction Documents
and any other documents or instruments or further assurances required to be
filed or recorded or refiled or re-recorded by the terms of any Transaction
Document.
5.19 ENVIRONMENTAL MATTERS.
5.19.1 The Seller will comply in all material respects with all
Environmental Laws now or hereafter applicable to the Seller and shall
obtain, at or prior to the time required by applicable Environmental Laws,
all environmental, health and safety permits, licenses and other
authorizations necessary for its operations and will maintain such
authorizations in full force and effect so as to avoid any action or
omission having a Material Effect.
5.19.2 The Seller will promptly furnish to the Agent all written
notices of violation, orders, claims, citations, complaints, penalty
assessments, suits or other proceedings received by any the Seller, or of
which it has notice, pending or threatened against any the Seller, by any
Governmental Entity with respect to any alleged violation of or
non-compliance with any Applicable Environmental Laws or any permits,
licenses or authorizations in connection with its ownership or use of its
Properties or the operation of its business.
ARTICLE VI
DEFINITIONS
As used in this Agreement, the following terms have the meanings
indicated:
"AFFILIATE" of a Person means any other individual or entity who directly
or indirectly controls, is controlled by, or is under common control with, that
Person.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in Houston, Texas are
authorized or obligated by law or executive order to be closed.
"CASH EQUIVALENTS" means, when used in connection with the Seller or any
Subsidiary of such Person's Investments in:
(a) government securities due within 180 days from the date of
acquisition thereof;
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(b) Readily marketable direct obligations of any State of the United
States or any political subdivision of any such State given on the date of
such investment a credit rating of at least A2 by Moody's Investors
Service, Inc. or A by Standard & Poor's Corporation, in each case due
within 180 days from the date of acquisition thereof;
(c) Certificates of deposit issued by, money market deposit accounts
with, eurodollar deposits through, bankers' acceptances of, and repurchase
and reverse repurchase agreements covering government securities executed
by any bank doing business in and incorporated under the laws of the
United States or any state thereof whose deposits are insured through the
FDIC, or any successor thereto, and having (either itself or its holding
company) on the date of such Investment combined capital, surplus and
undivided profits of at least $250,000,000, or any offshore branch of such
bank, in each case maturing within 180 days from the date of acquisition
thereof;
(d) "Money-market mutual funds" investing solely in instruments of
the types described in subparagraphs (a) through (c) above.
"COASTAL" means The Coastal Corporation Second Pension Trust.
"DEBT" means, for any Person, (a) all obligations required by GAAP to be
classified upon a balance sheet as liabilities, (b) liabilities secured by any
Lien existing on property owned or acquired by that Person, (c) obligations that
have been (or under GAAP should be) capitalized for financial reporting
purposes, (d) all guaranties, endorsements and other contingent obligations with
respect to Debt of others, and (e) for all deferrals, renewals, extensions and
refundings of, and amendments, modifications and supplements to, any of the
indebtedness referred to in (a) through (c) above.
"DEFAULT" means an "EVENT OF DEFAULT" as defined in the Note.
"DISTRIBUTION" means, with respect to any shares of any capital stock or
other equity securities or other interests issued by a Person, (a) the
retirement, redemption, purchase or other acquisition for value of those
securities by such Person, (b) the declaration or payment of any dividend on or
with respect to those securities by such Person, (c) any loan or advance by that
Person to, or other investment by that Person in, the holder of any of those
securities, and (d) any other payment by that Person with respect to those
securities.
"GAAP" means generally accepted accounting principles of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
the Financial Accounting Standards Board.
"INVESTMENT" means, with respect to any Person, any direct or indirect
purchase or other acquisition by such Person of stock, partnership interest or
other equity interest, or of a beneficial interest therein, of any other Person,
and any direct or indirect loan, advance (other than deposits with financial
institutions available for withdrawal on demand, prepaid expenses, advances to
employees and similar items made or incurred in the ordinary course of
business), or capital contribution by such Person to any other Person, including
all Debt and accounts owed by that other Person which are not current assets or
did not arise from sales of goods or services to such Person in the ordinary
course of business. The amount of any Investment shall be determined in
conformity with GAAP.
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"MATERIAL EFFECT" means (a) a material adverse effect on the business,
Properties, operations or condition (financial or otherwise) of the Seller and
its Subsidiaries taken as a whole, (b) material impairment of the ability of the
Seller to perform its obligations under any Transaction Document, or (c) a
material adverse effect on the validity or enforceability of this Agreement, the
Note, the Warrants or any of the other Transaction Documents or a material
impairment of the rights or remedies of the Purchaser hereunder or under any of
the other Transaction Documents.
"OBLIGATIONS" means all obligations, liabilities and indebtedness of every
nature of the Seller or any of its Subsidiaries from time to time owing to the
Purchaser under any Transaction Document to which such Person is a party,
including, without limitation, the due and punctual payment of the principal of
and interest on the Note, when and as due, whether at maturity, by acceleration,
upon one or more dates set for prepayment or otherwise, including, to the extent
permitted by applicable law, interest that accrues after the commencement of any
proceeding by or against any of the Seller or its Subsidiaries under the
Bankruptcy Code and all other applicable Debtor Relief Laws, and all other
monetary obligations of the Seller or any of its Subsidiaries to the Purchaser
under this Agreement and each of the other Transaction Documents to which such
Person is a party, including any and all fees, costs, expenses and indemnities.
"PERMITTED DEBT" means (a) the Obligations; (b) debt arising from
endorsing negotiable instruments for collection in the ordinary course of
business; (c) purchase money debt incurred to finance equipment in the ordinary
course of business; (d) trade payables that are for goods furnished or services
rendered in the ordinary course of business and that are payable in accordance
with customary trade terms; (e) indebtedness for borrowed money to Coastal of up
to $3,500,000; (f) indebtedness for borrowed money to SJ Corp. of up to
$6,500,000;(g) indebtedness for borrowed money to certain affiliated persons in
the aggregate principal amount of $710,000 and (h) indebtedness representing
Seller's payments in cancellation of redemption rights present in two
outstanding warrants in the aggregate principal amount of $1,750,000.
"PERMITTED LIENS" means (a) Encumbrances now or hereafter securing the
Obligations; (b) pledges or deposits made to secure payment of workers'
compensation, unemployment insurance, or other forms of governmental insurance
or benefits or to participate in any fund in connection with workers'
compensation, unemployment insurance, pensions, or other social security
programs; (c) good-faith pledges or deposits made to secure performance of bids,
tenders, contracts (other than for the repayment of borrowed money), or leases,
or to secure statutory obligations, surety or bonds, or indemnity, performance,
or other similar bonds in the ordinary course of business; (d) liens for taxes
and liens imposed by operation of law (including liens of mechanics,
materialmen, warehousemen, carriers and landlords), if (i) no amounts are due
and payable and no lien has been filed (or agreed to), or (ii) the validity or
amount secured thereof is being contested in good faith by lawful proceedings
diligently conducted, reserves required by GAAP have been made, and levy and
execution thereon have been (and continue to be) stayed or payment thereof is
covered in full (subject to the customary deductible) by insurance; (e) liens
currently in existence; (f) liens covering purchase money debt incurred to
finance equipment or inventory in the ordinary course of business;(g) liens
securing indebtedness for borrowed money to Coastal of up to $3,500,000, and (h)
liens securing indebtedness for borrowed money from SJ Corp. of up to
$6,500,000.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
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"PLEDGED SHARES" means all shares of capital stock or other evidences of
ownership now or hereafter issued to the Seller by DNA Enterprises, Inc., a
Texas corporation, Intelect Network Technologies Company, a Nevada corporation,
and Intelect Visual Communications Corp., a Delaware corporation, each a wholly
owned Subsidiary of the Seller and the Certificate(s) representing the Pledged
Shares and all dividends, cash, instruments and other property from time-to-time
received, receivable or otherwise distributed in respect of or in exchange of
any Pledged Shares.
"PROPERTY" means any asset, whether real, personal or mixed, or tangible
or intangible, or any interest therein.
"SJ CORP." means St. James Capital Corp., a Delaware corporation.
"SEC" means the U.S. Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act of 1933, as amended.
"SUBSIDIARY" means, with respect to any Person, any entity of which more
than 50% (in number of votes) of the stock (or equivalent interests) is owned of
record or beneficially, directly or indirectly, by such Person, excepting that,
for purposes thereof, "Subsidiary" shall not be taken to include Intelect
Network Systems Limited (U.K.), Intelect Finance Limited (Bermuda), Intelect
Communications Systems Limited (Bermuda), Intelect Defense Technologies, Inc.
(Delaware) or The Customer Premises Equipment Corporation (Delaware).
"UCC" means the Uniform Commercial Code, as adopted in Texas, PROVIDED,
HOWEVER, to the extent the perfection or the effect of perfection (or
non-perfection) of any Encumbrance in any collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than Texas, "UCC" means,
with respect to the provisions relating to perfection or the effect of
perfection (or non-perfection), the Uniform Commercial Code in effect in such
jurisdiction.
ARTICLE VII
GENERAL PROVISIONS
7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All of the
Seller's various representations, warranties, covenants and agreements in the
Transaction Documents shall survive the execution and delivery of this Agreement
and the other Transaction Documents and the performance hereof and thereof,
including the issuance and delivery of the Note, the Warrants and the other
Transaction Documents, and shall further survive until the Note is paid in full.
7.2 NOTICES. All notices or other communications which are required or may
be given under this Agreement shall be in writing and shall be deemed to have
been duly given when delivered in person, transmitted by telecopier (with
receipt confirmed) or mailed by registered or certified first class mail,
postage prepaid, return receipt requested to the parties hereto at the address
set forth below (as the same may be changed from time to time by notice
similarly given) or the last known business or residence address of such other
person as may be designated by either party hereto in writing.
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(a) If to the Seller: Intelect Communications, Inc.
1100 Executive Drive
Richardson, Texas 75081
Attn: Herman M. Frietsch
(b) If to Purchaser: St. James Capital Partners, L.P.
1980 Post Oak Boulevard, Suite 2030
Houston, Texas 77056
Attn: John L. Thompson
7.3 MISCELLANEOUS. This Agreement (i) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof,
(ii) shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns and is not intended to confer upon any
other person any rights or remedies hereunder, (iii) shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Texas and (iv) may be executed in two or more counterparts which
together shall constitute a single agreement.
7.4 PUBLICITY. Each of the Seller and Purchaser promptly shall advise and
cooperate with the other prior to issuing, or permitting any of its directors,
officers, employees or agents to issue, any press release with respect to this
Agreement or the explicit transactions contemplated hereby. Notwithstanding the
foregoing, without the prior consent of the Purchaser, neither the Seller nor
any of its directors, officers, employees or agents shall issue any press
release which includes the name of the Purchaser or any of the Purchaser's
Affiliates.
7.5 SCHEDULES. All statements contained in any exhibit, schedule,
appendix, certificate or other instrument delivered by or on behalf of the
parties hereto, or in connection with the transactions contemplated hereby, are
an integral part of this Agreement and shall be deemed representations and
warranties hereunder.
7.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which constitutes an original execution and, in the
aggregate, constitute a single document.
7.7 ASSIGNMENT.
(a) Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by Seller (whether by operation of
law or otherwise) without the prior written consent of the Purchaser.
(b) Purchaser may assign all or any part of its rights and
obligations hereunder, under the Note, the Warrants or any other
Transaction Document, to any other entity that is an Affiliate of either
Purchaser or the general partner of Purchaser, subject to the terms hereof
and upon prior written notice to Seller. Each such assignee (an
"Assignee") shall execute an Assignment and Acceptance substantially in
the form of EXHIBIT E. Upon the execution of such Assignment and
Acceptance by such Assignee, (i) the Assignee shall be a "Purchaser"
hereunder and, to the extent provided in the Assignment and Acceptance,
shall have the rights and obligations of a Purchaser hereunder, and (ii)
the assigning Purchaser (an "Assignor") shall, to the extent provided in
the
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Assignment and Acceptance and consistent with this subparagraph, be
released from its obligations hereunder.
(c) An Assignor hereunder shall, if requested by the Assignee,
deliver the Note and Warrants in favor of such Assignor to the Seller, and
the Seller shall issue replacement Notes and Warrants in favor of the
Assignor and the Assignee in the amounts and for such shares as are
indicated in the Assignment and Acceptance. The replacement Warrants shall
be issued for an exercise price per share equal to the exercise price set
forth in the Warrants to be delivered to Seller under this Section 7.7(c).
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SELLER'S SIGNATURE PAGE
IN WITNESS WHEREOF, the Seller has signed this Agreement as of the date
first written above.
INTELECT COMMUNICATIONS, INC.
By:
Name:
Title:
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PURCHASER'S SIGNATURE PAGE
IN WITNESS WHEREOF, Purchaser has signed this Agreement as of the date
first written above.
ST. JAMES CAPITAL PARTNERS, L.P.
By: St. James Capital Corp., its General Partner
By:
Name:
Title:
21
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EXHIBIT E
ASSIGNMENT AND ACCEPTANCE
Dated _______________, 1998
Reference is made to the Agreement for Purchase and Sale dated as of
___________, 1998 (as the same may be amended or modified from time-to-time, the
"Agreement") among INTELECT COMMUNICATIONS, INC., a Delaware corporation
("Borrower") and ST. JAMES CAPITAL PARTNERS, L.P. ("Assignor"). Capitalized
terms not otherwise defined in this Assignment and Acceptance shall have the
meanings assigned to them in the Agreement.
Pursuant to the terms of the Agreement, St. James Capital Partners, L.P.
wishes to assign and delegate ___% of its rights and obligations under the
Agreement. Therefore, St. James Capital Partners,
L.P. ("Assignor") and ________________ ("Assignee") agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor, without recourse to the
Assignor and without representation or warranty except for the representations
and warranties specifically set forth in clauses (i) and (ii) of Section 2, a
___ interest in and to all of the Assignor's rights and obligations under the
Agreement and the Transaction Documents as of the Effective Date (as defined
below), including, without limitation, such percentage interest in the
Assignor's obligation to make Advances, the Advances owing to the Assignor, the
Note held by the Assignor, the Warrants held by the Assignor, the Assignor's
interest in the Collateral, and the Assignor's registration rights in respect of
Common Stock.
2. The Assignor (i) represents and warrants that, prior to executing
this Assignment and Acceptance, its obligation to make further Advances under
the Agreement is $__________, and the aggregate outstanding principal amount of
Advances owed to it by the Borrower is $__________; (ii) represents and warrants
that it is the legal and beneficial owner of the interest being assigned by it
hereunder and that such interest is free and clear of any adverse claim; (iii)
makes no representation or warranty and assumes no responsibility with respect
to any statements, warranties, or representations made in or in connection with
the Agreement or any other Transaction Document or the execution, legality,
validity, enforceability, genuineness, sufficiency, or value of the Agreement or
any other Transaction Document or any other instrument or document furnished
pursuant thereto; (iv) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrower or any
Subsidiary or the performance or observance by the Borrower of any of its
obligations under the Agreement or any other Transaction Document or any other
instrument or document furnished pursuant thereto;(v) agrees to deliver the Note
to the Borrower to exchange such Note for a new Note dated _________ __, 19__,
in the principal amount of $___________ payable to the order of the Assignee;
(vi) and agrees to deliver the Warrants issued by Borrower to the Assignor to
exchange such Warrants for replacement Warrants in favor of the Assignee in
respect of ______ shares of Common Stock.
3. The Assignee (i) confirms that it has received a copy of the
Agreement and the other Transaction Documents, and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Acceptance and (ii) agrees that it
will perform in accordance with their terms all of the obligations which by the
terms of the Agreement or any other Transaction Document are required to be
performed by it as a Purchaser.
<PAGE>
4. The effective date for this Assignment and Acceptance shall be
_______________ (the "Effective Date").
5. As of the Effective Date, (i) the Assignee shall be a Purchaser under
the Agreement for all purposes, and, to the extent provided in this Assignment
and Acceptance, have the rights and obligations of a Purchaser thereunder and
(ii) the Assignor shall, to the extent provided in this Assignment and
Acceptance, relinquish its rights and be released from its obligations under the
Agreement.
6. From and after the Effective Date, the Borrower shall make all
payments under the Agreement and the Note in respect of the interest assigned
hereby (including, without limitation, all payments of principal, interest, and
commitment fees) to the Assignee. The Assignor and Assignee shall make all
appropriate adjustments in payments under the Agreement and the Note for periods
prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed
and enforced in accordance with, the laws of the State of Texas.
The parties hereto have caused this Assignment and Acceptance to be duly
executed as of the date first above written.
ASSIGNOR
ST. JAMES CAPITAL PARTNERS, L.P.
By: St. James Capital Corp., its
General Partner
By:
Name:
Title:
ASSIGNEE
By:
Name:
Title:
ACKNOWLEDGED
THIS ____ DAY OF ____________, 1998.
INTELECT COMMUNICATIONS, INC.
By:
Name:
Title:
2
THE SECURITIES REPRESENTED BY THIS NOTE AND THE COMMON STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY OTHER APPLICABLE SECURITIES LAWS AND, ACCORDINGLY, THE
SECURITIES REPRESENTED BY THIS NOTE MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER
APPLICABLE SECURITIES LAWS.
THE SECURITY INTERESTS GRANTED TO SECURE AMOUNTS DUE UNDER THIS NOTE MAY RANK
PARI PASSU WITH CERTAIN OTHER SECURITY INTERESTS GRANTED BY OF INTELECT
COMMUNICATIONS, INC. AS AND TO THE EXTENT SET FORTH IN THAT CERTAIN AGREEMENT
FOR PURCHASE AND SALE DATED AS OF THE DATE HEREOF BETWEEN INTELECT
COMMUNICATIONS, INC. AND ST. JAMES CAPITAL PARTNERS, L.P.
INTELECT COMMUNICATIONS, INC.
$15,000,000 CONVERTIBLE PROMISSORY NOTE
$15,000,000 Houston, Texas February __, 1998
INTELECT COMMUNICATIONS, INC., a Delaware corporation (hereinafter called
the "Company," which term includes any directly or indirectly controlled
subsidiaries or successor entities), for value received, hereby promises to pay
to St. James Capital Partners, L.P., a Delaware limited partnership (hereinafter
called "Holder"), or its registered assigns, the principal sum of up to Fifteen
Million Dollars ($15,000,000), together with interest on the amount of such
principal sum from time to time outstanding, payable in accordance with the
terms set forth below. It is the intention of the parties that the principal
sums of this Note shall be advanced in multiple Advances (as defined below),
subject to the satisfaction of the conditions precedent set forth in Section 1.5
of the Agreement of Purchase and Sale between the Company and Holder dated as of
the date hereof (the "Purchase Agreement"). No Advance shall be made under this
Note if an Event of Default (as defined below) exists or would exist but for the
passage of time. Interest under this Note shall accrue on amounts actually
advanced.
THE OBLIGATIONS OF THE COMPANY CONTAINED IN THIS NOTE ARE SECURED BY A
PLEDGE AGREEMENT BETWEEN THE COMPANY AND THE HOLDER DATED AS OF THE DATE HEREOF,
AS MAY BE AMENDED OR MODIFIED (THE "PLEDGE AGREEMENT").
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ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For all purposes of this Note, except as otherwise
expressly provided or unless the context otherwise requires: (a) the terms
defined in this Article have the meanings assigned to them in this Article and
include the plural as well as the singular; (b) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
generally accepted accounting principles as promulgated from time to time by the
Association of Independent Certified Public Accountants; and (c) the words
"herein," "hereof" and "hereunder" and other words of similar import refer to
this Note as a whole and not to any particular Article, Section or other
subdivision.
"ADVANCE" means a disbursement of proceeds of this Note.
"BOARD OF DIRECTORS" means the board of directors of the Company as
elected from time to time or any duly authorized committee of that board.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in Houston, Texas are
authorized or obligated by law or executive order to be closed.
"COMMON STOCK" means shares of common stock, par value $0.01 per share, of
the Company.
"CONVERSION PRICE" means the price per share determined in accordance with
Articles IV and V (as adjusted in accordance with the terms of this Note) at
which shares of Common Stock shall be delivered to Holder upon conversion of
this Note.
"DEFAULT" means any event which is, or after notice or passage of time
would be, an Event of Default.
"EVENT OF DEFAULT" has the meaning specified in Section 3.1.
"INDEBTEDNESS" of any Person means all indebtedness of such Person,
whether outstanding on the date of this Note or hereafter created, incurred,
assumed or guaranteed, (a) for the principal of and premium, if any, and
interest on all debts of the Person whether outstanding on the date of this Note
or thereafter created (i) for money borrowed by such Person (including
capitalized lease obligations), (ii) for money borrowed by others (including
capitalized lease obligations) and guaranteed, directly or indirectly, by such
Person, or (iii) constituting purchase money indebtedness, or indebtedness
secured by property at the time of the acquisition of such property by such
Person, for the payment of which the Person is directly or contingently liable;
(b) for all
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deferrals, renewals, extensions and refundings of, and amendments, modifications
and supplements to, any of the indebtedness referred to in (a) above.
"MATURITY DATE", when used with respect to this Note, means February __,
1999 (or such earlier date upon which this Note becomes due and payable under
Section 3.2), or as extended pursuant to Section 2.2 hereof.
"NOTE" means this $15,000,000 7% Convertible Promissory Note, as hereafter
amended, modified, substituted or replaced.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, estate,
other entity, unincorporated organization or government or any agency or
political subdivision thereof.
"SUBSIDIARY" means a corporation or other entity more than 50% of the
outstanding voting stock of which, or more than 50% of the equity interest in
which, is owned, directly or indirectly, by the Company or by one or more other
Subsidiaries of the Company, or by any combination of the Company and one or
more other Subsidiaries excepting that, for purposes thereof, "Subsidiary" shall
not be taken to include Intelect Network Systems Limited (U.K.), Intelect
Finance Limited (Bermuda), Intelect Communications Systems Limited (Bermuda),
Intelect Defense Technologies, Inc. (Delaware) or The Customer Premises
Equipment Corporation (Delaware).
ARTICLE II
PAYMENTS
2.1 INTEREST. From the date of this Note through the Maturity Date,
interest shall accrue hereunder on the unpaid outstanding principal sum of this
Note at a rate equal to seven percent (7%) per annum calculated on the basis of
a 360-day year. All past due amounts of principal and interest shall bear
interest at fifteen percent (15%) per annum calculated on the basis of a 360-day
year until paid.
2.2 PAYMENT OF PRINCIPAL AND INTEREST; EXTENSION. The principal and all
accrued interest under this Note shall be due and payable in full on the
Maturity Date. At any time, the Holder may, at its option and in lieu of cash,
elect to be paid all accrued and unpaid interest owed to Holder by the Company
in the form of Common Stock, based on a price per share equal to the Conversion
Price (the "Price Per Share"). The amount of all accrued and unpaid interest on
the Maturity Date shall be divided by the Price Per Share into a whole number of
shares of Common Stock, with the remainder, if any, being paid in cash. The
Company may extend the Maturity Date for an additional twelve (12) month period
upon written notice to the Holder no later than thirty (30) days prior to
February __, 1999. The Company shall, together with such notice, issue Warrants
to the Holder as more fully set forth in Section 1.3(c) of the Purchase
Agreement.
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2.3 PREPAYMENTS. Subject to Holder's right to convert, at any time before
the Maturity Date, the Company may prepay this Note, in whole or in part,
without penalty or discount, upon five days' prior written notice given to
Holder pursuant to Section 7.5. All payments made under this Note shall be
applied first to accrued interest, and the balance, if any, to principal;
provided, however, that interest shall accrue on any remaining principal balance
and shall be payable at the rate provided above.
2.4 MANNER OF PAYMENT. Cash payments of principal and interest on this
Note will be made by delivery of checks to Holder at its address as set forth in
this Note or wire transfers pursuant to instructions from Holder. If the date
upon which the payment of principal and interest is required to be made pursuant
to this Note occurs other than on a Business Day, then such payment of principal
and interest shall be made on the next occurring Business Day following said
payment date and shall include interest through said next occurring Business
Day.
2.5 SECURITY. This Note is secured by the collateral defined in the Pledge
Agreement.
ARTICLE III
REMEDIES
3.1 EVENTS OF DEFAULT. An "Event of Default" occurs if:
(a) the Company defaults in the payment or mandatory prepayment of
the principal or interest on this Note when such principal or interest
becomes due and payable and such default remains uncured for a period of
five days; or
(b) the Company or any Subsidiary defaults in the performance of any
covenant made by the Company, and such default remains uncured for a
period of 45 days in any of (i) the Common Stock Purchase Warrants issued
by the Company to the Holder dated as of the date hereof, (ii) the Common
Stock Purchase Warrants dated as of December 4, 1997 collectively relating
to an aggregate of 650,000 shares of the Company's Common Stock, each to
St. James Capital Corp. (the "SJCC Warrants"); (iii) that certain
Registration Rights Agreement dated as of the date hereof, as may be
thereafter amended or modified, by and between the Company and the Holder,
pursuant to which the Company grants to the Holder certain registration
rights in respect of the shares of Common Stock upon exercise of the
Warrants (the "Registration Rights Agreement"); (iv) that certain
Registration Rights Agreement dated and effective February 26, 1997, as
amended and restated on May 8, 1997 and as may be thereafter amended or
modified, by and between the Company and St. James Capital Corp., pursuant
to which St. James Capital Corp. was granted certain registration rights
in respect of the shares of Common Stock upon exercise of the SJCC
Warrants (the "SJCC Registration Rights Agreement"); (v) the Pledge
Agreement; (vi) this Note (other than a default in the performance of a
covenant specifically addressed elsewhere in this Section 3.1); or
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(c) any representation or warranty made by the Company or any
Subsidiary in the Purchase Agreement, the Warrants, the Registration
Rights Agreement, the Pledge Agreement, or this Note or in any certificate
furnished by the Company in connection with the consummation of the
transaction contemplated thereby or hereby, is untrue in any material
respect as of the date of making thereof and such default remains uncured
for a period of 45 days; or
(d) the Company or any Subsidiary defaults in the payment when due
(whether by lapse of time, by declaration, by call for redemption or
otherwise) of the principal of or interest on any Indebtedness of the
Company or such Subsidiary (other than the Indebtedness evidenced by this
Note) having an aggregate principal amount in excess of $200,000 or on any
Indebtedness of the Company to any of its stockholders and such default
remains uncured for a period of 45 days; or
(e) a court of competent jurisdiction enters a judgment or judgments
against the Company or any Subsidiary, or any property or assets of the
Company or any Subsidiary, for the payment of money aggregating $200,000
or more in excess of applicable insurance coverage, such default remains
uncured for a period of 45 days; or
(f) a court of competent jurisdiction enters (i) a decree or order
for relief in respect of the Company or any Subsidiary in an involuntary
case or proceeding under any applicable federal or state bankruptcy,
insolvency, reorganization or other similar law or (ii) a decree or order
adjudging the Company or any Subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or
any Subsidiary under any applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Subsidiary or of any substantial
part of the property of the Company or any Subsidiary or ordering the
winding up or liquidation of the affairs of the Company or any Subsidiary
and any such decree or order of relief or any such other decree or order
remains unstayed for a period of 90 days from its date of entry; or
(g) the Company or any Subsidiary commences a voluntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the Company or any Subsidiary
files a petition, answer or consent seeking reorganization or relief under
any applicable federal or state law, or the Company or any Subsidiary
makes an assignment for the benefit of creditors, or admits in writing its
inability to pay its debts generally as they become due; or
(h) any person or group (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934) becomes the beneficial owner of 40% or
more of the total voting power of the Company and was not the beneficial
owner of 40% or more of the total
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voting power of the Company as of the date hereof; provided that the
foregoing shall not include any person or group who or which acquires the
Warrants or shares of the Company's Common Stock issuable upon exercise of
the Warrants or upon conversion of this Note; and further provided that
such default has not been cured or waived within ninety (90) days
following such change of beneficial ownership.
(i) the Company or any operating Subsidiary (1) merges or
consolidates with or into any other Person (unless the Company or any of
its operating Subsidiaries is the surviving or acquiring party); (2)
dissolves or liquidates; or (3) sells all or any substantial portion of
its assets (unless the purchaser is a Subsidiary of the Company) except
where such action by the Company or its Subsidiary would not have a
materially adverse effect on the financial condition or business Company
and its Subsidiaries taken as a whole.
3.2 ACCELERATION OF MATURITY. This Note and all accrued interest shall
automatically become immediately due and payable if an Event of Default
described in Sections 3.1(f), 3.1(g) or 3.1(i) occurs and, this Note shall, at
the option of the Holder in its sole discretion, become immediately due and
payable if any other Event of Default occurs, and in every such case the Holder
of the Note may declare the principal and interest on the Note to be due and
payable immediately.
ARTICLE IV
CONVERSION OF NOTE
4.1 CONVERSION BY HOLDER. Subject to and upon compliance with the
provisions of this Article, at the option of Holder, all or any part of this
Note may be converted at any time, at the principal amount hereof together with
accrued and unpaid interest thereon, into fully paid and nonassessable shares
(calculated as to each conversion to the nearest 1/100 of a share) of Common
Stock. Except as set forth in Article V, the Conversion Price shall initially be
$9.082 per share.
4.2 CONVERSION BY COMPANY. Upon written notice to Holder, the Company may
require that this Note be converted, at the principal amount hereof together
with accrued and unpaid interest thereon, into fully paid and nonassessable
shares (calculated as to such conversion to the nearest 1/100 of a share) of
Common Stock if (a) no Event of Default exists hereunder or under any other
Transaction Document, (b) the Common Stock has traded at a closing price equal
to or greater than $13.50 per share for the previous fifteen (15) out of
seventeen (17) consecutive days and at a price equal to or greater than $13.50
per share as of the date written notice of conversion is provided by the Company
to Holder, (c) the Company has filed a registration statement covering the
shares of Common Stock issuable upon conversion of this Note, (d) such
registration statement has been declared effective by the Securities and
Exchange Commission and (e) the Company pays on the date of conversion, all
other amounts due under the Transaction Documents to Holder.
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ARTICLE V
ADJUSTMENT OF CONVERSION PRICE
5.1 ANTI-DILUTION PROVISIONS. The Conversion Price shall be subject to
adjustment from time to time as hereinafter provided. Upon each adjustment of
the Conversion Price, the holder of this Note shall thereafter be entitled to
purchase, at the Conversion Price resulting from such adjustment, the number of
shares of Common Stock obtained by multiplying the Conversion Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Conversion Price resulting from such adjustment.
5.2 STOCK DIVIDENDS. Except for distributions of Common Stock to holders
of the Company's preferred stock and distributions pursuant to a shareholder
rights plan duly adopted by the Company's Board of Directors and disclosed in
the Company's filings with the SEC, in case the Company shall declare a dividend
or make any other distribution upon any shares of the Company, payable in Common
Stock or Convertible Securities, any Common Stock or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
5.3 STOCK SPLITS AND REVERSE SPLITS. In the event that the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of Shares into which
this Note may be converted immediately prior to such subdivision shall be
proportionately increased, and conversely, in the event that the outstanding
shares of Common Stock shall at any time be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased and the number of Shares into which this Note
may be converted immediately prior to such combination shall be proportionately
reduced. Except as provided in this Section 5.4 no adjustment in the Conversion
Price and no change in the number of Shares shall be made under this Article V
as a result of or by reason of any such subdivision or combination.
5.4 REORGANIZATIONS AND ASSET SALES. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that holders of Common Stock
shall be entitled to receive capital stock, securities or assets with respect to
or in exchange for their shares, then the following provisions shall apply:
5.4.1 As a condition of such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer or other disposition
(except as otherwise provided below in Section 5.5.3), lawful and adequate
provisions shall be made whereby the holder of this Note shall thereafter
have the right to purchase and receive upon the terms and
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conditions specified in this Note and in lieu of the shares immediately
theretofore receivable upon the exercise of the rights represented hereby,
such shares of capital stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares
of such Common Stock equal to the number of shares immediately theretofore
so receivable had such reorganization, reclassification, consolidation,
merger, share exchange or sale not taken place, and in any such case
appropriate provision reasonably satisfactory to such holder shall be made
with respect to the rights and interests of such holder to the end that
the provisions hereof (including, without limitation, provisions for
adjustments of the Conversion Price and of the number of shares receivable
upon the exercise) shall thereafter be applicable, as nearly as possible,
in relation to any shares of capital stock, securities or assets
thereafter deliverable upon the exercise of this Note.
5.4.2 In the event of a merger, share exchange or consolidation of
the Company with or into another Person as a result of which a number of
shares of common stock or its equivalent of the successor Person greater
or lesser than the number of shares of Common Stock outstanding
immediately prior to such merger, share exchange or consolidation are
issuable to holders of Common Stock, then the Conversion Price in effect
immediately prior to such merger, share exchange or consolidation shall be
adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock.
5.4.3 The Company shall not effect any such consolidation, merger,
share exchange, sale, transfer or other disposition unless prior to or
simultaneously with the consummation thereof the successor Person (if
other than the Company) resulting from such consolidation, share exchange
or merger or the Person purchasing or otherwise acquiring such assets
shall have assumed by written instrument executed and mailed or delivered
to the Holder hereof at the last address of such Holder appearing on the
books of the Company the obligation to deliver to such Holder such shares
of capital stock, securities or assets as, in accordance with the
foregoing provisions, such Holder may be entitled to receive, and all
other liabilities and obligations of the Company hereunder. Upon written
request by the Holder hereof, such Successor Person will issue a new Note
revised to reflect the modifications in this Note effected pursuant to
this Section 5.5.
5.4.4 If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of Common
Stock, the Company shall not effect any consolidation, merger, share
exchange or sale, transfer or other disposition of all or substantially
all of the Company's assets with the Person having made such offer or with
any affiliate of such Person, unless prior to the consummation of such
consolidation, merger, share exchange, sale, transfer or other disposition
the holder hereof shall have been given a reasonable opportunity to then
elect to receive upon the conversion of this Note either the capital
stock, securities or assets then issuable with respect to the
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Common Stock or the capital stock, securities or assets, or the
equivalent, issued to previous holders of the Common Stock in accordance
with such offer.
5.5 ADJUSTMENT FOR ASSET DISTRIBUTION. If the Company declares a dividend
or other distribution payable to all holders of shares of Common Stock in
evidences of indebtedness of the Company or other assets of the Company
(including, cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, Convertible Securities or
options or rights thereto) or other property), the Conversion Price in effect
immediately prior to such declaration of such dividend or other distribution
shall be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash dividend
or distribution, or by the fair value of such dividend or distribution per share
of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is not taken, the date as of
which holders of record of Common Stock entitled to such dividend or
distribution are determined.
5.6 DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares of
Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon conversion of the Note and no adjustment in the Conversion
Price shall be required unless such adjustment would require an increase or
decrease of at least $.01 in the Conversion Price; provided, however, that any
adjustments which by reason of this Section 5.7 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest full share or nearest one
hundredth of a dollar, as applicable.
5.7 NOTICE OF ADJUSTMENT. Whenever the Conversion Price or the number of
Shares issuable upon the conversion of the Note shall be adjusted as herein
provided, or the rights of the holder hereof shall change by reason of other
events specified herein, the Company shall compute the adjusted Conversion Price
and the adjusted number of Shares in accordance with the provisions hereof and
shall prepare an Officer's Certificate setting forth the adjusted Conversion
Price and the adjusted number of Shares issuable upon the conversion of this
Note or specifying the other shares of stock, securities or assets receivable as
a result of such change in rights, and showing in reasonable detail the facts
and calculations upon which such adjustments or other changes are based. The
Company shall cause to be mailed to the Holder hereof copies of such Officer's
Certificate together with a notice stating that the Conversion Price and the
number of Shares purchasable upon conversion of this Note have been adjusted and
setting forth the adjusted Conversion Price and the adjusted number of Shares
purchasable upon conversion of this Note.
5.8 NOTIFICATIONS TO HOLDERS. In case at any time the Company proposes:
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(i) to declare any dividend upon its Common Stock payable in
capital stock or make any special dividend or other distribution
(other than cash dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the holders
of its Common Stock any additional shares of capital stock of any
class or other rights;
(iii) to effect any capital reorganization, or
reclassification of the capital stock of the Company, or
consolidation, merger or share exchange of the Company with another
Person, or sale, transfer or other disposition of all or
substantially all of its assets; or
(iv) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of such cases, the Company shall give the holder hereof
(a) at least 10 days (but not more than 90 days) prior written notice of the
date on which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of any such issuance, reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition, dissolution,
liquidation or winding up, and (b) in the case of any such issuance,
reorganization, reclassification, consolidation, merger, share exchange, sale,
transfer, disposition, dissolution, liquidation or winding up, at least 10 days
(but not more than 90 days) prior written notice of the date when the same shall
take place. Such notice in accordance with the foregoing clause (a) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Stock shall be entitled thereto, and
such notice in accordance with the foregoing clause (b) shall also specify the
date on which the holders of Common Stock shall be entitled to exchange their
Common Stock, as the case may be, for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or winding up,
as the case may be.
5.9 COMPANY TO PREVENT DILUTION. If any event or condition occurs as to
which other provisions of this Article are not strictly applicable or if
strictly applicable would not fairly protect the exercise or purchase rights of
this Note evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely affect the
exercise or purchase rights of the holder hereof under any provisions of this
Note, then the Company shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such exercise and purchase rights as aforesaid, and any adjustments
necessary with respect to the Conversion Price and the number of shares
purchasable hereunder so as to preserve the rights of the holder hereunder. In
no event shall any such adjustment have the effect of increasing the Conversion
Price as otherwise determined pursuant to this Article except in the event of a
combination of shares of the type contemplated in Section
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5.4 hereof, and then in no event to an amount greater than the Conversion Price
as adjusted pursuant to Section 5.4 hereof.
ARTICLE VI
COVENANTS
The Company covenants and agrees that, so long as this Note is
outstanding:
6.1 PAYMENT OF PRINCIPAL AND ACCRUED INTEREST. The Company will duly and
punctually pay or cause to be paid the principal sum of this Note, together with
interest accrued thereon from the date hereof to the date of payment, in
accordance with the terms hereof.
6.2 CORPORATE EXISTENCE. The Company will, and will cause each Subsidiary
to, do or cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence, rights (charter and statutory) and
franchises; provided, however, that the Company or a Subsidiary shall not be
required to preserve any such right or franchise if it shall reasonably
determine that the preservation thereof is no longer desirable in the conduct of
its business.
6.3 TAXES; CLAIMS; ETC. The Company will, and will cause each Subsidiary
to, promptly pay and discharge all lawful taxes, assessments, and governmental
charges or levies imposed upon it or upon its income or profits, or upon any of
its properties, real, personal, or mixed, before the same shall become in
default, as well as all lawful claims for labor, materials, and supplies or
otherwise which, if unpaid, might become a lien or charge upon such properties
or any part thereof, and which lien or charge will have a material adverse
effect on the business of the Company; provided, however, that neither the
Company nor any Subsidiary shall be required to pay or cause to be paid any such
tax, assessment, charge, levy, or claim prior to institution of foreclosure
proceedings if the validity thereof shall concurrently be contested in good
faith by appropriate proceedings and if the Company shall have established
reserves deemed by the Company adequate with respect to such tax, assessment,
charge, levy, or claim.
6.4 MAINTENANCE OF EXISTENCE AND PROPERTIES. The Company will, and will
cause each Subsidiary to, keep its material properties in good repair, working
order, and condition, ordinary wear and tear excepted, so that the business
carried on may be properly conducted at all times in accordance with prudent
business management.
6.5 SEC REPORTS. The Company will maintain its Edgar filing status with
the SEC and will deliver to the Holder within 20 days after completing filings
with the SEC, copies of its annual and quarterly reports and of the information,
documents, and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) which the Company is required
or elects to file with the SEC pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. The Company will timely comply in all material respects
with its reporting and filing obligations under the applicable federal
securities laws.
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6.6 NOTICE OF DEFAULTS. The Company will promptly notify the Holder in
writing of the occurrence of (i) any Event of Default under this Note, and (ii)
any event of default (or if any event of default would result upon any payment
with respect to this Note) with respect to any Indebtedness as such event of
default is defined therein or in the instrument under which it is outstanding,
permitting holders to accelerate the maturity of such Indebtedness.
6.7 COMPLIANCE WITH LAWS. The Company will promptly comply with all laws,
ordinances and governmental rules and regulations to which it is subject, the
violation of which would materially and adversely affect the Company.
6.8 AMENDMENTS TO CHARTER. The Company will not amend or modify its
charter in a manner modifying, amending or waiving any material right or
obligation of the Holder or rights of holders of the Company's Common Stock,
excepting such modifications, amendments or waivers which would not, singly or
in the aggregate, have a material adverse effect on such rights or obligations
without the prior written consent of Holder.
6.9 MERGERS AND ACQUISITIONS. Without the consent of the Holder, the
Company or any operating Subsidiary will not consolidate or merge with any
Person unless the Company or its operating Subsidiary is the surviving
corporation in such transaction, nor dissolve, liquidate, or enter into a share
exchange with or sell or transfer all or a substantial portion of its assets to
any Person.
ARTICLE VII
MISCELLANEOUS
7.1 CONSENT TO AMENDMENTS. This Note may be amended, and the Company may
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, if and only if the Company shall obtain the written consent
to such amendment, action or omission to act from the holders of a majority of
the aggregate principal amount of this Note.
7.2 BENEFITS OF NOTE; NO IMPAIRMENT OF RIGHTS OF HOLDER OF SENIOR
INDEBTEDNESS. Nothing in this Note, express or implied, shall give to any
Person, other than the Company, Holder, and their successors any benefit or any
legal or equitable right, remedy or claim under or in respect of this Note.
7.3 SUCCESSORS AND ASSIGNS. All covenants and agreements in this Note
contained by or on behalf of the Company and the Holder shall bind and inure to
the benefit of the respective successors and assigns of the Company and the
Holder.
7.4 RESTRICTIONS ON TRANSFER. Holder shall not transfer this Note except
(by the grant of a security interest) to its lender or lenders, and except as
provided in Section 7.7 of the Purchase Agreement. As between Holder and its
lender or lenders, this Note is transferable in
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the same manner and with the same effect as in the case of a negotiable
instrument payable to a specified person. Any lender to which Holder grants a
security interest in this Note shall be entitled to exercise all remedies to
which it is entitled by contract or by law, including (without limitation)
transferring this Note into its own name or into the name of any purchaser at
any sale undertaken in connection with enforcement by such lender of its
remedies.
7.5 NOTICE; ADDRESS OF PARTIES. Except as otherwise provided, all
communications to the Company or Holder provided for herein or with reference to
this Note shall be deemed to have been sufficiently given or served for all
purposes on the third business day after being sent as certified or registered
mail, postage and charges prepaid, to the following addresses: if to the
Company: Intelect Communications, Inc., 1100 Executive Drive, Richardson, Texas
75081, or at any other address designated by the Company in writing to Holder;
if to Holder: St. James Capital Partners, L.P., c/o St. James Capital Corp.,
1980 Post Oak Boulevard, Suite 2030, Houston, Texas 77056, Attn: John L.
Thompson, or at any other address designated by Holder to the Company in
writing.
7.6 SEPARABILITY CLAUSE. In case any provision in this Note shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions in such jurisdiction shall not in
any way be affected or impaired thereby; provided, however, such construction
does not destroy the essence of the bargain provided for hereunder.
7.7 GOVERNING LAW. This Note shall be governed by, and construed in
accordance with, the internal laws of the State of Texas (without regard to
principles of choice of law).
7.8 USURY. It is the intention of the parties hereto to conform strictly
to the applicable laws of the State of Texas and the United States of America,
and judicial or administrative interpretations or determinations thereof
regarding the contracting for, charging and receiving of interest for the use,
forbearance, and detention of money (hereinafter referred to in this Section 7.8
as "Applicable Law"). The Holder shall have no right to claim, to charge or to
receive any interest in excess of the maximum rate of interest, if any,
permitted to be charged on that portion of the amount representing principal
which is outstanding and unpaid from time to time by Applicable Law.
Determination of the rate of interest for the purpose of determining whether
this Note is usurious under Applicable Law shall be made by amortizing,
prorating, allocating and spreading in equal parts during the period of the
actual time of this Note, all interest or other sums deemed to be interest
(hereinafter referred to in this Section 7.8 as "Interest") at any time
contracted for, charged or received from the Company in connection with this
Note. Any Interest contracted for, charged or received in excess of the maximum
rate allowed by Applicable Law shall be deemed a result of a mathematical error
and a mistake. If this Note is paid in part prior to the end of the full stated
term of this Note and the Interest received for the actual period of existence
of this Note exceeds the maximum rate allowed by Applicable Law, Holder shall
credit the amount of the excess against any amount owing under this Note or, if
this Note has been paid in full, or in the event that it has been accelerated
prior to maturity, Holder shall refund to the Company the amount of such excess,
and shall not be subject to any of the penalties provided by
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Applicable Law for contracting for, charging or receiving Interest in excess of
the maximum rate allowed by Applicable Law. Any such excess which is unpaid
shall be canceled.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed on the date first above written.
INTELECT COMMUNICATIONS, INC..
By:
Name:
Title:
[Signature Page -- Convertible Note]
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PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "PLEDGE AGREEMENT",) is entered into as of
________ __, 1998 (the "EFFECTIVE DATE",), by and between INTELECT
COMMUNICATIONS, INC., a Delaware corporation ("PLEDGOR"), and ST. JAMES CAPITAL
PARTNERS, L.P., a Delaware limited partnership, ("SECURED PARTY").
RECITALS
Pursuant to the terms, and subject to the conditions, set forth in the
Agreement of Purchase and Sale dated the Effective Date (the "PURCHASE
AGREEMENT") and that certain Convertible Promissory Note (the "NOTE") dated the
Effective Date issued by Pledgor, payable to the order of Secured Party in the
original principal sum of $15,000,000, Secured Party has agreed to advance funds
to the Pledgor.
Pledgor owns one hundred percent (100%) of the issued and outstanding
capital stock of DNA Enterprises, Inc., a Texas corporation, Intelect Visual
Communications Corp., a Delaware corporation and Intelect Network Technologies
Company, a Nevada corporation, and will derive both direct and indirect benefit
from the issuance and sale of the Note to the Purchaser.
It is a condition to the agreement of Secured Party to advance such funds
and to consummate the transactions contemplated by the Note that this Pledge
Agreement shall have been executed and delivered by Pledgor and shall be in full
force and effect.
NOW, THEREFORE, in order to induce, and in consideration of, the execution
and delivery of the Note, the advancement of funds under the Note by Secured
Party and the consummation of the transactions contemplated by the Note, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by Pledgor, Pledgor hereby covenants and agrees with Secured
Party as follows:
SECTION 1. DEFINITIONS
1.1 CERTAIN DEFINED TERMS. As used in this Pledge Agreement, the following
terms or phrases have the respective meanings set forth below or in the Section
following such term:
"COASTAL" means The Coastal Corporation Second Pension Trust.
"COASTAL PLEDGE" means the pledge by Pledgor of the Pledged Securities to
Coastal.
"COLLATERAL" means the aggregate of:
(a) the DNA Shares, the IVC Shares and the INT Shares;
(b) (i) the certificates or instruments, if any, representing the
DNA Shares, the IVC Shares and the INT Shares (ii) all dividends (cash,
stock or otherwise), cash, instruments, rights to subscribe, purchase or
sell and all other rights and property from time to time received,
receivable or otherwise distributed in respect of or in exchange for any
or all of such securities,
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(iii) all replacements, additions to and substitutions for any of the
property referred to in this definition, including, without limitation,
claims against third parties, (iv) the proceeds, interest, profits and
other income of or on any of the property referred to in this definition,
and (v) all books and records relating to any of the property referred to
in this definition.
"DNA" means DNA Enterprises, Inc., a Texas corporation and a wholly-owned
Subsidiary of Pledgor.
"DNA SHARES" has the meaning assigned that term in the definition of
Pledged Securities below.
"EFFECTIVE DATE" has the meaning given that term in the introduction to
this Pledge Agreement.
"INT" means Intelect Network Technologies Company, a Nevada corporation
and a wholly-owned Subsidiary of Pledgor.
"INT SHARES" has the meaning given that term in the definition of Pledged
Securities below.
"IVC" means Intelect Visual Communications Corp., a Delaware corporation
and a wholly-owned Subsidiary of Pledgor.
""IVC SHARES" has the meaning given that term in the definition of Pledged
Securities below.
"NOTE" has the meaning given that term in the first Recital to this Pledge
Agreement.
"OBLIGATIONS" means the aggregate of:
(a) the indebtedness evidenced by the Note;
(b) all sums advanced and costs and expenses incurred by Secured
Party in accordance with the Note, this Pledge Agreement and the other
Transaction Documents, including, without limitation, all reasonable
legal, accounting, consulting or like fees, made and incurred in
connection with the Obligations described in clause (1) above or any part
thereof, any renewal, extension, or modification of, or substitution for,
the foregoing Obligations or any part thereof, or the acquisition,
perfection or maintenance and preservation of the security for the
Obligations, whether such advances, costs, or expenses shall have been
made and incurred at the request of Pledgor or Secured Party,
(c) all other obligations of Pledgor pursuant to the Purchase
Agreement, the Note and the other Transaction Documents; and
(d) any and all extensions and renewals of, substitutions for, or
modifications or amendments of any of the foregoing Obligations or any
part thereof.
"PARI PASSU AGREEMENT" means the In Pari Passu Agreement dated the date
hereof among Secured Party SJ Corp. and Coastal.
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"PLEDGE AGREEMENT" means this Pledge Agreement dated as of the Effective
Date, between Pledgor and Secured Party, as said agreement may be amended,
modified, supplemented, and/or extended from time to time.
"PLEDGED SECURITIES" means all of the following securities and all
additional securities (as that term is defined in the UCC), if any, constituting
Collateral under this Pledge Agreement, including:
(a) All of the issued and outstanding shares of common capital stock
of DNA Enterprises, Inc., consisting of 1,100 shares, evidenced by
Certificate Number 8, and any other shares of common stock of DNA now
owned or hereafter acquired by Pledgor or any of its affiliates (such
shares of stock referred to in this subsection 1.1(a) are hereinafter
sometimes referred to as the "DNA Shares".
(b) All of the issued and outstanding shares of common capital stock
of Intelect Visual Communications Corporation, consisting of 500 shares,
evidenced by Certificate Number 1, and any other shares of the common
capital stock of IVC now owned or hereafter acquired by Pledgor or any of
its affiliates (such shares of stock referred to in this subsection 1.1(a)
are hereinafter sometimes referred to as the "IVC Shares".
(c) All of the issued and outstanding shares of common capital stock
of Intelect Network Technologies, Inc., consisting of 1,000 shares of
common capital stock, evidenced by Certificate Number 1, and any other
shares of the common capital stock of INT now owned or hereafter acquired
by Pledgor or any of its affiliates (such shares of stock referred to in
this subsection 1.1(a) are hereinafter sometimes referred to as the "INT
Shares".
"PLEDGOR" has the meaning given that term in the introduction to this
Pledge Agreement.
"PROCEEDS" means whatever is received upon the sale, exchange, collection,
or other disposition of the Collateral and insurance payable or damages or other
payments by reason of loss or damage to the Collateral.
"SECURED PARTY" has the meaning given that term in the introduction to
this Pledge Agreement.
"SECURITY INTEREST" has the meaning assigned to that term in SECTION 2.1.
"SJ CORP." means St. James Capital Corp.
"SJ CORP. PLEDGE" means the pledge by Pledgor of the Pledged Securities to
SJ Corp.
"UCC" means the Uniform Commercial Code as in effect in any jurisdiction
applicable.
1.2 OTHER DEFINITIONS. Other capitalized terms used herein have the
meanings given them herein or in the Note.
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SECTION 2. CREATION OF SECURITY INTEREST
2.1 CREATION OF SECURITY INTEREST. In consideration of Secured Party's
advancing or extending the funds or credit constituting the Obligations
(including the indebtedness evidenced by the Note), as a condition to such
advances and extensions, in consideration of the mutual covenants contained
herein, and for the purpose of securing the payment and performance of the
Obligations, Pledgor hereby grants to Secured Party a continuing security
interest in and to all Collateral, including in all Proceeds (the "SECURITY
INTEREST").
2.2 PROCEEDS. Except as otherwise permitted herein, the security interest
of Secured Party hereunder in the Proceeds shall not be construed to mean that
Secured Party consents to the sale or other disposition of any part of the
Collateral.
2.3 TRANSFER OF COLLATERAL. All certificates or instruments representing
or evidencing the Pledged Securities shall be delivered to and held pursuant
hereto by Secured Party or a person or entity designated by Secured Party and
shall be in suitable form for transfer by delivery, or shall be accompanied by
duly executed instruments of transfer or assignment in blank. Notwithstanding
the preceding sentence, at Secured Party's discretion all Pledged Securities
must be delivered or transferred as set forth in Section 8-301(a) of the UCC.
Notwithstanding anything herein contained to the contrary, Secured Party
acknowledges that the certificates or instruments representing the Pledged
Securities have been delivered to Coastal pursuant to the Coastal Pledge and the
rights of the Secured Party and Coastal in and to the Pledged Securities and the
Proceeds are further governed by the terms of the Pari Passu Agreement;
PROVIDED, HOWEVER, that if the Coastal Pledge is terminated and any obligations
are then outstanding, Pledgor shall deliver to Secured Party all such
certification and instruments pursuant to the terms hereof.
SECTION 3. PLEDGOR'S REPRESENTATIONS, WARRANTIES, AND COVENANTS
3.1 RECORDING AND FILING. Pledgor shall pay all costs of filing,
registering, and recording this and every other instrument in addition or
supplemental hereto and all financing statements Secured Party may reasonably
require, in such offices and places and at such times and as often as may be, in
the judgment of Secured Party, necessary to create, perfect, preserve, protect,
and renew the Lien hereof on and in the Collateral, and otherwise do and perform
all matters or things necessary or expedient to be done or observed by reason of
any law or regulation of any applicable jurisdiction or any other competent
authority for the purpose of effectively creating, perfecting, preserving,
protecting, maintaining, and renewing the Lien hereof in and on the Collateral
and the priority thereof. Pledgor shall also pay the costs of obtaining reports
from appropriate filing offices concerning Lien filings in respect of any of the
Collateral. A carbon, photographic, or other reproduction of this Pledge
Agreement or of any financing statement relating hereto shall be sufficient as a
financing statement.
3.2 SECURED PARTY'S RIGHT TO PERFORM PLEDGOR'S OBLIGATIONS; FURTHER
ASSURANCES. Pledgor agrees that, if Pledgor fails to perform any act that
Pledgor is required to perform under this instrument, Secured Party may, but
shall not be obligated to, perform or cause to be performed such act.
Accordingly, to the extent permitted by law, Pledgor hereby authorizes Secured
Party to execute and file financing statements and continuation statements
without Pledgor's signature thereon. Any expense incurred by Secured Party in
taking action in accordance with the preceding two sentences shall be a demand
obligation owing by Pledgor to Secured Party, shall bear interest in accordance
with SECTION 6.14, and shall be a part of the Obligations, and Secured Party
shall be subrogated to all of the rights of the party receiving the
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benefit of such performance. The undertaking of such performance by Secured
Party as aforesaid shall not obligate such Person to continue such performance
or to engage in such performance or performance of any other act in the future,
shall not relieve Pledgor from the observance or performance of any covenant,
warranty, or agreement contained in this instrument or constitute a waiver of
default hereunder, and shall not affect the right of Secured Party to accelerate
the payment of all indebtedness and other sums secured hereby or to resort to
any other of its rights, powers, or remedies hereunder or under applicable law.
In the event Secured Party undertakes any such action, it shall have liability
to Pledgor only upon a showing of its bad faith, gross negligence or willful
misconduct (BUT SPECIFICALLY EXCLUDING ITS ORDINARY OR PARTIAL NEGLIGENCE), and
in all events no party other than the acting party shall be liable to Pledgor.
Pledgor will from time to time (a) sign, execute, deliver, and file, alone or
with Secured Party, all further financing statements, security agreements, or
other documents that are reasonably necessary; (b) procure any instruments or
documents as may be reasonably requested by Secured Party, and (c) take all
further action that may be reasonably necessary, or that Secured Party may
reasonably request, to confirm, perfect, preserve, and protect the security
interests intended to be granted hereby.
3.3 DEFENSE OF CLAIMS. Pledgor will preserve, warrant, and defend the
Security Interest created hereby in the Collateral against the claims of all
Persons whomsoever; will maintain and preserve such Security Interest at all
times as contemplated by the Transaction Documents; and will not do or suffer
any matter or thing whereby such Security Interest might or could be impaired.
Pledgor shall promptly notify Secured Party in writing of the commencement of
any legal proceedings affecting Secured Party's interest in the Collateral, or
any part thereof, and shall take such action, employing attorneys reasonably
acceptable to Secured Party, as may be necessary to preserve Pledgor's and
Secured Party's rights affected thereby, and should Pledgor fail or refuse to
take any such action, Secured Party may take the action on behalf of and in the
name of Pledgor and at Pledgor's expense. Moreover, Secured Party may take
independent action in connection therewith as it may in its sole discretion deem
proper, and Pledgor hereby agrees to make reimbursement for all reasonable sums
advanced and all reasonable expenses incurred in such actions plus interest in
accordance with SECTION 6.14.
3.4 CORPORATE IDENTITY.
(a) Pledgor will maintain (i) the location of its places of business
and its primary corporate office and (ii) the locations where it keeps or
holds records relating to the Collateral at the locations at which the
same are located as of the date of this Pledge Agreement or at locations
other than those specified above if, prior to such relocation, Secured
Party shall have given Pledgor written notice thereof. Pledgor shall not
in any event change the location of any Collateral if such change would
cause the Security Interest in such Collateral to lapse or cease to be
perfected.
(b) Pledgor, to the extent not otherwise restricted in the Note,
will not change its name, identity or form of organization in any manner
unless it shall have given prior written notice to Secured Party. On any
such change, Pledgor will execute and file such financing statements or
other documents as may be reasonably requested by Secured Party to
maintain the perfection of its Security Interest in the Collateral.
3.5 PLEDGED SECURITIES. The Pledged Securities have been duly authorized
and validly issued, and are fully paid and non-assessable. The Pledged
Securities constitute 100% of the issued and
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outstanding common stock of DNA, INT and IVC. Except as evidenced by the Pari
Passu Agreement, no other person or entity has any interest in or rights to
acquire any interest in DNA, INT or IVC.
3.6 FIRST PRIORITY SECURITY INTEREST. The pledge of Pledged Securities
pursuant to this Pledge Agreement creates a valid and perfected first priority
security interest in the Collateral, subject only to the security interest of
Coastal under the Coastal Pledge that is pari passu with the security interest
granted hereby and the security interest of SJ Corp. under the SJ Corp. Pledge
that is pari passu with the security interest granted hereby, enforceable
against Pledgor and all third parties and securing the payment and performance
of the Obligations.
3.7 SALE, DISPOSITION OR ENCUMBRANCE OF COLLATERAL. Pledgor will not in
any way encumber any of the Collateral (or permit or suffer any of the
Collateral to be encumbered) or sell, pledge, assign, lend or otherwise dispose
of or transfer any of the Collateral to or in favor of any person or entity
other than Secured Party, except for the Coastal Pledge and the SJ Corp. Pledge.
3.8 DIVIDENDS OR DISTRIBUTIONS. Subject to the Pari Passu Agreement, any
and all:
(a) dividends and other distributions paid or payable in cash in
respect of any Collateral in connection with a partial or total
liquidation or dissolution or in connection with a reduction of capital,
capital surplus or paid-in surplus, or reclassification, and
(b) cash paid, payable or otherwise distributed in redemption of, or
in exchange for, any Collateral,
shall be, and shall be forthwith delivered to Secured Party to hold as,
Collateral and shall, if received by Pledgor, be received in trust for the
benefit of Secured Party, be segregated from the other property or funds of
Pledgor, and be forthwith delivered to Secured Party as Collateral in the same
form as so received (with any necessary indorsement); provided, however, that
Secured Party shall have no duty to receive and hold such dividends and interest
payments and shall not be responsible for any failure to do so or delay in so
doing.
3.9 STOCK POWERS. Subject to the Pari Passu Agreement, Pledgor shall
furnish to Secured Party such stock powers and other instruments as may be
required by Secured Party to assure the transferability of the Collateral when
and as often as may be requested by Secured Party.
3.10 VOTING AND OTHER CONSENSUAL RIGHTS. Except to the extent otherwise
provided in SECTION 4.6(C), and subject to the Pari Passu Agreement Pledgor
shall be entitled to exercise any and all voting and other consensual rights
pertaining to the Collateral or any part thereof for any purpose not
inconsistent with the terms of this Pledge Agreement, the Note or any other
Transaction Document; provided however, that Pledgor shall not exercise or
refrain from exercising any such right if such action would have a material
adverse effect on the value of the Collateral or any part thereof, and,
provided, further, that upon request of Secured Party at any time or from time
to time, Pledgor shall give Secured Party prompt written notice of the manner in
which Pledgor has exercised, or the reasons for refraining from exercising, any
such right.
3.11 ATTORNEY-IN-FACT. Subject to the Pari Passu Agreement, Pledgor hereby
irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full
authority in the place and stead of Pledgor
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and in the name of Pledgor or otherwise, from time to time in Secured Party's
discretion, but at Pledgor's cost and expense and without notice to Pledgor, to
take any action and to execute any assignment, certificate, financing statement,
stock power, notification, document or instrument which Secured Party may deem
necessary or advisable to accomplish the purposes of this Pledge Agreement,
including, without limitation, to receive, endorse and collect all instruments
made payable to Pledgor representing any dividend, interest payment or other
distribution in respect of the Collateral or any part thereof and to give full
discharge for the same.
3.12 CUSTODY AND PRESERVATION OF THE COLLATERAL. Secured Party shall be
deemed to have exercised reasonable care in the custody and preservation of the
Collateral in its possession if the Collateral is accorded treatment
substantially equal to that which comparable secured parties accord comparable
collateral, it being understood and agreed, however, that Secured Party shall
not have responsibility for (i) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relative to
any Collateral, whether or not Secured Party has or is deemed to have knowledge
of such matters, (ii) taking any necessary steps to preserve rights against
persons or entities with respect to any Collateral,(iii) any actions taken by
Coastal respecting the Pledged Securities that are not approved by or consented
to by Secured Party or (iv) any actions taken by SJ Corp. respecting the Pledged
Securities that are not approved by or consented to by Secured Party.
SECTION 4. DEFAULT
4.1 EVENTS OF DEFAULT. Upon the occurrence and continuation of an Event of
Default beyond any applicable cure periods, as provided in the Note, Secured
Party may declare all Obligations immediately due and payable.
4.2 RIGHTS IN RESPECT OF COLLATERAL. Upon the occurrence and continuation
of any Event of Default, in addition to all other rights of Secured Party,
Secured Party will have the right and power, but will not be obligated, to enter
upon and take possession of all or any part of the Collateral, exclude Pledgor
therefrom, and to hold, use, administer, manage, and operate the same to the
extent that Pledgor could do so. After a Default under the Note, Secured Party
may exercise every power, right, and privilege of Pledgor with respect to the
Collateral (including, without limitation, the right of collection) without any
liability (SPECIFICALLY INCLUDING LIABILITY FOR ORDINARY OR PARTIAL NEGLIGENCE)
to Pledgor in connection therewith except with respect to bad faith, gross
negligence or willful misconduct; provided, however, that Secured Party may
notify account debtors of Pledgor to make payments directly to Secured Party
only after all cure periods, as provided in the Note, applicable to such Default
have lapsed. Provided there has been no foreclosure sale, when and if such
expenses of operation have been paid and the Obligations paid in full, the
remaining Collateral shall be returned to Pledgor.
4.3 ANCILLARY RIGHTS. Upon the occurrence and continuation of an Event of
Default, in addition to all other rights of Secured Party hereunder, without
notice, demand, or declaration of default, all of which are hereby expressly
waived by Pledgor, Secured Party may proceed by a suit or suits in equity or at
law (a) for the seizure and sale of the Collateral or any part thereof, (b) for
the specific performance of any covenant or agreement contained in this Pledge
Agreement, the Note or any of the other Transaction Documents or in aid of the
execution of any power herein granted, (c) for the foreclosure or sale of the
Collateral or any part thereof under the judgment or decree of any court of
competent jurisdiction, or (d) for the enforcement of any other appropriate
legal or equitable remedy.
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4.4 RECEIVERSHIP. Upon the occurrence and continuation of an Event of
Default, in addition to all other rights of Secured Party, Secured Party from
time to time may apply to a court of competent jurisdiction for the appointment
of one or more receivers to take possession of and to manage and administer the
Collateral or any portion thereof and to collect the Proceeds, all without
demand or declaration of default, which are hereby waived by Pledgor. Secured
Party shall be entitled to the appointment of such receiver(s) as a matter of
right, without regard to the value of the Collateral as security for the
Obligations or the solvency of Pledgor or any Person liable for the payment or
performance of all or any part of the Obligations. Such receiver(s) shall serve
without bond and shall have all usual and customary powers and authorities in
addition to all other powers and authorities permitted by the law of the
jurisdiction where the Collateral is situated and all powers and authorities
granted to Secured Party herein.
4.5 EXPENSES. Pledgor will pay to Secured Party all reasonable expenses,
including, without limitation, fees and expenses of any receiver(s), reasonable
attorneys' and consultants' fees and expenses, advanced by Secured Party and
incurred pursuant to the provisions contained in this SECTION 4, and all such
unpaid expenses shall be (a) a Lien against the Collateral; (b) added to the
Obligations, and (c) payable upon demand, with interest in accordance with
SECTION 6.14; PROVIDED, HOWEVER, that the existence of said Lien shall in no way
waive, diminish, or prejudice any other rights, remedies, powers, and privileges
that Secured Party or any receiver(s) may have under the applicable laws in the
collection of such funds as loans or otherwise.
4.6 PLEDGED SECURITIES. Upon the occurrence and during the continuance of
an Event of Default:
(a) All dividends and interest payments that are received by Pledgor
contrary to the provisions of this Pledge Agreement shall be received in
trust for the benefit of Secured Party, shall be segregated from other
funds of Pledgor and shall be forthwith paid over to Secured Party as
Collateral in the same form as so received (with any necessary
indorsement).
(b) Secured Party may exercise any and all rights of conversion,
exchange, subscription or any other rights, privileges or options
pertaining to any of the Pledged Securities as if it were the absolute
owner thereof, including without limitation, the right to exchange at its
discretion, any and all of the Pledged Securities upon the merger,
consolidation, reorganization, recapitalization or other readjustment of
any issuer of such Pledged Securities or upon the exercise by any such
issuer or Secured Party of any right, privilege or option pertaining to
any of the Pledged Securities, and in connection therewith, to deposit and
deliver any and all of the Pledged Securities with any committee,
depository, transfer agent, registrar or other designated agency upon such
terms and conditions as it may determine, all without liability except to
account for property actually received by it, but Secured Party shall have
no duty to exercise any of the aforesaid rights, privileges or options and
shall not be responsible for any failure to do so or delay in so doing.
(c) at the option of Secured Party and upon written notification
thereof to Pledgor, all rights of Pledgor to exercise the voting and other
consensual rights which Pledgor would otherwise be entitled to exercise
pursuant to SECTION 3.10 with respect to the Pledged Securities shall
cease, and all such rights shall thereupon become vested in Secured Party
who shall thereupon have the sole right to exercise such voting and other
consensual rights, but Secured Party shall have no duty
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to exercise any such voting or other consensual rights and shall not be
responsible for any failure to do so or delay in so doing.
SECTION 5. FORECLOSURE ON COLLATERAL
5.1 SALE. Upon the occurrence and continuation of an Event of Default,
Secured Party will have all rights and remedies granted by law, and particularly
by the UCC, including, without limitation, the right to take possession of the
Collateral, and for this purpose Secured Party may enter upon any premises on
which any or all of the Collateral is situated and take possession of and manage
the Collateral or remove it therefrom. Secured Party may require Pledgor to
assemble the Collateral and make it available to Secured Party at a place to be
designated by Secured Party that is reasonably convenient to all parties. Unless
the Collateral is perishable or threatens to decline speedily in value or is of
a type customarily sold on a recognized market, Secured Party will give Pledgor
reasonable notice of the time and place of any public sale or of the time after
which any private sale or other disposition of the Collateral is to be made.
This requirement of sending reasonable notice will be met if the notice is sent
to Pledgor as provided in the Note at least ten days before the time of the sale
or disposition.
5.2 PRIVATE SALE. If Secured Party in good faith believes that the
Securities Act of 1933 or any other state or federal law prohibits or restricts
the customary manner of sale or distribution of any of the Collateral, or if
Secured Party determines that there is any other restraint or restriction
limiting the timely sale or distribution of any such property in accordance with
the customary manner of sale or distribution, Secured Party may sell such
property privately or in any other manner it deems, in good faith, advisable at
such price or prices as it determines in good faith, but otherwise without any
liability whatsoever to Pledgor in connection therewith. Pledgor recognizes and
agrees that such prohibition or restriction may cause such property to have less
value than it otherwise would have and that, consequently, such sale or
disposition by Secured Party may result in a lower sales price than if the sale
were otherwise held.
5.3 SECURED PARTY AS PURCHASER. Secured Party will have the right to
become the purchaser at any foreclosure sale, and it will have the right to
credit upon the amount of the bid the amount payable to it out of the net
proceeds of sale.
5.4 RECITALS CONCLUSIVE; WARRANTY; RATIFICATION. Recitals contained in any
assignment or bill of sale to any purchaser at any sale made hereunder will
conclusively establish, as between the parties to such assignment or bill of
sale, the truth and accuracy of the matters therein stated, including, without
limitation, nonpayment of the unpaid principal sum of, and the interest accrued
on, the written instruments constituting part or all of the Obligations after
the same have become due and payable, nonpayment of any other of the
Obligations, or advertisement and conduct of the sale in the manner provided
herein. Secured Party will have authority to appoint an attorney-in-fact to act
in conducting any foreclosure sale and executing assignments and bills of sale.
All assignments and bills of sale may contain a general warranty of title from
the grantor. Pledgor ratifies and confirms all legal acts that Secured Party may
do in accordance with this Pledge Agreement.
5.5 EFFECT OF SALE. Any sale or sales of the Collateral or any part
thereof will operate to divest all right, title, interest, claim, and demand
whatsoever, either at law or in equity, of Pledgor in and to the property sold,
and will be a perpetual bar, both at law and in equity, against Pledgor,
Pledgor's successors or assigns and against any and all persons claiming or who
shall thereafter claim all or any of the property
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sold from, through, or under Pledgor, or Pledgor's successors or assigns. The
purchaser or purchasers at the foreclosure sale will receive immediate
possession of the property purchased.
5.6 APPLICATION OF PROCEEDS. Secured Party shall apply the proceeds of any
sale or other disposition of the Collateral as follows: First, to the payment of
all its expenses incurred in retaking, holding, and preparing any of the
Collateral for sale(s) or other disposition, in arranging for such sale(s) or
other disposition, and in actually selling or disposing of the same (all of
which are part of the Obligations); second, toward repayment of amounts
reasonably expended by Secured Party under SECTION 5 hereof; and third, toward
payment of the balance of the Obligations in the order and manner determined by
Secured Party in its sole discretion. Any surplus remaining shall be delivered
to Pledgor or as a court of competent jurisdiction may direct.
5.7 DEFICIENCY. Pledgor shall remain liable for any deficiency owing to
Secured Party after application of the net proceeds of any foreclosure sale.
Nothing herein contained shall be construed as limiting Secured Party to the
collection of any Obligations only out of the income, revenue, rents, issues,
and profits from the Collateral or as obligating Secured Party to delay or
withhold action upon any default that may be occasioned by failure of such
income or revenue to be sufficient to retire the principal or interest when due
on the indebtedness secured hereby. It is expressly understood between Secured
Party and Pledgor that any Obligations shall constitute an absolute,
unconditional obligation of Pledgor to pay as provided herein or in the Note in
accordance with the terms of the instrument evidencing such Obligations in the
amount therein specified at the maturity date or at the respective maturity
dates of the installments thereof, whether by acceleration or otherwise.
5.8 PLEDGOR'S WAIVER OF APPRAISEMENT, MARSHALLING, ETC. To the extent
permitted by applicable law, Pledgor agrees that Pledgor will not at any time
insist upon or plead or in any manner whatsoever claim the benefit of any
appraisement, valuation, stay, extension, or redemption law, if any, now or
hereafter in force, to prevent or hinder the enforcement or foreclosure of this
instrument, the absolute sale of the Collateral or the possession thereof by any
purchaser at any sale made pursuant to this instrument or pursuant to the decree
of any court having jurisdiction. To the extent permitted by applicable law,
Pledgor, for Pledgor and all who may claim by, through, or under Pledgor, hereby
waives the benefit of all such laws, if any, and to the extent that Pledgor may
lawfully do so under applicable law, waives any and all right to have any
Collateral marshaled upon any foreclosure of the Lien hereof or sold in inverse
order of alienation, and Pledgor agrees that Secured Party may sell the
Collateral as an entirety.
5.9 DISCHARGE OF PURCHASER. Upon any sale made under the powers of sale
herein granted and conferred, the sales receipt issued by Secured Party will be
sufficient discharge to the purchaser or purchasers at any sale for the purchase
money, and such purchaser or purchasers and the heirs, devisees, personal
representatives, successors, and assigns thereof will not, after paying such
purchase money and receiving such receipt of Secured Party, be obliged to see to
the application thereof or be in anywise answerable for any loss,
misapplication, or nonapplication thereof.
SECTION 6. MISCELLANEOUS
6.1 PARI PASSU AGREEMENT. The rights of Secured Party to foreclose on and
sell the Pledged Securities, to apply the Proceeds to the obligations and to
exercise the powers set forth in SECTION 4.6 hereof are subject to the terms of
the Pari Passu Agreement for so long as such agreement remains in effect.
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6.2 TERMINATION. If all the Obligations are paid and performed in full and
the covenants herein contained are performed in all respects, then Secured Party
shall, upon the request of Pledgor and at Pledgor's cost and expense, deliver to
Pledgor proper instruments executed by Secured Party evidencing the release of
this instrument. Until such delivery, this instrument shall remain and continue
in full force and effect.
6.3 REMEDIES CUMULATIVE. No failure on the part of Secured Party or any
holder of the Note to exercise, and no delay in exercising, any right, power or
privilege hereunder, under the Note or under any other Transaction Document and
no course of dealing between Pledgor and Secured Party or any holder of the Note
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or privilege, or any abandonment or discontinuance of any
steps to enforce such right, power or privilege, preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. No
notice to or demand on Pledgor in any case shall entitle Pledgor to any other or
further notice or demand in similar or other circumstances. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
6.4 PARTIAL RELEASE. Except as expressly set forth therein, no release
from the Lien of this instrument of any part of the Collateral by Secured Party
shall in any way alter, vary, or diminish the force, effect or lien of this
instrument on the balance or remainder of the Collateral.
6.5 SUBROGATION. This Pledge Agreement is made with full substitution and
subrogation of Secured Party in and to all covenants and warranties by others
heretofore given or made in respect of the Collateral or any part thereof.
6.6 SUCCESSOR LENDER. Any Person that succeeds to St. James Capital
Partners, L.P. as Holder pursuant to, and as permitted by, the terms of the Note
automatically shall become Secured Party hereunder.
6.7 NOTICES. Subject to the provisions of SECTION 5.1, all communications
under this Pledge Agreement shall be given as provided in the Note and shall be
effective as therein provided.
6.8 SUCCESSORS AND ASSIGNS. Neither party may assign its rights or
delegate its duties hereunder to any Person without prior written consent of the
other party, which consent will not be unreasonably withheld. This Pledge
Agreement shall be binding upon the successors and permitted assigns of each of
the parties, and, except as expressly set forth in the Note and this SECTION
6.7, shall inure to the benefit of the successors and permitted assigns of each
of the parties. The provisions of this Pledge Agreement are intended to be for
the benefit of all Persons constituting Secured Party.
6.9 AMENDMENT AND WAIVER.
(a) This Pledge Agreement may be amended, and the observance of any
term of this Pledge Agreement may be waived, with (and only with) the
written consent of Pledgor and Secured Party.
(b) Pledgor shall not solicit, request, or negotiate for or with
respect to any proposed waiver or amendment hereof except in accordance
with the provisions of this Agreement and the Note.
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(c) Any such amendment or waiver shall apply equally to all persons
constituting Secured Party or Pledgor and shall be binding upon each
future Secured Party and upon each person constituting Pledgor regardless
of whether this Pledge Agreement, the Note or any other document shall
have been marked to indicate such amendment or waiver. No such amendment
or waiver shall extend to or affect any obligation not expressly amended
or waived or impair any right consequent thereon.
6.10 GOVERNING LAW. THIS PLEDGE AGREEMENT, THE LEGAL RELATIONS AMONG THE
PARTIES HERETO, AND ALL RIGHTS AND OBLIGATIONS HEREUNDER, INCLUDING MATTERS OF
CONSTRUCTION, VALIDITY, AND PERFORMANCE, SHALL BE GOVERNED BY AND INTERPRETED,
CONSTRUED, APPLIED, AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF
TEXAS WITHOUT REFERENCE TO THE LAW OF ANOTHER JURISDICTION AND THE LAWS OF THE
UNITED STATES OF AMERICA; PROVIDED, HOWEVER, THAT MATTERS RELATING TO THE
PERFECTION OF SECURITY INTERESTS UPON ANY PERSONAL PROPERTY SHALL BE GOVERNED BY
THE LAW OF ANOTHER JURISDICTION TO THE EXTENT REQUIRED BY THE NONWAIVABLE
PROVISIONS OF SUCH LAW OR THE LAW OF THE STATE OF TEXAS.
6.11 SEVERABILITY. If any provision in this Pledge Agreement is rendered
or declared illegal, invalid, or unenforceable by reason of any rule of law,
public policy, or final judicial decision, all other terms and provisions of
this Pledge Agreement shall nevertheless remain in full force and effect so long
as the economic or legal substance of the transactions contemplated hereby are
not affected in any manner adverse to Pledgor or Secured Party. Upon such
determination that any term or other provision is invalid, illegal, or incapable
of being enforced, Pledgor and Secured Party shall negotiate in good faith to
modify this Pledge Agreement so as to effect the original intent of the parties
hereto as closely as possible to the end that the transactions contemplated
hereby are fulfilled to the extent possible.
6.12 ENTIRE AGREEMENT. This Pledge Agreement constitutes the entire
agreement of the parties hereto with respect to the matters contained herein and
supersede all prior contracts and agreements with respect thereto, whether
written or oral.
6.13 MULTIPLE COUNTERPARTS. The parties may execute more than one
counterpart of this Pledge Agreement, each of which shall be an original but all
of which together shall constitute one and the same instrument.
6.14 REFERENCES. All references herein to one gender shall include the
other. Unless otherwise expressly provided, all references to "Sections" are to
Sections of this Pledge Agreement and all references to "Exhibits" are to the
exhibits attached hereto, each of which is made a part hereof for all purposes.
6.15 INTEREST. The Obligations of Pledgor pursuant to SECTIONS 3.2 AND 4.5
shall bear interest at an annual rate equal to the default rate set forth in the
Note from the date that is ten days after the date Secured Party notifies
Pledgor that Secured Party has paid amounts required to be paid by Pledgor
hereunder until such amounts are reimbursed to Secured Party. Secured Party
agrees to use all reasonable efforts to forward expense invoices to Pledgor for
direct payment by Pledgor before Secured Party advances amounts to be reimbursed
by Pledgor, and no interest shall accrue on amounts directly paid by Pledgor.
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6.16 FINAL AGREEMENT OF THE PARTIES. THIS PLEDGE AGREEMENT (INCLUDING THE
EXHIBITS HERETO), THE NOTE AND THE OTHER TRANSACTION DOCUMENTS TO WHICH PLEDGOR
OR ANY OF ITS SUBSIDIARIES IS A PARTY CONSTITUTE A "LOAN AGREEMENT" AS DEFINED
IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the Effective Date.
Pledgor: INTELECT COMMUNICATIONS, INC.
Address:
1100 Executive Drive By:
Richardson, Texas 75081 Name:
Title:
SECURED PARTY: ST. JAMES CAPITAL PARTNERS, L.P.
By: St. James Capital Corp.,
General Partner
Address:
1980 Post Oak Blvd By:
Suite 2030 Name:
Houston, Texas 77056 Title:
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IRREVOCABLE STOCK POWER
For Value Received, the undersigned hereby sells, assigns and transfers to
________________________, One Thousand One Hundred (1,100) shares of the common
stock of DNA Enterprises, Inc., a corporation organized under the laws of the
State of Texas, standing in the undersigned's name on the books of the
corporation, represented by Certificate No. 8, and the undersigned does hereby
irrevocably constitute and appoint my true and lawful attorney-in-fact, with
full power of substitution, to transfer this stock on the books of the
corporation.
Dated:
INTELECT COMMUNICATIONS, INC.
By:
Name:
Title:
In the presence of:
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IRREVOCABLE STOCK POWER
For Value Received, the undersigned hereby sells, assigns and transfers to
___________________, Five Hundred (500) shares of the common stock of Intelect
Visual Communications Corp, a corporation organized under the laws of the State
of Delaware, standing in the undersigned's name on the books of the corporation,
represented by Certificate No. 1, and the undersigned does hereby irrevocably
constitute and appoint my true and lawful attorney-in-fact, with full power of
substitution, to transfer this stock on the books of the corporation.
Dated:
INTELECT COMMUNICATIONS, INC.
By:
Name:
Title:
In the presence of:
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IRREVOCABLE STOCK POWER
For Value Received, the undersigned hereby sells, assigns and transfers to
_________________________, One Thousand One Hundred (1,100) shares of the common
stock of Intelect Network Technologies Company, a corporation organized under
the laws of the State of Nevada, standing in the undersigned's name on the books
of the corporation, represented by Certificate No. 1, and the undersigned does
hereby irrevocably constitute and appoint my true and lawful attorney-in-fact,
with full power of substitution, to transfer this stock on the books of the
corporation.
Dated:
INTELECT COMMUNICATIONS, INC.
By:
Name:
Title:
In the presence of:
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